HSBC Holdings plc
Annual Report and Accounts 2009
Strong, steadfast, sustainable
www.hsbc.com
H S B C H O L D I N G S P L C
Annual Report and Accounts 2009
Headquartered in London, HSBC is one of the largest banking and financial
services organisations in the world. Its international network comprises some
8,000 properties in 88 countries and territories in Europe; Hong Kong; Rest of
Asia-Pacific; the Middle East; North America and Latin America.
With listings on the London, Hong Kong, New York, Paris and Bermuda stock
exchanges, shares in HSBC Holdings plc are held by over 220,000 shareholders in
121 countries and territories. The shares are traded on the New York Stock
Exchange in the form of American Depositary Shares.
HSBC provides a comprehensive range of financial services to more than
100 million customers through four customer groups and global businesses:
Personal Financial Services (including consumer finance); Commercial Banking;
Global Banking and Markets; and Private Banking.
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 subsidiaries. Within this document the Hong Kong Special Administrative
Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’
equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary shares and those
preference shares classified as equity.
This document comprises the Annual Report and Accounts 2009 for HSBC Holdings plc and its subsidiaries. It contains the Report of the
Directors and Financial Statements, together with the Independent Auditor’s Report thereon, as required by the UK Companies Act 2006.
The Annual Review 2009 of HSBC Holdings plc is published as a separate document. The Report of the Directors on pages 12 to 333 and
the Directors’ Remuneration Report on pages 334 to 348 have each been drawn up in accordance with the requirements of English law,
and liability in respect thereof is also governed by English law. In particular, the liability of the Directors for these reports is solely to
HSBC Holdings.
H S B C H O L D I N G S P L C
Contents
Financial Highlights ......................................................................................................................................................................
Cautionary Statement Regarding Forward-Looking Statements ...................................................................
Group Chairman’s Statement ................................................................................................................................................
2
6
8
Report of the Directors ............................................................................................................................................................... 12
Operating and Financial Review
Principal activities ................................................................
Strategic direction .................................................................
Challenges and uncertainties ................................................
Key performance indicators .................................................
Reconciliation of reported and underlying profit .................
Financial summary1 ..............................................................
Consolidated income statement .....................................
12
12
12
18
21
23
23
Group performance by income and expense item .........
Consolidated balance sheet ...........................................
Critical accounting policies ..................................................
Customer groups and global businesses1 .............................
Geographical regions1 ..........................................................
Products and services ...........................................................
Other information .................................................................
Impact of Market Turmoil
Background and disclosure policy ....................................... 151
Nature and extent of HSBC’s exposures .............................
Overview of exposure ........................................................... 152
Fair values of financial instruments .....................................
Business model ..................................................................... 156
Special purpose entities ........................................................
Risk management .................................................................. 157
Other off-balance sheet arrangements and commitments ....
Accounting policies .............................................................. 157
Risk1
Regulation and supervision .................................................. 196
Operational risk ....................................................................
Risk management .................................................................. 199
Pension risk ..........................................................................
Credit risk ............................................................................. 201
Reputational risk ..................................................................
Liquidity and funding ........................................................... 244
Sustainability risk..................................................................
Market risk ............................................................................ 250
Risk management of insurance operations ..........................
Residual value risk ............................................................... 261
Capital management and allocation .....................................
Governance1
Corporate governance report ................................................ 294
Corporate sustainability .......................................................
Directors and senior management ........................................ 294
Share capital .........................................................................
Board of Directors ................................................................ 302
Dividends, shareholders and meetings .................................
Employees ............................................................................. 318
26
42
61
66
85
145
147
157
166
181
194
262
263
263
264
265
285
326
328
331
Directors’ Remuneration Report1 ......................................................................................................................................... 334
Statement of Directors’ Responsibilities ......................................................................................................................... 349
Independent Auditor’s Report ............................................................................................................................................... 350
Financial Statements1 .................................................................................................................................................................. 352
Notes on the Financial Statements .................................................................................................................................... 365
Shareholder Information ........................................................................................................................................................... 472
Enforceability of judgements made in the US ..................... 472
Memorandum and Articles of Association ..........................
Limitations affecting equity security holders ....................... 472
Annual General Meeting ......................................................
Fourth interim dividend for 2008 ......................................... 472
Interim Management Statements and Interim Results .........
Fourth interim dividend for 2009 ......................................... 472
Shareholder enquiries and communications ........................
Interim dividends for 2010 ................................................... 473
Investor relations ..................................................................
Dividends on ordinary shares of HSBC Holdings ............... 473
Where more information about HSBC is available .............
American Depositary Shares ................................................ 474
Taxation of shares and dividends .........................................
Nature of trading market ....................................................... 475
History and development of HSBC .....................................
Shareholder profile ............................................................... 476
Organisational structure .......................................................
476
477
478
478
479
480
480
482
484
Glossary and Index ....................................................................................................................................................................... 485
1 Detailed contents are provided on the referenced pages.
1
H S B C H O L D I N G S P L C
Financial Highlights
Highlights / Ratios
For the year
• Total operating income down by 11 per cent to US$78,631 million (2008: US$88,571 million).
• Net operating income before loan impairment charges and other credit risk provisions down by
19 per cent to US$66,181 million (2008: US$81,682 million).
• Underlying group pre-tax profit up by US$15,308 million to US$13,286 million.
• Group pre-tax profit down by 24 per cent to US$7,079 million (2008: US$9,307 million).
• Profit attributable to shareholders of the parent company up by 2 per cent to US$5,834 million
(2008: US$5,728 million).
• Return on average shareholders’ equity of 5.1 per cent (2008: 4.7 per cent).
• Earnings per ordinary share down by 17 per cent to US$0.34 (2008: US$0.41).
At the year-end
• Total equity up by 35 per cent to US$135,661 million (2008: US$100,229 million).
• Loans and advances to customers down by 4 per cent to US$896,231 million (2008:
US$932,868 million).
• Customer accounts up by 4 per cent to US$1,159 billion (2008: US$1,115 billion).
• Ratio of customer advances to customer accounts 77.3 per cent (2008: 83.6 per cent).
• Risk-weighted assets down by 1 per cent to US$1,133 billion (2008: US$1,148 billion).
Dividends and capital position
•
Total dividends declared in respect of 2009 of US$0.34 per ordinary share, a decrease of 47 per
cent on dividends for 2008; fourth interim dividend for 2009 of US$0.10 per ordinary share, no
change from 2008.
• Core tier 1 ratio of 9.4 per cent and tier 1 ratio of 10.8 per cent.
Rights issue
•
In April 2009, HSBC Holdings raised £12.5 billion (US$17.8 billion), net of expenses, by way of a
fully underwritten rights issue, offering its shareholders 5 new ordinary shares for every 12
ordinary shares at a price of 254 pence per new ordinary share.
Dividends per ordinary share1
(US dollars)
0.34
2009
2008
2007
2006
2005
For footnotes, see page 5.
0.93
0.87
0.76
0.69
2
Earnings per ordinary share
(US dollars)
0.34
0.41
1.44
1.22
1.18
2009
2008
2007
2006
2005
Capital and performance ratios
Capital ratios
Core tier 1 ratio ........................................................................................................................................
Tier 1 ratio ...............................................................................................................................................
Total capital ratio .....................................................................................................................................
Performance ratios
Return on average invested capital2 .........................................................................................................
Return on average total shareholders’ equity3 .........................................................................................
Post-tax return on average total assets ....................................................................................................
Post-tax return on average risk-weighted assets .....................................................................................
Credit coverage ratios
Loan impairment charges as a percentage of total operating income .....................................................
Loan impairment charges as a percentage of average gross customer advances ....................................
Total impairment allowances outstanding as a percentage of impaired loans at the year-end ...............
Efficiency and revenue mix ratios
Cost efficiency ratio4
– reported .............................................................................................................................................
– excluding goodwill impairment5 ......................................................................................................
As a percentage of total operating income:
– net interest income ...........................................................................................................................
– net fee income ..................................................................................................................................
– net trading income ............................................................................................................................
Financial ratios
Loans and advances to customers as a percentage of customer accounts ...............................................
Average total shareholders’ equity to average total assets .....................................................................
Share information at the year-end
2009
%
9.4
10.8
13.7
4.1
5.1
0.27
0.58
31.72
2.82
83.2
52.0
52.0
51.8
22.5
12.5
77.3
4.72
2008
%
7.0
8.3
11.4
4.0
4.7
0.26
0.55
27.24
2.45
94.3
60.1
47.2
48.1
22.6
7.4
83.6
4.87
US$0.50 ordinary shares in issue (million) .............................................................................................
Market capitalisation (billion) .................................................................................................................
Closing market price per ordinary share:6
2009
2008
17,408
US$199
12,105
US$114
– London ..............................................................................................................................................
– Hong Kong .......................................................................................................................................
Closing market price per American Depositary Share7 ...........................................................................
£7.09
HK$89.40
US$57.09
£5.77
HK$67.81
US$44.15
HSBC total shareholder return to 31 December 20098 ...........................................
Benchmarks:
– FTSE 1009 ........................................................................................................
– MSCI World10 ..................................................................................................
– MSCI Banks11 ...................................................................................................
128.3
103.6
127.3
116.7
125.2
98.0
103.6
70.6
120.6
135.4
134.9
92.3
Over 1 year Over 3 years Over 5 years
Return on average invested capital
(per cent)
Cost efficiency ratio
(per cent)
4 .1
4.0
2009
2008
2007
2006
2005
For footnotes, see page 5.
2009
2008
2007
2006
2005
15.3
14.9
15.9
3
52.0
60.1
49.4
51.3
51.2
H S B C H O L D I N G S P L C
Financial Highlights (continued)
5-year comparison / Footnotes
Five-year comparison
For the year
Net interest income ...................................
Other operating income ............................
Loan impairment charges and other
credit risk provisions ............................
Total operating expenses ..........................
Profit before tax ........................................
Profit attributable to shareholders of the
parent company ....................................
Dividends1 .................................................
At the year-end
Called up share capital ..............................
Total shareholders’ equity ........................
Capital resources12,13 .................................
Customer accounts ....................................
Undated subordinated loan capital ...........
Preferred securities and dated
subordinated loan capital14 ...................
Loans and advances to customers15 ..........
Total assets ................................................
Per ordinary share
Basic earnings16 ........................................
Diluted earnings16 .....................................
Basic earnings excluding goodwill
impairment5,16 .......................................
Dividends ..................................................
Net asset value at year-end17 ....................
Share information
US$0.50 ordinary shares in
2009
US$m
40,730
37,901
(26,488)
(34,395)
7,079
5,834
5,639
8,705
128,299
155,729
1,159,034
2,785
52,126
896,231
2,364,452
US$
0.34
0.34
0.34
0.34
7.17
2008
US$m
2007
US$m
42,563
46,008
(24,937)
(49,099)
9,307
5,728
11,301
6,053
93,591
131,460
1,115,327
2,843
50,307
932,868
2,527,465
37,795
49,806
(17,242)
(39,042)
24,212
19,133
10,241
5,915
128,160
152,640
1,096,140
2,922
49,472
981,548
2,354,266
2006
US$m
34,486
35,584
(10,573)
(33,553)
22,086
15,789
8,769
5,786
108,352
127,074
896,834
3,219
42,642
868,133
1,860,758
US$
US$
US$
0.41
0.41
1.19
0.93
7.44
1.44
1.42
1.44
0.87
10.72
1.22
1.21
1.22
0.76
9.24
2005
US$m
31,334
30,370
(7,801)
(29,514)
20,966
15,081
7,750
5,667
92,432
105,449
739,419
3,474
35,856
740,002
1,501,970
US$
1.18
1.17
1.18
0.69
8.03
issue (millions) ......................................
17,408
12,105
11,829
11,572
11,334
%
%
%
%
%
Financial ratios
Dividend payout ratio18
– reported16 ...............................................
– excluding goodwill impairment5,16 ........
Post-tax return on average total assets .....
Return on average total shareholders’
equity ....................................................
Loans and advances to customers as a
percentage of customer accounts .........
Average total shareholders’ equity to
average total assets ...............................
Capital ratios12
Tier 1 ratio ................................................
Total capital ratio ......................................
Foreign exchange translation rates to
US$
Closing – £:US$1 .....................................
– €:US$1 .....................................
Average – £:US$1 .....................................
– €:US$1 .....................................
For footnotes, see page 5.
100.0
100.0
0.27
5.1
77.3
4.72
10.8
13.7
0.616
0.694
0.641
0.719
226.8
78.2
0.26
4.7
83.6
4.87
8.3
11.4
0.686
0.717
0.545
0.684
60.4
60.4
0.97
15.9
89.5
5.69
9.3
13.6
62.3
62.3
1.00
15.7
96.8
5.97
9.4
13.5
0.498
0.679
0.500
0.731
0.509
0.759
0.543
0.797
58.5
58.5
1.06
16.8
100.1
5.96
9.0
12.8
0.581
0.847
0.550
0.805
4
Consolidated Financial Statements
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been
prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International
Accounting Standards Board (‘IASB’) and as endorsed by the European Union (‘EU’). EU-endorsed IFRSs may
differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by
the EU. At 31 December 2009, there were no unendorsed standards effective for the year ended 31 December 2009
affecting these consolidated and separate financial statements, and there was no difference between IFRSs endorsed
by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC’s financial
statements for the year ended 31 December 2009 are prepared in accordance with IFRSs as issued by the IASB.
HSBC uses the US dollar as its presentation currency because the US dollar and currencies linked to it form the major
currency bloc in which HSBC transacts and funds its business. Unless otherwise stated, the information presented in
this document has been prepared in accordance with IFRSs.
When reference to ‘underlying’ or ‘underlying basis’ is made in tables or commentaries, comparative information has
been expressed at constant currency (see page 21), eliminating the impact of fair value movements in respect of credit
spread changes on HSBC’s own debt and adjusting for the effects of acquisitions and disposals. A reconciliation of
reported and underlying profit before tax is presented on page 22.
Footnotes to Financial Highlights
1 Dividends recorded in the financial statements are dividends per ordinary share declared in a year and are not dividends in respect of,
or for, that year. The third interim dividend for 2008 of US$0.18 was paid on 14 January 2009. The fourth interim dividend for 2008 of
US$0.10 was paid on 6 May 2009. First, second and third interim dividends for 2009, each of US$0.08 per ordinary share, were paid
on 8 July 2009, 7 October 2009 and 13 January 2010, respectively. Note 12 on the Financial Statements provides more information on
the dividends declared in 2009. On 1 March 2010 the Directors declared a fourth interim dividend for 2009 of US$0.10 per ordinary
share in lieu of a final dividend, which will be payable to ordinary shareholders on 5 May 2010 in cash in US dollars, or in pounds
sterling or Hong Kong dollars at exchange rates to be determined on 26 April 2010, with a scrip dividend alternative. The reserves
available for distribution at 31 December 2009 were US$34,460 million.
Quarterly dividends of US$15.50 per 6.20 per cent non-cumulative Series A US dollar preference share, equivalent to a dividend of
US$0.3875 per Series A ADS, each of which represents one-fortieth of a Series A dollar preference share, were paid on 16 March 2009,
15 June 2009, 15 September 2009 and 15 December 2009.
Quarterly coupons of 8.125 per cent capital securities of US$0.508 were paid on 15 January 2009, 15 April 2009, 15 July 2009 and
15 October 2009.
2 The definition of return on average invested capital and a reconciliation to the equivalent GAAP measures are set out on page 19.
3 The return on average total shareholders’ equity is defined as profit attributable to shareholders of the parent company divided by
average total shareholders’ equity.
4 The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and
other credit risk provisions.
5 In 2008 an impairment charge of US$10,564 million to fully write off goodwill in Personal Financial Services in North America was
reported in total operating expenses. This amount is excluded from total operating expenses to calculate the ratio.
6 The prices of HSBC Holdings ordinary shares and American Depositary Shares (‘ADS’) have been adjusted for the 5-for-12 rights
issue completed in April 2009.
7 Each ADS represents five ordinary shares.
8 Total shareholder return is defined on page 19.
9 The Financial Times Stock Exchange 100 Index.
10 The Morgan Stanley Capital International World Index.
11 The Morgan Stanley Capital International World Bank Index
12 The calculation of capital resources, capital ratios and risk-weighted assets for 2009 and 2008 is on a Basel II basis. 2005 to 2007
comparatives are on a Basel I basis.
13 Capital resources are total regulatory capital, the calculation of which is set out on page 289.
14 Includes perpetual preferred securities, details of which can be found in Note 32 on the Financial Statements.
15 Net of impairment allowances.
16 The effect of the bonus element of the rights issue (Note 13 on the Financial Statements) has been included within the basic and diluted
earnings per share.
17 The definition of net asset value per share is total shareholders’ equity, less non-cumulative preference shares and capital securities,
divided by the number of ordinary shares in issue.
18 Dividends per ordinary share expressed as a percentage of earnings per ordinary share.
5
H S B C H O L D I N G S P L C
Cautionary Statement Regarding Forward-Looking Statements
Cautionary statement
The Annual Report and Accounts 2009 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’ and ‘reasonably
possible’, 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
United States 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:
–
–
–
–
continuing or deepening recessions and
fluctuations in employment beyond those
factored into consensus forecasts;
changes in foreign exchange rates, in both
market exchange rates (for example,
between the US dollar and pound sterling)
and government-established exchange rates
(for example, between the Hong Kong
dollar and US dollar);
the timing of interest rate rises in countries
which have reduced policy rates to close to
zero and more general volatility in interest
rates;
volatility in equity markets, including in the
smaller and less liquid trading markets in
Asia and Latin America;
6
–
–
–
–
–
–
–
lack of liquidity in wholesale funding
markets;
illiquidity and downward price pressure in
national real estate markets, particularly
consumer-owned real estate markets;
the ease with which central banks which
have provided liquidity support to financial
markets through quantitative easing and
extended liquidity schemes are able to
withdraw such support and the timing of
any withdrawal;
heightened market concerns over sovereign
creditworthiness in over-indebted countries;
the impact of lower than expected
investment returns on the funding of 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; and
consumer perception as to the continuing
availability of credit, and price competition
in the market segments served by HSBC.
•
changes in government policy and regulation,
including:
–
–
–
the monetary, interest rate and other
policies of central banks and other
regulatory authorities, including the UK
Financial Services Authority, the Bank of
England, the Hong Kong Monetary
Authority, the US Federal Reserve, the US
Securities and Exchange Commission, the
US Office of the Comptroller of the
Currency, the European Central Bank, the
People’s Bank of China and the central
banks of other leading economies and
markets where HSBC operates;
initiatives to change the size, scope of
activities and interconnectedness of
financial institutions following
consideration of the regulatory
consultations currently under way;
revised capital and liquidity benchmarks
which could serve to deleverage bank
balance sheets and lower returns available
from the current business model and
portfolio mix;
–
imposition of levies or taxes designed to
change business mix and risk appetite;
–
–
–
–
–
–
the practices, pricing or responsibilities of
financial institutions serving their consumer
markets;
expropriation, nationalisation, confiscation
of assets and changes in legislation relating
to foreign ownership;
changes in bankruptcy legislation in the
principal markets in which HSBC operates
and the consequences thereof;
general changes in government policy that
may significantly influence investor
decisions, in particular in markets in which
HSBC operates, including financial
institutions newly taken into state
ownership on a full or partial basis;
extraordinary government actions as a result
of current market turmoil;
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 product
regulatory reviews, actions or litigation,
including any additional compliance
requirements; and
the effects of competition in the markets
where HSBC operates including increased
competition from non-bank financial
services companies, including securities
firms.
•
factors specific to HSBC:
–
the success of HSBC in adequately
identifying the risks it faces, such as the
incidence of loan losses or delinquency, and
managing those risks (through account
management, hedging and other
techniques). Effective risk management
depends on, among other things, HSBC’s
ability through stress testing and other
techniques to prepare for events that cannot
be captured by the statistical models it uses;
and
–
the success of HSBC in addressing
operational, legal and regulatory, and
litigation challenges.
7
H S B C H O L D I N G S P L C
Group Chairman’s Statement
Group Chairman’s Statement
2009: a year of transition
In a number of important respects, 2009 was a year
of transition.
It began with further turbulence in global
financial markets but, during the year, the markets
pulled back from uncertainty and progressively
stabilised as a consequence of the continued,
extraordinary and timely actions by governments and
central banks.
2009 also saw the deepest contraction in the real
economy in any year since the Second World War.
However, it was apparent by year end that the worst
was over – even if confidence remained fragile and
recovery would be uneven.
The global macro-economic transition from
West to East gathered pace during 2009. At HSBC
we have long been convinced that the world’s
economic centre of gravity is shifting, and the
financial crisis has only accelerated this trend.
Nevertheless, huge challenges and risks remain
for all of us.
While emerging markets are leading global
recovery and seem certain to drive the majority of
the world’s growth in the generation ahead, recovery
in developed markets has been slow to start, and
unemployment remains high.
Furthermore, the global rebalancing of demand
has barely begun. The financial crisis brought into
stark relief the extent of the imbalances, especially
between over-consuming Western economies and
high-saving emerging markets. Rebalancing requires
structural change and international co-operation, and
it will take time.
There are also important lessons to learn as we
8
seek to reform the financial system. Few of these
lessons are quick or simple, but the need for urgent
change is clearer than ever.
Supporting customers and delivering results
throughout the cycle
Throughout the crisis, HSBC has remained
profitable, financially strong and independently
owned by our shareholders.
It is testimony to the quality and strength of
HSBC’s management team that, in 2009, our
underlying performance was significantly ahead of
2008. On an underlying basis, and excluding the
impact of the goodwill impairment recorded in 2008,
pre-tax profit was US$13.3 billion, 56 per cent
higher. On a reported basis, profit before tax was
US$7.1 billion, down 24 per cent, in part due to the
reversal of fair value accounting gains on our own
debt.
That HSBC has reported a pre-tax profit in all
three years since the onset of the crisis should be a
source of great confidence to our shareholders, our
depositors and all of our customers. Our track record
of delivering results through adversity, and at all
stages of the economic cycle, remains intact.
We continued to enhance our financial strength
during 2009. We strengthened our capital base by
US$10.2 billion through underlying profit
generation. This comfortably covers our dividends
declared, which total US$5.9 billion in respect of
2009. The directors have announced a fourth interim
dividend of 10 cents per ordinary share, payable on 5
May 2010, and we remain one of the leading payers
of dividends in financial services, declaring
dividends in respect of the last three years of over
US$24 billion in total.
The successful completion of our rights issue in
April added US$17.8 billion to shareholders’ equity
and helped to set the tenor for market recovery. Its
success demonstrated the strong confidence which
you, our shareholders, have in our future and we are
profoundly thankful for your support.
We indicated at the time of the rights issue our
expectation that, if successful, it would increase our
tier 1 ratio by around 150 basis points. I am pleased
to report that our tier 1 ratio increased by some 250
basis points to 10.8 per cent at 31 December 2009,
largely as a result of the rights issue and internal
capital generation. The core tier 1 ratio was 9.4 per
cent at the same date, increasing by some 240 basis
points.
Throughout the crisis, our strategy has remained
clear: to build on our position as the leading
international and emerging markets bank. We have
also never forgotten that it is our responsibility to
make a real contribution to economic and social
development, and that our ability to do so is
fundamental to our success in delivering sustainable
value to our shareholders.
Meeting our commitments to the communities
we serve around the world is not some optional extra
or by-product of our business – it is part of our
raison d’ être. In Argentina, which was in the midst
of the peso crisis ten years ago, we did not abandon
our customers and have remained committed to the
market ever since. In 2009, our operations there
reported their best-ever underlying performance and
resumed paying cash dividends to the Group in
January 2010. In mainland China, we are proud of
our position as the leading international bank, and
we continued to build our strong rural presence
during the year. In Indonesia, we nearly doubled our
network to support the growing financial needs of
personal and business banking customers, and we
launched our SME fund in the United Arab Emirates
in January 2010. These are just a few examples
which illustrate our commitment to helping people
prepare for the future, building prosperity and
security for their families and communities.
Robust corporate governance and unrivalled
management experience
In 2009 we announced that, as Group Chief
Executive, Michael Geoghegan would take
responsibility for developing strategy as part of his
overall responsibilities for the performance of the
Group’s business. We relocated the principal office
of the Group Chief Executive to Hong Kong and, on
1 February 2010, he succeeded Vincent Cheng as
Chairman of The Hongkong and Shanghai Banking
Corporation Limited. This underscores our
commitment to our emerging markets businesses and
reflects the historic shift now taking place in the
global economy.
HSBC’s corporate headquarters remain in the
UK, where we continue to benefit from being at the
heart of one of the world’s pre-eminent financial
centres. From this base, as Chairman, I spend an
increasing amount of my time engaging with
policymakers and regulators throughout the world on
behalf of the Group, on the growing number of
policy issues which are crucial for the banking
industry in general and for HSBC in particular.
At HSBC, we have an extremely strong, diverse
and engaged Board and the international experience
and expertise of our management team is something
which sets us apart. We are committed to delivering
9
effective supervision and to compliance with the
principles set out in the Walker Review in the UK.
During 2009, we also took further steps to strengthen
our top management team. Sandy Flockhart was
appointed Chairman, Personal and Commercial
Banking, with responsibility for Personal Financial
Services, Commercial Banking and Insurance,
HSBC’s Latin American and African businesses, and
most Group functions. Stuart Gulliver was appointed
Chairman, Europe, Middle East and Global
Businesses and assumed responsibility for Private
Banking, adding to his responsibilities for Global
Banking and Markets. Douglas Flint assumed
additional responsibilities for Regulation and
Compliance in an expanded role as Chief Financial
Officer, Executive Director, Risk and Regulation.
Peter Wong was appointed Chief Executive of The
Hongkong and Shanghai Banking Corporation
Limited, succeeding Sandy Flockhart.
I would like to thank Vincent Cheng for his
tremendous contribution over the past five years as
Chairman of The Hongkong and Shanghai Banking
Corporation Limited, and look forward to continuing
to work with him as a main Board member and
Chairman of HSBC Bank (China) Company Limited.
I would also like to say thank you on behalf of
the Board to three of our directors, José Luis Durán,
William Fung and Sir Mark Moody-Stuart, who will
retire by rotation at the 2010 Annual General
Meeting and will not seek re-election. It has been a
privilege to work with each of them and all of us on
the Board are extremely grateful for their counsel
and support.
Learning the lessons from the crisis
In 2009, the G20 set out its clear belief that
sustainable globalisation and rising prosperity will
require an open world economy based on market
principles, effective regulation, and strong global
institutions. At HSBC, we agree that these principles
are critical for the common good. It is vital that the
industry should engage constructively in the debate
about how this should work in practice and HSBC is
participating fully in these discussions. In our view,
the overall objective must be to deliver three
effective market mechanisms.
Competitive product provision is fundamental to
economic and social development. In the recent past,
attempts to drive ever greater profits from the same
source resulted in distorted products, lack of
transparency and over-complexity. The industry
needs to learn the lessons from this and deliver a
market which provides financial services that are
competitive, transparent and responsive to genuine
H S B C H O L D I N G S P L C
Group Chairman’s Statement (continued)
Group Chairman’s Statement
customer needs.
The market for capital has also suffered from
clear distortions in recent years. There has been too
great an emphasis on short-term gains, often
accompanied by shareholder pressure to increase
leverage in order to boost returns, and a dangerous
underpricing of risk. This resulted in unsustainable
returns, which in some cases proved to be illusory.
Banks must be appropriately capitalised, sufficiently
liquid and not overstretched, and getting this right
will be crucial in delivering the sustainable financial
system we need for the future.
Partly because of these problems in other areas
of the marketplace, the third area requiring urgent
reform is the market for talent. There is
understandable public anger in some countries as a
result of the practices at certain banks and, in
particular, because of the egregious reward of
management failure. We have witnessed
unacceptable distortions – from rewards linked to
unsustainable or illusory day-one revenues which
encouraged excessive risk-taking; to multi-year
guaranteed bonuses with no performance criteria.
Over the last three years I have spoken publicly
about my concerns regarding remuneration and I will
set out our principles at HSBC.
Rewarding sustainable performance
First, for any bank to be sustainable it must strike the
right balance in serving the long-term interests of its
stakeholders. It must deliver sustainable returns to
shareholders on their investment; it must maintain
the capital strength needed to support the customers
and economies it serves; and it must reward its
employees appropriately. My own experience is that
colleagues want to know that their job makes a
difference and contributes to social and economic
development; reward is simply not the only
motivating factor. Nonetheless it is important, and
companies have a clear responsibility to treat their
employees appropriately.
It therefore follows that remuneration must be
firmly tied to sustainable performance and must not
reward failure. It should be properly aligned with
risk which remains on the balance sheet, and subject
to deferral and to clawback in case performance later
proves to be unsatisfactory.
Second, in order to maintain long-term
competitive advantage, remuneration must be
market-based. Underpaying ultimately results in a
company losing some of its best people. HSBC is
domiciled in the UK but we have around 300,000
employees in 88 countries and territories. We have to
think internationally, and remuneration policy is no
10
exception. Similarly, if pre-eminent financial centres
like London are to remain home to firms like HSBC,
those of us who care for its future must reflect the
reality of the global marketplace in our thinking and
approach.
Third, an independent Remuneration Committee
should conduct rigorous international benchmarking
on compensation and consult appropriately on its
conclusions. These are the principles we have
followed in determining HSBC’s rewards this year.
Our executive Directors have a combined
178 years of service – a track record almost without
parallel in the industry. I believe there is no better
management team in banking and it is no
coincidence that HSBC has remained profitable
throughout the financial crisis and paid dividends
when few other banks did. Indeed, for 2009, our total
dividends to shareholders once again comfortably
exceed total bonus awards. We have not needed
taxpayers’ money; on the contrary, HSBC has
contributed nearly £5 billion in tax to the UK
economy over the past five years.
At HSBC, we firmly believe that bonuses are a
legitimate and proper element of reward providing,
of course, awards fully satisfy the principles set out
above. The G20 has set out clear guidance which
HSBC wholly supports, and we comply with the
Financial Services Authority’s remuneration code of
practice. Indeed, our decision to defer 100 per cent
of executive Director bonuses in respect of 2009
over three years exceeds these guidelines.
Proper pay for proper performance includes
ensuring market-based pay for employees over time.
The Board expects fixed pay in banking to increase
as a proportion of total compensation, especially for
important risk and supervisory functions. This is a
process we intend to see through at HSBC, and our
management team is no exception.
The Board fully appreciates that, in these
extraordinary times, remuneration is enormously
sensitive – and particularly so when the absolute
numbers involved are large by any standards, even if
they are not in comparison with some other
companies of HSBC’s standing. Our practice is clear
and transparent and this year’s executive awards are
set out in the Directors’ Remuneration Report
published today. We absolutely believe that the
decisions we have taken on this year’s remuneration
awards are right – for all of our stakeholders.
Building a sustainable financial system for
the future
As policymakers and industry participants take the
necessary steps to improve the way our markets
work, there are also some important over-arching
challenges which we must address.
It is imperative to strike the right balance
between strengthening the financial system and
supporting economic growth. ‘De-risking’ the
banking system, if taken too far, will throttle
recovery and drive risk into other, unregulated parts
of the capital markets. It is in the collective public
interest to get this balance right. We must not rush to
implement hastily conceived responses and policy
must be co-ordinated internationally if we are to
manage risk better in a truly global industry.
Policymakers also need to evolve new
macroeconomic tools which will assist them to
manage the supply of credit, as well as the cost of
credit, in the economy. I believe a key element of
this involves managing bank capital on a
countercyclical basis which strikes the right balance
between financial system stability and the prospects
for economic growth. We cannot deliver a
sustainable financial system without improving the
wider framework for macroeconomic management
too.
Finally, in the context of a wide-ranging
discussion on the appropriate size and shape of
banks, we must recognise that corporate structure
and liquidity management are at least as important as
size per se. This debate has sometimes been given
the unhelpful shorthand ‘too big to fail’, but the
reality is more complex than the headlines suggest.
We believe that the financial system needs banks
which are ‘big enough to cope’ by having a
diversified business portfolio, helping to reduce risk
and to generate consistent returns. There has
likewise not been enough consideration given to the
need for banks to be ‘broad enough to serve’ those
global customers who have increasingly diverse
financial needs. In short, it is undesirable and
impractical to prescribe some ideal model for a bank.
The crisis clearly demonstrated that systemic
importance is not a function of size or business
focus.
HSBC has always believed in having a
transparent structure based on separately capitalised
subsidiaries, takes a conservative approach to
liquidity management, and has built a business with
the scale to provide broad, diversified services to its
global customers. While the detail and timing of
regulatory change remain uncertain, we are
confident that our focus on these fundamentals
positions us strongly and competitively to respond to
the challenges ahead.
S K Green, Group Chairman
1 March 2010
11
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review
Principal activities / Strategic direction / Challenges and uncertainties
Principal activities
HSBC is one of the largest banking and financial
services organisations in the world, with a market
capitalisation of US$199 billion at 31 December
2009.
Through its subsidiaries and associates, HSBC
provides a comprehensive range of banking and
related financial services. Headquartered in London,
HSBC operates through long-established businesses
and has an international network of some 8,000
properties in 88 countries and territories in six
geographical regions: Europe; Hong Kong; Rest
of Asia-Pacific; the Middle East; North America and
Latin America. Previously, the Middle East was
reported as part of Rest of Asia-Pacific. Within these
regions, a comprehensive range of financial services
is offered to personal, commercial, corporate,
institutional, investment and private banking clients.
Services are delivered primarily by domestic banks,
typically with large retail deposit bases, and by
consumer finance operations.
Taken together, the five largest customers of
HSBC do not account for more than one per cent of
HSBC’s income.
The Group has contractual and other
arrangements with numerous third parties in support
of its business activities. None of the arrangements is
individually considered to be essential to the
business of the Group.
There were no significant acquisitions during
the year (for details of acquisitions see page 444).
Strategic direction
HSBC’s strategic direction reflects its position as
‘The world’s local bank’, combining the largest
global emerging markets banking business and a
uniquely cosmopolitan customer base with an
extensive international network and substantial
financial strength.
The Group’s strategy is aligned with the key
trends which are shaping the global economy. In
particular, HSBC recognises that, over the long term,
developing markets are growing faster than the
mature economies, world trade is expanding at a
greater rate than gross domestic product and life
expectancy is lengthening virtually everywhere.
HSBC’s strategy is focused on delivering superior
growth and earnings over time by building on the
Group’s heritage and skills. Its origins in trade in
Asia have had a considerable influence over the
development of the Group and, as a consequence,
HSBC has an established and longstanding presence
in many countries. The combination of local
12
knowledge and international breadth is supported by
a substantial financial capability founded on balance
sheet strength, largely attributable to the scale of the
Group’s retail deposit bases.
HSBC is, therefore, continuing to direct
incremental investment primarily to the faster
growing markets and, in the more developed
markets, is focusing on businesses and customer
segments which have international connectivity. A
policy of maintaining HSBC’s capital strength and
strong liquidity position remains complementary to
these activities and is the foundation of decisions
about the pace and direction of investment.
The Group has identified three main business
models for its customer groups and global businesses
that embody HSBC’s areas of natural advantage:
•
•
•
businesses with international customers for
whom connections with developing markets are
crucial – Global Banking and Markets, Private
Banking, the large business segment of
Commercial Banking and the mass affluent
segment of Personal Financial Services;
businesses with local customers where service
efficiencies can be enhanced through global
scale – the small business segment of
Commercial Banking and the mass market
segment of Personal Financial Services; and
products where global scale is possible by
applying the Group’s efficiency, expertise and
brand – product platforms such as global
transaction banking.
The means of executing the strategy and making
greater use of the linkages within the Group are
clear:
•
•
the HSBC brand and global networks will be
leveraged to reach new customers and offer
further services to existing clients;
efficiency will be enhanced by taking full
advantage of local, regional and global
economies of scale, in particular by adopting
a common systems architecture wherever
possible; and
• objectives and incentives will be aligned to
motivate and reward staff for being fully
engaged in delivering the strategy.
Challenges and uncertainties
Current economic and market conditions
may adversely affect HSBC’s results
HSBC’s earnings are affected by global and local
economic and market conditions. The dislocation in
financial markets which began in August 2007 put
financial institutions under considerable pressure.
Market turbulence was accompanied by recessionary
conditions in developed economies and a slowdown
in emerging countries, with serious adverse
consequences for asset values, employment,
consumer confidence and levels of economic
activity. The global economy entered the most severe
downturn for 80 years in 2008.
Governments and central banks took concerted
action to make substantial funds and deposit
guarantees available to boost liquidity and
confidence in their financial systems, stimulate
lending and support institutions which were judged
to be at risk of failing. In addition, governments
extended fiscal stimulus programmes and central
banks reduced interest rates. As a consequence,
conditions eased in 2009 and most leading
developed economies began to emerge from
recession, although the pace and depth of recovery
was uneven across economies and asset markets.
The financial services industry continued to face
an unusually high degree of uncertainty.
Despite some evidence of stabilisation in
housing market conditions during 2009, the dramatic
declines of the previous two years, particularly in the
US and the UK, continued to affect adversely the
credit performance of real estate-related exposures.
Higher unemployment undermined consumer
confidence and this, coupled with the deterioration in
house prices, led to lower spending which weakened
economies. This resulted in significant write-downs
of related asset values by financial institutions,
including HSBC. These write-downs, both of direct
lending exposures and of asset-backed securities,
caused many financial institutions to seek additional
capital, to reduce or eliminate dividends, to merge
with larger and stronger competitors and, in some
cases, to fail.
Economic conditions remain fragile, and the risk
exists that major economies may suffer a ‘double
dip’ recession in which the improvements seen in a
number of important markets reverse. This could
have an adverse effect on HSBC’s operating results.
In particular, the Group may face the following
challenges in connection with these events:
• HSBC’s ability to assess the creditworthiness
of its customers or to estimate the values of its
assets may be impaired if the models and
techniques it uses become less accurate in their
predictions of future behaviour, valuations or
estimates. The process HSBC uses to estimate
losses inherent in its credit exposure or assess
the value of certain assets requires difficult,
13
subjective and complex judgements. These
include forecasts of economic conditions and
how predicted economic scenarios may impair
the ability of HSBC’s borrowers to repay their
loans or affect the value of assets. As a
consequence, this process may be less capable
of making accurate estimates which, in turn,
may undermine the reliability of the process;
•
•
the demand for borrowing from creditworthy
customers may diminish should economic
activity slow;
a prolonged period of low interest rates will
constrain net interest income earned by HSBC
on its excess deposits;
• HSBC’s ability to borrow from other financial
institutions or to engage in funding transactions
on favourable terms, or at all, could be
adversely affected by any renewed disruption
in the capital markets or deteriorating investor
sentiment;
• market developments may continue to depress
consumer confidence and may cause further
declines in credit card usage and adverse
changes in payment patterns, leading to
increases in delinquencies and default rates,
write-offs and loan impairment charges beyond
HSBC’s expectations;
•
loan impairment allowances and write-offs
would be likely to rise in the event of a ‘double
dip’ recession as consumer confidence
weakened and business failures increased;
• HSBC expects to face increased regulation and
supervision of the financial services industry,
following new proposed regulatory measures in
countries in which it operates;
•
•
trade and capital flows may contract as a result
of protectionist measures being introduced in
certain markets; and
increased government ownership and
control over financial institutions and further
consolidation in the financial industry which
could significantly alter the competitive
landscape.
As a global financial institution, HSBC
is exposed to these developments across all its
businesses, both directly and through their impact
on its customers and clients. Local variations exist,
however, reflecting regional circumstances and
presenting challenges to HSBC which are specific
to those areas. HSBC’s strong balance sheet and
capital position, its roots in emerging markets and
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Challenges and uncertainties
its links with the developed world provide it with the
platform to continue to grow, taking opportunities to
expand its operations in existing markets and
connect local customers internationally.
Europe
In the UK, the contraction in economic output
appears to have ceased with the country emerging
slowly from recession in the last quarter of 2009.
However, economic indicators remain weak and
the risk of the country slipping back into recession
in 2010 remains, thus delaying the recovery.
Government measures to tackle the record levels
of national debt, including taxation increases and
public spending cuts, are also likely to result in a
slower recovery than from other recessions. Political
involvement in the regulatory environment and the
major financial institutions in which the state has a
direct financial interest will continue. Government
demands for increased credit to support the
economic recovery coupled with regulatory actions
to diminish the banking sector’s reliance on short-
term wholesale funding will increase competition for
deposits, narrowing margins. The combination of
slow economic recovery, government intervention
and increased competition for deposits will maintain
pressure on profitability within HSBC’s retail
business model. Credit quality is expected to
improve in some sectors, however, as the economy
returns to growth but could suffer a reversal should
there be any further increase in unemployment in
2010.
In France, following government stimulus
measures, the economy has started recovering with
gross domestic product (‘GDP’) growing slightly
from the second quarter of 2009 and the number of
companies in default stabilising. Although
unemployment is rising and there are concerns about
the public deficit, household consumption remains
robust and continues to drive the economy. HSBC’s
retail business model depends on banking fees and
a consolidation of the recovery observed in the
financial markets in 2009 will help sustain
profitability. Credit quality is expected to remain
stable for personal customers due to the quality of
the client base, though the outlook for commercial
credit remains less certain.
Outside the UK and France, conditions are
likely to remain difficult in some of the countries in
which HSBC currently operates in Europe and
volatility is expected to continue, in particular as
markets focus on potential sovereign credit
deterioration.
14
Hong Kong and Rest of Asia-Pacific
In Asia-Pacific, Hong Kong remains HSBC’s key
market, and through the financial crisis has
continued to generate relatively high returns on
capital. HSBC will invest to maintain its competitive
position in Hong Kong while continuing to support
its growing franchises in other markets in the region.
The slowdown in commercial activity, which
precipitated the coordinated government stimulus
packages, affected fee-based businesses, and
continuing low interest rates have left deposit
spreads compressed. However, HSBC is now seeing
more lending demand as regional economies emerge
from recession and equity markets and cross-border
trade flows improve. HSBC attracted higher deposits
in 2009 despite intensified competition for liquidity,
and this added to the challenges of finding
opportunities to deploy the deposits where credit
demand remained muted. A recent increase in
lending has started to ease some of these pressures.
Emerging markets in Asia-Pacific currently offer the
brightest prospects, with GDP growth in mainland
China and India, in particular, expected to be strong
in 2010.
As the world’s fastest growing region, Asia is
expected to drive incremental growth in the global
recovery. Inflation triggered by rising output prices
and increased demand remains a concern which has
prompted regulatory interventions in the form of
‘cooling measures’ to manage asset growth and
prevent, as far as possible, asset bubbles emerging.
Mainland China has been prominent in taking a lead
in this area. HSBC’s strong liquidity position in the
region remains key to the Group’s ability to expand
as well as increase margins when interest rates begin
to rise again, the timing of which remains uncertain.
Regional markets are likely to remain competitive
due to the growing presence of large domestic and
regional banks, for example, the mainland Chinese
banks in Hong Kong.
Middle East
After a very difficult year, there are signs that the
conditions for a recovery in Middle East economic
activity have begun to emerge. Assuming an average
oil price in excess of US$70 a barrel, public finances
in the key oil producing states such as Saudi Arabia,
Qatar and the United Arab Emirates (‘UAE’) should
improve, allowing governments to maintain and
even accelerate fiscal stimulus programmes.
Investment spending is also likely to pick up
after last year’s slowdown, although ongoing
difficulty accessing funding will impede the pace of
capital spending growth for the public and private
sector alike. Tight financing conditions as well as a
sharp fall in asset prices in some parts of the region
will also weigh on an expected increase in private
consumption levels.
Provided the external environment continues to
strengthen, regional non-commodity exporters such
as Egypt should see the recent downturn in demand
for tourism and trade services slowly reverse,
offering additional support for growth.
With most regional economies basing their
monetary regimes around a US dollar-peg, interest
rates are expected to remain at historically low levels
across much of the region in 2010. Coupled with
growth in government spending and gains in global
commodity prices, this may result in a rise in
inflation. After the sharp economic downturn of
2009, however, the increase in price pressure is
unlikely to be pronounced.
North America
In 2009, the economic backdrop in the US continued
to be characterised by tight credit conditions,
reduced economic growth and a weak housing
market. Against this, market confidence began to
increase, beginning in the second quarter of the year,
stemming largely from government initiatives to
restore faith in the capital markets, and the benefits
to borrowers of the prolonged period of low Federal
funds rates. The latter put pressure on spreads earned
on HSBC’s deposit base, however. As the disruption
to financial markets eased, evidence emerged of
contracting credit spreads and improved liquidity
during 2009, beginning in the second quarter of the
year, enabling many companies to issue debt and
raise new capital.
The reduction in uncertainty helped capital
markets to recover and stock markets to rise. Signs
of stabilisation in house prices, most notably in the
lower price ranges, began to emerge in the third
quarter of the year. An improvement in
unemployment and a sustained recovery in the
housing market continue to remain critical to
consumer confidence and a broader US economic
recovery. Although consumer confidence has
improved, it remains depressed on a historical basis,
driven by declines in household income and wealth
and the job market remaining difficult. It is likely
that these conditions will continue to constrain the
Group’s results into 2010, although the degree to
which this happens remains uncertain.
On 14 January 2010, the US Administration
announced its intention to propose a Financial Crisis
Responsibility Fee to be assessed against financial
institutions with more than US$50 billion on
15
consolidated assets for at least 10 years. It is not
possible to assess the financial impact of this
proposal, however, until final legislation has been
enacted.
Latin America
Economic activity in Latin America was affected by
the global economic recession in 2009. The region’s
weighted average GDP is expected to fall by 2.7 per
cent in the year, though growth may resume in 2010
given the outlook for world trade and a rebound in
economic activity. Unemployment rates in the region
rose in 2009 and it is probable that this trend will
continue, albeit at a slower pace as economies begin
to recover. Inflation fell due to falling commodity
prices and lower demand. These effects will begin to
reverse in 2010 and consequently inflation may rise.
HSBC is positioning itself to grow in select
customer markets, though challenges remain to
expanding business volumes. Margin pressures are
expected to continue throughout the region due to
fierce competition for prime customers and lower
interest rates than the historical averages. Any
further reduction in GDP and increase in
unemployment will negatively affect business
activity, compounded by uncertainty surrounding
presidential elections in Costa Rica, Colombia and
Brazil in 2010 and in Peru and Argentina in 2011.
Liquidity and funding risks are inherent in
HSBC’s business
HSBC’s business model is founded upon having
ready access to financial resources whenever
required to meet its obligations and grow its
business. To this end, HSBC entities seek to
maintain a diversified and stable funding base
comprising core retail and corporate customer
deposits and institutional balances, and certain
entities augment this with modest amounts of
long-term wholesale funding. In addition, HSBC
holds portfolios of highly liquid assets diversified
by currency and maturity to enable it to respond to
unusual liquidity requirements.
Where markets become illiquid, the value at
which financial instruments can be realised is highly
uncertain, and although processes are available to
estimate fair values, they require substantial
elements of judgement, assumptions and estimates
(which may change over time). The risk of
illiquidity, therefore, may reduce capital resources as
valuations decline. Actions or the threat of actions by
third parties and independent market participants,
such as rating agency downgrades of instruments to
which HSBC has exposure, can result in reduced
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Challenges and uncertainties
liquidity and valuations of those instruments. The
liquidity of those HSBC entities that utilise
long-term wholesale markets could be constrained
by an inability to access them due to a variety of
unforeseen market dislocations or interruptions.
Rating agencies which determine HSBC’s credit
ratings and thereby influence the Group’s cost of
funds, take into consideration the effectiveness of
HSBC’s liquidity risk management framework.
The market conditions that the financial services
industry experienced during the height of the crisis
were reflected in decreased liquidity, reduced
availability of long-term wholesale market funding,
pressure on capital and extreme price volatility
across a wide range of asset classes. Illiquidity
prevented the realisation of some asset positions and
constrained risk distribution in ongoing banking
activities. The market conditions also highlighted the
significant benefits of a diversified core deposit base,
leading to increased competition for such deposits
and the greater risk of deposit migration between
competitors.
HSBC’s Global Banking and Markets business
operates in many markets affected by illiquidity and
is subject to the threat of extreme price volatility,
either directly or indirectly, through exposures to
securities, loans, derivatives and other commitments.
At the height of the financial crisis, HSBC made
substantial write-downs and recognised impairments
on illiquid legacy credit and structured credit
positions. Although during 2009 there was some
moderation in market conditions, it is difficult to
predict if this trend will continue and, if conditions
worsen, which of HSBC’s markets, products and
other businesses will be affected. Any repeat of these
factors could have an adverse effect on the Group’s
results.
Reform of the regulatory environment
presents risks to HSBC
There are potential strategic and structural risks to
the organisation, nature and scope of the Group’s
business activities and opportunities posed by many
of the proposals for regulatory reform being debated
both internationally and domestically in response to
the recent financial crisis. A consensus has emerged
among the G-20 nations that institutions that would
pose a systemic risk if they were to fail should be
subject to enhanced regulation in markets in which
they have a substantial presence. HSBC is likely to
be considered a systemically significant institution in
its key markets. The Basel Committee on Banking
Supervision (‘The Committee’) has issued a
comprehensive reform package to address the
lessons of the crisis which includes proposals on
16
strengthening global capital and liquidity regulations
and the resolution of systemically significant cross-
border banks. The Committee’s paper entitled
‘Strengthening the Resilience of the Banking Sector’
proposes changes to both the composition of capital
and the risk coverage of the capital framework, as
well as the introduction of a leverage ratio and
measures to promote the build up of capital buffers.
The stated intention of these proposals is to promote
a more resilient banking sector, to improve the
banking sector’s ability to absorb shocks, to
improve risk management and to strengthen bank
transparency and disclosure. The proposals
on liquidity aim to elevate the resilience of
internationally active banks to liquidity stresses, as
well as increasing international harmonisation of
liquidity risk supervision. A study of the impact of
all these proposals on individual banks, and the
financial services industry as a whole, is taking
place in the first half of 2010 in parallel with a
consultation process. The Committee is then seeking
to agree proposals by the end of 2010 for
implementation by the end of 2012.
At the same time, the European Commission,
the UK Tripartite Authorities (HM Treasury, the
Bank of England and the Financial Services
Authority (‘FSA’)), the US Government and others
have made a number of proposals for adjustments in
their regulatory regimes which could affect entities
in the HSBC Group. HSBC is engaged actively in
discussions with its regulators, both directly and
through industry bodies, on the appropriate regime to
be applied to various activities and entities, taking
into account the interaction of global and local
regulations. The precise nature, extent, form and
timing of any regulatory changes, as well as the
degree to which there will be effective consultation
among the various jurisdictions involved, are highly
uncertain and thus it is not possible to determine or
estimate the likely actual impact on the Group’s
business and activities. Major areas where reform is
being actively discussed, all of which could affect
HSBC’s business and activities, are possible capital
surcharges for systemically important banks, greater
emphasis on standalone national subsidiaries,
reduced interconnectedness within the system,
changes to capital regulations affecting both capital
and capital requirements, changes in compensation
practices, restrictions on certain types of financial
products, and greater separation of retail and
wholesale activities.
HSBC Bank, like all authorised institutions in
the UK, is subject to a ‘Special Resolutions Regime’
under the Banking Act 2009 which gives wide
powers in respect of UK banks and their parent
companies to HM Treasury, the Bank of England
and the FSA in circumstances where any such UK
bank has encountered or is likely to encounter
financial difficulties.
HSBC is subject to political and economic
risks in the countries in which it operates
HSBC operates through an international network
of subsidiaries and affiliates in 88 countries and
territories around the world. Its results are, therefore,
subject to the risk of loss from unfavourable political
developments, currency fluctuations, social
instability and changes in government policies on
such matters as expropriation, authorisations,
international ownership, interest-rate caps, limits
on dividend flows and tax in the jurisdictions in
which it operates. These factors may also negatively
affect revenues from the trading of securities and
investment in securities, and credit quality in lending
portfolios. The ability of HSBC’s subsidiaries and
affiliates to pay dividends could be restricted by
changes in official banking measures, exchange
controls and other requirements. HSBC prepares its
accounts in US dollars, but because a substantial
portion of its assets, liabilities, assets under
management, revenues and expenses are
denominated in other currencies, changes in foreign
exchange rates have an effect on its reported income,
cash flows and shareholders’ equity.
HSBC has significant exposure to
counterparty risk both within the financial
sector and to other risk concentrations
HSBC has exposure to virtually all major industries
and counterparties, and it routinely executes
transactions with counterparties in financial services,
including brokers and dealers, commercial banks,
investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions
expose HSBC to credit risk in the event of default by
its counterparty or client. HSBC’s ability to engage
in routine transactions to fund its operations and
manage its risks could be adversely affected by the
actions and commercial soundness of other financial
services institutions. Financial institutions are
necessarily interdependent because of trading,
clearing, counterparty or other relationships. As a
consequence, a default by, or decline in market
confidence in, individual institutions, or anxiety
about the financial services industry generally, can
lead to further individual and/or systemic
difficulties, defaults and losses. Where counterparty
risk has been mitigated by taking collateral, HSBC’s
credit risk may remain high if the collateral it holds
cannot be realised or has to be liquidated at prices
17
which are insufficient to recover the full amount of
its loan or derivative exposure.
HSBC operates in a highly competitive
environment, and competition could
intensify as a result of current global market
conditions and possible changes thereto
The financial crisis has begun to re-shape the
banking landscape globally and those institutions
which have emerged the strongest have reinforced
both the importance of a core retail and commercial
deposit funding base and strong capitalisation.
At the height of the crisis, financial institutions
requiring support from governments in a variety of
ways were characterised broadly as being dependent
on short-term wholesale funding which failed to roll
over due to market concerns about the quality of the
assets being funded. As a consequence, financial
firms have sought to reduce the proportion of their
balance sheets funded in the wholesale markets. As
a result, competition for retail deposits and tighter
balance sheet control have resulted in re-pricing of
loans and advances. Although the financial
industry’s renewed focus on building retail deposit
bases has resulted in greater price competition in
terms of interest rates offered, the strength of
HSBC’s brand and its longstanding conservative
balance sheet structure and its relationship-based
approach have enabled the Group to increase
deposits in the current environment.
Further consolidation is expected to take place
through portfolio disposals, the sale of banks and
financial institutions weakened by the crisis, or the
consolidation of smaller institutions which lack the
scale to compete in a world of higher capital and
liquidity requirements.
In addition, the crisis has reinforced a global
economic shift towards emerging markets. It is
now expected that much of the growth in financial
services will be in emerging markets as their
economies continue to grow and the relative
penetration of banking activities increases.
HSBC is subject to legal and compliance
risks, which could have an adverse effect
on the Group
Legal and compliance risks arise from a variety of
sources with the potential to cause harm to HSBC
and its ability to operate. These issues require the
Group to deal appropriately with potential conflicts
of interest; regulatory requirements; ethical issues;
anti-money laundering laws and regulations; privacy
laws; information security policies; sales and trading
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Challenges and uncertainties / KPIs
practices; and the conduct of companies with which
it is associated. Failure to address these issues
appropriately may give rise to additional legal and
compliance risk to HSBC, with an increase in the
number of litigation claims and the amount of
damages asserted against HSBC, or subject HSBC to
regulatory enforcement actions, fines or penalties or
reputational damage.
Operational risks are inherent in HSBC’s
business
HSBC is exposed to many types of operational risk,
including fraudulent and other criminal activities
(both internal and external), breakdowns in
processes or procedures and systems failure or
non availability. HSBC is also subject to the risk of
disruption of its business arising from events that are
wholly or partially beyond its control (for example
natural disasters, acts of terrorism, epidemics and
transport or utility failures) which may give rise to
losses in service to customers and/or economic loss
to HSBC. All of these risks are also applicable where
HSBC relies on outside suppliers or vendors to
provide services to it and its customers.
The reliability and security of HSBC’s
information and technology infrastructure and its
customer databases are crucial to maintaining the
service availability of banking applications and
processes and to protecting the HSBC brand. Critical
system failure, any prolonged loss of service
availability or any material breach of data security,
particularly involving confidential customer data,
could cause serious damage to the Group’s ability to
service its clients, could breach regulations under
which HSBC operates and could cause long-term
damage to its business and brand.
HSBC is subject to tax-related risks in the
countries in which it operates, which could
have an adverse effect on its operating
results
HSBC is subject to the substance and interpretation
of tax laws in all countries in which it operates. Tax
risk is the risk associated with changes in tax law or
the interpretation of tax law. It also includes the risk
of changes in tax rates and the risk of consequences
arising from failure to comply with procedures
required by tax authorities. Failure to manage tax
risks could lead to increased tax charges, including
financial or operating penalties.
Key performance indicators
The Board of Directors and the Group Management
Board monitor HSBC’s progress against its strategic
objectives. Progress is assessed by comparison with
the Group’s strategy, its operating plan targets and its
historical performance using both financial and
non-financial measures.
As a prerequisite for the vesting of Performance
Shares, the Remuneration Committee must satisfy
itself that HSBC Holdings’ financial performance
has shown a sustained improvement in the period
since the award date. In determining this, the
Remuneration Committee will take account of all
relevant factors but, in particular, will compare
HSBC’s financial key performance indicators
(‘KPI’s) with the equivalent measures within the
total shareholder return (‘TSR’) comparator group.
Financial KPIs
In assessing progress in delivering the Group’s
strategy and monitoring HSBC’s performance,
management reviews the financial KPIs described
below. These KPIs are complemented by a range of
secondary benchmarks which are relevant to
reviewing performance against plan and at the
business level.
HSBC has published a number of key targets
against which performance is measured. Financial
targets have been set as follows: a return on average
total shareholders’ equity over the medium term of
between 15 per cent and 19 per cent; the cost
efficiency ratio to be between 48 per cent and 52 per
cent; and HSBC’s TSR to be in the top half of that
achieved by the comparator group. The cost
efficiency ratio has been set as a range within which
the business is expected to remain in order to
accommodate both returns to stakeholders and the
need for continued investment in support of future
business growth.
In the light of market conditions and proposed
changes to capital requirements currently being
considered by various governmental and regulatory
bodies, HSBC believes return on average total
shareholders’ equity over the medium term is more
likely to be around the lower end of the target range.
Once regulatory proposals are in definitive form
HSBC intends to publish a revised target range.
18
Financial KPIs – trend analysis
Revenue growth1 ....................................................................
Revenue mix2
Net interest income ...........................................................
Net fee income ..................................................................
Other income3 ....................................................................
Cost efficiency4
– reported ...........................................................................
– excluding goodwill impairment .....................................
Credit performance as measured by risk adjusted margin5 ...
Return on average invested capital6 ......................................
Return on average total shareholders’ equity7........................
Dividends per share growth8 ..................................................
2009
%
(19.0)
61.5
26.7
11.8
52.0
52.0
3.5
4.1
5.1
(46.9)
Basic earnings per ordinary share9
– reported ...........................................................................
– excluding goodwill impairment .....................................
0.34
0.34
0.41
1.19
US$
US$
2008
%
2007
%
2006
%
3.4
20.8
13.4
52.1
24.5
23.4
60.1
47.2
4.8
4.0
4.7
(28.9)
47.8
27.9
24.3
49.4
49.4
6.0
15.3
15.9
11.1
US$
1.44
1.44
52.8
26.3
20.9
51.3
51.3
6.3
14.9
15.7
11.0
US$
1.22
1.22
2005
%
12.2
54.4
25.1
20.5
51.2
51.2
6.3
15.9
16.8
10.6
US$
1.18
1.18
For footnotes, see page 149.
Total shareholder return
HSBC TSR ..................
Benchmarks:
– FTSE 100 .............
– MSCI World ........
– MSCI Banks ........
Over Over Over
5 years
1 year 3 years
128.3
103.6
120.6
127.3
116.7
125.2
98.0
103.6
70.6
135.4
134.9
92.3
Revenue growth provides an important guide
to the Group’s success in generating business.
In 2009, total revenue declined by 19 per cent to
US$66.2 billion. On an underlying basis, revenue
grew by 8 per cent, reflecting the resilience of
HSBC’s income generating capabilities in these
difficult economic circumstances.
Revenue mix represents the relative distribution
of revenue streams between net interest income,
net fee income and other revenue. It is used to
understand how changing economic factors affect
the Group, to highlight dependence on balance sheet
utilisation for income generation and to indicate
success in cross-selling fee-based services to
customers with deposit and loan facilities. This
understanding assists management in making
business investment decisions.
Cost efficiency is a relative measure that
indicates the consumption of resources in generating
revenue. Management uses this to assess the success
of technology utilisation and, more generally, the
productivity of the Group’s distribution platforms
and sales forces.
Credit performance as measured by risk-
adjusted margin is an important gauge for assessing
whether credit is correctly priced so that the returns
available after recognising impairment charges meet
the Group’s required return parameters.
19
Return on average invested capital measures
the return on the capital investment made in the
business, enabling management to benchmark HSBC
against competitors.
Return on average total shareholders’ equity
measures the return on average shareholders’
investment in the business. This enables
management to benchmark Group performance
against competitors and its own targets. In 2009, the
ratio was 5.1 per cent or 0.4 percentage points higher
than in 2008.
HSBC aims to deliver sustained dividend per
share growth for its shareholders. The total dividend
for 2009, based on the year to which the dividends
relate (rather than when they were paid), amounts to
US$0.34 per ordinary share, a reduction of
47 per cent on 2008.
Basic earnings per share (‘EPS’) is a ratio that
shows the level of earnings generated per ordinary
share. EPS is one of two KPIs used in rewarding
employees and is discussed in more detail in the
Directors’ Remuneration Report on page 334. EPS
for 2009 was US$0.34, a decline of 17 per cent on
2008.
Total shareholder return is used as a method
of assessing the overall return to shareholders on
their investment in HSBC, and is defined as the
growth in share value and declared dividend income
during the relevant period. TSR is a key performance
measure in rewarding employees. In calculating
TSR, dividend income is assumed to be invested in
the underlying shares. The TSR benchmark is an
index set at 100 and measured over one, three and
five years for the purpose of comparison with the
performance of a group of competitor banks which
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
KPIs / Reconciliation of reported and underlying profit before tax
an overall score for each market on a 100-point
scale, which is then benchmarked against HSBC’s
main competitors. The scores from each market are
then weighted according to the risk-adjusted
revenues in that market to obtain the overall Group
score.
In 2009, Personal Financial Services’ customers
judged HSBC’s brand to be 6 points stronger than its
competitors, up from 4 points in 2008 and above the
target. Business Banking customers also judged the
brand to be 6 points higher than HSBC’s
competitors, the same as in 2008.
Customer recommendation
Customer recommendation is an important driver of
business growth for HSBC. HSBC uses a consistent
measure of customer recommendation around the
world to continue to improve the services provided
by the Group to customers of Personal Financial
Services and Business Banking. This measurement is
carried out by accredited independent third-party
organisations and the resulting recommendation
scores are benchmarked against competitors. A
100 point scale is used to measure the score.
The 2009 customer recommendation score for
Personal Financial Services increased from +1 to +2
compared with a target of +3.
Business Banking customer recommendation
was also +2 points ahead of HSBC’s competitors but
below the target of +4.
IT performance and systems reliability
HSBC tracks two key measures as indicators of IT
performance; namely, the number of customer
transactions processed and the reliability and
resilience of systems measured in terms of service
availability targets.
Number of customer transactions processed
The number of customer transactions processed
reflects the dependency on IT of the delivery
channels that customers use to interact with HSBC.
Monitoring the volumes by channel enables the
Group to allocate resources appropriately. Despite
a fall in total volumes, the transition of customer
transactions from labour intensive channels
(branch/call centre) to automated channels (credit
card, internet, self-service and other e-channels)
continued in 2009. The following chart shows the
2005 to 2009 volumes per delivery channel:
reflect HSBC’s range and breadth of activities. As
the comparator group includes companies listed on
overseas markets, a common currency is used to
ensure that TSR is measured on a consistent basis.
The TSR levels at the end of 2009 were 128.3, 103.6
and 120.6 over one, three and five years respectively.
HSBC’s performance did not meet the target of
being in the top half of the comparator group over
any of the required time periods.
Management believes that financial KPIs must
remain relevant to the business so they may be
changed over time to reflect changes in the Group’s
composition and the strategies employed.
Non-financial KPIs
HSBC has chosen four non-financial KPIs which
are important to the future success of the Group
in delivering its strategic objectives. These
non-financial KPIs are reported within HSBC
on a local basis.
Employee engagement
Employee engagement is a measure of employees’
emotional and rational attachment to HSBC. It is
critical to the long-term success of the Group and, as
such, an employee engagement target was included
in the 2009 objectives for Group executives (see
Directors’ Remuneration Report, page 334).
In 2009, HSBC conducted the third Global
People Survey of its workforce worldwide. The 2009
participation rate of 91 per cent was one of the
highest in the industry.
The Group’s employee engagement score rose
from 67 per cent in 2008 to 71 per cent in 2009. In
achieving 71 per cent, HSBC exceeded its target for
2009 of 69 per cent and the external global and
sector averages. HSBC aspires to progressively
improve its engagement score to best in class levels
by 2011.
The 2009 survey covered 14 aspects. Employees
rated HSBC above the external global average across
all aspects.
Brand perception
In order to manage the HSBC brand most
effectively, the Group tracks brand health among
Personal Financial Services and Business Banking
customers in each of HSBC’s major markets. The
survey is conducted on a consistent basis by
accredited independent third-party organisations.
A weighted scorecard of brand measures produces
20
Number of customer transactions (millions)
2,500
2,000
1,500
1,000
500
0
Branch/Call
Centre-Agent
Credit
card
Internet
Self Serv ice
Other
Others
Terminal
e-Channels
(pay ment,
clearing, etc)
2005
2006
2007
2008
2009
Percentage of IT services meeting or exceeding
targets
HSBC’s IT function establishes with its end-users
service levels for systems performance, such as
systems running 99.9 per cent of the time or credit
card authorisations within two seconds, and monitors
the achievement of each of these commitments. The
following chart shows the percentage of IT services
meeting or exceeding the agreed service targets by
region. All regions continue to show sustained
improvement over the period.
Percentage of IT services meeting or exceeding
targets
100%
99%
98%
97%
96%
95%
94%
93%
92%
91%
90%
Asia-Pacific
Europe
Latin America
North America
IT Overall
2007
2008
2009
Reconciliation of reported and
underlying profit before tax
HSBC measures its performance internally on a
like-for-like basis by eliminating the effects of
foreign currency translation differences; acquisitions
and disposals of subsidiaries and businesses; fair
value movements on own debt attributable to credit
spread where the net result of such movements will
be zero upon maturity of the debt; and, in 2007, gains
from the dilution of the Group’s interests in associates,
all of which distort year-on-year comparisons. HSBC
refers to this as its underlying performance.
Reported results include the effects of the above
items. They are excluded when monitoring progress
against operating plans and past results because
21
management believes that the underlying basis
more accurately reflects operating performance.
Constant currency
Constant currency comparatives for 2008 and
2007 used in the 2009 and 2008 commentaries,
respectively, are computed by retranslating into
US dollars for non-US dollar branches, subsidiaries,
joint ventures and associates:
•
•
the income statements for 2008 and 2007 at the
average rates of exchange for 2009 and 2008,
respectively; and
the balance sheets at 31 December 2008 and
2007 at the prevailing rates of exchange on
31 December 2009 and 2008, respectively.
No adjustment has been made to the exchange
rates used to translate foreign currency denominated
assets and liabilities into the functional currencies of
any HSBC branches, subsidiaries, joint ventures or
associates. When reference is made to ‘constant
currency’ in tables or commentaries, comparative
data reported in the functional currencies of HSBC’s
operations have been translated at the appropriate
exchange rates applied in the current period on the
basis described above.
Underlying performance
The tables below compare HSBC’s underlying
performance in 2009 with 2008, and 2008 with 2007.
Equivalent tables are provided for each of HSBC’s
customer groups and geographical segments in their
respective sections below.
The foreign currency translation differences
were mainly due to the relative strengthening of the
US dollar compared with its value in 2008, and were
most significant in Europe due to the size of HSBC’s
operations in the UK.
The following acquisitions and disposals
affected both comparisons:
•
the gain on sale of HSBC’s UK merchant
acquiring business to a joint venture 49 per cent
owned by the Group in June 2008 and the gain
on sale of the residual stake in June 2009;
•
•
•
the disposal of seven French regional banking
subsidiaries in July 2008;
the disposal of the stake in Financiera
Independencia S.A.B. de C.VB (‘Financiera
Independencia’) in Mexico in November 2008;
and
the acquisition of PT Bank Ekonomi Raharja
Tbk (‘Bank Ekonomi’) in May 2009.
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Reconciliation of profit / Financial summary > Income statement
Reconciliation of reported and underlying profit before tax
2009 compared with 2008
2008
as
reported
US$m
2008
adjust-
ments10
US$m
Currency
translation11
US$m
2008
at 2009
exchange
rates12
US$m
2009
adjust-
ments10
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
HSBC
Net interest income .........
Net fee income ................
Changes in fair value14 ....
Gains on disposal of
French regional banks
Other income15 ................
42,563
20,024
6,570
2,445
10,080
Net operating income16 .
81,682
(65)
(58)
(6,570)
(2,445)
(680)
(9,818)
(2,062)
(1,315)
–
–
(1,597)
40,436
18,651
–
–
7,803
53
6
(6,533)
241
(993)
–
40,730
17,664
(6,533)
–
298
–
6,219
–
14,320
(4)
(12)
(199)
(100)
42
(4,974)
66,890
(6,176)
5,467
66,181
(19)
Loan impairment charges
and other credit risk
provisions ...................
(24,937)
6
709
(24,222)
–
(2,266)
(26,488)
Net operating income ....
56,745
(9,812)
(4,265)
42,668
(6,176)
3,201
39,693
(6)
(30)
Operating expenses
(excluding goodwill
impairment) ................
(38,535)
Goodwill impairment ......
(10,564)
68
–
2,655
(35,812)
–
(10,564)
(31)
–
Operating profit ............
7,646
(9,744)
(1,610)
(3,708)
(6,207)
15,213
Income from associates ..
1,661
–
25
1,686
–
95
1,448
(34,395)
11
10,564
–
5,298
1,781
100
(31)
7
1
(5)
80
8
(9)
8
4
100
410
6
Profit before tax ............
9,307
(9,744)
(1,585)
(2,022)
(6,207)
15,308
7,079
(24)
757
2008 compared with 2007
2007
as
reported
US$m
2007
adjustments
& dilution
gains10
US$m
2007
at 2008
exchange
rates17
US$m
Currency
translation11
US$m
2008
adjust-
ments10
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
HSBC
Net interest income .........
Net fee income ................
Changes in fair value14 ....
Gains on disposal of
French regional banks
Other income15 ................
37,795
22,002
3,055
–
16,141
Net operating income16 ...
78,993
(389)
(239)
(3,055)
–
(1,232)
(4,915)
(4)
(152)
–
–
(269)
(425)
37,402
21,611
–
–
14,640
73,653
250
18
6,570
2,445
703
9,986
4,911
(1,605)
–
42,563
20,024
6,570
–
(5,263)
2,445
10,080
(1,957)
81,682
13
(9)
115
(38)
3
Loan impairment charges
and other credit risk
provisions ...................
(17,242)
31
113
(17,098)
(6)
(7,833)
(24,937)
(45)
Net operating income ......
61,751
(4,884)
(312)
56,555
9,980
(9,790)
56,745
(8)
13
(7)
(36)
(3)
(46)
(17)
Operating expenses
(excluding goodwill
impairment) ................
(39,042)
Goodwill impairment ......
–
514
–
Operating profit ..............
22,709
(4,370)
Income from associates ..
1,503
(12)
Profit before tax ..............
24,212
(4,382)
For footnotes, see page 149.
301
(38,227)
(198)
(110)
(38,535)
1
–
–
(11)
107
96
–
–
(10,564)
(10,564)
18,328
9,782
(20,464)
7,646
(66)
(112)
1,598
–
63
1,661
11
4
19,926
9,782
(20,401)
9,307
(62)
(102)
22
Financial summary
Consolidated income statement .....................
Group performance by income and
expense item ..............................................
Net interest income ....................................
Net fee income ...........................................
Net trading income ....................................
Net income from financial instruments
designated at fair value ..........................
Gains less losses from financial
investments .............................................
Net earned insurance premiums ................
Other operating income .............................
Net insurance claims incurred and
movement in liabilities to policyholders .
Loan impairment charges and other
credit risk provisions ..............................
Operating expenses ....................................
Share of profit in associates and joint
ventures ..................................................
Gains arising from dilution of interests in
associates ...............................................
Economic profit .............................................
Consolidated balance sheet ...........................
Movement from 31 December 2008 to
31 December 2009 .................................
Average balance sheet and net interest
income ....................................................
Analysis of changes in net interest
income ....................................................
Short-term borrowings ...............................
Contractual obligations .............................
Ratios of earnings to combined fixed
charges ...................................................
Loan maturity and interest sensitivity
analysis ..................................................
Deposits .....................................................
Certificates of deposit and other time
deposits ..................................................
Page
23
26
26
27
28
30
31
32
33
34
35
38
40
41
41
42
42
46
53
56
56
56
57
58
60
Consolidated income statement
2009 compared with 2008
Reported pre-tax profits in 2009 fell by 24 per cent
to US$7.1 billion and earnings per share declined to
US$0.34. Return on average shareholders’ equity
remained broadly at 2008 levels at 5.1 per cent
(2008: 4.7 per cent).
On an underlying basis, profit before tax
increased by US$15.3 billion compared with 2008.
The difference between reported and underlying
results is explained on page 21. Except where
otherwise stated, the commentaries in the Financial
Summary are on an underlying basis.
Profit before tax on an underlying basis and
excluding the goodwill impairment charge of
US$10.6 billion in 2008, was 56 per cent or
US$4.7 billion higher.
The increase in profit before tax was driven by
strong growth in net operating income in Global
Banking and Markets, in part reflecting the absence
of significant write-downs in securities and
structured credit positions which had affected results
in 2008. More significantly, the business benefited
from market share gains in core activities and the
effect of early positioning by Balance Sheet
Management, in anticipation of the low interest rate
environment. Results in 2009 also reflected lower
loan impairment charges in North America, partly
offset by an increase in loan impairment charges and
other credit risk provisions elsewhere.
Although HSBC’s business in North America
continued to record a loss, performance improved as
write-downs in Global Banking and Markets reduced
and loan impairment charges in Personal Financial
Services decreased. This resulted from steps taken to
curtail origination in 2007 and 2008 which
culminated in the closure of the Consumer Lending
branch network in the second quarter of 2009, and
from the decision to place all consumer finance
portfolios other than credit cards into run-off. The
closure of the branch network fed through to lower
operating expenses during the remainder of the year.
In Hong Kong, economic performance remained
robust despite continuing challenges, with HSBC’s
results underpinned by a market-leading share in
deposits, residential mortgages, cards and insurance.
Overall profitability declined, however, as revenue
was driven lower by compressed deposit spreads in
the low interest rate environment. Loan impairment
charges improved on 2008, remaining low, and
operating expenses reflected a disciplined approach
to cost management.
23
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Income statement
Consolidated income statement
Interest income ........................................................................................................
Interest expense .......................................................................................................
Net interest income ..................................................................................................
Fee income ...............................................................................................................
Fee expense ..............................................................................................................
Net fee income .........................................................................................................
Trading income excluding net interest income .......................................................
Net interest income on trading activities .................................................................
Net trading income ..................................................................................................
Changes in fair value of long-term debt issued and related derivatives18 ..............
Net income/(expense) from other financial instruments designated at fair value ..
Net income/(expense) from financial instruments designated at fair value ...........
Gains less losses from financial investments ..........................................................
Gains arising from dilution of interests in associates .............................................
Dividend income ......................................................................................................
Net earned insurance premiums ..............................................................................
Gains on disposal of French regional banks ...........................................................
Other operating income ...........................................................................................
Total operating income .........................................................................................
2009
US$m
62,096
(21,366)
40,730
21,403
(3,739)
17,664
6,236
3,627
9,863
(6,247)
2,716
(3,531)
520
–
126
10,471
–
2,788
78,631
2008
US$m
91,301
(48,738)
42,563
24,764
(4,740)
20,024
847
5,713
6,560
6,679
(2,827)
3,852
197
–
272
10,850
2,445
1,808
88,571
Net insurance claims incurred and movement in liabilities to policyholders .............
(12,450)
(6,889)
Net operating income before loan impairment charges and other credit
risk provisions ...................................................................................................
Loan impairment charges and other credit risk provisions .....................................
Net operating income ............................................................................................
Employee compensation and benefits .....................................................................
General and administrative expenses ......................................................................
Depreciation and impairment of property, plant and equipment ............................
Goodwill impairment ...............................................................................................
Amortisation and impairment of intangible assets ..................................................
Total operating expenses .......................................................................................
Operating profit .....................................................................................................
Share of profit in associates and joint ventures .......................................................
Profit before tax .....................................................................................................
Tax expense .............................................................................................................
Profit for the year ..................................................................................................
Profit attributable to shareholders of the parent company ......................................
Profit attributable to minority interests ...................................................................
66,181
(26,488)
39,693
(18,468)
(13,392)
(1,725)
–
(810)
(34,395)
5,298
1,781
7,079
(385)
6,694
5,834
860
81,682
(24,937)
56,745
(20,792)
(15,260)
(1,750)
(10,564)
(733)
(49,099)
7,646
1,661
9,307
(2,809)
6,498
5,728
770
2007
US$m
92,359
(54,564)
37,795
26,337
(4,335)
22,002
4,458
5,376
9,834
2,812
1,271
4,083
1,956
1,092
324
9,076
–
1,439
87,601
(8,608)
78,993
(17,242)
61,751
(21,334)
(15,294)
(1,714)
–
(700)
(39,042)
22,709
1,503
24,212
(3,757)
20,455
19,133
1,322
For footnote, see page 149.
In the Rest of Asia-Pacific region, the economic
challenges faced were similar to those in Hong Kong
and their impact was reflected in lower income and
higher loan impairment charges. Income from
associates, primarily in mainland China, made a
significant positive contribution to the region’s
performance. HSBC continued to expand its
presence in Rest of Asia-Pacific through organic
growth and strategic investment.
HSBC’s Middle East operations suffered from
a combination of factors: a severe contraction in the
economy of Dubai, a fall in oil revenues for much of
the year and investment losses incurred by many
regional investors. This led to a decline in profit
before tax of 74 per cent, primarily due to a
significant increase in loan impairment charges.
The regional economic downturn and continuing
uncertainty affected both retail and corporate
customers, particularly in the United Arab Emirates
(‘UAE’) where the downturn was most pronounced.
24
In Europe, HSBC reported an increase in profit
before tax on an underlying basis, driven by Global
Banking and Markets in London and Paris. This
resulted from a strong performance in Rates and
Balance Sheet Management, coupled with the
benefit of stabilisation of asset prices and general
tightening of credit spreads and lower write-downs
in the credit trading business. This was partly offset
by a reduction in deposit spreads in Personal
Financial Services and Commercial Banking as
interest rates fell, and an increase in loan impairment
charges in Global Banking, reflecting a deterioration
in the credit position of a small number of clients.
The increase in profit before tax was driven
by strong growth in Global Banking and
Markets.
In Latin America, the decline in pre-tax profits
was driven by an increase in loan impairment
charges in Personal Financial Services and
Commercial Banking and lower revenues in Personal
Financial Services, partly offset by a strong
performance in trading and Balance Sheet
Management in Global Banking and Markets. The
lower revenues in Personal Financial Services were
in part due to the continued curtailment of personal
unsecured credit exposures, following the Group’s
adverse experience in 2008, with net interest income
also adversely affected by declining interest rates
and narrowing spreads.
With the exception of Personal Financial
Services, which continued to be heavily affected by
the consumer finance losses in North America, all
customer groups remained profitable.
The following items are significant to a
comparison of reported results with 2008:
•
the non-recurrence of the US$10.6 billion
goodwill impairment charge in North America
recorded in 2008;
•
•
•
•
the non-recurrence of a US$2.4 billion gain on
the sale of French regional banks in 2008;
fair value losses relating to own credit spreads
of US$6.5 billion in 2009 compared with gains
of US$6.6 billion in 2008;
a US$72 million fraud loss relating to Bernard
L Madoff Investment Securities LLC (‘Madoff
Securities’) in 2009, which was in addition to
the US$984 million charge reported in 2008;
loss from write-downs in legacy securities and
structured credit positions amounting to
US$0.3 billion in 2009 compared with
US$5.4 billion in 2008;
25
•
•
•
•
the acquisition in 2008 of the subsidiary, Project
Maple II B.V., which owned the Group’s
headquarters at 8 Canada Square, and the
subsequent sale of the company and leaseback
of the property in 2009, resulting in gains of
US$0.6 billion in 2009 and US$0.4 billion in
2008;
the sale of the card merchant-acquiring business
in the UK, resulting in gains of US$0.3 billion
in 2009 and US$0.4 billion in 2008;
the change in the basis of delivering long-term
employee benefits in the UK, which generated a
one-off accounting gain of US$0.5 billion in
2009; and
the tax expense of US$0.3 billion in 2009,
which was lower than in previous years as a
result of the geographic distribution of income.
The Group generated profits in low tax rate
jurisdictions, principally Asia, and incurred
losses in high tax rate jurisdictions, principally
the US, which when mixed produced a low
overall rate.
2008 compared with 2007
Reported pre-tax profits in 2008 fell by 62 per cent
to US$9.3 billion and earnings per share declined to
US$0.47. In a year characterised by a significant
deterioration in the credit markets and by
unprecedented illiquidity in most asset classes,
return on average total shareholders’ equity fell to
4.7 per cent.
The fall in profit before tax was exacerbated by
recognition of a US$10.6 billion impairment charge
which wrote off in full the goodwill carried on the
balance sheet in respect of the Group’s investment in
its North America Personal Financial Services
business. This non-cash charge arose substantially in
the second half of 2008 as heightened risk premia in
the market increased discount rates and cash flows
estimated from ongoing activities fell as the US
economy continued to decline and the outlook for
the business deteriorated.
On an underlying basis, profit before tax
declined by 102 per cent compared with 2007. The
difference between the reported and underlying
results is explained on page 21. Except where stated
otherwise, the commentaries in the Financial
Summary are on an underlying basis.
Performance in Asia was strong, generating
profit before tax of US$11.9 billion, broadly in line
with results excluding the dilution gains which arose
in 2007 when HSBC did not participate in share
offerings by its mainland China associates. Within
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Net interest income / Net fee income
Asia, Global Banking and Markets’ results were
strongly ahead, driven by foreign exchange, Rates
and securities services. Balance Sheet Management
revenues rose significantly from positioning ahead
of interest rate cuts, and were especially strong in
Europe despite losses from the defaults of certain
financial sector companies. With the exception of
Personal Financial Services, which incurred
significant losses in North America, all customer
groups remained profitable. Commercial Banking
and Private Banking delivered results broadly in line
with 2007, while Global Banking and Markets’
profits declined.
Performance was overshadowed by a
US$7.8 billion rise in loan impairment charges and
other credit risk provisions, largely from the US
consumer finance business, and a further
US$5.4 billion in trading write-downs on illiquid
legacy positions in credit trading, leveraged and
acquisition finance and monoline credit exposure in
Global Banking and Markets. Increases in loan
impairment charges and other credit risk provisions in
Personal Financial Services and Commercial Banking,
the latter rising rapidly in the second half of 2008
from a low base, occurred as the global economy
slowed. Global Banking and Markets also experienced
a rise in loan impairment charges and other credit risk
provisions as refinancing options dried up for a
number of companies as the market for long-term
asset financing became increasingly illiquid. The
market turmoil also led to impairments on equity
securities in the available-for-sale portfolio.
•
•
•
•
The following items were significant:
the non-recurrence of US$1.1 billion of gains
which arose in 2007 on the dilution of the
Group’s stakes in various associates;
a US$3.6 billion increase (from US$3.0 billion
in 2007 to US$6.6 billion) in fair value gains
from wider credit spreads recorded
predominantly on HSBC’s own long-term
debt designated at fair value. These gains
reported in the ‘Other’ segment, are not
allocated to customer groups and are not
included within regulatory capital calculations;
the gain of US$2.4 billion on the sale of the
French regional banks; and
a charge against trading income of
US$984 million following the fraud in
December 2008 relating to Madoff Securities.
Group performance by income and expense item
Net interest income
Net interest income19 (US$m) .................................................................................
Average interest-earning assets (US$m) .................................................................
Gross interest yield20 (per cent) ...............................................................................
Net interest spread21 (per cent) ................................................................................
Net interest margin22 (per cent) ...............................................................................
40,730
1,384,705
4.48
2.90
2.94
42,563
1,466,622
6.23
2.87
2.90
37,795
1,296,701
7.12
2.86
2.91
2009
2008
2007
For footnotes, see page 149.
2009 compared with 2008
Reported net interest income of US$40.7 billion fell
by 4 per cent compared with 2008, but was
marginally higher on an underlying basis.
Reported net interest income includes the
expense of the internal funding of trading assets,
while related revenue is reported in trading income.
The cost of internally funding these assets declined
significantly as a result of the low interest rate
environment. In HSBC’s customer group reporting,
this cost is included within trading income.
Deposit spreads were squeezed by the
exceptionally low interest rates, although this was
partly offset by the reduced cost of funding trading
activities. Strong revenues in Balance Sheet
Management reflected positions taken in 2008 ahead
of the reduction in major currency interest rates. As
26
these positions began to mature, the revenue from
Balance Sheet Management’s activities reduced but
remained strong in the second half of 2009.
Average interest-earning assets fell slightly due
to a decline in term lending, mainly from the run-off
portfolios in North America and the decline in
consumer credit appetite globally.
Average interest-bearing liabilities also
decreased, due to a decline in debt securities in issue
as funding requirements for HSBC Finance
Corporation (‘HSBC Finance’) fell as certain
portfolios were managed down. This was largely
offset by a rise in current account balances, driven
by growth in customer demand for more liquid
assets. The very low interest rates led to clients
holding an increasing proportion of funds in liquid
current accounts rather than in savings and deposit
accounts as they positioned for rising interest rates or
prospective investment opportunities.
Competition for deposits and exceptionally
low interest rates squeezed deposit margins.
The net interest spread rose slightly. As a result
of continuing deposit inflows, the Group sourced an
increasing proportion of its funding from customer
accounts, and consequently reduced its reliance on
relatively more expensive debt securities. The
benefit of this was largely offset, however, by a
decline in customer lending, particularly higher
yielding personal lending, which reduced the
average yield on assets.
2008 compared with 2007
Reported net interest income of US$42.6 billion rose
by 13 per cent compared with 2007, 13 per cent on
an underlying basis.
Growth in net interest income was driven by
significantly higher revenues in Balance Sheet
Management, in part reflecting favourable
positioning to take advantage of falling interest rates.
Lending and deposit balances also grew strongly,
while progressive reductions in central bank
reference rates led to a decline in both asset yields
and the cost of funds. Overall, spreads narrowed on
an underlying basis.
Net fee income
Average interest-earning assets increased to
US$1,467 billion, led by growth in average loans
and advances to customers. This was mainly due to
an increase in average term lending balances in
Europe and Asia.
An increase in average interest-bearing
liabilities was driven by growth in average customer
accounts, notably in Europe. HSBC attracted
substantial deposits from customers who valued
HSBC’s perceived strength at a time of global
financial market turmoil and customers also
expressed a preference for security and liquidity
following declines in equity markets.
Interest rates were cut aggressively in many
countries during 2008, as central banks reduced their
reference rates as part of stimulus programmes
introduced in response to deteriorating economic
conditions. This contributed to a decline in asset
yields. The cost of funds also fell, but this was less
significant than the decline in yields as spreads
narrowed overall on an underlying basis.
In North America, net interest income was also
adversely affected by rises in loan modifications
designed to reduce the payment burden on the
Group’s customers, and impaired loans.
Cards ........................................................................................................................
Account services ......................................................................................................
Funds under management ........................................................................................
Broking income .......................................................................................................
Credit facilities ........................................................................................................
Insurance ..................................................................................................................
Global custody .........................................................................................................
Imports/exports ........................................................................................................
Underwriting ............................................................................................................
Remittances .............................................................................................................
Corporate finance ....................................................................................................
Unit trusts ................................................................................................................
Trust income ............................................................................................................
Mortgage servicing ..................................................................................................
Maintenance income on operating leases ................................................................
Taxpayer financial services .....................................................................................
Other ........................................................................................................................
Total fee income ......................................................................................................
Less: fee expense .....................................................................................................
Net fee income .........................................................................................................
2009
US$m
4,625
3,592
2,172
1,617
1,479
1,421
988
897
746
613
396
363
278
124
111
87
1,894
21,403
(3,739)
17,664
2008
US$m
5,844
4,353
2,757
1,738
1,313
1,771
1,311
1,014
325
610
381
502
325
120
130
168
2,102
24,764
(4,740)
20,024
2007
US$m
6,496
4,359
2,975
2,012
1,138
1,836
1,404
866
367
556
409
875
299
109
139
252
2,245
26,337
(4,335)
22,002
27
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Net fee income / Net trading income
2009 compared with 2008
Reported net fee income decreased by 12 per cent to
US$17.7 billion, 5 per cent lower on an underlying
basis.
Lower credit card fees and weaker equity
markets led to a decline in net fee income.
Credit card fees fell significantly, mainly
in North America, reflecting lower transaction
volumes, a reduction in cards in issue and changes in
customer behaviour which led to lower cash
advance, interchange, late and overlimit fees. In the
UK, the decrease primarily arose from the disposal
of the card-acquiring business to a joint venture in
June 2008.
Weaker equity markets and subdued investor
sentiment for higher risk products led to a reduction
in both the volume and the value of equity-related
products. This resulted in a decrease in fees
generated from funds under management, global
custody and unit trusts, though fees grew from
equity capital markets products in Global Banking
and Markets. The impact was particularly marked in
the first half of 2009, though market-related fees
recovered somewhat in the second half of the year as
market values rose and investor appetite for equity
products increased.
Account services fees fell, predominantly in
North America as the result of a decline in credit
card volumes and changes in customer behaviour,
and in Private Banking due to a decrease in fiduciary
deposit commissions as lower interest rates drove
down balances.
Insurance broking fees also fell, mainly due to
lower origination volumes of credit-related products,
Net trading income
principally in the US consumer finance business, and
reduced payment protection business in the UK.
Corporate credit facility and underwriting fees
increased strongly on the back of higher debt
originations in Europe and North America which
accompanied the considerable reconstruction and
refinancing of corporate balance sheets in 2009.
2008 compared with 2007
Reported net fee income declined by 9 per cent to
US$20 billion, 7 per cent lower on an underlying
basis.
Lower equity market-related revenues, notably
in Hong Kong, were driven by weakened investor
sentiment, and reflected in the fall in the aggregate
of broking income, global custody and unit trust
income. Similarly, fund management fees declined
as equity markets retreated and lower performance
fees were earned.
HSBC announced revisions to its credit card fee
charging policies in the US in 2007, and this fed
through as expected in the form of a substantial
decline in overlimit fees, further compounded by
lower cash advance and interchange fee income as a
result of reduced volumes. In the UK, the divestment
in 2008 of the card acquiring business resulted in
reduced card acquiring fees. Offsetting these factors
were rises in card fees in Hong Kong, the Middle
East, India and Turkey.
Fee income from credit facilities rose, notably in
the Middle East, in line with customer volumes.
Growth in fee income from trade and supply chain
products reflected higher volumes and customer
acquisition in India and, to a greater extent in the
Middle East, increased activity driven by commodity
price inflation.
Trading activities .....................................................................................................
Net interest income on trading activities .................................................................
Other trading income – hedge ineffectiveness:
– on cash flow hedges .........................................................................................
– on fair value hedges .........................................................................................
Non-qualifying hedges ............................................................................................
Losses on Madoff Securities fraud...........................................................................
2009
US$m
5,240
3,627
90
(45)
951
–
Net trading income23,24 .............................................................................................
9,863
For footnotes, see page 149.
2008
US$m
2,988
5,713
(40)
5
(1,122)
(984)
6,560
2007
US$m
4,521
5,376
(77)
19
(5)
–
9,834
28
2009 compared with 2008
Reported net trading income increased by 50 per
cent to US$9.9 billion, 83 per cent higher on an
underlying basis.
Reported trading income excludes the interest
expense of the internal funding of trading assets. As
noted in ‘Net interest income’, the cost of internally
funding these assets declined significantly as a result
of the low interest rate environment.
The Credit business benefited from a general
tightening of credit spreads following a return of
liquidity to much of the market, and the write-downs
on legacy positions in Credit trading declined
significantly following the stabilisation of asset
prices.
Net trading income rose by 83 per cent on
an underlying basis.
An increase in Rates revenues, particularly in
the first half of the year, reflected increased market
share and client trading volumes, wider bid-offer
spreads and early positioning for interest rate
movements. Partly offsetting these gains, fair value
losses were recorded on HSBC structured liabilities
as a result of credit spreads tightening, compared
with gains in this area in 2008.
Equities benefited from the non-recurrence of
the US$984 million charge reported in 2008 in
respect of Madoff Securities. The core Equities
business also took advantage of a changed
competitive landscape to capture a greater share of
business in strategic markets from key institutional
clients.
Foreign exchange trading revenues were well
ahead of 2007, but fell short of the record year in
2008. This reflected a combination of reduced
customer volumes from lower trade flows and
investment activity, and relatively lower market
volatility.
Tightening credit spreads led to losses of
US$429 million on credit default swap transactions
in parts of the Global Banking portfolio. In 2008,
gains of US$912 million were reported on these
credit default swaps as a result of widening credit
spreads.
A reduction in net interest income on trading
activities reflected the sharp fall in interest rates at
the end of 2008 but was partly compensated for by a
reduction in the internal funding cost of trading
activities, which is reported in ‘Net interest income’.
Income from non-qualifying hedges related to
mark-to-market gains on cross-currency swaps as the
29
US dollar depreciated against sterling, and on
interest rate swaps as US dollar long and medium
term interest rates increased over the year. In 2008,
appreciation of the US dollar and a fall in interest
rates led to mark-to-market losses on these
instruments.
During the second half of 2008, HSBC
reclassified US$17.9 billion of assets from ‘held for
trading’ to ‘loans and receivables’ and ‘available for
sale’ following the IASB’s amendment to
International Accounting Standard (‘IAS’) 39. Had
these reclassifications not taken place and the assets
had continued to be accounted for on a fair value
basis, additional gains of US$1.5 billion would have
been recorded in 2009 (2008: losses of
US$3.5 billion). See ‘Impact of Market Turmoil’,
pages 151 to 195.
2008 compared with 2007
Reported net trading income fell by 33 per cent
to US$6.6 billion, 32 per cent lower on an
underlying basis.
Net income from trading activities declined by
81 per cent, driven by the continuing effect of the
market turmoil which led to US$5.4 billion of write-
downs on legacy monoline credit exposures, credit
trading and leveraged and acquisition finance loans.
More information about the losses, the associated
assets and residual exposure is provided in ‘Impact
of Market Turmoil’ on pages 151 to 195.
Record foreign exchange trading income was
due to increased customer volumes and market
volatility across all regions, as investors sought to
reduce risk in the second half of 2008, driving
growth in global foreign exchange trading as
demand for assets denominated in US dollars
and Japanese Yen increased.
Rates trading income rose substantially, with
record revenues in the first half of 2008 due to
favourable positioning against movements in interest
rate yield curves as central banks responded to the
market turmoil by lowering short-term interest rates.
Revenues were also boosted by an increased number
of deals, widening spreads and increased customer
demand for trading and hedging products.
The decline in equities trading income reflected
weaker equity markets, particularly in Hong Kong,
where demand for structured equity products fell.
In addition, following the alleged fraud at Madoff
Securities, HSBC wrote off the value of units it held
in funds that had invested with the company and
took a US$984 million charge. The units had been
acquired in connection with various financing
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Net income from financial instruments at FV / Gains less losses from financial instruments
transactions HSBC had entered into with
institutional clients.
the US dollar appreciated and on interest rate swaps
as interest rates fell in late 2008.
The decline in non-qualifying hedges related to
Widening credit spreads led to further gains on
mark-to-market losses on cross-currency swaps as
credit default swap transactions in parts of the
Global Banking portfolio.
Net income from financial instruments designated at fair value
Net income/(expense) arising from:
– financial assets held to meet liabilities under insurance and
investment contracts ........................................................................................
– liabilities to customers under investment contracts ........................................
– HSBC’s long-term debt issued and related derivatives ..................................
Change in own credit spread on long-term debt ........................................
Other changes in fair value25 ......................................................................
– other instruments designated at fair value and related derivatives .................
Net income/(expense) from financial instruments designated at fair value ...........
Financial assets designated at fair value at 31 December .......................................
Financial liabilities designated at fair value at 31 December .................................
2009
US$m
3,793
(1,329)
(6,247)
(6,533)
286
252
(3,531)
37,181
80,092
2008
US$m
(5,064)
1,751
6,679
6,570
109
486
3,852
28,533
74,587
2007
US$m
2,056
(940)
2,812
3,055
(243)
155
4,083
41,564
89,939
For footnote, see page 149.
HSBC designates certain financial instruments at fair
value to remove or reduce accounting mismatches in
measurement or recognition, or where financial
instruments are managed and their performance is
evaluated together on a fair value basis. All income
and expense from financial instruments designated at
fair value are included in this line except for interest
arising from HSBC’s issued debt securities and
related derivatives managed in conjunction with
those debt securities, which is recognised in ‘Interest
expense’.
HSBC principally uses the fair value
designation in the following instances (for which
all numbers are ‘reported’):
•
for certain fixed-rate long-term debt issues
whose rate profile has been changed to floating
through interest rate swaps as part of a
documented interest rate management strategy.
Approximately US$63 billion (2008:
US$59 billion) of the Group’s debt issues have
been accounted for using the fair value option.
The movement in fair value of these debt issues
includes the effect of own credit spread changes
and any ineffectiveness in the economic
relationship between the related swaps and
own debt. As credit spreads widen or narrow,
accounting profits or losses, respectively, are
booked. The size and direction of the accounting
consequences of changes in own credit spread
and ineffectiveness can be volatile from year to
year, but do not alter the cash flows envisaged
30
as part of the documented interest rate
management strategy. As a consequence, gains
and losses arising from changes in own credit
spread on long-term debt are not regarded
internally as part of managed performance and
are excluded from underlying results. Similarly,
such gains and losses are ignored in the
calculation of regulatory capital;
for US$15 billion (2008: US$11 billion) of
financial assets held to meet liabilities under
insurance contracts, and certain liabilities under
investment contracts with discretionary
participation features; and
for US$8 billion (2008: US$7 billion) of
financial assets held to meet liabilities under
unit-linked and other investment contracts, as
well as the associated liabilities.
•
•
2009 compared with 2008
A net expense from financial instruments designated
at fair value of US$3.5 billion was reported
compared with income of US$3.9 billion in 2008.
A significant change in credit spread on
HSBC’s own debt in 2009 reversed the
movement in 2008.
On an underlying basis, HSBC reported income
of US$3.0 billion in 2009 compared with an expense
of US$2.6 billion in 2008. The large difference
between the reported and underlying results is due to
the exclusion of the effect of credit spread-related
movements in the fair value of HSBC’s own long-
term debt from underlying performance.
Income of US$3.8 billion was recorded due to a
fair value movement on assets held to back insurance
and investment contracts, compared with an expense
of US$4.8 billion in 2008. This reflected investment
gains in the current year driven by improved market
performance, predominantly affecting the value of
assets held in unit-linked and participating funds in
Hong Kong, the UK and France.
• To the extent that the investment gains related to
assets held to back investment contracts, the
expense associated with the corresponding
increase in liabilities to customers was also
recorded under net income from financial
instruments designated at fair value. This
expense amounted to US$1.3 billion in 2009
compared with an income of US$1.5 billion in
2008 when liabilities fell in line with declining
asset markets.
• To the extent that the investment gains related to
assets held to back insurance contracts, they
were offset by a corresponding increase in ‘Net
insurance claims and movement in liabilities to
policyholders’ to reflect the extent to which
unit-linked policyholders, in particular,
participate in the investment performance
experienced in the associated asset portfolios.
2008 compared with 2007
Reported net income from financial instruments
designated at fair value decreased by
US$231 million to US$3.9 billion in 2008.
On an underlying basis, in particular excluding a
large income from movements in the fair value of
the Group’s own long-term debt, a net expense of
US$2.7 billion was recorded, compared with income
of US$1.1 billion in 2007.
A negative movement of US$5.1 billion was
recorded in the fair value of assets held to back
insurance and investment contracts, compared with a
positive reported movement of US$2.1 billion in
2007. This reflected investment losses driven by
falling equity and bond markets, predominantly
affecting the value of assets held in unit-linked and
participating funds in Hong Kong, France and the
UK. The negative movement in fair value is partially
offset by a corresponding reduction in ‘Net
insurance claims and movement in liabilities to
policyholders’, where unit-linked policyholders in
particular participate in the investment performance
experienced on the investment portfolios held to
support the liabilities.
For assets held to meet liabilities under
investment contracts the corresponding reduction in
the liability to customers is also reported within net
income from financial instruments designated at fair
value. A reduction of US$1.8 billion in the fair value
of liabilities held under investment contracts
compared with a reported increase in the fair value
of liabilities of US$940 million in 2007.
Gains less losses from financial investments
Net gain from disposal of:
– debt securities ...................................................................................................
– equity securities ................................................................................................
– other financial investments ..............................................................................
Impairment of available-for-sale equity securities ..................................................
Gains less losses from financial investments ..........................................................
2009
US$m
463
407
8
878
(358)
520
2008
US$m
19
1,216
4
1,239
(1,042)
197
2007
US$m
120
1,864
14
1,998
(42)
1,956
2009 compared with 2008
Reported gains less losses from financial
investments increased by US$323 million to US$520
million. On an underlying basis, they increased by
US$546 million.
Net gains on the disposal of debt securities
increased significantly, due to gains recorded on the
sale of mortgage-backed securities in North
America. They were supplemented by smaller gains,
principally on the disposal of available-for-sale
bonds in Latin America and the UK.
Sales of Visa shares contributed significant
gains during 2008, with additional gains from further
sales in 2009. Other gains recognised during 2008,
including those recorded on the sale of MasterCard
shares, were not repeated in 2009.
A significantly lower level of impairments on
equity investments was recognised in 2009 than in
31
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Gains less losses from financial investments / Net earned insurance premiums / OOI
2008 in Asia, Europe and North America, reflecting
the improvement in the economic situation and
equity markets. Of the investments on which
material impairments were recognised in 2008, a
significant amount reversed during 2009 due to share
price appreciation, notably in India and, to a lesser
extent, Vietnam; however, under IFRSs all
subsequent increases in the fair value are treated as a
revaluation and are recognised in other
comprehensive income rather than the income
statement.
2008 compared with 2007
Reported gains less losses of US$197 million from
financial investments during 2008 were 90 per cent
lower than in 2007, 93 per cent lower on an
underlying basis. A reduction in net gains from
disposals was compounded by significant
impairments recognised on equity securities held in
Net earned insurance premiums
the available-for-sale portfolio as certain investments
were marked down to reflect the prevailing market
conditions.
The redemption of Visa shares following its
initial public offering (‘IPO’) resulted in significant
gains, and there were further gains from the sale of
MasterCard shares. These were more than offset by
losses in Principal Investments and the non-
recurrence of various significant gains in 2007,
mostly in respect of Euronext, the European stock
exchange, and a credit bureau in Brazil.
Declining equity markets caused impairments
to be recognised against a number of strategic
investments in Asia, held in the available-for-sale
portfolio and on private equity investments, mainly
in Europe. The market turmoil in the US also led to
impairments against investments in various US
financial institutions.
Gross insurance premium income ...........................................................................
Reinsurance premiums ............................................................................................
Net earned insurance premiums ..............................................................................
2009
US$m
10,991
(520)
10,471
2008
US$m
12,547
(1,697)
10,850
2007
US$m
11,001
(1,925)
9,076
2009 compared with 2008
Reported net earned insurance premiums amounted
to US$10.5 billion, a decrease of 3 per cent
compared with 2008. On an underlying basis, net
earned insurance premiums increased by 3 per cent.
Growth was recorded in Asia, Brazil and France, but
this was largely offset by significant declines in the
UK and the US.
Net earned insurance premiums continued
to grow in Asia, mainly from the launch of new
products including a life insurance product designed
for high net worth individuals and a guaranteed
savings product. In Hong Kong, HSBC retained its
position as the leading bancassurer and net earned
insurance premiums increased as a result of higher
sales of unit-linked and whole life products.
Growth in insurance premiums in Asia,
Brazil and France was largely offset by
declines in the UK and US.
In Latin America, premium growth was driven
by higher sales of pension and life products in
Brazil, partly due to a number of customers
switching their personal pension annuities to HSBC.
In France, growth was significantly influenced
by a large one-off reinsurance transaction in June
2008, which passed insurance premiums to a third-
party reinsurance provider. Adjusting for this, net
earned insurance premiums were ahead of 2008
despite a significant reduction in the distribution
network following the disposal of the French
regional banks in July 2008.
In the UK, demand for the Guaranteed Income
Bond savings product declined as HSBC offered
more favourable rates on an alternative deposit
product. As the deposit product was a savings bond
rather than an insurance contract, its income was
recorded under net interest income, while the
associated fall in sales of insurance products led to
a US$1.1 billion reduction in insurance premium
income with an equivalent decrease in ‘Net
insurance claims incurred and movement in
liabilities to policyholders’, as described below.
The reduction in origination volumes in the
consumer finance business in North America also
led to correspondingly lower sales of credit
protection insurance as the consumer finance
business was closed.
32
2008 compared with 2007
Reported net earned insurance premiums amounted
to US$10.9 billion, 20 per cent higher than in 2007.
HSBC acquired the remaining interest in HSBC
Assurances in France in March 2007 and, in October
2007, sold the Hamilton Insurance Company
Limited and Hamilton Life Assurance Company
Limited in the UK. On an underlying basis, net
earned insurance premiums increased by 14 per cent.
Growth in net earned insurance premiums was
driven by a continued strong performance from the
UK life assurance business, mainly as a result of
higher sales of the Guaranteed Income Bond, a non-
linked product that was launched in June 2007. The
introduction of enhanced life assurance benefits to
Other operating income
certain pension products, which led to these products
being reclassified as insurance contracts, also
resulted in higher premiums.
The Hong Kong insurance business also
performed well with respect to premium growth, due
to stronger sales of products with DPF and an
increase in regular premiums partly offset by a
reduction in unit-linked premiums.
In France, HSBC Assurances performed well in
a declining market, as three promotional campaigns
during the year contributed to growth in sales of
policies with DPF. However, a significant one-off
reinsurance transaction undertaken during 2008
caused net earned insurance premiums to decrease
compared with 2007.
Rent received ...........................................................................................................
Gains/(losses) recognised on assets held for sale ....................................................
Valuation gains/(losses) on investment properties ..................................................
Gain on disposal of property, plant and equipment, intangible assets and
non-financial investments ...................................................................................
Change in present value of in-force long-term insurance business ........................
Other ........................................................................................................................
Other operating income ...........................................................................................
2009
US$m
547
(115)
(24)
1,033
605
742
2,788
2008
US$m
606
(130)
(92)
881
286
257
1,808
2007
US$m
630
5
152
213
(145)
584
1,439
2009 compared with 2008
Reported other operating income of US$2.8 billion
was 54 per cent higher than in 2008. This included
a US$280 million gain related to the sale of the
remaining stake in the card merchant-acquiring
business in the UK, compared with a US$425 million
gain in 2008 from the sale of the first tranche. In
2008 results also included gains of US$71 million
related to the sale of HSBC’s stake in Financiera
Independencia. On an underlying basis, other
operating income rose by 163 per cent, driven
mainly by an increase in insurance-related income in
Hong Kong, a rise in gains on property disposals and
lower losses on foreclosed properties.
Increased insurance income in Hong Kong,
higher gains on property disposals and
lower losses on foreclosed properties in the
US helped drive an underlying
US$1.5 billion rise in other operating
income.
Losses recognised on assets held for sale
declined as losses on foreclosed properties in HSBC
Finance decreased, partly due to lower inventory
levels following delays in the foreclosure process
and partly due to some stabilisation in real estate
prices.
Property gains of US$576 million were
recognised in respect of the sale and leaseback
of 8 Canada Square, London which was effected
through the disposal of HSBC’s entire shareholding
in Project Maple II B.V. (‘PMII’) to the National
Pension Service of Korea. In 2008, HSBC reported a
gain of US$416 million in respect of the purchase of
PMII. See Note 23 on the Financial Statements.
An increase in insurance sales to new customers
in Hong Kong resulted in positive movements in the
present value of in-force (‘PVIF’) long-term
insurance business. Further positive movements
arose from refining the income recognition
methodology used in respect of long-term insurance
contracts in HSBC Finance. In 2008, a similar
refinement in Brazil and HSBC’s introduction of
enhanced benefits to existing pension products in the
UK, resulted in favourable movements in PVIF.
In Hong Kong, a gain of US$110 million was
recognised in respect of a property disposal, and in
Argentina a gain was realised on the sale of the head
office building.
Other operating income includes higher gains on
the sale of prime residential mortgage portfolios in
33
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Net insurance claims / Loan impairment charges
the US, gains from the extinguishment of certain
debt issued by HSBC’s mortgage securitisation
vehicles in the UK and lower costs associated with
the provision of support to certain money market
funds.
2008 compared with 2007
Reported other operating income of US$1.8 billion
was 26 per cent higher than in 2007. This included
gains of US$425 million on the sale of the card
merchant acquiring business in the UK and
US$71 million on the sale of HSBC’s entire stake
in Financiera Independencia, a Mexican consumer
lending company. On an underlying basis, other
operating income fell by 23 per cent.
The difficult property market conditions in the
UK led to a loss in value of a property fund, lower
income from the sale of property fund assets and a
reduction in Group real estate disposals in 2008.
Similarly, in Hong Kong revaluation gains on
investment properties did not recur.
Life assurance enhancements to pension
products resulted in increased present value of in-
force long-term insurance (‘PVIF’) business, which
also benefited from the non-recurrence of regulatory
changes in 2007 in the UK.
During 2008, HSBC recognised a gain of
US$416 million in respect of the purchase of the
subsidiary of Metrovacesa which owned the property
and long leasehold comprising 8 Canada Square,
London.
Other operating income declined, driven by
losses on sale of the Canadian vehicle finance
business and other loan portfolios in 2008, in addition
to the non-recurrence of gains on disposal of fixed
assets and private equity investments in 2007.
Net insurance claims incurred and movement in liabilities to policyholders
Insurance claims incurred and movement in liabilities to policyholders:
– gross .................................................................................................................
– reinsurers’ share ..............................................................................................
– net26 ..................................................................................................................
2009
US$m
12,560
(110)
12,450
2008
US$m
9,206
(2,317)
6,889
2007
US$m
9,550
(942)
8,608
For footnote, see page 149.
2009 compared with 2008
Reported net insurance claims incurred and
movement in liabilities to policyholders increased by
81 per cent to US$12.5 billion. On an underlying
basis, they increased by 94 per cent.
The increase in net insurance claims incurred
and movement in liabilities to policyholders mainly
reflected the improvement in investment market
performance compared with 2008 described above
under ‘Financial instruments designated at fair
value’. Higher investment gains were broadly
matched by movement in liabilities to policyholders
on unit-linked and, to a certain extent, participating
policies whose policyholders share in the investment
performance of the supporting assets. The gains
generated on the assets held to support insurance
contract liabilities are reported in ‘Net income from
financial instruments designated at fair value’.
New business growth in a number of regions
during 2009, particularly Hong Kong and Singapore,
also contributed to an increase in the movement in
liabilities to policyholders, as did the non-recurrence
of a large one-off reinsurance transaction in France
in 2008. The decline in sales of a Guaranteed Income
34
Bond noted above had a corresponding effect on
movement in liabilities to policyholders in the UK.
As a consequence of a rising incidence and
severity of claims, aggregate charges of
US$310 million were made to strengthen reserves
in the UK motor book and the Irish reinsurance
business during 2009. The UK motor insurance
business was placed into run-off in September 2009.
2008 compared with 2007
Reported net insurance claims incurred and
movement in liabilities to policyholders decreased
by 20 per cent to US$6.9 billion. HSBC acquired the
remaining interest in HSBC Assurances in France in
March 2007 and, in October 2007, sold Hamilton
Insurance Company Limited and Hamilton Life
Assurance Company Limited in the UK. On an
underlying basis, net insurance claims incurred and
movement in liabilities to policyholders fell by
22 per cent.
The reduction in net insurance claims incurred
and movement in liabilities to policyholders
primarily reflected the impact of markedly weaker
investment markets worldwide. This led to a
reduction in liabilities to policyholders on unit-
linked and, to a certain extent, participating policies.
gross liability valuations in that year, along with a
reduction in the corresponding reinsurers’ share.
The decline arising from market value
movements was partially offset by an increase in
claims incurred and movement in liabilities to
policyholders driven by new business growth, most
significantly in France, the UK and Hong Kong. In
addition, 2007 was affected by the implementation
of an FSA regulatory change, which led to lower
A significant increase in the reinsurers’ share
of claims incurred and movement in liabilities to
policyholders was primarily driven by the above
regulatory change plus an increase in a reserve
provision on a unit-linked product in Hong Kong,
which was fully reinsured. In addition, a significant
one-off reinsurance transaction was undertaken in
France during 2008.
Loan impairment charges and other credit risk provisions
Loan impairment charges
New allowances net of allowance releases .........................................................
Recoveries of amounts previously written off ....................................................
Individually assessed allowances ............................................................................
Collectively assessed allowances ............................................................................
Impairment of available-for-sale debt securities .....................................................
Other credit risk provisions .....................................................................................
Loan impairment charges and other credit risk provisions .....................................
As a percentage of net operating income excluding the effect of fair value
movements in respect of credit spread on own debt and before loan
impairment charges and other credit risk provisions ..........................................
Impairment charges on loans and advances to customers as a percentage of
2009
US$m
25,832
(890)
24,942
4,458
20,484
1,474
72
26,488
2008
US$m
24,965
(834)
24,131
2,064
22,067
737
69
24,937
%
%
36.4
33.2
gross average loans and advances to customers .................................................
2.8
2.5
US$m
US$m
Customer impaired loans .........................................................................................
Customer loan impairment allowances ...................................................................
30,606
25,542
25,352
23,909
2007
US$m
18,182
(1,005)
17,177
796
16,381
44
21
17,242
%
22.7
2.0
US$m
19,582
19,205
2009 compared with 2008
Reported loan impairment charges and other credit
risk provisions were US$26.5 billion in 2009, an
increase of 6 per cent over 2008, 9 per cent on an
underlying basis. Within this, collectively assessed
allowances declined while individually assessed
impairment allowances continued to increase.
HSBC’s aggregate outstanding customer loan
impairment allowances at 31 December 2009 of
US$25.5 billion represented 3 per cent of gross
customer advances (net of reverse repos and
settlement accounts), compared with 2.6 per cent at
the end of 2008.
Loan impairment charges declined in certain
businesses, notably Personal Financial Services in
North America and Commercial Banking in Hong
Kong, but this was more than offset by increases
elsewhere, primarily on individually significant
loans within Global Banking and Markets and more
broadly on Commercial Banking exposures outside
Hong Kong as the global economic downturn
adversely affected the ability of many customers to
service their loan commitments. As a consequence,
loan impairment charges rose despite an underlying
9 per cent decline in gross loans and advances to
customers which was driven mainly by the run-off
of the US consumer finance portfolios.
In the US Personal Financial Services business,
loan impairment charges declined by 11 per cent to
US$14.2 billion, as additional delinquencies due to
the continued deterioration in the US economy were
more than offset by the effect of lower balances in
the run-off portfolios in HSBC Finance.
In HSBC Finance, loan impairment charges
decreased by 12 per cent. The reduction arose in
most portfolios, but mainly in Mortgage Services as
the portfolio continued to run off. In Consumer
Lending, loan impairment charges increased,
particularly in the unsecured personal lending
portfolio, due to a deterioration in the 2006 and 2007
vintages and, to a lesser extent, first lien real estate
secured loans, which was partly offset by lower loan
35
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Loan impairment charges
impairment charges in the real estate secured
portfolio. Loan impairment charges in the Card
and Retail Services portfolio decreased despite
the state of the US economy and higher levels of
unemployment and personal bankruptcy. The main
reason was the decline in card balances following
actions taken to manage risk beginning in the fourth
quarter of 2007 and continuing through 2009, and
stable credit conditions.
In HSBC Bank USA, increased loan impairment
charges in the personal lending portfolios were due
to additional delinquencies which resulted in
increased write-offs in the prime first lien mortgage
loan portfolios as house prices continued to
deteriorate in certain markets.
Loan impairment charges and other credit risk
provisions increased significantly in Global Banking
and Markets. Loan impairment charges increased,
reflecting the impairment of a small number of
exposures in the financial and property sectors in
Europe and the Middle East. Further impairments
were also recognised in respect of certain asset-
backed securities held in the available-for-sale
portfolio, reflecting mark-to-market losses which
HSBC judged to be significantly in excess of the
likely ultimate cash losses.
Loan impairment charges declined in
Personal Financial Services in the US but
rose in Commercial Banking outside Hong
Kong and in Global Banking and Markets.
In the UK, loan impairment charges rose in both
the Commercial Banking and Personal Financial
Services portfolios. However, despite the contraction
in the economy, charges remained a low proportion
of the portfolio. In Commercial Banking, loan
impairment charges largely reflected economic
weakness in a broad range of sectors.
In UK Personal Financial Services, loan
impairment charges also increased as unemployment
rose. This was seen primarily in the credit card and
unsecured personal loan portfolios. In the residential
mortgage portfolios, delinquency rates decreased
as HSBC continued to benefit from very limited
exposure to buy-to-let and self-certified mortgages.
HSBC’s mortgage exposure continued to be well
secured, with an average loan-to-value ratio for new
UK business in HSBC Bank’s mortgage portfolio,
excluding First Direct, of under 55 per cent in 2009,
compared with 59 per cent in 2008.
In the Middle East, loan impairment charges
increased markedly from US$280 million to
US$1.3 billion as the region experienced a
significant economic contraction in activity,
36
predominantly in real estate and construction,
which particularly affected the UAE. Commercial
Banking recorded a number of specific loan
impairment charges and a significant increase
in collective loan impairment charges. Lower
employment in the region, largely driven by the
decline in construction activity, led to a rise in loan
impairment charges in Personal Financial Services,
particularly in the credit card and personal lending
portfolios.
In Latin America, portfolios were affected by
the weaker economic environment for much of
the year. In Personal Financial Services, loan
impairment charges rose by 12 per cent to
US$2.0 billion, with increased delinquencies in
credit cards, mortgages, vehicle finance and payroll
loans due to higher unemployment. In the Brazilian
Commercial Banking portfolios, higher
delinquencies were experienced primarily in the
business banking and mid-market segments. In
Mexico, action taken in 2008 to curtail originations
and increase collection resources held loan
impairment charges broadly unchanged
notwithstanding the deterioration in the economy
and the impact of the H1N1 virus.
In India, as in Mexico, curtailment of
origination activity in unsecured personal lending
slowed the increase in loan impairment charges in
the unsecured credit card and personal lending
portfolios in Personal Financial Services. In
Commercial Banking, a higher number of corporate
failures including a number of fraud-related losses,
led to increased loan impairment charges.
Loan impairment charges and other credit risk
provisions in Hong Kong decreased by 35 per cent to
US$500 million as the economic environment
improved in 2009, credit conditions recovered and
international trade volumes improved.
In Private Banking, loan impairment charges
increased from a very low level, largely attributable
to a specific charge relating to a single client
relationship in the US.
2008 compared with 2007
Reported loan impairment charges and other credit
risk provisions were US$24.9 billion in 2008, an
increase of 45 per cent over 2007, 46 per cent on an
underlying basis.
A deterioration in credit quality was
experienced across all customer groups and
geographical regions as the global economy slowed.
The rise in Group loan impairment charges and other
credit risk provisions also reflected an underlying
8 per cent increase in lending to customers
(excluding the financial sector and settlement
accounts).
Loan impairment charges rose significantly in
the US by 38 per cent to US$16.3 billion, due to
credit quality deterioration across all US portfolios
in Personal Financial Services.
In the US consumer lending portfolio, loan
impairment charges rose as delinquency rates
deteriorated sharply and the economy declined
markedly in the second half of 2008, most notably in
the first lien portfolio. This was particularly apparent
in the geographical regions most affected by house
price depreciation and rising unemployment rates. In
mortgage services, loan impairment charges rose as
2005 and 2006 vintages matured and moved into the
later stages of delinquency. This was partly offset by
the benefit of lower balances as run-off continued,
albeit at a slowing pace as house price depreciation
restricted refinancing options for customers. In
HSBC USA, loan impairment charges rose as credit
quality worsened across the real estate secured
portfolio and private label cards. Delinquencies rose
in the prime first lien residential mortgage portfolio,
Home Equity Line of Credit and Home Equity Loan
second lien portfolios. The higher delinquency rate
for prime first lien mortgages was in part due to
lower balances following US$7.0 billion of portfolio
sales during the year.
Loan impairment charges in the US card and
retail services portfolios rose, again driven by
increasing unemployment, portfolio seasoning,
higher levels of personal bankruptcy filings and
continued weakness in the US economy which was
most apparent in regions with the most significant
declines in house prices and rising unemployment.
Loan impairment charges in Commercial
Banking in North America more than doubled from
a low base in 2007, due to deterioration across the
commercial real estate, middle market and corporate
banking portfolios in the US and, to a lesser extent,
higher loan impairment charges against firms in the
manufacturing, export and commercial real estate
sectors in Canada.
In the UK, a modest decline in loan impairment
charges in Personal Financial Services reflected the
non-recurrence of a methodology change at HFC in
2007 which resulted in higher impairment charges.
Credit quality in the Personal Financial Services
portfolio remained broadly stable, reflecting early
risk mitigation through the tightening of lending
controls and the sale of non-core credit card
portfolios during the year. Credit quality in the
37
unsecured portfolios deteriorated slightly in 2008,
particularly in the second half of the year, due to the
weakening UK economy. Loan impairment charges
in the commercial portfolio rose in 2008 as the
weakening property market led to higher impairment
charges against construction companies and
businesses dependent upon the real estate sector,
particularly in the final quarter of the year.
Impairment charges against banks rose due to some
exposure to the Icelandic banks in 2008. In addition,
rising levels of personal indebtedness resulted in
lower releases and recoveries of charges than in
2007.
Higher loan impairment and other credit risk
provisions within Global Banking and Markets in
Europe reflected increased charges against certain
corporate accounts and impairment recorded on
available-for-sale debt securities.
In Mexico, loan impairment charges rose by
US$513 million or 69 per cent, primarily in the
credit card portfolio. This was due to a combination
of higher lending volumes from organic expansion
and higher delinquency rates which were driven by
a deterioration in credit quality as the portfolio
continued to season and move into the later stages of
delinquency. Management took action to enhance
collection activity and improve the quality of new
business. Impairment charges in the commercial
portfolio also rose due to credit quality deterioration
among small and medium-sized enterprises as the
economy weakened.
In Hong Kong, the rise in loan impairment
charges was driven by weakness in parts of the
export sector within the commercial portfolio in the
second half of 2008. In Global Banking and Markets,
credit impairment charges within Balance Sheet
Management principally reflected losses on debt
securities and paper issued by financial institutions
previously rated at investment grade which failed in
the year.
In Rest of Asia-Pacific, the growth in loan
impairment charges reflected a combination of the
expansion of consumer lending and credit quality
deterioration in India and the Middle East. In
addition, higher impairment charges in Commercial
Banking were driven by a deterioration in credit
quality in the second half of the year.
For the Group as a whole, the aggregate
outstanding customer loan impairment allowances
at 31 December 2008 of US$23.9 billion represented
2.6 per cent of gross customer advances (net of
reverse repos and settlement accounts), compared
with 2 per cent at 31 December 2007.
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Operating expenses
Operating expenses
By expense category
Employee compensation and benefits .....................................................................
Premises and equipment (excluding depreciation and impairment) .......................
General and administrative expenses ......................................................................
Administrative expenses ..........................................................................................
Depreciation and impairment of property, plant and equipment ............................
Amortisation and impairment of intangible assets ..................................................
Goodwill impairment ...............................................................................................
Total operating expenses .........................................................................................
Staff numbers (full-time equivalent)
Europe ......................................................................................................................
Hong Kong ..............................................................................................................
Rest of Asia-Pacific27 ..............................................................................................
Middle East27 ...........................................................................................................
North America .........................................................................................................
Latin America ..........................................................................................................
2009
US$m
2008
US$m
18,468
4,099
9,293
31,860
1,725
810
–
34,395
20,792
4,305
10,955
36,052
1,750
733
10,564
49,099
2007
US$m
21,334
3,966
11,328
36,628
1,714
700
–
39,042
At 31 December
2009
2008
2007
76,703
27,614
87,141
8,281
35,458
54,288
82,093
29,330
89,706
8,453
44,725
58,559
82,166
27,655
80,523
8,050
52,722
64,404
Total staff numbers ..................................................................................................
289,485
312,866
315,520
For footnote, see page 149.
2009 compared with 2008
Reported operating expenses fell by US$14.7 billion
to US$34.4 billion, with the most significant feature
being the non-recurrence of the goodwill impairment
charge of US$10.6 billion in 2008 to fully write off
goodwill in Personal Financial Services in North
America. Excluding this and on an underlying basis,
operating expenses fell by 4 per cent.
Underlying operating expenses excluding
goodwill impairment fell by 4 per cent.
Employee compensation and benefits fell by
4 per cent as costs in the US declined following the
closure of the branch-based consumer finance
business in the first quarter of 2009. Average
headcount in most regions was lower and this was
reflected in lower costs. In the UK, a change in the
basis of delivering death-in-service, ill health and
early retirement benefits for some UK employees
generated a one-off accounting gain of
US$499 million which was partly offset by increased
regular pension costs. There were higher
performance-related costs in Global Banking and
Markets reflecting its results. The UK and French
governments announced one-off taxes in late 2009
in respect of certain bonuses payable by banks
and banking groups. In both countries there is
uncertainty over the interpretation of the draft
proposals, and detailed analysis of individual awards
in the context of the final legislation will be required
to determine the precise effect of the taxes. The
estimated tax payable under the proposals as
currently drafted is US$355 million in the UK and
US$45 million in France. The taxes will be payable
and accounted for in 2010 once the legislation is
enacted. For further details, see page 326.
Premises and equipment costs increased
marginally with higher rental costs reflecting the sale
and leaseback of a number of properties in 2008.
One-off costs incurred due to the closure of the
Consumer Lending branch network in the US were
partly offset by savings resulting from the closure.
General and administrative expenses fell as
HSBC focused on managing costs tightly and
increasing efficiency. Marketing and advertising
costs fell across the group, most notably in Card and
Retail Services in North America, and in the UK.
Travel and entertainment costs, and expenditure
related to services contracted to third parties, fell,
primarily in Europe and North America. Better use
of direct channels, increased automation of manual
processes, enhanced utilisation of global service
centres and elimination of redundant systems
continued to be driven through the One HSBC
programme. In North America, cost savings also
resulted in the Consumer Lending Business from the
discontinuation of loan originations and the closure
of branches.
38
2008 compared with 2007
Reported operating expenses increased by
US$10.1 billion to US$49.1 billion, due to an
impairment charge of US$10.6 billion to fully write
off goodwill in Personal Financial Services in North
America. Excluding this, operating expenses
remained broadly in line on both reported and
underlying bases.
Employee compensation and benefits fell
marginally. Lower discretionary bonuses reflected
weaker performance in the current economic
conditions. A review of actuarial assumptions on
employees’ defined benefit pensions resulted in
lower service costs in the UK. The restructuring of
the consumer finance business in North America led
to reduced headcount and lower costs. This was
partially offset by higher salaries and increased
headcount to support business expansion, mainly in
Asia. Restructuring costs were incurred primarily in
Latin America and Europe.
Premises and equipment costs increased
primarily in the UK and the Rest of Asia-Pacific
region, driven by investment in technology and
extensions and improvements to the branch and
Cost efficiency ratios
ATM networks. As a consequence, repairs and
maintenance costs rose. Commercial property rental
costs also increased as a result of higher prices, new
rentals and sale and leaseback deals.
General and administrative expenses
decreased, primarily due to a one-off recovery of
US$110 million of previous years’ transactional
taxes in Brazil and the non-recurrence of a number
of one-off items in 2007, most notably (i) ex-gratia
payments made in the UK in respect of overdraft
fees, (ii) the provision for reimbursement of certain
charges on historic will trusts and other related
services in the UK, (iii) the indemnification
agreement with Visa ahead of Visa’s IPO, and
(iv) restructuring charges in the US consumer
finance business incurred in 2007. These were partly
offset by an increase in the Financial Services
compensation scheme levy in the UK and an
increase in a litigation provision in Asia.
Goodwill impairment amounting to
US$10.6 billion was booked following the continued
deterioration in economic and credit conditions in
North America. For further information see Note 22
on the Financial Statements.
2009
%
2008
%
HSBC .......................................................................................................................
52.0
60.1
Personal Financial Services ...................................................................................
Europe ......................................................................................................................
Hong Kong ...............................................................................................................
Rest of Asia-Pacific27 ...............................................................................................
Middle East27 ............................................................................................................
North America ..........................................................................................................
Latin America ...........................................................................................................
Commercial Banking .............................................................................................
Europe ......................................................................................................................
Hong Kong ...............................................................................................................
Rest of Asia-Pacific27 ...............................................................................................
Middle East27 ............................................................................................................
North America ..........................................................................................................
Latin America ...........................................................................................................
For footnote, see page 149.
51.7
68.7
34.9
81.2
53.5
38.1
66.7
46.4
47.4
33.7
47.0
33.8
47.7
57.0
76.4
62.7
32.2
81.5
53.2
106.8
59.7
43.0
44.2
26.2
45.9
32.0
46.1
55.0
2007
%
49.4
50.3
64.8
27.2
77.9
61.1
42.3
61.3
44.8
49.3
24.9
47.5
34.5
45.1
54.3
39
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Group performance > Share of profit in associates and joint ventures // Economic profit
Share of profit in associates and joint ventures
Associates
Bank of Communications Co., Limited ..............................................................
Ping An Insurance (Group) Company of China, Limited ..................................
Industrial Bank Co., Limited ...............................................................................
The Saudi British Bank .......................................................................................
Other ....................................................................................................................
Share of profit in associates .....................................................................................
Share of profit in joint ventures ...............................................................................
Share of profit in associates and joint ventures .......................................................
2009
US$m
754
551
216
172
42
1,735
46
1,781
2008
US$m
741
324
221
251
63
1,600
61
1,661
2007
US$m
445
518
128
216
159
1,466
37
1,503
2009 compared with 2008
2008 compared with 2007
The share of profit in associates and joint ventures
was US$1.8 billion, an increase of 7 per cent on
2008, and 6 per cent on an underlying basis.
Share of profit in associates and joint ventures was
US$1.7 billion, an increase of 11 per cent compared
with 2007, and 4 per cent on an underlying basis.
HSBC’s share of profits from Ping An Insurance
(Group) Company of China, Limited (‘Ping An
Insurance’) increased by 62 per cent as a result of the
non-recurrence of Ping An Insurance’s impairment of
its investment in Fortis SA/NV and Fortis N.V.
(‘Fortis’) in 2008 and an increase in new business
sales and investment returns which were boosted by a
recovery in equity markets during 2009. This was
partly offset by the non-recurrence of favourable
changes to investment assumptions in the first half of
2008.
6 per cent underlying increase in share of
profit in associates and joint ventures.
HSBC’s share of profits from the Bank of
Communications Co., Limited (‘Bank of
Communications’) remained in line with 2008 as
higher fee and trading income and a lower tax charge
were broadly offset by a decline in net interest
income and higher loan impairment charges.
Profits from The Saudi British Bank were lower
than in 2008 as an increase in loan impairment
charges was only partly offset by increased operating
income.
The share of profits from joint ventures fell due
to a decline in the profitability of HSBC Saudi Arabia
Ltd as a result of a slowdown in initial public
offerings (‘IPO’s) and a decline in assets under
management. This was partly offset by an increase in
profits from HSBC Merchant Services UK Ltd in the
first half of 2009 compared with the second half of
2008. HSBC Merchant Services UK Ltd was created
in June 2008 and sold in June 2009.
This increase was driven by higher contributions
from Bank of Communications, Industrial Bank, and
The Saudi British Bank, partly offset by lower profits
from Ping An Insurance.
HSBC’s share of profits from Bank of
Communications rose by 52 per cent to
US$741 million, primarily driven by increased
margins, as yields rose following higher base rates in
mainland China through most of 2008, and balance
sheet growth. Growth in revenues from the asset
custody business, financial advisory services and
bank card transactions also drove higher profits.
HSBC’s share of profits from Ping An Insurance
decreased by 43 per cent, primarily due to the
impairment of its investment in Fortis, following
significant declines in its market value.
Profits from The Saudi British Bank were higher
by 16 per cent due to strong balance sheet growth,
particularly in the lending portfolio, augmented by
higher fees from cards, account services and trade.
Profits from Industrial Bank grew by 72 per cent,
driven by increased investment income and balance
sheet growth.
The share of profits from joint ventures rose
due to growth in HSBC Saudi Arabia Ltd and the
recognition of profits in HSBC Merchant Services
UK Ltd, the new merchant acquiring venture with
Global Payments Inc.
An adjustment to the embedded value of HSBC
Assurances in 2007 did not recur.
40
Gains arising from dilution of interests in
associates
In 2007, HSBC’s associates, Industrial Bank,
Ping An Insurance and Bank of Communications
in mainland China, Financiera Independencia in
Mexico and Techcombank in Vietnam issued new
shares for which HSBC did not subscribe. As a
consequence of the new monies raised by the
associates, HSBC’s share of their underlying assets
increased by US$1.1 billion, notwithstanding the
reduction in the Group’s interests. These gains were
presented in the income statement as ‘Gains arising
from dilution of interests in associates’, and should
be regarded as exceptional.
Economic profit
HSBC’s internal performance measures include
economic profit, a calculation which compares the
return on 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 the post-tax profit attributable
to ordinary shareholders represents the amount
of economic profit generated. Economic profit
generated is used by management as one input in
deciding where to allocate capital and other
resources.
In seeking to drive long-term sustainable
risk-based performance, HSBC emphasises the trend
in economic profit ahead of absolute amounts within
business units. The Group’s long-term cost of equity
is reviewed annually and for 2009 remained at 10 per
cent. The following commentary on economic profit
is on a reported basis.
The economic loss decreased by US$0.2 billion.
Profit attributable to shareholders reflected a
significant negative fair value movement in own debt
of US$6.5 billion as credit spreads tightened,
compared with an equivalent gain of US$6.6 billion
in 2008, and the non-recurrence of a goodwill
impairment charge of US$10.6 billion in 2008.
Average invested capital decreased by 1 per cent.
The additional equity raised through the rights issue
was offset by the effect of the goodwill impairment
charge at the end of 2008 and losses on structural
foreign exchange exposures, the result of a stronger
US dollar.
Economic spread increased by 0.1 percentage
points, the result of an increase in return on invested
capital of 2 per cent and a decrease in the cost of
capital in dollar terms of 1 per cent compared with
2008.
2009
US$m %28
2008
US$m
%28
Average total shareholders’ equity .....................................................................
Adjusted by:
Goodwill previously amortised or written off ...............................................
Property revaluation reserves .........................................................................
Reserves representing unrealised losses on effective cash flow hedges .......
Reserves representing unrealised losses on available-for-sale securities ......
Preference shares and other equity instruments .............................................
115,431
8,123
(799)
385
16,189
(3,538)
Average invested capital29 ..................................................................................
135,791
122,292
8,152
(828)
997
9,163
(2,685)
137,091
Return on invested capital30 ................................................................................
5,565
4.1
5,497
4.0
Benchmark cost of capital ..................................................................................
(13,579)
(10.0)
(13,709)
(10.0)
Economic loss and spread ..................................................................................
(8,014)
(5.9)
(8,212)
(6.0)
For footnotes, see page 149.
41
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > Movement in 2009
Consolidated balance sheet
Consolidated balance sheet as at 31 December 2009
ASSETS
Cash and balances at central banks .........................................................................
Trading assets ..........................................................................................................
Financial assets designated at fair value .................................................................
Derivatives ...............................................................................................................
Loans and advances to banks ..................................................................................
Loans and advances to customers ...........................................................................
Financial investments ..............................................................................................
Other assets ..............................................................................................................
At 31 December
2008
US$m
2009
US$m
60,655
421,381
37,181
250,886
179,781
896,231
369,158
149,179
52,396
427,329
28,533
494,876
153,766
932,868
300,235
137,462
2007
US$m
21,765
445,968
41,564
187,854
237,366
981,548
283,000
155,201
Total assets ..............................................................................................................
2,364,452
2,527,465
2,354,266
LIABILITIES AND EQUITY
Liabilities
Deposits by banks ....................................................................................................
Customer accounts ...................................................................................................
Trading liabilities .....................................................................................................
Financial liabilities designated at fair value ............................................................
Derivatives ...............................................................................................................
Debt securities in issue ............................................................................................
Liabilities under insurance contracts .......................................................................
Other liabilities ........................................................................................................
124,872
1,159,034
268,130
80,092
247,646
146,896
53,707
148,414
130,084
1,115,327
247,652
74,587
487,060
179,693
43,683
149,150
132,181
1,096,140
314,580
89,939
183,393
246,579
42,606
113,432
Total liabilities .........................................................................................................
2,228,791
2,427,236
2,218,850
Equity
Total shareholders’ equity .......................................................................................
Minority interests .....................................................................................................
128,299
7,362
Total equity ..............................................................................................................
135,661
93,591
6,638
100,229
128,160
7,256
135,416
Total equity and liabilities .......................................................................................
2,364,452
2,527,465
2,354,266
A more detailed consolidated balance sheet is contained in the Financial Statements on page 355.
Movement from 31 December 2008 to
31 December 2009
creation by central banks, particularly in Europe
and North America.
Total assets amounted to US$2.4 trillion, 6 per cent
lower than at 31 December 2008. After excluding
the effect of currency movements, underlying total
assets declined by 11 per cent, driven by a reduction
in the fair value of derivative assets as market
conditions stabilised.
The Group’s reported tier 1 ratio increased from
8.3 per cent to 10.8 per cent, mainly due to additional
equity of US$17.8 billion raised through the rights
issue in April 2009, the contribution from profits for
the year and a reduction in the underlying level of
risk-weighted assets. For more details of capital and
risk weighted assets, see pages 285 to 291. The
following commentary is on an underlying basis.
Assets
Cash and balances at central banks increased by
12 per cent, consistent with the global liquidity
Trading assets fell by 6 per cent, primarily
due to a decrease in the level of reverse repos,
particularly in Europe and North America, and a
reduction in holdings of short-dated government
securities in Hong Kong. There was also a reduction
in the collateral required by counterparties to support
derivative liabilities as these balances declined.
Equity shares held-for-trading grew as activity
recovered against a low in the fourth quarter of 2008.
A reduction in the fair values of derivative
assets drove an 11 per cent decline in
underlying total assets.
Financial assets designated at fair value grew
by 19 per cent due to an increase in UK government
debt securities in Balance Sheet Management, and an
increase in the fair value of equity securities held
within the insurance business, particularly in Europe
and Hong Kong, as market values recovered.
42
Derivative assets declined by 52 per cent with
reductions across all classes of asset, notably foreign
exchange, interest rate and credit derivatives. Lower
volatility within the financial markets, steepening
yield curves in major currencies and narrowing
credit spreads led to a fall in the fair value of
outstanding derivative contracts.
Loans and advances to banks increased by
12 per cent, mainly in Hong Kong and Rest of Asia-
Pacific, where surplus funds were placed on a
short-term basis with financial institutions and
central banks as part of Balance Sheet Management
activities.
Loans and advances to customers fell by 9 per
cent, driven by a reduction in balances in North
America due to the run-off of the consumer finance
businesses, the sale of selected portfolios, and a
reduction in Treasury reverse repo balances and cash
collateral as excess liquidity was placed in other
investments. These factors were compounded by
declines in balances in other regions, particularly
in the first half of the year, due to customer
deleveraging and lower credit origination in certain
segments as risk appetite reduced and customer
demand declined. In the UK, there was also a
reduction in customer overdraft balances that are
managed on a net basis but reported gross under
IFRSs. Mortgage balances increased strongly in the
UK and Hong Kong as HSBC targeted growth in
these markets, although this was largely offset by the
run-off of balances in the US, as noted above.
Financial investments rose by 17 per cent,
mainly in Hong Kong driven by purchases of Hong
Kong government and other highly-rated securities
in the year. This increase was partly offset by a fall
in financial investments in Europe, as a result of debt
securities that matured and were not replaced.
was mainly due to an outflow of deposits in Europe
as the economic situation improved and investor risk
appetite increased. There was also a fall in deposits
from customers whose accounts are managed net but
reported gross under IFRSs, (see ‘Loans and
advances to customers’). These factors were partly
offset by an increase in deposits in Hong Kong due
to an excess of liquidity in the market.
Trading liabilities were 3 per cent higher, driven
by increases in hedged net short positions on equity
securities in line with a rise in market activity, and in
government debt securities as a result of more active
market making activities and an expectation of
interest rate rises on certain trading desks. Offsetting
this was a reduction in repo contracts, and a decrease
in structured deposit accounts in Hong Kong as
existing deals matured and customers expressed a
preference for vanilla cash instruments in the
uncertain economic environment.
Financial liabilities designated at fair value
grew by 4 per cent due to new HSBC debt issuances
in Europe during the year.
Derivative businesses are managed within
market risk limits and, as a consequence, the
reduction in the value of derivative liabilities
broadly matched that of derivative assets.
Debt securities in issue fell by 22 per cent,
primarily in North America as the funding
requirements reduced in line with the run-off of
the consumer finance business.
Liabilities under insurance contracts grew by
18 per cent due to gains recorded on unit-linked
products as a result of an improvement in investment
market values, and higher insurance sales in Hong
Kong following the launch of several new products.
Other liabilities were 4 per cent lower than at
Other assets grew by 7 per cent compared with
31 December 2008.
31 December 2008.
Liabilities
Deposits by banks decreased by 10 per cent, largely
reflecting a decline in central bank and other
interbank deposits in Hong Kong, Rest of Asia-
Pacific and North America.
Customer account balances decreased by 2 per
cent, despite growth in the Personal Financial
Services and Commercial Banking segments. This
Equity
Total shareholders’ equity increased by 31 per cent,
mainly due to the US$17.8 billion of funds raised
through the rights issue in April 2009. In addition,
the negative balance on the available-for-sale reserve
also declined from US$20.6 billion at 31 December
2008 to US$10.0 billion at 31 December 2009,
largely reflecting increases in the market value of
assets.
43
Under-
lying
change
%
12
(6)
19
(52)
12
(9)
17
7
(11)
(10)
(2)
3
4
(52)
(22)
18
(4)
(13)
31
7
30
(11)
%
16
(1)
30
(49)
17
(4)
23
9
(6)
(4)
4
8
7
(49)
(18)
23
–
(8)
37
11
35
(6)
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > Reconciliation of assets and liabilities / Loans and advances and customer accounts
Reconciliation of reported and underlying assets and liabilities
31 December 2009 compared with 31 December 2008
HSBC
Cash and balances at central banks ..
Trading assets ...................................
Financial assets designated at fair
value .............................................
Derivative assets ...............................
Loans and advances to banks ...........
Loans and advances to customers ....
Financial investments .......................
Other assets .......................................
31 Dec 08
as
reported
US$m
Currency
translation31
US$m
31 Dec 08
at 31 Dec 09
exchange
rates
US$m
Underlying
change
US$m
52,396
427,329
28,533
494,876
153,766
932,868
300,235
137,462
1,550
21,612
2,636
32,379
7,406
57,163
14,748
1,807
53,946
448,941
31,169
527,255
161,172
990,031
314,983
139,269
6,709
(27,560)
6,012
(276,369)
18,609
(93,800)
54,175
9,910
US$m
60,655
421,381
37,181
250,886
179,781
896,231
369,158
149,179
31 Dec 09
as
reported
Reported
change
Total assets .......................................
2,527,465
139,301
2,666,766
(302,314)
2,364,452
Deposits by banks .............................
Customer accounts ............................
Trading liabilities ..............................
Financial liabilities designated at
fair value .......................................
Derivative liabilities .........................
Debt securities in issue .....................
Liabilities under insurance
contracts ........................................
Other liabilities .................................
130,084
1,115,327
247,652
74,587
487,060
179,693
43,683
149,150
8,426
64,478
12,714
2,709
31,722
8,005
1,763
5,144
138,510
1,179,805
260,366
(13,638)
(20,771)
7,764
124,872
1,159,034
268,130
77,296
518,782
187,698
45,446
154,294
2,796
(271,136)
(40,802)
80,092
247,646
146,896
8,261
(5,880)
53,707
148,414
Total liabilities ..................................
2,427,236
134,961
2,562,197
(333,406)
2,228,791
Total shareholders’ equity ................
Minority interests ..............................
93,591
6,638
Total equity .......................................
100,229
4,114
226
4,340
97,705
6,864
30,594
498
128,299
7,362
104,569
31,092
135,661
Total equity and liabilities ................
2,527,465
139,301
2,666,766
(302,314)
2,364,452
For footnote, see page 149.
In 2009, the effect of acquisitions was not material.
44
Reconciliation of reported and underlying loans and advances to customers and customer accounts by geographical
region
31 December 2009 compared with 31 December 2008
31 Dec 08
as
reported
US$m
Currency
translation31
US$m
31 Dec 08
at 31 Dec 09
exchange
rates
US$m
Underlying
change
US$m
31 Dec 09
as
reported
Reported
change
US$m
%
Under-
lying
change
%
426,191
100,220
80,661
27,295
256,214
42,287
37,773
(54)
5,320
(69)
7,379
6,814
463,964
100,166
85,981
27,226
263,593
49,101
(24,483)
(785)
(5,938)
(4,382)
(56,740)
(1,472)
439,481
99,381
80,043
22,844
206,853
47,629
932,868
57,163
990,031
(93,800)
896,231
502,476
250,517
124,194
35,165
143,532
59,443
42,883
(119)
5,736
(76)
5,577
10,477
545,359
250,398
129,930
35,089
149,109
69,920
(50,340)
25,043
4,069
(2,560)
48
2,969
495,019
275,441
133,999
32,529
149,157
72,889
1,115,327
64,478
1,179,805
(20,771)
1,159,034
3
(1)
(1)
(16)
(19)
13
(4)
(1)
10
8
(7)
4
23
4
(5)
(1)
(7)
(16)
(22)
(3)
(9)
(9)
10
3
(7)
–
4
(2)
Loans and advances to customers
(net)
Europe ...............................................
Hong Kong .......................................
Rest of Asia-Pacific ..........................
Middle East .......................................
North America ..................................
Latin America ...................................
Customer accounts
Europe ...............................................
Hong Kong .......................................
Rest of Asia-Pacific ..........................
Middle East .......................................
North America ..................................
Latin America ...................................
Reconciliation of reported and underlying loans and advances to customers and customer accounts by customer
groups and global businesses
31 December 2009 compared with 31 December 2008
31 Dec 08
as
reported
US$m
Currency
translation31
US$m
31 Dec 08
at 31 Dec 09
exchange
rates
US$m
Underlying
change
US$m
31 Dec 09
as
reported
Reported
change
US$m
%
Under-
lying
change
%
401,402
203,949
287,306
37,590
2,621
932,868
440,338
235,879
320,386
116,683
2,041
21,119
14,614
19,989
1,416
25
57,163
24,029
13,901
24,243
2,291
14
422,521
218,563
307,295
39,006
2,646
(23,061)
(18,889)
(50,339)
(1,975)
464
399,460
199,674
256,956
37,031
3,110
990,031
(93,800)
896,231
464,367
249,780
344,629
118,974
2,055
34,742
17,608
(59,902)
(12,441)
(778)
499,109
267,388
284,727
106,533
1,277
1,115,327
64,478
1,179,805
(20,771)
1,159,034
–
(2)
(11)
(1)
19
(4)
13
13
(11)
(9)
(37)
4
(5)
(9)
(16)
(5)
18
(9)
7
7
(17)
(10)
(38)
(2)
Loans and advances to customers
(net)
Personal Financial Services ..............
Commercial Banking ........................
Global Banking and Markets ............
Private Banking ................................
Other .................................................
Customer accounts
Personal Financial Services ..............
Commercial Banking ........................
Global Banking and Markets ............
Private Banking ................................
Other .................................................
For footnote, see page 149.
In 2009, the effect of acquisitions was not material.
45
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet / Average balance sheet
Average balance sheet and net interest
income
Average balances and related interest are shown for
the domestic operations of HSBC’s principal
commercial banks by geographical region. ‘Other
operations’ comprise the operations of the principal
Commercial Banking and consumer finance entities
outside their domestic markets and all other banking
operations, including investment banking balances
and transactions.
Average balances are based on daily averages
for the principal areas of HSBC’s banking activities
with monthly or less frequent averages used
elsewhere.
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.
Net interest margin numbers are calculated
by dividing net interest income as reported in the
income statement by the average interest-earning
assets from which interest income is reported
within the ‘Net interest income’ line of the income
statement. Interest income and interest expense
arising from trading assets and liabilities and the
funding thereof is included within ‘Net trading
income’ in the income statement.
Assets
Summary
Average
balance
2009
Interest
income Yield
US$m US$m %
Average
balance
US$m
2008
Interest
income Yield
US$m
%
Average
balance
US$m
2007
Interest
income Yield
%
US$m
Total interest-earning assets (itemised
below) ...................................................... 1,384,705
357,504
62,143
(26,308)
667,942
Trading assets32 ............................................
Financial assets designated at fair value33 ...
Impairment provisions .................................
Non-interest-earning assets .........................
62,096
7,614
1,032
4.48 1,466,622
2.13
428,539
1.66
37,303
(20,360)
596,885
91,301
16,742
1,108
6.23
3.91
2.97
1,296,701
374,973
14,899
(15,309)
440,686
92,359 7.12
17,562 4.68
813 5.46
Total assets and interest income .................. 2,445,986
70,742
2.89 2,508,989
109,151
4.35 2,111,950 110,734 5.24
Short-term funds and loans and advances
to banks
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
HSBC France ..................
Hang Seng Bank .............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
Middle East27 HSBC Bank Middle East .
North America HSBC Bank USA ............
HSBC Bank Canada ........
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
38,455
1,379
3.59
46,703
2,187
4.68
49,910
2,592 5.19
4,451
37,239
16,626
43
440
202
0.97
1.18
1.21
8,040
35,801
17,402
333
1,495
4.14
4.18
5,295
31,591
229 4.32
1,294 4.10
587
3.37
13,054
609 4.67
27,903
182
0.65
47,244
1,344
2.84
50,210
2,352 4.68
23,107
3,776
4,312
2,338
2,934
3,722
10,490
1,187
256
326
81
52
94
10
1.41
2.15
1.21
4.02
0.34
149
1,003
10
29
4.00
9.56
0.84
11.33
27,907
4,659
6,028
9,595
3,354
3,682
7,959
1,133
612
881
165
188
328
107
247
951
30
43
760
3.16
3.54
19,286
2,861
810 4.20
103 3.60
3.12
6,328
324 5.12
3.42
3.19
6.71
11.95
2.65
7.03
9,393
3,810
3,555
5,790
897
304
477 5.08
174 4.57
239 6.72
645 11.14
33 3.68
16 5.26
3.80
19,087
898 4.70
192,578
4,199
2.18
240,111
9,646
4.02
221,371 10,795 4.88
46
Other operations ..........................................
15,782
199
1.26
19,992
Average
balance
US$m
2009
Interest
income Yield
US$m %
Average
balance
US$m
2008
Interest
income Yield
US$m
%
Average
balance
US$m
2007
Interest
income Yield
%
US$m
Loans and advances to customers
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
HSBC France ..................
HSBC Finance .................
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
276,602
10,898
3.94
288,214
18,587
6.45
237,231
18,078 7.62
9,993
71,048
3,094
176
1,932
319
1.76
2.72
10.31
12,355
73,455
4,808
494
3,604
505
4.00
4.91
10.50
9,805
68,027
5,492
507 5.17
3,219 4.73
611 11.13
42,619
1,194
2.80
42,304
1,589
3.76
37,827
2,120 5.60
55,287
1,757
3.18
54,628
2,291
4.19
48,134
2,901 6.03
66,262
8,113
3,668
455
5.54
5.61
77,741
8,407
5,163
553
6.64
6.58
59,286
7,467
4,321 7.29
507 6.79
Middle East27 HSBC Bank Middle East
22,612
1,593
7.04
23,697
1,549
6.54
15,125
1,200 7.93
North America HSBC Bank USA ............
HSBC Finance .................
HSBC Bank Canada ........
98,422
101,132
43,072
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
12,185
18,704
9,302
1,940
5,541
9,941
1,499
1,708
4,494
864
357
5.63
9.83
3.48
14.02
24.03
9.29
18.40
93,088
140,957
48,331
17,252
19,642
8,620
2,136
5,758
15,835
2,455
2,565
4,879
810
378
6.19
11.23
5.08
14.87
24.84
9.40
17.70
90,091
153,658
43,570
6,585 7.31
18,086 11.77
2,598 5.96
16,469
13,569
8,113
1,667
2,187 13.28
3,895 28.71
778 9.59
241 14.46
Other operations ..........................................
29,670
1,905
6.42
28,027
1,707
6.09
21,318
1,790 8.40
870,057
48,301
5.55
943,662
68,722
7.28
836,849
69,624 8.32
Financial investments
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
HSBC France ..................
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
79,763
2,321
2.91
83,725
3,840
4.59
45,885
2,431 5.30
15,602
5,327
24,594
363
141
630
2.33
2.65
2.56
12,018
14,862
553
795
4.60
5.35
10,372
10,357
511 4.93
511 4.93
24,031
1,063
4.42
30,791
1,550 5.03
52,965
644
1.22
15,361
563
3.67
20,717
1,017 4.91
34,056
1,218
1,039
37
Middle East27 HSBC Bank Middle East
6,996
North America HSBC Bank USA ............
HSBC Finance .................
HSBC Bank Canada ........
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
27,253
2,426
10,282
3,916
6,930
604
181
118
969
120
205
227
820
39
35
3.05
3.04
1.69
3.56
4.95
1.99
5.80
11.83
6.46
19.34
31,992
937
1,507
36
4.71
3.84
23,739
1,515
1,065 4.49
56 3.70
5,671
144
2.54
3,654
174 4.76
25,089
2,908
7,037
3,470
6,758
618
287
1,232
143
197
244
853
47
47
4.91
4.92
2.80
7.03
12.62
7.61
16.38
23,373
4,072
6,068
3,327
5,596
709
563
1,189 5.09
229 5.62
258 4.25
319 9.59
672 12.01
58 8.18
68 12.08
Other operations ..........................................
50,767
1,717
3.38
29,632
1,354
4.57
27,252
1,407 5.16
322,880
9,425
2.92
264,396
12,618
4.77
217,990
11,515 5.28
47
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > Average balance sheet
Assets (continued)
Average
balance
US$m
2009
Interest
income Yield
US$m %
Average
balance
US$m
2008
Interest
income Yield
US$m
%
Average
balance
US$m
2007
Interest
income Yield
%
US$m
17,406
188
1.08
25,885
630
2.43
11,170
652 5.84
21,450
11,867
2,618
360
172
1.68
1.45
21,189
23,414
875
630
4.13
2.69
16,360
12,158
882 5.39
419 3.45
32
1.22
1,629
48
2.95
832
42 5.05
26,657
214
0.80
33,571
949
2.83
27,057
1,237 4.57
Other interest-earning assets
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
HSBC France ..................
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
19,917
407
106
6
Middle East27 HSBC Bank Middle East .
North America HSBC Bank USA ............
HSBC Finance .................
HSBC Bank Canada ........
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
541
3,327
2,995
773
138
1,074
1,372
51
46
71
6
9
–
46
9
–
0.53
1.47
8.50
2.13
0.20
1.16
–
4.28
0.66
–
24,492
212
352
7
1.44
3.30
11,137
231
588 5.28
12 5.19
843
3,091
2,638
1,025
193
1,438
1,807
58
63
7.47
758
52 6.86
188
63
25
2
147
23
1
6.08
2.39
2.44
1.04
10.22
1.27
1.72
3,731
1,724
960
–
840
1,351
39
231 6.19
89 5.16
31 3.23
–
–
75 8.93
40 2.96
1 2.56
Other operations ..........................................
(111,403)
(1,094)
(123,032)
(3,688)
(67,857)
(3,926)
(810)
171 (21.11)
18,453
315
1.71
20,491
425 2.07
Total interest-earning assets
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
HSBC France ..................
HSBC Finance .................
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
412,226
14,786
3.59
444,527
25,244
5.68
344,196
23,753 6.90
51,496
125,481
3,094
942
2,685
319
1.83
2.14
10.31
53,602
147,532
4,808
2,255
6,524
505
4.21
4.42
10.50
41,832
122,133
5,492
2,129 5.09
5,443 4.46
611 11.13
86,457
2,058
2.38
85,366
3,287
3.85
82,504
4,321 5.24
162,812
2,797
1.72
150,804
5,147
3.41
146,118
7,507 5.14
143,342
13,514
5,139
579
3.59
4.28
162,132
14,215
7,903
761
4.87
5.35
113,448
12,074
6,784 5.98
678 5.62
Middle East27 HSBC Bank Middle East .
34,461
1,809
5.25
36,239
1,944
5.36
25,865
1,750 6.77
North America HSBC Bank USA ............
HSBC Finance .................
HSBC Bank Canada ........
131,340
106,553
57,061
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
19,961
37,198
12,465
2,428
6,675
10,067
1,723
2,084
6,363
922
421
5.08
9.45
3.02
10.44
17.11
7.40
17.34
130,863
146,503
59,747
24,597
35,797
12,178
3,093
7,506
16,041
2,784
3,058
6,830
910
469
5.74
10.95
4.66
12.43
19.08
7.47
15.16
126,588
159,454
54,408
8,482 6.70
18,404 11.54
3,061 5.63
23,351
25,795
11,070
2,573
2,745 11.76
5,287 20.50
909 8.21
326 12.67
Other operations ..........................................
(15,184)
2,727
(45,381)
133
(200)
169
1,384,705
62,096
4.48 1,466,622
91,301
6.23 1,296,701
92,359 7.12
For footnotes, see page 149.
48
Equity and liabilities
Summary
Total interest-bearing liabilities (itemised
Average
balance
US$m
2009
Interest
expense Cost
US$m %
Average
balance
US$m
2008
Interest
expense Cost
US$m
%
Average
balance
US$m
2007
Interest
expense Cost
%
US$m
below) ..................................................... 1,353,283
205,670
21,366
3,987
1.58 1,451,842
277,940
1.94
48,738
11,029
3.36
3.97
1,279,460
250,572
54,564 4.26
12,186 4.86
15,688
123,271
748,074
293
1.87
21,266
98,193
659,747
345
1.62
20,827
83,958
477,133
224 1.07
Total equity and liabilities .......................... 2,445,986
25,646
1.05 2,508,988
60,112
2.40
2,111,950
66,974 3.17
35,207
553
1.57
48,167
1,875
3.89
44,787
2,148 4.80
Trading liabilities ........................................
Financial liabilities designated at fair value
(excluding own debt issued) ..................
Non-interest bearing current accounts ........
Total equity and other non-interest bearing
liabilities .................................................
Deposits by banks35
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
HSBC France ..................
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
Middle East27 HSBC Bank Middle East
North America HSBC Bank USA ............
HSBC Bank Canada ........
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
Other operations ..........................................
1,063
43,682
1,051
6,892
10,710
110
773
8,381
1,405
1,462
3,292
908
12
2,899
1
536
5
9
165
2
9
9
8
49
241
26
1
45
117,847
1,659
Financial liabilities designated at fair
value – own debt issued36
Europe
HSBC Holdings ...............
HSBC Bank .....................
HSBC France ..................
17,887
7,932
5,108
Hong Kong
Hang Seng Bank ..............
130
North America HSBC Bank USA ............
HSBC Finance .................
1,615
26,628
369
196
128
2
30
871
0.09
1.23
0.48
4,493
37,851
1,696
105
1,672
2.34
4.42
690
30,816
22 3.19
1,358 4.41
55
3.24
2,993
123 4.11
0.13
3,665
70
1.91
3,634
150 4.13
1.54
1.82
1.16
0.11
0.57
3.35
7.32
2.86
8.33
1.55
1.41
2.06
2.47
2.51
1.54
1.86
3.27
16,232
338
1,680
11,015
1,391
822
2,790
1,016
27
4,564
450
10
2.77
2.96
10,247
375
29
1.73
220
41
32
190
43
1
166
2.00
2.95
3.89
6.81
4.23
3.70
3.64
672
6,933
1,681
983
1,549
1,137
117
4,495
445 4.34
12 3.20
32 4.76
414 5.97
93 5.53
63 6.41
106 6.84
66 5.80
9 7.69
291 6.47
135,747
4,959
3.65
111,109
5,332 4.80
18,675
8,805
1,515
127
1,504
32,126
721
529
79
3.86
6.01
5.21
15,142
9,907
143
822 5.43
525 5.30
11 7.69
6
4.72
126
6 4.76
67
1,563
4.45
4.87
1,620
31,889
125 7.72
2,079 6.52
Other operations ..........................................
921
(38) (4.13)
1,083
168
15.51
–
–
–
60,221
1,558
2.59
63,835
3,133
4.91
58,827
3,568 6.07
49
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > Average balance sheet
Equity and liabilities (continued)
Average
balance
US$m
2009
Interest
expense Cost
US$m %
Average
Balance
US$m
2008
Interest
expense Cost
US$m
%
Average
balance
US$m
2007
Interest
expense Cost
%
US$m
274,949
2,407
0.88
305,702
10,092
3.30
270,965
10,576 3.90
27,250
61,465
71,140
256
645
200
0.94
1.05
0.28
37,778
39,428
66,142
1,349
1,583
3.57
4.01
30,955
31,845
1,485 4.80
1,226 3.85
914
1.38
61,227
1,900 3.10
150,520
211
0.14
139,169
1,365
0.98
125,478
3,499 2.79
Customer accounts37
Europe
HSBC Bank .....................
HSBC Private Banking
Hong Kong
Rest of Asia-
Pacific27
Holdings (Suisse) ........
HSBC France ..................
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
92,305
9,658
1,494
191
Middle East27 HSBC Bank Middle East
18,726
North America HSBC Bank USA ............
HSBC Bank Canada ........
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
85,007
35,051
11,636
28,605
8,592
2,151
432
975
385
391
2,946
353
99
1.62
1.98
2.31
1.15
1.10
3.36
10.30
4.11
4.60
96,476
10,266
19,922
86,701
34,090
14,612
26,288
7,761
2,266
2,869
295
2.97
2.87
76,052
8,823
2,645 3.48
260 2.95
422
2.12
15,685
578 3.69
2,069
967
561
3,110
296
145
2.39
2.84
3.84
11.83
3.81
6.40
78,138
30,060
14,230
19,581
7,604
1,892
3,051 3.90
1,090 3.63
548 3.85
2,163 11.05
314 4.13
85 4.49
Other operations ..........................................
63,863
361
0.57
64,253
1,952
3.04
55,351
2,297 4.15
940,918
11,346
1.21
950,854
27,989
2.94
827,886
31,717 3.83
Debt securities in issue
Europe
HSBC Bank .....................
HSBC France ..................
HSBC Finance .................
72,955
25,065
–
1,305
330
–
1.79
1.32
–
86,216
30,815
215
4,001
1,447
8
4.64
4.70
3.72
64,168
28,757
240
3,753 5.85
1,207 4.20
18 7.50
Hong Kong
Hang Seng Bank ..............
1,220
21
1.72
1,685
57
3.38
1,734
80 4.61
Rest of Asia-
Pacific27
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
Middle East27 HSBC Bank Middle East
North America HSBC Bank USA ............
HSBC Finance .................
HSBC Bank Canada ........
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
5,409
403
2,988
20,968
63,563
12,825
1,460
1,568
487
1
218
16
4.03
3.97
62
2.07
590
2,510
322
67
86
34
–
2.81
3.95
2.51
4.59
5.48
6.98
–
8,995
475
2,650
21,922
98,096
16,957
2,693
1,859
556
2
640
20
7.12
4.21
90
3.40
8,979
318
2,086
559 6.23
13 4.09
119 5.70
852
3,765
604
243
156
33
–
3.89
3.84
3.56
9.02
8.39
5.94
–
25,724
115,520
14,771
1,232 4.79
5,311 4.60
640 4.33
1,147
1,417
607
12
110 9.59
115 8.12
45 7.41
–
–
Other operations ..........................................
16,745
340
2.03
13,691
66
0.48
6,446
(13)
(0.20)
225,657
5,901
2.62
286,827
11,982
4.18
271,926
13,189 4.85
50
Average
balance
US$m
2009
Interest
expense Cost
US$m %
Average
balance
US$m
2008
Interest
expense Cost
US$m
%
Average
balance
US$m
2007
Interest
expense Cost
%
US$m
Other interest-bearing liabilities
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
HSBC France ..................
HSBC Finance .................
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
50,247
655
1.30
38,906
1,134
2.91
22,035
1,302 5.91
3,892
24,699
2,363
789
18
187
59
0.46
0.76
2.50
4,203
33,920
3,712
135
1,361
191
3.21
4.01
5.15
3,427
27,830
4,557
163 4.76
979 3.52
227 4.98
5
0.63
1,258
41
3.26
2,278
114 5.00
12,815
105
0.82
10,557
288
2.73
9,866
535 5.42
19,447
266
177
2
0.91
0.75
23,685
338
466
7
1.97
2.07
12,631
232
580 4.59
6 2.59
Middle East27 HSBC Bank Middle East
North America HSBC Bank USA ............
HSBC Finance .................
HSBC Bank Canada ........
HSBC Markets Inc ..........
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
1,748
9,754
4,051
1,149
1,716
301
1,496
192
36
68
3.89
1,918
89
4.64
1,168
81 6.93
368
102
6
36
11
130
2
1
3.77
2.52
0.52
2.10
3.65
8.69
1.04
2.78
10,490
4,670
1,306
10,349
187
2,340
917
92
468
141
19
78
20
207
3
6
4.46
3.02
1.45
0.75
10.70
8.85
0.33
6.52
13,602
1,941
1,151
8,889
207
1,103
574
95
587 4.32
113 5.82
27 2.35
255 2.87
16 7.73
182 16.50
9 1.57
4 4.21
Other operations ..........................................
(126,321)
(1,030)
(134,269)
(3,979)
(101,874)
(4,422)
8,640
902
10.44
14,579
675
4.63
9,712
758 7.80
Total interest-bearing liabilities
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .....................
HSBC Private Banking
Holdings (Suisse) ........
HSBC France ..................
HSBC Finance .................
Hang Seng Bank ..............
The Hongkong and
Shanghai Banking
Corporation .................
The Hongkong and
Shanghai Banking
Corporation .................
HSBC Bank Malaysia .....
441,290
5,116
1.16
487,796
17,631
3.61
411,862
18,304 4.44
32,205
160,019
2,363
74,330
275
1,826
59
233
0.85
1.14
2.50
0.31
46,474
143,529
3,927
1,589
6,142
199
3.42
4.28
5.07
35,072
119,391
4,797
1,670 4.76
4,781 4.00
245 5.11
70,908
1,073
1.51
68,358
2,223 3.25
170,227
325
0.19
153,391
1,723
1.12
138,978
4,184 3.01
127,871
10,437
Middle East27 HSBC Bank Middle East
24,235
North America HSBC Bank USA ............
HSBC Finance .................
HSBC Bank Canada ........
HSBC Markets Inc ..........
Latin America HSBC Mexico .................
Brazilian operations34 ......
HSBC Bank Panama .......
HSBC Bank Argentina ....
125,725
94,242
50,430
1,716
14,859
34,961
10,179
2,200
Other operations ..........................................
(24,006)
2,054
211
571
1,972
3,483
721
36
518
3,403
415
101
47
1.61
2.02
2.36
1.57
3.70
1.43
2.10
3.49
9.73
4.08
4.59
145,388
11,417
26,170
131,632
134,892
53,744
10,349
18,314
33,277
10,250
2,387
4,425
332
630
3,676
5,469
1,631
78
856
3,663
375
152
3.04
2.91
107,909
9,748
4,229 3.92
291 2.99
2.41
2.79
4.05
3.03
0.75
4.67
11.01
3.66
6.37
19,611
810 4.13
126,017
149,350
47,663
8,889
16,567
23,650
9,922
2,116
5,409 4.29
7,503 5.02
1,850 3.88
255 2.87
737 4.45
2,566 10.85
434 4.37
98 4.63
(32,003)
(906)
(20,440)
(1,025)
For footnotes, see page 149.
1,353,283
21,366
1.58 1,451,842
48,738
3.36
1,279,460
54,564 4.26
51
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > Net interest margin / Average asset distribution / Changes in net interest income and expense
Net interest margin39
Europe
HSBC Bank ........................................................................
HSBC Private Banking Holdings (Suisse) .........................
HSBC France ......................................................................
HSBC Finance ....................................................................
Hong Kong
Hang Seng Bank .................................................................
The Hongkong and Shanghai Banking Corporation ..........
Rest of Asia-Pacific27 The Hongkong and Shanghai Banking Corporation ..........
HSBC Bank Malaysia ........................................................
Middle East27
North America
Latin America
HSBC Bank Middle East ...................................................
HSBC Bank USA ...............................................................
HSBC Finance ....................................................................
HSBC Bank Canada ...........................................................
HSBC Mexico ....................................................................
Brazilian operations34 .........................................................
HSBC Bank Panama ..........................................................
HSBC Bank Argentina .......................................................
Distribution of average total assets
Europe
HSBC Bank ........................................................................
HSBC Private Banking Holdings (Suisse) .........................
HSBC France ......................................................................
HSBC Finance ....................................................................
Hong Kong
Hang Seng Bank .................................................................
The Hongkong and Shanghai Banking Corporation ..........
Rest of Asia-Pacific27 The Hongkong and Shanghai Banking Corporation ..........
HSBC Bank Malaysia ........................................................
Middle East27
North America
Latin America
HSBC Bank Middle East ...................................................
HSBC Bank USA ...............................................................
HSBC Finance ....................................................................
HSBC Bank Canada ...........................................................
HSBC Mexico ....................................................................
Brazilian operations34 .........................................................
HSBC Bank Panama ..........................................................
HSBC Bank Argentina .......................................................
Other operations (including consolidation adjustments) ........................................
For footnotes, see page 149.
2009
%
2.35
1.30
0.68
8.40
2.11
1.52
2.15
2.72
3.59
3.58
6.18
1.76
7.85
7.96
4.07
13.18
2.94
2009
%
36.7
2.3
15.0
–
4.2
10.5
8.5
0.6
1.6
11.0
4.5
2.7
1.4
2.1
0.6
0.2
(1.9)
100.0
2008
%
1.71
1.24
0.26
6.36
2.59
2.27
2.15
3.02
3.63
2.93
7.22
1.93
8.95
8.85
4.39
10.25
2.90
2008
%
36.7
2.3
13.8
0.2
3.9
9.5
8.8
0.6
1.8
11.2
6.2
2.9
1.5
2.1
0.6
0.2
(2.3)
2007
%
1.58
1.10
0.54
6.66
2.54
2.27
2.25
3.21
3.63
2.43
6.84
2.23
8.60
10.55
4.29
8.86
2.91
2007
%
34.6
2.2
12.0
0.3
4.4
10.1
6.9
0.7
1.4
10.1
8.3
3.3
2.5
1.6
0.7
0.2
0.7
100.0
100.0
52
Analysis of changes in net interest income and net interest expense
The following tables allocate changes in net interest income and net interest expense between volume and rate for
2009 compared with 2008, and for 2008 compared with 2007.
Interest income
Short-term funds and loans and advances to banks
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank .................................
HSBC Private Banking
Holdings (Suisse) ....................
HSBC France ..............................
Hang Seng Bank ..........................
The Hongkong and Shanghai
Banking Corporation ..............
The Hongkong and Shanghai
Banking Corporation ..............
HSBC Bank Malaysia .................
Middle East27
HSBC Bank Middle East ............
North America
HSBC Bank USA ........................
HSBC Bank Canada ....................
Latin America
HSBC Mexico .............................
Brazilian operations34 ..................
HSBC Bank Panama ...................
HSBC Bank Argentina ................
Other operations .........................................................
Loans and advances to customers
Europe
Hong Kong
HSBC Bank .................................
HSBC Private Banking
Holdings (Suisse) ....................
HSBC France ..............................
HSBC Finance .............................
Hang Seng Bank ..........................
The Hongkong and Shanghai
43
440
202
182
326
81
52
94
10
149
1,003
10
29
199
176
1,932
319
1,194
Banking Corporation ..............
1,757
Rest of Asia-
Pacific27
The Hongkong and Shanghai
Banking Corporation ..............
HSBC Bank Malaysia .................
Middle East27
HSBC Bank Middle East ............
North America
Latin America
HSBC Bank USA ........................
HSBC Finance .............................
HSBC Bank Canada ....................
HSBC Mexico .............................
Brazilian operations34 ..................
HSBC Bank Panama ...................
HSBC Bank Argentina ................
Other operations .........................................................
3,668
455
1,593
5,541
9,941
1,499
1,708
4,494
864
357
1,905
Increase/(decrease)
in 2009 compared
with 2008
Increase/(decrease)
in 2008 compared
with 2007
2009 Volume
US$m
US$m
Rate
US$m
2008
US$m
Volume
US$m
Rate
US$m
2007
US$m
1,379
(386)
(422)
2,187
(166)
(239)
2,592
(149)
60
(26)
(141)
(1,115)
(359)
333
1,495
587
119
173
203
(15)
28
(225)
229
1,294
609
(549)
(613)
1,344
(139)
(869)
2,352
(152)
(31)
(54)
(248)
(13)
3
302
1
(25)
(160)
(403)
(53)
(82)
14
(84)
(101)
(250)
(21)
11
(401)
881
165
188
328
107
247
951
30
43
760
362
65
(15)
10
(21)
9
242
9
16
43
915
(291)
(3)
(121)
(159)
(46)
(1)
64
(12)
11
(181)
810
103
324
477
174
239
645
33
16
898
(2,064)
10,795
4,199
(1,911)
(3,536)
9,646
10,898
(749)
(6,940)
18,587
3,885
(3,376)
18,078
(94)
(118)
(180)
12
28
(762)
(19)
(71)
330
(4,472)
(267)
(753)
(233)
64
(35)
100
(224)
(1,554)
(6)
(407)
494
3,604
505
1,589
132
257
(76)
251
(145)
128
(30)
(782)
507
3,219
611
2,120
(562)
2,291
392
(1,002)
2,901
(733)
(79)
115
(547)
(1,422)
(689)
(104)
(152)
(10)
14
98
5,163
553
1,549
5,758
15,835
2,455
2,565
4,879
810
378
1,707
1,345
64
680
219
(1,495)
284
104
1,744
49
68
564
(503)
(18)
(331)
(1,046)
(756)
(427)
274
(760)
(17)
69
(647)
4,321
507
1,200
6,585
18,086
2,598
2,187
3,895
778
241
1,790
48,301
(5,358)
(15,063)
68,722
8,887
(9,789)
69,624
53
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > Changes in net interest income / net interest expense
Interest income (continued)
Financial investments
Europe
Hong Kong
HSBC Bank ...........................
HSBC Private Banking
Holdings (Suisse) ..............
HSBC France ........................
Hang Seng Bank ....................
The Hongkong and Shanghai
Banking Corporation ........
Increase/(decrease) in
2009 compared with
2008
Increase/(decrease)
in 2008 compared with
2007
2009
US$m
Volume
US$m
Rate
US$m
2008
US$m
Volume
US$m
Rate
US$m
2007
US$m
2,321
(182)
(1,337)
3,840
2,006
(597)
2,431
363
141
630
644
165
(510)
25
(355)
(144)
(458)
553
795
81
222
(39)
62
511
511
1,063
(340)
(147)
1,550
1,380
(1,299)
563
(263)
(191)
1,017
Rest of Asia-
Pacific27
The Hongkong and Shanghai
Banking Corporation ........
HSBC Bank Malaysia ...........
1,039
37
Middle East27 HSBC Bank Middle East ......
North America HSBC Bank USA ..................
HSBC Finance .......................
HSBC Bank Canada ..............
Latin America HSBC Mexico .......................
Brazilian operations34 ............
HSBC Bank Panama .............
HSBC Bank Argentina ..........
118
969
120
205
227
820
39
35
Other operations ................................................
1,717
97
11
34
106
(24)
91
31
22
(1)
(17)
966
(565)
(10)
(60)
(369)
1
(83)
(48)
(55)
(7)
5
1,507
36
144
1,232
143
197
244
853
47
47
(603)
1,354
371
(21)
96
87
(65)
41
14
140
(7)
(33)
123
71
1
(126)
(44)
(21)
(102)
(89)
41
(4)
12
1,065
56
174
1,189
229
258
319
672
58
68
(176)
1,407
9,425
2,790
(5,983)
12,618
2,450
(1,347)
11,515
For footnotes, see page 149.
Interest expense
Deposits by banks
Europe
Hong Kong
Rest of Asia-
Pacific27
HSBC Bank ...........................
HSBC Private Banking
Holdings (Suisse) ..............
HSBC France ........................
Hang Seng Bank ....................
The Hongkong and Shanghai
Banking Corporation ........
The Hongkong and Shanghai
Banking Corporation ........
HSBC Bank Malaysia ............
Middle East27 HSBC Bank Middle East ......
North America HSBC Bank USA ..................
HSBC Bank Canada ..............
Latin America HSBC Mexico .......................
Brazilian operations34 ............
HSBC Bank Panama .............
HSBC Bank Argentina ..........
Other operations ................................................
553
1
536
5
9
165
2
9
9
8
49
241
26
1
45
1,659
(504)
(818)
1,875
(80)
258
(21)
(24)
(1,394)
(29)
62
(123)
105
1,672
55
70
450
10
29
220
41
32
190
43
1
166
(132)
(1)
(4)
(158)
(33)
(8)
17
(12)
1
(60)
162
121
310
(53)
1
260
(1)
48
244
(16)
(10)
85
(7)
(7)
4
(435)
2,148
(38)
4
(15)
(81)
(255)
(1)
(51)
(438)
(36)
(21)
(1)
(16)
(1)
(129)
22
1,358
123
150
445
12
32
414
93
63
106
66
9
291
(2,647)
4,959
1,183
(1,556)
5,332
(153)
(7)
(16)
(53)
–
25
34
(5)
(1)
(61)
(653)
54
Customer accounts
Europe
Hong Kong
HSBC Bank ...............................
HSBC Private Banking
Holdings (Suisse) ..................
HSBC France .............................
Hang Seng Bank ........................
The Hongkong and Shanghai
Increase/(decrease)
in 2009 compared
with 2008
2009 Volume
US$m
US$m
Rate
US$m
2008
US$m
Increase/(decrease)
in 2008 compared
with 2007
Volume
US$m
Rate
US$m
2007
US$m
2,407
(1,015)
(6,670)
10,092
1,355
(1,839)
10,576
256
645
200
(376)
884
69
(717)
(1,822)
(783)
1,349
1,583
914
328
292
152
(464)
65
1,485
1,226
(1,138)
1,900
Banking Corporation .............
211
111
(1,265)
1,365
382
(2,516)
3,499
Rest of Asia-
Pacific27
The Hongkong and Shanghai
Banking Corporation .............
HSBC Bank Malaysia ...............
1,494
191
Middle East27
HSBC Bank Middle East ..........
North America HSBC Bank USA ......................
HSBC Bank Canada ..................
Latin America HSBC Mexico ...........................
Brazilian operations34 ................
HSBC Bank Panama .................
HSBC Bank Argentina ..............
432
975
385
391
2,946
353
99
(124)
(17)
(25)
(40)
27
(114)
274
32
(7)
(1,251)
(87)
35
(1,054)
(609)
(56)
(438)
25
(39)
Other operations ......................................................
361
(12)
(1,579)
2,869
295
422
2,069
967
561
3,110
296
145
1,952
711
43
156
334
146
15
741
6
17
369
(487)
(8)
(312)
(1,316)
(269)
(2)
206
(24)
43
2,645
260
578
3,051
1,090
548
2,163
314
85
(714)
2,297
11,346
(292)
(16,351)
27,989
4,710
(8,438)
31,717
Financial liabilities designated at fair value –
own debt issued
Debt securities in issue
1,558
(177)
(1,398)
3,133
304
(739)
3,568
Europe
HSBC Bank ...............................
HSBC France .............................
HSBC Finance ...........................
1,305
330
–
Hong Kong
Hang Seng Bank ........................
21
Rest of Asia-
Pacific27
The Hongkong and Shanghai
Banking Corporation .............
HSBC Bank Malaysia ................
Middle East27
HSBC Bank Middle East ..........
North America HSBC Bank USA ......................
HSBC Finance ...........................
HSBC Bank Canada ..................
Latin America HSBC Mexico ...........................
Brazilian operations34 ................
HSBC Bank Panama .................
218
16
62
590
2,510
322
67
86
34
Other operations ......................................................
340
(615)
(270)
(8)
(16)
(255)
(3)
11
(37)
(1,326)
(147)
(111)
(24)
(4)
15
(2,081)
(847)
–
(20)
(167)
(1)
(39)
(225)
71
(135)
(65)
(46)
5
259
4,001
1,447
8
57
640
20
90
852
3,765
604
243
156
33
66
1,290
86
(2)
(1,042)
154
(8)
3,753
1,207
18
(2)
(21)
80
1
6
32
(182)
(802)
95
148
36
(4)
(14)
80
1
(61)
(198)
(744)
(131)
(15)
5
(8)
93
559
13
119
1,232
5,311
640
110
115
45
(13)
5,901
(2,557)
(3,524)
11,982
(723)
(1,930)
13,189
For footnotes, see page 149.
55
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > Short-term borrowings / Contractual obligations / Ratios / Loan maturities
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 US
Securities and Exchange Commission (‘SEC’) as
Repos and short-term bonds
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 table 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 ..................................
2009
US$m
152,218
170,671
157,778
2008
US$m
145,180
177,256
190,651
Weighted average interest rate during the year .......................................................
Weighted average interest rate at the year-end .......................................................
0.8%
0.4%
3.8%
2.9%
Short-term bonds
Outstanding at 31 December ...................................................................................
Average amount outstanding during the year .........................................................
Maximum quarter-end balance outstanding during the year ..................................
38,776
33,010
38,776
40,279
45,330
55,842
Weighted average interest rate during the year .......................................................
Weighted average interest rate at the year-end .......................................................
3.2%
0.6%
5.0%
3.1%
Contractual obligations
The table below provides details of HSBC’s material contractual obligations as at 31 December 2009.
2007
US$m
140,001
129,779
148,601
5.4%
4.8%
51,792
39,153
51,792
7.0%
6.5%
Payments due by period
Less than
1 year
US$m
1–5 years
US$m
More than
5 years
US$m
Long-term debt obligations ......................................................
Term deposits and certificates of deposit .................................
Capital (finance) lease obligations ...........................................
Operating lease obligations ......................................................
Purchase obligations .................................................................
Short positions in debt securities and equity shares .................
Current tax liability ...................................................................
Pension/healthcare obligation ...................................................
Total
US$m
234,297
211,434
971
5,655
1,359
90,067
2,141
15,979
561,903
71,482
198,081
103
857
1,045
73,437
2,141
1,188
348,334
93,778
13,353
249
2,264
314
5,332
–
5,548
120,838
Ratios of earnings to combined fixed charges (and preference share dividends)
Ratios of earnings to combined fixed charges and preference
share dividends:38
– excluding interest on deposits ...............................................
– including interest on deposits ................................................
Ratios of earnings to combined fixed charges:38
2009
%
2008
%
2007
%
2006
%
2.64
1.20
2.97
1.13
6.96
1.34
7.22
1.40
– excluding interest on deposits ...............................................
– including interest on deposits ................................................
2.99
1.22
3.17
1.14
7.52
1.34
7.93
1.41
For footnote, see page 149.
56
69,037
–
619
2,534
–
11,298
–
9,243
92,731
2005
%
9.16
1.59
9.60
1.59
Loan maturity and interest sensitivity analysis
At 31 December 2009, the geographical analysis of loan maturity and interest sensitivity by loan type on a
contractual repayment basis was as follows:
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 .......
Loans and advances to customers ............................
Maturity after 1 year but within 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 .........
Loans and advances to customers ............................
Interest rate sensitivity of loans and advances
to banks and commercial loans to customers
Fixed interest rate .................................................
Variable interest rate ............................................
Commercial loans to customers
Commercial, industrial and international trade ....
Real estate and other property related ..................
Non-bank financial institutions ............................
Governments ........................................................
Other commercial .................................................
Hong Kong Government Home Ownership
Scheme .................................................................
Residential mortgages and other personal loans .......
Loans and advances to customers ............................
Interest rate sensitivity of loans and advances
to banks and commercial loans to customers
Fixed interest rate .................................................
Variable interest rate ............................................
For footnote, see page 149.
Europe
US$m
Hong
Kong
US$m
Rest
of Asia-
Pacific27
US$m
Middle
East27
US$m
North
America
US$m
Latin
America
US$m
Total
US$m
62,840
35,817
35,535
8,212
15,093
15,525
173,022
80,451
18,951
67,934
1,155
26,238
194,729
–
29,732
224,461
287,301
12,563
5,678
1,201
110
2,026
21,578
385
13,083
35,046
70,863
22,085
4,221
1,751
172
4,173
32,402
–
10,811
43,213
78,748
7,248
1,624
959
1,212
1,432
4,327
8,690
9,680
161
6,944
9,576
1,545
1,181
442
2,665
136,250
40,709
82,706
3,252
43,478
12,475
29,802
15,409
306,395
–
2,959
15,434
23,646
–
35,352
65,154
80,247
–
8,793
385
100,730
24,202
407,510
39,727
580,532
2,452
380
105
168
221
374
3,700
1,591
957
239
125
1,076
3,988
–
2,635
6,623
6,791
925
3,231
4,156
55
497
85
8
19
745
–
811
2,165
2,220
749
660
1,409
6,183
8,551
1,993
46
3,029
4,591
988
519
731
2,508
43,601
42,912
8,380
1,883
27,162
19,802
9,337
123,938
–
47,021
66,823
67,044
3,831
16,192
20,023
–
6,364
1,276
107,507
15,701
232,721
16,075
236,421
2,684
7,027
9,711
20,690
106,948
127,638
72
2,709
3,166
1,018
2,738
2,290
1
944
6,991
–
81,561
88,552
88,624
2,767
465
435
700
224
4,591
16,277
16,288
4,151
1,554
18,964
57,234
–
5,688
1,795
222,513
10,279
281,542
12,988
284,708
1,436
5,627
7,063
2,337
4,963
7,300
12,414
47,986
60,400
2,077
1,354
21,101
13,937
4,622
461
13,638
53,759
–
35,063
88,822
91,274
4,708
13,125
535
263
4,375
23,006
1,276
9,642
33,924
34,304
5,427
5,354
472
257
2,536
14,046
–
6,782
20,828
20,933
12,159
44,052
56,211
302
23,084
23,386
789
13,362
14,151
10,822
7,196
669
600
15,279
34,566
–
97,767
132,333
132,655
457
5,041
726
68
1,363
7,655
1,795
21,765
31,215
31,215
8
716
763
23
166
409
–
14,921
16,998
17,006
7,742
27,146
34,888
–
7,655
7,655
150
1,935
2,085
57
Maturity after 5 years
Loans and advances to banks ....................................
322
–
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > Deposits
Deposits
The following tables summarise the average amount
of bank deposits, customer deposits and certificates
of deposit (‘CD’s) and other money market
instruments (which are included within ‘Debt
securities in issue’ in the balance sheet), together
Deposits by banks
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.
2009
2008
2007
Average
balance
Average
rate
%
–
1.0
1.6
1.3
–
0.1
0.3
0.5
–
1.2
1.9
1.4
–
–
1.2
1.4
–
0.1
0.2
0.7
–
0.9
5.0
8.1
–
0.7
1.7
1.6
Average
balance
Average
rate
US$m
%
99,228
5,231
19,204
43,695
31,098
5,916
1,375
2,780
1,583
178
18,203
1,546
4,317
9,103
3,237
2,151
365
15
1,239
532
14,835
761
5,684
7,941
449
5,058
366
81
3,357
1,254
145,391
9,644
32,081
66,918
36,748
–
3.2
3.9
4.4
–
2.0
2.7
3.4
–
2.3
3.5
3.8
–
–
2.7
0.2
–
1.7
2.3
1.6
–
2.5
5.6
7.8
–
2.7
3.7
4.5
Average
balance
US$m
Average
rate
%
84,635
6,359
11,036
38,470
28,770
7,269
1,331
2,420
3,267
251
12,748
1,356
3,164
5,464
2,764
1,517
541
3
969
4
11,501
827
3,759
6,746
169
4,661
808
153
2,690
1,010
122,331
11,222
20,535
57,606
32,968
–
3.8
4.7
4.8
–
4.3
4.5
0.4
–
2.4
5.2
4.8
–
–
4.5
–
–
4.8
6.0
7.1
–
5.9
6.5
8.0
–
3.8
4.9
5.0
Europe ................................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Time ...............................................................................
Other ..............................................................................
Hong Kong ........................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Time ...............................................................................
Other ..............................................................................
Rest of Asia-Pacific27 .........................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Time ...............................................................................
Other ..............................................................................
Middle East27 ......................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Time ...............................................................................
Other ..............................................................................
North America ...................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Time ...............................................................................
Other ..............................................................................
Latin America ....................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Time ...............................................................................
Other ..............................................................................
US$m
87,677
6,415
14,259
30,367
36,636
10,725
2,975
5,526
1,637
587
12,467
1,605
4,097
4,682
2,083
1,317
539
18
691
69
13,203
1,755
4,770
5,422
1,256
5,959
212
219
4,171
1,357
Total ...................................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Time ...............................................................................
Other ..............................................................................
131,348
13,501
28,889
46,970
41,988
For footnote, see page 149.
58
Customer accounts
2009
2008
2007
Average
balance
Average
rate
%
–
0.4
2.2
1.4
0.8
–
0.1
0.6
0.6
0.1
–
0.8
2.5
1.2
1.8
–
1.4
3.4
2.7
0.2
–
0.2
1.4
1.3
0.8
–
1.1
8.5
4.8
6.4
–
0.3
2.6
1.6
0.9
Average
balance
Average
rate
US$m
%
447,982
39,610
225,034
73,479
83,208
26,651
236,109
15,620
126,199
65,068
27,659
1,563
128,381
11,872
49,329
52,849
13,342
989
35,546
10,849
6,324
16,119
1,884
370
144,982
16,759
18,261
87,001
17,838
5,123
65,071
12,507
4,994
31,442
15,179
949
1,058,071
107,217
430,141
325,958
159,110
35,645
–
2.9
4.3
3.8
3.9
–
0.4
2.4
2.3
1.2
–
2.0
3.8
3.3
3.6
–
1.6
3.1
2.9
0.5
–
1.6
2.5
3.2
2.4
–
1.9
10.3
5.2
8.2
–
1.9
3.9
3.6
3.6
Average
balance
US$m
Average
rate
%
391,496
34,585
210,692
62,002
69,476
14,741
212,792
14,214
107,053
63,649
26,712
1,164
103,235
10,225
37,340
44,004
10,114
1,552
25,615
6,213
3,749
13,946
1,424
283
130,982
15,175
15,389
79,529
17,655
3,234
54,708
10,530
5,662
24,861
12,443
1,212
918,828
90,942
379,885
287,991
137,824
22,186
–
3.5
4.6
4.9
4.5
–
2.2
3.9
3.9
4.3
–
2.5
4.1
4.7
5.2
–
2.0
4.6
4.1
1.1
–
3.3
3.3
5.9
3.7
–
2.1
8.8
5.9
9.5
–
3.0
4.4
4.9
4.7
Europe ................................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Savings ..........................................................................
Time ...............................................................................
Other ..............................................................................
Hong Kong ........................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Savings ..........................................................................
Time ...............................................................................
Other ..............................................................................
Rest of Asia-Pacific27 .........................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Savings ..........................................................................
Time ...............................................................................
Other ..............................................................................
Middle East27 ......................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Savings ..........................................................................
Time ...............................................................................
Other ..............................................................................
North America ...................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Savings ..........................................................................
Time ...............................................................................
Other ..............................................................................
Latin America ....................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Savings ..........................................................................
Time ...............................................................................
Other ..............................................................................
US$m
440,450
55,751
212,178
57,344
67,045
48,132
261,703
22,056
171,846
45,537
20,901
1,363
126,144
13,425
53,108
46,137
12,542
932
33,211
9,865
6,364
15,005
1,424
553
145,820
18,350
25,870
69,296
25,164
7,140
63,635
10,598
4,734
33,091
14,244
968
Total ...................................................................................
Demand and other – non-interest bearing .....................
Demand – interest bearing ............................................
Savings ..........................................................................
Time ...............................................................................
Other ..............................................................................
1,070,963
130,045
474,100
266,410
141,320
59,088
For footnote, see page 149.
59
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Financial summary > Balance sheet > CDs // Critical accounting policies
Certificates of deposit and other money market instruments
2009
2008
2007
Average
balance
Average
Average
balance
Average
rate
Average
balance
rate
%
0.9
3.6
3.7
6.4
1.1
3.6
1.2
US$m
74,007
745
6,966
648
22,278
3,036
107,680
%
4.5
3.0
6.6
4.6
3.3
7.8
4.5
Average
rate
%
US$m
66,164
941
7,094
136
23,735
1,526
99,596
5.0
3.9
6.0
3.7
5.4
6.8
5.2
Europe ................................................................................
Hong Kong ........................................................................
Rest of Asia-Pacific27 ........................................................
Middle East27 .....................................................................
North America ...................................................................
Latin America ....................................................................
US$m
65,151
278
3,536
265
14,218
1,227
84,675
For footnote, see page 149.
Certificates of deposit and other time deposits
The maturity analysis of CDs and other wholesale time deposits is expressed by remaining maturity. The majority of
CDs and time deposits are in amounts of US$100,000 and over or the equivalent in other currencies.
At 31 December 2009
After
3 months
but within
6 months
After
6 months
but within
12 months
US$m
US$m
After
12 months
US$m
3 months
or less
US$m
Europe .......................................................
Certificates of deposit ..........................
Time deposits:
– banks ..................................................
– customers ...........................................
Hong Kong ...............................................
Certificates of deposit ..........................
Time deposits:
– banks ..................................................
– customers ...........................................
Rest of Asia-Pacific27 ................................
Certificates of deposit ..........................
Time deposits:
– banks ..................................................
– customers ...........................................
Middle East27 .............................................
Certificates of deposit ..........................
Time deposits:
– banks ..................................................
– customers ...........................................
97,874
18,009
25,194
54,671
12,031
75
619
11,337
13,890
1,498
2,231
10,161
902
–
448
454
North America ..........................................
14,235
Time deposits:
– banks ..................................................
– customers ...........................................
Latin America ...........................................
Certificates of deposit ..........................
Time deposits:
– banks ..................................................
– customers ...........................................
Total ..........................................................
Certificates of deposit ..........................
Time deposits:
– banks ..................................................
– customers ...........................................
For footnote, see page 149.
2,798
11,437
11,980
88
1,036
10,856
150,912
19,670
32,326
98,916
11,310
3,810
2,048
5,452
873
24
1
848
1,784
1,001
252
531
486
136
186
164
4,221
–
4,221
2,626
–
1,421
1,205
21,300
4,971
3,908
12,421
60
19,664
3,755
9,455
6,454
484
151
–
333
651
366
19
266
43
–
–
43
3,314
7
3,307
1,713
–
747
966
25,869
4,272
10,228
11,369
7,131
1
3,965
3,165
500
265
89
146
1,108
183
108
817
319
–
24
295
1,293
238
1,055
3,002
322
236
2,444
13,353
771
4,660
7,922
Total
US$m
135,979
25,575
40,662
69,742
13,888
515
709
12,664
17,433
3,048
2,610
11,775
1,750
136
658
956
23,063
3,043
20,020
19,321
410
3,440
15,471
211,434
29,684
51,122
130,628
Critical accounting policies
(Audited)
Introduction
The results of HSBC are sensitive to the accounting
policies, assumptions and estimates that underlie the
preparation of its consolidated financial statements.
The significant accounting policies used in the
preparation of the consolidated financial statements
are described in Note 2 on the Financial Statements.
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.
The accounting policies that are deemed critical
to HSBC’s results and financial position, in terms
of the materiality of the items to which the policy
is applied, and which involve a high degree of
judgement including the use of assumptions and
estimation, are discussed below.
Impairment of loans and advances
HSBC’s accounting policy for losses arising from
the impairment of customer loans and advances is
described in Note 2g on the Financial Statements.
Loan impairment allowances represent
management’s best estimate of losses incurred
in the loan portfolios at the balance sheet date.
Management is required to exercise judgement
in making assumptions and estimations when
calculating loan impairment allowances on both
individually and collectively assessed loans and
advances. Of the Group’s total loans and advances
to customers before impairment allowances of
US$922 billion (2008: US$957 billion),
US$14.8 billion or 2 per cent (2008: US$7.9 billion;
1 per cent) were individually assessed for
impairment, and US$907 billion or 98 per cent
(2008: US$949 billion; 99 per cent) were
collectively assessed for impairment.
The most significant judgemental area is the
calculation of collective impairment allowances.
HSBC’s most significant geographical area of
exposure to collectively assessed loans and advances
is North America, which comprised US$219 billion
or 24 per cent (2008: US$271 billion; 29 per cent)
of HSBC’s total collectively assessed loans and
advances. Collective impairment allowances in
North America were US$13.0 billion, representing
68 per cent (2008: US$15.9 billion; 77 per cent) of
the total collectively assessed loan impairment
allowance.
61
HSBC uses two alternative methods to calculate
collective impairment allowances on homogeneous
groups of loans that are not considered individually
significant:
• when appropriate empirical information is
available, HSBC utilises roll-rate methodology.
This methodology employs statistical analysis
of historical data and experience of delinquency
and default to estimate the likelihood that loans
will progress through the various stages of
delinquency and ultimately prove irrecoverable.
The estimated loss is the difference between the
present value of expected future cash flows,
discounted at the original effective interest rate
of the portfolio, and the carrying amount of the
portfolio; and
• when the portfolio size is small or when
information is insufficient or not reliable
enough to adopt a roll-rate methodology, HSBC
adopts a basic formulaic approach based on
historical loss rate experience.
Both methodologies are subject to estimation
uncertainty, in part because it is not practicable to
identify losses on an individual loan basis because
of the large number of individually insignificant
loans in the portfolio.
In addition, the use of statistically assessed
historical information is supplemented with
significant management judgement to assess whether
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. In normal circumstances, historical
experience provides the most objective and relevant
information from which to assess inherent loss
within each portfolio. In certain circumstances,
historical loss experience provides less relevant
information about the inherent loss in a given
portfolio at the balance sheet date, for example,
where there have been changes in economic,
regulatory or behavioural conditions which result in
the most recent trends in the portfolio risk factors
being not fully reflected in the statistical models. In
these circumstances, such risk factors are taken into
account when calculating the appropriate levels of
impairment allowances by adjusting the impairment
allowances derived solely from historical loss
experience.
This key area of judgement is subject to
uncertainty and is highly sensitive to factors such as
loan portfolio growth, product mix, unemployment
rates, bankruptcy trends, geographical concentrations,
loan product features, economic conditions such as
national and local trends in housing markets, the
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Critical accounting policies
level of interest rates, portfolio seasoning, account
management policies and practices, changes in laws
and regulations, and other factors that can affect
customer payment patterns. Different factors are
applied in different regions and countries to reflect
the variation in economic conditions, laws and
regulations. The assumptions underlying this
judgement are highly subjective. The methodology
and the assumptions used in calculating impairment
losses are reviewed regularly in the light of
differences between loss estimates and actual loss
experience. For example, roll rates, loss rates and the
expected timing of future recoveries are regularly
benchmarked against actual outcomes to ensure they
remain appropriate.
The total amount of the Group’s impairment
allowances on homogeneous groups of loans is
inherently uncertain because it is highly sensitive to
changes in economic and credit conditions across a
large number of geographical areas. Economic and
credit conditions within geographical areas are
influenced by many factors with a high degree of
interdependency so that there is no single factor to
which the Group’s loan impairment allowances as
a whole are sensitive. However, HSBC’s loan
impairment allowances are particularly sensitive to
general economic and credit conditions in North
America. For example, a 10 per cent increase in
impairment allowances on collectively assessed
loans and advances in North America would increase
loan impairment allowances by US$1.3 billion at
31 December 2009 (2008: US$1.6 billion). It is
possible that the outcomes within the next financial
year could be different from the assumptions built
into the models, resulting in a material adjustment to
the carrying amount of loans and advances.
Goodwill impairment
HSBC’s accounting policy for goodwill is described
in Note 2p on the Financial Statements. Note 22 on
the Financial Statements lists the Group’s cash
generating units (‘CGU’s) by geographical region
and global business. Total goodwill for the Group
amounted to US$23 billion as at 31 December 2009
(2008: US$22 billion).
The process of identifying and evaluating
goodwill impairment is inherently uncertain because
it requires significant management judgement in
making a series of estimations, the results of which
are highly sensitive to the assumptions used. The
review of goodwill impairment represents
management’s best estimate of the factors below:
•
the future cash flows of the CGUs are sensitive
to the cash flows projected for the periods for
62
•
which detailed forecasts are available, and to
assumptions regarding the long-term pattern of
sustainable cash flows thereafter. Forecasts are
compared with actual performance and
verifiable economic data in future years;
however, the cash flow forecasts necessarily and
appropriately reflect management’s view of
future business prospects at the time of the
assessment; and
the rate used to discount the future expected
cash flows is based on the cost of capital
assigned to an individual CGU, and can have a
significant effect on the CGU’s valuation. The
cost of capital percentage is generally derived
from a Capital Asset Pricing Model, which
incorporates inputs reflecting a number of
financial and economic variables, including the
risk-free interest rate in the country concerned
and a premium to reflect the inherent risk of the
business being evaluated. These variables are
subject to fluctuations in external market rates
and economic conditions outside management’s
control and are therefore established on the basis
of significant management judgement and are
subject to uncertainty.
When this exercise demonstrates that the
expected cash flows of a CGU have declined and/or
that its cost of capital has increased, the effect is to
reduce the CGU’s estimated recoverable amount.
If this is lower than the carrying value of the CGU,
a charge for impairment of goodwill will be
recognised in HSBC’s income statement for the year.
The accuracy of forecast cash flows is subject to
a high degree of uncertainty in volatile market
conditions. In such market conditions, management
retests goodwill for impairment more frequently than
annually to ensure that the assumptions on which the
cash flow forecasts are based continue to reflect
current market conditions and management’s best
estimate of future business prospects.
During 2009, no impairment of goodwill was
identified (2008: US$10.6 billion). In addition to
the annual impairment test which was performed as
at 1 July 2009, HSBC reviewed the current and
expected performance of the CGUs as at
31 December 2009 and determined that there was no
indication of potential impairment of the goodwill
allocated to them. However, in the event of a
significant deterioration in economic and credit
conditions compared with those reflected by
management in the cash flow forecasts for the CGUs,
a material adjustment to a CGU’s recoverable amount
may occur which may result in the recognition of an
impairment charge in the income statement.
•
•
selecting an appropriate discount rate for
the instrument. Management bases the
determination of this rate on its assessment of
what a market participant would regard as the
appropriate spread of the rate for the instrument
over the appropriate risk-free rate; and
judgement to determine what model to use to
calculate fair value in areas where the choice of
valuation model is particularly subjective, for
example, when valuing complex derivative
products.
When applying a model with unobservable
inputs, estimates are made to reflect uncertainties
in fair values resulting from a lack of market data
inputs, for example, as a result of illiquidity in the
market. For these instruments, the fair value
measurement is less reliable. Inputs into valuations
based on unobservable data are inherently uncertain
because there is little or no current market data
available from which to determine the level at which
an arm’s length transaction would occur under
normal business conditions. However, in most cases
there is some market data available on which to base
a determination of fair value, for example historical
data, and the fair values of most financial
instruments will be based on some market
observable inputs even where the unobservable
inputs are significant.
The value of financial assets and liabilities
measured at fair value that use a valuation technique
was US$599 billion (2008: US$876 billion) and
US$447 billion (2008: US$671 billion) or 56 per
cent (2008: 71 per cent) and 75 per cent (2008:
83 per cent) of total financial assets and total
financial liabilities measured at fair value,
respectively.
Disclosures of types and amounts of fair value
adjustments made in determining the fair value of
financial instruments measured at fair value using
valuation techniques is provided on page 168. In
addition, a sensitivity analysis of fair values for
financial instruments with significant unobservable
inputs to reasonably possible alternative assumptions
and a range of assumptions can be found on
page 175. Given the uncertainty and subjective
nature of valuing financial instruments at fair value,
it is possible that the outcomes in the next financial
year could differ from the assumptions used, and this
could result in a material adjustment to the carrying
amount of financial instruments measured at fair
value.
Note 22 on the Financial Statements includes
details of the CGU’s with significant balances of
goodwill, states the key assumptions used to assess
the goodwill in each of those CGUs for impairment,
and provides a discussion of the sensitivity of the
carrying value of goodwill to changes in key
assumptions.
Valuation of financial instruments
HSBC’s accounting policy for determining the
fair value of financial instruments is described in
Note 2d on the Financial Statements.
The best evidence of fair value is a quoted price
in an actively traded market. In the event that the
market for a financial instrument is not active, a
valuation technique is used. The majority of
valuation techniques employ only observable market
data, and so the reliability of the fair value
measurement is high. However, certain financial
instruments are valued on the basis of valuation
techniques that feature one or more significant
market inputs that are unobservable. Valuation
techniques that rely to a greater extent on
unobservable inputs require a higher level of
management judgement to calculate a fair value than
those based wholly on observable inputs.
Valuation techniques used to calculate fair
values include comparisons with similar financial
instruments for which market observable prices
exist, discounted cash flow analysis, option pricing
models and other valuation techniques commonly
used by market participants. Valuation techniques
incorporate assumptions that other market
participants would use in their valuations, including
assumptions about interest rate yield curves,
exchange rates, volatilities, and prepayment and
default rates. When valuing instruments by reference
to comparable instruments, management takes into
account the maturity, structure and rating of the
instrument with which the position held is being
compared.
The main assumptions and estimates which
management considers when applying a model with
valuation techniques 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 when the ability of the
counterparty to service the instrument in
accordance with the contractual terms is in
doubt. Future cash flows may be sensitive to
changes in market rates;
63
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Critical accounting policies
Impairment of available-for-sale financial
assets
HSBC’s accounting policy for impairment of
available-for-sale financial assets is described in
Note 2j on the Financial Statements.
Available-for-sale financial assets are measured
at fair value, and changes in fair value are recognised
in other comprehensive income in ‘Available-for-
sale investments – fair value gains/(losses)’ until the
financial assets are either sold or become impaired.
An impairment loss is recognised if there is objective
evidence of impairment as a result of loss events
which have an impact on the estimated future cash
flows of the financial asset that can be reliably
estimated. If an available-for-sale financial asset
becomes impaired, the cumulative balance
previously recognised in other comprehensive
income is removed and recognised in the income
statement as an impairment loss. A further decline in
the fair value of an available-for-sale debt security
subsequent to the initial impairment is recognised in
the income statement when there is further objective
evidence of impairment.
At 31 December 2009, the Group’s total
available-for-sale financial assets amounted to
US$352 billion (2008: US$286 billion), of
which US$342 billion or 97 per cent (2008:
US$279 billion; 98 per cent) were debt securities.
The available-for-sale fair value reserve relating
to debt securities amounted to a deficit of
US$11.4 billion (2008: deficit of US$21.4 billion).
A deficit in the available-for-sale fair value reserve
occurs on debt securities when the fair value of a
security so categorised is less than the security’s
acquisition cost (net of any principal repayments and
amortisation) less any previous impairment loss
recognised in the income statement, but where
there is no evidence of any impairment or, if an
impairment was previously recognised, any
subsequent impairment.
Management is required to exercise judgement
in determining whether there is objective evidence
that an impairment loss has occurred. Once an
impairment has been identified, the amount of
impairment loss is measured with reference to the
fair value of the asset. More information on
assumptions and estimates requiring management
judgement relating to the determination of fair
values of financial instruments is provided above in
‘Valuation of financial instruments’.
a decrease in estimated future cash flows. When cash
flows are readily determinable, less judgement is
required. When determination of estimated future
cash flows requires consideration of a number of
variables, some of which may be unobservable in
current market conditions, more judgement is
required.
The most significant judgements concern more
complex instruments, such as asset-backed securities
(‘ABS’s), where it is necessary to consider factors
such as the estimated future cash flows on
underlying pools of collateral including prepayment
speeds, the extent and depth of market price declines
and changes in credit ratings. The review of
estimated future cash flows on underlying collateral
is subject to uncertainties when the assessment is
based on historical information on pools of assets,
and judgement is required to determine whether
historical performance remains representative of
current economic and credit conditions.
There is no single factor to which the Group’s
charge for impairment of available-for-sale debt
securities is particularly sensitive, because of the
range of different types of securities held, the range
of geographical areas in which those securities are
held, and the wide range of factors which can affect
the occurrence of loss events and the cash flows of
securities, including different types of collateral.
Management’s current assessment of the
holdings of available-for-sale ABSs with the most
sensitivity to possible future impairment is focused
on sub-prime and Alt-A residential mortgage-backed
securities. Excluding holdings in certain special
purpose entities where significant first loss risks are
borne by external investors, the available-for-sale
holdings in these categories amounted to
US$4.9 billion at 31 December 2009 (2008:
US$6.1 billion). The deficit in the available-for-sale
fair value reserve at 31 December 2009 in relation to
these securities was US$4.3 billion (2008:
US$6.0 billion).
Further details of the nature and extent of
HSBC’s exposures to ABSs classified as available-
for-sale are provided in ‘Impact of market turmoil’
under ‘Nature and extent of HSBC’s exposures’ on
page 157 and a more detailed description of the
assumptions and estimates used in assessing these
securities for impairment is disclosed in ‘Assessing
available-for-sale assets for impairment’ on
page 178.
The objective evidence required to determine
It is possible that outcomes in the next financial
whether an available-for-sale debt security is
impaired comprises evidence of the occurrence of a
loss event and evidence that the loss event results in
year could be different from those modelled when
seeking to identify impairment on available-for-sale
debt securities. In this event, impairment may be
64
identified in available-for-sale debt securities which
had previously been determined not to be impaired,
potentially resulting in the recognition of material
impairment losses in the next financial year.
Deferred tax assets
HSBC’s accounting policy for the recognition of
deferred tax assets is described in Note 2s on the
Financial Statements. A deferred tax asset is
recognised to the extent that it is probable that future
taxable profits will be available against which
deductible temporary differences can be utilised.
The recognition of a deferred tax asset relies on
management’s judgements about the probability and
sufficiency of future taxable profits, future reversals
of existing taxable temporary differences and
ongoing tax planning strategies.
HSBC’s most significant judgements are
around the US deferred tax assets, given the recent
history of losses in HSBC’s US operations. Net US
deferred tax assets amounted to US$5.1 billion or
59 per cent (2008: US$5.1 billion; 73 per cent) of
deferred tax assets recognised on the Group’s
balance sheet.
Recognition of US deferred tax assets is based
on the evidence available about conditions at the
balance sheet date, and requires significant
judgements to be made by management regarding
projections of loan impairment charges and the
timing of recovery in the US economy.
Management’s judgement takes into consideration
the impact of both positive and negative evidence,
including historical financial performance,
projections of future taxable income, future
reversals of existing taxable temporary differences,
tax planning strategies and the availability of loss
carrybacks.
The tax losses incurred in HSBC’s US
operations in 2009 were primarily caused by the high
level of loan impairment charges which were due to
the current housing and credit market conditions
and continued weakness in the general economy,
resulting in high unemployment levels. Management
has evaluated the factors contributing to the losses to
determine whether the factors leading to the losses
are temporary or indicative of a permanent decline in
earnings.
Management’s projections of future taxable
income in the US are based on business plans, future
capital requirements and ongoing tax planning
strategies. These projections include assumptions
about the depth and severity of house price
depreciation, assumptions about the US economic
downturn, including unemployment levels and their
impact on loan impairment charges, and assumptions
about capital support from HSBC.
Management’s forecasts are consistent with
the assumption that it is probable that the results of
future operations will generate sufficient taxable
income to support the deferred tax assets. In
management’s judgement, recent market conditions,
which have resulted in losses being incurred in the
US over the last three years, will create significant
downward pressure and volatility regarding the
profit or loss before tax in the next few years. To
reflect this, the assessment of recoverability of the
deferred tax asset in the US significantly discounts
any future expected taxable income and relies to a
greater extent on capital support to the US operations
from HSBC, including tax planning strategies
implemented in relation to such support. The most
significant tax planning strategy is HSBC’s
investment of capital in its US operations to ensure
the realisation of the deferred tax assets. Further to
the implementation of this strategy, an internal
reorganisation on 31 January 2010 resulted in a
capital injection that provided substantial support for
the recoverability of the US deferred tax assets.
HSBC expects that, with support, its US operations
will continue to execute their business strategies and
plans until they return to profitability. If HSBC were
to decide not to provide ongoing support, the full
recovery of the deferred tax asset may no longer be
probable and could result in a significant write-off of
the deferred tax asset which would be recognised as
a charge in the income statement.
65
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Summary / Personal Financial Services
Customer groups and global
businesses
Summary .......................................................
Personal Financial Services ...........................
Commercial Banking .....................................
Global Banking and Markets .........................
Private Banking .............................................
Other .............................................................
Analysis by customer group and global
business ......................................................
Page
66
67
70
73
77
80
82
Summary
HSBC’s senior management reviews operating
activity on a number of bases, including by
geographical region and by customer group and
global business. Although information is reviewed
Profit/(loss) before tax
on a number of bases, capital resources are allocated
and performance is assessed primarily by
geographical region, as presented on page 85.
In addition to utilising information by
geographical region, management assesses
performance through two customer groups, Personal
Financial Services and Commercial Banking, and
two global businesses, Global Banking and Markets
and Private Banking. Personal Financial Services
incorporates the Group’s consumer finance
businesses, the largest of which is HSBC Finance.
The commentaries below present customer
groups and global businesses followed by
geographical regions. Performance is discussed in
this order because certain strategic themes, business
initiatives and trends affect more than one
geographical region. All commentaries are on an
underlying basis (see page 21) unless stated
otherwise.
Personal Financial Services .............................
Commercial Banking .......................................
Global Banking and Markets ...........................
Private Banking ...............................................
Other40 ..............................................................
Total assets41
2009
US$m
%
(2,065)
4,275
(29.2)
60.4
10,481 148.1
15.6
(94.9)
1,108
(6,720)
2008
US$m
%
(10,974) (117.9)
77.3
37.4
15.6
87.6
7,194
3,483
1,447
8,157
2007
US$m
5,900
7,145
6,121
1,511
3,535
%
24.4
29.5
25.3
6.2
14.6
7,079 100.0
9,307 100.0
24,212 100.0
Personal Financial Services ................................................................................
Commercial Banking ..........................................................................................
Global Banking and Markets ..............................................................................
Private Banking ..................................................................................................
Other ...................................................................................................................
Intra-HSBC items ...............................................................................................
At 31 December
2009
US$m
554,074
251,143
1,683,672
116,148
150,983
(391,568)
%
23.4
10.6
71.2
4.9
6.4
(16.5)
2008
US$m
527,901
249,218
1,991,852
133,216
145,581
(520,303)
%
20.9
9.9
78.8
5.2
5.8
(20.6)
2,364,452 100.0
2,527,465 100.0
For footnotes, see page 149.
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 Group Management
Office (‘GMO’) functions, to the extent that these
can be meaningfully attributed to operational
business lines. While such allocations have been
made on a systematic and consistent basis, they
necessarily involve a degree of subjectivity.
Where relevant, income and expense amounts
presented include the results of inter-segment
funding as well as inter-company and inter-business
line transactions. All such transactions are
undertaken on arm’s length terms.
66
Personal Financial Services
Strategic direction
Profit/(loss) before tax
2009
US$m
2008
US$m
2007
US$m
Net interest income ...........
25,107
29,419
29,069
Net fee income ..................
8,238
10,107
11,742
Trading income excluding
net interest income .........
Net interest income on
trading activities .............
Net trading income42 .........
Net income/(expense) from
financial instruments
designated at fair value ..
Gains less losses from
financial investments .....
Dividend income ...............
Net earned insurance
premiums .......................
Other operating income ....
637
65
702
175
79
254
38
140
178
2,339
(2,912)
1,333
224
33
663
90
9,534
809
10,083
259
351
55
8,271
387
Total operating income ..
46,986
47,963
51,386
Net insurance claims43 ......
(11,571)
(6,474)
(8,147)
Net operating income16 ...
35,415
41,489
43,239
Loan impairment charges
and other credit risk
provisions .......................
(19,902)
(21,220)
(16,172)
Net operating income .....
15,513
20,269
27,067
Employee expenses ..........
Goodwill impairment ........
Other operating expenses .
(7,323)
–
(10,969)
(9,243)
(10,564)
(11,897)
(9,401)
–
(12,356)
Total operating expenses ..
(18,292)
(31,704)
(21,757)
Operating profit/(loss) ....
(2,779)
(11,435)
5,310
Share of profit in associates
and joint ventures ...........
714
461
590
Profit/(loss) before tax ....
(2,065)
(10,974)
5,900
By geographical region
Europe ............................
Hong Kong .....................
Rest of Asia-Pacific27 .....
Middle East27 .................
North America ...............
Latin America ................
312
2,728
463
(126)
(5,226)
(216)
1,658
3,428
211
289
(17,228)
668
(2,065)
(10,974)
%
%
Share of HSBC’s profit
before tax .......................
Cost efficiency ratio ..........
(29.2)
51.7
(117.9)
76.4
1,581
4,212
515
245
(1,546)
893
5,900
%
24.4
50.3
Balance sheet data41
Loans and advances to
US$m
US$m
US$m
customers (net) ...............
Total assets ........................
Customer accounts ............
399,460
554,074
499,109
401,402
527,901
440,338
464,726
636,185
450,071
For footnotes, see page 149.
67
HSBC’s strategy for Personal Financial Services is
to use its global reach and scale to grow profitably in
selected markets by providing relationship banking
and wealth management services.
In markets where HSBC already has scale, such
as Hong Kong and Mexico, or in emerging markets
where scale can be built over time, HSBC provides
services to all customer segments. In other markets,
HSBC participates more selectively, targeting mass
affluent customer segments which have strong
international connectivity or where HSBC’s global
scale is crucial.
HSBC employs two globally consistent
propositions, HSBC Premier (‘Premier’) and HSBC
Advance (‘Advance’), to serve customers who value
international connectivity, who are confident using
direct channels to access financial services and who
are likely to require wealth management services.
HSBC’s continued strategic focus on increasing
penetration of wealth management services, through
deepening customer relationships and offering
innovative solutions, positions the Personal Financial
Services business for growth as confidence and
demand for equity market and insurance products
improves.
Financial performance in 2009
• The reported loss before tax of US$2.1 billion
compared with a loss before tax of
US$11.0 billion in 2008. On an underlying basis
and excluding the impairment charge of
US$10.6 billion in 2008 to fully write off
goodwill in respect of North America Personal
Financial Services, the pre-tax loss grew by
US$1.1 billion. This was driven by a decline in
profits due to a significant fall in deposit
spreads, reflecting the very low levels of major
currency interest rates throughout 2009, and a
rise in loan impairment charges outside North
America as global economic conditions
deteroriated. Within North America, loan
impairment charges and operating expenses fell,
reflecting the continuing run-off of the exit
portfolios, some stabilisation in the credit
environment and the closure of the US
Consumer Lending branch network at the
beginning of 2009.
• Net interest income decreased by 10 per cent.
This was due to significant deposit spread
compression experienced in the Group’s major
deposit-taking entities as a result of lower base
rates and lower asset balances as customer loans
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Personal Financial Services
in the US declined and consumer finance and
unsecured lending activities in other countries
were scaled back. These factors were partially
mitigated by the benefit of lower funding costs
on lending spreads and growth in average
liability balances as customers responded to the
strength of HSBC’s brand following the market
turmoil in 2008.
• Net fee income was 13 per cent lower, reflecting
lower card fees from reduced volumes of new
lending and changes in customer behaviour,
particularly in North America. Weak equity
market sentiment in the first half of 2009 further
affected revenues from retail securities and
investments, notably in Hong Kong, although
relatively more buoyant markets led to some
recovery in the second half of the year.
• A net gain of US$2.3 billion was recorded on
financial instruments designated at fair value,
compared with an expense of US$2.9 billion in
2008. This was largely due to an increase in the
value of assets held to meet liabilities under
insurance and investment contracts.
• Loan impairment charges fell by 3 per cent, with
the significant decline in North America driven
by the continuing reduction in balances and
some stabilisation of loss experience in certain
segments of the consumer finance portfolios.
This was partly offset by credit deterioration
elsewhere, primarily in the unsecured portfolios
of various lending products in the Middle East,
the UK and Brazil. The Group further
strengthened collection systems and practices,
reduced credit lines and tightened lending
criteria in 2009.
• Costs declined by US$1.4 billion excluding the
goodwill impairment charge in North America
in 2008. This reduction resulted primarily from
the decision to discontinue originations and
close the branch network in the Consumer
Lending business in the US, and from the
exercise of tight control of discretionary
expenditure in most regions, notably in Asia.
Costs also benefited from a US$0.2 billion
accounting gain on staff benefits in 2009 in the
UK.
•
Income from associates and joint ventures rose
by 51 per cent, largely driven by the Group’s
share of profits from Ping An Insurance which
increased in 2009 following the non-recurrence
of an impairment on its investment in Fortis in
2008.
68
• Customer accounts increased by 7 per cent,
largely on the back of strong deposit growth in
Asia. Loans and advances to customers were
5 per cent lower as the US consumer finance
portfolio continued to decline and, globally,
customers reduced their use of credit. At
31 December 2009, the aggregate ratio of
customer advances to deposits in Personal
Financial Services was 80 per cent, compared
with 91 per cent at the end of 2008.
Business highlights in 2009
• Premier, the Group’s flagship global customer
proposition, grew to 3.4 million customers in
2009, attracting 724,000 net new customers
of which nearly 50 per cent were new to the
Group. Premier was launched in Russia and
Colombia during the year, extending the total
number of markets where the service is offered
to 43.
• Premier was expanded in 2009 with the launch
of HSBC Amanah Premier, the world's first
Islamic premium banking service, in six markets
(UAE, Saudi Arabia, Malaysia, Indonesia, Qatar
and Bahrain), offering customers a suite of
shariah compliant products and Islamic wealth
management services.
• A second globally consistent proposition,
Advance, was developed in 2009 for launch in
early 2010. Building on the success of Premier,
Advance will target emerging mass affluent
customers who are not yet Premier but have the
potential to be so. Advance is currently available
in seven markets, including Hong Kong and the
UK, and will be offered in over 30 markets by
the end of 2010.
• As part of its wealth management strategy,
HSBC successfully launched the World
Selection global investment offering in seven
markets. This fund, which will be available in
over 20 markets by the end of 2010, is designed
to meet the different needs and risk appetites of
HSBC customers by offering a range of globally
diversified and multi-asset portfolios. The fund
had assets of US$2.7 billion at the end of the
year.
• HSBC’s growth in personal lending in 2009 was
largely in mortgage products in the UK and
Hong Kong. In the UK, HSBC launched various
marketing campaigns including a new Rate
Matcher mortgage promotion. As a result of
market share gains in 2009, the UK bank more
than met its commitment to make £15 billion
(US$24.7 billion) of new mortgage lending
available to borrowers. In Hong Kong, HSBC
maintained its market leading position with
gross mortgage balance growth of 7 per cent
during the year.
• As part of its strategy to deliver a globally
consistent customer experience, Personal
Financial Services commenced a global retail
store update and refresh programme including
the introduction of a set of minimum service
standards across customer touch points. The
standardised range of design principles helps
address the diverse needs of customers and
enables them to recognise and be confident in
their dealings with HSBC wherever they are.
The customer recommendation score for
Personal Financial Services increased in 2009
(see page 20).
Reconciliation of reported and underlying profit/(loss) before tax
2008
as
reported
US$m
2008
acquisitions
and
disposals10
US$m
2008
at 2009
exchange
rates12
US$m
2009
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Personal Financial
Services
2009 compared with 2008
Net interest income ..........
Net fee income .................
Other income15 .................
29,419
10,107
1,963
Net operating income16 ..
41,489
(36)
(32)
(121)
(189)
(1,534)
(645)
(258)
27,849
9,430
1,584
(2,437)
38,863
Loan impairment charges
and other credit risk
provisions ....................
(21,220)
3
595
(20,622)
Net operating income ....
20,269
(186)
(1,842)
18,241
Operating expenses
(excluding goodwill
impairment) .................
Goodwill impairment .......
(21,140)
(10,564)
38
–
1,372
–
(19,730)
(10,564)
Operating loss ................
(11,435)
(148)
(470)
(12,053)
Income from associates ...
461
–
13
474
Loss before tax ...............
(10,974)
(148)
(457)
(11,579)
3
–
1
4
–
4
(1)
–
3
–
3
(2,745)
(1,192)
485
25,107
8,238
2,070
(3,452)
35,415
(15)
(18)
5
(15)
(10)
(13)
31
(9)
720
(19,902)
6
3
(2,732)
15,513
(23)
(15)
1,439
10,564
(18,292)
–
13
100
9,271
(2,779)
240
714
9,511
(2,065)
76
55
81
7
100
77
51
82
2008 compared with 2007
2007
acquisitions,
disposals
& dilution
gains10
US$m
2007
as
reported
US$m
2007
at 2008
exchange
rates17
US$m
2008
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Personal Financial
Services
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
485
(1,500)
(447)
29,419
10,107
1,963
(1,462)
41,489
(5,124)
(21,220)
(6,586)
20,269
1
(14)
(19)
(4)
(31)
(25)
2
(13)
(19)
(3)
(32)
(25)
362
(10,564)
(21,140)
(10,564)
3
2
(16,788)
(11,435)
(315)
(325)
(181)
461
(22)
(28)
215
(9)
83
289
(3)
286
(98)
–
188
–
188
(16,969)
(10,974)
(286)
(292)
Net interest income ..........
Net fee income .................
Other income15 .................
29,069
11,742
2,428
Net operating income16 ....
43,239
Loan impairment charges
and other credit risk
provisions ....................
(16,172)
Net operating income ......
27,067
Operating expenses
(excluding goodwill
impairment) .................
Goodwill impairment .......
(21,757)
–
Operating profit/(loss) .....
5,310
Income from associates ...
590
Profit/(loss) before tax .....
5,900
For footnotes, see page 149.
(224)
(21)
(91)
(336)
4
(332)
236
–
(96)
–
(96)
(126)
(105)
(10)
(241)
28,719
11,616
2,327
42,662
75
(16,093)
(166)
26,569
117
–
(49)
52
3
(21,404)
–
5,165
642
5,807
69
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Commercial Banking
Commercial Banking
Profit before tax
2009
US$m
Net interest income ...........
7,883
Net fee income ..................
3,702
Trading income excluding
net interest income .........
Net interest income on
trading activities .............
Net trading income42 .........
Net income/(expense) from
financial instruments
designated at fair value ..
Gains less losses from
financial investments .....
Dividend income ...............
Net earned insurance
premiums .......................
Other operating income ....
2008
US$m
9,494
4,097
369
17
386
332
22
354
100
(224)
23
8
886
739
193
88
679
939
2007
US$m
9,055
3,972
265
31
296
22
90
8
733
165
Total operating income ..
13,695
15,652
14,341
Net insurance claims43 ......
(842)
(335)
(391)
Net operating income16 ...
12,853
15,317
13,950
Loan impairment charges
and other credit risk
provisions .......................
(3,282)
(2,173)
(1,007)
Net operating income .....
9,571
13,144
12,943
Employee expenses ..........
Other operating expenses .
(2,606)
(3,357)
(3,056)
(3,525)
(3,094)
(3,158)
Total operating expenses ..
(5,963)
(6,581)
(6,252)
Operating profit ..............
3,608
6,563
6,691
Share of profit in associates
and joint ventures ...........
667
631
454
Profit before tax ..............
4,275
7,194
7,145
By geographical region
Europe ............................
Hong Kong .....................
Rest of Asia-Pacific27 .....
Middle East27 .................
North America ...............
Latin America ................
Share of HSBC’s profit
before tax .......................
Cost efficiency ratio ..........
Balance sheet data41
Loans and advances to
1,292
956
1,064
21
543
399
4,275
2,722
1,315
1,235
558
658
706
7,194
%
%
60.4
46.4
77.3
43.0
2,516
1,619
868
482
920
740
7,145
%
29.5
44.8
US$m
US$m
US$m
customers (net) ...............
Total assets ........................
Customer accounts ............
199,674
251,143
267,388
203,949
249,218
235,879
220,068
307,944
237,987
For footnotes, see page 149.
70
Strategic direction
HSBC’s Commercial Banking strategy is focused on
two key initiatives:
−
−
to be the leading international business bank,
using HSBC’s extensive geographical network
together with product expertise in payments,
trade, receivables finance and foreign exchange
to actively support customers who are trading
and investing across borders; and
to be the best bank for small and medium-sized
enterprises (‘SME’s) in target markets, building
global scale and creating efficiencies by sharing
systems and best practice, including customer
experience, training and product offerings, and
selectively rolling out the direct banking model.
Financial performance in 2009
• Commercial Banking remained profitable in all
regions in 2009, although profit before tax of
US$4.3 billion was 41 per cent lower than in
2008. The results included a US$280 million
gain from the disposal of the remaining stake in
HSBC’s UK card merchant acquiring business,
compared with a US$425 million gain in 2008
from the sale of the first tranche. On an
underlying basis, pre-tax profit declined by
35 per cent, driven by the effects of lower
interest rates on deposit margins and higher loan
impairment charges resulting from deterioration
in the global economy.
• Deposit balances increased by 7 per cent to
US$267 billion, largely in Hong Kong and the
UK, as HSBC’s brand strength continued to
attract new customers. Loans and advances were
9 per cent lower, largely as customer demand
for new lending declined. This decline was
partly offset by targeted growth in key markets
such as mainland China. The relative movement
in deposits and loans strengthened HSBC’s
liquidity position, with an aggregate customer
advances to deposits ratio in Commercial
Banking of 75 per cent compared with 86 per
cent reported at 31 December 2008.
• Net interest income fell by 11 per cent despite
higher deposit balances, driven by deposit
spread compression and reduced lending
balances. This was partly offset by wider
spreads on lending due to improved pricing.
• Net fee income was broadly unchanged, as
repricing initiatives drove higher fee income
from credit facilities in North America which
was offset by a reduction in fee income
following the part disposal of the card merchant
acquiring business to a joint venture in 2008.
• Loan impairment charges and other credit risk
provisions increased by 56 per cent to
US$3.3 billion, representing less than 2 per cent
of average reported assets. Loan impairment
charges in 2009 remained at broadly the same
rate as experienced in the second half of 2008,
with the charge concentrated in manufacturing,
general trading and real estate. The increase in
loan impairment charges was mainly in the
Middle East, the UK, Brazil, and India, partly
offset by an improving credit environment in
Hong Kong.
• Operating expenses remained broadly
unchanged, including the benefit in the UK of
an accounting gain on staff benefits; however,
the cost efficiency ratio deteriorated slightly
driven by the effect of deposit spread
compression on revenues.
•
Income from associates and joint ventures rose
by 5 per cent.
Business highlights in 2009
HSBC’s ‘leading international business’ strategy
continued to deliver customer-led and product-driven
growth across all segments.
• Product revenues from foreign exchange were
unchanged at US$0.5 billion, and revenues from
trade and supply chain also remained flat at
US$1.4 billion despite the overall decline
in global trade levels. While volumes of trade
activity were depressed in line with world trade
volumes, signs of recovery were apparent
towards the end of the year.
• Foreign exchange services were enhanced with
the launch of GetRate on Business Internet
Banking in Malaysia, India and the UK.
• The number of cross-border intra-Group
referrals increased by 48 per cent, notably in
Asia which accounted for over half of all
successful referrals. The aggregate transaction
value of successful referrals was US$9.0 billion.
• HSBC further strengthened its international
offerings for customers, with particular focus on
business flows to and from mainland China. In
conjunction with Bank of Communications,
HSBC launched a renminbi trade settlement
service in seven ASEAN countries and a same-
day credit pledge service on outward remittances
into mainland China from Hong Kong.
71
• Services for mainland China companies looking
to expand overseas were also a focus of
attention, with innovative solutions including a
video conference account opening service for
SMEs. Investment flows into mainland China
were targeted by increasing the number of
foreign national relationship managers in
HSBC’s international business teams there.
HSBC’s ‘best bank for business’ strategy also
progressed strongly with its transaction banking and
liabilities-led approach, particularly relevant in a
period of low credit demand:
• Business banking customer numbers increased
by 12 per cent to 3 million with over 61 per cent
of new customers in emerging markets.
• Deposit balances in business banking were
US$146 billion, providing a significant surplus
of funds for deployment. Total revenue from
Business Banking of US$5.8 billion, despite the
effects of deposit spread compression,
represented 45 per cent of total revenue,
highlighting the importance of this segment to
the Commercial Banking business.
• Customer loans and advances in business
banking were US$53 billion, and HSBC
continued to support businesses in the global
downturn. The US$5 billion International SME
Fund was launched in December 2008 in five
key markets. The fund was fully allocated by the
end of 2009 and 80 per cent of it was utilised.
•
In 2009, the global roll-out of internationally
consistent offerings continued. Business Direct,
the direct channel proposition, was launched in
a further three countries and is now live in ten,
while the roll-out of a credit scoring platform
and deployment of globally consistent training
programmes illustrated HSBC’s ability to
leverage best practice and drive efficiencies
across its worldwide network.
In the corporate segment (see page 145 for
details), HSBC’s ability to provide or arrange debt
finance combined with its international reach for
payments and trade activity across developed and
emerging markets was evident in the number of new
multi-country banking relationships won in 2009,
despite the more cautious sentiment within the
global economy.
• The number of customers using HSBCnet
continued to grow strongly, and full regional
connectivity was rolled out in Latin America.
The receivables finance capability was extended
to deliver supplier funding programmes for
large buyers, and new pan-European deals were
written.
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Commercial Banking / Global Banking and Markets
• Total revenue in the corporate segment was
US$6.3 billion. Deposits from corporate
customers were US$121 billion, while loans
and advances were US$147 billion. Signs of
returning confidence in the second half of 2009
were accompanied by higher levels of new
lending, particularly in Asia and other emerging
markets.
Commercial Banking continued to seek
opportunities to deliver intra-Group referrals:
• A new global referral programme between
Commercial Banking and Personal Financial
Services was launched, resulting in over 15,000
successful referrals to HSBC Premier.
• The number of referrals to Private Banking was
1,057, generating over US$2.5 billion in assets
under management.
Reconciliation of reported and underlying profit before tax
2009 compared with 2008
2008
as
reported
US$m
2008
acquisitions
and
disposals10
US$m
2008
at 2009
exchange
rates12
US$m
2009
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Commercial Banking
Net interest income ..........
Net fee income .................
Other income15 .................
Net operating income16 ..
Loan impairment charges
and other credit risk
provisions ....................
9,494
4,097
1,726
15,317
(29)
(26)
(464)
(519)
(697)
(367)
(213)
8,768
3,704
1,049
(1,277)
13,521
45
5
295
345
(930)
(7)
(76)
7,883
3,702
1,268
(1,013)
12,853
(2,173)
3
68
(2,102)
–
(1,180)
(3,282)
Net operating income ....
13,144
(516)
(1,209)
11,419
Operating expenses ..........
(6,581)
Operating profit .............
6,563
Income from associates ...
631
Profit before tax .............
7,194
30
(486)
–
(486)
537
(672)
7
(6,014)
5,405
638
(665)
6,043
345
(27)
318
–
318
(2,193)
9,571
78
(5,963)
(2,115)
3,608
(45)
(39)
29
667
6
5
(2,086)
4,275
(41)
(35)
(17)
(10)
(27)
(16)
(51)
(27)
9
(11)
–
(7)
(7)
(56)
(19)
1
2008 compared with 2007
2007
acquisitions,
disposals
& dilution
gains10
US$m
2007
as
reported
US$m
2007
at 2008
exchange
rates17
US$m
2008
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Commercial Banking
Net interest income ..........
Net fee income .................
Other income15 .................
9,055
3,972
923
Net operating income16 ....
13,950
Loan impairment charges
and other credit risk
provisions ....................
(1,007)
Net operating income ......
12,943
Operating expenses ..........
Operating profit ...............
(6,252)
6,691
Income from associates ...
454
Profit before tax ...............
7,145
For footnotes, see page 149.
(166)
(113)
(7)
(286)
3
(283)
180
(103)
–
(103)
(77)
(76)
(28)
8,812
3,783
888
(181)
13,483
41
27
525
593
641
287
313
9,494
4,097
1,726
1,241
15,317
5
3
87
10
7
8
35
9
36
(968)
(3)
(1,202)
(2,173)
(116)
(124)
(145)
12,515
47
(98)
26
(72)
(6,025)
6,490
480
6,970
590
(106)
484
–
484
39
13,144
(450)
(411)
151
(6,581)
6,563
631
(260)
7,194
2
(5)
(2)
39
1
–
(7)
(6)
31
(4)
72
Global Banking and Markets
Strategic direction
Profit before tax
2009
US$m
Net interest income ...........
8,610
Net fee income ..................
4,363
2008
US$m
8,541
4,291
2007
US$m
4,430
4,901
Trading income excluding
net interest income .........
Net interest income/
(expense) on trading
activities .........................
Net trading income42 .........
Net income/(expense)
from financial
instruments designated
at fair value ...................
Gains less losses from
financial investments .....
Dividend income ...............
Net earned insurance
premiums .......................
Other operating income ....
4,701
157
3,503
2,174
6,875
324
481
(236)
3,267
473
(438)
(164)
265
68
54
1,146
(327)
76
105
868
1,313
222
93
1,218
Total operating income ..
21,854
13,597
15,280
Net insurance claims43 ......
(34)
(79)
(70)
Net operating income16 ...
21,820
13,518
15,210
Loan impairment charges
and other credit risk
provisions .....................
(3,168)
(1,471)
(38)
Net operating income .....
18,652
12,047
15,172
Employee expenses ..........
Other operating expenses .
(4,703)
(3,834)
(4,928)
(4,164)
(5,572)
(3,786)
Total operating expenses ..
(8,537)
(9,092)
(9,358)
Operating profit ..............
10,115
2,955
5,814
Share of profit in associates
and joint ventures ...........
366
528
307
Profit before tax ..............
10,481
3,483
6,121
By geographical region
Europe ............................
Hong Kong .....................
Rest of Asia-Pacific27 .....
Middle East27 .................
North America ...............
Latin America ................
Share of HSBC’s profit
before tax .......................
Cost efficiency ratio ..........
For footnotes, see page 149.
4,545
1,507
2,319
467
712
931
195
1,436
2,970
816
(2,575)
641
10,481
3,483
%
%
148.1
39.1
37.4
67.3
2,527
1,578
1,969
495
(965)
517
6,121
%
25.3
61.5
73
In 2009, Global Banking and Markets continued to
pursue its now well-established ‘emerging markets-
led and financing-focused’ strategy, encompassing
HSBC’s objective to be a leading wholesale bank by:
–
–
–
utilising the Group’s extensive distribution
network;
developing Global Banking and Markets’
hub-and-spoke business model; and
continuing to build capabilities in major hubs
to support the delivery of an advanced suite
of services to corporate, institutional and
government clients across the HSBC network.
Ensuring that this combination of product depth
and distribution strength meets the needs of existing
and new clients will allow Global Banking and
Markets to achieve its strategic goals.
Financial performance in 2009
• Global Banking and Markets delivered a
considerably improved performance with
reported pre-tax profits of US$10.5 billion, an
increase of US$7.0 billion or 201 per cent
compared with 2008. On an underlying basis,
profit before tax increased by 249 per cent with
strong performances in both developed and
emerging markets. Robust revenues across core
businesses were driven by higher margins and
an increase in market share, with particularly
strong performances in Rates and Balance Sheet
Management. Revenues grew faster than
operating expenses with continued emphasis on
active cost management limiting the latter to a
relatively modest rise. The cost efficiency ratio
improved by 29.1 percentage points to 39.1 per
cent.
• Write-downs on legacy positions in credit
trading, leveraged and acquisition financing and
monoline credit exposures, which totalled
US$331 million, were significantly lower than
those recorded in 2008, primarily driven by the
stabilisation of asset prices. This was partly
offset by a fair value loss of US$444 million
resulting from tightening credit spreads on
structured liabilities; a gain of US$529 million
was reported in 2008.
• Loan impairment charges and other credit risk
provisions increased by US$1.7 billion. Loan
impairment charges were US$1.7 billion
compared with US$0.8 billion in 2008,
reflecting a deterioration in the credit position of
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Global Banking and Markets
Management view of total operating income
Business highlights in 2009
2009
US$m
10,364
2,330
2,648
2,979
641
1,420
2008
US$m
2,676
(5,502)
2,033
3,842
(64)
2,116
2007
US$m
5,720
(1,319)
1,291
2,178
1,177
1,926
Global Markets44 ...............
Credit ............................
Rates .............................
Foreign exchange .........
Equities .........................
Securities services45 ......
Asset and structured
finance .......................
346
251
467
Global Banking .................
Financing and equity
4,630
5,718
4,190
capital markets ...........
3,070
3,572
2,186
Payments and cash
management46 ............
Other transaction
services47.....................
Balance Sheet
1,053
1,665
1,632
507
481
372
Management .................
5,390
3,618
1,226
Global Asset
Management .................
Principal Investments .......
Other48 ...............................
939
42
489
934
(415)
1,066
1,336
1,253
1,555
Total operating income .....
21,854
13,597
15,280
Comparative information has been adjusted to reflect the
current management view.
For footnotes, see page 149.
a small number of clients. This was in line with
market trends of a rise in the number and
severity of defaults on loans, despite a return of
liquidity to the market. Impairment charges on
the available-for-sale portfolio at US$1.4 billion
were US$0.8 billion higher than in 2008;
however, they remained within the range of the
stress tests described on page 156 of the Annual
Report and Accounts 2008.
• Within the Group’s available-for-sale portfolio,
the negative reserves in respect of asset-backed
securities (‘ABS’s) reduced significantly from
US$18.7 billion to US$12.2 billion, reflecting
the impact of amortisation and recent increases
in ABS prices. Impairment charges of
US$1.4 billion were identified on ABSs with a
nominal value of US$2.6 billion and were taken
to the income statement in 2009. However, due
to the underlying credit quality and seniority of
the tranches held by HSBC, the expected cash
flow impairment on these securities was a more
modest US$378 million. A further
US$666 million of impairments was absorbed
by income noteholders who take the first loss on
positions within the securities investment
conduits (‘SIC’s) now consolidated in HSBC’s
accounts. Further details on the SICs are
provided on page 182.
74
• HSBC was recognised for the continuing
success of its ‘emerging markets-led and
financing-focused’ strategy with numerous key
industry awards, including Euromoney’s Best
Debt House in the following emerging market
countries and regions: Mexico, Turkey, Asia,
Latin America and the Middle East, along with
‘Best Global Bank’, and ‘Best Global Debt
House’. Other awards included ‘European DCM
House of the Year’, ‘European Corporate Bond
House of the Year’ and ‘European Financial
Institutions Bond House of the Year’ in
Financial News.
• Global Markets revenues grew significantly as
volatile markets and increased customer activity
gave impetus to client-facing businesses.
Exceptional revenues in Rates and improved
revenues in Credit were boosted by greater
market share in both primary and secondary
client business. Credit revenues were also
assisted by a general tightening of credit spreads
and an increase in asset prices following a return
of liquidity in financial markets. Foreign
exchange revenues normalised following
unprecedented levels of market volatility in
2008, as the business established deeper
institutional client relationships. Equities took
advantage of a changed competitive landscape
to capture a greater share of business in strategic
markets from key institutional clients,
particularly in Europe, the Middle East and
Asia.
• Securities Services revenues declined as lower
interest rates drove down overall margins,
although this was partially offset by recent
improvements in Asian equity markets which
stimulated increases in volumes and assets
under custody in the second half of 2009.
•
In Global Banking, certain credit default swap
transactions which hedge risk within the
portfolio, recorded fair value losses of
US$429 million as credit spreads tightened,
compared with gains of US$912 million reported
in 2008. Excluding this, higher spreads drove
an increase in credit and lending revenues,
reflecting the strength of HSBC’s franchise and
the quality of the client portfolio. Revenues in
the equity capital markets business doubled
following increased market share in key strategic
regions. Payments and cash management
activities continued to be adversely affected by
the low interest rate environment, partly
countered by an increase in liability balances.
• Balance Sheet Management continued to benefit
from early positioning against the backdrop of a
low interest rate environment although, as
expected, revenues slowed in the second half of
2009 as certain higher yield positions matured.
•
In Global Asset Management, positive fee
income growth was recorded in each
consecutive quarter, with an improving
contribution from emerging markets. Funds
under management at 31 December 2009 were
US$423 billion, 14 per cent higher than at the
start of the year, assisted by positive net inflows
of US$11 billion and strengthening market
performance. Fund launches during the year
included ‘HSBC World Selection’ in
conjunction with Personal Financial Services,
which had assets of US$2.7 billion at year end.
In August 2009, Global Asset Management
entered the European Exchange Traded Funds
(‘ETF’) market, working closely with Global
Markets and HSBC Securities Services, and
launched three ETF funds.
•
In Principal Investments, opportunities for
private equity realisations were limited and
impairment charges were made against a small
number of equity investments.
Reconciliation of reported and underlying profit before tax
2008
as
reported
US$m
2008
acquisitions
and
disposals10
US$m
2008
at 2009
exchange
rates12
US$m
2009
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Global Banking and
Markets
2009 compared with 2008
Net interest income ..........
Net fee income .................
Other income15 .................
Net operating income16 ..
Loan impairment charges
and other credit risk
provisions ....................
8,541
4,291
686
13,518
(1,471)
Net operating income ....
12,047
Operating expenses ..........
(9,092)
Operating profit .............
2,955
Income from associates ...
528
Profit before tax .............
3,483
–
–
–
–
–
–
–
–
–
–
(451)
(267)
(555)
8,090
4,024
131
(1,273)
12,245
45
(1,426)
(1,228)
10,819
743
(485)
6
(8,349)
2,470
534
(479)
3,004
5
1
2
8
–
8
(3)
5
–
5
515
338
8,714
8,610
4,363
8,847
1
2
1,190
6
8
6,652
9,567
21,820
61
78
(1,742)
(3,168)
(115)
(122)
7,825
18,652
(185)
(8,537)
7,640
10,115
(168)
366
7,472
10,481
55
6
242
(31)
201
72
(2)
309
(31)
249
2008 compared with 2007
2007
acquisitions,
disposals
& dilution
gains10
US$m
2007
as
reported
US$m
2007
at 2008
exchange
rates17
US$m
2008
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Global Banking and
Markets
Net interest income ..........
Net fee income .................
Other income15 .................
4,430
4,901
5,879
Net operating income16 ....
15,210
Loan impairment charges
and other credit risk
provisions ....................
(38)
Net operating income ......
15,172
Operating expenses ..........
(9,358)
Operating profit ...............
5,814
Income from associates ...
307
Profit before tax ...............
6,121
For footnotes, see page 149.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(32)
(46)
(57)
4,398
4,855
5,822
(135)
15,075
1
(37)
(134)
15,038
175
(9,183)
41
18
59
5,855
325
6,180
75
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
4,143
(564)
(5,136)
8,541
4,291
686
(1,557)
13,518
93
(12)
(88)
(11)
94
(12)
(88)
(10)
(1,434)
(1,471) (3,771)
(3,876)
(2,991)
12,047
(21)
(20)
91
(9,092)
(2,900)
2,955
203
528
(2,697)
3,483
3
(49)
72
(43)
1
(50)
62
(44)
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Global Banking and Markets / Private Banking
Balance sheet data significant to Global Banking and Markets
Europe
US$m
294,951
190,900
176,123
59,171
83,715
981,831
88,043
169,390
169,814
191,480
Hong
Kong
US$m
25,742
16,937
21,991
27,789
92,181
217,146
5,824
26,650
10,720
16,619
Rest of
Asia-
Pacific27
US$m
15,960
15,660
23,989
29,388
36,355
138,884
7,874
43,698
3,040
15,500
281,089
303,265
45,398
26,989
19,192
25,492
185,818
49,508
105,546
1,180,759
79,509
199,687
144,759
300,200
294,078
102,409
163,066
89,651
94,416
912,299
85,315
163,713
201,010
104,687
23,042
20,970
46,964
233,187
11,509
30,866
13,056
28,536
26,877
11,492
19,171
53,725
46,765
218,293
6,251
37,364
15,939
10,865
27,941
21,309
29,772
147,714
12,261
42,977
3,633
25,465
18,119
9,795
26,476
24,733
31,301
130,096
14,737
45,773
8,517
9,204
Middle
East27
US$m
North
America
Latin
America
US$m
US$m
Total
US$m
511
668
6,554
6,385
9,688
28,189
1,357
5,752
13
651
414
1,014
6,649
5,401
7,574
27,975
944
7,628
54
1,016
1,613
439
5,630
6,120
8,147
26,548
2,437
8,347
84
452
67,466
61,192
18,654
14,403
49,386
260,131
13,229
19,095
69,302
60,178
74,498
125,848
35,583
9,238
39,841
348,347
16,244
23,844
72,325
122,699
93,395
56,531
26,186
14,938
33,273
263,008
14,825
30,732
73,081
53,058
6,283
2,820
410,913
288,177
9,645
16,638
14,659
57,491
3,948
20,142
2,875
3,270
256,956
153,774
285,984
1,683,672
120,275
284,727
255,764
287,698
5,004
5,145
425,595
487,753
8,273
12,574
8,179
53,870
3,871
15,384
2,546
4,615
8,570
1,814
9,935
10,339
10,155
46,606
2,830
13,950
4,998
1,986
287,306
119,000
237,876
1,991,852
124,338
320,386
236,373
482,531
442,652
182,480
250,464
199,506
224,057
1,596,850
126,395
299,879
303,629
180,252
At 31 December 2009
Trading assets49 ...........................
Derivative assets .........................
Loans and advances to:
– customers (net) ....................
– banks (net) ...........................
Financial investments49 ...............
Total assets41 ...............................
Deposits by banks .......................
Customer accounts ......................
Trading liabilities ........................
Derivative liabilities ...................
At 31 December 2008
Trading assets49 ...........................
Derivative assets .........................
Loans and advances to:
– customers (net) ....................
– banks (net) ...........................
Financial investments49 ...............
Total assets41 ...............................
Deposits by banks .......................
Customer accounts ......................
Trading liabilities ........................
Derivative liabilities ...................
At 31 December 2007
Trading assets49 ...........................
Derivative assets .........................
Loans and advances to:
– customers (net) ....................
– banks (net) ...........................
Financial investments49 ...............
Total assets41 ...............................
Deposits by banks .......................
Customer accounts ......................
Trading liabilities ........................
Derivative liabilities ...................
For footnotes, see page 149.
76
Private Banking
Profit before tax
2009
US$m
Net interest income ...........
1,474
Net fee income ..................
1,236
2008
US$m
1,612
1,476
2007
US$m
1,216
1,615
Trading income excluding
net interest income .........
Net interest income
on trading activities ........
Net trading income42 .........
Net expense from financial
instruments designated at
fair value ........................
Gains less losses from
financial investments .....
Dividend income ...............
Other operating income ....
322
22
344
–
5
5
48
408
14
422
–
64
8
49
525
9
534
(1)
119
7
58
Total operating income ..
3,112
3,631
3,548
Net insurance claims43 ......
–
–
–
Net operating income16 ...
3,112
3,631
3,548
Loan impairment charges
and other credit risk
provisions .......................
(128)
(68)
(14)
Net operating income .....
2,984
3,563
3,534
Employee expenses ..........
Other operating expenses .
(1,234)
(650)
(1,367)
(749)
(1,250)
(775)
Total operating expenses ..
(1,884)
(2,116)
(2,025)
Operating profit ..............
1,100
1,447
1,509
Share of profit in associates
and joint ventures ...........
8
–
2
Profit before tax ..............
1,108
1,447
1,511
By geographical region
Europe ............................
Hong Kong .....................
Rest of Asia-Pacific27 .....
Middle East27 .................
North America ...............
Latin America ................
Share of HSBC’s profit
before tax .......................
Cost efficiency ratio ..........
Balance sheet data41
Loans and advances to
854
197
90
6
(50)
11
998
237
109
4
83
16
915
305
89
3
174
25
1,108
1,447
1,511
%
%
15.6
60.5
15.6
58.3
%
6.2
57.1
US$m
US$m
US$m
customers (net) ...............
Total assets ........................
Customer accounts ............
37,031
116,148
106,533
37,590
133,216
116,683
43,612
130,893
106,197
For footnotes, see page 149.
77
Strategic direction
Private Banking strives to be the world’s leading
international private bank, recognised for excellent
client experience and global connections.
The strength of HSBC’s brand, capital position,
and extensive global network provides a foundation
from which Private Banking continues to attract and
retain clients. Product and service leadership in areas
such as credit, estate planning, hedge funds, and
investment advice helps Private Banking meet the
complex international financial needs of individuals
and families.
Through continuing investment in its people,
integrated IT solutions and emerging markets-
focused domestic operations, Private Banking is
well-positioned for sustainable long-term growth.
Financial performance in 2009
• Reported pre-tax profit was 23 per cent lower at
US$1.1 billion, a fall of 21 per cent on an
underlying basis, primarily from a decline in fee
income. This was due to a change in the risk
tolerance of private banking customers and
consequent reduction in client activity, lower
fiduciary fees and the effect of weak markets on
the value of funds under management. Strong
cost control including reduced performance-
related costs partially offset the lower revenues.
• Net interest income fell by 6 per cent as lower
interest rates in the major economies, combined
with aggressive competition for deposits from
weaker competitors, particularly in Europe and
North America, led to tighter spreads and a
decline in balances. Lending volumes declined
due to client deleveraging and a lower appetite
for credit, although this was partly mitigated by
re-pricing historically low margin business to
reflect the changed conditions. Favourable
interest rate and yield curve movements at the
beginning of 2009 generated higher treasury
income in Asia and Europe, benefiting net
interest income.
• Net fee income decreased by 14 per cent,
affected by the fall in the value of equity
markets in the second half of 2008 and the first
quarter of 2009. This resulted in a lower average
value of funds under management and the
redemption of investments, particularly hedge
funds, in early 2009. Commission income on
fiduciary deposits decreased as low interest rates
resulted in a decline in volumes, and annual
fund performance fees earned in January 2008
were not repeated in 2009.
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Private Banking
• Trading income fell by 18 per cent, also
reflecting lower client trading activity, mainly in
foreign exchange and structured products.
• Gains less losses from financial investments
decreased by 90 per cent due to gains made on
the disposal of HSBC’s residual interest in the
Hermitage Fund in the first half of 2008 which
did not recur in 2009.
• Other operating income was in line with 2008,
and included gains on the sale of two office
buildings in Switzerland and Luxembourg.
• Loan impairment charges and other credit risk
provisions increased by US$62 million, largely
due to a single specific charge in the US in
2009.
• Operating expenses decreased by 9 per cent as
performance-related costs were cut, staff
numbers were reduced and discretionary costs
such as travel and marketing were tightly
managed. These steps were taken in response to
the lower revenues earned in the weaker
economic environment. Costs included
US$19 million of integration costs relating to
the merger of HSBC’s two Swiss private banks,
US$17 million of redundancy costs worldwide
and the up-front cost of establishing Private
Banking in new developing markets, including
investments in mainland China, India and
Russia.
• The cost efficiency ratio increased by
2.1 percentage points to 60.5 per cent.
Client assets
2009
US$bn
2008
US$bn
At 1 January .......................................
Net new money ..................................
Value change ......................................
Exchange and other ...........................
At 31 December .................................
352
(7)
27
(5)
367
421
24
(71)
(22)
352
Client assets by investment class
Equities ..............................................
Bonds .................................................
Structured products ............................
Funds ..................................................
Cash, fiduciary deposits and other ....
2009
US$bn
2008
US$bn
73
69
10
82
133
367
53
57
7
87
148
352
• Reported client assets increased by 4 per cent to
US$367 billion due to portfolio appreciation and
foreign exchange movements, partly offset by a
net outflow of funds due to hedge fund
redemptions, client deleveraging and the
decision not to match aggressive deposit prices
offered by weaker competitors, particularly in
Europe and North America. Private Banking
continued to experience net client inflows in
emerging markets, namely Asia, the Middle East
and Latin America, with net new money of
US$6.6 billion generated in these markets in the
year.
• Reported total client assets increased by 6 per
cent to US$460 billion, largely due to an
increase in the market value of assets. ‘Total
client assets’ is a measure equivalent to many
industry definitions of assets under management
which include some non-financial assets held in
client trusts.
Business highlights in 2009
•
Intragroup referrals continued to result in good
inflows with US$5.8 billion raised during 2009.
• The legal merger of HSBC’s two Swiss private
banks was achieved as planned in April 2009
and technical integration was completed in early
January 2010. The combined bank is expected to
achieve significant operational and cost
efficiencies.
• HSBC Alternative Investments Limited
continued to achieve strong returns on hedge
fund products in the second half of 2009,
including its flagship fund of hedge funds, the
GH fund, which achieved a return of 12.3 per
cent during the year. A series of new products
were launched including one of the first UCITS
III hedge funds of hedge funds and as a result,
the business saw net inflows in the second half
of 2009.
• Major awards included ‘Outstanding Global
Private Bank’ by Private Banker International,
and ‘Best Global Private Bank’, ‘Best Private
Bank in Asia’ and ‘Best Private Bank in the
Middle East’ by The Banker and The Financial
Times. The Euromoney 2010 Private Banking
Survey placed HSBC second in the Global
Private Banking category for the second
consecutive year.
•
Investment in emerging markets and domestic
businesses continued, including the launch of
Private Banking in Russia and further
investments in Private Banking operations in
Asia, Latin America and the Middle East.
78
Reconciliation of reported and underlying profit before tax
2009 compared with 2008
2008
as
reported
US$m
2008
acquisitions
and
disposals10
US$m
2008
at 2009
exchange
rates12
US$m
2009
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
–
–
–
–
–
–
–
–
–
–
(52)
(33)
(19)
(104)
1,560
1,443
524
3,527
2
(66)
(102)
3,461
54
(48)
–
(48)
(2,062)
1,399
–
1,399
–
–
–
–
–
–
–
–
–
–
(86)
(207)
(122)
(415)
1,474
1,236
402
3,112
(62)
(128)
(477)
2,984
178
(1,884)
(299)
1,100
8
8
(9)
(16)
(26)
(14)
(88)
(16)
11
(24)
(6)
(14)
(23)
(12)
(94)
(14)
9
(21)
(291)
1,108
(23)
(21)
2008 compared with 2007
2007
acquisitions,
disposals
& dilution
gains10
US$m
2007
as
reported
US$m
2007
at 2008
exchange
rates17
US$m
2008
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Private Banking
Net interest income ..........
Net fee income .................
Other income15 .................
Net operating income16 ..
Loan impairment charges
and other credit risk
provisions ....................
1,612
1,476
543
3,631
(68)
Net operating income ....
3,563
Operating expenses ..........
(2,116)
Operating profit .............
1,447
Income from associates ...
–
Profit before tax .............
1,447
Private Banking
Net interest income ..........
Net fee income .................
Other income15 .................
Net operating income16 ....
Loan impairment charges
and other credit risk
provisions ....................
1,216
1,615
717
3,548
(14)
Net operating income ......
3,534
Operating expenses ..........
(2,025)
Operating profit ...............
1,509
Income from associates ...
2
Profit before tax ...............
1,511
For footnotes, see page 149.
1,612
1,476
543
3,631
33
(9)
(24)
2
34
(4)
(23)
5
(68)
(386)
(386)
407
(60)
(161)
186
(54)
132
3,563
(172)
(2,116)
(40)
1,447
1
(4)
(4)
4
(9)
(3)
(2)
–
(100)
(100)
(42)
1,447
(4)
(3)
1
(105)
(18)
(122)
–
(122)
98
(24)
–
(24)
(12)
26
5
19
–
19
1,205
1,536
704
3,445
(14)
3,431
(17)
(1,944)
2
–
2
1,487
2
1,489
–
–
–
–
–
–
–
–
–
–
79
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
244
(262)
127
For footnotes, see page 149.
Customer groups > Other
Other
Profit/(loss) before tax
2009
US$m
Net interest expense ..........
(1,035)
Net fee income/(expense) ..
125
2008
US$m
(956)
53
2007
US$m
(542)
(228)
Trading income/(expense)
excluding net interest
income ............................
Net interest income/
(expense) on trading
activities .........................
Net trading income/
(expense)42 ....................
Changes in fair value of
long-term debt issued and
related derivatives ..........
Net income/(expense) from
other financial instruments
designated at fair value ...
Net income/(expense) from
financial instruments
designated at fair value ..
Gains less losses from
financial investments .....
Gains arising from dilution
of interests in associates
Dividend income ...............
Net earned insurance
premiums .......................
Gains on disposal of
French regional banks ....
Other operating income ....
Total operating income/
35
(268)
(1)
279
(530)
126
(6,247)
6,679
2,812
(196)
747
81
(6,443)
7,426
2,893
(396)
83
3
–
12
(3)
–
10
(17)
–
5,042
2,445
4,261
1,092
32
(21)
–
3,523
(expense) .......................
(2,020)
12,296
6,958
Net insurance claims43 ......
(3)
(1)
–
Net operating income/
(expense)16 .....................
Loan impairment charges and
other credit risk provisions
Net operating income/
(2,023)
12,295
6,958
(8)
(5)
(11)
(expense) ......................
(2,031)
12,290
6,947
Employee expenses ..........
Other operating expenses .
(2,602)
(2,113)
(2,198)
(1,976)
(2,017)
(1,545)
Total operating expenses ..
(4,715)
(4,174)
(3,562)
Operating profit/(loss) ....
(6,746)
8,116
3,385
Share of profit in joint
ventures and associates ..
26
41
Profit/(loss) before tax ....
(6,720)
8,157
By geographical region
Europe ............................
Hong Kong .....................
Rest of Asia-Pacific27 .....
Middle East27 .................
North America ...............
Latin America ................
(2,994)
(359)
264
87
(3,717)
(1)
(6,720)
5,296
(955)
197
79
3,534
6
8,157
Share of HSBC’s profit
before tax .......................
Cost efficiency ratio ..........
(94.9)
(233.1)
87.6
33.9
%
%
150
3,535
1,056
(375)
1,261
82
1,508
3
3,535
%
14.6
51.2
80
Balance sheet data41
2009
US$m
2008
US$m
2007
US$m
Loans and advances to
customers (net) ........
Total assets .................
Customer accounts .....
3,110
150,983
1,277
2,621
2,678
145,581 164,806
2,006
2,041
Notes
• Reported loss before tax in Other was
US$6.7 billion, compared with a profit of
US$8.2 billion in 2008. For a description of the
main items reported under ‘Other’, see footnote
40 on page 150.
• Net interest expense substantially comprises the
interest paid on third-party debt issues at the
holding company level.
• Net trading income was US$279 million,
compared with a net trading expense in 2008;
this reflected fair value gains on certain
non-qualifying hedges, compared with fair value
losses in 2008. This caption also included a
one-off hedging loss of US$344 million relating
to forward foreign exchange contracts entered
into to hedge the proceeds of the Group’s rights
issue, and a US$121 million loss arising from
the mark-to-market of the implied contingent
forward contract entered into with the
underwriters of the Group’s rights issue. Both of
these items were part of the net proceeds of the
rights issue but for technical accounting reasons
were reflected through the income statement.
• Net expense from financial instruments
designated at fair value declined by 90 per cent
to US$90 million due to reduced income from
non-qualifying interest and exchange rate
hedges related to long-term debt issued by
HSBC Holdings and its North American and
European subsidiaries.
• HSBC recognised a gain of US$576 million in
respect of the sale and leaseback of 8 Canada
Square, its global headquarters in London,
which was effected through the disposal of its
entire shareholding in PMII. In 2008, a gain of
US$416 million was reported in respect of the
purchase of PMII from Metrovacesa. See
Note 23 on the Financial Statements.
• Operating expenses increased by 15 per cent
to US$4.7 billion, mainly due to further
centralisation of certain operational functions
in the US to HSBC Technology Services USA
resulting in cost savings across the other
customer groups in North America. These
expenses were previously incurred directly by
customer groups, and are now substantially
recovered from them through a recharge
mechanism with the revenue reported in other
operating income. Costs at HSBC’s Group
Service Centres rose by 10 per cent as the
number of migrated activities increased in line
with the Group’s Global Resourcing model.
Reconciliation of reported and underlying profit/(loss) before tax
2008
as
reported
US$m
(956)
53
6,570
2,445
4,183
2008
adjust-
ments10
US$m
–
–
(6,570)
(2,445)
(95)
2009 compared with 2008
2008
at 2009
exchange
rates12
US$m
Currency
translation11
US$m
2009
adjust-
ments10
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
12
(3)
–
–
(13)
(944)
50
–
–
4,075
–
–
(6,533)
(91)
75
–
(1,035)
125
(6,533)
–
–
–
1,345
–
5,420
(8)
136
(199)
(100)
30
(10)
150
33
12,295
(9,110)
(4)
3,181
(6,533)
1,329
(2,023)
(116)
42
Other
Net interest expense .........
Net fee income .................
Changes in fair value .......
Gains on disposal of
French regional banks .
Other income15 .................
Net operating income/
(expense)16 ..................
Loan impairment charges
and other credit risk
provisions ....................
Net operating income/
(5)
–
(expense) .....................
12,290
(9,110)
Operating expenses ..........
(4,174)
–
Operating profit/(loss)....
8,116
(9,110)
Income from associates ...
41
–
Profit/(loss) before tax....
8,157
(9,110)
(1)
(5)
70
65
(1)
64
(6)
–
(2)
(8)
(60)
(33)
3,175
(6,533)
1,327
(2,031)
(117)
(4,104)
–
(611)
(4,715)
(13)
(929)
(6,533)
716
(6,746)
(183)
40
–
(14)
26
(37)
(889)
(6,533)
702
(6,720)
(182)
42
(15)
77
(35)
79
2008 compared with 2007
2007
as
reported
US$m
2007
adjustments
and dilution
gains10
US$m
2007
at 2008
exchange
rates17
US$m
Currency
translation11
US$m
2008
adjustments10
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
(542)
–
(38)
(580)
(6)
(370)
(956)
(76)
(64)
Other
Net interest expense .........
Net fee income/
(expense) .....................
Changes in fair value .......
Gains on disposal of
French regional banks .
Other income15 .................
Net operating income16 ....
Loan impairment charges
and other credit risk
provisions ....................
(228)
3,055
–
4,673
6,958
–
(3,055)
–
(1,116)
(4,171)
(11)
24
Net operating income ......
6,947
(4,147)
49
–
–
36
47
1
48
(179)
–
–
3,593
2,834
–
6,570
2,445
95
9,104
232
–
–
495
357
53
6,570
2,445
4,183
12,295
14
–
(19)
(5)
2,848
9,104
338
12,290
123
115
(10)
77
55
77
Operating expenses ..........
(3,562)
–
(15)
(3,577)
6
(603)
(4,174)
(17)
Operating profit ...............
3,385
(4,147)
Income from associates ...
150
(12)
Profit before tax ...............
3,535
(4,159)
33
11
44
(729)
149
(580)
9,110
(265)
8,116
–
(108)
41
9,110
(373)
8,157
140
(73)
131
For footnotes, see page 149.
81
130
14
13
(136)
12
(17)
(36)
(72)
(64)
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Profit/(loss) before tax
Analysis by customer group and global business
Profit/(loss) before tax
2009
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Personal
Financial
Services
US$m
25,107
8,238
637
65
702
7,883
3,702
332
22
354
8,610
4,363
4,701
2,174
6,875
–
–
–
2,339
100
473
2,339
224
33
9,534
809
100
23
8
886
739
473
265
68
54
1,146
Inter-
segment
elimination50
US$m
Other40
US$m
(1,035)
(1,309)
125
244
35
279
(6,247)
(196)
(6,443)
3
12
(3)
5,042
–
–
1,309
1,309
–
–
–
–
–
–
(4,996)
Total
US$m
40,730
17,664
6,236
3,627
9,863
(6,247)
2,716
(3,531)
520
126
10,471
2,788
1,474
1,236
322
22
344
–
–
–
5
5
–
48
Total
Net interest income/(expense) ....
Net fee income ............................
Trading income excluding net
interest income .......................
Net interest income on
trading activities .....................
Net trading income42 ...................
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income/
(expense) ................................
46,986
13,695
21,854
3,112
(2,020)
(4,996)
78,631
Net insurance claims43 ................
Net operating income/
(expense)16 .............................
Loan impairment charges and
(11,571)
(842)
(34)
–
(3)
–
(12,450)
35,415
12,853
21,820
3,112
(2,023)
(4,996)
66,181
other credit risk provisions .....
(19,902)
(3,282)
(3,168)
(128)
(8)
–
(26,488)
Net operating income/
(expense) ................................
15,513
18,652
(8,537)
10,115
2,984
(1,884)
1,100
(2,031)
(4,996)
39,693
4,996
(34,395)
(4,715)
(6,746)
(18,292)
(2,779)
714
(2,065)
%
(29.2)
51.7
9,571
(5,963)
3,608
667
4,275
%
60.4
46.4
Operating expenses .....................
Operating profit/(loss) ..............
Share of profit in associates
and joint ventures ...................
Profit/(loss) before tax ..............
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
–
–
–
5,298
1,781
7,079
%
100.0
52.0
US$m
896,231
2,364,452
1,159,034
366
8
26
10,481
1,108
(6,720)
%
148.1
39.1
%
15.6
60.5
%
(94.9)
(233.1)
US$m
US$m
US$m
US$m
US$m
399,460
554,074
499,109
199,674
251,143
267,388
256,956
1,683,672
284,727
37,031
116,148
106,533
3,110
150,983
1,277
(391,568)
82
Total
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Net interest income/(expense) ....
Net fee income ............................
29,419
10,107
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Gains on disposal of French
regional banks ........................
Other operating income ..............
9,494
4,097
369
17
386
8,541
4,291
157
324
481
175
79
254
–
–
–
(2,912)
(224)
(438)
(2,912)
(224)
663
90
10,083
–
259
193
88
679
–
939
(438)
(327)
76
105
–
868
2008
Private
Banking
US$m
1,612
1,476
408
14
422
–
–
–
64
8
–
–
49
Inter-
segment
elimination50
US$m
Other40
US$m
(956)
(5,547)
53
(262)
(268)
(530)
6,679
747
7,426
(396)
10
(17)
2,445
4,261
–
–
5,547
5,547
–
–
–
–
–
–
–
(4,568)
(4,568)
Total operating income ...............
47,963
15,652
13,597
3,631
12,296
Net insurance claims43 ................
Net operating income16 ...............
(6,474)
41,489
(335)
(79)
–
(1)
–
15,317
13,518
3,631
12,295
(4,568)
Loan impairment charges and
other credit risk provisions .....
(21,220)
(2,173)
Net operating income .................
20,269
13,144
Operating expenses (excluding
goodwill impairment) .............
Goodwill impairment ..................
Operating profit/(loss) ................
(21,140)
(10,564)
(11,435)
Share of profit in associates
and joint ventures ...................
461
Profit/(loss) before tax ................
(10,974)
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
(117.9)
76.4
%
(6,581)
–
6,563
631
7,194
%
77.3
43.0
(1,471)
12,047
(9,092)
–
2,955
528
3,483
%
37.4
67.3
(68)
(5)
–
(24,937)
3,563
12,290
(4,568)
56,745
4,568
–
–
–
–
(2,116)
–
1,447
(4,174)
–
8,116
–
41
1,447
8,157
%
15.6
58.3
%
87.6
33.9
Total
US$m
42,563
20,024
847
5,713
6,560
6,679
(2,827)
3,852
197
272
10,850
2,445
1,808
88,571
(6,889)
81,682
(38,535)
(10,564)
7,646
1,661
9,307
%
100.0
60.1
US$m
932,868
2,527,465
1,115,327
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
US$m
US$m
US$m
US$m
US$m
401,402
527,901
440,338
203,949
249,218
235,879
287,306
1,991,852
320,386
37,590
133,216
116,683
2,621
145,581
2,041
(520,303)
83
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Customer groups > Profit/(loss) before tax // Geographical regions > Summary
Profit/(loss) before tax (continued)
Total
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Net interest income/(expense) ....
Net fee income/(expense) ...........
29,069
11,742
9,055
3,972
Trading income excluding net
interest income .......................
Net interest income/(expense)
on trading activities ................
Net trading income42 ...................
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Gains arising from dilution of
interests in associates .............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
38
140
178
–
1,333
1,333
351
–
55
8,271
387
265
31
296
–
22
22
90
–
8
733
165
4,430
4,901
3,503
(236)
3,267
–
(164)
(164)
1,313
–
222
93
1,218
2007
Private
Banking
US$m
1,216
1,615
525
9
534
–
(1)
(1)
119
–
7
–
58
Total operating income ...............
51,386
14,341
15,280
3,548
Inter-
segment
elimination50
US$m
(5,433)
–
–
5,433
5,433
–
–
–
–
–
–
–
(3,912)
(3,912)
–
Other40
US$m
(542)
(228)
127
(1)
126
2,812
81
2,893
83
1,092
32
(21)
3,523
6,958
–
Total
US$m
37,795
22,002
4,458
5,376
9,834
2,812
1,271
4,083
1,956
1,092
324
9,076
1,439
87,601
(8,608)
78,993
Net insurance claims43 ................
Net operating income16 ...............
(8,147)
43,239
Loan impairment charges and
(391)
(70)
–
13,950
15,210
3,548
6,958
(3,912)
other credit risk provisions .....
(16,172)
(1,007)
(38)
Net operating income .................
27,067
12,943
15,172
Total operating expenses ............
Operating profit ..........................
(21,757)
5,310
(6,252)
6,691
(9,358)
5,814
(14)
3,534
(2,025)
1,509
(11)
–
(17,242)
6,947
(3,912)
61,751
3,912
(39,042)
(3,562)
3,385
Share of profit in associates
and joint ventures ...................
Profit before tax ..........................
Share of HSBC’s profit
before tax.................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 149.
–
–
–
22,709
1,503
24,212
%
100.0
49.4
US$m
981,548
2,354,266
1,096,140
590
5,900
%
24.4
50.3
454
7,145
%
29.5
44.8
307
6,121
%
25.3
61.5
2
150
1,511
3,535
%
6.2
57.1
%
14.6
51.2
US$m
US$m
US$m
US$m
US$m
464,726
636,185
450,071
220,068
307,944
237,987
250,464
1,596,850
299,879
43,612
130,893
106,197
2,678
164,806
2,006
(482,412)
84
Outside Hong Kong and mainland China, HSBC
conducts business in 20 countries in the Asia-Pacific
region, primarily through branches and subsidiaries
of The Hongkong and Shanghai Banking
Corporation, with particularly strong coverage in
Australia, India, Indonesia, Malaysia, South Korea,
Singapore and Taiwan. HSBC’s presence in
Australia is led by HSBC Bank Australia Limited
and in Malaysia by HSBC Bank Malaysia Berhad
(‘HSBC Bank Malaysia’), which has the largest
foreign bank-owned branch network in the country.
Middle East
In the Middle East, the network of branches of
HSBC Bank Middle East Limited (‘HSBC Bank
Middle East’), together with HSBC’s subsidiaries
and associates, gives it the widest coverage in the
region. HSBC’s associate in Saudi Arabia, The
Saudi British Bank (40 per cent owned), is the
Kingdom’s fifth largest bank by total assets.
North America
HSBC’s North American businesses are located in
the US, Canada and Bermuda. Operations in the US
are primarily conducted through HSBC Bank USA,
N.A. (‘HSBC Bank USA’) which is concentrated in
New York State, and HSBC Finance, a national
consumer finance company based in the Chicago
metropolitan area. HSBC Markets (USA) Inc. is the
intermediate holding company of, inter alia, HSBC
Securities (USA) Inc., a registered broker and dealer
of securities and a registered futures commission
merchant. HSBC Bank Canada and The Bank of
Bermuda Limited (‘Bank of Bermuda’) operate in
their respective countries.
Latin America
HSBC’s operations in Latin America principally
comprise HSBC México, S.A. (‘HSBC Mexico’),
HSBC Bank Brasil S.A.-Banco Múltiplo (‘HSBC
Bank Brazil’), HSBC Bank Argentina S.A. (‘HSBC
Bank Argentina’) and HSBC Bank (Panama) S.A.
(‘HSBC Bank Panama’), which owns subsidiaries in
Costa Rica, Honduras, Colombia and El Salvador.
HSBC is also represented by subsidiaries in Chile,
the Bahamas, Peru, Paraguay and Uruguay. In
addition to banking services, HSBC operates
insurance businesses in Mexico, Argentina, Brazil,
Panama, Honduras and El Salvador. In Brazil, HSBC
offers consumer finance products through its
subsidiary, Losango Promoções e Vendas Ltda.
Geographical regions
Summary .......................................................
Europe ...........................................................
Hong Kong ....................................................
Rest of Asia-Pacific .......................................
Middle East ...................................................
North America ...............................................
Latin America ................................................
Page
85
87
98
106
117
125
136
Additional information on results in 2009 may be
found in the ‘Financial Summary’ on pages 23 to 60.
Summary
Europe
HSBC’s principal banking operations in Europe are
HSBC Bank plc (‘HSBC Bank’) in the UK, HSBC
France, HSBC Bank A.S. in Turkey, HSBC Bank
Malta p.l.c., HSBC Private Bank (Suisse) S.A.
(‘HSBC Private Bank (Suisse)’) and HSBC Trinkaus
& Burkhardt AG. Through these operations HSBC
provides a wide range of banking, treasury and
financial services to personal, commercial and
corporate customers across Europe.
Hong Kong
HSBC’s principal banking subsidiaries in Hong
Kong are The Hongkong and Shanghai Banking
Corporation Limited (‘The Hongkong and Shanghai
Banking Corporation’) and Hang Seng Bank Limited
(‘Hang Seng Bank’). The former 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 67.2 per cent by value of banknotes in
circulation in 2008.
Rest of Asia-Pacific
HSBC offers personal, commercial, global banking
and markets services in mainland China, mainly
through its local subsidiary, HSBC Bank (China)
Company Limited (‘HSBC Bank China’). HSBC
also participates indirectly in mainland China
through its four associates, Bank of Communications
(19.01 per cent owned), Ping An Insurance
(16.78 per cent), Industrial Bank (12.78 per cent)
and Yantai City Commercial Bank (20 per cent) and
has a further interest of 8 per cent in Bank of
Shanghai.
85
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Summary / Europe
In the analysis of profit by geographical regions
that follows, operating income and operating expenses
include intra-HSBC items of US$2,756 million
(2008: US$2,492 million; 2007: US$1,985 million).
Profit/(loss) before tax
Europe ......................................................
Hong Kong ..............................................
Rest of Asia-Pacific27 ..............................
Middle East27 ...........................................
North America .........................................
Latin America ..........................................
Total assets41
2009
US$m
4,009
5,029
4,200
455
(7,738)
1,124
%
56.7
71.0
59.3
6.4
(109.3)
15.9
2008
US$m
%
10,869
5,461
4,722
1,746
(15,528)
2,037
116.7
58.7
50.7
18.8
(166.8)
21.9
2007
US$m
8,595
7,339
4,702
1,307
91
2,178
%
35.5
30.3
19.4
5.4
0.4
9.0
7,079
100.0
9,307
100.0
24,212
100.0
Europe ...........................................................................................................
Hong Kong ...................................................................................................
Rest of Asia-Pacific27 ...................................................................................
Middle East27 ................................................................................................
North America ..............................................................................................
Latin America ...............................................................................................
Intra-HSBC items .........................................................................................
For footnotes, see page 149.
At 31 December
2009
US$m
1,268,600
399,243
222,139
48,107
475,014
115,967
(164,618)
%
53.7
16.9
9.4
2.0
20.1
4.9
(7.0)
2008
US$m
1,392,049
414,484
225,573
50,952
596,302
102,946
(254,841)
%
55.1
16.4
8.9
2.0
23.6
4.1
(10.1)
2,364,452 100.0
2,527,465 100.0
86
Europe
Profit/(loss) before tax by country within customer groups and global businesses
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Other
US$m
Total
US$m
2009
UK .....................................................................
France51 .............................................................
Germany ...........................................................
Malta .................................................................
Switzerland .......................................................
Turkey ...............................................................
Other .................................................................
2008
UK .....................................................................
France51 .............................................................
Germany ...........................................................
Malta .................................................................
Switzerland .......................................................
Turkey ...............................................................
Other .................................................................
2007
UK .....................................................................
France51 .............................................................
Germany ...........................................................
Malta .................................................................
Switzerland .......................................................
Turkey ...............................................................
Other .................................................................
364
54
–
33
–
43
(182)
312
1,546
139
–
59
–
3
(89)
1,658
1,221
173
–
45
–
144
(2)
1,581
1,026
102
21
58
–
97
(12)
1,292
2,361
176
31
67
–
91
(4)
2,722
2,064
192
36
67
–
75
82
2,516
3,045
894
255
9
5
119
218
4,545
(469)
273
184
16
–
130
61
195
1,214
692
195
45
–
118
263
2,527
252
3
32
–
448
2
117
854
250
10
32
–
553
–
153
998
317
25
45
–
475
(1)
54
915
(2,561)
(429)
(18)
–
(3)
–
17
(2,994)
2,997
2,242
(22)
–
–
–
79
5,296
976
(49)
19
–
–
–
110
1,056
Loans and advances to customers (net) by country
UK ....................................................................................................................
France51 ............................................................................................................
Germany ..........................................................................................................
Malta ................................................................................................................
Switzerland ......................................................................................................
Turkey ..............................................................................................................
Other ................................................................................................................
Customer accounts by country
UK ....................................................................................................................
France51 ............................................................................................................
Germany ..........................................................................................................
Malta ................................................................................................................
Switzerland ......................................................................................................
Turkey ..............................................................................................................
Other ................................................................................................................
For footnote, see page 149.
87
2009
US$m
329,182
71,567
4,131
4,649
12,072
5,758
12,122
439,481
2009
US$m
349,162
70,899
8,134
5,888
45,148
5,830
9,958
495,019
At 31 December
2008
US$m
313,065
70,896
5,756
4,343
12,708
6,125
13,298
426,191
At 31 December
2008
US$m
351,253
74,826
11,611
5,604
44,643
5,845
8,694
502,476
2,126
624
290
100
450
261
158
4,009
6,685
2,840
225
142
553
224
200
10,869
5,792
1,033
295
157
475
336
507
8,595
2007
US$m
326,927
81,473
6,411
4,157
13,789
7,974
11,544
452,275
2007
US$m
367,363
64,905
10,282
5,947
41,015
6,473
8,969
504,954
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe > 2009
Profit before tax
Europe
Net interest income ..........................................................................................
Net fee income .................................................................................................
Net trading income ..........................................................................................
Changes in fair value of long-term debt issued and related derivatives .........
Net income/(expense) from other financial instruments designated
at fair value .................................................................................................
Net income/(expense) from financial instruments designated at fair value ...
Gains less losses from financial investments ..................................................
Dividend income ..............................................................................................
Net earned insurance premiums ......................................................................
Gains on disposal of French regional banks ...................................................
Other operating income ...................................................................................
2009
US$m
12,268
6,267
5,459
(2,746)
1,321
(1,425)
50
29
4,223
–
2,262
2008
US$m
9,696
7,492
5,357
2,939
(1,826)
1,113
418
130
5,299
2,445
2,096
2007
US$m
7,746
8,431
6,943
1,059
167
1,226
1,326
171
4,010
–
1,193
Total operating income .................................................................................
29,133
34,046
31,046
Net insurance claims incurred and movement in liabilities
to policyholders ..........................................................................................
(5,589)
(3,367)
(3,479)
Net operating income before loan impairment charges and other
credit risk provisions ................................................................................
Loan impairment charges and other credit risk provisions .............................
Net operating income ....................................................................................
Total operating expenses .................................................................................
Operating profit .............................................................................................
Share of profit in associates and joint ventures ...............................................
Profit before tax .............................................................................................
Share of HSBC’s profit before tax ..................................................................
Cost efficiency ratio ........................................................................................
23,544
(5,568)
17,976
(13,988)
3,988
21
4,009
%
56.7
59.4
30,679
(3,754)
26,925
(16,072)
10,853
16
10,869
%
116.7
52.4
27,567
(2,542)
25,025
(16,525)
8,500
95
8,595
%
35.5
59.9
Year-end staff numbers (full-time equivalent) ................................................
76,703
82,093
82,166
Balance sheet data41
Loans and advances to customers (net) ...........................................................
Loans and advances to banks (net) ..................................................................
Trading assets, financial assets designated at fair value and
financial investments49 ...............................................................................
Total assets ......................................................................................................
Deposits by banks ............................................................................................
Customer accounts ...........................................................................................
For footnotes, see page 149.
All commentaries on Europe are on an underlying basis unless stated otherwise.
2009
US$m
439,481
65,521
450,727
1,268,600
89,893
495,019
At 31 December
2008
US$m
426,191
61,949
433,885
1,392,049
80,847
502,476
2007
US$m
452,275
104,527
445,258
1,256,220
87,491
504,954
2009 compared with 2008
Economic briefing
The UK economy suffered a sharp contraction
during the course of 2009, although evidence from
the final months of the year suggested that some
growth had resumed. Gross Domestic Product
(‘GDP’) fell by 5 per cent in 2009 – the sharpest
contraction in over 60 years – after a 0.5 per cent
increase in 2008. Weakness affected most sectors
of the economy, and the unemployment rate hit a
13-year high of 7.9 per cent in July 2009, although
some stabilisation of labour market conditions was
apparent towards the end of the year. Consumer
Price Index (‘CPI’) inflation reached a five-year
low of 1.1 per cent in September 2009 before
moving towards the Bank of England’s 2 per cent
target by the end of the year. Nominal house prices
88
appreciated modestly during the second half of 2009,
although indicators of housing market activity
remained at relatively weak levels. After reducing
interest rates to just 0.5 per cent in March 2009, the
Bank of England launched the Asset Purchase
Facility in an attempt to improve the circulation of
credit throughout the economy and support
expectations of future economic activity.
The eurozone economy also performed poorly
during 2009, with GDP falling by 4 per cent
following a 0.5 per cent expansion in 2008. Much of
this weakness was concentrated in the early months
of 2009 and growth resumed in the third quarter,
helped by a variety of fiscal stimulus programmes
and a rebuilding of inventory levels. Consumer
spending proved relatively resilient in early 2009,
boosted by a number of purchase incentive schemes,
and some weakness was observed as these
programmes expired. Unemployment rose to an
11-year high of 10 per cent in December 2009, while
CPI temporarily turned negative during the third
quarter of the year. The European Central Bank cut
interest rates by 150 basis points to finish the year at
1 per cent.
Reconciliation of reported and underlying profit before tax
2009 compared with 2008
2008
as
reported
US$m
2008
adjust-
ments10
US$m
Currency
translation11
US$m
2008
at 2009
exchange
rates12
US$m
2009
adjust-
ments10
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Europe
Net interest income ..........
Net fee income .................
Changes in fair value14 ....
Gains on disposal of
French regional banks .
Other income15 .................
9,696
7,492
3,118
2,445
7,928
Net operating income16 ..
30,679
(65)
(58)
(3,118)
(2,445)
(609)
(6,295)
(1,049)
(917)
–
–
(1,206)
8,582
6,517
–
–
6,113
–
–
(2,841)
–
280
3,686
(250)
–
–
1,457
12,268
6,267
(2,841)
–
7,850
27
(16)
(191)
(100)
(1)
(3,172)
21,212
(2,561)
4,893
23,544
(23)
Loan impairment charges
and other credit risk
provisions ....................
(3,754)
6
395
(3,353)
–
(2,215)
(5,568)
Net operating income ....
26,925
(6,289)
(2,777)
17,859
(2,561)
2,678
17,976
Operating expenses ..........
(16,072)
68
1,723
(14,281)
–
293
(13,988)
Operating profit .............
10,853
(6,221)
(1,054)
3,578
(2,561)
2,971
3,988
Income from associates ...
16
–
–
16
–
5
21
Profit before tax .............
10,869
(6,221)
(1,054)
3,594
(2,561)
2,976
4,009
(48)
(33)
13
(63)
31
(63)
43
(4)
24
23
(66)
15
2
83
31
83
For footnotes, see page 149.
Review of business performance
HSBC’s European operations reported a pre-tax
profit of US$4.0 billion, compared with
US$10.9 billion in 2008. This decline was largely
caused by movement in the fair value attributable
to credit spread on the Group’s own debt. A
US$2.8 billion expense in 2009 following
stabilisation in financial markets and a narrowing of
credit spreads largely reversed the US$3.1 billion
income recognised in 2008, giving a US$5.9 billion
year on year movement. Also included within these
results was a gain on the sale of the residual stake in
the UK card merchant acquiring business to Global
Payments Inc. of US$280 million in June 2009. This
followed a US$425 million gain realised in 2008 on
the sale of the first tranche. Excluding these gains on
sale, the profit on disposal of the French regional
89
banks in July 2008 and the reversal of movements in
the fair value of own debt, underlying pre-tax profits
grew by US$3.0 billion or 83 per cent. This was
driven by robust performances in the European
Global Banking and Markets businesses, in
particular from the non-recurrence of significant
credit-related write-downs taken in 2008 and
outstanding results in Rates and Balance Sheet
Management. Deterioration in the economic
environment and higher unemployment levels led to
a rise in loan impairment charges in the Personal
Financial Services and Commercial Banking
businesses. HSBC Bank continued to provide
lending services to its customers while maintaining
effective credit control and strengthening collection
practices and systems.
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe > 2009
Net interest income increased by 43 per cent,
with Balance Sheet Management revenues in Global
Banking and Markets rising robustly. This resulted
from the early positioning of the balance sheet in
anticipation of decisions by central banks to
maintain a low base rate environment. Net interest
income also benefited from a reduction in the cost
of funding trading activities as interest rates fell.
Conversely, the Personal Financial Services and
Commercial Banking businesses and payments and
cash management were adversely affected by
continued margin compression following interest
rate reductions in late 2008 and early 2009.
Excluding one-off gains and movements in
fair value of own debt, underlying profit
grew by US$3.0 billion or 83 per cent.
Mortgage balances increased as HSBC gained
market share in the UK through the success of a
new Rate Matcher mortgage promotion and other
campaigns launched in line with its secured lending
growth strategy. In 2009, the UK bank more than
met its commitment to make £15 billion
(US$24.7 billion) of new mortgage lending available
to borrowers. In Commercial Banking, net
lending fell compared with 2008 as a result of
muted customer demand. Utilisation of committed
overdraft facilities provided by HSBC in the UK to
commercial customers was only 40 per cent at the
end of 2009, illustrating the potential availability of
credit when customer demand resumes. Across most
businesses, asset balances declined reflecting
reduced customer demand for credit, increased debt
issuance as the bond markets reopened in 2009 and
HSBC’s diminished appetite for unsecured lending
in Europe. Asset spreads widened, most notably in
the UK and Turkey, as funding costs fell in the low
interest rate environment and market pricing of
corporate lending increased.
Throughout 2009, HSBC worked to retain and
build on the personal and commercial banking
deposit bases gained in the last quarter of 2008 in the
face of fierce competition and the narrowing of
spreads across the region following interest rate cuts.
Net fee income fell by 4 per cent. The overall
reduction in fees was a consequence of the part-
disposal of the UK card merchant acquiring business
to a joint venture in 2008 and lower insurance
income following the closure of the consumer
finance branch network in the UK and reduced sales
of discontinued products. In Private Banking, lower
equity brokerage commissions and reduced
performance and management fees reflected subdued
investor sentiment for risk and structured products;
this, together with stock market declines, reduced the
90
average value of funds under management during
the year.
HSBC generated higher underwriting fees than
in 2008 from increased government and corporate
debt issuances, and by taking market share in equity
capital markets issues as corporates and financial
institutions restructured their balance sheets by
raising share capital. As part of its wealth
management strategy, HSBC continued to grow the
Premier customer base and successfully launched
the World Selection fund in the UK which raised
US$1.5 billion. In France, the Premier customer base
grew by over 10 per cent as HSBC brand awareness
increased.
Trading income increased by 23 per cent to
US$5.5 billion due to strong revenues across core
businesses. Rates reported a significant increase in
income driven by a growth in market share, higher
client trading volumes and wider bid-offer spreads.
Similarly, revenue in the Credit trading business also
rose as credit prices improved and client activity
increased with the return of liquidity to the market.
Foreign exchange revenue fell, however, reflecting
a combination of reduced customer volumes and
relatively low market volatility when compared with
the exceptional experience of 2008.
In 2009, the UK bank more than met its
commitment to make £15 billion
(US$24.7 billion) of new mortgage lending
available to borrowers.
Trading income also benefited from
significantly lower write-downs on legacy positions
in Credit trading, leveraged and acquisition
financing and monoline exposures, and from the
non-recurrence of a reported US$854 million loss in
2008 following the fraud at Madoff Securities. These
benefits were partly offset by losses on structured
liabilities as credit spreads narrowed (compared with
gains in 2008) and a reduction in net interest income
on trading activities. This was due to the decline in
interest rates, which also contributed to the reduction
in the cost of funding trading activities as reported
in ‘Net interest income’. The tightening of credit
spreads also led to a reduction in the carrying value
of credit default swap transactions held as hedges in
parts of the Global Banking portfolio. In 2008, gains
were reported on these credit default swaps
following widening credit spreads.
A net expense of US$1.4 billion was incurred
on financial instruments designated at fair value,
compared with income in 2008. Gains on the fair
value of assets held to meet liabilities under
insurance and investment contracts were recognised
as equity markets recovered from declines sustained
in 2008. To the extent that these gains were
attributed to policyholders holding either insurance
contracts or investment contracts with DPF, there
was a corresponding increase in net insurance claims
incurred and movement in liabilities to
policyholders.
Gains less losses from financial investments
were US$192 million lower than in 2008 due to the
non-recurrence of certain disposals in that year,
including MasterCard shares, private equity
investments and the remaining stake in the
Hermitage Fund.
Net earned insurance premiums decreased by
12 per cent. In the UK demand for the insurance-
linked Guaranteed Income Bond fell as HSBC
offered more favourable rates on an alternative
non-insurance deposit product, giving rise to a
US$1.1 billion decrease in insurance premium
income, with a corresponding decrease in ‘Net
insurance claims incurred and movement in
liabilities to policyholders’. Excluding the effect
of a significant re-insurance transaction in 2008
which passed insurance premiums to a third-party
reinsurer, net premiums in France increased despite
a significant reduction in the distribution network
following the disposal of the regional banks in July
2008.
Other operating income increased by 45 per
cent, mainly due to a US$576 million gain on the
sale and leaseback of 8 Canada Square in London
which was effected through the disposal of HSBC’s
entire shareholding in the company which was the
legal owner of the building and long leasehold
interest in 8 Canada Square. In 2008, HSBC reported
a gain of US$416 million representing the equity
deposit on a previously negotiated sale of the
building which ultimately did not complete. In
addition, a change in mortality assumptions in
France resulted in increased PVIF of long-term
insurance business. The growth in revenue also
reflected the non-recurrence of costs associated with
the support of money market funds in the global
asset management business in 2008. Offsetting this
was the non-recurrence of a favourable embedded
value adjustment following HSBC’s introduction of
enhanced benefits to existing pension products in
the UK in 2008, and lower gains on the sale and
leaseback of branches.
Net insurance claims incurred and movement
in liabilities to policyholders increased by
US$2.5 billion. The majority of the movement was
due to the change in liabilities to policyholders
reported above in ‘Financial instruments designated
91
at fair value’, and the large one-off reinsurance
transaction in France in 2008. In addition, an
increase of US$310 million in claims reserving was
required to reflect a higher incidence and severity
of insurance claims in the UK motor underwriting
business and a higher incidence of credit protection
claims through the reinsurance business in Ireland.
Risk mitigation measures implemented in 2009
included the decision to cease originations of UK
motor insurance business. This was partly offset by
the decrease in liabilities following reduced sales of
the personal customer bond product offering noted
above.
Utilisation of committed overdraft facilities
to commercial customers in the UK only
40 per cent.
Loan impairment charges and other credit risk
provisions rose by 66 per cent to US$5.6 billion as
the impact of weaker economic conditions across
the region fed through to higher delinquency and
default. In Global Banking and Markets, loan
impairment charges and credit risk provisions
increased, with the charges concentrated among a
small number of clients in the financial and property
sectors. The emergence in the year of cash flow
impairment on certain asset-backed debt securities
held within the available-for-sale portfolios added
US$1.1 billion to the charge. Impairment booked on
these exposures reflects mark-to-market losses
which HSBC judges to be significantly in excess of
the likely ultimate cash losses.
In Commercial Banking, loan impairment
charges rose by US$471 million, again reflecting
the economic downturn. The commercial property
portfolio in the UK declined during 2009, reflecting
HSBC’s efforts to reduce risk in this sector. In the
personal sector, deterioration was most evident
in the unsecured portfolios as unemployment rose.
As a result of past management action, unsecured
lending remained a small proportion of HSBC’s
personal lending portfolio, with the bulk of
the portfolio secured in the form of residential
mortgages. Despite some increase in losses in
the residential sector, impairment charges as a
percentage of total lending in this portfolio remained
very low at 0.14 per cent.
Operating expenses were held broadly in line
with 2008. Excluding an accounting gain of
US$499 million following a change in the basis
of delivering death-in-service, ill health and early
retirement benefits for some UK employees,
operating expenses increased slightly despite
efficiency benefits as higher performance-related
awards were made to reflect Global Banking and
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe > 2009 / 2008
Markets’ exceptional revenue and profit growth in
selective businesses.
In Personal Financial Services and Commercial
Banking businesses, operational cost savings
reflected HSBC’s leverage of its global technology
platforms and processes to reduce costs and improve
customer experience, complemented by tight control
over discretionary expenditure and a reduction in
staff numbers. Payroll savings and lower Financial
Services Compensation Scheme costs were partly
offset by an increase in rental costs following the
sale and leaseback of properties and higher regular
defined benefit pension charges. In Europe, full time
equivalent staff numbers fell by some 6,000 during
the year.
2008 compared with 2007
Economic briefing
In the UK, growth in GDP decelerated markedly in
2008 to 0.7 per cent from 3 per cent in 2007, with a
technical recession of two successive quarterly
contractions in GDP confirmed during the second
half of the year. Weakness proved widespread
across most of the economy, prompting a sharp
deterioration in labour market conditions as
unemployment hit a nine-year high of 6.1 per cent
in November 2008. CPI inflation reached a decade-
long high of 5.2 per cent in September 2008 before
falling back to 3.1 per cent by the year-end, still
some way above the Bank of England’s 2 per cent
target. House prices continued to fall throughout the
year and housing activity decreased sharply. The
Bank of England reduced interest rates by 350 basis
points during 2008, to finish the year at 2 per cent, as
policymakers sought to mitigate the worst effects
of the economic slowdown.
The expansion of the eurozone economy
slowed sharply in 2008, with GDP growth of 0.7 per
cent following a 2.6 per cent expansion in 2007. As
in the UK, conditions deteriorated markedly as the
year progressed and three successive quarterly
declines in GDP were recorded during 2008,
confirming that the economy had entered a period
of recession. Consumer spending growth proved
subdued following the sharp rise in oil prices during
the first of half of 2008 and a progressive increase
in the unemployment rate towards the year-end.
Inflation remained a concern for much of 2008,
hitting a peak of 4 per cent in July before falling
rapidly to 1.6 per cent in December. The European
Central Bank, having initially raised interest rates by
25 basis points in July, cut them by 175 basis points
to finish the year at 2.5 per cent.
Reconciliation of reported and underlying profit before tax
2008 compared with 2007
2007
as
reported
US$m
2007
adjustments
& dilution
gains10
US$m
2007
at 2008
exchange
rates17
US$m
Currency
translation11
US$m
Europe
Net interest income ..........
Net fee income .................
Changes in fair value14 ....
Gains on disposal of
French regional banks ..
Other income15 .................
7,746
8,431
1,294
–
10,096
(390)
(134)
(1,294)
–
(121)
Net operating income16 ....
27,567
(1,939)
(224)
(244)
–
–
(321)
(789)
7,132
8,053
–
–
9,654
24,839
2008
adjust-
ments10
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
219
15
3,118
2,445
562
6,359
2,345
(576)
–
–
(2,288)
9,696
7,492
3,118
2,445
7,928
(519)
30,679
25
(11)
141
(21)
11
33
(7)
(24)
(2)
Loan impairment charges
and other credit risk
provisions ....................
(2,542)
30
152
(2,360)
(6)
(1,388)
(3,754)
(48)
(59)
Net operating income ......
25,025
(1,909)
(637)
22,479
6,353
(1,907)
26,925
Operating expenses ..........
(16,525)
416
531
(15,578)
(88)
(406)
(16,072)
Operating profit ...............
8,500
(1,493)
(106)
6,901
6,265
(2,313)
10,853
Income from associates ...
95
(12)
Profit before tax ...............
8,595
(1,505)
14
(92)
97
–
(81)
16
6,998
6,265
(2,394)
10,869
8
3
28
(83)
26
(8)
(3)
(34)
(84)
(34)
For footnotes, see page 149.
92
Review of business performance
HSBC’s European operations reported a pre-tax
profit of US$10.9 billion, compared with
US$8.6 billion in 2007, an increase of 26 per cent.
These results included gains of US$2.4 billion
on the disposal of seven regional banks in France in
July 2008, and of US$425 million on the sale of the
card acquiring business in the UK to a joint venture
with Global Payments, Inc. in June 2008. Excluding
these disposals and, in 2007, the acquisition of
HSBC Assurances and the disposal of Hamilton
Insurance Company Limited and Hamilton Life
Assurance Company Limited and substantial fair
value gains on own debt, underlying pre-tax profits
fell by 34 per cent. This primarily reflected a sharp
decline in Global Banking and Markets’ revenues,
which was mainly attributable to the deterioration in
credit markets, the continuing illiquidity in asset-
backed securities markets which led to further
write-downs, and a US$854 million charge within
the equities business following the alleged fraud at
Madoff Securities. Personal Financial Services and
Private Banking delivered underlying growth.
Net interest income increased by 33 per cent.
There was significant growth in Balance Sheet
Management revenues, which reflected favourable
interest rate risk positioning in expectation of
interest rate cuts by central banks. Net interest
income also benefited from necessarily selective
incremental lending as credit availability generally
contracted. In Global Banking, net interest income
was boosted by improved spreads.
Falling confidence in the UK banking sector
necessitated government intervention in a number of
competitor banks. HSBC experienced a strong
increase in customer numbers, with corresponding
growth in liability balances as the market turmoil
intensified. The volume benefit was partially offset
by narrowing deposit spreads, as base rates were cut
in the UK, and increased funding costs, principally
for trading activities, in France. Higher net interest
income from the expansion of credit card lending
and commercial loan portfolio growth in the small
and mid-market customer segments in Turkey was
partially offset by narrower spreads following credit
card interest rate cap reductions by the central bank.
Net fee income fell by 7 per cent, with lower
fees from mergers and acquisitions and equity
capital markets due to origination and execution
difficulties, coupled with a rise in brokerage
expenses in line with increased trading activity in
France. Lower performance and management fees
in the UK and France, as the value of funds under
management reduced, reflected the decline in global
93
equity markets. Increased customer acquisition
partly offset this, with higher fees derived from
growth in packaged accounts and transaction
volumes in France and credit card fees in Turkey.
Trading income was 20 per cent lower than in
2007, falling significantly in Global Banking and
Markets due to further write-downs on legacy
exposures in credit, structured credit derivatives and
leveraged and acquisition finance caused by the
ongoing turmoil in the credit markets. In addition,
a US$854 million charge was taken in equities in
respect of the alleged fraud at Madoff Securities.
US$11.4 billion and US$2.4 billion of held-for-
trading financial assets were reclassified under
revised IFRS rules as loans and receivables and
available for sale, respectively, preventing any
further mark-to-market trading losses on these
assets. If these reclassifications had not been
made, the profit before tax would have been
US$2.6 billion lower.
Excluding the write-downs on legacy exposures
and the charge relating to Madoff Securities, trading
income grew by 11 per cent, driven by a significant
increase in foreign exchange revenues against the
backdrop of greater market volatility, and robust
revenues in the Rates business, which was positioned
to take advantage of falling interest rates. The
widening of credit spreads, particularly in the second
half of 2008, contributed to fair value gains on
structured liabilities and on credit protection bought
in the form of credit default swaps.
A rise in the Net expense from financial
instruments designated at fair value was recorded as
a result of a reduction in the value of assets held to
meet liabilities under insurance and investment
contracts. The reduction in fair value of assets held
to meet liabilities under unit-linked insurance
contracts is offset by a corresponding reduction in
‘Net insurance claims and liabilities to
policyholders’.
Gains less losses from financial investments of
US$418 million were US$915 million lower than in
2007 as there were fewer disposal opportunities in
2008 and the significant realisations from equity
investments in the UK and France in 2007 did not
recur. Gains mainly reflected the sale of MasterCard
shares in 2008.
Net earned insurance premiums increased by
22 per cent, largely due to growth in the Guaranteed
Income Bond launched in June 2007 and the
introduction of enhanced death benefits to certain
pension products in the UK. In France, HSBC
Assurances performed well in a declining market,
as the launch of new guaranteed rate products
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe > 2008 / Profit/(loss) before tax by customer group
contributed to 3 per cent growth in gross earned
premiums. However, net earned insurance premiums
fell following a significant reinsurance transaction
undertaken in the first half of 2008.
Other operating income increased by 33 per
cent. This was primarily due to recognition of the
gain in respect of the purchase of the subsidiary of
Metrovacesa which owned the property and long
leasehold land comprising 8 Canada Square,
London. See Note 23 on the Financial Statements for
further details. The growth in revenue also reflected
the non-recurrence of a decrease in the value of
PVIF business in 2007 following regulatory changes
to the rules governing the calculation of insurance
liabilities. In addition, there was a favourable
embedded value adjustment following HSBC’s
introduction of enhanced benefits to existing
commercial pension products in the first half of
2008. These benefits were partially offset by costs
associated with the support of money market funds
in the global asset management business.
Net insurance claims incurred and movement in
liabilities to policyholders decreased by 5 per cent as
a reduction in insurance liabilities reflected the fall
in value of market-linked funds. This was partially
offset by an increase in liabilities following
increased sales of the Guaranteed Income Bond and
the implementation of FSA rule changes in 2007
which lowered the liability valuation on life policies.
Loan impairment charges and credit risk
provisions rose by 59 per cent to US$3.8 billion; in
the UK, primarily in Global Banking and Markets.
The deteriorating credit environment resulted in a
rise in loan impairment charges, largely reflecting an
exposure to a single European property company,
and additional credit risk provisions on debt
securities held within the Group’s available-for-sale
portfolio, mainly in Solitaire Funding Limited
(‘Solitaire’), a special purpose entity managed by
HSBC. A modest improvement in the UK personal
finance sector reflected the non-recurrence of a
change in the methodology in the consumer finance
business which resulted in a higher charge in 2007.
Excluding this factor, delinquency rates in cards
were marginally higher and there was a rise in
impairments in the consumer finance business driven
by worsening economic conditions and credit quality
deterioration, partly offset by action taken to
mitigate risk through the continued application of
strict lending criteria and the sale of non-core credit
card portfolios.
Credit conditions weakened in the commercial
business and specific loan impairment charges
increased in the UK and France due to the
deteriorating credit environment in the second half
of 2008. In Turkey, credit card and personal loan
delinquency rates were significantly higher, resulting
in the implementation of tighter underwriting
criteria, reduced credit limits and revised account
management policies throughout 2008.
Operating costs increased by 3 per cent to
US$16.1 billion. Costs in the UK were in line with
2007, which included ex-gratia payments expensed
in respect of overdraft fees applied in previous years
and a provision for reimbursement of certain charges
on historic will trusts and other related services.
Excluding these items, costs rose as a result of an
increase in the Financial Services Compensation
Scheme levy, restructuring costs and increased rental
charges following the sale and leaseback of branch
properties, partially offset by lower performance-
related pay and a reduction in defined benefit
pension scheme costs due to a change in actuarial
assumptions.
Operating costs in France decreased slightly
with lower performance-related pay and a reduction
in pension and retirement healthcare costs following
the transfer of certain obligations to a third party
offsetting the higher costs of a voluntary retirement
programme.
There was investment in premises and new staff
to support business expansion in Turkey, Russia and
central and eastern Europe. In 2008, 112 new
branches opened and staff numbers increased by
30 per cent in these markets.
Share of profit in associates and joint ventures
declined by 84 per cent to US$16 million with 2007
benefiting from an adjustment to the embedded
value of HSBC Assurances. The absence of this gain
was partially offset by increased joint venture profits
following the sale of the card acquiring business in
the UK.
94
Analysis by customer group and global business
Profit/(loss) before tax
2009
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Personal
Financial
Services
US$m
5,413
1,949
Europe
Net interest income/(expense) ....
Net fee income ............................
Trading income excluding net
interest income .......................
Net interest income/(expense)
on trading activities ................
Net trading income42 ...................
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
34
(1)
33
–
1,012
20
2
3,975
182
1,012
133
375
2,739
1,679
3
17
20
–
4,367
1,670
2,267
1,869
4,136
–
375
25
26
(2)
670
133
2
1
253
373
5,200
(365)
949
883
175
23
198
–
–
–
5
3
–
28
Other
US$m
(525)
86
382
15
397
(2,746)
(199)
(2,945)
(2)
(3)
(3)
914
Inter-
segment
elimination50
US$m
(675)
–
–
675
675
–
–
–
–
–
–
95
95
–
Total
US$m
12,268
6,267
2,861
2,598
5,459
(2,746)
1,321
(1,425)
50
29
4,223
2,262
29,133
(5,589)
Total operating income/
(expense) ................................
12,586
Net insurance claims43 ................
(5,221)
11,267
2,066
(2,081)
–
–
(3)
Net operating income/
(expense)16 .............................
Loan impairment charges and
7,365
4,835
11,267
2,066
(2,084)
95
23,544
other credit risk provisions .....
(1,992)
(1,267)
(2,277)
(29)
(3)
–
(5,568)
Net operating income/
(expense) ................................
5,373
Total operating expenses ............
(5,062)
Operating profit/(loss) ..............
Share of profit in associates
and joint ventures ...................
Profit/(loss) before tax ..............
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ....................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets ..................................
Customer accounts ......................
17,976
(13,988)
3,988
21
4,009
%
56.7
59.4
US$m
439,481
1,268,600
495,019
3,568
(2,294)
1,274
18
1,292
%
18.3
47.4
8,990
(4,447)
4,543
2
4,545
%
64.2
39.5
2,037
(1,183)
(2,087)
(907)
854
(2,994)
–
854
%
12.1
57.3
–
(2,994)
%
(42.3)
(43.5)
95
(95)
–
–
–
311
1
312
%
4.4
68.7
US$m
US$m
US$m
US$m
US$m
147,760
208,669
165,161
89,084
111,874
102,249
176,123
981,831
169,390
25,541
76,871
58,213
973
84,010
6
(194,655)
95
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Europe > Profit/(loss) before tax by customer group
Inter-
segment
elimination50
US$m
Other
US$m
(459)
(4,278)
72
(138)
17
(121)
2,939
633
3,572
(27)
(9)
(19)
2,445
832
6,286
–
2008
Private
Banking
US$m
1,046
1,020
198
14
212
–
–
–
62
5
–
–
16
3,488
1,763
1,513
(655)
858
–
(30)
25
–
–
398
Profit/(loss) before tax (continued)
Europe
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Net interest income/(expense) ....
Net fee income ............................
6,464
2,612
3,435
2,025
47
–
47
–
71
12
83
–
(1,634)
(214)
(611)
(1,634)
(214)
(611)
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Gains on disposal of French
regional banks ........................
Other operating income ..............
281
35
4,927
–
230
132
74
391
–
620
6,546
(143)
6,403
(867)
5,536
(2,830)
2,706
Total operating income ...............
12,962
Net insurance claims43 ................
Net operating income16 ...............
Loan impairment charges and
other credit risk provisions .....
Net operating income .................
Total operating expenses ............
Operating profit ..........................
Share of profit/(loss) in
(3,224)
9,738
(1,971)
7,767
(6,107)
1,660
associates and joint ventures ..
(2)
16
Profit before tax ..........................
1,658
2,722
%
17.8
62.7
%
29.2
44.2
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ....................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets ..................................
Customer accounts ......................
5,891
2,361
–
–
5,891
2,361
6,286
(875)
5,016
(4,823)
193
2
195
%
2.1
81.9
(38)
2,323
(1,325)
998
–
998
%
10.7
56.1
(3)
6,283
(987)
5,296
–
5,296
%
56.9
15.7
–
–
4,278
4,278
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
US$m
9,696
7,492
1,691
3,666
5,357
2,939
(1,826)
1,113
418
130
5,299
2,445
2,096
34,046
(3,367)
30,679
(3,754)
26,925
(16,072)
10,853
16
10,869
%
116.7
52.4
US$m
US$m
US$m
US$m
US$m
126,909
171,962
145,411
87,245
107,495
91,188
185,818
1,180,759
199,687
25,722
84,485
66,007
497
64,423
183
(217,075)
US$m
426,191
1,392,049
502,476
96
Europe
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Inter-
segment
elimination50
US$m
Other
US$m
86
(4,517)
2007
Private
Banking
US$m
793
1,032
161
9
170
–
–
–
115
7
–
8
2,125
–
(171)
89
1
90
1,059
195
1,254
25
4
(22)
301
1,567
–
7,647
2,125
1,567
(4)
2,121
(1,208)
913
2
915
%
3.8
56.8
(5)
1,562
(579)
983
73
1,056
%
4.4
36.9
–
–
4,517
4,517
–
–
–
–
–
–
12
12
–
12
–
12
(12)
–
–
–
Total
US$m
7,746
8,431
3,003
3,940
6,943
1,059
167
1,226
1,326
171
4,010
1,193
31,046
(3,479)
27,567
(2,542)
25,025
(16,525)
8,500
95
8,595
%
35.5
59.9
Net interest income .....................
Net fee income/(expense) ...........
6,604
3,060
3,419
2,194
Trading income excluding net
interest income .......................
Net interest income/(expense)
on trading activities ................
Net trading income42 ...................
Changes in fair value of long-
term debt issued and
related derivatives ..................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Other operating income/
(expense) ................................
60
(7)
53
–
126
126
50
1
3,511
54
Total operating income ...............
13,459
Net insurance claims43 ................
Net operating income16 ...............
(3,214)
10,245
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income .................
Total operating expenses ............
Operating profit ..........................
Share of profit in associates
(2,044)
8,201
(6,635)
1,566
36
30
66
–
31
31
36
4
521
(35)
6,236
(265)
5,971
(515)
5,456
(2,941)
2,515
1,361
2,316
2,657
(610)
2,047
–
(185)
(185)
1,100
155
–
853
7,647
–
26
7,673
(5,150)
2,523
and joint ventures ...................
15
1
4
Profit before tax ..........................
1,581
2,516
2,527
%
6.5
64.8
%
10.4
49.3
%
10.4
67.3
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ....................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets ..................................
Customer accounts ......................
For footnotes, see page 149.
US$m
US$m
US$m
US$m
US$m
151,687
240,361
178,757
106,846
168,846
99,704
163,066
912,299
163,713
30,195
83,740
62,055
481
96,346
725
(245,372)
US$m
452,275
1,256,220
504,954
97
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Hong Kong > 2009
Hong Kong
Profit/(loss) before tax by customer group and global business
Personal Financial Services .............................................................................
Commercial Banking .......................................................................................
Global Banking and Markets ...........................................................................
Private Banking ...............................................................................................
Other ................................................................................................................
Profit before tax
Net interest income ..........................................................................................
Net fee income .................................................................................................
Net trading income ..........................................................................................
Changes in fair value of long-term debt issued and related derivatives .........
Net income/(expense) from other financial instruments designated at fair
value ............................................................................................................
Net income/(expense) from financial instruments designated at fair value ...
Gains less losses from financial investments ..................................................
Dividend income ..............................................................................................
Net earned insurance premiums ......................................................................
Other operating income ...................................................................................
2009
US$m
2,728
956
1,507
197
(359)
5,029
2009
US$m
4,195
2,669
1,225
(3)
788
785
9
28
3,674
1,274
Total operating income .................................................................................
13,859
2008
US$m
3,428
1,315
1,436
237
(955)
5,461
2008
US$m
5,698
2,580
1,193
3
(1,194)
(1,191)
(309)
41
3,247
817
12,076
2007
US$m
4,212
1,619
1,578
305
(375)
7,339
2007
US$m
5,483
3,362
1,242
2
674
676
94
31
2,797
845
14,530
Net insurance claims incurred and movement in liabilities
to policyholders ...........................................................................................
(4,392)
(1,922)
(3,208)
Net operating income before loan impairment charges and other
credit risk provisions .................................................................................
Loan impairment charges and other credit risk provisions .............................
Net operating income ....................................................................................
Total operating expenses .................................................................................
Operating profit .............................................................................................
Share of profit in associates and joint ventures ...............................................
Profit before tax .............................................................................................
Share of HSBC’s profit before tax ..................................................................
Cost efficiency ratio ........................................................................................
9,467
(500)
8,967
(3,946)
5,021
8
5,029
%
71.0
41.7
10,154
(765)
9,389
(3,943)
5,446
15
5,461
%
58.7
38.8
11,322
(231)
11,091
(3,780)
7,311
28
7,339
%
30.3
33.4
Year-end staff numbers (full-time equivalent) ................................................
27,614
29,330
27,655
Balance sheet data41
Loans and advances to customers (net) ...........................................................
Loans and advances to banks (net) ..................................................................
Trading assets, financial assets designated at fair value, and
financial investments ...................................................................................
Total assets ......................................................................................................
Deposits by banks ............................................................................................
Customer accounts ...........................................................................................
2009
US$m
99,381
36,197
154,418
399,243
6,023
275,441
At 31 December
2008
US$m
100,220
29,646
122,602
414,484
11,769
250,517
2007
US$m
89,638
63,737
102,180
359,386
6,420
234,488
For footnote, see page 149.
All commentaries on Hong Kong are on an underlying basis unless stated otherwise.
98
2009 compared with 2008
Economic briefing
The performance of the Hong Kong economy
proved variable during the course of 2009, with a
robust recovery developing after a sharp contraction
was recorded during the first quarter of the year.
GDP in 2009 fell by 2.7 per cent after growth of
2.1 per cent in 2008. Unemployment rose during the
first half of 2009, before falling slightly to end the
year at 4.9 per cent, a figure still well below the
average of the past 10 years. The CPI profile proved
volatile during the course of the year, turning
negative between June and August before rising to
1.3 per cent by December 2009, although these
movements largely reflected the trends of food and
energy prices. The Hong Kong Monetary Authority
held the base rates steady at 0.5 per cent throughout
the course of the year. Asset price performance
proved unusually volatile as the Hang Seng Index
recovered strongly from a weak start to 2009 to
record a 52 per cent increase during the year.
Reconciliation of reported and underlying profit before tax
2009 compared with 2008
2008
as
reported
US$m
2008
adjust-
ments10
US$m
Currency
translation11
US$m
2008
at 2009
exchange
rates12
US$m
2009
adjust-
ments10
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Hong Kong
Net interest income ..........
Net fee income .................
Changes in fair value14 ....
Other income15 .................
5,698
2,580
5
1,871
Net operating income16 ..
10,154
Loan impairment charges
and other credit risk
provisions ....................
(765)
Net operating income ....
9,389
Operating expenses ..........
(3,943)
Operating profit .............
5,446
Income from associates ...
15
Profit before tax .............
5,461
For footnotes, see page 149.
–
–
(5)
–
(5)
–
(5)
–
(5)
–
(5)
21
10
–
7
38
(2)
36
5,719
2,590
–
1,878
10,187
(767)
9,420
(16)
(3,959)
20
–
20
5,461
15
5,476
–
–
(1)
–
(1)
–
(1)
–
(1)
–
(1)
(1,524)
79
–
726
4,195
2,669
(1)
2,604
(26)
3
(120)
39
(719)
9,467
(7)
267
(500)
(452)
8,967
13
(3,946)
(439)
5,021
(7)
8
(446)
5,029
35
(4)
–
(8)
(47)
(8)
(27)
3
39
(7)
35
(5)
–
(8)
(47)
(8)
Review of business performance
HSBC’s operations in Hong Kong reported
pre-tax profits of US$5.0 billion compared with
US$5.5 billion in 2008, an 8 per cent decline on
both a reported and an underlying basis.
The decrease in profits came from lower
revenue, which resulted from compressed deposit
spreads in a near-zero interest rate environment. This
loss of revenue was partly offset by significantly
lower loan impairment charges and other credit risk
provisions during 2009, and a recovery in trade
activity triggered by an improvement in regional
economic conditions in the second half of the year.
Despite continuing economic challenges,
performance remained robust, and was underpinned
by HSBC’s market-leading share in deposits,
residential mortgages, cards and insurance. In
particular, HSBC consolidated its position as Hong
Kong’s leading bancassurer, growing the value of
new life insurance business by 38 per cent. In
residential mortgages, business growth was
combined with conservative loan-to-value ratios
on new business.
Net interest income declined by 27 per cent to
US$4.2 billion, driven by significant deposit spread
compression as HIBOR and LIBOR remained low
throughout 2009. Selective repricing of customer
loans helped to mitigate the impact of lower rates
on lending spreads and the continued increase in
customer account balances has positioned HSBC to
benefit from economic recovery and a resulting
widening of deposit spreads.
Average customer lending balances remained
broadly in line with 2008, as lower Commercial
Banking balances, which reflected the reduction in
exports in the first half of 2009, were broadly offset
by higher lending in Personal Financial Services and
Global Banking and Markets. As the regional
economy rebounded, trade volumes and Commercial
99
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Hong Kong > 2009 / 2008
Banking lending activity increased in the second half
of the year. Throughout this challenging period for
trade, HSBC continued to support local business
through its HK$20 billion (US$2.6 billion) global
loan fund for smaller businesses. These facilities
were fully utilised by over 8,600 companies at
31 December 2009.
As residential property prices increased,
personal lending volumes rose, and HSBC
consolidated its mortgage market share by
originating significant volumes of new mortgages.
HSBC led this market with a 38 per cent share of
new loan drawdowns with an average loan-to-value
ratio of 58 per cent on new business. Asset spreads
improved as a result of selective risk-based
repricing, notably in cards, while funding costs
fell in the low interest rate environment.
Pre-tax profit declined by 8 per cent to
US$5.0 billion as deposit spreads
compressed in the near-zero interest rate
environment.
HSBC continued to increase market share in
savings and deposit accounts, and balances grew
following a series of deposit acquisition campaigns.
In Personal Financial Services, customer account
balances rose by 15 per cent and Premier customer
numbers grew to over 380,000. Strong growth in
Commercial Banking was driven by a rise in
customer numbers, also supported by a series of
deposit acquisition campaigns and increased
liquidity in the region.
Overall, deposit balances grew by 10 per cent.
Liability spreads remained under severe pressure
throughout 2009, however.
Net fee income increased by 3 per cent with an
increase in IPO underwriting fees in the second half
of the year, triggered by improved investor sentiment
and a recovery in equity markets. Personal Financial
Services customers’ preference for deposit products
rather than equity-linked products in the first half of
the year reversed as equity markets recovered in the
second half of 2009, resulting in a recovery in
revenue generated from unit trusts, wealth
management, custody and other investment products.
Similarly, the increase in trade flows in the second
half of 2009 affected trade-related fee income in
Commercial Banking.
Trading income increased by 2 per cent,
primarily due to increased volumes of bond trading
and wider margins on market making activities. The
non-recurrence of US$0.2 billion of write-downs on
a legacy monoline exposure also contributed to the
rise. Foreign exchange trading revenue decreased
100
from the exceptional results reported in 2008,
reflecting the lower market volatility and a decline
in customer volumes. Interest on trading assets
declined due to a reduced holding of trading debt
securities.
Income of US$0.8 billion was generated from
financial instruments designated at fair value,
compared with an expense of US$1.2 billion in
2008. The positive movement in fair value was
primarily driven by equity market-related gains in
unit-linked insurance products. To the extent that
these gains were attributed to policyholders, there
was a corresponding increase in net insurance claims
incurred and movement in liabilities to
policyholders.
Net earned premiums increased by 13 per cent
to US$3.7 billion due to strong sales of both existing
and new products, including a life insurance product
designed for high net worth individuals, all of which
contributed to a rise in market share. The proportion
of regular premium policies grew and sales of
investment-linked insurance products began to
improve in the second half of the year. HSBC
retained its market leadership position in the regular-
premium individual-life new business. The growth
in insurance business also resulted in higher net
insurance claims incurred and movement in
liabilities to policyholders.
Gains less losses from financial investments
moved from a loss of US$310 million to a net gain
of US$9 million, mainly due to the non-recurrence
of impairments against available-for-sale equity
investments following declines in market valuations
in 2008. The loss recognised in 2008 on the equity
investments concerned was partially recovered in
2009 but this gain was reflected in reserves rather
than reversing through the income statement.
Other operating income of US$1.3 billion
was 55 per cent higher than in 2008, reflecting a
positive movement in PVIF driven largely by an
increase in insurance sales to new customers. A gain
of US$110 million was recognised in respect of the
disposal of a property in Hong Kong.
Loan impairment charges and other credit risk
provisions fell by 35 per cent to US$0.5 billion, as
the credit environment was more stable in 2009
following deterioration in the second half of 2008.
The high level of credit risk provisions and loan
impairment charges taken in 2008 against financial
institutions and export-led customers moderated in
2009 as credit conditions recovered and international
trade volumes improved.
A rise in unemployment and in bankruptcy
petitions led to increased impairment charges against
unsecured lending in Personal Financial Services,
though bankruptcy levels improved in the second
half of the year. Property prices increased during
2009 and mortgage lending remained well secured
with conservative loan-to-value ratios and
origination subject to tight internal and regulatory
guidelines.
Operating expenditure was held in line with
2008 as higher staff costs were offset by lower
general and administrative costs. The increase in
staff costs, driven by higher performance-related
pay, was partly offset by reduced staff numbers.
Non-staff costs fell as marketing expenditure was
reduced and operational efficiencies improved as a
result of the increased use of direct channels.
2008 compared with 2007
Economic briefing
Hong Kong’s GDP growth slowed to 2.5 per cent in
2008 from 6.4 per cent in 2007. After performing
strongly during the early months of the year, the
economy slowed sharply and a technical recession
was confirmed with the release of the third quarter
GDP statistics. External demand proved especially
weak during the second half of 2008 and the growth
in private consumption also slowed sharply. The
unemployment rate rose from a ten-year low of
3.2 per cent in August 2008 to 4.1 per cent by the
year-end. Consumer price inflation proved volatile
during the year, rising to a ten-year high of 6.3 per
cent in July before slowing to 2.1 per cent by
December 2008, although this movement largely
reflected the trends in food and energy prices. In
response to interest rate cuts in the US, Hong Kong
cut its base interest rate on seven occasions during
2008, finishing the year at 0.5 per cent compared
with 5.75 per cent at the end of 2007. The Hang
Seng Index fell by 48 per cent during 2008.
Review of business performance
Hong Kong reported pre-tax profits of
US$5.5 billion, a 26 per cent decline compared with
record profits of US$7.3 billion in 2007. Lower
revenues largely reflected a decline in wealth
management and insurance income as economic
conditions deteriorated. Revenue decline was
compounded by impairment charges recognised on
certain investments, which arose as a consequence of
significant falls in equity market prices. Offsetting
this, in part, was considerably stronger Balance
Sheet Management income from treasury positions
which correctly anticipated the decline in interest
rates.
101
Net interest income rose by 4 per cent, driven by
the strong Balance Sheet Management performance
in Global Banking and Markets mainly driven by
liquidity generated by retail banking in the
environment of falling short-term interest rates.
Savings and deposit balances grew strongly,
particularly in Personal Financial Services, as
customers revealed a preference for security and
liquidity following declines in equity markets.
Deposit growth was augmented by the launch of
campaigns offering both preferential time deposit
rates and an enhanced HSBC online platform. The
significant decline in interest rates during 2008 led to
a narrowing of deposit spreads.
Customer lending volumes were 11 per cent
higher, due in part to an 11 per cent rise in mortgage
balances. Lending margins narrowed, however, due
to interest rate cuts, particularly affecting mortgage
lending and other loans linked to HIBOR. Balances
outstanding on credit cards rose, driven by increased
cardholder spending, and spreads on this business
increased due to lower funding costs. Nearly one
million new cards were issued in the year, bringing
the total cards in circulation to 5.3 million. Volumes
of trade finance grew strongly, driven by demand
from corporates with international trade
requirements, and commercial lending balances rose,
particularly during the first half of the year.
Fee income declined by 23 per cent, driven by
lower equity market-related revenues. Weak market
sentiment led to lower volumes of retail brokerage
and a decrease in income from wealth management
activity. This was partly offset by a rise in fees from
cards following increases in both cards in circulation
and cardholder spending. Fees from account services
rose due to greater customer activity and there were
higher fees generated from bundled products.
Trading income was 4 per cent lower, driven by
further write-downs of US$0.2 billion in Global
Banking and Markets on a legacy monoline
exposure. Excluding these write-downs, trading
income grew due to a rise in foreign exchange and
rates income as continuing market volatility
generated increased trading opportunities and
demand for active hedging products.
The net loss of US$1.2 billion on financial
instruments designated at fair value compared with
income of US$676 million in 2007. The loss
reflected a decline in the value of assets linked to the
insurance business. To a large extent, these losses
are attributable to policyholders, with an equivalent
reduction in net insurance claims and movement in
liabilities to policyholders. While the decline in the
value of assets which relate to unit-linked products is
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Hong Kong > 2008 / Profit/(loss) before tax by customer group
allocated to policyholders in full, the portion of
decline in the value passed on to clients who have
products with discretionary participation features
and guarantees may be restricted.
Losses from financial investments of
US$309 million reflected impairments required on
investments which have experienced significant falls
in equity market prices. These equity investments
are classified as available for sale, are not held for
trading, and remain part of the strategic positioning
of HSBC’s businesses in Asia. These losses
were partly offset by an aggregate gain of
US$203 million from the redemption of shares
in the Visa initial public offering (‘IPO’) and the
disposal of MasterCard shares.
Reconciliation of reported and underlying profit before tax
2008 compared with 2007
2007
as
reported
US$m
2007
adjustments
and dilution
gains10
US$m
2007
at 2008
exchange
rates17
US$m
Currency
translation11
US$m
2008
adjust-
ments10
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Hong Kong
Net interest income ..........
Net fee income .................
Changes in fair value14 ....
Other income15 .................
5,483
3,362
1
2,476
Net operating income16 ....
11,322
Loan impairment charges
and other credit risk
provisions ....................
(231)
Net operating income ......
11,091
Operating expenses ..........
(3,780)
Operating profit ...............
7,311
Income from associates ...
28
Profit before tax ...............
7,339
For footnotes, see page 149.
–
–
(1)
(1)
(2)
1
(1)
–
(1)
–
(1)
15
9
–
3
27
(1)
26
(9)
17
–
17
5,498
3,371
–
2,478
11,347
(231)
11,116
(3,789)
7,327
28
7,355
–
–
5
–
5
–
5
–
5
–
5
200
(791)
–
(607)
5,698
2,580
5
1,871
(1,198)
10,154
4
(23)
400
(24)
(10)
4
(23)
(24)
(11)
(534)
(765)
(231)
(231)
(1,732)
9,389
(154)
(3,943)
(1,886)
5,446
(13)
15
(1,899)
5,461
(15)
(4)
(26)
(46)
(26)
(16)
(4)
(26)
(46)
(26)
Net earned insurance premiums increased by
16 per cent to US$3.2 billion, largely due to growth
in the life insurance business, in particular for
policies with discretionary participation features.
Net insurance claims and movement in
liabilities to policyholders fell by 40 per cent,
reflecting the decline in asset values noted above
partly offset by increases due to growth in
premiums.
Loan impairment charges and other credit risk
provisions rose markedly from the previously low
level to US$765 million as economic conditions
deteriorated. Within these charges were exposures
to financial institutions held within Global Banking
and Markets, which resulted in other credit risk
provisions. In Commercial Banking, the combination
of an absence of significant recoveries recorded in
2007 and weakness among certain exporters in Hong
Kong, who were affected by reduced demand from
the US and other developed countries, raised loan
impairment charges. As local businesses responded
to the economic environment, unemployment rose in
the second half of 2008. Credit policies were
consequently adjusted across certain products as
delinquency and bankruptcy increased in
Hong Kong. Although property market declines
reduced equity levels for residential mortgage
customers, the impact on loan impairment charges
was limited as this lending was well-secured and
regulatory restrictions constrained origination
loan-to-value ratios to below 70 per cent.
Operating expenses rose by 4 per cent. Staff
costs declined by 3 per cent despite wage increases
and a rise in the number of customer-facing staff,
largely due to lower performance-related costs in
Global Banking and Markets. Staff numbers were
higher than in 2007 notwithstanding reductions
within the branch network for lower business
volumes in the latter part of 2008. IT costs rose as
investment in systems continued. Marketing costs
were lower following active management of costs
while property rental costs increased due to higher
market rental rates. Overall, cost growth was
curtailed in response to the more difficult economic
climate.
102
Analysis by customer group and global business
Profit/(loss) before tax
2009
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Personal
Financial
Services
US$m
2,577
1,410
707
(46)
138
938
530
92
–
92
–
1,150
563
792
16
808
–
(46)
18
1
500
64
2,097
(404)
1,693
(168)
1,525
(570)
955
1
956
%
13.5
33.7
138
(108)
10
13
59
2,633
(9)
2,624
(131)
2,493
(987)
1,506
1
1,507
%
21.3
37.6
186
3
189
–
707
80
1
3,161
346
8,471
(3,979)
4,492
(203)
4,289
%
38.5
34.9
Hong Kong
Net interest income/(expense) .....
Net fee income ............................
Trading income/(expense)
excluding net interest income
Net interest income on trading
activities ..................................
Net trading income/(expense)42 ...
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance
premiums ................................
Other operating income ..............
Total operating income ............
Net insurance claims43 ................
Net operating income16 .............
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income ...............
Total operating expenses ............
(1,566)
Operating profit/(loss) ..............
2,723
Share of profit in associates
and joint ventures ...................
5
Profit/(loss) before tax ..............
2,728
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
Other
US$m
(558)
41
(93)
14
(79)
(3)
(11)
(14)
19
16
–
1,062
487
–
487
1
488
(848)
(360)
1
(359)
%
(5.1)
174.1
212
125
91
–
91
–
–
–
–
–
–
10
438
–
438
1
439
(242)
197
–
197
%
2.8
55.3
(124)
–
–
124
124
–
–
–
–
–
–
(267)
(267)
–
(267)
–
(267)
267
–
–
–
Total
US$m
4,195
2,669
1,068
157
1,225
(3)
788
785
9
28
3,674
1,274
13,859
(4,392)
9,467
(500)
8,967
(3,946)
5,021
8
5,029
%
71.0
41.7
US$m
99,381
399,243
275,441
US$m
US$m
US$m
US$m
US$m
43,869
83,497
166,445
28,217
34,743
62,146
21,991
217,146
26,650
3,361
20,353
19,474
1,943
52,508
726
(9,004)
103
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Hong Kong > Profit/(loss) before tax by customer group
Profit/(loss) before tax (continued)
Hong Kong
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
2008
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
Net interest income/(expense) .....
Net fee income ............................
3,381
1,441
1,498
548
1,524
414
Trading income excluding net
interest income .......................
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ...
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance
premiums ................................
Other operating income ..............
Total operating income ...............
Net insurance claims43 ................
Net operating income16 ...............
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income/(expense) .
Total operating expenses ............
Operating profit/(loss) ................
Share of profit in associates
143
11
154
–
79
1
80
–
(1,291)
(10)
(1,291)
156
3
3,047
132
7,023
(1,773)
5,250
(134)
5,116
(1,691)
3,425
(10)
32
2
181
38
2,369
(136)
2,233
(335)
1,898
(584)
1,314
483
244
727
–
39
39
(109)
17
17
101
2,730
(11)
2,719
(284)
2,435
(1,000)
1,435
and joint ventures ...................
3
1
1
Profit/(loss) before tax ................
3,428
1,315
1,436
%
36.9
32.2
%
14.1
26.2
%
15.4
36.8
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
(250)
–
–
250
250
–
–
–
–
–
–
(368)
(368)
–
–
(368)
368
–
–
–
214
163
120
–
120
–
–
–
–
–
–
8
505
–
505
(13)
492
(255)
237
–
237
%
2.6
50.5
(669)
14
30
(168)
(138)
3
68
71
(388)
19
2
906
(183)
(2)
(185)
1
(184)
(781)
(965)
10
(955)
%
(10.3)
(422.2)
Total
US$m
5,698
2,580
855
338
1,193
3
(1,194)
(1,191)
(309)
41
3,247
817
12,076
(1,922)
(765)
9,389
(3,943)
5,446
15
5,461
%
58.7
38.8
US$m
100,220
414,484
250,517
(368)
10,154
US$m
US$m
US$m
US$m
US$m
41,447
75,419
145,002
30,331
36,428
54,869
23,042
233,187
30,866
3,605
28,800
19,416
1,795
66,192
364
(25,542)
104
Hong Kong
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Net interest income/(expense) .....
Net fee income ............................
3,342
1,973
1,540
526
Trading income excluding net
interest income .......................
Net interest income on trading
activities ..................................
Net trading income42 ...................
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance
premiums ................................
Other operating income ..............
Total operating income ...............
Net insurance claims43 ................
Net operating income16 ...............
Loan impairment charges and
other credit risk provisions .....
Net operating income .................
Total operating expenses ............
Operating profit/(loss) ................
Share of profit in associates
188
5
193
–
63
–
63
–
820
(13)
820
(13)
–
2
2,654
153
9,137
(3,116)
6,021
(175)
5,846
(1,639)
4,207
–
1
130
28
2,275
(82)
2,193
(28)
2,165
(547)
1,618
986
682
553
241
794
–
7
7
38
6
13
114
2,640
(10)
2,630
(28)
2,602
(1,025)
1,577
and joint ventures ...................
5
1
1
Profit/(loss) before tax ................
4,212
1,619
1,578
%
17.4
27.2
%
6.7
24.9
%
6.5
39.0
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 149.
2007
Private
Banking
US$m
70
179
280
–
280
–
–
–
1
–
–
6
536
–
536
–
536
(231)
305
–
305
%
1.3
43.1
Inter-
segment
elimination50
US$m
312
–
–
(312)
(312)
–
–
–
–
–
–
(337)
(337)
–
(337)
–
(337)
337
–
–
–
Other
US$m
(767)
2
186
38
224
2
(140)
(138)
55
22
–
881
279
–
279
–
279
(675)
(396)
21
(375)
%
(1.6)
241.9
Total
US$m
5,483
3,362
1,270
(28)
1,242
2
674
676
94
31
2,797
845
14,530
(3,208)
11,322
(231)
11,091
(3,780)
7,311
28
7,339
%
30.3
33.4
US$m
89,638
359,386
234,488
US$m
US$m
US$m
US$m
US$m
38,197
66,002
129,159
25,890
32,059
51,562
19,171
218,293
37,364
4,329
17,484
15,649
2,051
53,227
754
(27,679)
105
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific > 2009
Rest of Asia-Pacific27
Profit/(loss) before tax by country within customer groups and global businesses
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Other
US$m
Total
US$m
30
(219)
(24)
(79)
494
678
(184)
88
129
(3)
(3)
50
463
19
(155)
(22)
(88)
284
393
(109)
94
104
(16)
(41)
32
211
41
(70)
(7)
(34)
494
516
(22)
81
101
(44)
(52)
5
515
32
(41)
60
–
616
558
58
53
77
(5)
65
207
140
393
129
65
479
285
194
140
247
342
96
288
1,064
2,319
68
118
17
(1)
622
558
64
96
83
(13)
45
200
102
578
126
88
688
335
353
171
337
304
179
397
1,235
2,970
37
88
29
(3)
397
351
46
90
112
(20)
27
111
868
42
429
86
75
369
220
149
146
240
159
144
279
1,969
–
1
–
(4)
(7)
–
(7)
–
98
–
–
2
90
–
2
–
1
(5)
–
(5)
–
110
–
–
1
109
–
(1)
–
–
–
–
–
–
90
–
–
–
89
(4)
240
(11)
1
50
–
50
5
(9)
25
2
(35)
264
(13)
123
–
4
16
–
16
8
(37)
38
(8)
66
197
4
83
(4)
5
1,101
1,093
8
13
7
28
4
20
198
374
154
(17)
1,632
1,521
111
286
542
359
160
512
4,200
176
666
121
4
1,605
1,286
319
369
597
313
175
696
4,722
124
529
104
43
2,361
2,180
181
330
550
123
123
415
1,261
4,702
2009
Australia ............................................................
India ..................................................................
Indonesia ...........................................................
Japan .................................................................
Mainland China ................................................
Associates .....................................................
Other mainland China ..................................
Malaysia ............................................................
Singapore ..........................................................
South Korea ......................................................
Taiwan ..............................................................
Other .................................................................
2008
Australia ............................................................
India ..................................................................
Indonesia ...........................................................
Japan .................................................................
Mainland China ................................................
Associates .....................................................
Other mainland China ..................................
Malaysia ............................................................
Singapore ..........................................................
South Korea ......................................................
Taiwan ..............................................................
Other .................................................................
2007
Australia ............................................................
India ..................................................................
Indonesia ...........................................................
Japan .................................................................
Mainland China ................................................
Associates .....................................................
Other mainland China ..................................
Malaysia ............................................................
Singapore ..........................................................
South Korea ......................................................
Taiwan ..............................................................
Other .................................................................
For footnote see page 149.
106
Loans and advances to customers (net) by country
Australia ...........................................................................................................
India .................................................................................................................
Indonesia ..........................................................................................................
Japan ................................................................................................................
Mainland China ...............................................................................................
Malaysia ...........................................................................................................
Singapore .........................................................................................................
South Korea .....................................................................................................
Taiwan .............................................................................................................
Other ................................................................................................................
Customer accounts by country
Australia ...........................................................................................................
India .................................................................................................................
Indonesia ..........................................................................................................
Japan ................................................................................................................
Mainland China ...............................................................................................
Malaysia ...........................................................................................................
Singapore .........................................................................................................
South Korea .....................................................................................................
Taiwan .............................................................................................................
Other ................................................................................................................
2009
US$m
12,112
4,893
2,721
2,496
13,294
9,132
14,817
4,438
4,280
11,860
80,043
2009
US$m
12,093
11,676
5,014
4,914
21,867
12,809
33,211
4,162
9,891
18,362
At 31 December
2008
US$m
9,321
6,244
1,904
5,839
11,440
9,404
13,441
5,336
4,329
13,403
80,661
At 31 December
2008
US$m
9,201
9,767
2,896
6,204
19,171
11,963
32,748
4,383
9,689
18,172
2007
US$m
11,339
7,220
1,642
4,258
11,647
8,856
11,505
7,124
3,658
12,996
80,245
2007
US$m
11,418
12,021
2,574
4,657
14,537
11,701
28,962
5,760
9,426
18,240
2009 compared with 2008
Economic briefing
Growth in mainland China accelerated throughout
the course of the year as the government’s fiscal
stimulus package helped offset weak levels of
demand within key export markets. Overall GDP
growth totalled 8.7 per cent in 2009, down from
9.6 per cent in 2008, although on a quarterly basis
the annual rate of growth rose to a very high 10.7 per
cent in the final three months of the year. Industrial
production also gathered momentum as the year
progressed, while very strong levels of bank lending
growth helped fixed asset investment expenditure to
maintain a rapid pace of expansion throughout 2009.
Consumer spending remained robust, with retail
sales rising by 17.5 per cent in the year. The annual
CPI rate was negative throughout much of 2009,
largely reflecting the earlier movements in food and
energy prices, before accelerating to 1.9 per cent in
December 2009. The renminbi exchange rate was
little changed against the US dollar throughout the
course of the year.
Economic conditions proved difficult in Japan
during 2009, although some signs of stabilisation did
107
133,999
124,194
119,296
emerge following an extremely weak start to the
year. First quarter GDP fell by 3.2 per cent on a
quarter-on-quarter basis, before gains of 1.3 per cent,
zero and 1.1 per cent were recorded in the next three
quarters, respectively. The unemployment rate rose
from 4.3 per cent in December 2008 to a record high
of 5.7 per cent in July 2009, before declining to
finish the year at 5.1 per cent. The Bank of Japan
introduced a range of initiatives in January 2009
with the intention of improving financing conditions
across the corporate sector, while fiscal stimulus
packages were also implemented.
Elsewhere in Asia, most economies experienced
a further year of uneven growth in 2009. Sharp
economic contractions proved commonplace across
the region during the early months of 2009 before
economic recovery began, often helped by an
aggressive loosening of both monetary and fiscal
policy. Such trends were particularly evident in
Singapore where, following a very weak start to
2009, a rapid rate of expansion was recorded during
the second quarter, although GDP growth fell back
into negative territory during the final months of the
year. Growth proved much more stable in India,
with GDP rising by 6.3 per cent in the first three
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific > 2009
Profit before tax
Rest of Asia-Pacific27
Net interest income .............................................................................................
Net fee income ....................................................................................................
Net trading income .............................................................................................
Changes in fair value of long-term debt issued and related derivatives ............
Net income/(expense) from other financial instruments designated at
fair value ........................................................................................................
Net income/(expense) from financial instruments designated at fair value ......
Gains less losses from financial investments .....................................................
Gains arising from dilution of interests in associates ........................................
Dividend income .................................................................................................
Net earned insurance premiums .........................................................................
Other operating income ......................................................................................
Total operating income ....................................................................................
Net insurance claims incurred and movement in liabilities to policyholders ....
Net operating income before loan impairment charges and other
credit risk provisions ...................................................................................
Loan impairment charges and other credit risk provisions ................................
Net operating income .......................................................................................
Total operating expenses ....................................................................................
Operating profit ................................................................................................
Share of profit in associates and joint ventures ..................................................
Profit before tax ................................................................................................
Share of HSBC’s profit before tax .....................................................................
Cost efficiency ratio ...........................................................................................
2009
US$m
3,539
1,557
1,606
(1)
111
110
(19)
–
2
365
1,238
8,398
(395)
8,003
(896)
7,107
(4,450)
2,657
1,543
4,200
%
59.3
55.6
2008
US$m
3,937
1,867
2,042
1
(172)
(171)
24
–
2
197
1,055
8,953
28
8,981
(852)
8,129
(4,704)
3,425
1,297
4,722
%
50.7
52.4
2007
US$m
3,049
1,775
1,346
1
110
111
36
1,081
6
226
781
8,411
(253)
8,158
(561)
7,597
(3,991)
3,606
1,096
4,702
%
19.4
48.9
Year-end staff numbers (full-time equivalent) ...................................................
87,141
89,706
80,523
Balance sheet data41
Loans and advances to customers (net) ..............................................................
Loans and advances to banks (net) .....................................................................
Trading assets, financial assets designated at fair value, and
2009
US$m
80,043
35,648
financial investments ......................................................................................
Total assets .........................................................................................................
Deposits by banks ...............................................................................................
Customer accounts ..............................................................................................
58,941
222,139
8,075
133,999
For footnotes, see page 149.
All commentaries on Rest of Asia-Pacific are on an underlying basis unless stated otherwise.
At 31 December
2008
US$m
80,661
28,665
53,167
225,573
12,688
124,194
2007
US$m
80,245
32,373
54,541
208,195
15,100
119,296
quarters of the fiscal year 2009/10 following a
5.7 per cent expansion in the same period in
2008/09, helped by an aggressive reduction in
interest rates and a sharp increase in government
expenditure. Although growth slowed in 2009 in
Indonesia, the 4.5 per cent increase in GDP and the
relative stability of growth left the country as one of
the region’s better performers. Economic conditions
proved very weak during the early months of 2009 in
Malaysia as first quarter GDP fell by 6.2 per cent on
the same period in 2008, but a strong recovery,
helped by an improvement in regional trade activity
and a domestic stimulus package, placed fourth
quarter GDP some 4.5 per cent above the
comparable figure from a year earlier. A recovery in
both exports and domestic demand helped the South
Korean economy to record a strong recovery from a
very weak start to 2009, with GDP increasing
slightly by 0.2 per cent for the full year, following a
2.2 per cent increase during 2008. Increased public
108
expenditure helped the Philippines economy to
return to growth following a weak start to 2009, with
full year growth of 0.9 per cent being recorded,
down from 3.8 per cent in 2008. Taiwan’s economy
proved particularly vulnerable to the sharp fall in
global trade activity during the early months of
2009, although the year-on-year rate of decline in
GDP moderated as 2009 progressed, thanks in part
to a recovery in consumer expenditure around the
Reconciliation of reported and underlying profit before tax
middle of the year. A substantial fiscal stimulus
package in Vietnam contributed to improved growth
momentum during the first half of 2009, although
concerns over the deterioration in the trade position
led to a devaluation of the currency and a tightening
of monetary policy during the final weeks of the
year. Full year 2009 GDP growth slowed slightly to
5.3 per cent from 6.2 per cent in 2008.
2009 compared with 2008
2008
as
reported
US$m
2008
adjust-
ments10
US$m
Currency
translation11
US$m
2008
at 2009
exchange
rates12
US$m
2009
adjust-
ments10
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Rest of Asia-Pacific27
Net interest income ..........
Net fee income .................
Changes in fair value14 ....
Other income15 .................
Net operating income16 ..
Loan impairment charges
and other credit risk
provisions ....................
3,937
1,867
3
3,174
8,981
(852)
Net operating income ....
8,129
Operating expenses ..........
(4,704)
Operating profit .............
3,425
Income from associates ...
1,297
Profit before tax .............
4,722
For footnotes, see page 149.
–
–
(3)
–
(3)
–
(3)
–
(3)
–
(3)
(165)
(80)
–
(205)
(450)
31
(419)
208
(211)
27
(184)
3,772
1,787
–
2,969
8,528
(821)
7,707
(4,496)
3,211
1,324
4,535
53
6
(3)
18
74
–
74
(31)
43
–
43
(286)
(236)
–
(77)
3,539
1,557
(3)
2,910
(10)
(17)
(200)
(8)
(599)
8,003
(11)
(75)
(896)
(674)
7,107
77
(4,450)
(597)
2,657
219
1,543
(378)
4,200
(5)
(13)
5
(22)
19
(11)
(8)
(13)
(3)
(7)
(9)
(9)
2
(19)
17
(8)
Review of business performance
HSBC’s operations in the Rest of Asia-Pacific
region reported a pre-tax profit of US$4.2 billion
compared with US$4.7 billion in 2008, a decline
of 11 per cent or 8 per cent on an underlying basis.
The decline in regional performance was primarily
attributable to the challenging economic conditions
which resulted in deposit spread compression, lower
fee income and credit quality deterioration.
During 2009, HSBC continued to build its
presence in the region through organic growth, the
acquisition of Bank Ekonomi, and strategic
investments. The purchase of Bank Ekonomi nearly
doubled HSBC’s presence in Indonesia to over 200
outlets in 27 cities. HSBC became the first foreign
bank to incorporate locally in Vietnam in January
2009, creating the opportunity to widen the product
range and increase distribution channels to
customers. The integration of IL&FS Investsmart,
subsequently rebranded to HSBC InvestDirect, has
strengthened HSBC’s network in India, allowing it
to offer wealth management products through over
200 additional outlets. Building the Group’s
mainland China business and renminbi capabilities
continued to be a key focus, as demonstrated by the
opening of onshore renminbi accounts in mainland
China and the launch of renminbi trade settlement
in seven ASEAN countries. 19 new HSBC branded
outlets were opened in mainland China in 2009, as
well as eight additional rural bank outlets and four
new Hang Seng Bank branches, consolidating
HSBC’s position as the leading foreign bank in the
country. HSBC also launched a new jointly-owned
life insurance company in mainland China, and
announced the intention to establish a new cards
joint venture with Bank of Communications to
which over 11 million cards in force will be
transferred. In insurance, HSBC expanded its
regional coverage and increased its stake in Bao Viet
in January 2010, allowing it to extend its position in
the Vietnamese market.
Net interest income declined by 8 per cent to
US$3.5 billion, driven by deposit spread
compression in the low interest rate environment and
a decline in lending balances. This was partly offset
109
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific > 2009 / 2008
by asset repricing, particularly in Commercial
Banking.
reflected in net insurance claims incurred and
movement in liabilities to policyholders.
Average lending balances fell in Global
Banking and Markets and Commercial Banking as a
result of lower demand for financing as international
trade volumes declined, especially in the first half of
the year. Growth returned in the second half of the
year as the volume of trade activity improved.
Customer deposits grew compared with
2008. Personal Financial Services continued to
successfully attract deposits and the acquisition
of Premier customers was strong with the region
growing customer numbers by 35 per cent to over
580,000. Payments and cash management was
adversely affected by the low interest rate
environment.
Net fee income was 13 per cent lower than in
2008, driven by a decline in income from funds
under management and global custody. Fees from
funds under management in Singapore, Japan and
Taiwan declined as a result of weak investor
sentiment and lower fee margins as customers
moved away from equity investment products
though, in the latter part of the year, an improvement
in equity markets drove a recovery in investment-
related fee income. In India, tightened credit criteria
resulted in lower fees from the card business. By
contrast, trade services and cash management
increased in a number of countries, and the Group
took various steps to capture cross-border business
and continued to benefit from its international
business reach. Significant cross-border referral
growth was seen in Greater China where numbers
rose compared with 2008.
Net trading income declined by 16 per cent, as
the fall in interest rates reduced net interest income
from trading activities. Foreign exchange and Rates
trading income also declined across the region,
reflecting relatively low market volatility, though
Credit trading performance was strong, particularly
in mainland China, Japan and Singapore. In
mainland China, the decline in Rates income resulted
from losses on bond positions following an upward
shift in yields. However, in South Korea, revenue
increased as opportunities arose from market-making
and client hedging activities.
Net income from financial instruments
designated at fair value of US$110 million was
recorded compared with a net expense of
US$171 million in 2008. This was primarily
attributable to equity market-related gains on unit-
linked insurance products and was largely offset by a
corresponding increase in liabilities to policyholders
110
Net earned insurance premiums increased by
91 per cent to US$365 million. Sales growth was
particularly strong in Singapore following the launch
of new products, including a life insurance product
designed for high net worth individuals and a single
premium guaranteed saver product. Growth in
insurance business resulted in higher net insurance
claims incurred and movement in liabilities to
policyholders.
Deposit spread compression, lower fees and
a rise in loan impairment charges reduced
underlying profit before tax by 8 per cent.
Loan impairment charges and other credit risk
provisions rose by 9 per cent compared with 2008 as
credit quality deteriorated in India.
In Personal Financial Services, loan impairment
charges rose by 9 per cent to US$649 million,
primarily due to rising delinquencies in the
unsecured consumer lending businesses in India and
Indonesia. In India, a challenging credit environment
and high delinquency rates contributed to increased
loan impairment charges in personal loans, consumer
finance and mortgages. The delinquencies in India
began to moderate in the second half of 2009 as the
measures implemented by HSBC in the second half
of 2008 to mitigate loan losses, including ceasing
consumer finance loan origination and tightening
lending criteria on other unsecured lending products,
began to take effect. As a result, loan impairment
charges against cards remained broadly in line with
2008. In Commercial Banking, significant
deterioration was experienced in India in the first
half of 2009. The loan impairment charges across the
region improved in the second half of 2009 with
credit quality stabilising as a result of support from
the governments’ various economic stimulus
initiatives, together with improved liquidity and
actions taken by customers to adjust in difficult
times. Notwithstanding the improvement towards the
end of the year, HSBC continues to closely monitor
portfolios for signs of weakness.
Operating expenditure was broadly in line with
2008. Tight cost control resulted in lower
administrative costs and marketing expenditure.
Staff costs fell due to lower performance-related
costs and a decrease in staff numbers. These were
broadly offset by expenditure to support the ongoing
development of infrastructure in the region,
including branch expansion in mainland China,
Vietnam and Malaysia and integration and
development costs related to HSBC InvestDirect and
the operations of The Chinese Bank Co., Ltd (‘The
Chinese Bank’) in Taiwan.
In an effort to improve operational efficiencies
and reduce costs, an increased number of
transactions were completed through direct channels,
including internet banking, telephone services and
self-service machines compared with 2008.
Operating expenses within the Group Service
and Software Development Centres rose by 9 per
cent as the number of migrated activities and
processes increased in accordance with the Group’s
global resourcing strategy to develop centres of
excellence. All related costs are recharged to other
Group entities and the income from these recharges
is reported within other operating income.
New outlets, the launch of a new jointly-
owned life insurance company and a
planned card joint venture with Bank of
Communications consolidated HSBC’s
position as the leading foreign bank in
mainland China.
Profit from associates and joint ventures in the
region was 17 per cent higher as a result of the non-
recurrence of Ping An Insurance’s impairment of its
investment in Fortis in 2008, and an increase in new
business sales and investment returns which were
boosted by a recovery in equity markets. Income
from Bank of Communications remained in line with
2008.
2008 compared with 2007
Economic briefing
Growth in mainland China was steady during 2008,
although lower than in previous years. Overall GDP
growth totalled 9 per cent in 2008, down from 13 per
cent in 2007, as weakness in key export markets led
to a slowdown in industrial activity during the final
months of the year. The tightening of monetary
conditions in 2007 and early 2008 also contributed to
the slowdown, although interest rates and reserve
requirements were both reduced significantly during
the final months of the year and a significant fiscal
stimulus package was also announced. Consumer
spending continued to advance at a strong pace with
retail spending increasing by 21.6 per cent over the
course of 2008. After accelerating to an eleven year
high of 8.7 per cent in February 2008, consumer
price inflation slowed to 1.2 per cent by the year-
end, largely reflecting the movements in food and
energy prices. The renminbi appreciated by more
than 6 per cent against the US dollar during 2008,
although the exchange rate was little changed during
the second half of the year.
111
Japan’s economy slowed sharply during the
course of 2008, with industrial activity declining
rapidly during the final quarter of the year in
response to much weaker external demand.
Contractions were registered in both second and
third quarter GDP data, confirming a technical
recession, while the unemployment rate rose from
3.8 per cent in January 2008 to 4.4 per cent by the
year-end. Inflationary pressures increased during the
first half before subsiding during the final months of
2008, while measures of business confidence also
fell sharply.
Elsewhere in Asia, most economies followed an
uneven pattern of growth during 2008. Policymakers
focused on the rise in inflation during the first half of
the year, but the sharp slowdown in growth during
the final months of 2008 came to dominate, with a
series of monetary and fiscal policy measures being
introduced across the region to stimulate activity.
The sustained rise in inflation prompted the Reserve
Bank of India to tighten policy by raising both
interest rates and reserve requirements during the
first half of 2008, before then cutting the cash
reserve ratio by 350 basis points and the repo rate by
250 basis points during the final quarter of the year.
A recession was confirmed in Singapore after GDP
contracted for three consecutive quarters in 2008, as
an economic slowdown initially focused on specific
industries turned more pervasive. After rising to
a 26-year high of 7.5 per cent in June 2008, the
annual rate of inflation slowed to 4.3 per cent by
the year-end.
Inflation also proved the predominant concern
in Vietnam during the first half of 2008 as the
annual rate of consumer price inflation more than
doubled to 28.3 per cent, prompting the State Bank
of Vietnam to sanction substantial interest rate
increases, before these measures were rapidly
reversed during the final months of the year. Interest
rate increases were also forthcoming in Indonesia
between May and October 2008, although with
growth levels maintaining a relatively robust level
during much of the year, a tentative easing cycle was
only initiated during the final weeks of 2008. Bank
Negara Malaysia proved the exception by refraining
from interest rate increases during the year, even as
consumer price inflation accelerated to 8.5 per cent
in July 2008, before cutting the policy rate to
3.25 per cent in November. The outlook for the
South Korean economy was affected by the open
nature of the economy and the relatively high levels
of household and corporate sector indebtedness. Full
year GDP rose by 2.5 per cent in 2008, down from
5.0 per cent in 2007 and the weakest performance for
ten years, while fourth quarter GDP fell by 3.4 per
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific > 2008
cent on a year-on-year basis. Rising food prices
proved particularly problematic for the Philippines
during the first half of the year as inflation moved
well above the central bank’s targeted range,
although the earlier tightening of monetary policy
was partially reversed at the end of 2008. Growth
slowed sharply in Taiwan during the course of the
year, driven by deteriorating conditions overseas.
Reconciliation of reported and underlying profit before tax
2008 compared with 2007
2007
as
reported
US$m
2007
adjustments
and dilution
gains10
US$m
2007
at 2008
exchange
rates17
US$m
Currency
translation11
US$m
2008
adjust-
ments10
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Rest of Asia-Pacific27
Net interest income ..........
Net fee income .................
Changes in fair value14 ....
Other income15 .................
Net operating income16 ....
Loan impairment charges
and other credit risk
provisions ....................
3,049
1,775
–
3,334
8,158
–
–
–
(1,081)
(1,081)
(561)
–
38
22
–
15
75
15
90
3,087
1,797
–
2,268
7,152
(546)
6,606
Net operating income ......
7,597
(1,081)
Operating expenses ..........
(3,991)
–
(12)
(4,003)
Operating profit ...............
3,606
(1,081)
Income from associates ...
1,096
–
Profit before tax ...............
4,702
(1,081)
78
93
171
2,603
1,189
3,792
31
3
3
70
819
67
–
836
107
1,722
3,937
1,867
3
3,174
8,981
29
5
(5)
10
–
107
(110)
(3)
–
(3)
(306)
(852)
(52)
1,416
8,129
7
(591)
(4,704)
(18)
825
108
933
3,425
1,297
4,722
(5)
18
–
27
4
37
24
(56)
21
(15)
32
9
25
For footnotes, see page 149.
Review of business performance
HSBC’s operations in Rest of Asia-Pacific reported
a pre-tax profit of US$4.7 billion which was in line
with 2007. HSBC continued to increase its presence
in key markets, augmenting organic growth with the
integration of the operations of The Chinese Bank in
Taiwan and the purchase of IL&FS Investsmart Ltd
in India, which was completed in September. On an
underlying basis, excluding the dilution gains on
Chinese associates of US$1.1 billion recorded in
2007 and the acquisitions noted above, profit before
tax increased by 25 per cent, with notable growth in
South Korea, mainland China, India, and an
increased contribution from associates in the region.
Branches were added in mainland China, Indonesia,
Japan, Malaysia and Bangladesh.
Net interest income increased by 27 per cent,
with growth across most major countries and all
customer groups. Deposit acquisition and related
asset deployment across the region drove net interest
income, though this volume growth was partly offset
by deposit spread compression in the second half of
the year due to declining interest rates, compounded
by strong competition to acquire deposits.
In India, net interest income increased by 44 per
cent as deposit balances in Personal Financial
Services and Commercial Banking rose due to
112
customer acquisition, notably among small
businesses following the launch of the HSBC Direct
for Business product. These deposits were deployed
in increasing lending, where spreads improved on
the corporate lending and credit card portfolios and
mortgage spreads widened following a re-pricing in
the second half of the year.
In mainland China, net interest income also rose
due to deposit growth, as investors increasingly
preferred deposits over market-led investments as
market sentiment deteriorated. This facilitated an
increase in personal lending balances following
branch network expansion and successful re-pricing
initiatives on corporate and commercial loans.
There was strong growth in net interest income
from Balance Sheet Management within Global
Banking and Markets, due to lower funding costs
and steeper yield curves, notably in Singapore,
mainland China, India and Japan.
Net fee income rose by 4 per cent, driven by a
growth in fees from personal credit cards and trade
and supply chain services. Credit card fees rose,
particularly in India, driven by increases in
interchange fees from higher cardholder spending
and late payment and over-limit fees from higher
delinquencies. There were lower fees from
investment products and broking across the region,
driven by a decline in equity markets and weakened
investor sentiment.
Fee income from credit facilities rose, notably in
India, Australia and Singapore, reflecting increases
in the number of customers.
Net trading income rose by 54 per cent,
predominantly due to strong Rates and foreign
exchange trading across the region as volatile market
conditions continued, encouraging increased
corporate hedging activity.
Growth was particularly strong in South Korea,
mainland China and Australia due to strategic
positioning of HSBC’s balance sheet to benefit from
the interest rate cuts and foreign exchange volatility
in 2008, and increased activity in these local
markets. In India, foreign exchange and, to a lesser
extent, Rates revenues rose, driven mainly by
increased customer activity and high levels of
market volatility.
A net expense from financial instruments
designated at fair value of US$171 million was
recorded compared with income of US$121 million
in 2007. Declines in equity markets affected unit-
linked insurance products, particularly in Singapore.
This was largely offset by a corresponding decrease
in liabilities to policyholders reflected in net
insurance claims incurred and movement in
liabilities to policyholders.
Net earned insurance premiums decreased by
17 per cent to US$197 million, mainly in Singapore
and Malaysia due to lower sales of single premium
unit-linked products. This was partly offset by an
increase in the sale of general insurance products.
Loan impairment charges rose sharply,
increasing by 56 per cent to US$852 million,
following a marked deterioration in credit quality
across the region in the final quarter of the year.
These charges rose most significantly in India and,
to a lesser extent, in Australia.
In India, the rise was attributable to increased
delinquency across personal lending portfolios, in
response to which HSBC took action to restrict
mortgage and personal lending. However, HSBC
continued to extend credit to selected cards
customers, which resulted in volume growth and
also contributed to higher loan impairment charges.
In Australia, higher delinquencies arose from
the maturing of the cards portfolio and, to a lesser
extent, volume growth, in addition to a credit risk
provision related to an exposure to an Icelandic
Bank. Partly offsetting this, loan impairment charges
declined by 41 per cent in Taiwan due to an
improvement in asset quality. Similarly, in Thailand,
loan impairment charges were 69 per cent lower due
to the non-recurrence of charges attributable to the
down-grading of certain corporate customers.
Operating expenses increased by 15 per cent to
US$4.7 billion. Significant investment in the region
continued, notably in mainland China where 29 new
outlets were opened and staff numbers increased.
Related premises and equipment costs rose
accordingly. Expansion was also pursued in
Indonesia with the addition of new branches, and in
Japan with the rollout of seven HSBC Premier
centres. In India, the rise in operating expenses was
driven mainly by investment in IT, premises costs
and an increase in collection activities as default
rates rose. Business growth contributed to higher
operating expenses in Australia. Litigation costs in
the region rose.
Growth in operating expenses at the Group
Service and Software Development Centres was
driven by increased volumes of activity as HSBC
continued to implement a global resourcing strategy
to minimise costs throughout the Group. All related
costs are recharged to other Group entities and the
income is reported within Other operating income.
Profit from associates and joint ventures in the
region increased by 9 per cent, notwithstanding a
significant impairment recorded in Ping An
Insurance in respect of its stake in Fortis Bank.
Growth was strong across HSBC’s other principal
associates, the Bank of Communications and
Industrial Bank.
113
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific > Profit before tax by customer groups
Analysis by customer group and global business
Profit before tax
Rest of Asia-Pacific27
Net interest income .....................
Net fee income/(expense) ...........
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ...
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income ...............
Total operating income ............
Net insurance claims43 ................
Net operating income16 .............
Loan impairment charges and
other credit risk provisions .....
Net operating income ...............
Share of profit in associates
and joint ventures ...................
Profit before tax ........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
Total operating expenses ............
(1,839)
Operating profit/(loss) ..............
(223)
Total
US$m
3,539
1,557
1,264
342
1,606
(1)
111
110
(19)
2
365
1,238
8,398
(395)
8,003
(896)
7,107
(4,450)
2,657
1,543
4,200
%
59.3
55.6
US$m
80,043
222,139
133,999
2009
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
Personal
Financial
Services
US$m
1,493
554
807
331
134
–
134
–
1
1
2
–
28
66
1,369
(15)
1,354
(221)
1,133
(636)
497
567
1,064
%
15.0
47.0
1,174
636
1,013
202
1,215
–
(2)
(2)
(7)
1
–
41
3,058
–
3,058
(23)
3,035
(1,006)
2,029
290
2,319
%
32.8
32.9
115
55
55
–
55
–
–
–
–
–
–
(2)
223
–
223
(2)
221
(131)
90
–
90
%
1.3
58.7
91
(19)
(18)
–
(18)
(1)
2
1
(19)
1
–
1,200
1,237
–
(141)
–
–
141
141
–
–
–
–
–
–
(134)
(134)
–
1,237
(134)
–
(134)
134
–
–
–
(1)
1,236
(972)
264
–
264
%
3.7
78.6
80
(1)
79
–
110
110
5
–
337
67
2,645
(380)
2,265
(649)
1,616
686
463
%
6.5
81.2
US$m
US$m
US$m
US$m
US$m
30,433
40,266
47,573
22,595
31,221
30,196
23,989
138,884
43,698
2,834
11,928
12,496
192
7,160
36
(7,320)
114
Rest of Asia-Pacific27
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
2008
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
934
356
122
–
122
–
–
–
3
–
25
76
1,516
(14)
1,502
(137)
1,365
(689)
676
559
1,235
%
13.3
45.9
1,524
831
1,233
123
1,356
–
(4)
(4)
6
2
–
79
3,794
–
3,794
(73)
3,721
(1,086)
2,635
335
2,970
%
31.9
28.6
(471)
–
–
471
471
–
–
–
–
–
–
(227)
(227)
–
(227)
–
(227)
227
–
–
–
103
71
77
–
77
–
–
–
–
–
–
(1)
250
–
250
(1)
249
(140)
109
–
109
%
1.2
56.0
139
17
(54)
10
(44)
1
4
5
–
–
–
1,070
1,187
–
1,187
(1)
1,186
(1,000)
186
11
197
%
2.0
84.2
Net interest income .....................
Net fee income ............................
1,708
592
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ...
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Dividend income .........................
Net earned insurance premiums .
Other operating income/
(expense) ................................
Total operating income ...............
Net insurance claims43 ................
Net operating income16 ...............
Loan impairment charges and
other credit risk provisions .....
Net operating income .................
65
(5)
60
–
(172)
(172)
15
–
172
58
2,433
42
2,475
(640)
1,835
Total operating expenses ............
(2,016)
Operating profit/(loss) ................
(181)
392
211
%
2.3
81.5
Share of profit in associates
and joint ventures ...................
Profit before tax ..........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
US$m
US$m
US$m
US$m
US$m
27,634
36,310
42,778
21,967
29,030
25,372
27,941
147,714
42,977
2,960
12,440
12,713
159
5,528
354
(5,449)
115
Total
US$m
3,937
1,867
1,443
599
2,042
1
(172)
(171)
24
2
197
1,055
8,953
28
8,981
(852)
8,129
(4,704)
3,425
1,297
4,722
%
50.7
52.4
US$m
80,661
225,573
124,194
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Rest of Asia-Pacific > Profit before tax by customer group // Middle East
Profit before tax (continued)
Rest of Asia-Pacific27
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
2007
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
Net interest income .....................
Net fee income ............................
1,507
594
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ...
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from
financial investments ..............
Gains arising from dilution of
interests in associates .............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income ...............
Net insurance claims43 ................
Net operating income16 ...............
Loan impairment charges and
other credit risk provisions .....
Net operating income .................
42
(2)
40
–
73
73
3
–
–
209
18
2,444
(246)
2,198
(486)
1,712
Total operating expenses ............
(1,713)
Operating profit ..........................
(1)
516
515
%
2.1
77.9
Share of profit in associates
and joint ventures ...................
Profit before tax ..........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 149.
750
265
86
–
86
–
4
4
4
–
–
16
3
1,035
820
817
(21)
796
–
(3)
(3)
28
–
–
–
44
1,128
2,720
(7)
–
1,121
2,720
(72)
1,049
(532)
517
351
868
%
3.6
47.5
(3)
2,717
(969)
1,748
221
1,969
%
8.1
35.6
59
82
71
–
71
–
(1)
(1)
–
–
–
–
1
212
–
212
–
212
(123)
89
–
89
%
0.4
58.0
(437)
–
–
437
437
–
–
–
–
–
–
–
(133)
(133)
–
(133)
–
(133)
133
–
–
–
135
14
(70)
(14)
(84)
1
37
38
1
1,081
6
1
848
2,040
–
2,040
–
2,040
(787)
1,253
8
1,261
%
5.2
38.6
US$m
US$m
US$m
US$m
US$m
29,313
36,292
38,625
21,397
27,524
25,306
26,476
130,096
45,773
2,913
9,245
9,491
146
9,487
101
(4,449)
116
Total
US$m
3,049
1,775
946
400
1,346
1
110
111
36
1,081
6
226
781
8,411
(253)
8,158
(561)
7,597
(3,991)
3,606
1,096
4,702
%
19.4
48.9
US$m
80,245
208,195
119,296
Middle East27
Profit/(loss) before tax by country within customer groups and global businesses
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Other
US$m
Total
US$m
2009
Egypt .................................................................
United Arab Emirates .......................................
Other .................................................................
Middle East (excluding Saudi Arabia) .............
Saudi Arabia .....................................................
2008
Egypt .................................................................
United Arab Emirates .......................................
Other .................................................................
Middle East (excluding Saudi Arabia) .............
Saudi Arabia .....................................................
2007
Egypt .................................................................
United Arab Emirates .......................................
Other .................................................................
Middle East (excluding Saudi Arabia) .............
Saudi Arabia .....................................................
18
(177)
13
(146)
20
(126)
16
133
80
229
60
289
10
108
83
201
44
245
51
(136)
45
(40)
61
21
68
330
125
523
35
558
46
262
101
409
73
482
97
307
(14)
390
77
467
90
388
161
639
177
816
65
242
116
423
72
495
–
(2)
–
(2)
8
6
–
4
–
4
–
4
–
3
–
3
–
3
58
5
(3)
60
27
87
49
6
1
56
23
79
32
2
–
34
48
82
Loans and advances to customers (net) by country
Egypt ................................................................................................................
United Arab Emirates ......................................................................................
Other ................................................................................................................
Customer accounts by country
Egypt ................................................................................................................
United Arab Emirates ......................................................................................
Other ................................................................................................................
For footnote, see page 149.
2009
US$m
2,553
13,883
6,408
22,844
2009
US$m
5,743
17,498
9,288
32,529
At 31 December
2008
US$m
2,473
17,537
7,285
27,295
At 31 December
2008
US$m
5,363
19,808
9,994
35,165
224
(3)
41
262
193
455
223
861
367
1,451
295
1,746
153
617
300
1,070
237
1,307
2007
US$m
1,853
14,103
5,651
21,607
2007
US$m
4,056
18,455
8,426
30,937
117
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Middle East > 2009
Profit before tax
Middle East27
Net interest income ..........................................................................................
Net fee income .................................................................................................
Net trading income ..........................................................................................
Gains less losses from financial investments ..................................................
Dividend income ..............................................................................................
Other operating income ...................................................................................
2009
US$m
1,485
625
394
16
3
71
2008
US$m
1,556
691
402
8
2
9
2007
US$m
1,094
471
297
2
2
17
Total operating income .................................................................................
2,594
2,668
1,883
Net insurance claims incurred and movement in liabilities
to policyholders ..........................................................................................
–
–
Net operating income before loan impairment charges and other
credit risk provisions ................................................................................
Loan impairment charges and other credit risk provisions .............................
Net operating income ....................................................................................
Total operating expenses .................................................................................
Operating profit .............................................................................................
Share of profit in associates and joint ventures ...............................................
Profit before tax .............................................................................................
Share of HSBC’s profit before tax ..................................................................
Cost efficiency ratio ........................................................................................
2,594
(1,334)
1,260
(1,001)
259
196
455
%
6.4
38.6
2,668
(279)
2,389
(959)
1,430
316
1,746
%
18.8
35.9
Year-end staff numbers (full-time equivalent) ................................................
8,281
8,453
Balance sheet data41
Loans and advances to customers (net) ...........................................................
Loans and advances to banks (net) ..................................................................
Trading assets, financial assets designated at fair value, and
financial investments ...................................................................................
Total assets ......................................................................................................
Deposits by banks ............................................................................................
Customer accounts ...........................................................................................
For footnotes, see page 149.
All commentaries on Middle East are on an underlying basis unless stated otherwise.
2009
US$m
22,844
8,420
10,230
48,107
1,491
32,529
At 31 December
2008
US$m
27,295
7,476
8,056
50,952
1,001
35,165
–
1,883
(55)
1,828
(773)
1,055
252
1,307
%
5.4
41.1
8,050
2007
US$m
21,607
7,488
9,840
45,669
2,460
30,937
2009 compared with 2008
Economic briefing
Although the majority of economies in the Middle
East were spared the most severe effects of the
global recession, 2009 marked a dramatic downturn
as growth slowed markedly, bringing a sharp end to
a five-year run of strong expansion.
In part, the region proved vulnerable to
weakened external demand, particularly economies
such as Egypt and the UAE that are significant
service and merchandise exporters to the West and
are exposed to global trade patterns. A sharp drop
in hydrocarbon prices in late 2008 and early 2009
adversely affected sentiment and caused some oil-
exporters to reassess spending plans as their revenue
streams weakened.
In addition, the liquidity environment tightened
considerably during the course of the year. This led
to a rapid slowdown in credit creation, weighing
heavily on private consumption and investment
spending and contributing to marked downward
pressure on asset prices. Access to international
funding was also impaired as global capital flows
slowed, further impeding local investment spending.
The recovery of the region may lag that of some
other emerging markets. However, in contrast to
118
1998 (the last occasion on which growth trends
sharply reversed) policymakers in Saudi Arabia and
elsewhere were able to draw on reserves built up
during years of high oil earnings to maintain
spending, rather than boosting borrowing. With the
recovery in oil prices from mid-2009 onward, the
reserves allowed the region to weather the difficult
Reconciliation of reported and underlying profit before tax
economic environment without experiencing
pressure on external balances or a downturn in the
dollar value of local currencies. Inflation also fell
across the region as growth slowed and import prices
fell, and policymakers were able to track the
exceptionally low level of interest rates in the US.
2009 compared with 2008
2008
as
reported
US$m
2008
acquisitions
and
disposals10
US$m
2008
at 2009
exchange
rates12
US$m
2009
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Middle East27
Net interest income ..........
Net fee income .................
Other income15 .................
Net operating income16 ..
Loan impairment charges
and other credit risk
provisions ....................
1,556
691
421
2,668
(279)
Net operating income ....
2,389
Operating expenses ..........
(959)
Operating profit .............
1,430
Income from associates ...
316
Profit before tax .............
1,746
For footnotes, see page 149.
–
–
–
–
–
–
–
–
–
–
(7)
(4)
(7)
(18)
(1)
(19)
11
(8)
1
(7)
1,549
687
414
2,650
(280)
2,370
(948)
1,422
317
1,739
–
–
–
–
–
–
–
–
–
–
(64)
(62)
70
(56)
1,485
625
484
2,594
(5)
(10)
15
(3)
(4)
(9)
17
(2)
(1,054)
(1,334)
(378)
(376)
(1,110)
1,260
(53)
(1,001)
(1,163)
(121)
(1,284)
259
196
455
(47)
(4)
(82)
(38)
(74)
(47)
(6)
(82)
(38)
(74)
Review of business performance
HSBC’s operations in the Middle East reported a
pre-tax profit of US$0.5 billion compared with
US$1.7 billion in 2008, a decrease of 74 per cent on
both reported and underlying bases. The decline in
profitability was largely due to the impact of the
global recession, which brought a sharp decline in
oil prices and a considerable reduction in capital
inflows in the second half of 2008, triggering a
regional economic downturn which continued
throughout 2009. The UAE was significantly
affected by declines in construction and global trade,
losses incurred by regional investors, and tight
liquidity and lower real-estate prices, which together
resulted in higher loan impairment charges as
the crisis affected both personal and corporate
customers. However, despite the severe deterioration
in credit conditions, the region remained profitable
due to Global Banking and Markets. In Personal
Financial Services, HSBC continued to focus on
Premier and affluent mass market customers,
growing its Premier customer base by 32 per cent
compared with 2008. HSBC further expanded its
presence in Egypt, opening 15 new branches in
2009.
Net interest income declined by 4 per cent,
driven by lower deposit and lending balances and
deposit spread compression across all customer
groups.
Commercial Banking lending balances fell as
trade levels declined. In Personal Financial Services,
average mortgages and credit card balances were
higher than in 2008, reflecting the deferred
drawdown of facilities approved in 2008. Unsecured
personal lending balances declined during the year
due to tighter origination criteria and a move towards
relationship lending. The shift in the composition of
personal lending portfolios, from unsecured to
secured lending, resulted in narrower asset spreads.
Customer deposit balances fell, mainly due to an
outflow of funds from corporate customers reflecting
tighter liquidity in the local markets. In Personal
Financial Services, liability balances rose due to the
combination of attractive rates offered and ongoing
marketing campaigns, although the higher rates
resulted in narrower deposit spreads.
Net fee income fell by 9 per cent, due to a
decline in custody, insurance and unit trust income
as investor sentiment weakened in the difficult
119
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Middle East > 2009 / 2008
market conditions, and trade finance fees declined as
regional trade deteriorated. Cards income also fell
due to lower drawdowns and originations as
underwriting criteria were tightened.
Loan impairment charges and other credit
provisions increased by US$1.1 billion as
real estate and construction were hard hit in
the UAE.
Trading income was broadly in line with 2008
as weaker foreign exchange and Rates trading
revenue were offset by higher revenue from Credit
trading on favourable positioning of the trading
portfolio in expectation of spreads narrowing from
their peak in the third quarter of 2008.
Other operating income rose by US$62 million,
driven by gains arising from the buy-back and
extinguishment of HSBC’s own debt issued locally.
Loan impairment charges and other credit risk
provisions rose significantly from US$0.3 billion to
US$1.3 billion, reflecting substantially higher
charges in the UAE where the deterioration in credit
quality was particularly significant. The UAE’s real
estate and construction industries were adversely
affected by the global economic crisis, resulting in
several large infrastructure projects being postponed
or cancelled, and triggering higher levels of
unemployment. This resulted in increased
delinquencies, notably in credit cards and personal
loans, which were exacerbated by large numbers of
expatriate workers departing the region leaving debts
unpaid. Management has taken steps to mitigate
losses, including reducing credit lines, tightening
origination criteria and strengthening collections
activities.
Commercial and corporate banking loan
impairment charges rose sharply, primarily due to
a few individually significant impairment charges
recorded on exposures to large corporates.
Operating expenditure increased by 6 per
cent. Staff costs remained broadly flat as higher
expenditure in Global Banking and Markets was
offset by lower staff costs in Personal Financial
Services and Commercial Banking as headcount
declined. Non-staff costs rose as new head office
buildings in the UAE and Qatar caused higher rental
costs, and IT investment increased from systems
upgrades and rollouts.
Profit from associates and joint ventures in the
region fell by 38 per cent as the Group’s share of
income from The Saudi British Bank declined as a
result of higher loan impairment charges. HSBC’s
share of income from HSBC Saudi Arabia Ltd
declined as a result of a slowdown in IPOs and a
decline in assets under management.
Reconciliation of reported and underlying profit before tax
2008 compared with 2007
2007
acquisitions,
disposals
& dilution
gains10
US$m
2007
as
reported
US$m
2007
at 2008
exchange
rates17
US$m
2008
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
457
218
100
775
1,556
691
421
2,668
42
47
32
42
42
46
31
41
(223)
(279)
(407)
(398)
552
2,389
31
(181)
(959)
(24)
371
64
435
1,430
316
1,746
36
25
34
30
(23)
35
25
33
Middle East27
Net interest income ..........
Net fee income .................
Other income15 .................
Net operating income16 ....
Loan impairment charges
and other credit risk
provisions ....................
1,094
471
318
1,883
(55)
Net operating income ......
1,828
Operating expenses ..........
(773)
Operating profit ...............
1,055
Income from associates ...
252
Profit before tax ...............
1,307
For footnotes, see page 149.
–
–
–
–
–
–
–
–
–
–
5
2
3
10
(1)
9
(5)
4
–
4
1,099
473
321
1,893
(56)
1,837
(778)
1,059
252
1,311
–
–
–
–
–
–
–
–
–
–
120
2008 compared with 2007
Economic briefing
The economies of the Middle East performed
strongly for much of 2008, although inflationary
concerns were a feature for much of the year, driven
by the surge in oil prices to record levels and private
and public investment expenditure. High oil
revenues continued to boost fiscal and current
account surpluses throughout the region during
2008, although the impact of the decline in oil prices
during the final months of the year, together with the
OPEC-mandated production cuts, are expected to
lead to slower growth in 2009.
Review of business performance
HSBC’s operations in the Middle East performed
strongly, reporting a pre-tax profit of US$1.7 billion,
an increase of 33 per cent on an underlying basis.
Record oil prices which peaked in July 2008 boosted
domestic spending on infrastructure and real estate
in the first half of 2008. The resulting increase in
demand for credit was reflected by growth in both
volumes and the average loan size. HSBC also
successfully launched new banking products across
the region, in addition to growing the Premier
customer base. Business volume growth and wider
asset spreads drove higher net interest income, and
fee income rose as volumes of cards and trade
products grew.
As global financial conditions began to worsen
in the second half of 2008, liquidity in the region
declined, which combined with deteriorating
consumer confidence, adversely impacted real-estate
prices. This triggered an increase in construction-
related unemployment as large developments were
cancelled or suspended resulting in an increase in
loan impairment charges.
Net interest income increased by 42 per cent
driven by balance sheet growth in the region.
In Personal Financial Services, the strong
lending growth was driven by increased balances in
unsecured lending as both cards in circulation and
cardholder spending drove higher card balances.
Similarly new personal loan products were launched.
Mortgage balances rose in the UAE, driven by
increased customer demand. The increase in
Commercial Banking lending balances reflected a
strong rise in corporate lending aligned to trade and
infrastructure investments. Asset spreads benefited
from a decline in local base rates following US
dollar interest rate cuts, which resulted in a lower
cost of funds.
Growth in personal customer deposits was
driven by a significant increase in the number of
e-saver and Premier accounts. Deposit spreads
narrowed due to declining market interest rates in the
region.
There was strong growth in net interest income
from Balance Sheet Management, due to early
positioning in anticipation of lower market interest
rates.
Net fee income rose by 46 per cent driven by
higher fees in Global Banking and Markets as
increased interest from foreign investors and asset
growth drove securities services income. Credit card
fees rose, driven by increases in interchange fees
from higher cardholder spending, and late payment
and over-limit fees from higher delinquencies. Fee
income from credit facilities rose reflecting increases
in the numbers of customers. Trade and supply chain
services contributed strongly to fee income primarily
in the construction and infrastructure industries.
Trading income rose by 34 per cent resulting
from market uncertainty regarding possible currency
revaluations which drove volatility and together with
robust client demand, led to higher foreign exchange
income.
Loan impairment charges rose significantly,
albeit from a low base, to US$279 million as a result
of increased delinquency rates on higher personal
unsecured lending in the UAE. A deterioration in
credit conditions also led to increased charges in
Commercial Banking.
Operating expenses were 23 per cent higher,
reflecting substantially increased levels of operating
volumes, related headcount growth and wage
inflation driven by competitive labour market
conditions. Non-staff costs rose as a result of higher
premises costs, and increased marketing expenditure
in line with new product launches.
Profit from associates and joint ventures rose by
25 per cent as the Group’s share of income from the
Saudi British Bank increased as a result of higher fee
income from cards, account management and trade-
related businesses. These were partly offset by
higher operating expenditure resulting from branch
expansion, increased investment in technology and
higher performance-related pay.
121
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Middle East > Profit/(loss) before tax by customer group
Analysis by customer group and global business
Profit/(loss) before tax
Middle East27
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
2009
Net interest income .....................
Net fee income ............................
644
203
Trading income excluding net
interest income .......................
55
Net interest income on trading
activities ..................................
Net trading income42....................
Gains less losses from
financial investments ..............
Dividend income .........................
Other operating income/
(expense) ................................
Total operating income ............
Net insurance claims43 ................
Net operating income16 .............
Loan impairment charges and
other credit risk provisions .....
Net operating income ...............
Total operating expenses ............
Operating profit/(loss) ..............
Share of profit in associates
and joint ventures ...................
Profit/(loss) before tax ..............
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
Total
US$m
1,485
625
369
25
394
16
3
71
2,594
–
2,594
(1,334)
1,260
(1,001)
259
196
455
%
6.4
38.6
US$m
22,844
48,107
32,529
464
219
75
–
75
(2)
–
39
795
–
795
(573)
222
(269)
(47)
68
21
%
0.3
33.8
330
198
235
20
255
1
3
35
822
–
822
(173)
649
(255)
394
73
467
%
6.6
31.0
1
3
1
–
1
–
–
(1)
4
–
4
–
4
(6)
(2)
8
6
%
0.1
150.0
–
–
–
–
–
–
–
(76)
(76)
–
(76)
–
(76)
76
–
–
–
46
2
3
5
8
5
–
39
100
–
100
–
100
(39)
61
26
87
%
1.2
39.0
–
55
12
–
35
949
–
949
(588)
361
(508)
(147)
21
(126)
%
(1.8)
53.5
US$m
US$m
US$m
US$m
US$m
5,979
6,810
15,074
10,281
11,861
10,122
6,554
28,189
5,752
28
96
1,172
2
4,952
409
(3,801)
122
Middle East27
Net interest income .....................
Net fee income ............................
Trading income excluding net
interest income .......................
Net interest income/(expense)
on trading activities ................
Net trading income42 ...................
Gains less losses from
financial investments ..............
Dividend income .........................
Other operating income ...............
Total operating income ...............
Net insurance claims43 ................
Net operating income16 ...............
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income .................
Total operating expenses ............
Operating profit ..........................
Share of profit in associates
and joint ventures ...................
Profit before tax ..........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
2008
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
652
227
47
–
47
14
–
21
961
–
961
(223)
738
(511)
227
62
289
%
3.1
53.2
510
241
65
–
65
–
–
8
824
–
824
(45)
779
(264)
515
43
558
%
6.0
32.0
362
217
244
20
264
(6)
2
11
850
–
850
(12)
838
(212)
626
190
816
%
8.9
24.9
3
6
–
–
–
–
–
3
12
–
12
–
12
(8)
4
–
4
%
–
66.7
(17)
–
–
17
17
–
–
(60)
(60)
–
(60)
–
(60)
60
–
–
–
46
–
24
(15)
9
–
–
26
81
–
81
1
82
(24)
58
21
79
%
0.8
29.6
US$m
US$m
US$m
US$m
US$m
7,226
8,168
13,753
13,221
14,672
10,978
6,649
27,975
7,628
29
46
1,762
170
5,754
1,044
(5,663)
Total
US$m
1,556
691
380
22
402
8
2
9
2,668
–
2,668
(279)
2,389
(959)
1,430
316
1,746
%
18.8
35.9
US$m
27,295
50,952
35,165
123
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Middle East > Profit/(loss) before tax by customer group // North America > 2009
Profit/(loss) before tax (continued)
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
2007
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
458
172
30
–
30
2
–
22
684
–
684
(66)
618
(418)
200
45
245
%
1.0
61.1
381
164
43
–
43
–
–
12
600
–
600
11
611
(207)
404
78
482
%
2.0
34.5
260
132
183
(1)
182
–
2
9
585
–
585
–
585
(171)
414
81
495
%
2.1
29.2
1
3
–
–
–
–
–
1
5
–
5
–
5
(2)
3
–
3
%
–
40.0
(24)
–
–
24
24
–
–
(28)
(28)
–
(28)
–
(28)
28
–
–
–
18
–
–
18
18
–
–
1
37
–
37
–
37
(3)
34
48
82
%
0.3
8.1
US$m
US$m
US$m
US$m
US$m
5,173
6,045
11,078
10,762
12,219
9,585
5,630
26,548
8,347
42
49
1,625
–
4,390
302
(3,582)
Total
US$m
1,094
471
256
41
297
2
2
17
1,883
–
1,883
(55)
1,828
(773)
1,055
252
1,307
%
5.4
41.1
US$m
21,607
45,669
30,937
Middle East27
Net interest income .....................
Net fee income ............................
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ...
Gains less losses from
financial investments ..............
Dividend income .........................
Other operating income ..............
Total operating income ...............
Net insurance claims43 ................
Net operating income16 ...............
Loan impairment charges and
other credit risk provisions .....
Net operating income .................
Total operating expenses ............
Operating profit ..........................
Share of profit in associates
and joint ventures ...................
Profit before tax ..........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 149.
124
North America
Profit/(loss) before tax by country within customer groups and global businesses
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Other
US$m
Total
US$m
2009
US .....................................................................
Canada ..............................................................
Bermuda ............................................................
Other .................................................................
2008
US52 ...................................................................
Canada ..............................................................
Bermuda ............................................................
Other .................................................................
2007
US ......................................................................
Canada ..............................................................
Bermuda ............................................................
Other .................................................................
(5,292)
17
49
–
(5,226)
(17,364)
106
31
(1)
(17,228)
(1,824)
265
13
–
(1,546)
158
347
37
1
543
226
380
51
1
658
377
466
77
–
920
505
159
47
1
712
(2,899)
252
72
–
(2,575)
(1,243)
239
39
–
(965)
(49)
–
(2)
1
(50)
67
5
11
–
83
156
8
10
–
174
(3,626)
(100)
10
(1)
(3,717)
3,427
96
9
2
3,534
1,468
5
34
1
1,508
For footnote, see page 149.
Loans and advances to customers (net) by country
US ....................................................................................................................
Canada .............................................................................................................
Bermuda ...........................................................................................................
Customer accounts by country
US ....................................................................................................................
Canada .............................................................................................................
Bermuda ...........................................................................................................
2009
US$m
156,638
47,158
3,057
206,853
2009
US$m
99,371
41,565
8,221
149,157
At 31 December
2008
US$m
208,834
44,866
2,514
256,214
At 31 December
2008
US$m
101,963
33,905
7,664
143,532
(8,304)
423
141
2
(7,738)
(16,543)
839
174
2
(15,528)
(1,066)
983
173
1
91
2007
US$m
233,706
53,891
2,263
289,860
2007
US$m
100,034
37,061
8,078
145,173
2009 compared with 2008
Economic briefing
Economic conditions remained extremely difficult in
the US during the early months of 2009 before some
signs of recovery appeared as the year progressed,
limiting the decline in full year GDP to 2.4 per cent
after a 0.4 per cent increase during 2008. Housing
sales and residential construction activity showed
some improvement from very depressed levels and
this, along with the introduction of tax incentives,
drove a reduction in the rate of decline of house
prices in some states as the year progressed. Labour
market conditions weakened throughout the year as
the unemployment rate rose to a 26-year high of
10.1 per cent in October 2009, contributing to
concerns around the trend of delinquencies on both
secured and unsecured debt within the household
sector. The annual CPI rate remained negative
during the second and third quarters of the year
before rising to 2.7 per cent by December 2009,
although this trend was largely reflective of the
125
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America > 2009
Profit/(loss) before tax
North America
Net interest income ..........................................................................................
Net fee income .................................................................................................
Net trading income/(expense) .........................................................................
Changes in fair value of long-term debt issued and related derivatives .........
Net income from other financial instruments designated at fair value ...........
Net income/(expense) from financial instruments designated at fair value ...
Gains less losses from financial investments ..................................................
Dividend income ..............................................................................................
Net earned insurance premiums ......................................................................
Other operating income ...................................................................................
2009
US$m
13,670
4,817
331
(3,497)
1
(3,496)
296
53
309
566
2008
US$m
15,218
5,227
(3,135)
3,736
1
3,737
(120)
77
390
23
2007
US$m
14,847
5,810
(542)
1,750
–
1,750
245
105
449
360
Total operating income .................................................................................
16,546
21,417
23,024
Net insurance claims incurred and movement in liabilities
to policyholders ............................................................................................
(241)
(238)
(241)
Net operating income before loan impairment charges and other
credit risk provisions .................................................................................
Loan impairment charges and other credit risk provisions .............................
Net operating income ....................................................................................
Operating expenses (excluding goodwill impairment) ...................................
Goodwill impairment .......................................................................................
Operating profit/(loss)....................................................................................
Share of profit in associates and joint ventures ...............................................
Profit/(loss) before tax ...................................................................................
Share of HSBC’s profit before tax ..................................................................
Cost efficiency ratio ........................................................................................
Year-end staff numbers (full-time equivalent) ................................................
Balance sheet data41
Loans and advances to customers (net) ...........................................................
Loans and advances to banks (net) ..................................................................
Trading assets, financial assets designated at fair value, and
financial investments49 ................................................................................
Total assets ......................................................................................................
Deposits by banks ............................................................................................
Customer accounts ...........................................................................................
16,305
(15,664)
641
(8,391)
–
(7,750)
12
(7,738)
%
(109.3)
51.5
35,458
2009
US$m
206,853
15,386
123,288
475,014
13,970
149,157
21,179
(16,795)
4,384
(9,359)
(10,564)
(15,539)
11
(15,528)
%
(166.8)
94.1
44,725
At 31 December
2008
US$m
256,214
11,458
119,634
596,302
18,181
143,532
22,783
(12,156)
10,627
(10,556)
–
71
20
91
%
0.4
46.3
52,722
2007
US$m
289,860
16,566
133,998
574,318
16,618
145,173
For footnotes, see page 149.
All commentaries on North America are on an underlying basis unless stated otherwise.
earlier volatility of energy prices. Measures of
consumer confidence improved during the year, but
remained consistent with a weak overall level of
household expenditure. The Standard & Poor’s
S&P 500 stock market index recovered from a weak
start to 2009 to eventually record a gain of 23 per
cent in the year. Having already lowered the Fed
funds target rate to within a narrow range of between
zero and 25 basis points, the Federal Reserve
maintained their efforts to improve the availability of
credit across the economy by purchasing a range of
financial instruments, while a substantial fiscal
stimulus package provided additional support to
economic activity from the middle of the year.
Canadian GDP fell by 3.2 per cent during the
first eleven months of 2009 compared with the
equivalent period of 2008, led by a sharp contraction
126
of output within the manufacturing sector. Labour
market conditions deteriorated as the unemployment
rate rose from a level of 6.8 per cent in December
2008 to an eleven year high of 8.7 per cent in August
2009, before then declining slightly in the final
months of the year. In common with many other
economies, the headline CPI rate turned negative
around the middle of 2009, largely reflecting the
trend of energy prices, and the core rate of inflation
displayed a more pronounced downward trend as
2009 progressed. Responding to this deteriorating
economic outlook, the Bank of Canada cut its
overnight interest rate from 1.5 per cent in December
2008 to 0.25 per cent in April 2009, and provided a
conditional commitment to maintain this level of
interest rates until the end of the second quarter of
2010.
Reconciliation of reported and underlying profit/(loss) before tax
2008
as
reported
US$m
15,218
5,227
3,444
2008
adjust-
ments10
US$m
–
–
(3,444)
North America
Net interest income ..........
Net fee income .................
Changes in fair value14 .....
Other income/
2009 compared with 2008
2008
at 2009
exchange
rates12
US$m
Currency
translation11
US$m
2009
adjust-
ments10
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
(79)
(33)
–
15,139
5,194
–
–
–
(3,688)
(1,469)
(377)
–
13,670
4,817
(3,688)
(10)
(8)
(207)
156
(23)
(10)
(7)
155
13
(expense)15 ...................
(2,710)
–
(4)
(2,714)
–
4,220
1,506
Net operating income16 ..
21,179
(3,444)
(116)
17,619
(3,688)
2,374
16,305
Loan impairment charges
and other credit risk
provisions ....................
(16,795)
–
(8)
(16,803)
–
1,139
(15,664)
7
7
Net operating income ....
4,384
(3,444)
(124)
816
(3,688)
3,513
641
(85)
431
Operating expenses
(excluding goodwill
impairment) .................
Goodwill impairment .......
(9,359)
(10,564)
–
–
58
–
(9,301)
(10,564)
–
–
910
10,564
(8,391)
–
10
100
Operating loss ................
(15,539)
(3,444)
(66)
(19,049)
(3,688)
14,987
(7,750)
Income from associates ...
11
–
(1)
10
–
2
12
Loss before tax ...............
(15,528)
(3,444)
(67)
(19,039)
(3,688)
14,989
(7,738)
50
9
50
10
100
79
20
79
For footnotes, see page 149.
Review of business performance
In North America, HSBC reported a loss before tax
of US$7.7 billion in 2009 compared with a loss of
US$15.5 billion in 2008. On an underlying basis,
excluding US$3.7 billion of fair value movements on
HSBC’s own debt, and also excluding an impairment
charge of US$10.6 billion in 2008 to fully write-off
goodwill in respect of North America Personal
Financial Services, the pre-tax loss fell by 52 per
cent to US$4.1 billion. This improved performance
was largely due to a marked reduction in write-
downs and losses in Global Banking and Markets,
lower loan impairment charges in Personal Financial
Services and lower operating expenses following the
closure of the Consumer Lending branch network at
the beginning of 2009, partly offset by higher loan
impairment charges and other credit risk provisions
in the corporate and commercial, and Private
Banking, books.
Net interest income in 2009 declined by 10 per
cent, mainly reflecting reduced asset balances in the
legacy consumer finance portfolios, increases in
average delinquencies and modified loans (which
generate lower yields), the compression of deposit
spreads and lower revenue from Balance Sheet
Management activities. These effects were partly
offset by lower funding costs from the decline in
interest rates and higher credit card yields which
were driven by the effects of re-pricing initiatives,
interest rate floors and lower levels of promotional
balances.
Loans and advances to customers declined,
mainly in HSBC Finance, following decisions taken
to cease new originations and run off the residual
balances in Mortgage Services, Consumer Lending
and vehicle finance. HSBC Bank USA sold
US$4.5 billion of prime mortgages in 2009 in
addition to normal sale activity. In Card and Retail
127
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions >North America > 2009
Services, balances declined due to lower consumer
spending and steps taken by management to mitigate
risk and reduce originations, including tightening
initial credit-line sales authorisation criteria, closing
inactive accounts, decreasing credit lines, restricting
underwriting criteria, restricting cash access and
reducing marketing expenditure. In the second half
of the year, direct marketing mailings and new
customer account originations were resumed for
portions of the sub-prime credit card portfolio which
had held up well through the economic downturn.
In November 2009, HSBC entered into an
agreement to sell the vehicle finance loan servicing
operation and US$1.0 billion of associated loans.
This transaction is expected to close in the first
quarter of 2010.
On an underlying basis and excluding
goodwill impairment in 2008, the pre-tax
loss in North America halved.
In December 2009, HSBC Finance revised the
write-off period for its real estate secured and other
personal lending portfolios in order to reflect
changed customer behaviour, aligning it with the
policy used across the Group. As a consequence
of this, real estate secured loan balances are now
written down to net realisable value generally no
later than the end of the month in which the account
becomes 180 days delinquent, and personal lending
products balances are now written off no later than
the end of the month in which the account becomes
180 days delinquent. This change did not have a
material effect on financial results as write-offs
were offset with releases of related impairment
allowances. However, the write-offs resulted in a
US$3.3 billion reduction in gross balances in
Mortgage Services and Consumer Lending.
Asset spreads narrowed slightly in the Mortgage
Services and Consumer Lending portfolios as the
effect of credit quality deterioration and increased
loan modifications were partly offset by lower
funding costs. Vehicle finance spreads widened due
to lower funding costs. In Card and Retail Services,
spreads widened due to lower funding costs, re-
pricing initiatives, lower levels of promotional
balances and interest rate floors on portions of the
portfolio. In Global Banking and Markets and
Commercial Banking, asset spreads widened,
primarily due to loan repricing and lower funding
costs.
Customer deposit balances were broadly
unchanged. In Global Banking and Markets, reduced
deposits reflected the decline in assets being funded.
This reduction was partly offset in both Personal
128
Financial Services and Commercial Banking, which
were successful in increasing deposits through
Premier, the expanded branch network and various
internet-based propositions. Liability spreads
tightened as base rates declined, although spreads
widened in the second half of 2009 as rates paid to
customers decreased in line with major competitors.
Net interest income from Balance Sheet
Management fell, despite strong performance in the
first half of the year, affected by risk management
initiatives which included selling higher yielding
assets and reinvesting the proceeds in assets with a
reduced risk profile, resulting in lower yield.
Net fee income declined by 7 per cent to
US$4.8 billion, driven by lower late, overlimit,
interchange and cash advance fees in the US credit
cards business. This was mainly due to a reduction in
cards in issue, lower transaction volumes and
changes in customer behaviour. Fee income from
enhancement services also decreased due to lower
balances and fewer accounts, and the discontinuance
of all but one partner relationship and a change in
product mix to lower revenue products led to a
decline in fee income from Taxpayer Financial
Services. In Global Banking and Markets, fee
income from underwriting increased, driven by
higher debt origination volumes.
Net trading income of US$331 million
compared with a net trading loss of US$3.1 billion in
2008, primarily due to significantly lower write-
downs on exposures in Global Banking and Markets,
as the effect of downgrades of monoline insurers and
mortgage-backed securities were far less marked
than in 2008. Revenue from foreign exchange fell,
following a record performance in 2008 in which
there had been unprecedented levels of market
volatility and wider spreads. In Global Banking, fair
value losses were recorded on certain credit default
swap transactions used to hedge corporate loan
exposures following the tightening of credit spreads,
compared with gains in 2008.
Net income from financial instruments
designated at fair value declined by 35 per cent to
US$192 million, as income from ineffective interest
rate hedges related to long-term debt issued by the
Group’s subsidiaries in North America reduced.
Gains less losses from financial investments
were US$296 million, compared with a net loss of
US$123 million in 2008. Gains in the current year
were largely attributable to the sale of mortgage-
backed securities, compared with losses on the sale
of US government agency securities in 2008. Gains
from the sale of Visa shares in 2008 did not recur.
Net earned insurance premiums declined by
21 per cent as lower loan balances and the
discontinuation of real estate originations in HSBC
Finance led to lower premiums from payment
protection insurance products.
Other operating income was US$566 million
compared with US$26 million in 2008 due to lower
losses on sales of repossessed properties during
2009. House prices began to stabilise during the
second half of the year and this resulted in less
deterioration in value in the time between taking title
and selling the property. Also, there were further
delays in the foreclosure process in 2009, resulting in
lower inventory levels and fewer sales. In addition,
HSBC Finance recognised gains from the refinement
of the income recognition methodology of long-term
insurance contracts, and gains on the sale of prime
mortgages in HSBC Bank USA increased.
Net insurance claims incurred and movements
in liabilities to policyholders increased marginally to
US$241 million as higher claims and an increase
in liabilities for credit protection policies written
against the US prime mortgage book were largely
offset by reduced life insurance and disability claims
due to a decline in the number of policies underwritten.
Loan impairment charges and other credit
risk provisions decreased by 7 per cent to
US$15.7 billion. Lower loan impairment charges in
HSBC Finance were partly offset by increases in
loan impairment charges and other credit risk
provisions in Global Banking and Markets,
Commercial Banking, the US prime mortgage book
and Private Banking.
Loan impairment charges in US consumer
finance fell by 12 per cent to US$13.5 billion.
Loan impairment charges in US consumer
finance decreased by 12 per cent to US$13.5 billion,
due to a stabilisation in delinquency trends. In the
Mortgage Services portfolio, loan impairment
charges fell by 40 per cent to US$2.1 billion as the
portfolio progressed further into run-off. By contrast,
there was a 4 per cent rise in loan impairment
charges in Consumer Lending, primarily in the
unsecured portfolio due to a deterioration in the 2006
and 2007 vintages and, to a lesser extent, first lien
real estate secured loans. This was partly offset by
lower loan impairment charges for second lien real
estate secured loans, reflecting a reduction in
portfolio risk factors as delinquency trends stabilised
and the outlook for current inherent losses on certain
first lien real estate secured vintages improved. The
change in write-off period referred above had no
significant effect on loan impairment charges.
129
In Card and Retail Services, loan impairment
charges decreased by 4 per cent, due to lower loan
balances, reflecting lower consumer spending and
actions taken to manage risk, and stable credit
conditions. In addition, the outlook for future loss
estimates improved: the effect of higher
unemployment on losses was not as severe as had
been predicted, in part due to tighter underwriting;
fuel prices declined; and government stimulus
activities helped household cashflow. These
developments occurred despite the continued
deterioration of the US economy and higher levels
of unemployment and personal bankruptcy filings.
In Personal Financial Services in HSBC Bank
USA, loan impairment charges rose by 18 per cent
to US$616 million, mainly in the prime residential
mortgage portfolios. Higher delinquencies and losses
were experienced due to credit quality deterioration
and continued weakness in house prices in certain
markets.
Loan impairment charges and other credit risk
provisions in Global Banking and Markets rose from
US$198 million to US$621 million, driven by
deterioration in the credit position of certain
corporate clients and additional impairments
recognised in respect of certain ABSs held in the
available-for-sale portfolio which reflected mark-to-
market losses. In Commercial Banking, loan
impairment charges rose by 15 per cent to
US$519 million as the recession adversely affected
the commercial real estate and construction
portfolios in the US, and the commercial real estate,
manufacturing, trade and service sectors in Canada.
In Private Banking, higher loan impairment charges
were attributable to a single specific charge.
Further commentary on delinquency trends in
the US Personal Financial Services portfolios is
provided in ‘Areas of special interest – personal
lending’ on page 215.
Operating expenses declined to US$8.4 billion.
Apart from the non-recurrence of a US$10.6 billion
charge for the impairment of the goodwill of the
North American Personal Financial Services business,
savings from the decision to discontinue originations
and close branches in the Consumer Lending
business and other cost reduction initiatives drove
expense reduction. Restructuring costs associated
with the closure of the branch network amounted to
US$150 million. Staff costs decreased as a result
of lower staff numbers, offsetting higher
performance-related costs in Global Banking and
Markets. General and administrative costs declined
with lower marketing costs in Card and Retail
Services as a significant element as origination
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions >North America > 2008
activity was curtailed. Deposit insurance expenses
increased by US$143 million following a Federal
Deposit Insurance Corporation special assessment
in response to the bail out of a number of regional
banks.
2008 compared with 2007
Economic briefing
Economic conditions proved very difficult in the
US during 2008 as the economy entered a period
of recession. Overall GDP growth slowed to just
1.1 per cent for the year, down from 2 per cent in
2007. In common with many other economies, much
of this weakness was concentrated in the final
months of 2008 as fourth quarter GDP registered the
largest quarterly decline for 26 years. Economic
weakness proved broad-based across most areas
of the economy, with the notable exception of net
exports. Housing sales and residential construction
activity both declined from already depressed levels,
with house prices continuing to fall in most regions
and mortgage delinquencies continuing to rise.
Labour market conditions weakened throughout the
course of the year as the unemployment rate rose
from 4.9 per cent in January to a 15-year high of
7.2 per cent in December 2008. The annual CPI rate
reached a 17-year high of 5.6 per cent in July 2008
before moderating sharply to stand at just 0.1 per
cent by the year-end. A combination of falling asset
values and weak employment conditions undermined
consumer confidence and household spending
growth turned negative during the second half of
2008. The Standard & Poor’s S&P 500 stock market
index fell by 38 per cent during the year. Faced with
this deterioration in economic activity and financial
conditions, the Federal Reserve lowered short-term
interest rates by 425 basis points during the course of
2008, leaving the Funds’ target rate within a narrow
range of between zero and 25 basis points, while a
number of liquidity initiatives were also introduced.
Canadian GDP increased by 0.4 per cent during
the first eleven months of 2008 compared with the
equivalent period of 2007, with growth slowing
markedly during the second half of the year, due
predominantly to weaker external demand. Labour
market conditions deteriorated as the unemployment
rate rose from a historical low of 5.8 per cent in
January 2008 to finish the year at 6.6 per cent. After
rising to a level of 3.5 per cent in August 2008, the
headline rate of consumer price inflation slowed to
1.2 per cent by the year-end. The core rate of
inflation remained below 2.0 per cent throughout
the year. Responding to the deteriorating economic
outlook, the Bank of Canada cut its overnight
interest rate from 4.25 per cent at the end of 2007
to 1.5 per cent in December 2008.
Reconciliation of reported and underlying profit/(loss) before tax
2007
as
reported
US$m
2007
adjustments
and dilution
gains10
US$m
Currency
translation11
US$m
North America
Net interest income ..........
Net fee income .................
Changes in fair value14 ....
Other income/
(expense)15 ...................
14,847
5,810
1,760
1
(105)
(1,760)
366
(18)
Net operating income16 ....
22,783
(1,882)
Loan impairment charges
and other credit risk
provisions ....................
(12,156)
–
Net operating income ......
10,627
(1,882)
Operating expenses
(excluding goodwill
impairment) .................
Goodwill impairment .......
Operating profit/(loss) .....
Income from associates ...
Profit/(loss) before tax .....
For footnotes, see page 149.
(10,556)
–
71
20
91
98
–
(1,784)
–
(1,784)
2008 compared with 2007
2007
at 2008
exchange
rates17
US$m
14,855
5,706
–
2008
adjust-
ments10
US$m
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
–
–
3,444
363
(479)
–
15,218
5,227
3,444
2
(10)
96
2
(8)
348
–
(3,058)
(2,710)
(840)
(879)
20,909
3,444
(3,174)
21,179
(7)
(15)
(12,144)
–
(4,651)
(16,795)
8,765
3,444
(7,825)
4,384
(38)
(59)
(38)
(89)
(10,464)
–
–
–
1,105
(10,564)
(9,359)
(10,564)
11
11
(1,699)
3,444
(17,284)
(15,539) (21,986)
(1,017)
20
–
(9)
11
(45)
(45)
(1,679)
3,444
(17,293)
(15,528) (17,164)
(1,030)
7
1
–
–
8
12
20
(6)
–
14
–
14
130
Review of business performance
HSBC’s operations in North America reported a pre-
tax loss of US$15.5 billion in 2008, compared with a
pre-tax profit of US$91 million in 2007. On an
underlying basis, the loss before tax was
US$17.3 billion worse at US$19.0 billion.
Net interest income in North America increased
by 2 per cent to US$15.2 billion, driven by Balance
Sheet Management activities in Global Banking and
Markets which more than offset the decline in
Personal Financial Services as lending reduced.
The significant increase in net interest income
in the Balance Sheet Management business resulted
from correct positioning in anticipation of lower
interest rates. Net interest income was also boosted
by higher balances within certain loan portfolios in
Global Banking and Markets.
Net interest income fell in Personal Financial
Services as asset balances declined and deposit
spreads narrowed. Deposit spread compression was
driven by the competitive environment for retail
deposits in which HSBC refrained from passing on
the full effects of interest rate cuts to customers.
Asset spreads widened, particularly in vehicle
finance and credit cards and, to a lesser extent, the
real estate secured portfolios as yields declined by
less than funding costs in the lower interest rate
environment, and the credit card portfolio benefited
from APR floors. This was partly offset by a rise in
non-performing loans, lower loan prepayments,
increased volumes of loan modifications, and lower
fees from reduced loan origination volumes.
Funding costs declined as a result of lower base
rates during the year.
Lending balances declined as the mortgage
services portfolio continued to run-off, originations
ceased during the year within the dealer and direct-
to-consumer channels in vehicle finance, and tighter
underwriting criteria in consumer lending
constrained customer eligibility for finance. In
addition, US$8.2 billion of mortgages were sold
from the US real estate secured portfolios during the
year. These factors were partly offset by a change in
mix towards higher-yielding credit card loans and
reduced levels of prepayments that resulted in loans
remaining on the balance sheet longer. At the end of
February 2009, HSBC authorised the discontinuation
as soon as practicable of all new receivable
originations of all products by the branch-based
consumer lending business of HSBC Finance in
North America (see page 215).
Net fee income declined by 8 per cent, driven by
reductions in US credit card fees following changes
131
in fee practices implemented since the fourth quarter
of 2007 and lower cash advance and interchange fees
as a result of reduced volumes. Partly offsetting the
decline were increased income from enhancement
services due to higher customer acceptance rates of
Account Secure Plus and Identity Protection Plan,
a rise in syndication, credit and service fees in
Commercial Banking and increased fees from asset
management.
Trading losses were dominated by write-downs
in Global Banking and Markets on legacy exposures
as continuing turmoil in credit markets adversely
affected valuations of credit and structured credit
trading positions, monoline exposures and leveraged
and acquisition finance loans. Continued
deterioration in the fair value of the run-off portfolio
of sub-prime residential mortgage loans held for sale
also contributed to the loss. US$3.6 billion in
leveraged loans, high yield notes and securities held
for balance sheet management were reclassified in
2008 under revised IFRS rules from trading assets
to loans and receivables and available for sale,
preventing any further mark-to-market trading losses
on these assets. If these reclassifications had not
been made, the loss before tax would have been
US$0.9 billion higher.
The losses on legacy assets were partly offset
by strong performances in other trading areas as
foreign exchange trading benefited from pronounced
market volatility, Rates trading correctly anticipated
central bank rate cuts and gains were generated on
credit default swaps in Global Banking. Revenues
from emerging markets trading and precious metals
trading also rose as a result of ongoing market
volatility and increased transaction volumes as
prices of gold and platinum rose during 2008.
Losses on non-qualifying hedge positions in interest
rate swaps generated further trading losses. In 2007,
the Decision One business, which was closed that
year, recorded trading losses of US$263 million.
Net income from financial instruments
designated at fair value rose by US$304 million to
US$293 million due to income from ineffective
hedges related to long-term debt issued by the
Group’s subsidiaries in North America.
Gains less losses from financial investments
declined, mainly due to losses on US government
agency securities in 2008 and the non-recurrence of
the sale of MasterCard shares, partly offset by gains
from the Visa IPO in 2008.
Net earned insurance premiums decreased by
13 per cent to US$390 million, driven by lower
credit related premiums in HSBC Finance due to
declining loan volumes.
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America > 2008 / Profit/(loss) before tax by customer group
Vehicle finance loan impairment charges rose as
delinquencies rose and lower prices resulted in lower
recoveries when repossessed vehicles were sold at
auction.
Loan impairment charges in Commercial
Banking grew to US$449 million from a low base,
primarily driven by higher impairment losses due to
deterioration across the middle market, commercial
real estate and corporate banking portfolios in the
US and among firms in the manufacturing, export
and commercial real estate sectors in Canada. Higher
loan impairment charges and other credit risk
provisions in Global Banking and Markets reflected
weaker credit fundamentals in the US in 2008.
Operating expenses increased by 90 per cent,
driven by US$10.6 billion of impairment charge
recognised in respect of North America Personal
Financial Services in 2008 to fully write off
goodwill. Excluding the goodwill impairment
charge, expenses were US$1.1 billion or 11 per cent
lower. Staff costs declined, primarily in HSBC
Finance, following decisions taken in 2007 to close
the acquisition channels for new business in
Mortgage Services and a number of consumer
lending branches, and integrate the operations of the
card businesses. HSBC USA made the decision to
close its wholesale and third-party correspondent
mortgage business in November 2008, while HSBC
Finance took the decision to cease originations in the
dealer and direct-to-consumer channels in the
vehicle finance business in July 2008. Staff costs
in Global Banking and Markets also fell as
performance-related compensation and staff
numbers both declined.
Other administrative costs decreased as
origination activity declined, marketing costs in card
and retail services reduced and branch costs in
consumer lending fell as tightened underwriting
criteria curtailed business and led to branch closures.
This was partly offset by higher marketing and
occupancy costs in the retail bank reflecting a
continued expansion of the branch network,
increased community investment activities and
higher deposit insurance, collection, payments and
cash management and asset management costs in
support of business growth.
Other operating income declined due to losses
on sale of the Canadian vehicle finance businesses
and other loan portfolios in 2008, in addition to the
non-recurrence of gains on disposal of fixed assets
and a small portfolio of private equity investments in
2007.
Net insurance claims incurred and movement in
liabilities to policyholders were broadly in line with
2007 at US$238 million.
Loan impairment charges and other credit
risk provisions rose sharply, by 38 per cent to
US$16.8 billion, reflecting substantially higher
impairment charges in HSBC Finance across all
portfolios and, in HSBC USA, the deterioration of
credit quality in prime residential mortgages, second
lien portfolios and private label cards. The main
factors driving this deterioration were the continued
weakening of the US economy, which led to rising
levels of unemployment and personal bankruptcy
filings: higher early-stage delinquency and increased
roll rates in consumer lending: the ageing of
portfolios: and further declines in house prices which
increased loss severity and reduced customers’
ability to refinance and access equity in their homes.
Partly offsetting these factors was a reduction in
overall lending as HSBC continued to actively
reduce its balance sheet and lower its risk profile in
the US.
In the Mortgage Services business, loan
impairment charges rose by 14 per cent to
US$3.5 billion as the 2005 and 2006 vintages
continued to season and experience rising
delinquency. Run-off of the portfolio slowed in light
of continued house price depreciation which, along
with the constrained credit environment, restricted
refinancing options for personal customers. In
consumer lending, loan impairment charges rose by
39 per cent to US$5.7 billion. In the second half
of 2008, delinquency rates began to accelerate
particularly in the first lien portfolios in the parts
of the country most affected by house price
depreciation and rising unemployment rates. In
HSBC USA, loan impairment charges rose by 76 per
cent to US$2.6 billion driven by credit quality
deterioration across the Home Equity line of credit,
Home Equity loan, prime first lien residential
mortgage and private label card portfolios.
Loan impairment charges in US card and retail
services rose, driven by portfolio seasoning and
rising unemployment, particularly in the second half
of 2008, higher levels of personal bankruptcy filings
and lower recovery rates. As with mortgages, this
was most notable in parts of the country most
affected by house price falls and unemployment.
132
Analysis by customer group and global business
Profit/(loss) before tax
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
2009
North America
Net interest income/(expense) ....
11,244
Net fee income ............................
3,174
1,391
453
999
1,045
178
142
Trading income/(expense)
excluding net interest income
257
(10)
(179)
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income from other financial
instruments designated at
fair value .................................
Net expense from financial
instruments designated
at fair value .............................
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income/
60
317
–
–
–
16
21
309
9
3
(7)
–
–
–
3
5
–
162
175
(4)
–
–
–
277
27
–
317
(expense) ................................
15,090
2,007
2,661
Net insurance claims43 ................
(241)
–
–
(3)
(1)
(4)
–
–
–
–
2
–
11
329
–
(84)
3
(30)
1
(29)
(3,497)
1
(3,496)
–
(2)
–
1,828
(58)
–
–
58
58
–
–
–
–
–
–
(1,761)
Net operating income/
(expense)16 .............................
Loan impairment charges and
14,849
2,007
2,661
329
(1,780)
(1,761)
16,305
other credit risk provisions .....
(14,424)
(519)
(621)
(98)
(2)
–
(15,664)
(1,780)
(1,761)
16,546
–
–
(241)
Net operating income/
(expense) ................................
425
1,488
Operating expenses .....................
Operating profit/(loss) ..............
(5,651)
(5,226)
Share of profit/(loss) in
associates and joint ventures ..
–
Profit/(loss) before tax ..............
(5,226)
%
(73.8)
38.1
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
2,040
(1,328)
712
–
712
%
10.1
49.9
231
(281)
(50)
–
(50)
%
(1,761)
1,761
–
–
–
(1,782)
(1,934)
(3,716)
(1)
(3,717)
%
(0.7)
85.4
(52.6)
(108.7)
(958)
530
13
543
%
7.7
47.7
US$m
US$m
US$m
US$m
US$m
151,671
179,597
74,228
31,292
38,232
42,900
18,654
260,131
19,095
5,236
6,572
12,834
–
2,071
100
(11,589)
133
Total
US$m
13,670
4,817
35
296
331
(3,497)
1
(3,496)
296
53
309
566
641
(8,391)
(7,750)
12
(7,738)
%
(109.3)
51.5
US$m
206,853
475,014
149,157
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > North America > Profit/(loss) before tax by customer group
Profit/(loss) before tax (continued)
North America
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
2008
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
Total
US$m
Net interest income .....................
12,632
Net fee income/(expense) ...........
3,896
1,480
391
Trading income/(expense)
excluding net interest income
(250)
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Other operating income/
(expense) ................................
Total operating income/
5
–
5
–
–
–
5
11
–
66
(184)
–
(2)
(2)
65
36
390
1,064
818
(3,516)
584
(2,932)
–
(1)
(1)
(209)
27
–
240
(993)
–
224
181
10
–
10
–
–
–
–
3
–
22
(59)
(128)
(110)
(238)
3,736
4
3,740
19
–
–
(204)
15,218
–
–
204
204
–
–
–
–
–
–
5,227
(3,879)
744
(3,135)
3,736
1
3,737
(120)
77
390
23
(426)
140
20
1,419
(1,370)
(expense) ................................
16,407
2,032
Net insurance claims43 ................
(238)
–
438
–
4,903
(1,370)
21,417
–
–
(238)
Net operating income/
(expense)16 ..............................
Loan impairment charges and
16,169
2,032
(993)
438
4,903
(1,370)
21,179
other credit risk provisions .....
(16,132)
(449)
(198)
(16)
–
–
(16,795)
Net operating income/
(expense) ................................
37
1,583
(1,191)
422
4,903
(1,370)
4,384
Operating expenses (excluding
goodwill impairment) .............
Goodwill impairment ..................
(6,701)
(10,564)
Operating profit/(loss) ................
(17,228)
Share of profit/(loss) in
associates and joint ventures ..
–
Profit/(loss) before tax ................
(17,228)
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
(185.1)
106.8
%
(937)
–
646
12
658
%
7.1
46.1
(1,384)
–
(2,575)
–
(2,575)
%
(339)
–
83
–
83
%
(27.7)
(139.4)
0.9
77.4
(1,368)
–
3,535
(1)
3,534
%
38.0
27.9
1,370
–
–
–
–
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
US$m
US$m
US$m
US$m
US$m
179,663
205,722
65,830
35,725
42,211
39,105
35,583
348,347
23,844
5,243
7,054
14,657
–
3,323
96
(10,355)
(9,359)
(10,564)
(15,539)
11
(15,528)
%
(166.8)
94.1
US$m
256,214
596,302
143,532
134
North America
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
2007
Private
Banking
US$m
Inter-
segment
elimination50
US$m
Other
US$m
Total
US$m
Net interest income/(expense) ....
13,175
Net fee income/(expense) ...........
4,571
1,558
338
Trading income/(expense)
excluding net interest income
(349)
Net interest income/(expense)
on trading activities ................
Net trading income/(expense)42 ..
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income from financial
instruments designated at
fair value .................................
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Other operating income/
(expense) ................................
134
(215)
–
–
–
176
47
449
(5)
(2)
–
(2)
–
–
–
(1)
1
–
88
Total operating income ...............
18,198
1,982
Net insurance claims43 ................
(241)
–
Net operating income16 ...............
17,957
1,982
Loan impairment charges and
other credit risk provisions .....
(11,909)
Net operating income .................
Total operating expenses ............
Operating profit/(loss) ................
6,048
(7,594)
(1,546)
Share of profit/(loss) in
associates and joint ventures ..
–
Profit/(loss) before tax ................
(1,546)
(191)
1,791
(893)
898
22
920
%
3.8
45.1
%
(6.4)
42.3
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 149.
378
701
(871)
137
(734)
–
11
11
65
57
–
167
645
–
645
(46)
599
(1,562)
(963)
(2)
(965)
%
(4.0)
242.2
273
279
11
–
11
–
–
–
2
–
–
34
599
–
599
(10)
589
(415)
174
–
174
%
0.7
69.3
(17)
(79)
(78)
(44)
(122)
1,750
(11)
1,739
3
–
–
1,480
3,004
–
(520)
14,847
–
–
520
520
–
–
–
–
–
–
(1,404)
(1,404)
–
5,810
(1,289)
747
(542)
1,750
–
1,750
245
105
449
360
23,024
(241)
3,004
(1,404)
22,783
–
–
(12,156)
3,004
(1,404)
10,627
1,404
(10,556)
–
–
–
(1,496)
1,508
–
1,508
%
6.3
49.8
71
20
91
%
0.4
46.3
US$m
289,860
574,318
145,173
US$m
US$m
US$m
US$m
US$m
218,676
252,304
61,824
38,930
46,247
36,306
26,186
263,008
30,732
6,068
20,073
16,187
–
1,095
124
(8,409)
135
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America > 2009
Latin America
Profit/(loss) before tax by country within customer groups and global businesses
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Other
US$m
Total
US$m
2009
Argentina ..........................................................
Brazil .................................................................
Mexico ..............................................................
Panama ..............................................................
Other .................................................................
2008
Argentina ..........................................................
Brazil .................................................................
Mexico ..............................................................
Panama ..............................................................
Other .................................................................
2007
Argentina ..........................................................
Brazil .................................................................
Mexico ..............................................................
Panama ..............................................................
Other .................................................................
24
(224)
(31)
69
(54)
(216)
–
250
360
51
7
668
36
293
514
45
5
893
86
211
66
55
(19)
399
111
348
157
37
53
706
75
286
333
18
28
740
122
515
230
24
40
931
113
298
190
33
7
641
90
297
113
16
1
517
–
5
7
–
(1)
11
–
8
7
–
1
16
–
9
11
7
(2)
25
–
3
–
–
(4)
(1)
–
6
–
–
–
6
–
(6)
9
–
–
3
Loans and advances to customers (net) by country
Argentina .........................................................................................................
Brazil ................................................................................................................
Mexico .............................................................................................................
Panama .............................................................................................................
Other ................................................................................................................
Customer accounts by country
Argentina .........................................................................................................
Brazil ................................................................................................................
Mexico .............................................................................................................
Panama .............................................................................................................
Other ................................................................................................................
2009
US$m
2,319
22,765
12,114
5,989
4,442
47,629
2009
US$m
3,083
39,022
18,195
6,996
5,593
72,889
At 31 December
2008
US$m
2,356
18,255
12,211
4,538
4,927
42,287
At 31 December
2008
US$m
2,988
27,857
17,652
5,185
5,761
59,443
232
510
272
148
(38)
1,124
224
910
714
121
68
2,037
201
879
980
86
32
2,178
2007
US$m
2,485
18,491
18,059
4,158
4,730
47,923
2007
US$m
2,779
26,231
22,307
5,062
4,913
61,292
136
Profit before tax
Latin America
Net interest income ..........................................................................................
Net fee income .................................................................................................
Net trading income ..........................................................................................
Changes in fair value of long-term debt issued and related derivatives .........
Net income from other financial instruments designated at fair value ...........
Net income from financial instruments designated at fair value ....................
Gains less losses from financial investments ..................................................
Gains arising from dilution of interests in associates ......................................
Dividend income ..............................................................................................
Net earned insurance premiums ......................................................................
Other operating income ...................................................................................
2009
US$m
5,573
1,729
848
–
495
495
168
–
11
1,900
133
2008
US$m
6,458
2,167
701
–
364
364
176
–
20
1,717
300
2007
US$m
5,576
2,153
548
–
320
320
253
11
9
1,594
228
Total operating income .................................................................................
10,857
11,903
10,692
Net insurance claims incurred and movement in liabilities
to policyholders ..........................................................................................
(1,833)
(1,390)
(1,427)
Net operating income before loan impairment charges and other
credit risk provisions ................................................................................
Loan impairment charges and other credit risk provisions .............................
Net operating income ....................................................................................
Total operating expenses .................................................................................
Operating profit .............................................................................................
Share of profit in associates and joint ventures ...............................................
Profit before tax .............................................................................................
Share of HSBC’s profit before tax ..................................................................
Cost efficiency ratio ........................................................................................
9,024
(2,526)
6,498
(5,375)
1,123
1
1,124
%
15.9
59.6
10,513
(2,492)
8,021
(5,990)
2,031
6
2,037
%
21.9
57.0
9,265
(1,697)
7,568
(5,402)
2,166
12
2,178
%
9.0
58.3
Year-end staff numbers (full-time equivalent) ................................................
54,288
58,559
64,404
Balance sheet data41
Loans and advances to customers (net) ...........................................................
Loans and advances to banks (net) ..................................................................
Trading assets, financial assets designated at fair value, and
financial investments ...................................................................................
Total assets ......................................................................................................
Deposits by banks ............................................................................................
Customer accounts ...........................................................................................
2009
US$m
47,629
18,608
28,779
115,967
5,421
72,889
At 31 December
2008
US$m
42,287
14,572
18,753
102,946
5,598
59,443
2007
US$m
47,923
12,675
24,715
102,649
4,092
61,292
For footnote, see page 149.
All commentaries on Latin America are on an underlying basis unless stated otherwise.
2009 compared with 2008
Economic briefing
A mixture of weak external demand and the
disruption caused by the H1N1 virus contributed to a
substantial deterioration in economic conditions in
Mexico during the first half of 2009. The period of
recession ended decisively as the economy improved
strongly during the third quarter of the year, but the
previous sharp decline in activity had left GDP some
6.2 per cent below the comparable figure in 2008.
The annual CPI rate continued to moderate, falling
from 6.5 per cent in December 2008 to 3.6 per cent
in December 2009. In response to the deterioration
in economic conditions, the Bank of Mexico cut its
overnight interest rate by 375 basis points during the
first seven months of 2009 to 4.5 per cent by the end
of the year.
The Brazilian economy experienced a mild
contraction during the early months of 2009 but
137
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America > 2009
returned to growth during the second quarter of
the year, helped by a recovery in household
consumption and a broader stabilisation of external
demand and commodity prices. Starting the year at
unusually low levels, the unemployment rate
increased during the early months of 2009 relative to
the comparable period of 2008, before declining to
the historically low level of 6.8 per cent in December
2009. The annual CPI rate moderated from 5.9 per
cent in December 2008 to a level slightly below the
central banks’ targeted rate of 4.5 per cent at the
year end. Faced with this softening of economic
conditions and diminishing inflationary pressures,
the central bank of Brazil reduced the policy Selic
target rate by a cumulative 500 basis points during
the first seven months of 2009, placing the rate at
8.75 per cent at the end of the period.
In Argentina, economic activity was adversely
affected by the decline in external demand during
2009, with a very weak level of growth being
reported around the middle of the year. Industrial
production is reported to have risen by 0.4 per cent
during 2009. The improving global and regional
outlook during the second half of 2009 and a
recovery in commodity prices provided some relief
to the economy, enabling interest rates to ease.
Reconciliation of reported and underlying profit before tax
2009 compared with 2008
2008
as
reported
US$m
2008
acquisitions
and
disposals10
US$m
2008
at 2009
exchange
rates12
US$m
2009
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
Under-
lying
change
US$m
2009
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
Latin America
Net interest income ..........
Net fee income .................
Other income15 .................
6,458
2,167
1,888
Net operating income16 ..
10,513
Loan impairment charges
and other credit risk
provisions ....................
(2,492)
Net operating income ....
8,021
Operating expenses ..........
(5,990)
Operating profit .............
2,031
Income from associates ...
6
Profit before tax .............
2,037
For footnotes, see page 149.
–
–
(71)
(71)
–
(71)
–
(71)
–
(71)
(783)
(291)
(220)
(1,294)
5,675
1,876
1,597
9,148
294
(2,198)
(1,000)
6,950
709
(291)
(2)
(5,281)
1,669
4
(293)
1,673
–
–
–
–
–
–
–
–
–
–
(102)
(147)
125
5,573
1,729
1,722
(124)
9,024
(328)
(2,526)
(452)
6,498
(94)
(5,375)
(546)
1,123
(3)
1
(549)
1,124
(14)
(20)
(9)
(14)
(1)
(19)
10
(45)
(83)
(45)
(2)
(8)
8
(1)
(15)
(7)
(2)
(33)
(75)
(33)
Review of business performance
HSBC’s operations in Latin America reported
pre-tax profits of US$1.1 billion, compared with
US$2.0 billion in 2008. On an underlying basis, pre-
tax profits decreased by 33 per cent, primarily
attributable to significantly higher loan impairment
charges in Personal Financial Services and
Commercial Banking and lower revenues in Personal
Financial Services. Global Banking and Markets’
performance improved driven by strong results in
trading and Balance Sheet Management.
2009 was a year of consolidating risk policies
and strongly emphasising cost control. Additional
capital was injected into Brazil and Mexico during
the fourth quarter of 2009, in line with the Group
strategy of focusing on emerging markets. In both
Panama and Argentina, strong results were achieved
in spite of the challenging economic environment.
However, performance in Honduras, Costa Rica and
El Salvador was significantly affected by higher loan
impairment charges and lower income. One HSBC
and Group systems were implemented in Chile and
the operations in Panama were fully integrated.
Net interest income remained broadly in line
with 2008 excluding the one-off interest income
which arose on recovery of transactional taxes on
insurance transactions in Brazil in 2008. Net interest
income decreased in Personal Financial Services as
average customer lending volumes declined,
primarily driven by actions taken to tighten credit
criteria and manage down existing higher risk
portfolios including credit cards, personal loans and
vehicle finance. The effect was partly offset by
higher income on increased lending to commercial
customers, primarily in Brazil. Repricing initiatives
taken during 2008 and early 2009 drove increased
spreads on lending products.
138
Average customer deposit balances rose,
resulting from an increase in commercial and Global
Banking balances. In Mexico, Personal Financial
Services launched new deposit products to mitigate
the fall in deposits. Deposits Spreads narrowed due
to falling interest rates, also primarily in Mexico.
Interest income rose in Balance Sheet
Management, primarily in Brazil.
Net fee income declined by 8 per cent. Tighter
credit origination criteria resulted in lower credit
card fees in Mexico. Account service fees also fell,
primarily due to lower transaction volumes. Weak
equity market performance in Brazil led to lower
assets under management and related fee income.
This was partly offset by growth in restructuring fees
in Global Banking and Markets.
Below inflation increase in operating
expenses reflected significant cost control
measures in Latin America.
Net trading income rose by 42 per cent due to
a strong performance in Global Banking and
Markets, particularly in the first half of the year in
Brazil. This resulted from increased foreign
exchange and Rates trading income, which benefited
from early positioning against interest rate
movements in a volatile market.
Net income from financial instruments
designated at fair value rose by 36 per cent,
primarily from higher insurance-related assets. This
resulted from business growth and a recovery of the
Brazilian equity markets as well as an increase in the
fair value of fixed income securities held in support
of personal pension portfolios in the country. An
offsetting increase was recorded in net insurance
claims incurred and movement in liabilities to
policyholders.
Net earned insurance premiums rose by 24 per
cent, driven by higher sales of pension and life
assurance products. In addition, a number of
customers in Brazil switched their personal pension
annuities to HSBC. These gains were partially offset
by the impact of the 2008 nationalisation of the
pension system in Argentina on the annuities
business there.
Net insurance claims incurred and movement in
liabilities to policyholders rose, primarily as a result
of the fair value movement on financial instruments
referred to above and insurance business growth.
Other operating income fell by 29 per cent,
largely due to the non-recurrence of gains arising in
2008 on a refinement of the income recognition
139
methodology used in respect of long-term insurance
contracts in Brazil. In 2009, a one-off gain was
realised on the sale of the head office in Argentina.
Loan impairment charges and other credit
risk provisions rose by 15 per cent as economic
conditions deteriorated across the region. In the first
half of 2009, delinquencies rose as GDP fell and
unemployment increased. The situation was
exacerbated by the H1N1 virus in Mexico and the
related economic shutdown. With the introduction of
enhanced credit risk management techniques and
gradual economic recovery, loan impairment charges
in the second half of 2009 decreased by 11 per cent
compared with the second half of 2008 and by 27 per
cent on the first half of 2009.
In Personal Financial Services, the combination
of portfolio seasoning, which followed expansion in
market share in previous years, and increased
delinquencies in secured and unsecured personal
lending products such as personal loans and payroll
loans in Brazil and cards and mortgages in Mexico,
resulted in higher loan impairment charges, mainly
in the first half of 2009. Some payroll loan portfolios
were run down in Brazil, as were several consumer
finance and unsecured portfolios in Mexico. Loan
impairment charges in Personal Financial Services
fell by 8 per cent in the second half of the year
compared with the same period in 2008 and by
27 per cent compared with the first half of 2009.
Loan impairment charges rose in commercial
lending portfolios, primarily in Business Banking
and mid-market business segments in Brazil, as trade
levels fell as a consequence of the global economic
slowdown. This was partly offset by net releases in
loan impairment charges in Global Banking and
Markets when compared with a net charge in 2008.
Operating expenses increased slightly by 2 per
cent, well below the inflation rates of the main
economies in which HSBC operates, reflecting
significant cost control measures. The benefit from
the reduction in staff numbers, which began in 2008
and continued in 2009, was partially offset by
union-agreed pay rises. Savings in general and
administrative costs were offset by investment
expenditure on regional initiatives to centralise
certain back office processes, and the
implementation of One HSBC and Group systems
intended to drive future operational efficiencies.
Costs also increased in the form of higher litigation
expenses and transactional taxes, the latter partly
from the non-recurrence of a recovery of
transactional taxes in the insurance business in 2008.
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America > 2008
2008 compared with 2007
Economic briefing
Inflationary pressures developed in Mexico during
the course of 2008, mostly due to rising commodity
prices, as consumer price inflation accelerated from
3.7 per cent in January to 6.5 per cent by the year-
end. In response, the Bank of Mexico raised its
overnight interest rate by 75 basis points to 8.25 per
cent by the end of the year, although a variety of
economic indicators pointed to a sharp loss of
momentum during the final quarter as global growth
slowed.
The Brazilian economy performed strongly
during the first half of 2008, driven by domestic
demand, with the annual rate of consumer price
inflation rising from 4.6 per cent in January to
6.4 per cent in July, towards the upper limit of the
central banks’ tolerance range. Conditions within
the labour market improved, with the rate of
unemployment well below levels observed a year
earlier. In line with many other economies within the
region, however, conditions weakened markedly
towards the end of 2008, with industrial production
falling by close to 20 per cent during the fourth
quarter.
In Argentina, economic activity held at a
reasonably robust level for much of the year,
although measures of industrial production growth
slowed noticeably during the final months of 2008.
Declines in commodity prices during the second half
of 2008 and the reduced value of exports raised
concerns over the level of capital outflow from the
country, while domestic currency interest rates
increased sharply. The official headline rate of
consumer price inflation rose during the first half of
2008, reaching 9.3 per cent in June 2008 before
slowing to 7.2 per cent in December, although
methodological changes make comparisons over
year difficult.
Reconciliation of reported and underlying profit before tax
2008 compared with 2007
2007
acquisitions,
disposals
& dilution
gains10
US$m
2007
as
reported
US$m
2007
at 2008
exchange
rates17
US$m
2008
acquisitions
and
disposals10
US$m
Currency
translation11
US$m
–
–
(11)
(11)
–
(11)
–
(11)
–
(11)
155
58
23
236
(64)
172
5,731
2,211
1,548
9,490
(1,761)
7,729
(190)
(5,592)
(18)
–
(18)
2,137
12
2,149
–
–
71
71
–
71
–
71
–
71
Under-
lying
change
US$m
2008
as
reported
US$m
Re-
ported
change13
%
Under-
lying
change13
%
727
(44)
269
6,458
2,167
1,888
952
10,513
16
1
23
13
13
(2)
17
10
(731)
(2,492)
(47)
(42)
221
8,021
6
(398)
(5,990)
(11)
(177)
2,031
(6)
6
(183)
2,037
(6)
(50)
(6)
3
(7)
(8)
(50)
(9)
Latin America
Net interest income ..........
Net fee income .................
Other income15 .................
Net operating income16 ....
Loan impairment charges
and other credit risk
provisions ....................
5,576
2,153
1,536
9,265
(1,697)
Net operating income ......
7,568
Operating expenses ..........
(5,402)
Operating profit ...............
2,166
Income from associates ...
12
Profit before tax ...............
2,178
For footnotes, see page 149.
Review of business performance
In Latin America, HSBC reported a pre-tax profit
of US$2.0 billion compared with US$2.2 billion in
2007, a decrease of 6 per cent. On an underlying
basis, pre-tax profits decreased by 9 per cent as
increased revenues were offset by higher loan
impairment charges, largely in Mexico and Brazil,
and increased operating costs across the region.
Net interest income increased by 13 per cent.
Growth in average personal lending volumes was
mainly driven by vehicle finance and payroll loans
in Brazil, and credit cards and personal loans in
Mexico. Average credit card balances increased as a
result of significant organic growth in 2007 which
was not repeated in 2008. Commercial loan volume
growth was driven by increased lending for working
capital and trade finance loans in Brazil, and
medium-sized businesses and the real estate sector in
Mexico. Increased income on customer liabilities,
which was driven by volume growth, particularly in
time deposits, was largely offset by a contraction in
deposit spreads, primarily on US dollar denominated
accounts. Active repricing strategies were deployed
140
to mitigate spread compression in the region and to
better reflect the credit risk on the loan portfolio.
Lower overall spreads on lending products were
partly offset by increases in cards in the region,
small business loans in Mexico and overdrafts in
Brazil. In Argentina, spreads on most products
widened.
Net fee income decreased by 2 per cent
following a ruling by the Brazilian Central Bank
reducing or eliminating certain fees such as charges
on early loan repayments and returned cheques.
Lower transaction volumes in Personal Financial
Services in Brazil also reduced fee income. These
were partly offset by product repricing, the
introduction of new fees and volume growth,
particularly in cards, personal loans, packaged
deposit products and payments and cash
management.
Trading income rose by 22 per cent largely
reflecting favourable positioning against foreign
exchange movements and increased foreign
exchange sales volumes. Trading losses were
registered on certain transactions where an offsetting
benefit is reported in net income from financial
instruments designated at fair value. Losses from
defaults on derivative contracts were registered,
primarily in Mexico.
Gains less losses from financial investments
declined by 24 per cent as gains on the redemption
of VISA shares, following its global IPO, and the
sale of shares in both Brazil and Mexico were lower
than the gains achieved on the sale of shares in a
number of companies in Brazil in 2007.
Net earned insurance premiums rose, driven by
higher prices and increased sales in the general
insurance business, primarily in Argentina. Sales of
life assurance products remained strong.
Increased net insurance claims incurred and
movements in liabilities to policyholders in
Argentina were more than offset by a decrease in
liabilities to policyholders in Brazil following a
decline in the equity market where the investment
losses were passed on to unit-linked policyholders.
This was compensated for by a similar decrease in
net income from financial instruments designated at
fair value.
Other operating income was broadly in line
with 2007. A refinement of the income recognition
methodology used in respect of long-term insurance
contracts in Brazil in 2008 was offset by a similar
adjustment in Mexico in 2007.
Loan impairment charges and other credit risk
provisions rose by 42 per cent, mainly relating to
credit cards, as organically grown portfolios in
Mexico seasoned following market share growth and
credit quality deteriorated in Mexico and Brazil. The
personal unsecured, vehicle finance and small and
medium-sized commercial loan portfolios in Brazil
also experienced increased levels of loan
impairment. Specific focus was placed on improving
the quality of new business, based on underwriting
experience and relationship management, and steps
were taken to improve collection strategies.
Operating expenses increased by 7 per cent. An
increase in staff costs was primarily driven by higher
salaries following union-agreed pay rises and
redundancy payments following reductions in staff
numbers, partly offset by cost savings from the
reduced headcount. Administrative expenses rose
following an increase in the use of a credit card
cashback promotional facility in Mexico which was
terminated at the end of 2008. Costs also grew in
support of improved operational processes in the
region. HSBC benefited in 2008 from the
recognition of a tax credit following a court ruling
in Brazil granting the right to recover excess taxes
paid on insurance transactions and changes in
transactional tax legislation. As economic conditions
weakened towards the second half of 2008, strategic
cost saving measures were implemented throughout
the region.
141
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America > Profit/(loss) before tax by customer group
Analysis by customer group and global business
Profit/(loss) before tax
Latin America
Net interest income/(expense) ....
Net fee income ............................
Trading income excluding net
interest income .......................
Net interest income/(expense)
on trading activities ................
Net trading income42 ...................
Changes in fair value of long-
term debt issued and
related derivatives ..................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Other operating income/
(expense) ................................
Total operating income ............
Net insurance claims43 ................
Net operating income16 .............
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income ...............
Share of profit in associates
and joint ventures ...................
Profit/(loss) before tax ..............
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
2009
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Private
Banking
US$m
Personal
Financial
Services
US$m
3,736
948
Inter-
segment
elimination50
US$m
Other
US$m
(5)
12
1,544
490
38
2
40
–
590
251
573
(108)
465
–
25
4
29
–
510
12
(38)
510
91
9
1,752
170
7,245
(1,750)
5,495
(2,046)
3,449
12
–
1
105
35
2,227
(58)
2,169
(534)
1,635
399
–
399
%
5.6
57.0
1
(216)
%
(3.1)
66.7
(38)
77
1
43
24
1,413
(25)
1,388
57
1,445
(514)
931
–
931
%
13.2
37.0
19
28
3
–
3
–
–
–
–
–
–
2
52
–
52
–
52
(41)
11
–
11
%
0.2
78.8
(311)
–
–
311
311
–
–
–
–
–
–
(97)
(97)
–
(97)
–
(97)
97
–
–
–
–
–
–
–
11
11
–
–
–
(1)
17
–
17
(3)
14
(15)
(1)
–
(1)
%
–
88.2
US$m
US$m
US$m
US$m
US$m
19,748
35,236
30,628
18,205
23,212
19,775
9,645
57,491
20,142
31
328
2,344
–
281
–
(581)
142
Total
US$m
5,573
1,729
639
209
848
–
495
495
168
11
1,900
133
10,857
(1,833)
9,024
(2,526)
6,498
(5,375)
1,123
1
1,124
%
15.9
59.6
US$m
47,629
115,967
72,889
Total operating expenses ............
(3,666)
(1,236)
Operating profit/(loss) ..............
(217)
Latin America
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Net interest income/(expense) ....
Net fee income ............................
4,582
1,339
1,637
536
Trading income excluding net
interest income .......................
Net interest income/(expense)
on trading activities ................
Net trading income42 ...................
Changes in fair value of long-
term debt issued and
related derivatives ..................
Net income from other financial
instruments designated at fair
value .......................................
Net income from financial
instruments designated at
fair value .................................
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income ...............
Net insurance claims43 ................
Net operating income16 ...............
123
7
130
–
187
187
132
16
1,547
244
8,177
(1,281)
6,896
Loan impairment charges and
other credit risk provisions .....
(2,120)
Net operating income .................
4,776
27
4
31
–
–
–
21
1
82
57
2,365
(42)
2,323
(340)
1,983
Total operating expenses ............
(4,114)
(1,277)
662
6
668
%
7.2
59.7
706
–
706
%
7.6
55.0
Operating profit ..........................
Share of profit in associates
and joint ventures ...................
Profit before tax ..........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
2008
Private
Banking
US$m
22
35
3
–
3
–
–
–
2
–
–
3
65
–
65
–
65
(49)
16
–
16
%
0.2
75.4
Inter-
segment
elimination50
US$m
Other
US$m
(35)
(327)
–
–
327
327
–
–
–
–
–
–
(51)
(51)
–
(51)
–
(51)
51
–
–
–
9
4
(2)
2
–
38
38
–
–
–
8
22
1
23
(3)
20
(14)
6
–
6
%
–
60.9
579
248
200
8
208
–
139
139
21
3
88
39
1,325
(68)
1,257
(29)
1,228
(587)
641
–
641
%
6.9
46.7
Total
US$m
6,458
2,167
356
345
701
–
364
364
176
20
1,717
300
11,903
(1,390)
10,513
(2,492)
8,021
(5,990)
2,031
6
2,037
%
21.9
57.0
US$m
42,287
102,946
59,443
US$m
US$m
US$m
US$m
US$m
18,523
30,320
27,564
15,460
19,382
14,367
8,273
53,870
15,384
31
391
2,128
–
361
–
(1,378)
143
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Geographical regions > Latin America > Profit/(loss) before tax by customer group // Products and services
Profit/(loss) before tax (continued)
Latin America
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking &
Markets
US$m
Net interest income .....................
Net fee income ............................
3,983
1,372
1,407
485
Trading income excluding net
interest income .......................
Net interest income on
trading activities .....................
Net trading income42 ...................
Changes in fair value of long-
term debt issued and
related derivatives ..................
Net income from other financial
instruments designated at fair
value .......................................
Net income from financial
instruments designated at
fair value .................................
Gains less losses from financial
investments .............................
Gains arising from dilution of
interests in associates .............
Dividend income .........................
Net earned insurance premiums .
Other operating income ..............
Total operating income ...............
Net insurance claims43 ................
Net operating income16 ...............
Loan impairment (charges)/
recoveries and other credit
risk provisions ........................
Net operating income .................
67
10
77
–
314
314
120
–
5
1,448
145
7,464
(1,330)
6,134
(1,492)
4,642
39
1
40
–
–
–
51
–
2
66
69
2,120
(37)
2,083
(212)
1,871
Total operating expenses ............
(3,758)
(1,132)
884
9
893
%
3.7
61.3
739
1
740
%
3.1
54.3
Operating profit ..........................
Share of profit in associates
and joint ventures ...................
Profit before tax ..........................
Share of HSBC’s profit
before tax ................................
Cost efficiency ratio ...................
Balance sheet data41
Loans and advances to
customers (net) .......................
Total assets .................................
Customer accounts ......................
For footnotes, see page 149.
2007
Private
Banking
US$m
20
40
2
–
2
–
–
–
1
–
–
–
8
71
–
71
–
71
(46)
25
–
25
%
0.1
64.8
Inter-
segment
elimination50
US$m
Other
US$m
(247)
–
–
247
247
–
–
–
–
–
–
–
(37)
(37)
–
(37)
–
(37)
37
–
–
–
3
6
–
–
–
–
–
–
(1)
11
–
–
12
31
–
31
(6)
25
(22)
3
–
3
%
–
71.0
410
250
164
18
182
–
6
6
82
–
2
80
31
1,043
(60)
983
13
996
(481)
515
2
517
%
2.1
48.9
Total
US$m
5,576
2,153
272
276
548
–
320
320
253
11
9
1,594
228
10,692
(1,427)
9,265
(1,697)
7,568
(5,402)
2,166
12
2,178
%
9.0
58.3
US$m
47,923
102,649
61,292
US$m
US$m
US$m
US$m
US$m
21,680
35,181
30,628
16,243
21,049
15,524
9,935
46,606
13,950
65
302
1,190
–
261
–
(750)
144
Products and services
Personal Financial Services
Personal Financial Services provides 98 million
individual and self-employed customers with
financial services in over 60 markets worldwide.
In markets where HSBC already has scale or, in
emerging markets where scale can be built over
time, HSBC offers its range of personal financial
products and services to all customer segments. In
other markets, HSBC participates more selectively,
targeting only those customer segments which have
strong international connectivity or where HSBC’s
global scale is crucial.
Typically, offerings include personal banking
products (current and savings accounts, mortgages
and personal loans, credit cards, and local and
international payment services) and wealth
management services (insurance and investment
products and financial planning services).
HSBC Premier (‘Premier’) provides premium
banking services to its customers including
personalised relationship management, a single
online view of all international accounts, free
international funds transfer between HSBC accounts,
24-hour priority telephone access, global travel
assistance and wealth management services. There
are now over 3.4 million Premier customers, who
can use more than 370 specially designated Premier
branches and centres in 43 markets.
HSBC Advance offers a range of premium
services including preferential day-to-day and
international banking while allowing solutions to be
customised to meet local requirements.
Wealth management services play an important
part in meeting the needs of customers. Insurance
products distributed by HSBC through its direct
channels and branch networks include life, property
and health insurance as well as pensions and credit
protection. HSBC also makes available a wide range
of investment products. A choice of third-party and
proprietary funds offer customers the ability to
diversify their investments across a range of best-in-
class fund managers chosen after a rigorous and
objective selection process. Comprehensive financial
planning services covering customers’ investment,
retirement, personal and asset protection needs are
offered through qualified financial planning
managers.
Personal customers prefer to conduct their
financial business at times convenient to them, using
the sales and service channels of their choice. This
demand for flexibility is met through the increased
145
provision of direct channels such as the internet and
self-service terminals, in addition to traditional and
automated branches and service centres accessed by
telephone.
HSBC is a major global credit card issuer with
over 100 million credit cards in force in over
50 markets. In addition to HSBC branded cards, a
number of markets offer co-branded credit cards and
third-party private label cards (or store cards)
through merchant relationships.
High net worth individuals and their families
who choose the differentiated services offered within
Private Banking are not included in this customer
group.
Commercial Banking
HSBC is one of the world’s leading and most
international banks, with over 3 million Commercial
Banking customers in 63 countries and territories,
including sole proprietors, partnerships, clubs and
associations, incorporated businesses and publicly
quoted companies.
HSBC divides its Commercial Banking business
into corporate, mid-market, business banking upper
and business banking mass segments, allowing the
development of tailored customer propositions while
adopting a broader view of the entire commercial
banking sector, from sole traders to top-end
mid-market corporations. This allows HSBC to
provide continuous support to companies as they
grow in size both domestically and internationally,
and ensures a clear focus on the business banking
sectors, which are typically the key to innovation
and growth in market economies.
HSBC places particular emphasis on
geographical collaboration to meet its business
customers’ needs and aims to be recognised as the
leading international business bank and the best bank
for business in target markets. The range of products
and services includes:
Financing: HSBC provides a range of short and
longer-term financing options for Commercial
Banking customers, both domestically and cross-
border, including overdrafts, receivables finance,
term loans and property finance. The Group offers
forms of asset finance in selected sites and has
established specialised divisions providing leasing
and instalment finance for vehicles, plant and
equipment.
Payments and cash management: HSBC is a
leading provider of domestic and cross-border
payments, collections, liquidity management and
account services worldwide. The Group’s extensive
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Products and services / Other information > Funds under management
network of offices and direct access to numerous
local clearing systems enhances its customers’ ability
to manage their cash efficiently on a global basis.
Deposits are attracted through current accounts and
savings products, in local and foreign currencies.
International trade: HSBC finances and
facilitates significant volumes of international trade,
under both open account terms and traditional trade
finance instruments. HSBC also provides
international factoring, commodity and insured
export finance, and forfaiting services. The Group
utilises its extensive international network to build
customer relationships at both ends of trade flows,
and maximises efficiency through expertise in
document checking and processing, and highly
automated systems.
Treasury and capital markets: Commercial
Banking customers are volume users of the Group’s
foreign exchange, derivatives and structured product
capabilities, including sophisticated currency and
interest rate options.
Commercial cards: HSBC offers commercial
card issuing and acquiring services. Commercial
card issuing helps customers enhance cash
management, improve cost control and streamline
purchasing processes. HSBC’s card acquiring
services enable merchants to accept credit and
debit card payments either in person or when the
cardholder is not present (e.g. over the internet or
by telephone).
Insurance: Through its bancassurance model,
HSBC offers a full range of commercial insurance
products and services to enable customers and
company owners to trade and grow safely. Products
include key person and life insurance, employee
benefits and a variety of commercial risks such as
property, liability, cargo and trade credit insurance.
These products are provided by HSBC as a
manufacturer or an intermediary utilising preferred
strategic partners. Upon the completion of the sale of
HSBC Insurance Brokers in 2010 a new partnership
will be launched with Marsh, the global insurance
broker, to provide intermediary services to HSBC’s
corporate customers.
Wealth management services: These include
advice and products related to savings and
investments provided to Commercial Banking
customers and their employees through HSBC’s
worldwide network, with clients being referred to
Premier and Private Banking where appropriate.
Investment banking: A small number of
Commercial Banking customers need corporate
146
finance and advisory support. These requirements
are serviced by the Group on a client-specific basis.
Delivery channels: HSBC deploys a full range
of delivery channels, including specific online and
direct banking offerings such as HSBCnet and
Business Internet Banking.
Global Banking and Markets
Global Banking and Markets provides tailored
financial solutions to major government, corporate
and institutional clients worldwide. Managed as a
global business, Global Banking and Markets
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 62 countries and access to HSBC’s worldwide
presence and capabilities, this business serves
subsidiaries and offices of its clients on a global
basis.
Global Banking and Markets is managed as four
principal business lines: Global Markets, Global
Banking, Global Asset Management and Principal
Investments. This structure allows HSBC to focus on
relationships and sectors that best fit the Group’s
footprint and facilitates seamless delivery of HSBC’s
products and services to clients.
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 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;
distribution of capital markets instruments,
including debt, equity and structured products,
utilising HSBC’s global network; 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.
Global Banking
HSBC’s operations in Global Banking consist of
financing, advisory and transaction services for
corporations, institutional and private investors,
financial institutions, and governments and their
agencies. Products include:
•
•
•
financing and capital markets, which comprises
capital raising, including debt and equity capital,
corporate finance and advisory services,
bilateral and syndicated lending, leveraged and
acquisition finance, structured and project
finance, lease finance, and non-retail deposit-
taking;
international, regional and domestic payments
and cash management services; and
other transaction services, including trade
services, factoring and banknotes.
Global Asset Management
HSBC’s operations in asset management consist of
products and services for institutional investors,
intermediaries and individual investors and their
advisers.
Principal Investments
This includes private equity, which comprises
HSBC’s captive private equity funds, strategic
relationships with third-party private equity
managers and other investments.
Private Banking
HSBC’s presence in all the major wealth-creating
regions has enabled it to build one of the world’s
leading private banking groups, providing private
banking and trustee services to high net worth
individuals and their families from over 90 locations
in 42 countries and territories, with client assets of
US$367 billion at 31 December 2009.
HSBC Private Bank is the principal marketing
name of the HSBC Group’s international private
banking business. Utilising the most suitable
products from the marketplace, HSBC Private Bank
works with its clients to offer both traditional and
innovative ways to manage and preserve wealth
while optimising returns. Products and services
offered include:
Private Banking Services: These comprise
multi-currency deposit accounts and fiduciary
deposits, credit and specialist lending, treasury
147
trading services, cash management, securities
custody and clearing. In addition, HSBC Private
Bank works to ensure that its clients have full access
to other products and services available throughout
HSBC such as credit cards, internet banking,
corporate banking, and investment banking.
Private Wealth Management: This comprises
both advisory and discretionary investment services.
A wide range of investment vehicles is covered,
including bonds, equities, derivatives, options,
futures, structured products, mutual funds and
alternatives (hedge funds, private equity and real
estate). By accessing regional expertise in six major
advisory centres in Hong Kong, Singapore, Geneva,
New York, Paris and London, Private Banking seeks
to identify the most suitable investments for clients’
needs and investment strategies. Corporate Finance
Solutions helps provide clients with cross-border
solutions for their companies, working in
conjunction with Global Banking & Markets.
Private Wealth Solutions: These comprise
inheritance planning, trustee and other fiduciary
services designed to protect wealth and preserve it
for future generations through structures tailored to
meet the individual needs of each family. Areas of
expertise include trusts, foundation and company
administration, charitable trusts and foundations,
insurance, family office advisory and philanthropy.
Other information
Funds under management
Funds under management
At 1 January ...............................
Net new money ..........................
Value change .............................
Exchange and other ....................
At 31 December .........................
Funds under management by
business
Global Asset Management .........
Private Banking .........................
Affiliates ....................................
Other ..........................................
2009
US$bn
2008
US$bn
735
36
76
10
857
844
(1)
(159)
51
735
At 31 December
2009
US$bn
2008
US$bn
423
251
3
180
857
370
219
2
144
735
Funds under management at 31 December 2009
were US$857 billion, an increase of 17 per cent
when compared with 2008. Both Global Asset
Management and Private Banking fund holdings
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Other information > Assets held in custody / Property / Legal proceedings / Data security // Footnotes
increased, primarily as a result of the improvement
in global equity markets during the year.
Global Asset Management funds increased by
14 per cent compared with 2008 to US$423 billion
as a result of market performance, strong net flows,
particularly in Asia, and favourable foreign exchange
movements. Emerging markets funds increased
during 2009, driven by market performance gains
and net flows. HSBC remains one of the world’s
largest emerging market asset managers with funds
under management of US$90 billion at 31 December
2009.
Private Banking funds under management
increased by 15 per cent to US$251 billion at
31 December 2009, driven by strengthening equity
markets, mainly in Europe and Hong Kong.
Client assets, which provide an indicator of
overall Private Banking volumes and include funds
under management, were US$367 billion, up by
US$15 billion compared with 2008.
Other funds under management, which are
mainly held by a corporate trust business in Asia,
increased to US$180 billion.
Assets held in custody and under
administration
Custody is the safekeeping and servicing of
securities and other financial assets on behalf of
clients. At 31 December 2009, assets held by HSBC
as custodian amounted to US$5.2 trillion, 45 per
cent higher than the US$3.6 trillion held at
31 December 2008. This was mainly driven by an
increase in the market value of assets.
HSBC’s assets under administration business,
which includes the provision of various support
function activities including the valuation of
portfolios of securities and other financial assets on
behalf of clients, complements the custody business.
At 31 December 2009, the value of assets held under
administration by the Group amounted to
US$2.8 trillion.
Property
At 31 December 2009, HSBC operated from some
10,100 operational properties worldwide, of which
approximately 2,600 were located in Europe, 2,900
in Hong Kong and Rest of Asia-Pacific, 800 in North
America, 3,500 in Latin America and 300 in the
Middle East. These properties had an area of
approximately 70.8 million square feet (2008:
73.6 million square feet).
A gain of US$576 million was recognised in
respect of the sale and leaseback of HSBC’s
headquarters building at 8 Canada Square, London
which was effected through the disposal of the
Group’s entire shareholding in Project Maple II B.V.
(‘PMII’) to the National Pension Service of Korea.
Gains were also realised on the sale of the head
office building in Argentina.
HSBC’s freehold and long leasehold properties,
together with all leasehold properties in Hong Kong,
were valued in 2009. The value of these properties
was US$4.1 billion (2008: US$3.3 billion) in excess
of their carrying amount in the consolidated balance
sheet. In addition, properties with a net book value
of US$1,061 million were held for investment
purposes.
HSBC’s operational properties are stated at cost,
being historical cost or fair value at the date of
transition to IFRSs (their deemed cost) less any
impairment losses, and are depreciated on a basis
calculated to write off the assets over their estimated
useful lives. Properties owned as a consequence of
an acquisition are recognised initially at fair value.
Further details are included in Note 23 on the
Financial Statements.
Legal proceedings
On 27 July 2007, the UK Office of Fair Trading
(‘OFT’) issued High Court legal proceedings against
a number of UK financial institutions, including
HSBC Bank, to determine the legal status and
enforceability of certain charges applied to their
personal customers in relation to unauthorised
overdrafts. In a judgement given on 25 November
2009, the Supreme Court held that provided the
relevant charges were in plain and intelligible
language, the amount of those charges could not be
assessed for fairness by either the OFT or the courts.
On 22 December 2009, the OFT announced that it
would not be continuing the investigation it began in
March 2007 into the fairness of unauthorised
overdraft charges following detailed consideration of
the Supreme Court judgement.
In December 2008, in the US, Bernard L
Madoff (‘Madoff’) was arrested and charged with
securities fraud and the US Securities and Exchange
Commission filed securities fraud charges against
Madoff and Madoff Securities. On 29 March 2009,
Madoff pleaded guilty to 11 felony cases and was
subsequently sentenced to 150 years in prison.
Various non-US HSBC group companies provide
custodial, administration and similar services to a
148
number of funds incorporated outside the US whose
assets were invested with Madoff Securities and
have been named as defendants in suits in the US,
Ireland, Luxembourg and other jurisdictions. HSBC
considers that it has good defences to these claims
and will continue to defend them vigorously. HSBC
is unable reliably to estimate the liability, if any, that
might arise as a result of such claims.
Full details are provided in Note 42 on the
Financial Statements.
Data security
HSBC Private Bank (Suisse) is currently continuing
to investigate a theft of client data which was widely
reported in December 2009 as having been supplied
to the French authorities. The theft appears to have
taken place during a period preceding March 2007.
The bank is working closely with the Swiss
authorities and its regulator to establish the extent of
data involved in the theft in order to protect the
interests and rights of its clients and of the Group
and to further enhance its security policies and data
protection practices.
Footnotes to the Operating and Financial Review
Key performance indicators (page 18)
1 The percentage increase in net operating income before loan impairment and other credit risk charges since the previous year.
2 As a percentage of net operating income before loan impairment charges and other credit risk provisions.
3 Other income comprises net operating income before loan impairment charges and other credit risk provisions less net interest income
and net fee income.
4 Total operating expenses divided by net operating income before loan impairment and other credit risk charges.
5 Net operating income divided by average risk-weighted assets.
6 Profit attributable to ordinary shareholders divided by average invested capital.
7 The return on average total shareholders’ equity is defined as profit attributable to shareholders of the parent company divided by the
average total shareholders’ equity.
8 The percentage increase in dividends per share since the previous year, based on the dividends paid in respect of the year to which the
dividend relates.
9 Basic earnings per ordinary share is defined in Note 13 on the Financial Statements.
Reconciliations of reported and underlying profit/(loss) before tax (pages 21 to 22)
10 These columns comprise the net increments or decrements in profits in the current year compared with the previous year which are
attributable to acquisitions or disposals of subsidiaries and/or movements in fair value of own debt attributable to credit spread
(together referred to as ‘adjustments’ in the tables for HSBC, the ‘Other’ customer group and certain geographical regions).
Comparatives for 2007 include gains arising on the dilution of interests in associates, where relevant. The inclusion of acquisitions and
disposals is determined in the light of events each year.
11 ‘Currency translation’ is the effect of translating the results of subsidiaries and associates for the previous year at the average rates of
exchange applicable in the current year.
12 Excluding adjustments in 2008.
13 Positive numbers are favourable: negative numbers are unfavourable.
14 Changes in fair value of long-term debt issued.
15 ‘Other income’ in this context comprises net trading income, net income/(expense) from other financial instruments designated at fair
value, gains less losses from financial investments, gains arising from dilution of interests in associates, dividend income, net earned
insurance premiums and other operating income less net insurance claims incurred and movement in liabilities to policyholders.
16 Net operating income before loan impairment charges and other credit risk provisions.
17 Excluding adjustments in 2007.
Financial summary (pages 23 to 60)
18 The change in fair value related to movements in the Group’s credit spread on long-term debt resulted in an expense of US$6.5 billion
in 2009 (2008: income of US$6.6 billion; 2007: income of US$3.1 billion).
19 Net interest income includes the cost of funding trading assets, while the related external revenues are reported in trading income. In
HSBC’s customer group results, the cost of funding trading assets is included with Global Banking and Markets’ net trading income as
an interest expense.
20 Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’).
21 Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan
fees, and the average annualised interest rate paid on average interest-bearing funds.
22 Net interest margin is net interest income expressed as an annualised percentage of AIEA.
23 The cost of internal funding of trading assets was US$1,309 million (2008: US$5,547 million; 2007: US$5,433 million) and is excluded
from the reported ‘Net trading income’ line and included in ‘Net interest income’. However, this cost is reinstated in ‘Net trading
income’ in HSBC’s customer group and global business reporting.
24 Net trading income includes an expense of US$444 million (2008: income of US$529 million; 2007: income of US$34 million),
associated with changes in the fair value of issued structured notes and other hybrid instrument liabilities derived from movements in
HSBC issuance spreads.
25 Other changes in fair value include gains and losses arising from changes in the fair value of derivatives that are managed in
conjunction with HSBC’s long-term debt issued.
26 Net insurance claims incurred and movement in liabilities to policyholders arise from both life and non-life insurance business. For
non-life business, amounts reported represent the cost of claims paid during the year and the estimated cost of notified claims. For life
149
H S B C H O L D I N G S P L C
Report of the Directors: Operating and Financial Review (continued)
Footnotes // Impact of Market Turmoil > Background and disclosure policy
business, the main element of claims is the liability to policyholders created on the initial underwriting of the policy and any subsequent
movement in the liability that arises, primarily from the attribution of investment performance to savings-related policies. Consequently,
claims rise in line with increases in sales of savings-related business and with investment market growth.
27 The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of
Asia-Pacific. Comparative data have been restated accordingly.
28 Expressed as a percentage of average invested capital.
29 Average invested capital is measured as average total shareholders’ equity after:
– adding back the average balance of goodwill amortised pre-transition to IFRSs or subsequently written-off, directly to reserves (less
goodwill previously amortised in respect of the French regional banks sold in 2008);
– deducting the average balance of HSBC’s revaluation surplus relating to property held for own use. This reserve was generated when
determining the deemed carrying cost of such properties on transition to IFRSs and will run down over time as the
properties are sold;
– deducting average preference shares and other equity instruments issued by HSBC Holdings; and
– deducting average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities.
30 Return on invested capital is based on the profit attributable to ordinary shareholders of the parent company less goodwill previously
amortised in respect of the French regional banks sold in 2008.
31 ‘Currency translation’ is the effect of translating the assets and liabilities of subsidiaries and associates for the previous year-end at the
rates of exchange applicable at the current year-end.
32 Interest income on trading assets is reported as ‘Net trading income’ in the consolidated income statement.
33 Interest income on financial assets designated at fair value is reported as ‘Net income from financial instruments designated at fair
value’ in the consolidated income statement.
34 Brazilian operations comprise HSBC Bank Brasil S.A.-Banco Múltiplo and subsidiaries, plus HSBC Serviços e Participações Limitada.
35 This table analyses interest-bearing bank deposits only. See page 58 for an analysis of all bank deposits.
36 Interest expense on financial liabilities designated at fair value is reported as ‘Net income on financial instruments designated at fair
value’ in the consolidated income statement, other than interest on own debt.
37 This table analyses interest-bearing customer accounts only. See page 59 for an analysis of all customer accounts.
38 For the purpose of calculating the ratios, earnings consist of income from continuing operations before taxation and minority interests,
plus fixed charges, and after deduction of the unremitted pre-tax income of associated undertakings. Fixed charges consist of total
interest expense, including or excluding interest on deposits, as appropriate, dividends on preference shares and other equity
instruments, as applicable, and the proportion of rental expense deemed representative of the interest factor.
39 Net interest margin is calculated as net interest income divided by average interest earning assets.
40 The main items reported under ‘Other’ are certain property activities, unallocated investment activities, centrally held investment
companies, gains arising from the dilution of interests in associates, movements in the fair value of own debt designated at fair value
(the remainder of the Group’s gain on own debt is included in Global Banking and Markets), and HSBC’s holding company and
financing operations. The results also include net interest earned on free capital held centrally, operating costs incurred by the head
office operations in providing stewardship and central management services to HSBC, and costs incurred by the Group Service Centres
and Shared Service Organisations and associated recoveries. At 31 December 2009, there were no gains arising from the dilution of
interests in associates (2008: nil; 2007: US$1.1 billion) and fair value gains on HSBC’s own debt designated at fair value were
US$6.2 billion (2008: US$6.7 billion income; 2007: US$2.8 billion expense).
41 Assets by geographical region and customer group include intra-HSBC items. These items are eliminated, where appropriate, under the
heading ‘Intra-HSBC items’.
42 In the analyses of customer groups and global businesses, net trading income comprises all gains and losses from changes in the fair
value of financial assets and financial liabilities classified as held for trading, together with related external and internal interest
income and interest expense, and dividends received; in the statutory presentation internal interest income and expense are eliminated.
43 Net insurance claims incurred and movement in liabilities to policyholders.
44 In 2009, Global Markets included a US$444 million expense on the widening of credit spreads on structured liabilities (2008: income
of US$529 million; 2007: income of US$34 million).
45 Total income earned on securities services products in the Group amounted to US$1.4 billion (2008: US$2.2 billion; 2007:
US$2.0 billion), of which US$1.4 billion was in Global Banking and Markets (2008: US$2.1 billion; 2007: US$1.9 billion) and
US$19 million was in Commercial Banking (2008: US$45 million; 2007: US$33 million).
46 Total income earned on payments and cash management products in the Group amounted to US$3.8 billion (2008: US$5.2 billion;
2007: US$5.2 billion), of which US$2.8 billion was in Commercial Banking (2008: US$3.5 billion; 2007: US$3.5 billion) and
US$1.1 billion was in Global Banking and Markets (2008: US$1.7 billion; 2007: US$1.6 billion).
47 Total income earned on other transaction services in the Group amounted to US$1.8 billion (2008: US$1.8 billion; 2007:
US$1.4 billion), of which US$1.3 billion was in Commercial Banking relating to trade and supply chain (2008: US$1.3 billion; 2007:
US$1.0 billion) and US$507 million was in Global Banking and Markets of which US$382 million related to trade and supply chain
(2008: US$355 million; 2007: US$270 million) and US$125 million related to banknotes and other (2008: US$126 million; 2007:
US$102 million)
48 ‘Other’ in Global Banking and Markets includes net interest earned on free capital held in the global business not assigned to products.
49 Trading assets and financial investments held in Europe, and by Global Banking and Markets in North America, include financial
assets which may be repledged or resold by counterparties.
50 Inter-segment elimination comprises (i) the costs of shared services and Group Service Centres included within ‘Other’ which are
recovered from customer groups, and (ii) the intra-segment funding costs of trading activities undertaken within Global Banking and
Markets. HSBC’s Balance Sheet Management business, reported within Global Banking and Markets, provides funding to the trading
businesses. To report Global Banking and Markets’ ‘Net trading income’ on a fully funded basis, ‘Net interest income’ and ‘Net interest
income/(expense) on trading activities’ are grossed up to reflect internal funding transactions prior to their elimination in the inter-
segment column.
51 France primarily comprises the domestic operations of HSBC France, HSBC Assurances and the Paris branch of HSBC Bank.
52 US includes the impairment of goodwill in respect of Personal Financial Services – North America as described in Note 22 on the
Financial Statements.
150
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil
Background and disclosure policy
(Audited)
As a result of the widespread deterioration in the
markets for securitised and structured financial
assets and consequent disruption to the global
financial system which began in mid-2007, the
markets for these assets have remained illiquid and
it has remained difficult to observe prices for
structured credit risk, including senior tranches of
such risk. The ensuing constraint on the ability of
financial institutions to access wholesale markets to
fund such assets has put additional downward
pressure on asset prices. As a consequence, since
2007 many financial institutions have recorded
considerable reductions in the fair values of asset
values, including their asset-backed securities
(‘ABS’s) and leveraged structured transactions, most
significantly for sub-prime and Alt-A mortgage-
backed securities (‘MBS’s) and collateralised debt
obligations (‘CDO’s) referencing these securities.
A further constraint on liquidity within the
market for securitised assets emerged in 2009 as
rating agencies changed their rating methodologies
in response to changed circumstances, precipitating
widespread downgrades and the fear of further
downgrades across all tranches of securitised paper.
This accentuated illiquidity, particularly for those
institutions subject to the Basel II framework, which
ties capital requirements to external credit ratings
without reference to the actual level of expected loss
on the securities. In light of these issues around
liquidity and the risk to capital from further write-
downs, ratings changes and realised losses and
impairments in 2009, many financial institutions
took steps to reduce leveraged exposures, build their
liquidity and raise additional capital.
Volatility in financial markets, particularly in
the first half of 2009, resulted in wider transaction
spreads, although these narrowed during the second
half of the year. Markets for securitised and
structured financial assets continued to be severely
constrained, and the primary market for all but US
government-sponsored issues remained weak.
Notwithstanding these developments, the severe
deterioration in the fair value of assets supported by
sub-prime and Alt-A mortgages experienced in 2008
began to reverse in 2009 as buyers sought higher
yields in the low interest rate environment. For
example, spreads tightened modestly on Alt-A assets
and sub-prime assets as greater clarity of ultimate
losses emerged.
This section contains disclosures about the
effect of the ongoing market turmoil on HSBC’s
securitisation exposures and other structured
151
products. HSBC’s principal exposures to the US and
the UK mortgage markets take the form of credit risk
from direct loans and advances to customers which
were originated to be held to maturity or refinancing,
details of which are provided on page 218.
Financial instruments which were most affected
by the market turmoil include those exposures to
direct lending which are held at fair value through
profit or loss, or are classified as available for sale,
which are also held at fair value. Financial
instruments included in these categories comprise
ABSs, including MBSs and CDOs, and exposures to
and contingent claims on monoline insurers
(‘monolines’) in respect of structured credit activities
and leveraged finance transactions which were
originated to be distributed.
In accordance with HSBC’s policy to provide
meaningful disclosures that help investors
and other stakeholders understand the
Group’s performance, financial position and
changes thereto, the information provided in
this section goes beyond the minimum
levels required by accounting standards,
statutory and regulatory requirements and
listing rules.
HSBC has voluntarily adopted the draft British
Bankers’ Association Code on Financial Reporting
Disclosure (‘the draft BBA Code’) for its 2009
Financial Statements. This sets out five disclosure
principles together with supporting guidance. The
principles are that UK banks will:
•
•
•
•
•
provide high quality and meaningful disclosures
useful to decision-making;
review and enhance their financial instrument
disclosures for key areas of interest;
assess the applicability and relevance of good
practice recommendations to their disclosures,
acknowledging the importance of such
guidance;
seek to enhance the comparability of financial
statement disclosures across the UK banking
sector; and
clearly differentiate in their annual reports
between information that is audited and
information that is unaudited.
In the context of facilitating an understanding
of the ongoing turmoil in markets for securitised and
structured assets and in line with the principles of the
draft BBA Code, HSBC has continued to assess
good practice recommendations issued from time to
time by relevant regulators and standard setters.
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Background and disclosure policy / Overview of exposure > Reclassification of financial assets
Specifically, HSBC has considered the
recommendations relating to disclosure contained
within the following reports:
•
•
•
the Financial Stability Forum: ‘Enhancing
market and institutional resilience’;
the Committee of European Banking
Supervisors: ‘Banks’ transparency on activities
and products affected by the recent market
turmoil’ and ‘Consultation Paper 30: Disclosure
guidelines: Lessons learnt from the financial
crisis’; and
the IASB Expert Advisory Panel: ‘Measuring
and disclosing the fair value of financial
instruments in markets that are no longer
active’.
The particular topics covered in respect of
HSBC’s securitisation activities and exposure to
structured products are as follows:
• overview of exposure;
•
business model;
• risk management;
• accounting policies;
• nature and extent of HSBC’s exposures;
• fair values of financial instruments; and
• special purpose entities.
Overall exposure of HSBC
Overview of exposure
(Audited)
At 31 December 2009, the aggregate carrying
amount of HSBC’s exposure to ABSs, trading loans
held for securitisation and exposure to leveraged
finance transactions was US$79 billion (2008:
US$91 billion), summarised in the table below. The
majority of these exposures arose in Global Banking
and Markets.
HSBC’s holdings of available-for-sale ABSs
fell by US$8.2 billion to US$48.1 billion in
2009. The associated AFS reserve deficit
improved by US$6.5 billion or 35 per cent
to US$12.2 billion.
Within the total carrying amount of ABSs on the
balance sheet, ABS holdings of US$14.0 billion
(2008: US$14.6 billion) are held through vehicles
discussed on page 155, where significant first loss
protection is provided by external investors on a
fully collateralised basis. This includes
US$3.3 billion (2008: US$3.5 billion) in respect of
sub-prime and Alt-A residential mortgage exposure.
At 31 December 2009
At 31 December 2008
Carrying
amount
US$bn
Including
sub-prime
and Alt-A
US$bn
Carrying
amount
US$bn
Including
sub-prime
and Alt-A
US$bn
ABSs ....................................................................................................
– fair value through profit or loss ...................................................
– available for sale1 .........................................................................
– held to maturity1 ...........................................................................
– loans and receivables ....................................................................
Loans at fair value through profit or loss ............................................
Leveraged finance loans ......................................................................
– loans and receivables ....................................................................
For footnote, see page 195.
Reconciliation of movement in carrying amount of ABSs
71
12
48
3
8
2
6
6
79
11
1
8
–
2
2
–
–
13
81
14
56
3
8
4
6
6
91
Balance at 1 January 2009....................................................................................................................................................
Net ABS sales (principally of US Government agency and sponsored enterprises) ..........................................................
Principal amortisation of available-for-sale ABSs (repayment at par) ...............................................................................
Movement on fair values of available-for-sale ABSs .........................................................................................................
Net sales, principal amortisation and write-downs of ABSs classified as trading .............................................................
Exchange differences and other movements .......................................................................................................................
Balance at 31 December 2009 .............................................................................................................................................
12
1
9
–
2
3
–
–
15
2009
US$bn
81.0
(5.4)
(6.1)
4.1
(2.1)
(0.9)
70.6
152
Reclassification of financial assets
In October 2008, the IASB issued amendments to
IAS 39 ‘Financial Instruments: Recognition and
Measurement’ and IFRS 7 ‘Financial Instruments:
Disclosures’ which permitted an entity to reclassify
non-derivative financial assets out of the held-for-
trading category as described in the accounting
policies in Note 2 (e) on the Financial Statements.
During the second half of 2008, HSBC
reclassified US$15.3 billion and US$2.6 billion of
financial assets from the held-for-trading category
to the loans and receivables and available-for-sale
classifications, respectively. The amount
Reclassifications of HSBC’s financial assets
reclassified reflected the fair value of the financial
assets at the date of reclassification.
The amendment to IAS 39 was restricted to
situations where the transferring entity had the
intention and ability to hold the transferred position
for the foreseeable future, in the case of transfers to
the loans and receivable category. Transfers to the
available-for-sale category were undertaken when
the transferring entity no longer intended to sell the
transferred position in the near term.
HSBC did not undertake any further
reclassifications under the amendment to IAS 39
during 2009.
Reclassification to loans and receivables
ABSs ....................................................................................................
Trading loans – commercial mortgage loans ......................................
Leveraged finance and syndicated loans .............................................
Reclassification to available for sale
Corporate debt and other securities .....................................................
If these reclassifications had not been made,
the Group’s profit before tax in 2009 would have
risen by US$1.5 billion from US$7.1 billion to
US$8.6 billion (2008: a reduction of US$3.5 billion
from US$9.3 billion to US$5.8 billion). The rise in
profit before tax would have been attributable to
increases of US$0.6 billion in the North America
segment and US$0.9 billion in the Europe segment
HSBC’s fair value gains and losses, income and expense
At 31 December 2009
Carrying
At 31 December 2008
Carrying
amount
US$m
7,827
553
5,824
Fair
value
US$m
6,177
506
5,434
amount
US$m
7,991
587
5,670
Fair
value
US$m
6,139
557
4,239
14,204
12,117
14,248
10,935
1,408
15,612
1,408
13,525
2,401
16,649
2,401
13,336
(2008: reductions of US$0.9 billion and
US$2.6 billion, respectively). These would have
arisen due to the increase in the fair value of
leveraged loans and ABSs during the year. The
following table shows the fair value gains and
losses, income and expense recognised in the
income statement both before and after the date
of reclassification:
Effect on income statement for 2009
Assuming
no reclass-
ification3
US$m
Recorded in
the income
statement2
US$m
Net effect
of reclass-
ification
US$m
Effect on income statement for 2008
Recorded in
the income
statement2
US$m
Assuming
no reclass-
ification3
US$m
Net effect
of reclass-
ification
US$m
Financial assets reclassified to
loans and receivables
ABSs ..................................................
Trading loans – commercial
mortgage loans ..............................
Leveraged finance and syndicated
loans ...............................................
Financial assets reclassified to
available for sale
Corporate debt and other securities ...
For footnotes, see page 195.
511
32
434
977
101
1,078
767
15
1,494
2,276
301
2,577
153
(256)
17
(1,060)
(1,299)
(200)
(1,499)
303
17
192
512
22
534
(1,549)
1,852
(13)
(1,239)
(2,801)
(202)
(3,003)
30
1,431
3,313
224
3,537
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Overview of exposure > Financial effect / ABSs classified as available for sale
Financial effect of market turmoil
As described in ‘Background and disclosure policy’
on page 151, the dislocation of financial markets
which developed in the second half of 2007
continued throughout 2008 and into 2009. For the
last four half-year periods, the write-downs incurred
by the Group on ABSs, trading loans held for
securitisation, leveraged finance transactions and
Financial effect of market turmoil on HSBC
The Group’s write-downs as a consequence
of market turmoil were US$1.9 billion in
2009, down from US$6.3 billion in 2008.
the movement in fair values on available-for-sale
ABSs taken to equity, plus impairment losses on
specific exposures to banks, are summarised in the
following table:
Write-downs taken to income statement .........................................................
Net movement on available-for-sale reserve on ABSs in the period ..............
Closing balance of available-for-sale reserve relating to ABSs .....................
Half-year to
31 Dec
2009
US$bn
(0.6)
5.3
(12.2)
30 Jun
2009
US$bn
(1.3)
1.2
(17.5)
31 Dec
2008
US$bn
(2.3)
(10.4)
(18.7)
30 Jun
2008
US$bn
(4.0)
(6.1)
(8.3)
Virtually all of these were recorded in Global
Further analyses of the write-downs taken to the
Banking and Markets. During 2009, no further
impairment losses were recognised on the collapse
of financial institutions as the coordinated actions
taken by governments and central banks acted to
stabilise market conditions (2008: US$209 million,
of which the collapse of Icelandic banks accounted
for US$126 million).
income statement by Global Banking and Markets
and the net carrying amounts of the positions that
generated these write-downs, are shown in the
following table:
Global Banking and Markets write-downs/(write-backs) taken to the income statement and carrying amounts
Write-downs/(write-backs) during half-year to
30 Jun
31 Dec
2008
2009
US$m
US$m
31 Dec
2008
US$m
30 Jun
2009
US$m
Sub-prime mortgage-related assets
– loan securitisation ..........................
– credit trading .................................
Other ABSs ...........................................
Impairments on reclassified assets4 ......
Derivative exposure to monolines
– investment grade counterparts ......
– non-investment grade counterparts
Leveraged finance loans5 ......................
Other credit related items .....................
Available-for-sale impairments and
other non-trading related items ........
80
17
(196)
3
(78)
45
(120)
(19)
833
565
156
83
103
160
25
241
(11)
5
564
292
150
486
26
130
370
–
95
655
301
665
1,327
–
598
608
278
99
55
1,326
2,204
3,931
31 Dec
2009
US$m
758
282
990
15,612
897
408
196
61
30 Jun
Carrying amount at
31 Dec
2008
30 Jun
2008
US$m US$m US$m
2009
943
303
1,376
16,308
1,593
510
285
116
1,213
428
2,201
16,649
2,089
352
271
186
1,565
1,377
8,923
–
1,206
78
7,375
321
For footnotes, see page 195.
Asset-backed securities classified as
available for sale
HSBC’s principal holdings of ABSs are in the
Global Banking and Markets’ business through
special purpose entities (‘SPE’s) which were
established from the outset with the benefit of
external investor first loss protection
support, together with positions held directly and by
Solitaire Funding Limited (‘Solitaire’), where HSBC
has first loss risk.
The table below summarises the Group’s
exposure to ABSs which are classified as available
for sale.
154
Available-for-sale ABSs exposure
Total carrying amount of net principal exposure
Total available-for-sale reserves ........................
2009
Impairment charge:
– borne by HSBC ..........................................
– allocated to capital note holders7 ...............
Total impairment charge .....................................
2008
Impairment charge:
– borne by HSBC ..........................................
– allocated to capital note holders7 ...............
Total impairment charge .....................................
For footnotes, see page 195.
At 31 December 2009
At 31 December 2008
Directly
held/
Solitaire6
US$m
34,040
(7,349)
SPEs
US$m
Total
US$m
Directly
held/
Solitaire6
US$m
SPEs
US$m
Total
US$m
14,021
48,061
41,601
14,610
56,211
(4,864)
(12,213)
(11,528)
(7,204)
(18,732)
Half year to 31 December
Half year to 30 June
Directly
held/
Solitaire6
US$m
SPEs
US$m
Total
US$m
Directly
held/
Solitaire6
US$m
SPEs
US$m
Total
US$m
883
–
883
224
–
224
–
20
20
–
159
159
883
20
903
224
159
383
539
–
539
55
–
55
–
646
646
–
134
134
539
646
1,185
55
134
189
Securities investment conduits (special
purpose entities)
In the table above, the total carrying amount of
ABSs in respect of SPEs represent holdings in which
significant first loss protection is provided through
capital notes issued by the securities investment
conduits (‘SIC’s), excluding Solitaire.
At each reporting date, an assessment is made
of whether there is any objective evidence of
impairment in the value of available-for-sale ABSs.
Impairment charges incurred on assets held by these
SPEs are offset by a credit to the impairment line for
the amount of the loss allocated to capital note
holders.
The economic first loss protection remaining
at 31 December 2009 amounted to US$2.2 billion
(2008: US$2.2 billion).
On an IFRSs accounting basis, the carrying
value of the liability for the capital notes at
31 December 2009 amounted to US$0.7 billion
(2008: US$0.9 billion). The impairment charge
recognised during 2009 amounted to US$666 million
(2008: US$293 million).
At 31 December 2009, the available-for-sale
reserve in respect of securities held by the SICs was
a deficit of US$5.2 billion (2008: US$7.9 billion).
Of this, US$4.9 billion related to ABSs (2008:
US$7.2 billion).
Impairments recognised during 2009 from
assets held directly or within Solitaire, in recognition
of the first loss protection of US$1.2 billion provided
by HSBC through credit enhancement and from
drawings against the liquidity facility provided
by HSBC, were US$1,422 million (2008:
US$279 million), based on a notional principal
value of securities which were impaired of
US$2,641 million (2008: US$570 million). The level
of impairment recognised in comparison with the
deficit in the available-for-sale reserve is a reflection
of the credit quality and seniority of the assets held.
Sub-prime and Alt-A residential mortgage-
backed securities
Management judges that the assets which are most
sensitive to possible future impairment are sub-prime
and Alt-A residential MBSs within HSBC’s holdings
of available-for-sale ABSs.
Excluding those held in the SPEs discussed
above, available-for-sale holdings in these higher
risk categories amounted to US$4.9 billion at
31 December 2009 (2008: US$6.1 billion). The
deficit in the available-for-sale fair value reserve at
31 December 2009 in relation to these securities was
US$4.3 billion (2008: US$6.0 billion).
During 2009, the credit ratings on a proportion of
ABSs held directly by HSBC, Solitaire and the SICs
were downgraded. In particular, Moody’s Investor
155
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Overview of exposure > AFS ABSs impairment // Business model / Risk management / Accounting policies / Nature and extent of exposures
Services downgraded the ratings on substantially all
US Alt-A residential MBSs issued during 2006 and
2007, including those held by HSBC.
As discussed on page 178, when assessing
available-for-sale ABSs for objective evidence of
impairment at each balance sheet date, HSBC
considers all available evidence including the
performance of the underlying collateral. A
downgrade of a security’s credit rating is not, of
itself, evidence of impairment. Consequently,
Moody’s actions alone have no direct impact on the
measurement of impairment losses. The impairment
losses recognised on these securities at 31 December
2009 are set out on page 155.
Available-for-sale ABS impairment and cash
loss projections
(Unaudited)
HSBC’s regular impairment assessment employs
an industry standard model with inputs which are
corroborated using observable market data where
available. At 31 December 2008, management
performed a stress test on the available-for-sale ABS
positions, based on the fair value of the positions at
that date. The main impacts of the stress test arose
from increasing the net effect of expected loss and
prepayment rates for Alt-A securities by between a
third and a half depending on loan vintage and by
removing all credit protection from monolines rated
below AAA by S&P on the HELoC positions. The
results of the stress test showed that, by applying
different inputs to those then observed across the
available-for-sale ABS population, a further
potential impairment charge to the income statement
of some US$2 billion to US$2.5 billion could arise
in the period 2009 to 2011 with expected cash losses
of US$600 million to US$800 million in the period
2009 to 2012.
In 2009, the Global Banking and Markets’
available-for-sale ABS portfolio experienced
US$1.4 billion of impairment charges with
US$378 million of associated expected cash losses.
At 31 December 2009, management undertook an
analysis of the portfolio to estimate the further
potential impairments and expected cash losses on
the available-for-sale ABS portfolio. This exercise
comprised a further shift of projections as at
31 December 2009 of future loss severities, default
rates and prepayment rates. The analysis showed
that the portfolio is now primarily sensitive to
impairments arising on Alt-A securities. The
sensitivity of Global Banking and Markets’
available-for-sale ABS positions to the loss of
protection from monolines reduced during 2009 and
is no longer expected to be a material contributor to
156
future impairment charges. The results of the
analysis indicate that further impairment charges
of some US$1.1 billion and expected cash losses of
some US$450 million could arise over the next two
to three years. These are at the upper end of the
guidance previously given.
This analysis makes assumptions in respect of
the future behaviour of loss severities, default rates
and prepayment rates. Movements in the parameters
are not independent of each other. For example,
increased default rates and increased loss severities,
which would imply greater impairments, generally
arise under economic conditions that give rise to
reduced levels of prepayment, reducing the potential
for impairment charges. Conversely, economic
conditions which increase the rates of prepayment
are generally associated with reduced default rates
and decreased loss severities. The assumptions used
by management in the roll-forward analysis have
been set in the context of further increases in loss
severities and elevated levels of default rates partly
offset by stable prepayment rates in the short to
medium term.
At 31 December 2009, the incurred and
projected impairment charges measured for
accounting purposes significantly exceeded the
expected cash losses on the securities. Over the
lives of the available-for-sale ABS securities the
cumulative impairment charges will converge
towards the level of cash losses.
Business model
(Audited)
Asset-backed securities and leveraged
finance
HSBC is or has been involved in the following
activities in these areas:
• purchasing US mortgage loans with the
intention of structuring and placing
securitisations into the market;
• trading in ABSs, including MBSs, in secondary
markets;
• holding MBSs and other ABSs in balance sheet
management activities, with the intention of
earning net interest income over the life of the
securities;
•
holding MBSs and other ABSs as part of
investment portfolios, including the structured
investment vehicles (‘SIV’s), SICs and money
market funds described under ‘Special purpose
entities’ below, with the intention of earning net
interest income and management fees;
Accounting policies
(Audited)
HSBC’s accounting policies regarding the
classification and valuation of financial instruments
are in accordance with the requirements of IAS 32
‘Financial Instruments: Presentation’ and IAS 39
‘Financial Instruments: Recognition and
Measurement’, as described in Note 2 on the
Financial Statements, and the use of assumptions and
estimation in respect of valuation of financial
instruments as described on page 63.
Nature and extent of HSBC’s
exposures
(Audited)
This section contains information on HSBC’s
exposures to the following:
•
direct lending held at fair value through profit or
loss;
• ABSs including MBSs and CDOs;
• monolines;
•
credit derivative product companies (‘CDPC’s);
and
•
leveraged finance transactions.
MBSs are securities that represent interests in a
group of mortgages. Investors in these securities
have the right to cash received from future mortgage
payments (interest and/or principal). Where an MBS
references mortgages with different risk profiles, the
MBS is classified according to the highest risk class.
Consequently, an MBS with both sub-prime and
Alt-A exposures is classified as sub-prime.
CDOs are securities in which ABSs and/or other
related assets have been purchased and securitised
by a third party, or securities which pay a return
which is referenced to those assets. CDOs may
include exposure to sub-prime mortgage assets
where these are part of the underlying assets or
reference assets. As there is often uncertainty
surrounding the precise nature of the underlying
collateral supporting CDOs, all CDOs supported by
residential mortgage-related assets, irrespective of
the level of sub-prime assets referenced or contained
therein, are classified as sub-prime.
HSBC’s holdings of ABSs and CDOs, and its
direct lending positions, include the following
categories of collateral and lending activity:
•
holding MBSs or other ABSs in the trading
portfolio hedged through credit derivative
protection, typically purchased from monolines,
with the intention of earning the spread
differential over the life of the instruments; and
• originating leveraged finance loans for the
purposes of syndicating or selling them down in
order to generate a trading profit and holding
them in order to earn interest margin over their
lives.
These activities are not a significant part of
Global Banking and Markets’ business, and Global
Banking and Markets is not reliant on them for any
material aspect of its business operations or
profitability.
The purchase and securitisation of US mortgage
loans and the secondary trading of US MBSs, which
was conducted in HSBC’s US MBSs business, was
discontinued in 2007.
Special purpose entities
HSBC enters into certain transactions with
customers in the ordinary course of business which
involve the establishment of SPEs to facilitate
customer transactions. SPEs are used in HSBC’s
business in order to provide structured investment
opportunities for customers, facilitate the raising
of funding for customers’ business activities, or
diversify HSBC’s sources of funding and/or
improve capital efficiency.
The use of SPEs in this way 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 or profitability. Detailed disclosures of
HSBC’s sponsored SPEs are provided on page 181.
Risk management
(Audited)
The effect of the recent market turmoil on HSBC’s
risk exposures, the way in which HSBC has
managed risk exposures in this context, and any
changes made in HSBC’s risk management polices
and procedures in response to the market conditions
are set out in the following sections:
• Credit risk – ‘Credit exposure’ (see page 206);
• Liquidity risk – ‘The impact of market turmoil
on the Group’s liquidity risk position’ (see
page 248); and
• Market risk – ‘The impact of market turmoil
on market risk’ (see page 252).
157
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Overview of exposure > Nature and extent of exposures
•
other mortgage-related assets: residential
mortgage-related assets that do not meet any of
the classifications described above. Prime
residential mortgage-related assets are included
in this category.
HSBC’s exposure to non-residential mortgage-
related ABSs and direct lending includes:
•
commercial property mortgage-related
assets: MBSs with collateral other than
residential mortgage-related assets;
•
•
•
leveraged finance-related assets: securities
with collateral relating to leveraged finance
loans;
student loan-related assets: securities with
collateral relating to student loans; and
other assets: securities with other receivable-
related collateral.
Included in the tables on pages 159 to 161 are
ABSs which are held through SPEs that are
consolidated by HSBC. Although HSBC
consolidates these assets in full, the risks arising
from the assets are mitigated to the extent of third-
party investment in notes issued by those SPEs. For
a description of HSBC’s holdings of and
arrangements with SPEs, see page 181.
The exposure detailed in the table on page 159
includes long positions where risk is mitigated by
specific credit derivatives with monolines and other
financial institutions. These positions comprise:
•
residential MBSs with a carrying amount of
US$1.0 billion (2008: US$0.9 billion);
•
residential MBS CDOs with a carrying amount
of US$15 million (2008: US$39 million); and
• ABSs other than residential MBSs and
MBS CDOs with a carrying amount of
US$9.2 billion (2008: US$9.8 billion).
In the tables on pages 160 to 161, carrying
amounts and gains and losses are given for securities
except those where risk is mitigated through specific
credit derivatives with monolines, as detailed above,
with a total carrying amount of US$10.2 billion
(2008: US$10.7 billion). The counterparty credit risk
arising from the derivative transactions undertaken
with monolines is covered in the monoline exposure
analysis on page 163.
•
sub-prime: loans to customers who have
limited credit histories, modest incomes, high
debt-to-income ratios or have experienced credit
problems caused by occasional delinquencies,
prior charge-offs, bankruptcy or other credit-
related actions. For US mortgages, standard US
credit scores are primarily used to determine
whether a loan is sub-prime. US Home Equity
Lines of Credit (‘HELoC’s) are classified as
sub-prime. For non-US mortgages, management
judgement is used to identify loans with similar
risk characteristics to sub-prime, for example,
UK non-conforming mortgages (see below);
• US Home Equity Lines of Credit: a form of
revolving credit facility provided to customers,
which is supported by a first or second lien
charge over residential property. Global
Banking and Markets’ holdings of HELoCs are
classified as US sub-prime residential mortgage
assets;
• US Alt-A: loans classified as Alt-A are regarded
as lower risk than sub-prime, but they share
higher risk characteristics than lending under
fully conforming standard criteria. US credit
scores, as well as the level and completeness of
mortgage documentation held (such as whether
there is proof of income), are considered when
determining whether an Alt-A classification is
appropriate. Mortgages in the US which are not
eligible to be sold to the major government
sponsored mortgage agencies, Ginnie Mae
(Government National Mortgage Association),
Fannie Mae (the Federal National Mortgage
Association) and Freddie Mac (the Federal
Home Loan Mortgage Corporation), are
classified as Alt-A if they do not meet the
criteria for classification as sub-prime;
• US Government agency and US Government
sponsored enterprises mortgage-related
assets: securities that are guaranteed by US
Government agencies, such as Ginnie Mae, or
are guaranteed by US Government sponsored
entities, including Fannie Mae and Freddie Mac;
• UK non-conforming mortgage-related assets:
UK mortgages that do not meet normal lending
criteria. This includes instances where the
normal level of documentation has not been
provided (for example, in the case of self-
certification of income), or where increased risk
factors, such as poor credit history, result in
lending at a rate that is higher than the normal
lending rate. UK non-conforming mortgages are
treated as sub-prime exposures; and
158
Carrying amount of HSBC’s consolidated holdings of ABSs, and direct lending held at fair value through profit or loss
Trading
US$m
Available
for sale
US$m
Held to
maturity
US$m
Designated
at fair value
through
profit or loss
US$m
Loans and
receivables
US$m
Of which
held through
consolidated
SPEs
US$m
Total
US$m
At 31 December 2009
Sub-prime residential
mortgage-related assets ..........
Direct lending .........................
MBSs and MBS CDOs8 .........
US Alt-A residential
mortgage-related assets ..........
Direct lending .........................
MBSs8 .....................................
US Government agency and
sponsored enterprises
mortgage-related assets
MBSs8 .....................................
Other residential mortgage-
related assets ...........................
Direct lending .........................
MBSs8 .....................................
Commercial property mortgage-
related assets
MBSs and MBS CDOs8 .........
Leveraged finance-related assets
ABSs and ABS CDOs8 ...........
Student loan-related assets
ABSs and ABS CDOs8 ...........
Other assets
ABSs and ABS CDOs8 ...........
At 31 December 2008
Sub-prime residential
mortgage-related assets ..........
Direct lending .........................
MBSs and MBS CDOs8 .........
US Alt-A residential
mortgage-related assets ..........
Direct lending .........................
MBSs8 .....................................
US Government agency and
sponsored enterprises
mortgage-related assets
MBSs8 .....................................
Other residential mortgage-
related assets9 .........................
Direct lending .........................
MBSs8 .....................................
Commercial property mortgage-
related assets9
MBSs and MBS CDOs8 .........
Leveraged finance-related assets
ABSs and ABS CDOs8 ...........
Student loan-related assets
ABSs and ABS CDOs8 ...........
Other assets
2,063
1,439
624
191
113
78
2,782
–
2,782
5,403
–
5,403
–
–
–
192
–
192
375
13,332
2,333
1,646
452
1,194
414
555
141
2,302
7,687
3,372
2,789
583
618
246
372
4,582
–
4,582
7,535
5,150
4,948
4,329
48,061
3,741
–
3,741
5,829
–
5,829
–
–
–
–
–
–
–
2,525
–
–
–
185
–
185
1,127
20,312
2,412
1,633
677
956
589
784
214
4,272
–
4,272
6,802
4,489
4,809
–
–
–
–
–
–
–
–
–
–
–
–
–
–
837
–
837
882
–
882
5,682
1,439
4,243
6,668
113
6,555
3,213
913
2,300
3,672
–
3,672
–
16,040
322
335
–
335
1,401
–
1,401
7,964
452
7,512
3,160
–
3,160
103
2,143
10,195
5,730
–
–
6,025
6,463
1
–
1
–
–
–
51
31
–
31
86
–
3
6,371
6,543
484
145
1,987
7,879
453
–
453
1,056
–
1,056
6,189
4,144
5,234
4,127
14,643
72,615
2,696
27,064
7,567
2,789
4,778
7,688
246
7,442
4,230
1,300
2,930
3,831
–
3,831
–
23,902
441
1,413
–
1,413
7,349
677
6,672
2,822
–
2,822
2,124
9,601
4,985
204
81
2,660
7,991
5,477
3,667
5,107
4,028
18,056
84,747
3,941
27,945
ABSs and ABS CDOs8 ...........
3,068
5,957
11,405
56,211
2,597
For footnotes, see page 195.
The above table excludes leveraged finance transactions, which are shown separately on page 165.
159
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Overview of exposure > Nature and extent of exposures
HSBC’s consolidated holdings of ABSs, and direct lending held at fair value through profit or loss
2009
At 31 December 2009
Gross fair value
movements
Other
compre-
Income
hensive
income12
statement11
US$m US$m
Realised
gains/
(losses) in
the income
statement13
US$m
Reclassi-
fied14
US$m
Gross
principal15
US$m
Credit
default
swap
gross
protection16
US$m
Net
principal
exposure17
US$m
Carrying
amount18
US$m
Mortgage-related assets
Sub-prime residential
Direct lending ....................
MBSs8 ...............................
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
MBS CDOs8 ......................
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
US Alt-A residential
Direct lending ....................
MBSs8 ...............................
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
US Government agency and
sponsored enterprises
MBSs8
– high grade10 ....................
Other residential
Direct lending ....................
MBSs8,9 ..............................
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
Commercial property
MBS and MBS CDOs8,9.....
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
Leveraged finance-related assets
ABSs and ABS CDOs8 ..........
– high grade10 .......................
– rated C to A .......................
– not publicly rated ..............
Student loan-related assets
ABSs and ABS CDOs8 ..........
– high grade10 .......................
– rated C to A .......................
– not publicly rated ..............
Other assets
ABS and ABS CDOs8 ...........
– high grade10 .......................
– rated C to A .......................
– not publicly rated ..............
(227)
(44)
(16)
(25)
(3)
(2)
–
(1)
(1)
(273)
–
95
(9)
103
1
95
–
187
177
10
–
(9)
(1)
(8)
–
178
–
661
361
300
–
661
(40)
(130)
1
(131)
–
–
–
–
–
–
795
134
661
–
2
–
2
–
1,703
7,483
2,762
4,616
105
138
36
89
13
–
1,248
603
645
–
15
15
–
–
1,703
6,235
2,159
3,971
105
123
21
89
13
1,439
3,419
1,719
1,700
–
29
17
10
2
(170)
797
9,324
1,263
8,061
4,887
–
(143)
1
(144)
–
–
1,693
317
1,376
–
129
13,546
1,625
11,885
36
–
491
428
63
–
129
13,055
1,197
11,822
36
113
6,427
1,237
5,176
14
(143)
1,693
13,675
491
13,184
6,540
116
252
(2)
(123)
15,827
–
15,827
16,040
79
71
76
(5)
–
150
35
72
(37)
–
(1)
14
(15)
–
(6)
2
(8)
–
74
18
40
16
–
625
617
10
(2)
625
702
683
17
2
721
758
(37)
–
569
630
(61)
–
415
288
152
(25)
70
37
37
–
–
–
50
75
(34)
9
463
8,741
7,884
773
84
107
50
9,204
(8)
(8)
–
–
–
–
–
–
2
–
2
–
(17)
10
(29)
2
(104)
(90)
(12)
(2)
13,734
9,805
3,860
69
(40)
(41)
1
–
32
32
–
–
91
31
85
(25)
7,516
6,620
881
15
7,192
6,690
477
25
17,608
12,846
4,126
636
–
91
91
–
–
91
395
264
131
–
895
414
481
–
224
30
194
–
8,797
8,607
190
–
463
8,650
7,793
773
84
452
7,443
6,440
941
62
9,113
7,895
13,339
9,541
3,729
69
6,621
6,206
400
15
6,968
6,660
283
25
8,811
4,239
3,936
636
9,954
7,537
2,365
52
5,612
5,301
295
16
5,122
5,019
76
27
6,327
3,564
2,245
518
Total ...........................................
190
4,123
(231)
2,396
94,080
12,156
81,924
62,377
160
2008
At 31 December 2008
Gross fair value
movements
Other
compre-
hensive
income12
US$m US$m
Income
statement11
Realised
gains/
(losses) in
the income
statement13
US$m
Reclassi-
fied14
US$m
Gross
principal15
US$m
Credit
default
swap
gross
protection16
US$m
Net
principal
exposure17
US$m
Carrying
amount18
US$m
(494)
(787)
(244)
(446)
(97)
(125)
(14)
(111)
–
–
(1,872)
(558)
(1,314)
–
(58)
(81)
23
–
(1,406)
(1,930)
(11)
(737)
(446)
(292)
1
–
(6,416)
(3,012)
(3,404)
–
(748)
(6,416)
7
1
6
(4)
(1)
–
–
–
–
8
–
9
17
(7)
(1)
9
–
(8)
(8)
–
–
(50)
–
(50)
–
3,653
8,317
4,298
3,990
29
1,095
212
881
2
–
794
507
287
–
234
27
207
–
3,653
7,523
3,791
3,703
29
861
185
674
2
2,789
4,183
2,723
1,449
11
87
68
17
2
(58)
13,065
1,028
12,037
7,059
–
(240)
(82)
(158)
–
264
16,860
9,804
7,041
15
–
436
317
119
–
264
16,424
9,487
6,922
15
246
7,174
4,869
2,293
12
(240)
17,124
436
16,688
7,420
(51)
392
40
23,470
–
23,470
23,902
(9)
(72)
(75)
2
1
(81)
(27)
(38)
11
–
1
1
–
(4)
(4)
–
23
(178)
(149)
(28)
(1)
–
(738)
(723)
(15)
–
(155)
(738)
(292)
(231)
(61)
–
(19)
(19)
–
(63)
(47)
(16)
(466)
(329)
(137)
–
(2,743)
(2,709)
(31)
(3)
(1,306)
(1,302)
(4)
(1,959)
(1,649)
(310)
(1,461)
(733)
(728)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
691
8,391
7,592
717
82
9,082
13,524
13,091
376
57
7,392
7,373
19
7,708
6,986
722
–
284
262
22
–
284
553
553
–
–
936
936
–
279
279
–
691
8,107
7,330
695
82
677
6,511
5,915
549
47
8,798
7,188
12,971
12,538
376
57
6,456
6,437
19
7,429
6,707
722
9,232
8,925
264
43
4,781
4,766
15
4,963
4,578
385
9,462
6,531
1,902
1,029
(107)
(81)
(26)
–
(84)
–
(13)
(71)
21,112
11,346
3,592
6,174
8,494
3,049
343
5,102
12,618
8,297
3,249
1,072
Mortgage-related assets
Sub-prime residential
Direct lending ....................
MBSs8 ...............................
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
MBS CDOs8 ......................
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
US Alt-A residential
Direct lending ....................
MBSs8 ...............................
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
US Government agency and
sponsored enterprises
MBSs8
– high grade10 ....................
Other residential
Direct lending ....................
MBSs8,9 ..............................
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
Commercial property
MBS and MBS CDOs8,9.....
– high grade10 ....................
– rated C to A ....................
– not publicly rated ...........
Leveraged finance-related assets
ABSs and ABS CDOs8 ..........
– high grade10 .......................
– rated C to A .......................
Student loan-related assets
ABSs and ABS CDOs8 ..........
– high grade10 .......................
– rated C to A .......................
Other assets
ABS and ABS CDOs8 ...........
– high grade10 .......................
– rated C to A .......................
– not publicly rated ..............
Total ...........................................
(3,200)
(16,161)
(161)
(382)
112,477
12,010
100,467
74,007
For footnotes, see page 195.
161
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Overview of exposures > Significant movements / Monolines
Analysis of exposures and significant
movements
The majority of the reduction in the holdings of ABS
resulted from the disposal of securities issued by
government sponsored entities. Further reductions
arose largely as a result of principal repayments.
Sub-prime residential mortgage-related
assets
Sub-prime residential mortgage-related
assets included US$3,746 million (2008:
US$5,894 million) relating to US originated assets
and US$1,141 million (2008: US$1,100 million)
relating to UK non-conforming residential mortgage-
related assets. Of the non-high grade assets held
of US$1,712 million, US$1,604 million (2008:
US$1,426 million) related to US originated assets,
reflecting the higher quality of the UK originated
assets.
A modest increase in observable values of sub-
prime assets took place in 2009. However, further
impairment of US$559 million on assets classified as
available for sale was recognised in 2009 (2008:
US$50 million) as losses were incurred under
current accounting impairment rules which require
the full fair value deficit to be recognised when
objective evidence of impairment as a result of a loss
event has an impact on the estimated future cash
flows of the instrument, without reference to the
amount of the expected loss. The expectation of
losses on the underlying assets did not increase from
that at 31 December 2008. Of the impairment above,
US$312 million (2008: nil) occurred in the SICs and
was borne by the capital note holders.
US Alt-A residential mortgage-related assets
During 2009, spreads on Alt-A mortgage-related
assets tightened modestly from the levels seen in
2008 and no further deterioration was experienced
in the second half of 2009. Further impairments of
US$1,372 million (2008: US$510 million) were
recorded in respect of Alt-A mortgage-related assets
as losses were incurred under the current accounting
rules described in the paragraph above, without
reference to the amount of expected loss. The
expectation of losses in the underlying assets did
not increase from that at 31 December 2008. Of
the impairment above, US$346 million (2008:
US$281 million) occurred in the SICs and was
borne by the capital note holders.
During the first half of 2009, the credit ratings
on a proportion of ABSs held directly by HSBC,
Solitaire and the SICs were downgraded. In
particular, Moody’s Investor Services downgraded
the ratings on substantially all the Group’s holdings
of US Alt-A residential MBSs issued in 2006 and
2007. The downgrade of assets is reflected in the
disclosure of fair value movements in the above
tables as if the downgrade had taken effect on
1 January 2009.
The following table shows the vintages of the
collateral assets supporting HSBC’s holdings of US
sub-prime and Alt-A MBSs. Market prices for these
instruments generally incorporate higher discounts
for later vintages. The majority of HSBC’s holdings
of US sub-prime MBSs are originated pre-2007;
holdings of US Alt-A MBSs are more evenly
distributed between pre- and post-2007 vintages.
Vintages of US sub-prime and Alt-A mortgage-backed securities
Mortgage vintage
Pre-2006 ........................................................................
2006 ..............................................................................
2007 ..............................................................................
For footnote, see page 195.
US Government agency and sponsored
enterprises mortgage-related assets
During 2009, HSBC reduced its holdings of US
Government agency and sponsored enterprises
mortgage-related assets by US$7,862 million.
Gross principal15 of US sub-prime
mortgage-backed securities
at 31 December
2009
US$m
2008
US$m
Gross principal15 of US Alt-A
mortgage-backed securities
at 31 December
2009
US$m
2008
US$m
1,748
2,827
1,187
5,762
2,012
4,287
1,588
7,887
2,108
6,225
5,213
13,546
2,695
7,712
6,453
16,860
Other residential mortgage-related assets
The majority of other residential mortgage-related
assets were originated in the UK (2009:
US$4,744 million; 2008: US$4,568 million). No
impairments were recognised in respect of these UK
162
originated assets in 2009 (2008: nil), reflecting credit
support within the asset portfolio.
Commercial property mortgage-related
assets
Of the total of US$9,954 million (2008:
US$9,232 million) of commercial property
mortgage-related assets, US$4,292 million related to
US originated assets (2008: US$3,182 million).
Spreads tightened on both US and non-US
commercial property mortgage-related assets during
2009. Impairments of US$88 million (2008: nil)
were recognised in 2009 as losses on the underlying
assets accelerated.
Leveraged finance-related assets
The majority of assets related to US originated
exposures; almost all (2009: 94 per cent; 2008:
99 per cent) were high grade with no impairments
recorded in the year (2008: nil).
Student loan-related assets
Holdings in student loan-related assets were
US$5,122 million (2008: US$4,963 million). No
impairments were recorded on student loan-related
assets in 2009 (2008: nil).
Transactions with monoline insurers
HSBC’s exposure to derivative transactions
entered into directly with monoline insurers
HSBC’s principal exposure to monolines is through
a number of over-the-counter (‘OTC’) derivative
transactions, mainly credit default swaps (‘CDS’s).
HSBC entered into these CDSs primarily to purchase
credit protection against securities held at the time
within the trading portfolio.
During 2009, the notional value of derivative
contracts with monolines and HSBC’s overall credit
exposure to monolines decreased as a number of
transactions were commuted, others matured, and
credit spreads narrowed. The table below sets out the
fair value, essentially the replacement cost, of the
remaining derivative transactions at 31 December
2009, and hence the amount at risk if the CDS
protection purchased were to be wholly ineffective
because, for example, the monoline insurer was
unable to meet its obligations. In order to further
analyse that risk, the value of protection purchased is
shown subdivided between those monolines that
were rated by Standard & Poor’s (‘S&P’) at ‘BBB–’
or above at 31 December 2009, and those that were
‘below BBB–’ (‘BBB–’ is the S&P cut-off for an
investment grade classification). As a result of the
downgrade of a number of monolines during 2009,
exposure to monolines rated ‘below BBB–’ at
31 December 2009 increased from the position as at
31 December 2008. The ‘Credit risk adjustment’
column indicates the valuation adjustment taken by
HSBC against the net exposures, and reflects
HSBC’s best estimate of the likely loss of value on
purchased protection arising from the deterioration
in creditworthiness of the monolines. These
valuation adjustments, which reflect a measure of the
irrecoverability of the protection purchased, have
been charged to the income statement.
HSBC’s exposure to derivative transactions entered into directly with monoline insurers
At 31 December 2009
Derivative transactions with monoline counterparties
Monoline – investment grade (BBB– or above) ......
Monoline – sub-investment grade (below BBB–) ...
At 31 December 2008
Derivative transactions with monoline counterparties
Monoline – investment grade (BBB– or above) ......
Monoline – sub-investment grade (below BBB–) ...
For footnotes, see page 195.
Notional
amount
US$m
Net exposure
before credit
risk adjustment19
US$m
Credit risk
adjustment20
US$m
Net exposure
after credit
risk adjustment
US$m
5,623
4,400
10,023
9,627
2,731
12,358
997
1,317
2,314
2,829
1,104
3,933
(100)
(909)
(1,009)
(740)
(752)
(1,492)
897
408
1,305
2,089
352
2,441
163
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Overview of exposure > Monolines / Leveraged finance transactions
The above table can be analysed as follows.
HSBC has derivative transactions referenced to
underlying securities with a notional value of
US$10.0 billion (2008: US$12.4 billion), whose
value at 31 December 2009 indicated a potential
claim against the protection purchased from the
monolines of some US$2.3 billion (2008:
US$3.9 billion). On the basis of a credit assessment
of the monolines, a credit risk adjustment of
US$1.0 billion has been taken (2008:
US$1.5 billion), leaving US$1.3 billion exposed
(2008: US$2.4 billion), of which US$0.9 billion is
recoverable from monolines rated investment grade
at 31 December 2009 (2008: US$2.1 billion). The
provisions taken imply in aggregate that 90 cents in
the dollar will be recoverable from investment grade
monolines and 31 cents in the dollar from non-
investment grade monolines (2008: 74 cents and
32 cents, respectively).
For the CDSs, market prices are generally not
readily available. Therefore the CDSs are valued
based upon market prices of the referenced
securities.
The credit risk adjustment against monolines is
determined by one of a number of methodologies,
dependent upon the internal credit rating of the
monoline. HSBC’s assignment of internal credit
ratings is based upon detailed credit analysis, and
may differ from external ratings.
• For highly-rated monolines, the standard credit
risk adjustment methodology (as described on
page 170) applies, with the exception that the
future exposure profile is deemed to be constant
(equal to the current market value) over the
weighted average life of the referenced security,
and the credit risk adjustment cannot fall below
10 per cent of the mark-to-market exposure.
•
In respect of monolines, where default has either
occurred or there is a strong possibility of
default in the near term, the adjustment is
determined based on the estimated probabilities
of various potential scenarios, and the estimated
recovery in each case.
• For other monoline exposures, the credit risk
adjustment follows the methodology for highly-
rated monolines. However, this methodology is
adjusted to include the probability of a claim
arising in respect of the referenced security, and
applies implied probabilities of default where
the likelihood of a claim is believed to be high.
At 31 December 2009, US$2,566 million
notional value of securities referenced by monoline
CDS transactions with a market value of
164
US$1,863 million, were held in the loans and
receivables category, having been included in the
reclassification of financial assets described on
page 153. At the date of reclassification, the market
value of the assets was US$1,926 million. The
reclassification resulted in an accounting asymmetry
between the CDSs, which continue to be held at fair
value through profit and loss, and the reclassified
securities, which are accounted for on an amortised
cost basis. If the reclassifications had not occurred,
the impact on the income statement for 2009 would
have been an increase in profit of US$5 million
(2008: decrease in profit of US$115 million). This
amount represents the difference between the
increase in market value of the securities during
2009 and the accretion recognised under the
amortised cost method in 2009.
HSBC’s exposure to direct lending and
irrevocable commitments to lend to
monoline insurers
HSBC has minimal liquidity facilities at
31 December 2009 (2008: US$47 million) to
monolines, all of which were drawn at 31 December
2009 (2008: US$2 million drawn).
HSBC’s exposure to debt securities which
benefit from guarantees provided by
monoline insurers
Within both the trading and available-for-sale
portfolios, HSBC holds bonds that are ‘wrapped’
with a credit enhancement from a monoline. As the
bonds are traded explicitly with the benefit of this
enhancement, any deterioration in the credit profile
of the monoline is reflected in market prices and,
therefore, in the carrying amount of these securities
at 31 December 2009. For wrapped bonds held in the
trading portfolio, the mark-to-market movement has
been reflected through the income statement. For
wrapped bonds held in the available-for-sale
portfolio, the mark-to-market movement is reflected
in equity unless there is objective evidence of
impairment, in which case the impairment loss is
reflected in the income statement. No wrapped bonds
were included in the reclassification of financial
assets described on page 153.
HSBC’s exposure to Credit Derivative
Product Companies
CDPCs are independent companies that specialise in
selling credit default protection on corporate
exposures. OTC derivative exposure to CDPCs
became a focus during the second half of 2008 as
corporate credit spreads widened, but these
exposures reduced during 2009 as corporate credit
spreads tightened again. At 31 December 2009,
HSBC had purchased from CDPCs credit protection
with a notional value of US$5.0 billion (2008:
US$6.4 billion) which had a fair value (essentially,
replacement cost) of US$0.3 billion (2008:
US$1.2 billion), against which a credit risk
adjustment (a provision) of US$0.1 billion was held
(2008: US$0.2 billion). At 31 December 2009,
83 per cent of exposure was to CDPCs with
investment grade ratings (2008: 100 per cent).
HSBC’s exposure to leveraged finance transactions
Leveraged finance transactions
Leveraged finance transactions include sub-
investment grade acquisition or event-driven
financing.
The following tables show HSBC’s gross
commitments and exposure to leveraged finance
transactions arising from primary transactions and
the movement in that leveraged finance exposure in
the year. HSBC’s additional exposure to leveraged
finance loans through holdings of ABSs from its
trading and investment activities is shown in the
table on page 159.
Funded
exposures21
US$m
At 31 December
Unfunded
exposures22
US$m
Total
exposures
US$m
2009
Europe ..................................................................................................................
Rest of Asia-Pacific .............................................................................................
North America .....................................................................................................
Held within:
– loans and receivables ....................................................................................
– fair value through profit or loss ...................................................................
2008
Europe ..................................................................................................................
Rest of Asia-Pacific .............................................................................................
North America .....................................................................................................
Held within:
– loans and receivables ....................................................................................
– fair value through profit or loss ...................................................................
For footnotes, see page 195.
Movement in leveraged finance exposures
3,790
70
1,713
5,573
5,569
4
3,554
25
1,825
5,404
5,401
3
368
22
188
578
386
192
480
12
258
750
482
268
4,158
92
1,901
6,151
5,955
196
4,034
37
2,083
6,154
5,883
271
Funded
exposures21
US$m
Unfunded
exposures22
US$m
Total
exposures
US$m
At 1 January 2009 ................................................................................................
Additions ..............................................................................................................
Fundings ..............................................................................................................
Sales, repayments and other movements ............................................................
Write-backs ..........................................................................................................
At 31 December 2009 ..........................................................................................
5,404
–
99
(34)
104
5,573
750
50
(99)
(150)
27
578
6,154
50
–
(184)
131
6,151
For footnotes, see page 195.
Leveraged finance commitments held by HSBC
were US$6.5 billion at 31 December 2009 (2008:
US$6.6 billion), of which US$5.9 billion (2008:
US$5.8 billion) was funded.
held at amortised cost subject to impairment and
are not marked to market, and net gains of
US$1.2 billion (2008: net losses of US$1.3 billion)
were not taken to the income statement in 2009.
As described on page 153, certain leveraged
finance loans were reclassified from held-for-trading
to loans and receivables. As a result, these loans are
At 31 December 2009, HSBC’s principal
exposures were to companies in two sectors:
US$3.8 billion to data processing (2008:
165
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value
US$3.6 billion) and US$1.9 billion to
communications and infrastructure (2008:
US$1.7 billion). During the year, 99 per cent
of the total fair value movement not recognised was
against exposures in these two sectors (2008: 99 per
cent). Subsequent to the end of the year, as part of
portfolio management, US$0.6 billion of the data
processing exposure was sold.
Fair values of financial instruments
(Audited)
The classification of financial instruments is
determined in accordance with the accounting
policies set out in Note 2 on the Financial
Statements. The use of assumptions and estimation
in valuing financial instruments is described on
page 63. The following is a description of HSBC’s
methods of determining fair value and its related
control framework, and a quantification of its
exposure to financial instruments measured at fair
value.
Fair value is the amount for which an asset
could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length
transaction.
Financial instruments measured at fair value
on an ongoing basis include trading assets and
liabilities, instruments designated at fair value,
derivatives and financial investments classified
as available for sale (including treasury and other
eligible bills, debt securities, and equity securities).
Fair values of financial instruments carried
at fair value
Control framework
Fair values are subject to a control framework
designed to ensure that they are either determined
or validated by a function independent of the
risk-taker. To this end, ultimate responsibility for
the determination of fair values lies with Finance,
which reports functionally to the Chief Financial
Officer, Executive Director, Risk and Regulation.
Finance establishes the accounting policies and
procedures governing valuation and is responsible
for ensuring that they comply with all relevant
accounting standards.
For all financial instruments where fair values
are determined by reference to externally quoted
prices or observable pricing inputs to models,
independent price determination or validation is
utilised. In inactive markets, direct observation
of a traded price may not be possible. In these
circumstances, HSBC will source alternative market
information to validate the financial instrument’s fair
value, with greater weight given to information that
is considered to be more relevant and reliable. The
factors that are considered in this regard are, inter
alia:
•
the extent to which prices may be expected to
represent genuine traded or tradeable prices;
•
•
•
•
•
the degree of similarity between financial
instruments;
the degree of consistency between different
sources;
the process followed by the pricing provider to
derive the data;
the elapsed time between the date to which the
market data relates and the balance sheet date;
and
the manner in which the data was sourced.
Models provide a logical framework for the
capture and processing of necessary valuation inputs.
For fair values determined using a valuation model,
the control framework may include, as applicable,
independent development or validation of (i) the
logic within valuation models; (ii) the inputs to those
models; (iii) any adjustments required outside the
valuation models; and (iv) where possible, model
outputs. Valuation models are subject to a process
of due diligence and calibration before becoming
operational and are calibrated against external
market data on an ongoing basis.
The results of the independent validation
process are reported to, and considered by, Valuation
Committees. Valuation Committees are composed of
valuation experts from several independent support
functions (Product Control, Market Risk
Management, Quantitative Risk and Valuation
Group and Finance) in addition to senior
management. The members of each Valuation
Committee consider the appropriateness and
adequacy of the fair value adjustments and the
effectiveness of valuation models. If necessary,
they may require changes to model calibration or
calibration procedures. The Valuation Committees
are overseen by the Valuation Committee Review
Group, which consists of Heads of Global Banking
and Markets’ Finance and Risk Functions. All
subjective valuation items with a potential impact in
excess of US$5 million are reported to the Valuation
Committee Review Group.
166
Determination of fair value
Fair values are determined according to the
following hierarchy:
• Level 1 – quoted market price: financial
instruments with quoted prices for identical
instruments in active markets.
• Level 2 – valuation technique using observable
inputs: financial instruments with quoted prices
for similar instruments in active markets or
quoted prices for identical or similar instruments
in inactive markets and financial instruments
valued using models where all significant
inputs are observable.
• Level 3 – valuation technique with significant
unobservable inputs: financial instruments
valued using valuation techniques where one or
more significant inputs are unobservable.
The best evidence of fair value is a quoted price
in an actively traded market. In the event that the
market for a financial instrument is not active, a
valuation technique is used.
The judgement as to whether a market is
active may include, but is not restricted to, the
consideration of factors such as the magnitude and
frequency of trading activity, the availability of
prices and the size of bid/offer spreads. The bid/offer
spread represents the difference in prices at which a
market participant would be willing to buy compared
with the price at which they would be willing to sell.
In inactive markets, obtaining assurance that the
transaction price provides evidence of fair value or
determining the adjustments to transaction prices
that are necessary to measure the fair value of the
instrument requires additional work during the
valuation process.
The majority of valuation techniques employ
only observable market data. However, certain
financial instruments are valued on the basis of
valuation techniques that feature one or more
significant market inputs that are unobservable, and
for them, the derivation of fair value is more
judgemental. An instrument in its entirety is
classified as valued using significant unobservable
inputs if, in the opinion of management, a significant
proportion of the instrument’s carrying amount
and/or inception profit (‘day 1 gain or loss’) is
driven by unobservable inputs. ‘Unobservable’ in
this context means that there is little or no current
market data available from which to determine the
price at which an arm’s length transaction would be
likely to occur. It generally does not mean that there
is no market data available at all upon which to base
a determination of fair value (consensus pricing data
167
may, for example, be used). Furthermore, in some
cases the majority of the fair value derived from a
valuation technique with significant unobservable
inputs may be attributable to observable inputs.
Consequently, the effect of uncertainty in
determining unobservable inputs will generally be
less than the overall fair value of the financial
instrument being measured. To help in
understanding the extent and the range of this
uncertainty, additional information is provided in the
section headed ‘Effect of changes in significant
unobservable assumptions to reasonably possible
alternatives’ below.
In certain circumstances, primarily where debt is
hedged with interest rate derivatives, HSBC records
its own debt in issue at fair value, based on quoted
prices in an active market for the specific instrument
concerned, if available. When quoted market prices
are unavailable, the own debt in issue is valued using
valuation techniques, the inputs for which are either
based upon quoted prices in an inactive market for
the instrument, or are estimated by comparison with
quoted prices in an active market for similar
instruments. In both cases, the fair value includes the
effect of applying the credit spread which is
appropriate to HSBC’s liabilities. For all issued debt
securities, discounted cash flow modelling is used to
separate the change in fair value that may be
attributed to HSBC’s credit spread movements from
movements in other market factors such as
benchmark interest rates or foreign exchange rates.
Specifically, the change in fair value of issued debt
securities attributable to the Group’s own credit
spread is computed as follows: for each security at
each reporting date, an externally verifiable price is
obtained or a price is derived using credit spreads for
similar securities for the same issuer. Then, using
discounted cash flow, each security is valued using a
LIBOR-based discount curve. The difference in the
valuations is attributable to the Group’s own credit
spread. This methodology is applied consistently
across all securities.
Structured notes issued and certain other hybrid
instrument liabilities are included within trading
liabilities and are measured at fair value. The credit
spread applied to these instruments is derived from
the spreads at which HSBC issues structured notes.
These market spreads are smaller than credit spreads
observed for plain vanilla debt or in the credit
default swap markets.
Gains and losses arising from changes in the
credit spread of liabilities issued by HSBC reverse
over the contractual life of the debt, provided that the
debt is not repaid at a premium or a discount.
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value
All net positions in non-derivative financial
instruments, and all derivative portfolios, are valued
at bid or offer prices as appropriate. Long positions
are marked at bid prices; short positions are marked
at offer prices.
The fair value of a portfolio of financial
instruments is calculated as the product of the
number of units and its quoted price and no block
discounts are applied.
Fair value adjustments
The valuation models applied for ‘level 2’ and ‘level
3’ assets incorporate assumptions that HSBC
believes would be made by a market participant to
establish fair value. Fair value adjustments are
adopted when HSBC considers that there are
additional factors that would be considered by a
Global Banking and Markets fair value adjustments
market participant that are not incorporated within
the valuation model. The magnitude of fair value
adjustments depends upon many entity-specific
factors, including modelling sophistication, the
nature of products traded, and the size and type
of risk exposures. For this reason, fair value
adjustments may not be comparable across the
banking industry.
HSBC classifies fair value adjustments as either
‘risk-related’ or ‘model-related’. They form part of
the portfolio fair value and are incorporated within
the balance sheet values of the product types to
which they have been applied. The majority of these
adjustments relate to Global Banking and Markets.
The magnitude and types of fair value adjustment
adopted by Global Banking and Markets are listed
in the following table:
At 31 December
2009
US$m
Type:
Risk-related ...........................................................................................................................................
Bid-offer ...........................................................................................................................................
Uncertainty .......................................................................................................................................
Credit risk adjustment ......................................................................................................................
Other .................................................................................................................................................
Model-related ........................................................................................................................................
Model limitation ...............................................................................................................................
Other .................................................................................................................................................
Inception profit (Day 1 P&L reserves) .................................................................................................
2,955
528
223
2,172
32
457
391
66
260
2008
US$m
3,796
811
319
2,658
8
487
381
106
204
Total ......................................................................................................................................................
3,672
4,487
The quantum of fair value adjustments has
reduced by US$815 million during the year.
Movements in the level of fair value adjustments do
not necessarily result in the recognition of profits or
losses within the income statement. For example,
following enhancement of a model to incorporate an
additional factor, the model value will have changed
and so the fair value adjustment in respect of that
factor will no longer be required. Similarly, if a
position is unwound at a price inclusive of the fair
value adjustment, then the fair value adjustment base
will decrease, but no profit or loss will result.
The major movements occurred in the bid-offer
and credit risk adjustment categories. The reduction
of US$283 million in the bid-offer adjustment in
2009 largely reflected decreasing market bid-offer
spreads as the market stabilised following the
turmoil seen in the latter part of 2008.
The reduction of US$486 million in the credit
risk adjustment in 2009 reflected the release of
US$716 million due to the commutation of
transactions with monoline insurers, which did not
result in any material gain or loss being recognised
in the income statement. It also reflected lower OTC
derivative counterparty exposures, resulting from the
tightening of credit spreads, the steepening of yield
curves and the recovery in equity markets during the
year, offset by increased probability of counterparty
default.
Risk-related adjustments
‘Risk-related’ adjustments are driven, in part, by
the magnitude of HSBC’s market or credit risk
exposure, and by external market factors, such as
the size of market spreads.
Bid-Offer
IAS 39 requires that portfolios are marked at bid or
offer, as appropriate. Bid prices represent the price at
which a long position could be sold and offer prices
168
represent the price at which a short position could be
bought back. Valuation models will typically
generate mid market values. The bid-offer
adjustment reflects the cost that would be incurred if
substantially all residual net portfolio market risks
were closed using available hedging instruments or
by disposing of or unwinding the actual position.
The majority of the bid-offer adjustment relates
to OTC derivative portfolios. For each portfolio, the
major risk types are identified. These may include,
inter alia, delta (the sensitivity to changes in the
price of an underlying), vega (the sensitivity to
changes in volatilities) and basis risk (the sensitivity
to changes in the spread between two rates). For
each risk type, the net portfolio risks are first
classified into buckets, and then a bid-offer spread is
applied to each risk bucket based upon the market
bid-offer spread for the relevant hedging instrument.
The granularity of the risk bucketing is determined
by reference to several factors, including the actual
risk management practice undertaken by HSBC, the
granularity of risk bucketing within the risk
reporting process, and the extent of correlation
between risk buckets. Within a risk type, the bid-
offer adjustment for each risk bucket may be
aggregated without offset or limited netting may be
applied to reflect correlation between buckets. There
is no netting applied between risk types or between
portfolios that are not managed together for risk
management purposes. There is no netting across
legal entities.
Uncertainty
Certain model inputs may be less readily
determinable from market data, and/or the choice
of model itself may be more subjective, with less
market evidence available from which to determine
general market practice. In these circumstances,
there exists a range of possible values that the
financial instrument or market parameter may
assume and an adjustment may be necessary to
reflect the likelihood that in estimating the fair value
of the financial instrument, market participants
would adopt rather more conservative values for
uncertain parameters and/or model assumptions than
those used in the valuation model. Uncertainty
adjustments are derived by considering the potential
range of derivative portfolio valuation given the
available market data. The objective of an
uncertainty adjustment is to arrive at a fair value that
is not overly prudent but rather reflects a level of
prudence believed to be consistent with market
pricing practice.
Uncertainty adjustments are applied to various
types of exotic OTC derivative. For example, the
169
correlation between one or more market rates may be
an important component of an exotic derivative
value and an uncertainty adjustment may be taken to
reflect the range of possible values that market
participants may assume for this parameter.
Credit risk adjustment
The credit risk adjustment is an adjustment to the
valuation of OTC derivative contracts to reflect
within fair value the possibility that the counterparty
may default, and HSBC may not receive the full
market value of the transactions. The calculation
of the credit risk adjustment against monolines is
described on page 163, and for all other
counterparties on page 170.
Model-related adjustments
These adjustments are primarily related to internal
factors, such as the ability of HSBC’s models to
incorporate all material market characteristics. A
description of each adjustment type is given below:
Model limitation
Models used for portfolio valuation purposes,
particularly for exotic derivative products, may be
based upon a simplifying set of assumptions that do
not capture all material market characteristics or may
be less reliable under certain market conditions.
Additionally, markets evolve, and models that were
adequate in the past may require development to
capture all material market characteristics in current
market conditions. In these circumstances, model
limitation adjustments are adopted outside the core
valuation model.
The adjustment methodologies vary according
to the nature of the model. The Quantitative Risk and
Valuation Group, an independent quantitative
support function reporting into Finance, highlights
the requirement for model limitation adjustments and
develops the methodologies employed. Over time, as
model development progresses, model limitations
are addressed within the core revaluation models and
a model limitation adjustment is no longer needed.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted where the
fair value estimated by a valuation the model is
based on one or more significant unobservable
inputs, in accordance with IAS 39. At trade
execution, the adjustment is equal to the inception
profit which is the difference between the fair
value and the price at which the transaction was
undertaken. The balance is amortised to the
‘observability boundary’ based on the risk profile
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value
of the unobservable component. The ‘observability
boundary’ is the point at which during the lifetime
of the trade the previously unobservable significant
input is expected to become observable, which at
the extreme may be the maturity date.
An analysis of the movement in the deferred
Day 1 P&L reserve is provided on page 426.
Transaction costs and the future costs of
administering the OTC derivative portfolio are not
included in the fair value calculation. These, along
with trade origination costs such as brokerage fees
and post-trade costs, are accounted for as part of
either fee expense or operating expenses.
Credit risk adjustment methodology
HSBC adopts a credit risk adjustment (also
frequently known as a ‘credit valuation adjustment’)
against OTC derivative transactions to reflect within
fair value the possibility that the counterparty may
default, and HSBC may not receive the full market
value of the transactions. HSBC calculates a separate
credit risk adjustment for each HSBC legal entity,
and within each entity for each counterparty to
which the entity has exposure. The calculation of the
monoline credit risk adjustment is described on
page 163. The description below relates to the credit
risk adjustment taken against counterparties other
than monolines, which totalled US$1,009 million at
31 December 2009 (2008: US$1,492 million).
HSBC calculates the credit risk adjustment
by applying the probability of default of the
counterparty to the expected positive exposure to the
counterparty, and multiplying the result by the
loss expected in the event of default. The calculation
is performed over the life of the potential exposure.
For most products, HSBC uses a simulation
methodology to calculate the expected positive
exposure. The methodology simulates the range of
potential exposures of HSBC to the counterparty
over the life of an instrument. The range of
exposures is calculated across the portfolio of
transactions with a counterparty to arrive at an
expected overall exposure. The probability of default
assumptions are based upon historic rating transition
matrices. The credit rating used for a particular
counterparty is that determined by HSBC’s internal
credit process. Rating transition is taken account of
throughout the duration of the exposure. A standard
loss given default assumption of 60 per cent is
generally adopted. HSBC considers that an
appropriate spread to reflect HSBC’s own probability
of default within the credit risk adjustment
calculation is currently zero. Consequently, HSBC
does not derive the adjustment on a bilateral basis
170
and has a zero adjustment against derivative
liabilities, often referred to as a ‘debit valuation
adjustment’. The simulation methodology includes
credit mitigants such as counterparty netting
agreements and collateral agreements with the
counterparty.
For certain types of exotic derivatives where
the products are not currently supported by the
simulation, or for derivative exposures in smaller
trading locations where the simulation tool is not yet
available, HSBC adopts an alternative methodology.
Alternative methodologies used by HSBC fall into
two categories. One method maps transactions
against the results for similar products which are
accommodated by the simulation tool. Where such a
mapping approach is not appropriate, a bespoke
methodology is used, generally following the same
principles as the simulation methodology, reflecting
the key characteristics of the instruments but in a
manner that is computationally less intensive. The
calculation is applied at a trade level, with more
limited recognition of credit mitigants such as
netting or collateral agreements than used in the
simulation methodology described previously.
The methodologies do not, in general, account
for ‘wrong-way risk’. Wrong-way risk arises where
the underlying value of the derivative prior to any
credit risk adjustment is related to the probability
of default of the counterparty. A more detailed
description of wrong-way risk is included on
page 208. For particular transactions where there is
significant wrong-way risk, a trade specific approach
is applied to reflect the wrong-way risk within the
valuation.
HSBC includes all third-party counterparties in
the credit risk adjustment calculation and HSBC
does not net credit risk adjustments across HSBC
Group entities.
During 2009, there were no material changes
made by HSBC to the methodologies used to
calculate the credit risk adjustment.
Consideration of other methodologies for
calculation of credit risk adjustments
(Unaudited)
The credit risk adjustment methodology used by
HSBC, in the opinion of management, appropriately
quantifies the exposure of HSBC to counterparty risk
on its OTC derivative portfolio and appropriately
reflects the risk management strategy of the
business.
HSBC recognises that a variety of credit risk
adjustment methodologies are adopted within the
banking industry. Some of the key attributes that
may differ between these methodologies are:
uncertainties inherent in estimating fair value for
private equity investments.
•
•
•
•
the probability of default may be calculated
from historical market data, or implied from
current market levels for certain transaction
types such as credit default swaps, either with or
without an adjusting factor;
some entities derive their own probability of
default from a non-zero spread, which has the
effect of reducing the overall adjustment;
differing loss assumptions in setting the level of
loss given defaults, which may utilise levels set
by regulators for capital calculation purposes;
and
counterparty exclusions, whereby certain
counterparty types (for example collateralised
counterparties) are excluded from the
calculation.
HSBC has estimated the impact of adopting two
alternative methodologies on the level of its credit
risk adjustment (excluding the monoline credit risk
adjustment), as follows:
•
•
adapting HSBC’s existing methodology to
utilise probabilities of default implied from
credit default swaps with no adjustment factor
applied and also implying HSBC’s own
probability of default from credit default swaps,
results in an additional adjustment of
US$170 million; and
adapting HSBC’s existing methodology to
include HSBC’s own probability of default from
a non-zero spread based on historical data,
excluding collateralised counterparties, and
applying loss given default assumptions
consistent with those used in regulatory capital
calculations, results in a reduction of the credit
risk adjustment of US$300 million.
A detailed description of the valuation
techniques applied to instruments of particular
interest follows:
Private equity
HSBC’s private equity positions are generally
classified as available for sale and are not traded in
active markets. In the absence of an active market,
an investment’s fair value is estimated on the basis
of an analysis of the investee’s financial position and
results, risk profile, prospects and other factors, as
well as by reference to market valuations for similar
entities quoted in an active market, or the price at
which similar companies have changed ownership.
The exercise of judgement is required because of
171
Debt securities, treasury and other eligible bills,
and equities
The fair value of these instruments is based on
quoted market prices from an exchange, dealer,
broker, industry group or pricing service, when
available. When they are unavailable, the fair value
is determined by reference to quoted market prices
for similar instruments, adjusted as appropriate for
the specific circumstances of the instruments.
Illiquidity and a lack of transparency in the
market for ABSs have resulted in less observable
data being available. While quoted market prices are
generally used to determine the fair value of these
securities, valuation models are used to substantiate
the reliability of the limited market data available
and to identify whether any adjustments to quoted
market prices are required.
In the absence of quoted market prices, fair
value is determined using valuation techniques based
on the calculation of the present value of expected
future cash flows of the assets. The inputs to these
valuation techniques are derived from observable
market data and, where relevant, assumptions in
respect of unobservable inputs. In respect of ABSs
including residential MBSs, the valuation uses an
industry standard model and the assumptions relating
to prepayment speeds, default rates and loss severity
based on collateral type, and performance, as
appropriate. The valuations output is benchmarked
for consistency against observable data for securities
of a similar nature.
Derivatives
OTC (i.e. non-exchange traded) derivatives are
valued using valuation models. Valuation models
calculate the present value of expected future cash
flows, based upon ‘no-arbitrage’ principles. For
many vanilla derivative products, such as interest
rate swaps and European options, the modelling
approaches used are standard across the industry. For
more complex derivative products, there may be
some differences in market practice. Inputs to
valuation models are determined from observable
market data wherever possible, including prices
available from exchanges, dealers, brokers or
providers of consensus pricing. Certain inputs may
not be observable in the market directly, but can be
determined from observable prices via model
calibration procedures. Finally, some inputs are not
observable, but can generally be estimated from
historical data or other sources. Examples of inputs
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value
that are generally observable include foreign
exchange spot and forward rates, benchmark interest
rate curves and volatility surfaces for commonly
traded option products. Examples of inputs that may
be unobservable include volatility surfaces, in whole
or in part, for less commonly traded option products,
and correlations between market factors such as
foreign exchange rates, interest rates and equity
prices.
Loans, including leveraged loans and loans held
for securitisation
Loans held at fair value are valued from broker
quotes and/or market data consensus providers when
available. In the absence of an observable market,
the fair value is determined using valuation
techniques. These techniques include discounted
cash flow models, which incorporate assumptions
regarding an appropriate credit spread for the loan,
derived from other market instruments issued by the
same or comparable entities.
Structured notes
The fair value of structured notes valued using a
valuation technique is derived from the fair value
of the underlying debt security as described above,
and the fair value of the embedded derivative is
determined as described in the paragraph above
on derivatives.
Fair value valuation bases
The table below provides an analysis of the various
bases described above which have been deployed
for valuing financial assets and financial liabilities
measured at fair value in the consolidated financial
statements.
The movement in the balances of assets and
liabilities measured at fair value with significant
unobservable inputs was mainly attributable to a
decrease in the fair value of derivative assets, loans
held for securitisation and the disposal of securities
in other portfolios. At 31 December 2009, financial
instruments measured at fair value using a valuation
technique with significant unobservable inputs
represented 2 per cent of total assets and liabilities
measured at fair value (2008: 2 per cent).
Bases of valuing financial assets and liabilities measured at fair value
At 31 December 2009
Assets
Trading assets ..................................................................
Financial assets designated at fair value .........................
Derivatives .......................................................................
Financial investments: available for sale ........................
Liabilities
Trading liabilities .............................................................
Financial liabilities designated at fair value ....................
Derivatives .......................................................................
At 31 December 2008
Assets
Trading assets ..................................................................
Financial assets designated at fair value .........................
Derivatives .......................................................................
Financial investments: available for sale ........................
Liabilities
Trading liabilities .............................................................
Financial liabilities designated at fair value ....................
Derivatives .......................................................................
Valuation techniques
Using
observable
inputs
Level 2
US$m
With significant
unobservable
inputs
Level 3
US$m
142,452
11,773
244,472
178,168
139,812
52,032
240,611
185,369
13,483
476,498
173,157
135,559
51,276
473,359
6,420
1,224
4,453
10,214
8,774
507
5,192
7,561
460
9,883
9,116
6,509
–
3,805
Total
US$m
421,381
37,181
250,886
351,531
268,130
80,092
247,646
427,329
28,533
494,876
286,222
247,652
74,587
487,060
Quoted
market
price
Level 1
US$m
272,509
24,184
1,961
163,149
119,544
27,553
1,843
234,399
14,590
8,495
103,949
105,584
23,311
9,896
172
Financial instruments measured at fair value using a valuation technique with significant unobservable
inputs – Level 3
Assets
Available
for sale
US$m
Held for
trading
US$m
Designated
at fair value
through
profit or loss Derivatives
US$m
US$m
Held for
trading
US$m
Liabilities
Designated
at fair value
through
profit or loss
US$m
Derivatives
US$m
At 31 December 2009
Private equity investments ...........
Asset-backed securities ...............
Leveraged finance .......................
Loans held for securitisation .......
Structured notes ...........................
Derivatives with monolines .........
Other derivatives ..........................
Other portfolios ............................
At 31 December 2008
Private equity investments ...........
Asset-backed securities ...............
Leveraged finance .......................
Loans held for securitisation ........
Structured notes ...........................
Derivatives with monolines .........
Other derivatives ..........................
Other portfolios ............................
2,949
4,270
–
–
–
–
–
2,995
10,214
2,689
4,264
–
–
–
–
–
2,163
9,116
197
944
73
1,395
196
–
–
3,615
6,420
54
882
266
2,133
87
–
–
4,139
7,561
345
–
–
–
–
–
–
879
1,224
225
–
–
–
–
–
–
235
460
–
–
–
–
–
1,305
3,148
–
4,453
–
95
–
–
–
2,441
7,347
–
9,883
–
–
–
–
5,055
–
–
3,719
8,774
–
–
–
–
5,294
–
–
1,215
6,509
–
–
–
–
–
–
–
507
507
–
–
–
–
–
–
–
–
–
–
–
25
–
–
–
5,167
–
5,192
–
565
33
–
–
–
3,207
–
3,805
At 31 December 2009, available-for-sale ABSs
valued using a valuation technique with significant
unobservable inputs principally comprised
commercial property-related securities, leveraged
finance-related securities and Alt-A securities with
no particular concentration in any one category.
Assets in other portfolios valued using a valuation
technique with significant unobservable inputs were
principally holdings in an Asian bond portfolio
where the credit spreads are not directly observable.
Trading assets valued using a valuation
technique with significant unobservable inputs
principally comprised ABSs, loans held for
securitisation and other portfolios. The ABSs
are classified in Level 3 as a result of the
unobservability of the underlying price of the assets.
Loans held for securitisations are valued using a
proprietary model which utilises inputs relating to
the credit spread of the obligor. Other portfolios
include holdings in various bonds, preference shares
and debentures where the unobservability relates to
the prices of the underlying securities. The decrease
during the year was due to a reduction in the fair
value of loans held for securitisation and disposals
of positions within other portfolios.
Derivative products with monolines valued
using techniques with unobservable inputs decreased
during the year as a result of a decrease in exposure
to the monoline counterparties, primarily as a result
of decreasing credit spreads and from commutations
undertaken. The primary unobservable input relates
to the probability of default of the counterparty.
Further details of the transactions with monoline
counterparties are shown on page 163.
Derivative products valued using valuation
techniques with significant unobservable inputs
included certain correlation products, such as foreign
exchange basket options, equity basket options,
foreign exchange-interest rate hybrid transactions
and long-dated option transactions. Examples of the
latter are equity options, interest rate and foreign
exchange options and certain credit derivatives.
Credit derivatives include certain tranched CDS
transactions. The decrease in Level 3 derivative
assets during the year was mainly due to a decrease
in the fair value of structured credit transactions.
Trading liabilities valued using a valuation
technique with significant unobservable inputs
principally comprised equity-linked structured notes
which are issued by HSBC and provide the
counterparty with a return that is linked to the
performance of certain equity securities, and other
portfolios. The notes are classified as Level 3 due to
the unobservability of parameters such as long-dated
equity volatilities and correlations between equity
prices, between equity prices and interest rates and
173
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value
between interest rates and foreign exchange rates.
The movement in Level 3 trading liabilities during
the year was primarily due to the issue of new equity
derivative linked structures classified in other
portfolios, partially offset by transfers out of Level 3
as a result of increased observability of long-dated
volatilities.
The increase in derivative liabilities valued
using a valuation technique with significant
unobservable inputs was primarily attributable to the
transfer into Level 3 of swaps linked to securitisation
structures whose valuation utilises inputs relating to
the prepayment rates for the underlying asset pools
Movement in Level 3 financial instruments
which are unobservable. This was partially offset by
transfers out of structured interest rate and equity
derivatives due to increased observability of long-
dated swaptions and equity volatilities.
Reconciliation of fair value measurements in
Level 3 of the fair value hierarchy
The following table provides a reconciliation of the
movement between opening and closing balances of
Level 3 financial instruments, measured at fair value
using a valuation technique with significant
unobservable inputs:
Assets
Designated
at fair value
through
profit or loss Derivatives
Liabilities
Designated
at fair value
through
profit or loss Derivatives
US$m
US$m
At 1 January 2009 ........................
Total gains/(losses) recognised
in profit or loss .........................
Total gains recognised in other
comprehensive income ............
Purchases .....................................
New issuances ..............................
Sales .............................................
Settlements ...................................
Transfers out ................................
Transfers in ..................................
Available
for sale
US$m
Held for
trading
US$m
9,116
7,561
(260)
(730)
617
1,785
–
(806)
(1,059)
(3,043)
3,864
85
1,598
–
(2,166)
(295)
(1,077)
1,444
6,420
Held for
trading
US$m
6,509
US$m
9,883
(5,275)
(107)
119
–
–
–
(104)
(1,057)
887
4,453
301
22
2,522
–
(1,266)
(537)
1,330
8,774
US$m
460
97
–
260
–
(13)
(6)
–
426
1,224
–
(3)
10
–
500
–
–
–
–
507
3,805
(1,372)
94
–
–
–
(206)
(620)
3,491
5,192
At 31 December 2009 ..................
10,214
Total gains/(losses) recognised in
profit or loss relating to those
assets and liabilities held on
31 December 2009 ..................
(371)
(596)
98
(3,753)
(136)
(3)
(135)
For available-for-sale securities, the
unobservability of valuations of asset-backed
(particularly Alt-A and leveraged finance-related)
securities and the Asian bond portfolio discussed on
page 173 resulted in assets in these categories being
transferred or purchased into Level 3 during 2009.
Transfers out of Level 3 were primarily in respect of
commercial property related ABSs due to certain
valuations in these asset categories becoming
observable during 2009.
For trading assets, transfers into Level 3 arose
principally on ABSs, fixed income securities and a
syndicated loan position where valuations for the
specific instruments were not observable. Transfers
out also related principally to ABSs and fixed
income securities as valuations for specific
instruments became observable. Purchases relate
primarily to the unwind of certain ABS total return
swap funding transactions, in which HSBC’s market
risk position did not change, but securities were
purchased in place of the derivative transactions.
For derivative assets, transfers out of Level 3
were driven by decreases in residual maturity of
longer-dated equity options to below the
observability boundary, movement in equity prices
leading to previously out-of-the money or in-the-
money options becoming closer to at-the-money
options, and some increased observability of long-
dated swaption and foreign exchange volatilities.
Transfers in were largely driven by the
unobservability of prepayment rates on swaps linked
to third-party securitisations.
For held-for-trading liabilities, transfers into
Level 3 were primarily due to a reduction in the
observability of volatilities and gap risk parameters
on embedded derivatives within issued structured
notes. Transfers out of Level 3 were driven by
174
similar factors as derivative assets, also relating to
embedded derivatives within issued structured notes.
movements on all other financial instruments
designated at fair value and related derivatives.
For derivative liabilities, the unobservability of
prepayment rates on securitisation swaps was the
main reason for transfers into Level 3. Transfers out
of Level 3 were driven by similar factors as
derivative assets.
During 2009, there were no significant transfers
between Levels 1 and 2.
For assets and liabilities classified as held for
trading, realised and unrealised gains and losses are
presented in the income statement under ‘Trading
income excluding net interest income’.
Fair value changes on long term debt designated
at fair value and related derivatives are presented
in the income statement under ‘Changes in fair
value of long-term debt issued and related
derivatives’. The income statement line item ‘Net
income/(expense) from other financial instruments
designated at fair value’ captures fair value
Realised gains and losses from available-for-
sale securities are presented under ‘Gains less losses
of financial investments’ in the income statement
while unrealised gains and losses are presented in
‘Fair value gains/(losses) within ‘Available-for-sale
investments’ in other comprehensive income/
(expense).
Effect of changes in significant unobservable
assumptions to reasonably possible
alternatives
As discussed above, the fair value of financial
instruments are, in certain circumstances, measured
using valuation techniques that incorporate
assumptions that are not evidenced by prices from
observable current market transactions in the same
instrument and are not based on observable market
data. The following table shows the sensitivity of
these fair values to reasonably possible alternative
assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
At 31 December 2009
Derivatives, trading assets and trading liabilities23 ......
Financial assets and liabilities designated at fair value
Financial investments: available for sale .....................
At 31 December 2008
Derivatives, trading assets and trading liabilities23 ......
Financial assets and liabilities designated at fair value
Financial investments: available for sale .....................
For footnote, see page 195.
Reflected in profit or loss
Reflected in equity
Favourable
Unfavourable
Favourable
changes
US$m
changes
US$m
changes
US$m
Unfavourable
changes
US$m
984
102
–
1,266
30
–
(577)
(98)
–
(703)
(30)
–
–
–
1,161
–
–
984
–
–
(1,157)
–
–
(1,005)
The decrease in the effect of changes in
significant unobservable inputs in relation to
derivatives, trading assets and trading liabilities
during the year primarily reflected the decreased
sensitivity to the assumptions for the derivative
portfolios. The increase in the effect of changes in
significant unobservable inputs for available-for-sale
assets arose from the increase in private equity
holdings in Level 3 and from increased sensitivity
to the assumptions for ABSs.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
Reflected in profit or loss
Reflected in equity
Favourable
Unfavourable
Favourable
changes
US$m
changes
US$m
changes
US$m
Unfavourable
changes
US$m
At 31 December 2009
Private equity investments ............................................
Asset-backed securities ................................................
Leveraged finance ........................................................
Loans held for securitisation ........................................
Structured notes ............................................................
Derivatives with monolines ..........................................
Other derivatives ...........................................................
Other portfolios .............................................................
54
41
1
16
3
333
309
329
175
(54)
(41)
(1)
(16)
(3)
(25)
(332)
(203)
302
734
–
–
–
–
–
125
(299)
(735)
–
–
–
–
–
(123)
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value
At 31 December 2008 ...................................................
Private equity investments ............................................
Asset-backed securities ................................................
Leveraged finance ........................................................
Loans held for securitisation ........................................
Structured notes ............................................................
Derivatives with monolines ..........................................
Other derivatives ...........................................................
Other portfolios .............................................................
Reflected in profit or loss
Reflected in equity
Favourable
Unfavourable
Favourable
changes
US$m
changes
US$m
changes
US$m
Unfavourable
changes
US$m
28
90
2
41
8
341
652
134
(28)
(91)
(2)
(41)
(8)
(250)
(224)
(89)
234
667
–
–
–
–
–
83
(261)
(660)
–
–
–
–
–
(84)
Favourable and unfavourable changes are
determined on the basis of changes in the value of
the instrument as a result of varying the levels of the
unobservable parameters using statistical techniques.
When parameters are not amenable to statistical
analysis, quantification of uncertainty is
judgemental.
When the fair value of a financial instrument is
affected by more than one unobservable assumption,
the above table reflects the most favourable or most
unfavourable change from varying the assumptions
individually.
In respect of private equity investments, the
valuations are assessed on an asset by asset basis
using a valuation methodology appropriate to the
specific investment, in line with industry guidelines.
In many of the methodologies, the principal
assumption is the valuation multiple to be applied to
the main financial indicators. This may be
determined with reference to multiples for
comparable listed companies and includes discounts
for marketability.
For ABSs whose prices are unobservable,
models are used to generate the expected value
of the asset. The principal assumptions in these
models are based on benchmark information about
prepayment speeds, default rates, loss severities and
the historical performance of the underlying assets.
The models used are calibrated by using securities
for which external market information is available.
For leveraged finance, loans held for
securitisation and derivatives with monolines the
principal assumption concerns the appropriate value
to be attributed to the counterparty credit risk.
This requires estimation of exposure at default,
probability of default and recovery in the event
of default. For loan transactions, assessment of
exposure at default is straightforward. For derivative
transactions, a future exposure profile is generated
on the basis of current market data. Probabilities of
default and recovery levels are estimated using
market evidence, which may include financial
176
information, historical experience, CDS spreads and
consensus recovery levels.
In the absence of such evidence, management’s
best estimate is used.
For structured notes and other derivatives,
principal assumptions concern the value to be
attributed to future volatility of asset values and the
future correlation between asset values. These
principal assumptions include credit volatilities and
correlations used in the valuation of structured credit
derivatives (including leveraged credit derivatives).
For such unobservable assumptions, estimates are
based on available market data, which may include
the use of a proxy method to derive a volatility or a
correlation from comparable assets for which market
data is more readily available, and/or an examination
of historical levels.
Changes in fair value recorded in the income
statement
The following table quantifies the changes in fair
values recognised in profit or loss during the year in
respect of assets and liabilities held at the end of the
year whose fair values are estimated using valuation
techniques that incorporate significant assumptions
that are not evidenced by prices from observable
current market transactions in the same instrument,
and are not based on observable market data:
2009
US$m
2008
US$m
Recorded profit/(loss) on:
Derivatives, trading assets and
trading liabilities ......................
(4,620)
Financial assets and liabilities
designated at fair value ............
95
779
109
The loss during the year included changes in the
fair value of monoline and CDPC-related credit
derivatives which use a valuation technique with
significant unobservable inputs. Additionally, there
was a decline in the fair value of other structured
credit derivatives attributable to the tightening of
credit spreads during the year.
In general, many Level 3 instruments are risk
managed using derivatives which employ a valuation
technique with observable inputs. However, the
associated gains on these derivatives in the year are
not reflected in the table above. The table details the
total change in fair value of these instruments; it
does not isolate the component attributable to
unobservable inputs.
HSBC Holdings
The following table provides an analysis of the basis
for valuing financial assets and financial liabilities
measured at fair value in the financial statements:
Bases of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Valuation techniques
Quoted
market
price
Level 1
US$m
Using
observable
inputs
Level 2
US$m
With significant
unobservable
inputs
Level 3
US$m
2,981
–
4,360
362
3,682
–
3,068
1,324
–
2,455
–
–
–
2,629
–
–
Total
US$m
2,981
2,455
16,909
362
3,682
2,629
16,389
1,324
Effect of changes in significant unobservable
assumptions to reasonably possible
alternatives
In certain circumstances, the fair value of financial
instruments are measured using valuation models
that incorporate assumptions that are not supported
by prices from observable current market
transactions in the same instrument and are not based
on observable market data. The following table
shows the sensitivity of non-derivative financial
instruments to reasonably possible alternative
assumptions:
Reflected in equity
Favourable
changes
US$m
Unfavourable
changes
US$m
115
113
(107)
(97)
Financial investments
available for sale
At 31 December 2009 ....
At 31 December 2008 .....
At 31 December 2009
Assets
Derivatives ................................................................
Financial investments: available for sale .................
–
–
Liabilities
Financial liabilities designated at fair value ............
Derivatives ................................................................
12,549
–
At 31 December 2008
Assets
Derivatives ................................................................
Financial investments: available for sale .................
–
–
Liabilities
Financial liabilities designated at fair value ............
Derivatives ................................................................
13,321
–
Financial investments measured using a
valuation technique with significant unobservable
inputs comprise fixed-rate preferred securities and
senior notes purchased from HSBC undertakings.
The unobservable elements of the valuation
technique include the use of implied credit spreads
and simplified bond pricing assumptions.
At 1 January 2009 .......................................
Total gains or losses:
– recognised in profit or loss .................
– recognised in other comprehensive
income .............................................
Settlements ..................................................
At 31 December 2009 .................................
Total gains or losses recognised in profit or
loss relating to those assets and liabilities
held on 31 December 2009 ....................
Assets
available
for sale
US$m
2,629
(2)
103
(275)
2,455
(2)
177
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Carried at fair value / Not carried at fair value
Assessing available-for-sale assets for
impairment
HSBC’s policy on impairment of available-for-sale
assets is described on page 375. The following is a
description of HSBC’s application of that policy.
A systematic impairment review is carried out
periodically of all available-for-sale assets, and all
available indicators are considered to determine
whether there is any objective evidence that an
impairment may have occurred, whether as the result
of a single loss event or as the combined effect of
several events.
Debt securities
When assessing available-for-sale debt securities for
objective evidence of impairment at the balance
sheet date, HSBC considers all available evidence,
including observable data or information about
events specifically relating to the securities which
may result in a shortfall in recovery of future cash
flows. These events may include a significant
financial difficulty of the issuer, a breach of contract
such as a default, bankruptcy or other financial
reorganisation, or the disappearance of an active
market for the debt security because of financial
difficulties relating to the issuer.
These types of specific events and other factors
such as information about the issuers’ liquidity,
business and financial risk exposures, levels of and
trends in default for similar financial assets, national
and local economic trends and conditions, and the
fair value of collateral and guarantees may be
considered individually, or in combination, to
determine if there is objective evidence of
impairment of a debt security.
In addition, when assessing available-for-sale
ABSs for objective evidence of impairment, HSBC
considers the performance of underlying collateral
and the extent and depth of market price declines.
Changes in credit ratings are considered but a
downgrade of a security’s credit rating is not, of
itself, evidence of impairment. The primary
indicators of potential impairment are considered
to be adverse fair value movements, and the
disappearance of an active market for the securities.
At 31 December 2009, the population of
available-for-sale ABSs identified as being most
at risk of impairment included residential MBSs
backed by sub-prime and Alt-A mortgages
originated in the US, commercial MBSs orginated in
the US and Europe and CDOs with considerable
exposure to these sectors. The estimated future cash
flows of these securities are assessed to determine
178
whether any of their cash flows are unlikely to be
recovered as a result of events occurring on or before
the balance sheet date.
In particular, for residential and commercial
MBSs the estimated future cash flows are assessed
by determining the future projected cash flows
arising on the underlying collateral taking into
consideration the delinquency status of underlying
loans, the probability of delinquent loans progressing
to default, the proportion of the advances
subsequently recoverable and the prepayment
profiles of the underlying assets. Management uses
externally available data and applies judgement
when determining the appropriate assumptions in
respect of these factors. HSBC uses a modelling
approach which incorporates historically observed
progression rates to default, to determine if the
decline in aggregate projected cash flows from the
underlying collateral will lead to a shortfall in
contractual cash flows. In such cases the security is
considered to be impaired.
In respect of CDOs, in order to determine
whether impairment has occurred, the expected
future cash flows of the CDOs are compared with
the total of the underlying collateral on the non-
defaulted assets and the recovery value of the
defaulted assets. In the event of a shortfall, the
CDO is considered to be impaired.
When a security benefits from a contract
provided by a monoline insurer that insures
payments of principal and interest, the expected
recovery on the contract is assessed in determining
the total expected credit support available to the
ABS.
Equity securities
Objective evidence of impairment for available-
for-sale equity securities may include specific
information about the issuer as detailed above, but
may also include information about significant
changes in technology, markets, economics or the
law that provides evidence that the cost of the equity
securities may not be recovered.
A significant or prolonged decline in the fair
value of the asset below its cost is also objective
evidence of impairment. In assessing whether it is
significant, the decline in fair value is evaluated
against the original cost of the asset at initial
recognition. In assessing whether it is prolonged, the
decline is evaluated against the period in which the
fair value of the asset has been below its original
cost at initial recognition.
For impairment losses on available-for-sale
equity and debt securities, see pages 31 and 35,
respectively. Any impairment losses relating to
ABSs recognised in the income statement are
recorded as ‘Loan impairment charges and other
credit risk provisions’. Impairment losses incurred
on assets held by consolidated securities investment
conduits (excluding Solitaire) are offset by a credit
to the impairment line for the amount of the loss
borne by capital note holders.
Fair values of financial instruments not
carried at fair value
Financial instruments that are not carried at fair
value on the balance sheet include loans and
advances to banks and customers, deposits by banks,
customer accounts, debt securities in issue and
subordinated liabilities. Their fair values are,
however, provided for information by way of note
disclosure and are calculated as described below.
The calculation of fair value incorporates
HSBC’s estimate of the amount at which financial
assets could be exchanged, or financial liabilities
settled, between knowledgeable, willing parties in an
arm’s length transaction. It does not reflect the
economic benefits and costs that HSBC expects to
flow from the instruments’ cash flows over their
expected future lives. Other reporting entities
may use different valuation methodologies and
assumptions in determining fair values for which
no observable market prices are available, so
comparisons of fair values between entities may
not be meaningful and users are advised to exercise
caution when using this data.
As a consequence of the market turmoil there
has been a significant reduction in the secondary
market demand for US consumer lending assets.
Uncertainty over the extent and timing of future
credit losses, together with a near absence of
liquidity for non-prime ABSs and loans, continued
to be reflected in a low volume of bid prices at
31 December 2009. It is not possible from the
indicative market prices that are available to
distinguish between the relative discount to nominal
value within the fair value measurement that reflects
cash flow impairment due to expected losses to
maturity, and the discount that the market is
demanding for holding an illiquid asset. Under
impairment accounting for loans and advances, there
is no requirement to adjust the carrying value to
reflect illiquidity as HSBC’s intention is to fund
assets until the earlier of prepayment, charge-off or
repayment on maturity. The fair value, by contrast,
reflects both incurred loss and loss expected through
the life of the asset, a discount for illiquidity and a
179
credit spread which reflects the market’s current risk
preferences. This usually differs from the credit
spread applicable in the market at the time the loan
was underwritten and funded.
The estimated fair values at 31 December 2009
and 31 December 2008 of loans and advances to
customers in North America reflected the combined
effect of these conditions. As a result, the fair values
are substantially lower than the carrying amount of
customer loans held on-balance sheet and lower than
would otherwise be reported under more normal
market conditions. Accordingly, the fair values
reported do not reflect HSBC’s estimate of the
underlying long-term value of the assets. Fair values
at the balance sheet date of the assets and liabilities
set out below are estimated for the purpose of
disclosure as follows:
• Loans and advances to banks and customers
The fair value of loans and advances is based
on observable market transactions, where
available. In the absence of observable market
transactions, fair value is estimated using
discounted cash flow models. Performing
loans are grouped, as far as possible, into
homogeneous pools segregated by maturity and
coupon rates. In general, contractual cash flows
are discounted using HSBC’s estimate of the
discount rate that a market participant would use
in valuing instruments with similar maturity,
re-pricing and credit risk characteristics.
The fair value of a loan portfolio reflects
both loan impairments at the balance sheet
date and estimates of market participants’
expectations of credit losses over the life of
the loans. For impaired loans, fair value is
estimated by discounting the future cash flows
over the time period they are expected to be
recovered.
• Financial investments
The fair values of listed financial investments
are determined using bid market prices. The fair
values of unlisted financial investments are
determined using valuation techniques that take
into consideration the prices and future earnings
streams of equivalent quoted securities.
• Deposits by banks and customer accounts
For the purpose of estimating fair value,
deposits by banks and customer accounts are
grouped by remaining contractual maturity. Fair
values are estimated using discounted cash
flows, applying current rates offered for deposits
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
Fair values of financial instruments > Not carried at fair value // SPEs > HSBC-sponsored SPEs
of similar remaining maturities. The fair value
of a deposit repayable on demand is assumed to
be the amount payable on demand at the balance
sheet date.
• Debt securities in issue and subordinated
liabilities
Fair values are determined using quoted market
prices at the balance sheet date where available,
or by reference to quoted market prices for
similar instruments.
The fair values in this note are stated at a
specific date and may be significantly different from
the amounts which will actually be paid on the
maturity or settlement dates of the instruments. In
many cases, it would not be possible to realise
immediately the estimated fair values given the size
of the portfolios measured. Accordingly, these fair
values do not represent the value of these financial
instruments to HSBC as a going concern.
For all classes of financial instruments, fair
value represents the product of the value of a single
instrument, multiplied by the number of instruments
held. No block discount or premium adjustments are
made. The fair values of intangible assets related to
the businesses which originate and hold the financial
instruments subject to fair value measurement, such
as values placed on portfolios of core deposits, credit
card and customer relationships, are not included in
the above because they are not classified as financial
instruments. Accordingly, an aggregation of fair
value measurements does not approximate to the
value of the organisation as a going concern.
The following is a list of financial instruments
whose carrying amount is a reasonable
approximation of fair value because, for example,
they are short-term in nature or reprice to current
market rates frequently:
Assets
Cash and balances at central banks
Items in the course of collection from other banks
Hong Kong Government certificates of indebtedness
Endorsements and acceptances
Short-term receivables within ‘Other assets’
Accrued income
Liabilities
Hong Kong currency notes in circulation
Items in the course of transmission to other banks
Investment contracts with discretionary participation features
within ‘Liabilities under insurance contracts’
Endorsements and acceptances
Short-term payables within ‘Other liabilities’
Accruals
Fair values of financial instruments which are not carried at fair value on the balance sheet
Assets
Loans and advances to banks .......................................................................
Loans and advances to customers ................................................................
Financial investments: debt securities ..........................................................
Financial investments: treasury and other eligible bills ...............................
Liabilities
Deposits by banks .........................................................................................
Customer accounts ........................................................................................
Debt securities in issue .................................................................................
Subordinated liabilities .................................................................................
At 31 December 2009
At 31 December 2008
Carrying
amount
US$m
Fair
value
US$m
Carrying
amount
US$m
179,781
896,231
17,526
101
179,658
855,780
18,097
101
153,766
932,868
14,013
–
Fair
value
US$m
153,363
876,239
15,057
–
124,872
1,159,034
146,896
30,478
124,856
1,160,036
145,888
30,307
130,084
1,115,327
179,693
29,433
130,129
1,115,291
170,599
28,381
Fair values of financial instruments held for sale which are not carried at fair value on the balance sheet
Assets classified as held for sale
Loans and advances to banks and customers ...............................................
Financial investments: debt securities ..........................................................
At 31 December 2009
At 31 December 2008
Carrying
amount
US$m
1,356
–
Fair
value
US$m
1,316
–
Carrying
amount
US$m
11
37
Fair
value
US$m
11
37
180
Analysis of loans and advances to customers by geographical segment
Loans and advances to customers
Europe ...........................................................................................................
Hong Kong ...................................................................................................
Rest of Asia-Pacific24 ...................................................................................
Middle East24 ................................................................................................
North America25 ............................................................................................
Latin America ...............................................................................................
For footnotes, see page 195.
HSBC Holdings
The methods used by HSBC Holdings to determine
fair values of financial instruments for the purpose of
measurement and disclosure are described above.
At 31 December 2009
At 31 December 2008
Carrying
amount
US$m
Fair
Value
US$m
Carrying
amount
US$m
439,481
99,381
80,043
22,844
206,853
47,629
431,158
99,694
79,972
22,538
174,957
47,461
426,191
100,220
80,661
27,295
256,214
42,287
Fair
value
US$m
417,256
100,490
77,391
27,296
211,346
42,460
896,231
855,780
932,868
876,239
The following table provides an analysis of the
fair value of financial instruments not carried at fair
value on the balance sheet:
Fair values of HSBC Holdings’ financial instruments not carried at fair value on the balance sheet
Assets
Loans and advances to HSBC undertakings ...................
Liabilities
Amounts owed to HSBC undertakings ...........................
Debt securities in issue ....................................................
Subordinated liabilities ....................................................
2009
Carrying
amount
US$m
23,212
3,711
2,839
14,406
Fair
value
US$m
23,871
3,827
3,141
15,666
2008
Carrying
amount
US$m
11,804
4,042
–
14,017
Fair
value
US$m
12,670
4,218
–
13,940
Special purpose entities
HSBC-sponsored SPEs
This section contains disclosures about HSBC-
sponsored SPEs that are included in HSBC’s
consolidated balance sheet, with a particular focus
on SPEs containing exposures affected by the
turmoil in credit markets which began in mid-2007,
and those that are not consolidated by HSBC under
IFRSs. In addition to the disclosures about SPEs,
information on other off-balance sheet arrangements
has been included in this section.
HSBC enters into certain transactions with
customers in the ordinary course of business which
involve the establishment of SPEs to facilitate or
secure customer transactions.
HSBC structures that utilise SPEs are authorised
centrally when they are established to ensure
appropriate purpose and governance. The activities
of SPEs administered by HSBC are closely
monitored by senior management. HSBC’s
involvement with SPE transactions is described
below.
HSBC sponsors the formation of entities which are
designed to accomplish certain narrow and well-
defined objectives, such as securitising financial
assets or effecting a lease, and this requires a form of
legal structure that restricts the assets and liabilities
within the structure to the single purpose for which it
was established. HSBC consolidates these SPEs
when the substance of the relationship indicates
that HSBC controls them. In assessing control, all
relevant factors are considered, including qualitative
and quantitative aspects. For example:
Qualitative factors – in substance:
•
the activities of the SPE are being conducted on
behalf of HSBC according to HSBC’s specific
business needs so that it obtains benefit from the
SPE’s operation. This might be evidenced, for
example, by HSBC providing a significant level
of support to the SPE; and
• HSBC has the decision-making powers to obtain
the majority of the benefits of the activities of
the SPE.
181
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
SPEs > SIVs and conduits
Quantitative factors – hereinafter referred to as ‘the
majority of risks and rewards of ownership’. In
substance:
• HSBC has rights to obtain the majority of the
benefits of the SPE and therefore may be
exposed to risks incidental to the activities of
the SPE; and
• HSBC retains the majority of the residual or
ownership risks related to the SPE or its assets
in order to obtain benefits from its activities.
In a number of cases, these SPEs are accounted
for off-balance sheet under IFRSs where HSBC does
not have the majority of the risks and rewards of
ownership of the SPE. However, in certain
circumstances and after careful consideration of the
facts, HSBC consolidates an SPE when the
qualitative features of its involvement indicate that,
in substance, the activities of the SPE are being
conducted on behalf of HSBC, even though HSBC
does not obtain the majority of risks and rewards of
ownership.
HSBC reassesses the required consolidation
accounting tests whenever there is a change in the
substance of the relationship between HSBC and an
SPE, for example, when the nature of HSBC’s
involvement or the governing rules, contractual
arrangements or capital structure of the SPE change.
The most significant categories of SPEs are
discussed in more detail below.
Structured investment vehicles and
conduits
Structured investment vehicles
Structured investment vehicles (‘SIV’s) are SPEs
which invest in diversified portfolios of interest-
earning assets, generally funded through issues of
commercial paper (‘CP’), medium-term notes
(‘MTN’s) and other senior debt to take advantage of
the spread differentials between the assets in the SIV
and the funding cost. Prior to the implementation of
Basel II, it was capital efficient to many bank
investors to invest in highly-rated investment
securities in this way. HSBC sponsored the
establishment of two SIVs, Cullinan Finance
Limited (‘Cullinan’) and Asscher Finance Limited
(‘Asscher’) which are now in the process of
voluntary liquidation following completion of the
transfer of their portfolios of investment securities
and derivatives to the three new structured
investment conduits (‘SIC’s) established in 2008 in
order to remove the risk of having to make forced
asset sales. Mazarin Funding Limited (‘Mazarin’),
an asset-backed CP conduit, and Barion Funding
182
Limited (‘Barion’), a term-funding vehicle, were set
up in respect of Cullinan; and Malachite Funding
Limited (‘Malachite’), a term-funding vehicle, was
set up in respect of Asscher. Cullinan and Asscher
retain only residual cash balances to facilitate the
voluntary liquidation process.
At 31 December 2009, all the capital notes in
Cullinan and Asscher had been redeemed and
replaced by capital notes in the new SICs (2008:
8.7 per cent of Asscher’s capital notes remained
outstanding).
Conduits
HSBC sponsors and manages two types of conduits
which issue CP: multi-seller conduits and SICs.
HSBC has consolidated these conduits from
inception because it is exposed to the majority of
risks and rewards of ownership.
Securities investment conduits
Solitaire, HSBC’s principal securities investment
conduit, purchases highly rated ABSs to facilitate
tailored investment opportunities. HSBC’s other
SICs, Mazarin, Barion and Malachite, evolved from
the restructuring of HSBC’s sponsored SIVs as
discussed above.
Multi-seller conduits
These vehicles were established for the purpose of
providing access to flexible market-based sources of
finance for HSBC’s clients, for example, to finance
discrete pools of third-party originated trade and
vehicle finance loan receivables. HSBC’s principal
multi-seller conduits are Regency Assets Limited
(‘Regency’), Bryant Park Funding Limited LLC
(‘Bryant Park’), Abington Square Funding LLC
(‘Abington Square’, inactive since March 2008)
and Performance Trust.
The multi-seller conduits purchase or fund
interests in diversified pools of third-party assets
financed by issuing CP or drawing advances from
HSBC. The cash flows received by the conduits
from the third-party assets are used to service the
funding and provide a commercial rate of return
for HSBC for structuring, for various other
administrative services, and for the liquidity and
credit support it gives to the conduits. The asset
pools acquired by the conduits are structured so that
the credit enhancement the conduits receive, which
equates to senior investment grade ratings, and the
benefit of liquidity facilities typically provided by
HSBC mean that the CP issued by the multi-seller
conduits is itself highly rated.
Ratings analysis of assets held by HSBC’s SIVs and conduits
S&P ratings at 31 December 2009
AAA .............................................................
AA ................................................................
A ...................................................................
BBB ..............................................................
BB ................................................................
B ...................................................................
CCC ..............................................................
CC ................................................................
D ...................................................................
Total investments ............................................
Cash and other investments ............................
S&P ratings at 31 December 2008
AAA .............................................................
AA ................................................................
A ...................................................................
BBB ..............................................................
BB ................................................................
B ...................................................................
CCC ..............................................................
D ...................................................................
Total investments ............................................
Cash and other investments ............................
Solitaire
US$bn
Other
SICs
US$bn
Total
SICs
US$bn
Total
multi-seller
conduits
US$bn
Total
SIVs
US$bn
5.2
3.0
0.8
0.7
0.2
0.4
1.0
0.3
0.1
11.7
1.1
12.8
8.1
0.7
1.0
0.8
0.3
0.1
0.2
–
11.2
0.9
12.1
6.7
4.1
6.0
0.8
0.3
0.3
1.0
0.4
0.1
19.7
0.3
20.0
12.0
1.4
4.7
1.0
0.4
0.2
0.2
–
19.9
0.3
20.2
11.9
7.1
6.8
1.5
0.5
0.7
2.0
0.7
0.2
31.4
1.4
32.8
20.1
2.1
5.7
1.8
0.7
0.3
0.4
–
31.1
1.2
32.3
6.2
1.3
1.8
0.5
0.5
–
–
–
–
10.3
0.6
10.9
6.1
1.8
1.6
1.2
0.2
0.5
1.8
0.3
13.5
0.4
13.9
–
–
–
–
–
–
–
–
–
–
–
–
0.3
–
–
–
–
–
–
–
0.3
0.1
0.4
The migration to lower ratings during 2009 is a
result of the performance of the underlying assets
being outside the expectations established at
inception of the original securitisations, and changes
to the ratings methodology of the principal rating
agencies.
At 31 December 2009, 6.8 per cent of the SICs’
exposures to sub-prime and US Alt-A mortgages,
which in aggregate amounted to US$0.4 billion,
remained AAA rated (2008: 62.7 per cent,
US$4.2 billion), while 30.5 per cent, which in
aggregate amounted to US$1.8 billion, remained
investment grade (2008: 94 per cent,
US$6.3 billion).
Weighted average life of portfolios
It should be noted that securities purchased by
SICs typically benefit from substantial transaction-
specific credit enhancements such as subordinated
tranches and/or excess spread, which absorb any
credit losses before they fall on the tranche held by
the SPE.
At 31 December 2009, the SIVs did not
hold any CP issued by SICs set up by HSBC
(2008: US$0.3 billion). As described above, by
31 December 2008 all the original assets held by
the SIVs had been transferred to the new SICs,
with the exception of residual cash balances.
Weighted average life (years)
At 31 December 2009 ....................................
At 31 December 2008 .....................................
6.3
5.8
Solitaire
Other
SICs
4.1
3.9
Total
multi-seller
conduits
Total
SICs
4.9
4.6
2.4
1.6
Total
SIVs
–
–
183
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
SPEs > SIVs and conduits
Composition of asset portfolio
Solitaire
US$bn
Other
SICs
US$bn
Total
SICs
US$bn
Total
multi-seller
conduits26
US$bn
Total
SIVs
US$bn
Asset class at 31 December 2009
Structured finance
Vehicle loans and equipment leases ............
Consumer receivables ..................................
Credit card receivables ................................
Residential MBSs ........................................
Commercial MBSs .......................................
Auto floor plan .............................................
Trade receivables .........................................
Student loan securities .................................
Vehicle finance loan securities ....................
Leverage loan securities ..............................
Other ABSs ..................................................
Finance
Commercial bank securities and deposits ...
Investment bank debt securities ...................
Finance company debt securities .................
Other assets ..................................................
Sub-prime mortgages ......................................
US Alt-A .........................................................
Asset class at 31 December 2008
Structured finance
Vehicle loans and equipment leases ............
Consumer receivables ..................................
Credit card receivables ................................
Residential MBSs ........................................
Commercial MBSs .......................................
Auto floor plan .............................................
Trade receivables .........................................
Student loan securities .................................
Vehicle finance loan securities ....................
Leverage loan securities ..............................
Other ABSs ..................................................
Finance
Commercial bank securities and deposits ...
Investment bank debt securities ...................
Finance company debt securities .................
Other assets ..................................................
Sub-prime mortgages ......................................
US Alt-A .........................................................
For footnote, see page 195.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.3
0.1
0.4
0.4
–
–
–
–
–
0.2
3.8
2.4
–
–
2.3
0.1
1.9
1.0
–
–
–
4.6
3.3
–
–
1.8
0.2
2.3
1.8
–
–
0.2
8.4
5.7
–
–
4.1
0.3
4.2
2.8
3.0
0.8
1.3
0.3
0.2
0.5
2.8
–
–
–
1.2
11.7
14.0
25.7
10.1
4.9
0.8
0.2
1.2
7.1
0.6
–
0.2
–
0.8
32.8
10.9
2.2
3.7
5.9
–
–
0.2
10.1
5.2
–
–
4.2
0.3
3.7
2.1
25.8
4.4
0.5
0.4
1.2
6.5
–
–
–
3.9
0.7
1.4
0.6
0.2
2.2
2.7
–
–
–
1.7
13.4
0.4
–
–
0.1
0.5
32.3
13.9
2.2
4.5
6.7
–
–
–
0.1
–
–
1.0
1.1
12.8
0.7
1.9
2.6
–
–
0.2
4.4
2.1
–
–
2.2
–
1.5
0.8
4.8
0.8
0.2
0.2
6.0
20.0
1.5
1.8
3.3
–
–
–
5.7
3.1
–
–
2.0
0.3
2.2
1.3
11.2
14.6
4.4
0.5
0.4
0.3
5.6
20.2
1.3
2.2
3.5
–
–
–
0.9
0.9
12.1
0.9
2.3
3.2
184
Asset analysis by geographical origination for multi-seller conduits27
Europe ......................................................................................................................................................
Rest of Asia-Pacific .................................................................................................................................
North America .........................................................................................................................................
At 31 December
2009
US$bn
2008
US$bn
6.1
0.6
4.2
10.9
7.5
0.9
5.5
13.9
For footnote, see page 195.
Total assets by balance sheet classification
Solitaire
US$bn
Other
SICs
US$bn
At 31 December 2009
Financial instruments designated at
fair value ................................................
Loans and advances to banks ...................
Loans and advances to customers ............
Financial investments ...............................
Other assets ...............................................
At 31 December 2008
Financial instruments designated at
fair value ................................................
Derivative assets .......................................
Loans and advances to banks ...................
Loans and advances to customers ............
Financial investments ...............................
Other assets ...............................................
Funding structure
0.1
–
–
11.6
1.1
12.8
0.1
–
–
–
11.1
0.9
12.1
–
–
–
19.8
0.2
20.0
–
0.2
0.1
–
19.9
–
20.2
0.1
–
–
31.4
1.3
32.8
0.1
0.2
0.1
–
31.0
0.9
32.3
Total
multi-seller
conduits
Total
SICs
US$bn
US$bn
–
0.3
10.3
–
0.3
10.9
–
0.1
–
13.4
–
0.4
13.9
Total
SIVs
US$bn
–
–
–
–
–
–
–
–
0.1
–
0.3
–
0.4
Solitaire
Other SICs
Total SICs
Total multi-seller
conduits
Total SIVs
Provided
by HSBC Total
Total
US$bn US$bn US$bn
Provided
by HSBC Total
US$bn US$bn
Provided
by HSBC Total
US$bn US$bn
Provided
Provided
by HSBC Total
by HSBC
US$bn US$bn US$bn
At 31 December 2009
Capital notes .................
Drawn liquidity facility ..
Commercial paper ........
Medium-term notes ......
Term repos executed .....
At 31 December 2008
Capital notes .................
Drawn liquidity facility ..
Commercial paper ........
Medium-term notes ......
Term repos executed .....
–
7.6
10.8
–
–
–
7.6
0.7
–
–
0.7
–
10.1
3.8
10.2
–
–
10.1
3.8
10.2
0.7
7.6
20.9
3.8
10.2
–
7.6
10.8
3.8
10.2
–
–
10.3
–
–
18.4
8.3
24.8
24.1
43.2
32.4
10.3
–
2.4
17.2
–
0.8
–
2.4
8.3
–
0.8
0.9
–
10.5
3.4
13.3
–
–
10.4
3.4
13.3
0.9
2.4
27.7
3.4
14.1
–
2.4
18.7
3.4
14.1
–
–
12.9
–
–
20.4
11.5
28.1
27.1
48.5
38.6
12.9
–
–
–
–
–
–
–
–
2.1
–
–
2.1
–
–
–
–
–
–
–
–
–
0.1
–
0.1
–
–
–
–
–
–
–
–
–
–
–
–
185
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
SPEs > SIVs and conduits / Money market funds / CNAV funds
Weighted average life of the funding liabilities
At 31 December 2009
CP funding ..................................................
MTN funding ..............................................
At 31 December 2008
CP funding ..................................................
MTN funding ..............................................
Solitaire
Years
0.2
–
0.1
n/a
Other
SICs
Years
0.1
10.3
0.2
7.3
Total
multi-seller
conduits
Years
0.1
–
0.1
n/a
Total
SICs
Years
0.1
10.3
0.1
7.3
Total
SIVs
Years
n/a
n/a
n/a
0.1
The majority of CP and MTN funding issued by
the SIVs was repaid in full during 2008 using the
proceeds from the asset sales to the new SICs. The
CP and MTNs matured in early 2009.
HSBC’s maximum exposure
Conduits
Mazarin
• HSBC is exposed to the par value of Mazarin’s
assets through the provision of a liquidity
facility equal to the lesser of the amortised cost
of issued senior debt and the amortised cost of
non-defaulted assets. At 31 December 2009,
HSBC’s exposure amounted to US$13.6 billion
(2008: US$15.5 billion). First loss protection is
provided through the capital notes issued by
Mazarin, which are substantially all held by
third parties.
•
In addition, at 31 December 2009, HSBC held
1.3 per cent of Mazarin’s capital notes (2008:
1.3 per cent), which have a par value of
US$17 million (2008: US$17 million), and
a carrying amount of US$0.6 million
(2008: US$0.6 million).
Barion and Malachite
• These SICs are term funded by HSBC,
consequently HSBC’s primary exposure to them
is represented by the amortised cost of the debt
required to support the non-cash assets of the
vehicles. At 31 December 2009 this amounted
to US$10.5 billion (2008: US$11.7 billion).
• First loss protection is provided through the
capital notes issued by these vehicles, which are
substantially all held by third parties.
•
In addition, at 31 December 2009, HSBC held
3.76 per cent (2008: 3.53 per cent) of the capital
notes issued by these vehicles which have a par
value of US$37 million (2008: US$35 million),
and a carrying amount of US$2.0 million (2008:
US$1.3 million).
186
Solitaire
• CP issued by Solitaire benefits from a 100 per
cent liquidity facility provided by HSBC. First
loss credit protection against CP-funded
securities, after any transaction-specific credit
enhancement (as described on page 155) and
retained reserves, is provided by HSBC in the
form of letters of credit with a combined
notional value of US$1.2 billion at 31 December
2009 (2008: US$1.2 billion).
• At 31 December 2009, US$7.6 billion of
Solitaire’s assets were funded by the draw-down
of the liquidity facility (2008: US$2.4 billion).
HSBC is exposed to credit losses on the drawn
amounts.
• HSBC’s maximum exposure to Solitaire is
limited to the amortised cost of non-cash
equivalent assets, which represents the risk that
HSBC may be required to fund the vehicle in
the event the debt is redeemed without
reinvestment from third parties.
• HSBC’s maximum exposure at 31 December
2009 amounted to US$18.4 billion (2008:
US$20.4 billion).
Multi-seller conduits
• HSBC provides transaction-specific liquidity
facilities to each of its multi-seller conduits,
designed to be drawn in order to ensure the
repayment of the CP issued. At 31 December
2009, the committed liquidity facilities
amounted to US$14.4 billion (2008:
US$17.1 billion).
• First loss protection is provided through
transaction-specific credit enhancements, for
example, over-collateralisation and excess
spread. These credit enhancements are provided
by the originator of the assets and not by
HSBC. In addition, a layer of secondary loss
protection is provided by HSBC in the form
of programme-wide enhancement facilities,
and at 31 December 2009 this amounted to
US$0.6 billion (2008: US$0.6 billion). HSBC’s
maximum exposure is equal to the transaction-
specific liquidity facilities offered to the multi-
seller conduits, as described above.
• The liquidity facilities are set to support total
commitments and therefore exceed the funded
assets at both 31 December 2009 and
31 December 2008.
•
In consideration of the significant first loss
protection afforded by the structure, the credit
enhancements and a range of indemnities
provided by the various obligors, HSBC carries
only a minimal risk of loss from the programme.
Structured investment vehicles
• Cullinan and Asscher’s only assets are cash
equivalents with liabilities to the extent of the
liquidation costs and cash balances due to
Mazarin, Barion and Malachite. These remain
HSBC’s only residual exposure in respect of the
SIVs (2008: Cullinan held Mazarin CP
amounting to US$0.3 billion).
Money market funds
HSBC has established and manages a number of
money market funds which provide customers with
tailored investment opportunities with a set of
narrow and well-defined objectives. In most cases,
they are not consolidated by HSBC because the
Group’s holdings in them are not of sufficient size to
represent the majority of the risks and rewards of
ownership.
Investors in money market funds generally have
no recourse other than to the assets in the funds, so
asset holdings are designed to meet expected fund
liabilities. Usually, money market funds are
constrained in their operations should the value
of their assets and their ratings fall below
predetermined thresholds. The risks to HSBC are,
therefore, contingent, arising from the reputational
damage which could occur if an HSBC-sponsored
money market fund was thought to be unable to meet
withdrawal requests on a timely basis or in full.
In aggregate, HSBC has established money
market funds with total assets of US$99 billion at
31 December 2009 (2008: US$102.7 billion).
The main sub-categories of money market funds
are:
• US$73.6 billion (2008: US$72.0 billion) in
Constant Net Asset Value (‘CNAV’) funds,
which invest in shorter-dated and highly-rated
187
money market securities with the objective of
providing investors with a highly liquid and
secure investment;
• US$0.7 billion (2008: US$2.7 billion) in French
domiciled dynamique (‘dynamic’) funds and
Irish ‘enhanced’ funds, together Enhanced
Variable Net Asset Value (‘Enhanced VNAV’)
funds, which invest in longer-dated money
market securities to provide investors with a
higher return than traditional money market
funds; and
• US$24.7 billion (2008: US$28.0 billion) in
various other money market Variable Net Asset
Value (‘VNAV’) funds, including funds
domiciled in Brazil, France, India and Mexico.
These money market funds invest in diverse
portfolios of highly-rated debt instruments, and
historically included limited holdings in instruments
issued by SIVs. At 31 December 2009, these funds
had no exposure to instruments issued by SIVs
(2008: US$0.5 billion).
Constant Net Asset Value funds
During 2008, action was taken by HSBC in respect
of the CNAV funds to maintain their AAA rating
and mitigate any forced sale of liquid assets to meet
potential redemptions. As a consequence, HSBC
incurred losses totalling US$114 million in 2008.
As a result of this action, HSBC concluded that
the relationship with these CNAV funds had
substantively changed, so HSBC consolidated them
from 30 September 2008. It was not necessary for
any further action to be taken by HSBC in 2009 in
respect of maintaining the rating of the CNAV
funds.
Total assets of HSBC’s CNAV funds which are
on-balance sheet
At 31 December
2009
US$bn
2008
US$bn
ABSs .......................................
Certificates of deposit .............
CP ............................................
Asset-backed CP .....................
Floating rate notes ...................
Government agency bonds .....
Other assets .............................
Total ........................................
0.3
16.6
12.0
4.6
–
6.6
2.3
42.4
0.8
13.0
13.5
4.6
5.2
1.9
4.8
43.8
The associated liabilities included on HSBC’s
balance sheet at 31 December 2009 amounted to
US$41.5 billion (2008: US$43.1 billion) and are
shown in ‘Other liabilities’. The associated interest
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
SPEs > CNAV funds / Enhanced VNAV funds / Non-money market investment funds / Securitisations / Other
income from the funds and the expense payable to
third-party holders of units in the funds are presented
within ‘Net interest income on trading activities’.
HSBC’s maximum exposure
HSBC’s maximum exposure to consolidated and
unconsolidated CNAV funds is represented by
HSBC’s investment in the units of each CNAV fund,
and by the maximum limit of any letters of limited
indemnity provided to the CNAV funds. HSBC’s
exposure to investment in units within the CNAV
funds at 31 December 2009 amounted to
US$1.0 billion (2008: US$0.7 billion). There was no
exposure to letters of limited indemnity (2008:
US$58 million).
Enhanced Variable Net Asset Value funds
Enhanced VNAV funds price their assets on a fair
value basis and, consequently, prices may change
from one day to the next. These funds pursue an
‘enhanced’ investment strategy, as part of which
investors accept greater credit and duration risk in
the expectation of higher returns.
During 2008, HSBC consolidated two of its
French dynamic money market funds as a result of
continued redemptions by unitholders. HSBC’s
aggregate holdings in these funds at 31 December
2009 amounted to €0.5 billion (US$0.6 billion
(2008: €0.5 billion (US$0.6 billion)).
HSBC’s maximum exposure
HSBC’s maximum exposure to consolidated and
unconsolidated Enhanced VNAV and consolidated
and unconsolidated VNAV funds is represented
by its investment in the units of each fund. HSBC’s
maximum exposure at 31 December 2009 amounted
to US$0.6 billion (2008: US$0.6 billion) and
US$0.2 billion (2008: US$1.6 billion), for Enhanced
VNAV and VNAV funds, respectively.
Total assets of HSBC’s money market funds which
are on-balance sheet by balance sheet classification
Cash .....................................
Trading assets ......................
Other assets ..........................
At 31 December
2009
US$bn
2008
US$bn
–
42.8
0.3
43.1
0.3
43.3
2.3
45.9
188
Non-money market investment funds
Through its fund management business, HSBC has
established a large number of non-money market
funds to enable customers to invest in a range of
assets, typically equities and debt securities. At the
launch of a fund HSBC, as fund manager, usually
provides a limited amount of initial capital known as
‘seed capital’ to enable the fund to start purchasing
assets. These holdings are normally redeemed over
time. The majority of these funds are off-balance
sheet for HSBC because the Group’s limited
economic interest means it does not have the
majority of the risks and rewards of ownership.
As the non-money market funds explicitly provide
investors with tailored risk, the risk to HSBC is
restricted to its own investments in the funds.
In aggregate, HSBC has established non-money
market funds with total assets of US$255.4 billion at
31 December 2009 (2008: US$200.3 billion).
The main sub-categories of non-money market
funds are:
• US$115.6 billion (2008: US$83.1 billion) in
specialist funds, comprising fundamental active
specialists and active quantitative specialists;
• US$121.7 billion (2008: US$96.2 billion) in
local investment management funds which
invest in domestic products, primarily for retail
and private clients; and
• US$18.1 billion (2008: US$21.0 billion) in
multi-manager funds which offer fund of funds
and manager of manager products across a
diversified portfolio of assets.
Total assets of HSBC’s on-balance sheet non-money
market funds by balance sheet classification
Cash ...........................................
Trading assets ...........................
Financial instruments
designated at fair value .........
Financial investments ...............
At 31 December
2009
US$bn
2008
US$bn
0.2
0.2
5.3
–
5.7
0.4
0.2
2.3
0.8
3.7
HSBC’s maximum exposure
HSBC’s maximum exposure to consolidated
and unconsolidated non-money market funds is
represented by its investment in the units of each
respective fund. HSBC’s exposure at 31 December
2009 amounted to US$6.8 billion (2008:
US$4.4 billion).
Securitisations
HSBC uses SPEs to securitise customer loans and
advances that it has originated, mainly in order to
diversify its sources of funding for asset origination
and for capital efficiency purposes. In such cases, the
loans and advances are transferred by HSBC to the
SPEs for cash, and the SPEs issue debt securities
to investors to fund the cash purchases. Credit
enhancements to the underlying assets may be used
to obtain investment grade ratings on the senior debt
issued by the SPEs. HSBC has also established
securitisation programmes in the US and Germany
where loans originated by third parties are
securitised. Most of these vehicles are not
consolidated by HSBC as it is not exposed to the
majority of risks and rewards of ownership in the
SPEs. In 2009, demand for the securitised products
remained low.
In addition, HSBC uses SPEs to mitigate the
capital absorbed by some of the customer loans and
advances it has originated. Credit derivatives are
used to transfer the credit risk associated with such
customer loans and advances to an SPE, using
securitisations commonly known as synthetic
securitisations. These SPEs are consolidated when
HSBC is exposed to the majority of risks and
rewards of ownership.
Total assets of HSBC’s securitisations which are on-
balance sheet, by balance sheet classification
Trading assets ............................
Loans and advances to customers
Other assets ................................
Derivatives .................................
At 31 December
2009
US$bn
2008
US$bn
0.9
35.4
1.4
1.2
38.9
1.3
50.8
1.1
1.4
54.6
These assets include US$0.9 billion (2008:
US$1.3 billion) of exposure to US sub-prime
mortgages.
Total assets of HSBC’s securitisations which are
off-balance sheet
HSBC originated assets ..............
Non-HSBC originated assets:
– term securitisation
programmes .........................
2009
US$bn
2008
US$bn
0.6
0.6
10.5
11.1
13.5
14.1
HSBC’s financial investments in off-balance
sheet securitisations at 31 December 2009 amounted
to US$0.1 billion (2008: US$0.2 billion). These
assets include assets which are classified as
available-for-sale securities and measured at fair
value, and have been securitised by HSBC under
arrangements by which HSBC retains a continuing
involvement in them. Further details are provided in
Note 20 on the Financial Statements.
HSBC’s maximum exposure
The maximum exposure is the aggregate of any
holdings of notes issued by these vehicles and the
reserve account positions intended to provide credit
support under certain pre-defined circumstances to
senior note holders. HSBC is not obligated to
provide further funding. At 31 December 2009,
HSBC’s maximum exposure to consolidated and
unconsolidated securitisations amounted to
US$8.0 billion (2008: US$8.0 billion).
Other
HSBC also establishes SPEs in the normal course
of business for a number of purposes, for example,
structured credit transactions for customers to
provide finance to public and private sector
infrastructure projects, and for asset and structured
finance (‘ASF’) transactions.
Structured credit transactions
HSBC provides structured credit transactions to
third-party professional and institutional investors
who wish to obtain exposure, sometimes on a
leveraged basis, to a reference portfolio of debt
instruments. In such structures, the investor receives
returns referenced to the underlying portfolio by
purchasing notes issued by the SPEs. HSBC enters
into contracts with the SPEs, generally in the form of
derivatives, in order to pass the required risks and
rewards of the reference portfolios to the SPEs.
HSBC’s risk in relation to the derivative contracts
with the SPEs is managed within HSBC’s trading
market risk framework (see ‘Market risk’ on
page 250).
In certain transactions HSBC is exposed to risk
often referred to as gap risk. Gap risk typically arises
in transactions where the aggregate potential claims
against the SPE by HSBC pursuant to one or more
derivatives could be greater than the value of the
collateral held by the SPE and securing such
derivatives. HSBC often mitigates such gap risk by
incorporating in the SPE transaction features which
189
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
SPEs > Other / Maximum exposures to SPEs
allow for deleveraging, a managed liquidation of the
portfolio, or other mechanisms. Following the
inclusion of such risk reduction mechanisms, HSBC
has, in certain circumstances, retained all or a
portion of the underlying exposure in the transaction.
When this retained exposure represents ABSs, it has
been included in ‘Nature and extent of HSBC’s
exposures’ on page 157.
Often, transactions are facilitated through SPEs
to enable the notes issued to the investors to be rated.
The SPEs are not consolidated by HSBC when the
investors bear substantially all the risks and rewards
of ownership through the notes.
The total fair value of liabilities (notes issued
and derivatives) in structured credit transaction
SPEs was US$20.6 billion at 31 December 2009
(2008: US$21.2 billion). There were no SPEs that
were consolidated by HSBC included in these
amounts (2008: US$0.3 billion).
Other uses of SPEs
HSBC participates in Public-Private Partnerships to
provide financial support for infrastructure projects
initiated by government authorities. The funding
structure is commonly achieved through the use of
SPEs. HSBC consolidates these SPEs when it is
exposed to the majority of risks and rewards of the
vehicles.
HSBC’s ASF business specialises in leasing and
arranging finance for aircraft and other physical
assets, which it is customary to ring-fence through
the use of SPEs, and in structured loans and deposits,
where SPEs introduce cost efficiencies. HSBC
consolidates these SPEs when the substance of the
relationship indicates that HSBC controls the SPE.
HSBC’s risks and rewards of ownership in these
SPEs are in respect of its on-balance sheet assets and
liabilities.
HSBC’s maximum exposures to SPEs
The following tables show the total assets of the
various types of SPEs, and the amount and types
of funding provided by HSBC to these SPEs. The
tables also show HSBC’s maximum exposure to the
SPEs and, within that exposure, the types of liquidity
and credit enhancements provided by HSBC. The
maximum exposures to SPEs represent HSBC’s
maximum possible risk exposure that could occur
as a result of the Group’s arrangements and
commitments to SPEs. The maximum amounts are
contingent in nature, and may arise as a result of
drawdowns under liquidity facilities, where these
have been provided, and any other funding
commitments, or as a result of any loss protection
provided by HSBC to the SPEs. The conditions
under which such exposure might arise differ
depending on the nature of each SPE and HSBC’s
involvement with it. The aggregation of such
maximum exposures across the different forms
of SPEs results in a theoretical total maximum
exposure number. The elements of the maximum
exposure to an SPE are not necessarily additive and
a detailed explanation of how maximum exposures
are determined is provided under each category of
SPE.
190
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C
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H
H S B C H O L D I N G S P L C
Report of the Directors: Impact of Market Turmoil (continued)
SPEs > Third-party sponsored SPEs // Other off-balance sheet / Footnotes
Third-party sponsored SPEs
Through standby liquidity facility commitments,
HSBC has exposure to third-party sponsored SIVs,
conduits and securitisations under normal banking
arrangements on standard market terms. These
exposures are quantified below.
HSBC’s commitments under liquidity facilities to
third-party SIVs, conduits and securitisations
At 31 December 2009
Third-party conduits ............
Third-party securitisations ...
At 31 December 2008
Third-party conduits ............
Third-party securitisations ...
Commit-
ments
US$bn
Drawn
US$bn
1.3
0.7
2.0
1.1
0.6
1.7
0.3
0.1
0.4
0.1
0.1
0.2
Other exposures to third-party SIVs, conduits and
securitisations where a liquidity facility has been
provided
At 31 December
Derivative assets ..................
0.1
2009
US$bn
2008
US$bn
–
Other off-balance sheet
arrangements and commitments
Financial guarantees, letters of credit and
similar undertakings
Note 39 on the Financial Statements 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 ‘Other provisions’.
Commitments to lend
Undrawn credit lines are disclosed in Note 39 on
the Financial Statements. The majority by value of
undrawn credit lines arise from ‘open to buy’ lines
on personal credit cards, advised overdraft limits
and other pre-approved loan products, 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 cases HSBC’s
position will be protected through restrictions on
access to funding in the event of material adverse
change.
Leveraged finance transactions
Loan commitments in respect of leveraged finance
transactions are accounted for as derivatives where
it is HSBC’s intention to sell the loan after
origination. Further information is provided on
page 165.
194
Footnotes to Impact of Market Turmoil
1 Total includes holdings of ABSs issued by Freddie Mac and Fannie Mae.
2 ‘Income and expense’ recorded in the income statement represents the accrual of the effective interest rate and, for 2009, also includes
US$163 million in respect of impairment (2008: US$26 million). The effect on the income statement for 2008 shows the income and
expense post-reclassification. In 2008 pre-reclassification, the assets were held at fair value and a loss of US$1,371 million was
recorded in the period up to reclassification.
3 Effect on the income statement during the period had the reclassification not occurred.
4 Included in the write-downs during the half year to 31 December 2008 were US$26 million relating to reclassified leveraged finance
exposures, which had previously been presented under leveraged finance loans.
5 The carrying amount includes funded loans plus the net exposure to unfunded leveraged finance commitments, held within fair value
through the profit or loss.
6 ‘Directly held’ includes assets held by Solitaire where HSBC provides first loss protection and assets held directly by the Group.
7 Impairment charges allocated to capital note holders represent impairments where losses would be borne by external third-party
investors in the structures.
8 Mortgage-backed securities (‘MBS’s), asset-backed securities (‘ABS’s) and collateralised debt obligations (‘CDO’s).
9 During 2009, for disclosure purposes, certain other residential MBSs were reclassified to commercial property mortgage-related
assets. Comparatives have been restated accordingly.
10 High grade assets rated AA or AAA.
11 Gains or losses on the net principal exposure (footnote 17) recognised in the income statement as a result of changes in the fair value of
the asset.
12 Fair value gains and losses on the net principal exposure (footnote 17) recognised in other comprehensive income as a result of the
changes in the fair value of available-for-sale assets.
13 Realised fair value gains and losses on the net principal exposure (footnote 17) recognised in the income statement as a result of the
disposal of assets or the receipt of cash flows from assets.
14 Reclassified from equity on impairment, disposal or payment. This includes impairment losses recognised in the income statement in
respect of the net principal exposure (footnote 17) of available-for-sale assets. Payments are the contractual cash flows received on the
assets.
15 The gross principal is the redemption amount on maturity or, in the case of an amortising instrument, the sum of the future redemption
amounts through the residual life of the security.
16 A credit default swap (‘CDS’) gross protection is the gross principal of the underlying instrument that is protected by CDSs.
17 Net principal exposure is the gross principal amount of assets that are not protected by CDSs. It includes assets that benefit from
monoline protection, except where this protection is purchased with a CDS.
18 Carrying amount of the net principal exposure.
19 Net exposure after legal netting and any other relevant credit mitigation prior to deduction of the credit risk adjustment.
20 Cumulative fair value adjustment recorded against OTC derivative counterparty exposures to reflect the creditworthiness of the
counterparty.
21 Funded exposure represents the loan amount advanced to the customer, less any fair value write-downs, net of fees held on deposit.
22 Unfunded exposures represent the contractually committed loan facility amount not yet drawn down by the customer, less any fair value
write-downs, net of fees held on deposit.
23 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial
instruments are risk-managed.
24 The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of
Asia-Pacific. Comparative data have been restated accordingly.
25 The reasons for the significant difference between carrying amount and fair value of loans and advances to customers in North America
are discussed on page 179.
26 Assets within multi-seller conduits are classified as collateralised loans. Under IFRSs, the conduits cannot recognise the underlying
assets.
27 For details of the geographical origin of the mortgage loans held at fair value and ABSs, including those represented by MBSs and
CDOs held in consolidated SIVs and securities investment conduits, see ‘Nature and extent of HSBC’s exposures’ on page 157.
28 The securities investment conduits include Mazarin, Barion, Malachite and Solitaire.
29 Local investment management funds.
30 Also includes consolidated SPEs that hold mortgage loans held at fair value.
31 These assets only include those measured at fair value. For details on the geographical origin of the mortgage loans held at fair value
and ABSs, including those represented by MBSs and CDOs held in consolidated SIVs and securities investment conduits, see ‘Nature
and extent of HSBC’s exposures’ on page 157. The geographical origin of the loans and receivables held by the multi-seller conduits is
disclosed on page 185.
32 The carrying amount of HSBC’s holding of capital notes in the securities investment conduits amounted to US$2.6 million (2008:
US$1.9 million) with a par value of US$54 million (2008: US$52 million).
33 Total maximum exposure to consolidated SPEs as at 31 December 2008 has been restated to reflect more accurately the Group’s
exposure to certain securitisation vehicles in which a proportion of the maximum exposure to risk of loss is borne by third-party
noteholders.
34 Two limited letters of indemnity which were in place in respect of CNAV funds at 31 December 2008 expired in April 2009.
35 HSBC’s financial investments in off-balance sheet money market funds and non-money market funds have been classified as available-
for-sale securities, and measured at fair value. HSBC’s financial investments in off-balance sheet securitisations have been classified as
trading assets and available-for-sale securities, and measured at fair value.
36 In the US, HSBC has established securitisation programmes where term-funded SPEs are used to securitise third-party originated
mortgages, mainly sub-prime and Alt-A residential mortgages. The majority of these SPEs are not consolidated by HSBC as it is not
exposed to the majority of the risk and rewards of ownership in the SPEs. No liquidity facility has been provided by HSBC.
37 Local investment management funds.
195
H S B C H O L D I N G S P L C
Report of the Directors: Risk
Regulation and supervision > UK / Hong Kong
Regulation and supervision1 .......................
Risk management1 ......................................
Credit risk ...................................................
Credit risk management2 ........................
Credit exposure3 .....................................
Areas of special interest1 ........................
Credit quality of financial instruments3 ..
Impaired loans and advances2 ................
Impairment allowances and charges3 ......
HSBC Holdings2 .....................................
Risk elements in the loan portfolio1 ........
Liquidity and funding2 ................................
Policies and procedures2 ........................
Primary sources of funding2 ...................
The management of risk2 .........................
Contingent liquidity risk2 ........................
The impact of market turmoil2 ................
HSBC Holdings2 .....................................
Market risk .................................................
Sensitivity analysis2 ................................
Impact of market turmoil3 .......................
Trading portfolios2 ..................................
Non-trading portfolios2 ...........................
Sensitivity of net interest income1 ...........
Structural foreign exchange exposures1 ...
Defined benefit pension schemes2 ............
HSBC Holdings3 .....................................
Residual value risk1 ....................................
Operational risk1 .........................................
Legal risk1 ...............................................
Group security and fraud risk1 ...............
Pension risk1 ...............................................
Reputational risk1 .......................................
Sustainability risk1 ......................................
Risk management of insurance operations2
Life insurance business2 ..........................
Non-life insurance business2 ...................
Insurance risk2 ........................................
Financial risks2 .......................................
Present value of in-force long-term
insurance business2 .............................
Capital management and allocation ............
Capital management2 ..............................
Capital measurement and allocation3 .....
Risk-weighted assets by principal
Page
196
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201
206
214
225
230
230
241
241
244
244
244
245
247
248
249
250
251
252
253
255
256
257
258
258
261
262
262
263
263
263
264
265
265
266
266
272
283
285
285
286
subsidiary1 ...........................................
291
1 Unaudited.
2 Audited.
3 Audited where indicated.
196
Regulation and supervision
(Unaudited)
With 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 (‘FSA’); in Hong Kong, The
Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited (‘HKSE’);
in the US, where the shares are traded in the form of
ADSs, HSBC Holdings’ shares are registered with
the US Securities and Exchange Commission. As a
consequence of its US listing, HSBC Holdings is
also subject to the reporting and other requirements
of the US Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and
the New York Stock Exchange’s (‘NYSE’) 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 respectively,
applicable to companies with secondary listings.
A statement of HSBC’s compliance with the
provisions of the Combined Code on Corporate
Governance issued by the Financial Reporting
Council and with the Code on Corporate Governance
Practices in 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: Governance’ on page 294.
HSBC’s operations throughout the world are
regulated and supervised by approximately
540 different central banks and regulatory authorities
in those jurisdictions in which HSBC has offices,
branches or subsidiaries. These authorities impose a
variety of requirements and controls designed to
improve financial stability and the transparency of
financial markets and their contribution to economic
growth. These regulations and controls cover, 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
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. As a result of government
interventions in response to recent global economic
conditions, it is widely anticipated that there will be
a substantial increase in government regulation and
supervision of the financial services industry,
including the imposition of higher capital
requirements, heightened disclosure standards and
restrictions on certain types of transaction structures.
The 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.
UK 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’). Additionally, data privacy is
regulated by the Data Protection Act 1998. Other UK
financial services legislation is derived from EU
directives relating to banking, securities, insurance,
investments and sales of personal financial services.
In addition to its role as HSBC’s lead regulator,
the FSA is responsible for authorising and
supervising all HSBC’s businesses in the UK which
require authorisation under FSMA. These include
deposit-taking, retail banking, life and general
insurance, pensions, investments, mortgages,
custody and share dealing businesses, and treasury
and capital markets activity. 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 and allocation’ on pages 285
to 291. The FSA’s approach to capital requirements
197
for UK insurers is to require minimum capital to be
calculated on two bases. First, firms must calculate
their liabilities on a prudent basis and add a statutory
solvency margin (‘pillar 1’). Secondly, firms must
calculate their liabilities on a realistic basis then add
to this their own calculation of risk-based capital.
The sum of realistic reserves and risk-based capital
(‘pillar 2’) is agreed with the FSA. Insurers are
required to maintain capital equal to the higher of
pillars 1 and 2. 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. In light of current conditions, HSBC has
experienced an increased level of ongoing
interaction with the FSA.
Hong Kong regulation and supervision
Banking in Hong Kong is subject to the provisions
of the Banking Ordinance and to the powers,
functions and duties ascribed by the Banking
Ordinance to the Hong Kong Monetary Authority
(the ‘HKMA’). The principal function of the HKMA
is to promote the general stability and effective
working of the banking system in Hong Kong. The
HKMA 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
HKMA and the Financial Secretary with respect to
the exercise of their respective functions under the
Banking Ordinance.
The HKMA has responsibility for authorising
banks, and has discretion to attach conditions to its
authorisation. The HKMA requires that banks or
their holding companies file regular prudential
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Regulation and supervision > US // Risk management > Introduction / Risk governance
returns, and holds regular discussions with the
management of the banks to review their operations.
The HKMA 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 HKMA 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 HKMA. In addition, the
HKMA may from time to time conduct tripartite
discussions with banks and their external auditors.
The HKMA has the power to serve a notice of
objection on persons if they are no longer deemed to
be fit and proper to be controllers of the bank, if they
may otherwise threaten the interests of depositors or
potential depositors, or if they have contravened any
conditions specified by the HKMA. The HKMA 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 HKMA implemented Basel II with effect
from 1 January 2007 for all Authorised Institutions
incorporated in Hong Kong.
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 (‘Securities and Futures Ordinance’). Entities
engaging in activities regulated by the Securities and
Futures Ordinance are required to be licensed. The
HKMA 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 Board of Governors of the
Federal Reserve System (the ‘Federal Reserve
Board’), the Office of the Comptroller of the
Currency (the ‘OCC’) and the Federal Deposit
Insurance Corporation (the ‘FDIC’) govern many
aspects of HSBC’s US business.
HSBC and its US operations are subject to
supervision, regulation and examination by the
Federal Reserve Board because HSBC is a ‘bank
holding company’ under the US Bank Holding
Company Act of 1956 (‘BHCA’), as a result of its
control of HSBC Bank USA, N.A., McLean,
Virginia (‘HBUS’); HSBC Trust Company
198
(Delaware), N.A., Wilmington, Delaware (‘HTCD’);
and Wells Fargo HSBC Trade Bank, N.A., San
Francisco, California (‘WFTB’). HSBC North
America Holdings Inc. (‘HNAH’), formed to hold
HSBC’s US and Canadian operations is also a ‘bank
holding company’. Both HSBC and HNAH are
registered as financial holding companies (‘FHC’s)
under the BHCA, and, accordingly, may affiliate
with securities firms and insurance companies and
engage in other activities that are financial in nature
or incidental or complementary to activities that are
financial in nature. The ability of HSBC and HNAH
to engage in expanded financial activities as FHCs
depends upon HSBC and HNAH continuing to meet
certain criteria set forth in the BHCA, including
requirements that their US depository institution
subsidiaries 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.
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.
The three US banks, HBUS, HTCD, and WFTB
are subject to regulation and examination primarily
by the OCC, secondarily by the FDIC, and by the
Federal Reserve Board. Banking laws and
regulations restrict many aspects of their operations
and administration, including the establishment and
maintenance of branch offices, capital and reserve
requirements, deposits and borrowings, investment
and lending activities, payment of dividends and
numerous other matters.
In December 2007, US regulators published a
final rule regarding Risk-Based Capital Standards:
Advanced Capital Adequacy Framework – Basel II.
This final rule represents the US adoption of
Basel II. The final rule became effective on 1 April
2008, and requires large bank holding companies,
including HNAH, to adopt its provisions no later
than 1 April 2011. HNAH has established
comprehensive Basel II implementation project
teams comprised of risk management specialists
representing all risk disciplines. In addition, US
banking 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).
HSBC Bank USA and HTCD are subject to
risk-based assessments from the Federal Deposit
Insurance Corporation (‘FDIC’), which insures
deposits generally to a maximum of US$100,000 per
depositor for domestic deposits. In October 2008, the
FDIC raised the maximum amount of insured
deposits to US$250,000 per depositor and, on
20 May 2009, extended the increased limit until
31 December 2013. On 1 January 2014, the limit
will return to US$100,000 for all deposit accounts,
except for certain retirement accounts which remain
insured up to US$250,000 per depositor. The FDIC
bases assessments on supervisory ratings, financial
ratios and long-term debt issuer ratings, with those
banks in the highest rated categories paying lower
assessments. Due to projected shortfalls in the FDIC
fund as a result of continuing bank failures, the
FDIC has required all insured banks, including
HBUS and HTCD, to prepay their insurance
premium for the next three years.
In October 2008, the FDIC announced its
Temporary Liquidity Guarantee Programme
(‘TLGP’), under which the FDIC will guarantee
(i) newly-issued senior unsecured debt issued by
eligible, participating institutions, and (ii) certain
non-interest bearing transaction accounts. HNAH
and its subsidiary banks and bank holding companies
elected to participate in both components of the
TLGP, as applicable. The FDIC is phasing out this
programme, and will cease guaranteeing newly-
issued debt on 30 April 2010.
HSBC’s US consumer finance operations are
subject to extensive state-by-state regulation in the
US, and to laws relating to consumer protection
(both in general, and in respect of sub-prime lending
operations, which have been subject to 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.
Risk management
(Unaudited)
Introduction
All HSBC’s activities involve, to varying degrees,
the measurement, evaluation, acceptance and
management of risks or combinations of risks. The
most important categories of risk that the Group is
exposed to are credit risk (including cross-border
country risk), market risk, operational risks in
various forms, liquidity risk, insurance risk, pension
risk, residual value risk, reputational risk and
sustainability (environmental and social) risks.
Market risk includes foreign exchange, interest rate
and equity price risks.
The management of these various risk
categories is discussed below. Insurance risk is
managed by the Group’s insurance businesses
together with their own credit, liquidity and market
risk functions, distinct from those covering the rest
of HSBC due to the different nature of their
activities but under risk oversight at Group level.
The risk profiles of HSBC Group and of
individual operating entities change constantly under
the influence of a wide range of factors. The risk
management framework established by the Group
fosters the continuous monitoring of the risk
environment and an integrated evaluation of risks
and their interactions.
Risk governance and ownership
A well-established risk governance and ownership
structure ensures oversight of, and accountability for,
the effective management of risk at Group, regional,
customer group and operating entity levels.
The Board approves the Group’s risk appetite
framework, plans and performance targets for the
Group and its principal operating subsidiaries, the
appointment of senior officers, the delegation of
authorities for credit and other risks and the
establishment of effective control procedures. Under
authority delegated by the Board, the Group
Management Board (‘GMB’) through its separately
convened Risk Management Meeting (‘RMM’)
formulates high-level Group risk management policy,
exercises delegated risk authorities and oversees the
implementation of risk appetite and controls. It
monitors all categories of risk, receives reports on
performance and emerging issues, determines action
to be taken and reviews the efficacy of HSBC’s risk
management framework.
Primary responsibility for managing risk at
operating entity level lies with the respective boards
and Chief Executive Officers, as custodians of their
199
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Risk management > Risk governance / Risk appetite / Scenario stress testing / Control culture // Credit risk > Management
balance sheets. In their oversight and stewardship of
risk management at Group level, however, GMB and
RMM are supported by a dedicated Global Risk
function headed by the Group Chief Risk Officer
(‘GCRO’), who is a member of both bodies and
reports to the Chief Financial Officer, Executive
Director, Risk and Regulation within the integrated
Finance and Risk function, which the latter represents
on the Board.
Global Risk has functional responsibility for the
principal financial risk types, namely retail and
wholesale credit, market, operational, security and
fraud risks. For these it establishes Group policy,
exercises Group-wide oversight and provides
reporting and analysis of portfolio composition
trends on a global and regional basis to senior
management. Accountability and consistent control
across the Global Risk function is provided through
the Global Risk Management Board, chaired by the
GCRO, the members of which include the Chief Risk
Officers of HSBC’s regions and the heads of risk
disciplines within Group Management Office
(‘GMO’). The regional governance bodies for key risk
matters reflect those in place at the centre. Functional
units at the entity and regional levels report to Group
Risk. GMO helps build the Group’s risk management
capacity through staff selection, training,
development, performance assessment and
remuneration – the GCRO is jointly responsible with
business heads for setting the performance goals of
senior Global Risk officers. Global Risk also
co-ordinates the continued development of the
Group’s risk appetite, economic capital and stress
testing frameworks, and engages in discussions with
regulators and in industry forums on risk and
regulatory policy developments, assesses their
implications and makes recommendations
accordingly. In addition, the GCRO is a member of
the Group Portfolio Oversight Committee, chaired by
the Group Treasurer, which governs the portfolio
management activities of Global Banking.
qualitatively, describing which risks are taken and
why, and quantitatively. HSBC senior management
attaches quantitative metrics to individual risk types
to ensure that:
•
underlying business activity may be guided and
controlled, so that it continues to be aligned to
the risk appetite framework;
•
•
key assumptions underpinning risk appetite can
be monitored and, as necessary, adjusted
through subsequent business planning cycles;
and
business decisions anticipated to be necessary to
mitigate risk are flagged and acted upon
promptly.
The risk appetite framework, governed by
the Board and overseen in its implementation on
an ongoing basis by GMB and RMM, is also
maintained at regional and customer group levels.
It operates through two key mechanisms:
•
the framework itself defines the governance
bodies, processes, metrics and other features of
how HSBC addresses risk appetite as part of its
ongoing business; and
•
periodic risk appetite statements define, at
various levels in the business, the desired level
of risk commensurate with return and growth
targets and in line with the corporate strategy
and stakeholder objectives.
The risk appetite framework covers both the
beneficial and adverse aspects of risk. Within it,
economic capital is the common currency through
which risk is measured and used as the basis for risk
evaluation, capital allocation and performance
measurement across regions and customer groups.
Risk appetite is executed through the operational
limits that control the levels of risk run by the
Group, regions and customer groups and is measured
using risk-adjusted performance metrics.
Risk appetite
Scenario stress testing
HSBC’s risk appetite framework describes the
quantum and types of risk that HSBC is prepared to
take in executing its strategy. It is central to an
integrated approach to risk, capital and business
management and supports the Group in achieving its
return on equity objectives, as well as being a key
element in meeting the Group’s obligations under
pillar 2 of Basel II.
The formulation of risk appetite considers
HSBC’s risk capacity, its financial position, the
strength of its core earnings and the resilience of
its reputation and brand. It is expressed both
Scenario analysis and stress testing are important
mechanisms in understanding the sensitivities of the
Group capital and business plans to the adverse
effects of extreme, but plausible, events. As well as
considering the potential financial effect on plans, a
key output of this tool is the consideration and
establishment of management action plans for
mitigating such events should they, or similar events,
arise.
Group Risk regularly assesses regulatory capital
supply against demand under a range of stress
200
scenarios, including projected global economic
downturns more severe than that which is currently
being experienced. Qualitative and quantitative
techniques are used to estimate the potential impact
on HSBC’s capital position of such scenarios. HSBC
also participates, where appropriate, in standard
scenario analyses requested by regulatory bodies.
In particular, this framework has aided
management in mitigating some of the effects of the
global financial crisis. While the prediction of future
events cannot cover all eventualities, nor precisely
identify future events, a number of the scenarios
analysed in the past provided additional management
insight into the actions necessary to mitigate the
risks when similar events occurred.
In addition to the suite of risk scenarios
considered for the HSBC Group, each major
subsidiary conducts regular macro-economic and
event-driven scenario analyses specific to that region
under the Group governance framework. Executive
managers from across HSBC meet regularly to
consider and debate the outcome of these scenarios
and formulate recommended management actions.
Macro-economic analyses are considered regularly
by GMB.
Risk control culture
HSBC’s risk management policies are encapsulated
in the Group Standards Manual and cascaded in a
hierarchy of policy manuals throughout the Group to
communicate standards, instructions and guidance to
employees. They support the formulation of risk
appetite and establish procedures for monitoring and
controlling risks, with timely and reliable reporting to
management. HSBC regularly reviews and updates its
risk management policies, systems and methodologies
to reflect changes in law, regulation, markets,
products and emerging best practice.
It is the responsibility of all Group officers to
identify, assess and manage risk within the scope
of their assigned responsibilities. Personal
accountability, reinforced by the Group’s governance
structure and instilled by training and experience,
helps to foster throughout the Group a disciplined and
constructive culture of risk management and control.
Credit risk
Credit risk management
(Audited)
Credit risk is the risk of financial loss if a customer
or counterparty fails to meet a payment obligation
under a contract. It arises principally from direct
lending, trade finance and leasing business, but also
201
from off-balance sheet products such as counterparty
risk guarantees and credit derivatives, and from the
Group’s holdings of debt securities. Among the risks
in which the Group engages, credit risk generates the
largest regulatory capital requirement.
The objectives of credit risk management,
underpinning sustainably profitable business, are
principally to maintain a strong culture of
responsible lending and a robust risk policy and
control framework; to both partner and challenge the
business line in defining and implementing risk
appetite, with its continuous re-evaluation under
actual and scenario conditions; and to ensure
independent, expert scrutiny of credit risks, their
costs and their mitigation.
The credit risk governance structures and
control frameworks implemented by the Group are
designed for all stages of economic and financial
cycles. During 2009, a number of processes, for
example, crisis management and new product
review, were enhanced in response to recent ‘best
practice’ recommendations of industry and
regulatory bodies. Central credit risk oversight and
independent review activities have been reinforced
within a common operating model for the
responsibilities and interaction of GMO Risk,
regionally integrated risk functions and country-
based management.
Credit Risk is part of the Global Risk function,
and the heads of its retail, wholesale and market risk
disciplines within GMO, as well as regional Chief
Risk Officers and certain country Chief Credit
Officers and the Head of Risk Strategy, report to
the GCRO.
Across the Group, Credit Risk fulfils the role of
an independent credit control unit, while engaging
in dialogue with business teams to set priorities,
refine risk appetite, and monitor and report higher-
risk exposures. Credit risk and risk capital
management policies and methodologies, including
analytical model developments and management
information, are enhanced in the light of experience
gained, for instance through the roll-out of the
Group’s advanced internal ratings-based (‘IRB’)
approach to Basel II. See also ‘Capital Management’
on page 285.
The Credit Risk function within GMO provides
high-level oversight and management of credit risk
for HSBC worldwide. Its responsibilities include:
•
formulating Group credit policy. Compliance,
subject to approved dispensations, is mandatory
for all HSBC’s operating companies, which
must develop and record in local instruction
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Management
•
•
manuals their detailed credit policies and
procedures, consistent with Group policy;
guiding HSBC’s operating companies on the
Group’s appetite for credit risk exposure to
specified market sectors, activities and banking
products. GMO Risk controls exposures to
certain higher-risk sectors and closely monitors
exposure to others, including real estate, the
automotive sector, certain non-bank financial
institutions, structured products and leveraged
finance transactions. When necessary,
restrictions are imposed on new business or
exposures, which may be capped at Group
and/or entity level;
undertaking independent review and objective
assessment of risk. GMO Risk assesses all
commercial non-bank credit facilities and
exposures – including those embedded in
derivatives – that are originated or renewed by
HSBC’s operating companies over designated
limits, prior to the facilities being committed to
customers or transactions being undertaken.
Operating companies may not confirm credit
approval without this concurrence;
• monitoring the performance and management of
portfolios across the Group. GMO Risk tracks
emerging trends and conducts in-depth portfolio
reviews, overseeing the effective management
of any adverse characteristics;
•
•
•
controlling centrally exposures to sovereign
entities, banks and other financial institutions.
HSBC’s credit and settlement risk limits to
counterparties in these sectors are approved and
managed by GMO Risk to optimise the use of
credit availability and avoid excessive risk
concentration;
controlling exposure for all debt securities held;
where a security is not held solely for the
purpose of trading, a formal issuer risk limit is
established;
establishing and maintaining HSBC’s policy
on large credit exposures, ensuring that
concentrations of exposure by counterparty,
sector or geography do not become excessive in
relation to the Group’s capital base and remain
within internal and regulatory limits. GMO Risk
also monitors HSBC’s intra-Group exposures to
ensure they are maintained within regulatory
limits and ensures that policy and practice are
fully aligned to evolving regulatory
requirements;
•
controlling cross-border exposures, through the
imposition of country limits with sub-limits by
202
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 higher risk are considered on a case by
case basis;
• maintaining and developing HSBC’s risk rating
framework and systems, to classify exposures
meaningfully and enable focused management
of the risks involved. The GCRO chairs the
Credit Risk Analytics Oversight Committee,
which reports to the RMM and oversees risk
rating model governance for both wholesale and
retail business. Rating methodologies, based
upon a wide range of analytics and market data-
based tools, are core inputs to the assessment of
customer risk. For larger facilities, while full use
is made of automated risk-rating processes, the
ultimate responsibility for setting risk ratings
rests with the final approving executive;
•
•
assisting the Risk Strategy unit in the
development of stress-testing scenarios,
economic capital measurement and the
refinement of key risk indicators and their
reporting, embedded within the Group’s
business planning processes;
reporting on aspects of the HSBC credit risk
portfolio to the RMM, the Group Audit
Committee and the Board of Directors of HSBC
Holdings by way of a variety of regular and ad
hoc reports covering:
–
–
–
–
–
–
–
risk concentrations;
retail portfolio performance at Group entity,
regional and overall Group levels;
specific higher-risk portfolio segments;
a risk map of the status of key risk topics,
with associated preventive and mitigating
actions;
individual large impaired accounts, and
impairment allowances/charges for all
customer segments;
country limits, cross-border exposures and
related impairment allowances;
portfolio and analytical model performance
data; and
–
stress-testing results and recommendations;
• managing and directing credit risk management
systems initiatives. A centralised database
covers substantially all the Group’s direct
lending exposures, to deliver an increasingly
•
•
granular level of management reporting. A
uniform credit application process for banks is
operational throughout the Group and a similar
corporate credit application system covers
almost all Group corporate business by value;
providing advice and guidance to HSBC’s
operating companies, to promote best practice
throughout the Group on credit-related matters
such as sustainability risk, new products and
training; and
acting on behalf of HSBC Holdings as the
primary interface, for credit-related issues, with
external parties including the Bank of England,
the FSA, local regulators, rating agencies,
corporate analysts, trade associations and
counterparts in the world’s major banks and
non-bank financial institutions.
Each HSBC operating company is required to
implement credit policies, procedures and lending
guidelines that meet local requirements while
conforming to Group standards. Credit approval
authorities are delegated by the Board of Directors of
HSBC Holdings to the most senior Chief Executive
Officers, who receive commensurate delegations
from their own boards. In each major subsidiary, a
Chief Risk Officer or Chief Credit Officer reports to
the local Chief Executive Officer or Chief Operating
Officer on credit-related issues, while maintaining a
direct functional reporting line to the GCRO.
Credit quality
(Audited)
Each operating company is responsible for the
quality and performance of its credit portfolios and
for monitoring and controlling all credit risks in
them, including those subject to central approval by
Group 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 retail product
segments. A Credit Review and Risk Identification
team reports directly to each regional Chief Risk
Officer, and reviews the robustness and effectiveness
of key risk measurement, monitoring and control
activities.
HSBC’s credit risk rating systems and processes
differentiate exposures in order to highlight those
with greater risk factors and higher potential severity
of loss. In the case of individually significant
accounts, risk ratings are reviewed regularly and any
amendments are implemented promptly. Within the
Group’s retail businesses, risk is assessed and
203
managed using a wide range of risk and pricing
models to generate portfolio data.
HSBC’s historical risk rating system based on a
judgemental assessment of the likelihood and impact
of delinquency was superseded in 2008 for financial
reporting purposes and, for all significant risk
management decisions employing credit risk ratings,
by a more risk-sensitive and granular methodology.
This facilitates the IRB approach under Basel II
adopted by the Group to support calculation of its
minimum credit regulatory capital requirement.
For further details, see ‘Credit quality of financial
instruments’ on page 225.
Special attention is paid to problem exposures,
which are subject to more frequent and intensive
review and reporting, in order to accelerate remedial
action. Where appropriate, HSBC’s local operating
companies maintain or establish specialist units to
provide customers with support in order to help them
avoid default wherever possible.
Periodic risk-based audits of operating
companies’ credit processes and portfolios are
undertaken by HSBC’s Internal Audit function.
Audits include consideration of the adequacy and
clarity of credit policy/procedure manuals; an
overview of homogeneous portfolios of similar
assets to assess the quality of the loan book and other
exposures; consideration of any oversight or review
work performed by credit risk management functions
and the adequacy of impairment calculations; a
review of analytical model governance and
implementation; a review of management objectives
and a check that Group and local standards and
policies are adhered to in the approval and
management of credit facilities.
Individually significant accounts are reviewed
on a sample basis to ensure that risk ratings are
appropriate, that credit and collection procedures
have been properly followed and that where
deterioration is evident, impairment allowances are
raised in accordance with the Group’s established
procedures. Internal Audit discusses with
management any risk ratings it considers to
be inappropriate; after discussion, its final
recommendations for revised ratings must
then be adopted.
Impairment assessment
(Audited)
When impairment losses occur, HSBC reduces the
carrying amount of loans and advances through the
use of an allowance account. When impairment of
available-for-sale financial assets and held-to-
maturity financial investments occurs, the carrying
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Management
amount of the asset is reduced directly. For further
details, see ‘Accounting policies’ on page 369.
Impairment allowances may be assessed and
created either for individually significant accounts
or, on a collective basis, for groups of individually
significant accounts for which no evidence of
impairment has been individually identified or for
high-volume groups of homogeneous loans that are
not considered individually significant.
It is HSBC’s policy that each operating
company creates allowances for impaired loans
promptly and consistently.
Management regularly evaluates the adequacy
of the established allowances for impaired loans by
conducting a detailed review of the loan portfolio,
comparing performance and delinquency statistics
with historical trends and assessing the impact of
current economic conditions.
Individually assessed impairment allowances
These are determined by evaluating exposure to loss,
case by case, on all individually significant accounts
and all other accounts that do not qualify for the
collective assessment approach outlined below.
Loans are treated as impaired as soon as there is
objective evidence that an impairment loss has been
incurred. The criteria used by HSBC to determine
that there is such objective evidence include:
•
•
•
•
•
known cash flow difficulties experienced by the
borrower;
past due contractual payments of either principal
or interest;
breach of loan covenants or conditions;
the probability that the borrower will enter
bankruptcy or other financial realisation; and
a significant downgrading in credit rating by an
external credit rating agency.
In determining the level of allowances on such
accounts, the following factors are typically
considered:
• HSBC’s aggregate exposure to the customer;
•
•
the viability of the customer’s business model
and their capacity to trade successfully out of
financial difficulties, generating sufficient cash
flow to service debt obligations;
the ability of the borrower to obtain, and make
payments in, the currency of the loan if not
denominated in local currency;
204
•
•
•
•
•
the amount and timing of expected receipts and
recoveries;
the extent of other creditors’ commitments
ranking ahead of, or pari passu with, HSBC 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 value of security and likelihood of
successfully realising it;
the existence of other credit mitigants and the
ability of the providers of such credit mitigants
to deliver as contractually committed; and
• when available, the secondary market price of
the debt.
The level of impairment allowances on
individually significant accounts that are above
defined materiality thresholds is reviewed at
least semi-annually, and more regularly when
circumstances require. This normally encompasses
re-assessment of the enforceability of any collateral
held and of actual and anticipated receipts. For
significant commercial and corporate debts,
specialised loan ‘work-out’ teams with experience in
insolvency and specific market sectors are used to
manage the lending and assess likely losses.
Individually assessed impairment allowances
are only released when there is reasonable and
objective evidence of a reduction in the established
loss estimate.
Collectively assessed impairment allowances
Impairment is assessed on a collective basis in two
circumstances:
•
•
to cover losses that have been incurred but have
not yet been identified on loans subject to
individual assessment; and
for homogeneous groups of loans that are not
considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of
impairment has been specifically identified on an
individual basis are grouped together according to
their credit risk characteristics. A collective
impairment allowance is calculated to reflect
impairment losses incurred at the balance sheet date
which will only be individually identified in the
future.
The collective impairment allowance is
determined having taken into account:
•
•
historical loss experience in portfolios of similar
credit risk characteristics (for example, by
industry sector, risk rating or product segment);
the estimated period between impairment
occurring and the loss being identified and
evidenced by the establishment of an
appropriate allowance against the individual
loan; and
• management’s experienced judgement as to
whether 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 period between a loss occurring and its
identification is estimated by local management for
each relevant portfolio. In general, the periods used
vary between four and twelve months although, in
exceptional cases, longer periods are warranted.
The basis on which impairment allowances for
incurred but not yet identified losses is established in
each reporting entity is documented and reviewed by
senior Finance and Credit Risk management to
ensure conformity with Group policy.
Homogeneous groups of loans
Two methodologies are used to calculate impairment
allowances where large numbers of relatively low-
value assets are managed using a portfolio approach,
typically:
•
•
•
low-value, homogeneous small business
accounts in certain countries or territories;
residential mortgages that have not been
individually assessed;
credit cards and other unsecured consumer
lending products; and
• motor vehicle financing.
When appropriate empirical information is
available, the Group uses roll rate methodology. This
employs a statistical analysis of historical trends of
default and the amount of consequential loss, based
on the delinquency of accounts within a portfolio of
homogeneous accounts. Other historical data and
current economic conditions are also evaluated when
calculating the appropriate level of impairment
allowance required to cover inherent loss. In certain
highly developed markets, models also take into
account behavioural and account management
trends revealed in, for example, bankruptcy and
rescheduling statistics.
205
When the portfolio size is small, or when
information is insufficient or not reliable enough
to adopt a roll rate methodology, the Group uses a
basic formulaic approach based on historical loss
rate experience.
Generally, historical experience is the most
objective and relevant information from which to
begin to assess inherent loss within each portfolio. In
circumstances where historical loss experience
provides less relevant information about the inherent
loss in a given portfolio at the balance sheet date –
for example, where there have been changes in
economic conditions or regulations – management
considers the more recent trends in the portfolio risk
factors which may not be adequately reflected in its
statistical models and, subject to guidance from
Group Finance and GMO Risk, adjusts impairment
allowances accordingly.
Roll rates, loss rates and the expected timing of
future recoveries are regularly benchmarked against
actual outcomes to ensure they remain appropriate.
Write-off of loans and advances
Loans are normally written off, either partially or in
full, when there is no realistic prospect of further
recovery. Where loans are secured, this is generally
after receipt of any proceeds from the realisation of
security. In circumstances where the net realisable
value of any collateral has been determined and there
is no reasonable expectation of further recovery,
write off may be earlier.
In the case of residential mortgages and second
lien loans in HSBC Finance, loan carrying amounts
in excess of net realisable value are written off at or
before the time foreclosure is completed or when
settlement is reached with the borrower. If there is
no reasonable expectation of recovery, and
foreclosure is pursued, unconstrained by delays
required by law or regulation, the loan is normally
written off no later than the end of the month in
which the loan becomes 180 days contractually
past due.
Unsecured personal facilities, including credit
cards, are generally written off at between 150 and
210 days past due, the standard period being the end
of the month in which the account becomes 180 days
contractually delinquent. Write-off periods may be
extended, generally to no more than 360 days past
due but in very exceptional circumstances exceeding
that figure, in a few countries where local regulation
or legislation constrain earlier write-off, or where the
realisation of collateral for secured real estate
lending extends to this time.
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Management / Credit exposure > Maximum exposure / Collateral
In the event of bankruptcy or analogous
Credit exposure
proceedings, write-off may occur earlier than at the
periods stated above. Collections procedures may
continue after write-off.
Following the earlier decision to cease
underwriting through the Group’s US consumer
mortgage lending business and, given the reduced
ability of customers to refinance their facilities
which changed their historical behaviour patterns,
HSBC Finance shortened the write-off period from
240 days or later to 180 days contractually past due.
The effect of this change was an acceleration of
write-offs which reduced gross loans and advances
by US$3.3 billion, with a corresponding reduction in
impairment allowances and impaired loans. There
has been no significant impact on net loans and
advances or loan impairment charges. The effect on
the current period has been quantified where relevant
to the appropriate disclosure.
Cross-border exposures
Management assesses the vulnerability of countries
to foreign currency payment restrictions when
considering impairment allowances on cross-border
exposures. This assessment includes an analysis of
the economic and political factors existing at the
time. 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, threats to security, and the
quality and independence of the legal system.
Impairment allowances are assessed in respect
of all qualifying exposures within these countries
unless these exposures and the inherent risks are:
•
performing, trade-related and of less than one
year’s maturity;
• mitigated by acceptable security cover which is,
other than in exceptional cases, held outside the
country concerned;
•
•
•
in the form of securities held for trading
purposes for which a liquid and active market
exists, and which are measured at fair value
daily;
performing facilities with a principal (excluding
security) of US$1 million or below; or
performing facilities with maturity dates shorter
than three months.
206
Maximum exposure to credit risk
(Audited)
HSBC’s exposure to credit risk covers a broad range
of asset classes, including derivatives, trading assets,
loans and advances to customers, loans and advances
to banks and financial investments. Credit exposure
in 2009 remained diversified across these asset
classes, though the balance of the Group’s credit
exposure changed in 2009 due to the run-off of
consumer finance assets in the US and greater
deployment of deposit inflows into debt securities. In
addition, a significant decline in volatility in
financial markets led to lower derivative assets and a
reduced exposure to loss in the event of default on
derivative contracts. The lower volatility, steepening
yield curves and narrowing credit spreads resulted in
a fall in the fair value of outstanding derivative
contracts. The level of offsetting derivative balances
moved in line with the decline in balances of
maximum exposure.
There was a deterioration in 2009 in the credit
quality of loans and advances to the commercial
real estate sector, notably in parts of Europe, the
Middle East and North America.
Exposure to personal lending secured on
residential property remained significant. HSBC
suffered from continuing weakness in credit
conditions in the US mortgage market. However, in
the UK, despite lower activity in the housing market
as a whole, the credit quality of HSBC’s mortgage
business remained good throughout 2009 and was
well secured. Exposure to the Hong Kong residential
mortgage market also remained well-secured. For
further commentary on personal lending, see ‘Areas
of Special Interest – Personal Lending’ on page 215.
Loss experience continued to be concentrated in
the personal lending portfolios, primarily in the US
with 75 per cent of loan impairment charges and
other credit risk provisions arising in Personal
Financial Services in 2009 compared with 85 per
cent in 2008. In 2009, 12 per cent of the Group’s
loan impairment charges and other credit risk
provisions arose in Commercial Banking, compared
with 9 per cent in 2008. Loan impairment charges in
Global Banking and Markets were 6 per cent of total,
loan impairment charges and other credit risk
provisions compared with 3 per cent in 2008.
The following table presents the maximum
exposure to credit risk from balance sheet and off-
balance sheet financial instruments, before taking
account of any collateral held or other credit
enhancements (unless such credit enhancements
meet offsetting requirements). For financial assets
recognised on the balance sheet, the maximum
exposure to credit risk equals their carrying amount;
for financial guarantees and similar contracts
granted, it is the maximum amount that HSBC
would have to pay if the guarantees were called
Maximum exposure to credit risk
(Audited)
upon. For loan commitments and other credit-related
commitments that are irrevocable over the life of the
respective facilities, it is generally the full amount of
the committed facilities.
At 31 December 2009
At 31 December 2008
Cash and balances at central banks ....................
Items in the course of collection from other
Maximum
exposure
US$m
60,655
banks ...............................................................
6,395
Hong Kong Government certificates of
indebtedness ...................................................
17,463
Trading assets .....................................................
Treasury and other eligible bills .....................
Debt securities ................................................
Loans and advances to banks .........................
Loans and advances to customers ..................
Financial assets designated at fair value ............
Treasury and other eligible bills .....................
Debt securities ................................................
Loans and advances to banks .........................
Loans and advances to customers ..................
386,070
22,346
201,598
78,126
84,000
22,198
223
20,718
354
903
Exposure
to credit
risk (net)
US$m
Offset
US$m
Maximum
exposure
US$m
Offset
US$m
Exposure
to credit
risk (net)
US$m
–
–
–
(8,496)
–
–
–
(8,496)
–
–
–
–
–
60,655
52,396
6,395
6,003
17,463
15,358
377,574
22,346
201,598
78,126
75,504
22,198
223
20,718
354
903
405,451
32,458
199,619
73,055
100,319
17,540
235
16,349
230
726
–
–
–
(13,227)
–
–
–
(13,227)
–
–
–
–
–
52,396
6,003
15,358
392,224
32,458
199,619
73,055
87,092
17,540
235
16,349
230
726
Derivatives ..........................................................
250,886
(189,606)
61,280
494,876
(383,308)
111,568
Loans and advances held at amortised cost: ......
– to banks ........................................................
– to customers .................................................
1,076,012
179,781
896,231
(91,127)
(116)
(91,011)
Financial investments .........................................
Treasury and other similar bills ......................
Debt securities ................................................
Other assets .........................................................
Endorsements and acceptances ......................
Other ...............................................................
Financial guarantees and similar contracts ........
Loan and other credit-related commitments1 .....
360,034
58,434
301,600
36,373
9,311
27,062
53,251
558,050
–
–
–
(4)
(4)
–
–
–
984,885
179,665
805,220
360,034
58,434
301,600
36,369
9,307
27,062
53,251
558,050
1,086,634
153,766
932,868
(83,398)
(126)
(83,272)
1,003,236
153,640
849,596
292,984
41,027
251,957
40,859
10,482
30,377
52,318
604,022
–
–
–
(5)
(5)
–
–
–
292,984
41,027
251,957
40,854
10,477
30,377
52,318
604,022
2,827,387
(289,233)
2,538,154
3,068,441
(479,938)
2,588,503
For footnote, see page 291.
Collateral and other credit enhancements
(Audited)
Collateral held against financial instruments
presented in the above table is described in more
detail below.
Items in the course of collection from other banks
Settlement risk arises in any situation where a
payment in cash, securities or equities is made in the
expectation of a corresponding receipt of cash,
securities or equities. Daily settlement limits are
established for counterparties to cover the aggregate
of HSBC’s transactions with each one on any
single day. Settlement risk on many transactions,
particularly those involving securities and equities,
is substantially mitigated by settling through assured
payment systems or on a delivery-versus-payment
basis.
Treasury, other eligible bills and debt securities
Collateral held as security for financial assets other
than loans and advances is determined by the nature
of the instrument. Debt securities, treasury and other
eligible bills are generally unsecured, except for
ABSs and similar instruments, which are secured by
pools of financial assets.
207
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Credit exposure > Maximum exposure / Concentration of exposure
Derivatives
The International Swaps and Derivatives Association
(‘ISDA’) Master Agreement is HSBC’s preferred
agreement for documenting derivatives activity. It
provides the contractual framework within which
dealing activity across a full range of over-the-
counter products is conducted, and contractually
binds both parties to apply close-out netting across
all outstanding transactions covered by an agreement
if either party defaults or another pre-agreed
termination event occurs. It is common, and HSBC’s
preferred practice, for the parties to execute a Credit
Support Annex (‘CSA’) in conjunction with the
ISDA Master Agreement. Under a CSA, collateral is
passed between the parties to mitigate the market-
contingent counterparty risk inherent in outstanding
positions.
Loans and advances
It is HSBC’s policy, when lending, to do so on the
basis of the customer’s capacity to repay, rather than
rely primarily on the value of security offered.
Depending on the customer’s standing and the type
of product, facilities may be provided unsecured.
Whenever available, collateral can be an important
mitigant of credit risk.
The guidelines applied by operating companies
in respect of the acceptability of specific classes
of collateral or credit risk mitigation and the
determination of valuation parameters are subject to
regular review to ensure that they are supported by
empirical evidence and continue to fulfil their
intended purpose. The principal collateral types
employed by HSBC are as follows:
•
•
•
•
in the personal sector, mortgages over
residential properties;
in the commercial and industrial sector, charges
over business assets such as premises, stock and
debtors;
in the commercial real estate sector, charges
over the properties being financed; and
in the financial sector, charges over financial
instruments such as cash, debt securities and
equities in support of trading facilities.
In addition, credit derivatives, including credit
default swaps and structured credit notes, and
securitisation structures are used to hedge or transfer
credit risk within the Group’s loan portfolio.
HSBC does not disclose the fair value of
collateral held as security or other credit
enhancements on loans and advances past due but
208
not impaired, or on individually assessed impaired
loans and advances, as it is not practicable to do so.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number
of counterparties or exposures have comparable
economic characteristics, or such counterparties are
engaged in similar activities or operate in the same
geographical areas or industry sectors, so that their
collective ability to meet contractual obligations is
uniformly affected by changes in economic, political
or other conditions. Wrong-way risk is an aggravated
form of concentration risk and arises when there is a
strong correlation between the counterparty’s
probability of default and the mark-to-market value
of the underlying transaction. Wrong-way risk can
be seen in the following examples:
• when the counterparty is resident and/or
incorporated in an emerging market and seeks to
sell a non-domestic currency in exchange for its
home currency;
• when the trade involves the purchase of an
equity put option from a counterparty whose
shares are the subject of the option;
•
•
the purchase of credit protection from a
counterparty who is closely associated with the
reference entity of the credit default swap or
total return swap; and
the purchase of credit protection on an asset
type which is highly concentrated in the
exposure of the counterparty selling the credit
protection.
HSBC uses a range of tools to monitor and
control wrong-way risk, including requiring entities
to obtain prior approval before undertaking wrong-
way risk transactions outside pre-agreed guidelines.
The Credit Risk Management functions undertake
control and monitoring processes and a regular
meeting of a committee comprising senior
management from Global Markets, Credit, Market
Risk Management and Finance is responsible for
reviewing and actively managing wrong-way risk,
including allocating capital.
Securities held for trading
(Unaudited)
Total securities held for trading within trading assets
were US$259 billion at 31 December 2009 (2008:
US$254 billion). The largest concentration of these
assets was government and government agency
securities, which amounted to US$135 billion, or
52 per cent of overall trading securities (2008:
US$143 billion, 56 per cent). This included
US$22 billion (2008: US$32 billion) of treasury
and other eligible bills. Corporate debt and other
securities were US$84 billion or 32 per cent of
overall trading securities, in line with 2008’s level of
US$83 billion. Included within total securities
held for trading were US$41 billion (2008:
US$50 billion) of debt securities issued by banks
and other financial institutions.
A more detailed analysis of securities held for
trading is set out in Note 16 on the Financial
Statements and an analysis of credit quality is
provided on page 225.
Derivatives
(Unaudited)
Derivative assets at 31 December 2009 were
US$251 billion, a decline of 49 per cent from
31 December 2008, primarily in foreign exchange,
interest rate and credit derivatives. The main drivers
of the reduction were fair value movements across
the entire portfolio arising from lower levels of
volatility within the financial markets, steepening
yield curves and narrowing credit spreads.
Exposure to derivative assets fell by 49 per
cent in 2009 to US$251 billion.
Debt securities, treasury and other eligible bills
(Unaudited)
Loans and advances
(Unaudited)
At US$360 billion, total financial investments
excluding equity securities were 23 per cent higher
at 31 December 2009 than at the end of 2008. Debt
securities, at US$302 billion, represented the largest
concentration of financial investments at 84 per cent
of the total, compared with US$252 billion (86 per
cent) at 31 December 2008. HSBC’s holdings of
corporate debt, ABSs and other securities were
spread across a wide range of issuers and
geographical regions, with 37 per cent invested in
securities issued by banks and other financial
institutions. In total, holdings in ABSs decreased by
US$8 billion due to a combination of movements in
fair values, principal amortisations and write-downs.
Total financial investments excluding equity
securities increased by 23 per cent to
US$360 billion in 2009.
Investments in securities of governments and
government agencies of US$171 billion were 46 per
cent of overall financial investments, 8 percentage
points higher than in 2008. US$58 billion of these
investments comprised treasury and other eligible
bills.
A more detailed analysis of financial
investments is set out in Note 19 on the Financial
Statements and an analysis by credit quality is
provided on page 225.
The insurance businesses held diversified
portfolios of debt and equity securities designated
at fair value (2009: US$25 billion; 2008:
US$20 billion) and debt securities classified as
financial investments (2009: US$35 billion; 2008:
US$28 billion). A more detailed analysis of
securities held by the insurance businesses is set
out on page 273.
At constant exchange rates, gross loans and advances
to customers (excluding the financial sector) at
31 December 2009 declined by US$83 billion or
9 per cent from 31 December 2008.
Personal lending represented 47 per cent of
total gross loans and advances to customers.
Residential mortgages of US$261 billion represented
28 per cent of total gross advances to customers and
constituted the Group’s largest concentration in
a single exposure type. As a result of continued
run-off in the US consumer finance exit portfolios,
personal lending within North America fell to be
broadly in line with European exposure.
Corporate, commercial and financial lending,
including settlement accounts, amounted to 52 per
cent of total gross loans and advances to customers
at 31 December 2009. The largest industry
concentrations were to non-bank financial
institutions and commercial real estate lending at
10 per cent and 8 per cent, respectively, of total
gross lending to customers.
Exposure to non-bank financial institutions
principally comprised secured lending on trading
accounts, primarily through repo facilities.
Commercial, industrial and international trade
lending declined moderately in 2009, falling as a
proportion of total lending by a single percentage
point to 21 per cent of total gross loans and advances
to customers. Within this category, the largest
concentration of lending was to the service sector,
which amounted to 6 per cent of total gross lending
to customers.
Loans and advances to banks were widely
distributed across major institutions in 2009.
Further discussion of significant movements in
credit quality of the personal lending and wholesale
209
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Credit exposure > Concentration of exposure
lending portfolios is set out in Areas of Special
Interest on pages 214 to 218.
The following tables analyse loans by industry
sector and by the location of the principal operations
of the lending subsidiary or, in the case of the
operations of The Hongkong and Shanghai Banking
Corporation, HSBC Bank, HSBC Bank Middle East
and HSBC Bank USA, by the location of the lending
branch.
Gross loans and advances by industry sector
(Unaudited)
At
31 December
2008
US$m
Constant
currency
effect
US$m
Movement on
a constant
currency basis
US$m
At
31 December
2009
US$m
Gross loans and advances to customers
Personal2 ........................................................................
Residential mortgages2,3, ...........................................
Other personal2,4 .......................................................
Corporate and commercial ...........................................
Commercial, industrial and international trade.........
Commercial real estate .............................................
Other property-related ..............................................
Government ..............................................................
Other commercial5 ....................................................
Financial .......................................................................
Non-bank financial institutions ................................
Settlement accounts ..................................................
Asset-backed securities reclassified .............................
Total gross loans and advances to customers6 .............
Gross loans and advances to banks ..........................
440,227
243,337
196,890
407,474
209,840
70,969
30,739
6,544
89,382
101,085
99,536
1,549
7,991
956,777
153,829
Total gross loans and advances ....................................
1,110,606
For footnotes, see page 291.
Gross loans and advances to customers by industry sector
(Audited)
22,169
13,567
8,602
30,384
16,125
4,668
1,783
185
7,623
5,419
5,248
171
–
57,972
7,413
65,385
(28,190)
3,765
(31,955)
(54,768)
(29,837)
(6,248)
(2,002)
(40)
(16,641)
(9,854)
(9,547)
(307)
(164)
(92,976)
18,646
(74,330)
Personal2 ..................................................................
Residential mortgages2,3 ......................................
Other personal2,4 ..................................................
Corporate and commercial ......................................
Commercial, industrial and international trade ...
Commercial real estate ........................................
Other property-related .........................................
Government .........................................................
Other commercial5 ...............................................
Financial ..................................................................
Non-bank financial institutions ...........................
Settlement accounts .............................................
Asset-backed securities reclassified ........................
Total gross loans and advances to customers6 ........
Impaired loans .........................................................
– as a percentage of gross loans and advances
2009
US$m
434,206
260,669
173,537
383,090
196,128
69,389
30,520
6,689
80,364
96,650
95,237
1,413
7,827
921,773
30,606
2008
US$m
440,227
243,337
196,890
407,474
209,840
70,969
30,739
6,544
89,382
101,085
99,536
1,549
7,991
2007
US$m
500,834
269,068
231,766
400,771
202,038
72,345
33,907
5,708
86,773
99,148
96,781
2,367
–
956,777
1,000,753
25,352
19,582
2006
US$m
476,146
265,337
210,809
343,107
162,109
60,366
27,165
8,990
84,477
62,458
59,204
3,254
–
881,711
15,071
to customers ....................................................
3.3%
2.6%
2.0%
1.7%
Total impairment allowances ..................................
25,542
23,909
19,205
13,578
– as a percentage of total gross loans
434,206
260,669
173,537
383,090
196,128
69,389
30,520
6,689
80,364
96,650
95,237
1,413
7,827
921,773
179,888
1,101,661
2005
US$m
420,476
238,546
181,930
278,709
130,802
51,815
22,196
8,218
65,678
52,174
50,032
2,142
–
751,359
12,338
1.6%
11,357
and advances ...................................................
2.8%
2.5%
1.9%
1.5%
1.5%
For footnotes, see page 291.
210
Loans and advances to customers by industry sector and by geographical region
(Audited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific7
US$m
Middle
East7
US$m
North
America
US$m
Gross
loans and
advances
to
customers
Gross loans
by industry
sector as a
% of total
gross loans
%
Latin
America
US$m US$m
At 31 December 2009
Personal2 ...............................................
Residential mortgages2,3 ...................
Other personal2,4 ...............................
162,562
109,872
52,690
47,946
35,292
12,654
32,514
21,983
10,531
6,405
1,898
4,507
163,934
86,591
77,343
20,845
5,033
15,812
434,206
260,669
173,537
Corporate and commercial ...................
202,919
49,340
46,175
16,604
40,902
27,150
383,090
Commercial, industrial and
international trade ........................
Commercial real estate .....................
Other property-related ......................
Government ......................................
Other commercial5 ............................
Financial ...............................................
Non-bank financial institutions ........
Settlement accounts ..........................
112,374
33,853
6,231
2,216
48,245
73,851
73,225
626
Asset-backed securities reclassified .....
6,284
17,728
13,782
10,062
441
7,327
2,899
2,462
437
–
28,228
6,475
3,863
595
7,014
2,350
2,246
104
–
9,336
1,309
1,357
1,356
3,246
1,213
1,206
7
11,528
11,527
8,452
208
9,187
14,150
13,963
187
16,934
2,443
555
1,873
5,345
2,187
2,135
52
196,128
69,389
30,520
6,689
80,364
96,650
95,237
1,413
–
1,543
–
7,827
47.2
28.3
18.9
41.5
21.3
7.5
3.3
0.7
8.7
10.5
10.3
0.2
0.8
Total gross loans and advances
to customers (‘TGLAC’)6,8 ...............
Percentage of TGLAC by
445,616
100,185
81,039
24,222
220,529
50,182
921,773
100.0
geographical region ..........................
48.3%
10.9%
Impaired loans8 .....................................
– as a percentage of TGLAC ............
Total impairment allowances8 ..............
– as a percentage of TGLAC ............
10,722
2.4%
6,135
1.4%
841
0.8%
804
0.8%
8.8%
1,200
1.5%
996
1.2%
2.6%
23.9%
5.5% 100.0%
1,646
6.8%
1,378
5.7%
13,246
6.0%
13,676
6.2%
2,951
5.9%
30,606
3.3%
2,553
5.1%
25,542
2.8%
US$m
US$m
US$m
US$m
US$m
US$m US$m
At 31 December 2008
Personal .................................................
Residential mortgages3 ......................
Other personal4 ..................................
141,532
87,267
54,265
46,087
33,014
13,073
29,887
18,244
11,643
7,524
1,941
5,583
195,534
98,383
97,151
19,663
4,488
15,175
440,227
243,337
196,890
Corporate and commercial ...................
219,640
52,186
47,394
18,732
47,291
22,231
407,474
Commercial, industrial and
international trade ........................
Commercial real estate .....................
Other property-related ......................
Government ......................................
Other commercial5 ............................
Financial ...............................................
Non-bank financial institutions ........
Settlement accounts ..........................
121,047
32,704
7,666
1,864
56,359
62,620
61,823
797
Asset-backed securities reclassified .....
6,258
20,186
14,233
10,296
951
6,520
2,680
2,402
278
–
29,294
6,713
3,541
579
7,267
4,193
3,940
253
–
10,853
1,431
1,587
1,181
3,680
1,453
1,447
6
15,178
13,504
7,234
352
11,023
27,746
27,560
186
13,282
2,384
415
1,617
4,533
2,393
2,364
29
209,840
70,969
30,739
6,544
89,382
101,085
99,536
1,549
–
1,733
–
7,991
46.0
25.4
20.6
42.5
21.9
7.4
3.2
0.7
9.3
10.6
10.4
0.2
0.9
TGLAC6 ................................................
430,050
100,953
81,474
27,709
272,304
44,287
956,777
100.0
Percentage of TGLAC by
geographical region ..........................
44.9%
10.6%
Impaired loans ......................................
– as a percentage of TGLAC ............
Total impairment allowances ...............
– as a percentage of TGLAC ............
6,774
1.6%
3,859
0.9%
852
0.8%
733
0.7%
For footnotes, see page 291.
8.5%
835
1.0%
813
1.0%
2.9%
279
1.0%
414
1.5%
28.5%
4.6% 100.0%
14,285
5.2%
16,090
5.9%
2,327
5.3%
25,352
2.6%
2,000
4.5%
23,909
2.5%
211
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Credit exposure > Concentration of exposure
Gross loans and advances to customers by country within Rest of Asia-Pacific, Middle East and Latin America
(Audited)
At 31 December 2009
Rest of Asia-Pacific7
Australia .................................................
India .......................................................
Indonesia ................................................
Japan ......................................................
Mainland China .....................................
Malaysia .................................................
Singapore ...............................................
South Korea ...........................................
Taiwan ...................................................
Other ......................................................
Middle East7 (excluding Saudi Arabia)
Egypt ......................................................
United Arab Emirates ............................
Other ......................................................
Latin America
Argentina ...............................................
Brazil ......................................................
Mexico ...................................................
Panama ...................................................
Other ......................................................
At 31 December 2008
Rest of Asia-Pacific7
Australia .................................................
India .......................................................
Indonesia ................................................
Japan ......................................................
Mainland China .....................................
Malaysia .................................................
Singapore ...............................................
South Korea ...........................................
Taiwan ...................................................
Other ......................................................
Middle East7 (excluding Saudi Arabia)
Egypt ......................................................
United Arab Emirates ............................
Other ......................................................
Latin America
Argentina ...............................................
Brazil ......................................................
Mexico ...................................................
Panama ...................................................
Other ......................................................
For footnote, see page 291.
Residential
mortgages
US$m
Other
personal
US$m
Property-
related
US$m
Commercial,
international
trade and
other
US$m
5,919
883
59
109
1,503
2,925
5,149
2,093
2,205
1,138
993
864
571
149
319
1,717
3,041
407
503
1,967
1,785
458
71
796
2,633
1,085
2,407
30
53
1,020
3,496
3,002
2,114
1,444
8,915
3,548
4,251
1,932
1,578
7,907
21,983
10,531
10,338
38,187
4
1,650
244
1,898
31
717
2,259
1,151
875
5,033
3,598
1,112
27
57
1,303
2,699
4,209
2,153
2,217
869
326
2,881
1,300
4,507
628
10,494
2,702
973
1,015
15,812
783
1,482
527
160
12
1,624
3,301
682
705
2,367
126
1,395
1,145
2,666
49
1,076
995
475
403
2,998
1,621
493
26
808
2,784
941
2,448
34
14
1,085
2,132
8,848
4,171
15,151
1,689
12,111
6,762
3,464
2,313
26,339
3,350
3,332
1,410
4,818
7,423
4,263
3,521
2,497
1,497
9,222
18,244
11,643
10,254
41,333
–
1,693
248
1,941
41
376
2,150
1,105
816
4,488
275
3,748
1,560
5,583
707
8,585
3,665
1,076
1,142
15,175
125
2,118
775
3,018
60
694
1,024
569
452
2,799
2,106
10,214
4,847
17,167
1,648
9,578
6,094
1,877
2,628
21,825
212
Total
US$m
12,193
5,207
2,815
2,498
13,370
9,275
14,848
4,462
4,339
12,032
81,039
2,588
14,774
6,860
24,222
2,397
24,398
12,718
6,063
4,606
50,182
9,352
6,419
1,990
5,843
11,522
9,527
13,479
5,366
4,433
13,543
81,474
2,506
17,773
7,430
27,709
2,456
19,233
12,933
4,627
5,038
44,287
Loans and advances to banks by geographical region
(Audited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific7
US$m
Middle
East7
US$m
North
America
US$m
Gross
loans and
advances
to banks
Latin
America
US$m US$m
Impair-
ment
allowances
US$m
At 31 December 2009 ..........................
At 31 December 2008 ...........................
At 31 December 2007 ...........................
At 31 December 2006 ...........................
At 31 December 2005 ...........................
65,614
62,012
104,534
76,837
44,369
36,197
29,646
63,737
50,359
42,751
35,648
28,665
32,373
19,716
14,514
8,435
7,476
7,488
7,801
5,045
15,386
11,458
16,566
17,865
10,331
18,608
14,572
12,675
12,634
8,964
179,888
153,829
237,373
185,212
125,974
(107)
(63)
(7)
(7)
(9)
For footnote, see page 291.
Country distribution of outstandings and
cross-border exposures
(Unaudited)
HSBC controls the risk associated with cross-border
lending, essentially that foreign currency will not be
made available to local residents to make payments,
through a centralised structure of internal country
limits which are determined by taking into account
relevant economic and political factors. Exposures to
individual countries and cross-border exposure in
aggregate are kept under continual review.
The following table summarises the aggregate
of in-country foreign currency and cross-border
outstandings by type of borrower to countries which
individually represent in excess of 1 per cent of
HSBC’s total assets. The classification is based on
the country of residence of the borrower but also
recognises the transfer of country risk in respect of
third-party guarantees, eligible collateral held and
residence of the head office when the borrower is a
branch. In accordance with the Bank of England
Country Exposure Report (Form CE) guidelines,
outstandings comprise loans and advances
(excluding settlement accounts), amounts receivable
under finance leases, acceptances, commercial bills,
CDs and debt and equity securities (net of short
positions), and exclude accrued interest and
intra-HSBC exposures.
In-country foreign currency and cross-border amounts outstanding
(Unaudited)
Government
and official
institutions
US$bn
Banks
US$bn
Other
US$bn
Total
US$bn
7.0
29.3
10.7
15.0
7.1
26.4
12.1
8.0
1.9
2.2
11.4
1.7
5.9
0.2
38.0
25.7
7.7
4.5
33.8
34.1
7.9
6.7
10.3
47.5
29.5
1.9
5.6
4.2
82.5
65.7
45.4
41.4
79.3
74.1
39.9
33.6
26.3
82.0
54.9
42.4
41.8
25.8
At 31 December 2009
UK ...................................................................................
US ...................................................................................
France .............................................................................
Germany .........................................................................
At 31 December 2008
UK ...................................................................................
US ...................................................................................
France .............................................................................
Germany .........................................................................
The Netherlands ..............................................................
At 31 December 2007
UK ...................................................................................
US ...................................................................................
France .............................................................................
Germany .........................................................................
The Netherlands ..............................................................
37.5
10.7
27.0
21.9
38.4
13.6
19.9
18.9
14.1
32.3
14.0
38.8
30.3
21.4
213
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Concentration of exposure / Areas of special interest > Wholesale lending / Personal lending
At 31 December 2009, HSBC had in-country
foreign currency and cross-border amounts
outstanding to counterparties in The Netherlands of
between 0.75 per cent and 1 per cent of total assets;
in aggregate, US$19.6 billion.
At 31 December 2008, HSBC had in-country
foreign currency and cross-border amounts
outstanding to counterparties in Japan of between
0.75 per cent and 1.0 per cent of total assets; in
aggregate, US$24.4 billion.
At 31 December 2007, HSBC had in-country
foreign currency and cross-border amounts
outstanding to counterparties in Hong Kong,
Belgium and Ireland of between 0.75 per cent and
1.0 per cent of total assets. The aggregate in-
country foreign currency and cross-border amounts
outstanding were Hong Kong, US$19.7 billion,
Belgium, US$19.3 billion and Ireland,
US$19.3 billion.
Areas of special interest
Wholesale lending
(Unaudited)
Wholesale lending covers the range of credit
facilities granted to sovereign borrowers, banks,
non-bank financial institutions and major corporate
entities. The Group’s wholesale portfolios are well
diversified across geographical and industry
sectors, with exposure subject to portfolio controls
governing concentration risk. Overall credit quality
showed some signs of deterioration during 2009, as
companies were affected by the global economic
downturn, although in the second half credit
conditions eased on the back of successful
refinancing activity earlier in the year.
The widespread intervention by many
governments to stabilise and, in some cases to
recapitalise, banks and other financial
intermediaries had a positive effect in reducing
fears of a systemic threat to financial markets.
Notwithstanding this, many wholesale customers
and counterparties faced the twin challenges of a
reduction in available credit and liquidity, and
reduced demand for their products and services;
this encouraged them to reduce indebtedness
through portfolio disposals, extend the duration of
short-term finance and focus increasingly on cost
efficiency.
HSBC has worked closely with its customers
to identify problem areas early and minimise the
likelihood and impact of potentially adverse
situations. During 2009, the Group improved the
structure of its credit exposures by, for example,
adjusting tenor and adding collateral in response to
214
the heightened risks. HSBC also played a positive
role in maintaining credit supply, where possible.
Commercial real estate
Commercial real estate and other property-related
lending at 31 December 2009 of US$100 billion
declined by 8 per cent from 31 December 2008
on a constant currency basis and represented 11 per
cent of total loans and advances to customers. In
2009, the sector experienced a deterioration in
credit quality, particularly in parts of Europe,
including the UK, and in the Middle East and
North America, due to a decline in asset values, a
rise in rent shortfalls from vacant properties or non-
payment, a contraction in demand for new housing,
a prospective fall in rental cash flows and
significantly restricted refinancing options. As
a result of these factors, portfolio impairment
occurred in a limited number of cases. The Group’s
long-standing policies on asset origination which
focus on relationships with long-term customers
and appropriate initial leverage and interest
coverage ratios played a key role in minimising
impairment. While individual regions differ in their
approach, the Group’s origination loan-to-value
ratios are typically less than 65 per cent.
Automotive sector
The global automotive industry has seen a
significant deterioration in market conditions and
prospects over a prolonged period, as new entrants
and legacy cost issues, primarily in the US and
Europe, have taken effect. Declining sales volumes,
exacerbated by the current economic downturn,
have increased the incidence of financial stress on
equipment manufacturers, suppliers and dealers.
In the second half of 2009, the industry saw some
consolidation and, although there were tentative
signs of an increase in sales, these should be viewed
in the light of the various government scrappage
schemes for older vehicles in the US and Europe.
HSBC has adopted a cautious approach
towards this industry for a number of years,
prioritising commitments to stronger global
manufacturers and limiting exposure to those firms
considered most likely to be affected by an industry
downturn. As a result, HSBC did not have any
significant direct exposure to the major US vehicle
manufacturers which entered Chapter 11
bankruptcy restructuring during 2009. HSBC had
some exposure to North American vehicle dealers
and suppliers, but this was minimal in the context
of the Group. Exposure to the industry is controlled
by a global appetite cap that is reviewed regularly
at the Group Risk Management Meeting.
Dubai and the UAE
In November 2009, Dubai World, a Dubai
government-owned firm, requested a creditor
standstill on its debt repayments and those of some
of its subsidiaries. The announcement prompted
a significant sell-off in markets across the world.
Abu Dhabi announced that it would offer additional
assistance to Dubai, providing liquidity and a
platform for the debt restructuring process to
continue.
HSBC, as the longest-established bank in the
region, has a longstanding relationship with the
government of Dubai and its related entities. HSBC
has contributed from the earliest days to the
development of Dubai as an emerging economy and
continues to maintain supportive relationships with
all parts of the UAE. HSBC will continue to offer its
support to the government of Dubai in achieving a
workable resolution of its current liquidity problems.
HSBC’s exposure within Dubai is acceptably
spread and is primarily to operating companies
within the emirate. HSBC is playing a prominent
role in restructuring indebtedness in order to help
restore confidence in the region.
In the UAE, gross customer loans and advances
fell from US$18 billion at 31 December 2008 to
US$15 billion at 31 December 2009. Although the
Middle East represents 2 per cent of the Group’s
balance sheet, it remains a region to which HSBC
is strongly committed.
Sovereign counterparties
The overall quality of the Group’s sovereign risk
exposure remained satisfactory during 2009, with the
large majority of both in-country and cross-border
limits extended to countries with strong internal
credit risk ratings. There was no significant
downward shift in the quality of the exposure
although, given the higher debt and weaker fiscal
positions of many Western governments, there is
increased potential for deterioration in sovereign risk
profiles before budgetary re-balancing is achieved.
In order to manage this, the Group regularly updates
its assessments of higher-risk countries and adjusts
its risk appetite to reflect such changes.
Leveraged financing
The Group operates a controlled approach towards
leveraged finance origination with caps on
underwriting and final hold levels in place. This puts
a premium on successfully distributing risk in order
to create capacity under the caps. Group exposure to
leveraged finance transactions remained modest in
relation to overall exposure.
215
Personal lending
(Unaudited)
HSBC provides a broad range of secured and
unsecured personal lending products to meet
customer needs. Given the diverse nature of the
markets in which HSBC operates, the range is not
standardised across all countries but is tailored to
meet the demands of individual markets while using
appropriate distribution channels and, wherever
possible, standard global IT platforms.
Personal lending includes advances to customers
for asset purchase, such as residential property and
motor vehicles, where the loans are typically secured
on the assets being acquired. HSBC also offers loans
secured on existing assets, such as first and second
liens on residential property; unsecured lending
products such as overdrafts, credit cards and payroll
loans; and debt consolidation loans which may be
secured or unsecured.
In 2009, credit exposure in the personal lending
portfolios continued to be affected by adverse global
economic conditions, particularly increased
unemployment levels and the restricted availability
of refinancing which limited the ability of many
customers to service financial obligations in line
with contractual commitments. This led to
delinquency levels and loan impairment charges
remaining high, although management action in
recent years to run off the US consumer finance exit
portfolios and curtail originator activity helped
reduce the overall impairment charge.
The commentary that follows is on an
underlying basis.
At 31 December 2009, total personal lending
was US$434 billion, a decline of 6 per cent from
31 December 2008, driven by run-off in the US
consumer finance exit portfolios. Within Personal
Financial Services total loan impairment charges and
other credit risk provisions of US$19.9 billion were
3 per cent lower than in 2008 and were concentrated
in North America (US$14.4 billion) and, to a lesser
extent, Europe (US$2.0 billion) and Latin America
(US$2.0 billion).
In early March 2009, HSBC Finance announced
the discontinuation of new customer account
originations for all products offered by its Consumer
Lending business and closed approximately 800
Consumer Lending branch offices. In November
2009, it entered into an agreement to sell its vehicle
loan servicing operations to Santander Consumer
USA Inc. (‘SC USA’) as well as an aggregate
US$1.0 billion of vehicle finance loans, both
delinquent and non-delinquent. Under a separate
agreement, SC USA will service the remainder of
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Areas of special interest > Personal lending
HSBC’s US vehicle finance portfolio. The
transaction is currently expected to close in the
first quarter of 2010.
The Consumer Lending business historically
provided real estate secured, vehicle finance and
personal non-credit card loans. Loans were offered
with both revolving and closed-end terms and with
fixed or variable interest rates, and were originated
through branches, direct mail and the internet. Prior
to the first quarter of 2007, HSBC Finance’s
Mortgage Services business acquired loans from
correspondent lenders and, before September 2007,
also originated loans sourced through mortgage
brokers. The vehicle finance business originated
vehicle loans through its dealer and direct-to-
consumer origination channels and through its
‘autos-in-branches’ programme in the Consumer
Lending branch offices, until these originations were
discontinued.
In December 2009, HSBC Finance revised the
write-off period for its real estate secured and
Consumer Lending unsecured portfolios in order
to reflect changed customer behaviour. As a
consequence of this, real estate secured balances
are now written down to net realisable value
generally no later than the end of the month in which
the account becomes 180 days delinquent. Similarly,
for Consumer Lending unsecured products, balances
are now written off no later than the end of the
month in which the account becomes 180 days
delinquent. This change in write-off period was
reflected in lower recoverable balances and lower
impairment reserves at 31 December 2009.
Total US personal lending at 31 December 2009
stood at US$135 billion, a decline of 21 per cent
compared with the end of 2008, as HSBC ran off
certain portfolios in the consumer finance business
and improved the credit quality of the Card and
Retail Services portfolio through tightening
underwriting criteria.
Residential mortgage lending balances in the US
declined by 19 per cent to US$66 billion, driven by
the decision to close all Consumer Lending branches
and run off the legacy consumer finance portfolios.
The decrease in balances included a US$2.0 billion
reduction relating to the revised write-off period
referred to above and the sale of US$4.5 billion of
prime mortgage loans in HSBC Bank USA. US
mortgage lending is discussed in greater detail on
page 218.
216
Total personal lending fell by 6 per cent
in 2009. In the US, personal lending was
reduced by 21 per cent.
Other personal lending in the US fell by
23 per cent to US$69 billion, partly due to the run-
off in the unsecured Consumer Lending portfolio.
Credit card balances also declined, by 16 per cent to
US$39 billion, due to lower consumer spending and
steps taken by the Group to mitigate risk, including
tightening initial credit lines and sales authorisation
criteria, closing inactive accounts, decreasing credit
lines, restricting underwriting criteria, limiting cash
access, reducing marketing expenditure and, in the
private label portfolio, ending certain third-party
relationships. HSBC ceased originations in those
segments of the cards portfolio most affected by
the current housing and economic downturn. The
decline in balances included US$1.3 billion relating
to the revised write-off period for second lien
mortgages and other unsecured personal lending.
The Cards business remains a continuing
business in the US for HSBC, comprising both
general and private label portfolios. The general
Cards portfolio has approximately US$23 billion in
loans. According to The Nilson Report, HSBC is the
sixth largest issuer of MasterCard and Visa credit
cards in the US, based on loan balances.
The Private Label Credit Card (‘PLCC’)
business, with balances of US$15.6 billion, has
approximately 14 million active customer accounts
and 32 active merchant relationships. The Nilson
Report lists HSBC’s private label servicing
portfolio as the third largest portfolio in the US.
At 31 December 2009, PLCC loans were sourced
from the following business lines: approximately
45 per cent in consumer electronics, 24 per cent in
power sport vehicles, 16 per cent in department
stores, and 7 per cent of loans in furniture stores.
The private label financing products are generated
through merchant retail locations, merchant
catalogue and telephone sales, and direct mail and
internet applications.
Motor vehicle finance balances in the US
declined by 47 per cent to US$5.8 billion, reflecting
the 2008 decision to run off the portfolio in HSBC
Finance. As noted above, in November 2009, HSBC
agreed to sell the vehicle finance loan servicing
operation and US$1.0 billion of associated loans.
Total personal lending
(Unaudited)
At 31 December 2009
Residential mortgages2 .......................................
Other personal lending2 ......................................
– motor vehicle finance ..................................
– credit cards ..................................................
– second lien mortgages .................................
– other .............................................................
UK
US$m
100,667
29,018
–
12,427
1,068
15,523
Rest of
Europe
US$m
9,205
23,672
65
1,820
2
21,785
Rest of
North
US9
US$m
America
US$m
Other
regions10
US$m
Total
US$m
65,784
69,275
5,771
39,374
11,786
12,344
20,807
64,206
260,669
8,068
99
1,118
695
6,156
43,504
6,378
13,319
472
23,335
173,537
12,313
68,058
14,023
79,143
Total personal lending2 .......................................
129,685
32,877
135,059
28,875
107,710
434,206
Impairment allowances
Residential mortgages2 ...................................
Other personal lending2 ..................................
– motor vehicle finance ..............................
– credit cards ..............................................
– second lien mortgages .............................
– other .........................................................
Total impairment allowances on personal
lending2 ...........................................................
(151)
(1,443)
–
(524)
(79)
(840)
(41)
(552)
(7)
(233)
–
(312)
(4,416)
(7,691)
(211)
(3,895)
(1,608)
(1,977)
(7)
(206)
(1)
(42)
(56)
(107)
(233)
(4,848)
(2,349)
(351)
(854)
–
(1,144)
(12,241)
(570)
(5,548)
(1,743)
(4,380)
(1,594)
(593)
(12,107)
(213)
(2,582)
(17,089)
– as a percentage of total personal lending ....
1.2%
1.8%
9.0%
0.7%
2.4%
3.9%
At 31 December 2008
Residential mortgages ........................................
Other personal lending .......................................
– motor vehicle finance ..................................
– credit cards ..................................................
– second lien mortgages .................................
– other .............................................................
78,346
29,274
–
11,215
1,160
16,899
8,921
24,991
99
1,695
2
23,195
80,946
89,562
10,864
46,972
14,614
17,112
17,437
57,687
243,337
7,589
137
1,469
803
5,180
45,474
6,201
13,426
503
25,344
196,890
17,301
74,777
17,082
87,730
Total personal lending ........................................
107,620
33,912
170,508
25,026
103,161
440,227
Impairment allowances
Residential mortgages ....................................
Other personal lending ...................................
– motor vehicle finance ..............................
– credit cards ..............................................
– second lien mortgages .............................
– other .........................................................
Total impairment allowances on personal
(10)
(1,197)
–
(385)
(50)
(762)
(22)
(441)
(5)
(165)
–
(271)
(5,109)
(9,911)
(426)
(4,255)
(2,397)
(2,833)
(4)
(192)
(1)
(51)
(41)
(99)
(174)
(5,319)
(1,909)
(175)
(805)
–
(929)
(13,650)
(607)
(5,661)
(2,488)
(4,894)
lending ............................................................
(1,207)
(463)
(15,020)
(196)
(2,083)
(18,969)
– as a percentage of total personal lending ....
1.1%
1.4%
8.8%
0.8%
2.0%
4.3%
For footnotes, see page 291.
Total personal lending in the UK increased by
8 per cent to US$130 billion, driven by growth in
residential mortgage lending at HSBC Bank and
First Direct as HSBC grew market share in UK
mortgage lending (discussed in greater detail below).
Other personal lending in the UK declined by 11 per
cent to US$29 billion, primarily due to reduced
customer demand for credit.
In Latin America, gross loans and advances
to personal customers declined by 9 per cent to
US$21 billion. Residential mortgage lending
increased by 6 per cent, while other personal lending
fell by 13 per cent. The reduction in other personal
lending was largely in Mexico, where balances
decreased by 30 per cent to US$2.7 billion following
management action to mitigate risk and restrict
originations in the credit cards portfolio to address
the adverse credit experience which developed in
2008. Similarly, in Brazil, personal lending declined
by 6 per cent to US$11 billion at 31 December 2009
as steps were taken to improve credit quality by
tightening underwriting criteria.
217
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Areas of special interest > Personal lending > Mortgage lending
For an analysis of loan impairment allowances
Including the US$2.3 billion decline in balances
and impaired loans, see page 230.
Mortgage lending
The Group offers a wide range of mortgage products
designed to meet customer needs, including capital
repayment mortgages subject to fixed or variable
interest rates and products designed to meet demand
for housing loans with more flexible payment
structures. HSBC underwrites both first lien
residential mortgages and loans secured on second
lien mortgages.
Interest-only mortgages are those for which
customers make regular payments of interest during
the life of the loan and repay the principal from the
sale of their home or alternative sources of funds.
Introductory interest-only mortgages are typically
where the interest-only element is for a fixed term at
the start of the loan, after which principal
repayments commence.
Affordability mortgages include all products
where the customers’ monthly payments are set at
a low initial rate, either variable or fixed, before
resetting to a higher rate once the introductory period
is over. These include adjustable-rate mortgages
(‘ARM’s) and loans on which the interest rate is
periodically changed based on a reference price.
Offset mortgages are products linked to a
current or savings account, where interest earned is
used to repay mortgage debt.
US mortgage lending
US mortgage lending, comprising residential
mortgage and second lien lending, made up 18 per
cent of the Group’s gross loans and advances to
personal customers at 31 December 2009.
Balances declined by 19 per cent compared with
2008 to US$78 billion, including a reduction of
US$2.3 billion attributed to the revision of the write-
off period referred to above. The decrease was
driven by the continued run-off of the Mortgage
Services portfolio and actions taken since mid-2007
to reduce risk and discontinue, from the first quarter
of 2009, new originations in the Consumer Lending
business. In addition, HSBC Bank USA sold
US$4.5 billion of prime mortgage loans in 2009
on top of normal sale activity. The overall rate of
decline in real-estate secured balances continued to
slow due to a reduction in loan prepayments, as the
continuing weakness in the US economy limited
the number of refinancing options available to
customers.
218
due to the acceleration of write-offs, mortgage
lending in HSBC Finance fell from US$74 billion at
31 December 2008 to US$61 billion at 31 December
2009 as set out in the table on page 221. Balances
outstanding in the Consumer Lending business
were US$40 billion at 31 December 2009, of which
approximately 95 per cent were fixed rate loans and
88 per cent were first lien. The Mortgage Services
business had US$22 billion in outstanding balances
at 31 December 2009, of which approximately
62 per cent were fixed rate loans and 86 per cent
were first lien.
Mortgage lending in the US fell by 19 per
cent to US$78 billion and rose in the UK by
15 per cent to US$102 billion.
As a consequence of the turmoil in mortgage
lending markets in the US, there was a significant
amount of federal and state legislative and regulatory
focus on this activity in 2009. Increased regulatory
oversight over residential mortgage lenders occurred
at both state and federal level. Several regulators,
legislators and other governmental bodies promoted
particular views of appropriate or ‘model’ loan
modification programmes, loan products, and
foreclosure and loss-mitigation practices. HSBC
Finance has developed a modification programme
that employs procedures which are believed to be
responsive to customers’ needs, and continues to
enhance and refine these practices as other
programmes are announced and the results of
customer assistance efforts are evaluated. It
continues to be active in various initiatives to help
people keep their homes, and participates in local
events sponsored by industry participants, regulators
and consumer advocates.
The mortgage portfolios in both Consumer
Lending and Mortgage Services are now expected to
remain on the balance sheet for a longer period than
was assumed when they were originated. Reduced
mortgage prepayment rates and higher levels of loan
modifications have had the effect of extending the
projected average life of these loan portfolios. As a
result, both net interest income and asset valuations
have increasingly become exposed to rising interest
rates as the average life of funding has declined
while the average life of mortgage asset portfolios
has grown.
In HSBC Bank USA, mortgage lending declined
from US$22 billion at 31 December 2008 to
US$16 billion at 31 December 2009 following
initiatives taken to reduce risk. This included the
ongoing sale of the majority of new residential loan
originations to government-sponsored enterprises
and private investors and, in 2009, additional sales
of US$4.5 billion of prime adjustable and fixed rate
residential mortgage loans. At the end of 2009,
approximately 32 per cent of the HSBC Bank USA
mortgage portfolio were fixed rate loans and 75 per
cent were first lien.
Further discussion of credit trends in the US
mortgage lending portfolio and the steps taken to
mitigate risk is provided in ‘US personal lending –
credit quality’ on page 221.
UK mortgage lending
Total mortgage lending in the UK increased by
15 per cent on a constant currency basis to
US$102 billion at 31 December 2009, with HSBC
increasing its market share of UK mortgage lending
through the success of the RateMatcher promotion
and other campaigns within the UK secured lending
growth strategy.
HSBC was able both to grow market share and
maintain high credit quality despite adverse UK
market conditions because of the consistent
application of conservative underwriting standards
and constraints on some competitors in growing
their lending exposure. Almost all new business
originations are made through HSBC’s own
salesforce and mainly to existing customers holding
a current or savings account relationship with the
Group. HSBC does not accept self-certification of
income and restricts lending to purchase residential
property for rental.
UK mortgage impairments and delinquency
balances deteriorated slightly but remained at
relatively low levels despite higher unemployment.
House prices recovered, and the portfolio remained
well secured, reflecting the continuing benefit from
management decisions taken in 2007 and 2008 to
reduce market share when property prices were
rising to unsustainably high levels. In the HSBC
Bank Mortgage Portfolio, excluding First Direct, the
percentage of loans that were 30 days or more
delinquent declined from 1.8 per cent at
31 December 2008 to 1.6 per cent in 2009. The
average loan-to-value ratio for new business in this
portfolio in 2009 was 54.6 per cent, a decrease
of 4.2 percentage points on the previous year.
Interest-only mortgage balances increased by
21 per cent to US$45 billion compared with 2008,
driven by an increase in balances at First Direct
following marketing initiatives, and competitive
pricing. The majority of these mortgages were offset
mortgages linked to a current account for which
delinquency rates remained at very low levels.
Second lien balances, which were all held
by HFC Bank Ltd (‘HFC’) in the UK, declined by
17 per cent to US$1.1 billion at 31 December 2009
as the portfolio was placed in run-off during the
year. Within this portfolio, two months or more
delinquency rates increased from 6 per cent at
31 December 2008 to 6.6 per cent at 31 December
2009, despite a decline in delinquencies in dollar
terms as balances declined at a faster pace.
The following table shows the levels of
mortgage lending products in the various portfolios
in the US, the UK and the rest of the HSBC Group.
219
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Areas of special interest > Personal lending > Mortgage lending // US personal lending – credit quality
Mortgage lending products
(Unaudited)
At 31 December 2009
Residential mortgages11 ...............................................
Second lien mortgages11 ..............................................
UK
US$m
100,667
1,068
Total mortgage lending11 .............................................
101,735
Rest of
Europe
US$m
9,205
2
9,207
Rest of
North
America
US$m
Other
regions10
US$m
Total
US$m
20,807
695
64,206
472
260,669
14,023
US9
US$m
65,784
11,786
77,570
21,502
64,678
274,692
Second lien as a percentage of total mortgage lending
1.0%
–
15.2%
3.2%
0.7%
5.1%
Impairment allowances
Residential mortgages11 ...........................................
Second lien mortgages11 ..........................................
Total impairment allowances on mortgage lending
Interest-only (including endowment) mortgages ........
Affordability mortgages, including ARMs .................
Other ............................................................................
(151)
(79)
(230)
45,471
2,681
144
Total interest-only and affordability mortgages ..........
48,296
(41)
–
(41)
–
1,084
–
1,084
(4,416)
(1,608)
(6,024)
–
21,024
–
21,024
– as a percentage of total mortgage lending ...........
47.5%
11.8%
27.1%
Negative equity mortgages12 .......................................
Other loan-to-value ratios greater than 90 per cent13 ..
6,412
10,522
Total negative equity and other mortgages .................
16,934
– as a percentage of total mortgage lending ...........
16.6%
–
–
–
–
20,229
13,695
33,924
43.7%
(7)
(56)
(63)
1,154
232
–
1,386
6.4%
163
1,887
2,050
(233)
–
(233)
1,127
5,921
147
(4,848)
(1,743)
(6,591)
47,752
30,942
291
7,195
78,985
11.1%
488
1,451
28.8%
27,292
27,555
1,939
54,847
9.5%
3.0%
20.0%
At 31 December 2008
Residential mortgages .................................................
Second lien mortgages .................................................
78,346
1,160
Total mortgage lending ................................................
79,506
8,921
2
8,923
80,946
14,614
17,437
803
57,687
503
243,337
17,082
95,560
18,240
58,190
260,419
Second lien as a percentage of total mortgage lending
1.5%
–
15.3%
4.4%
0.9%
6.6%
Impairment allowances
Residential mortgages .............................................
Second lien mortgages ............................................
Total impairment allowances on mortgage lending
(10)
(50)
(60)
Interest-only (including endowment) mortgages ........
Affordability mortgages, including ARMs .................
Other ............................................................................
33,782
4,740
153
(22)
–
(22)
553
824
–
(5,109)
(2,397)
(7,506)
–
28,571
–
Total interest-only and affordability mortgages ..........
38,675
1,377
28,571
(4)
(41)
(45)
1,427
311
–
1,738
(174)
–
(174)
993
4,166
82
(5,319)
(2,488)
(7,807)
36,755
38,612
235
5,241
75,602
– as a percentage of total mortgage lending ...........
48.6%
15.4%
29.9%
9.5%
9.0%
29.0%
Negative equity mortgages12 .......................................
Other loan-to-value ratios greater than 90 per cent13 ..
3,268
8,978
Total negative equity and other mortgages .................
12,246
–
107
107
21,904
19,009
40,913
86
1,737
1,823
1,635
2,122
26,893
31,953
3,757
58,846
– as a percentage of total mortgage lending ...........
15.4%
1.2%
42.8%
10.0%
6.5%
22.6%
For footnotes, see page 291.
HSBC Finance held approximately
US$61 billion of residential mortgage and second
lien loans and advances to personal customers
secured on real estate at 31 December 2009, 14 per
cent of the Group’s gross loans and advances to
personal customers. A breakdown of these balances
by portfolio was as follows:
220
HSBC Finance US mortgage lending14
(Unaudited)
At 31 December 2009
Other
mortgage
lending
US$m
Consumer
Lending
US$m
37,639
1,867
1,867
–
98
6
–
6
Mortgage
Services
US$m
13,596
8,168
7,070
1,098
At 31 December 2008
Mortgage
Services
US$m
16,288
11,339
9,530
1,809
Total
US$m
51,333
10,041
8,937
1,104
Consumer
Lending
US$m
43,873
2,324
2,324
–
Other
mortgage
lending
US$m
91
35
33
2
Total
US$m
60,252
13,698
11,887
1,811
21,764
39,506
104
61,374
27,627
46,197
126
73,950
Fixed-rate15 ......................
Other15 ..............................
Adjustable-rate ............
Interest-only ................
First lien15 ........................
Second lien15 ....................
18,710
3,054
34,913
4,593
77
27
53,700
7,674
23,188
4,439
40,334
5,863
93
33
63,615
10,335
Stated income16 ................
Impairment allowances ....
– as a percentage of total
21,764
39,506
104
61,374
27,627
46,197
126
73,950
3,905
2,419
–
3,167
–
1
3,905
5,587
5,667
3,819
–
3,403
–
1
5,667
7,223
mortgage lending .........
11.1%
8.0%
1.0%
9.1%
13.8%
7.4%
0.8%
9.8%
For footnotes, see page 291.
US personal lending – credit quality
(Unaudited)
During 2009, challenging economic conditions in the
US continued, marked by further declines in the
housing market, rising unemployment, tight credit
conditions and reduced economic growth. Although
the economic recession continued to deepen into
the first half of 2009, signs of stabilisation and
improvement began to appear in the second half
of the year. While the ongoing financial market
disruption continued to affect credit and liquidity
throughout the year, an improvement in conditions
which began in the second quarter and continued
through the rest of the year, strengthened liquidity
and narrowed credit spreads. The recovery in market
confidence stemmed largely from various
government actions taken to restore faith in the
capital markets and stimulate consumer spending,
and success in these initiatives is bolstering
HSBC Finance: geographical concentration of US lending14,17
(Unaudited)
consumer and business sentiment. The pace of job
losses eased in the second half of 2009, and this
helped the housing market, though the first-time
homebuyer tax credit and the low interest rates were
the main forces driving up home sales and shrinking
inventories of unsold properties. This resulted in
some house price stabilisation in the latter half of
2009, particularly in the middle and lower price
sector.
US unemployment rates, which have been a
major factor in the deterioration of credit quality in
the country, were 10 per cent in December 2009, an
increase of 260 basis points since December 2008.
Unemployment rates in 16 states were greater than
the US national average and unemployment rates in
10 states were at or above 11 per cent, including
California and Florida, with more than 5 per cent of
HSBC Finance’s total loan balances.
Mortgage lending
as a percentage of:
Other personal lending
as a percentage of:
total
lending
%
total
mortgage
lending
%
total
lending
%
total other
personal
lending
%
percentage
of total
lending
%
California ...............................................................................
New York ...............................................................................
Florida ....................................................................................
Texas ......................................................................................
Pennsylvania ..........................................................................
Ohio .......................................................................................
6
3
3
2
3
3
11
7
7
4
6
5
5
3
3
4
2
2
11
7
6
8
5
5
11
7
6
6
5
5
For footnotes, see page 291.
221
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Areas of special interest > US personal lending – credit quality
Mortgage lending
In line with its exit strategy for non-prime real estate
secured mortgage lending, HSBC continued to
reduce mortgage lending exposure in the US and
balances declined from US$96 billion to
US$78 billion as the portfolios ran off.
Although delinquency increased during 2009,
credit quality deteriorated at a slower rate than in
previous years as the effect of higher unemployment
was not as severe as expected due to actions
previously taken by HSBC to reduce risk in the
loan portfolio.
Following the revision of the write-off period
described on page 205, two months and over
delinquent balances in the real estate secured
portfolios of HSBC Finance decreased in dollar
terms but, excluding the effects of the change, they
rose. Delinquent balances also increased in HSBC
Bank USA. Increased delinquency reflected portfolio
seasoning in an environment of continuing weakness
in the housing market and diminished availability of
refinancing opportunities. In addition, delays to
foreclosure caused by changes in some state
government practices and backlogs in court
proceedings resulted in balances that would
otherwise have proceeded to foreclosure remaining
reported as contractually delinquent.
Excluding the effects of revising the write-off
period:
•
•
delinquency in the Consumer Lending business
increased, primarily in the 2006, 2007 and 2008
vintages of the first lien real estate secured
portfolio. Two months or more delinquent
balances rose from US$5.6 billion in 2008 to
US$7.4 billion at 31 December 2009, and two
months or more delinquency rates grew from
12.1 per cent to 18.2 per cent;
two months or more delinquent balances in the
Mortgage Services portfolio declined from
US$4.7 billion in 2008 to US$4.5 billion at
31 December 2009 as the portfolio continued to
season, and two months or more delinquency
rates increased from 17 per cent in 2008 to
19.6 per cent at 31 December 2009 as balances
declined at a faster pace than delinquencies.
At HSBC Bank USA, the level of dollar
delinquency increased within the first lien prime
residential mortgage and Home Equity mortgage
loan portfolios, reflecting the weakened US
economy, high unemployment and continued
deterioration of the US housing market. Delinquency
rates also rose, in part due to lower balances as
mortgage portfolios were sold to third parties. In
222
2009, HSBC Bank USA sold US$4.5 billion of
mortgage portfolios to third parties and it continued
to sell the majority of new mortgage loan
originations to government-sponsored enterprises
and private investors. Two months or more
delinquencies increased from 3.4 per cent to 7.5 per
cent at 31 December 2009, as delinquency balances
increased from US$0.7 billion to US$1.2 billion,
while balances declined.
In HSBC Finance, loss rates on the sale of
foreclosed properties were broadly stable throughout
2009 but were higher than those incurred in 2008
as house prices continued to fall. The number of
properties foreclosed decreased, in part due to delays
in foreclosure proceedings and the lengthening by
certain states of the foreclosure process. HSBC
continued to assist customers in restructuring their
debts to avoid foreclosure, including by modifying
their loans when it was decided that they could be
serviced on revised terms. For further details, see
‘HSBC Finance loan modifications and re-ageing’
on page 224.
Second lien mortgage loans have a risk profile
characterised by higher loan-to-value ratios because,
in the majority of cases, the loans were taken out to
complete the refinancing or purchase of properties.
HSBC Finance has typically experienced loss on
default for second lien loans approaching 100 per
cent of the amount owing, as any equity in the
property is initially applied to the first lien loan.
Excluding the effects of the change to the write-off
period, in the HSBC Finance Mortgage Services
second lien portfolio, two months or more
delinquency rates decreased to 17.3 per cent at
31 December 2009 as the portfolio continued to run
off. In the Consumer Lending second lien portfolio,
two months or more delinquency rates increased to
18.6 per cent at 31 December 2009. In HSBC Bank
USA, second lien two months or more delinquency
rates increased from 3.5 per cent at 31 December
2008 to 4 per cent at 31 December 2009.
Stated-income mortgage balances in HSBC
Finance declined from US$5.7 billion to
US$3.9 billion as the portfolio continued to run off.
The decline included US$0.2 million as a result of
the revised write-off period referred to on page 205.
These mortgages were underwritten on the basis of
borrowers’ representations of annual income and
were not verified by supporting documents and, as a
result, represent a higher than average level of risk.
Two months or more delinquency rates decreased to
22.7 per cent at 31 December 2009. In HSBC Bank
USA, stated-income balances decreased from
US$2.2 billion to US$2.1 billion and delinquency
rates increased from 8.7 per cent at 31 December
2008 to 11.1 per cent at 31 December 2009.
Affordability mortgages are those in which the
customer’s monthly payments are set at a low initial
rate, either fixed or variable, before resetting to a
higher rate once the initial introductory period is
over. At 31 December 2009, HSBC Finance had
US$10 billion of affordability mortgages, compared
with US$14 billion at 31 December 2008, as the
portfolio continued to run off. Excluding the effects
of revising the write-off period, in dollar terms,
delinquencies in this portfolio declined during 2009
but, as balances declined at a faster rate, delinquency
rates increased. At HSBC Bank USA, affordability
mortgage balances of US$11 billion at 31 December
2009 compared with US$15 billion at 31 December
2008.
Credit cards
In the US credit card portfolio, two months or
more delinquent balances declined from
US$2.0 billion to US$1.8 billion, while in
percentage terms they rose from 6.8 per cent at
31 December 2008 to 7.4 per cent at 31 December
2009 as loan balances declined at a faster pace than
delinquencies. In the private label cards portfolio,
two months and over delinquent balances declined
from US$0.7 billion to US$0.6 billion while
contractual delinquency increased from 4 per cent
at 31 December 2008 to 4.1 per cent at 31 December
2009. The decline of balances in both portfolios was
a result of actions taken to tighten underwriting
criteria in order to reduce the risk profile of the
portfolio, lower customer spending and, in the
private label business, terminate certain unprofitable
partner relationships. The decrease in delinquency
balances in both portfolios also reflected higher
levels of personal bankruptcy filings.
Motor vehicle finance
In the vehicle finance portfolio, two months or
more delinquencies declined from 5.0 per cent at
31 December 2008 to 4.6 per cent at 31 December
2009, despite the reduction in loan balances, as
delinquencies fell at a faster pace.
Other personal lending
In dollar terms, delinquencies in the Consumer
Lending unsecured portfolio remained lower, despite
the weakened economic conditions, due to a higher
number of personal bankruptcy filings which
resulted in accounts moving to write-off more
quickly, portfolio seasoning as the portfolio ran
off, and the actions taken previously to tighten
underwriting criteria in order to reduce the risk
profile of the portfolio.
US personal lending – loan delinquency
The table below sets out the trends in two months
and over contractual delinquencies in the US:
Two months and over contractual delinquency
(Unaudited)
Quarter ended
As
reported
31 Dec
2009
US$m
Ex. period
change
31 Dec
2009
US$m
30 Sep
2009
US$m
30 Jun
2009
US$m
31 Mar
2009
US$m
31 Dec
2008
US$m
30 Sep
2008
US$m
30 Jun
2008
US$m
31 Mar
2008
US$m
9,551
11,519
10,834
10,070
9,892
9,236
7,061
5,984
5,757
1,194
267
1,798
622
1,628
267
1,798
622
1,631
295
1,834
639
1,676
310
1,864
636
1,772
269
1,992
659
1,790
541
2,029
679
1,616
512
1,871
606
1,585
445
1,700
590
1,638
370
1,782
591
In Personal Financial
Services in the US
Residential mortgages
Second lien mortgage
lending ...................
Vehicle finance ..........
Credit card .................
Private label ...............
Personal non-credit
card ........................
1,548
2,619
2,680
2,709
2,855
3,020
2,763
2,606
2,650
Total ...........................
14,980
18,453
17,913
17,265
17,439
17,295
14,429
12,910
12,788
%18
%18
%18
%18
%18
%18
%18
%18
%18
14.54
17.03
15.39
13.89
12.82
11.42
8.23
6.65
5.96
Residential mortgages
Second lien mortgage
lending ...................
Vehicle finance ..........
Credit card .................
Private label ...............
Personal non-credit
10.14
4.63
7.38
4.12
13.35
4.63
7.38
4.12
12.71
4.61
7.28
4.38
card ........................
12.55
19.77
18.73
Total ...........................
11.09
13.34
12.47
12.35
3.97
7.25
4.08
18.02
11.49
12.59
2.79
7.14
4.28
18.30
10.92
12.26
4.98
6.76
3.99
17.83
10.16
10.59
4.27
6.18
3.72
9.83
3.48
5.57
3.65
9.76
2.83
5.81
3.66
15.41
14.00
13.71
8.13
7.01
6.64
223
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Areas of special interest > Renegotiated loans // Credit quality
Quarter ended
As
reported
31 Dec
2009
US$m
Ex. period
change
31 Dec
2009
US$m
30 Sep
2009
US$m
30 Jun
2009
US$m
31 Mar
2009
US$m
31 Dec
2008
US$m
30 Sep
2008
US$m
30 Jun
2008
US$m
31 Mar
2008
US$m
In Mortgage Services and
Consumer Lending
Mortgage Services: ....
– first lien ...............
– second lien ..........
Consumer Lending: ...
– first lien ...............
– second lien ..........
3,477
3,093
384
6,022
5,380
642
4,456
3,900
556
7,445
6,541
904
4,250
3,688
562
7,131
6,241
890
4,257
3,642
615
6,514
5,640
874
4,535
3,824
711
6,203
5,322
881
4,699
3,912
787
5,577
4,724
853
4,227
3,420
807
3,866
3,176
690
4,260
3,363
897
2,777
2,194
583
4,484
3,456
1,028
2,484
1,954
530
%18
%18
%18
%18
%18
%18
%18
%18
%18
Mortgage Services:
– first lien ...............
– second lien ..........
– total .....................
16.53
12.57
15.98
20.00
17.25
19.61
18.09
16.36
17.84
Consumer Lending:
– first lien ...............
– second lien ..........
– total .....................
15.41
13.98
15.24
18.15
18.64
18.21
16.75
17.49
16.84
17.13
16.35
17.01
14.72
16.17
14.90
17.24
17.44
17.27
13.52
15.43
13.76
16.87
17.72
17.01
11.71
14.54
12.07
14.16
16.62
14.57
12.91
16.63
13.55
12.41
16.99
13.22
7.72
11.27
8.18
5.15
9.04
5.66
4.52
7.96
4.98
For footnote, see page 291.
Renegotiated loans
(Audited)
Restructuring activity is designed to manage
customer relationships, maximise collection
opportunities and, wherever possible, avoid
foreclosure or repossession. Such activities include
re-ageing, extended payment arrangements, approved
external debt management plans, deferred
foreclosure, modification, loan rewrites and/or
deferral of payments in the event of a change in
circumstances. Restructuring is most commonly
applied to real estate loans within consumer finance
portfolios. Following restructuring, an overdue
consumer account is normally reset from delinquent
to current status. Restructuring policies and practices
are based on indicators or criteria which, in the
judgement of local management, indicate that
repayment is likely to continue. These policies are
kept under continual review and their application
varies according to the nature of the market, the
product, and the availability of empirical data.
Criteria vary between products, but typically include
receipt of two or more qualifying payments within a
certain period (or, in the case of HSBC Finance, one
or more), a minimum lapse of time from origination
before restructuring may occur, and restrictions on
the number and/or frequency of successive
restructurings. Renegotiated loans are segregated
from other parts of the loan portfolio for collective
impairment assessment, to reflect their risk profile.
When empirical evidence indicates an increased
propensity to default on restructured accounts, the use
of roll rate methodology ensures this factor is taken
into account when calculating impairment
224
allowances. Interest is recorded on renegotiated loans
taking into account the new contractual terms
following renegotiation.
Renegotiated loans that would otherwise have
been past due or impaired totalled US$39 billion
at 31 December 2009 (2008: US$35 billion). The
largest concentration was in the US and amounted
to US$33 billion (2008: US$31 billion) or 86 per
cent (2008: 89 per cent) of the Group’s total
renegotiated loans. The increase was attributable
to the deterioration in credit quality highlighted
above.
HSBC Finance loan modifications and re-ageing
(Unaudited)
HSBC Finance continued to offer a variety of
account management policies and practices.
Modification occurs when the terms of a loan are
modified, either temporarily or permanently,
including changes to the rate and/or the payment.
Modification may also lead to a re-ageing of the
account. In 2009, HSBC Finance modified over
104,000 loans in Consumer Lending and Mortgage
Services through the Foreclosure Avoidance and
Account Modification programmes, with an
aggregate balance of US$14.6 billion.
The total outstanding balances of real estate
secured accounts which have been either re-aged or
modified was US$30.2 billion, compared with
US$26.2 billion at the end of 2008. Two months and
over contractual delinquencies on re-aged or
modified loans was 26 per cent, broadly consistent
with the end of 2008.
HSBC Finance also supports a variety of
initiatives to help preserve home ownership and
avoid foreclosure. A quarterly breakdown of
foreclosure data is provided below:
HSBC Finance foreclosed properties in the US
(Unaudited)
Number of foreclosed properties at end of period ................
Number of properties added to foreclosed inventory
in the year/quarter ..............................................................
Average loss on sale of foreclosed properties (US$000)19 ....
Average total loss on foreclosed properties20 ........................
Average time to sell foreclosed properties (days) .................
For footnotes, see page 291.
Credit quality of financial instruments
(Audited)
The five credit quality classifications set out and
defined below describe the credit quality of HSBC’s
lending, debt securities portfolios and derivatives.
Since 2008, the medium classification has been
subdivided into ‘medium-good’ and ‘medium-
satisfactory’ to provide further granularity. These
five classifications each encompass a range of more
2009
6,188
14,845
12
51%
193
2008
9,589
20,051
14
42%
177
31 Dec
2009
Quarter ended
30 Sep
2009
30 Jun
2009
31 Mar
2009
6,188
6,428
7,286
8,866
3,496
5
50%
172
3,546
8
52%
184
3,550
13
53%
194
4,253
18
52%
201
granular, internal credit rating grades assigned to
wholesale and retail lending business, as well as the
external ratings attributed by external agencies to
debt securities.
There is no direct correlation between the
internal and external ratings at granular level, except
to the extent each falls within a single quality
classification.
Credit quality of HSBC’s debt securities and other bills
External
credit rating
Quality classification
A– and above
Strong ........................................................................................................................................................................
Medium-good ...........................................................................................................................................................
BBB+ to BBB–
Medium-satisfactory ................................................................................................................................................. BB+ to B+ and unrated
B and below
Sub-standard .............................................................................................................................................................
Impaired
Impaired ....................................................................................................................................................................
Credit quality of HSBC’s wholesale lending and derivatives
Internal
credit rating
Probability of
default %
Quality classification
Strong ...........................................................................................................................................
Medium-good ..............................................................................................................................
Medium-satisfactory ....................................................................................................................
Sub-standard ................................................................................................................................
Impaired .......................................................................................................................................
CRR1 to CRR2
CRR3
CRR4 to CRR5
CRR6 to CRR8
CRR9 to CRR10
0 – 0.169
0.170 – 0.740
0.741 – 4.914
4.915 – 99.999
100
Credit quality of HSBC’s retail lending
Quality classification
Strong ...........................................................................................................................................
Medium-good ...............................................................................................................................
Medium-satisfactory.....................................................................................................................
Sub-standard .................................................................................................................................
Impaired .......................................................................................................................................
For footnotes, see page 291.
Internal
credit rating21
Expected
loss %
EL1 to EL2
EL3
EL4 to EL5
EL6 to EL8
EL9 to EL10
0 – 0.999
1.000 – 4.999
5.000– 19.999
20.000 – 99.999
100+ or defaulted22
225
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Credit quality > Risk ratings / Financial instruments by credit quality
Quality classification definitions
Risk rating scales
•
•
•
•
•
‘Strong’: exposures demonstrate a strong
capacity to meet financial commitments, with
negligible or low probability of default and/or
low levels of expected loss. Retail accounts
operate within product parameters and only
exceptionally show any period of delinquency.
‘Medium-good’: exposures require closer
monitoring and demonstrate a good capacity to
meet financial commitments, with low default
risk. Retail accounts typically show only short
periods of delinquency, with any losses
expected to be minimal following the adoption
of recovery processes.
‘Medium-satisfactory’: exposures require closer
monitoring and demonstrate an average to fair
capacity to meet financial commitments, with
moderate default risk. Retail accounts typically
show only short periods of delinquency, with
any losses expected to be minor following the
adoption of recovery processes.
‘Sub-standard’: exposures require varying
degrees of special attention and default risk is of
greater concern. Retail portfolio segments show
longer delinquency periods of generally up to
90 days past due and/or expected losses are
higher due to a reduced ability to mitigate these
through security realisation or other recovery
processes.
‘Impaired’: exposures have been assessed,
individually or collectively, as impaired.
The Customer Risk Rating (‘CRR’) 10-grade scale
above summarises a more granular underlying
22-grade scale of obligor probability of default
(‘PD’). All distinct HSBC customers are rated using
one of these two PD scales, depending on the degree
of sophistication of the Basel II approach adopted for
the exposure.
The Expected Loss (‘EL’) 10-grade scale for
retail business summarises a more granular
underlying EL scale for these customer segments;
this combines obligor and facility/product risk
factors in a composite measure.
For debt securities and certain other financial
instruments, external ratings have been aligned to the
five quality classifications. The ratings of Standard
and Poor’s are cited, with those of other agencies
being treated equivalently. Debt securities with
short-term issue ratings are reported against the
long-term rating of the issuer of those securities. If
major rating agencies have different ratings for the
same debt securities, a prudent rating selection is
made in line with regulatory requirements.
Additional credit quality information in respect
of HSBC’s consolidated holdings of ABSs and
assets held in consolidated SIVs and conduits is
provided on pages 160 to 161 and 182 to 183,
respectively.
For the purpose of the following disclosure,
retail loans which are past due up to 89 days and are
not otherwise classified as EL9 or EL10, are
separately classified as past due but not impaired.
The following tables set out the Group’s
distribution of financial instruments by measures of
credit quality:
226
Distribution of financial instruments by credit quality
(Audited)
At 31 December 2009
Cash and balances at central
Strong
US$m
Good Satisfactory
US$m
US$m
Neither past due nor impaired
Medium
Sub
standard
US$m
Past due
but not
impaired Impaired
US$m
US$m
Impair-
ment
allowances23
US$m
banks .......................................
55,355
3,414
1,589
297
Items in the course of collection
from other banks .....................
5,922
Hong Kong Government
certificates of deposit .............
17,463
20
–
453
–
–
–
–
–
–
–
–
–
Trading assets24 ...........................
– treasury and other eligible
bills ......................................
– debt securities ......................
– loans and advances to banks
– loans and advances to
306,481
37,911
39,457
2,221
21,747
180,876
59,152
315
7,499
14,213
169
12,360
4,572
115
863
189
customers .............................
44,706
15,884
22,356
1,054
Financial assets designated at fair
value24 .....................................
– treasury and other eligible
bills ......................................
– debt securities ......................
– loans and advances to banks
– loans and advances to
customers .............................
11,163
3,834
7,122
223
9,701
336
903
–
3,834
–
–
–
7,104
18
–
79
–
79
–
–
Derivatives24 ...............................
169,430
60,759
15,688
5,009
Total
US$m
60,655
6,395
17,463
386,070
22,346
201,598
78,126
84,000
22,198
223
20,718
354
903
250,886
Loans and advances held at
amortised cost .........................
– loans and advances to banks
– loans and advances to
customers8,25 ........................
Financial investments .................
– treasury and other similar
570,357
130,403
231,394
34,646
185,167
13,154
43,820
1,434
40,078
12
30,845
239
(25,649) 1,076,012
179,781
(107)
439,954
196,748
172,013
42,386
40,066
30,606
(25,542)
896,231
316,604
20,080
15,359
5,602
–
–
–
908
12
896
2,389
5
2,384
848
77
771
360,034
58,434
301,600
36,373
9,311
27,062
bills ......................................
– debt securities ......................
54,158
262,446
1,458
18,622
2,315
13,044
Other assets .................................
13,454
6,968
12,477
– endorsements and
acceptances ..........................
– accrued income and other ...
1,349
12,105
3,200
3,768
4,161
8,316
498
5,104
1,718
512
1,206
.
227
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Credit quality > Risk ratings / 2009 / Past due but not impaired
Distribution of financial instruments by credit quality (continued)
Neither past due nor impaired
Medium
Strong
US$m
Good Satisfactory
US$m
US$m
Sub
standard
US$m
Past due
but not
Impair-
ment
impaired Impaired
US$m
US$m
allowances23
US$m
Total
US$m
At 31 December 2008
Cash and balances at central
banks .......................................
50,070
206
1,831
289
Items in the course of collection
from other banks .....................
4,541
Hong Kong Government
certificates of indebtedness ....
15,358
4
–
1,392
–
–
–
–
66
–
–
–
–
Trading assets24 ...........................
– treasury and other eligible
bills ......................................
– debt securities ......................
– loans and advances to banks
– loans and advances to
303,307
37,349
61,628
3,167
32,314
175,681
60,400
75
5,294
7,501
17
17,547
5,013
52
1,097
141
1,877
customers .............................
34,912
24,479
39,051
Financial assets designated at fair
value24 .....................................
– treasury and other eligible
bills ......................................
– debt securities ......................
– loans and advances to banks
– loans and advances to
customers .............................
5,288
4,141
7,293
818
204
4,129
230
725
–
4,140
–
1
31
7,262
–
–
–
818
–
–
Derivatives24 ...............................
383,393
79,243
27,105
5,135
52,396
6,003
15,358
405,451
32,458
199,619
73,055
100,319
17,540
235
16,349
230
726
494,876
Loans and advances held at
amortised cost .........................
– loans and advances to banks
– loans and advances to
customers25 ..........................
Financial investments .................
– treasury and other similar
565,542
118,684
231,966
23,753
195,822
10,013
43,432
1,268
48,422
41
25,422
70
(23,972) 1,086,634
153,766
(63)
446,858
208,213
185,809
42,164
48,381
25,352
(23,909)
932,868
257,435
16,170
16,719
1,382
bills ......................................
– debt securities ......................
37,932
219,503
1,904
14,266
1,023
15,696
Other assets .................................
11,959
9,491
17,026
– endorsements and
acceptances ..........................
– accrued income and other ...
1,851
10,108
4,333
5,158
3,460
13,566
168
1,214
1,747
805
942
32
–
32
219
30
189
1,246
–
1,246
417
3
414
292,984
41,027
251,957
40,859
10,482
30,377
For footnotes, see page 291.
2009 compared with 2008
Financial instruments on which credit quality
has been assessed declined by 8 per cent to
US$2,216 billion at 31 December 2009, of which
US$1,466 billion was classified as ‘strong’,
representing 66 per cent (2008: 66 per cent) of the
total of such financial instruments. This percentage
held constant in 2009 as management actions to
mitigate the Group’s exposure to credit risk offset
the effects on credit quality of the global economic
slowdown. The proportion of financial instruments
classified as ‘medium-good’ increased by nearly one
percentage point to 16.4 per cent. The proportion of
‘medium-satisfactory’ declined by one percentage
point to 12.5 per cent. The proportion of ‘sub-
standard’ rose marginally.
Factors contributing to the relative improvement
in credit quality included the run-off of the consumer
finance exit portfolios in the US, while factors
contributing to relative deterioration in credit quality
included higher delinquency levels in personal and
commercial lending.
Derivative assets on which credit quality has
been assessed decreased to US$251 billion at the end
of 2009 and led to a reduction in balances in each of
the credit risk categories. The decline in the overall
balance was driven mainly by a reduction in foreign
exchange, interest rate and credit derivatives as
lower levels of volatility within the financial
markets, steepening yield curves and narrowing
credit spreads led to a fall in the fair value of
outstanding derivative contracts.
228
Financial investments on which credit quality
has been assessed increased by 23 per cent to
US$360 billion, with a significant increase in the
balance classified as ‘strong’. This reflected the
investment of surplus funds in government-
guaranteed, agency, supranational and government
debt securities in line with the bank’s risk appetite.
Past due but not impaired gross financial
instruments
(Audited)
Examples of exposures past due but not impaired
include overdue loans fully secured by cash
collateral; mortgages that are individually assessed
for impairment, and that are in arrears more than 90
days, but where the value of collateral is sufficient
to repay both the principal debt and all potential
interest for at least one year; and short-term trade
facilities past due more than 90 days for technical
reasons such as delays in documentation, but where
there is no concern over the creditworthiness of the
counterparty.
Past due but not impaired loans and advances to customers and banks by geographical region
(Audited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific7
US$m
Middle
East7
US$m
Gross
loans and
advances
past due not
impaired
US$m
North
America
US$m US$m
Latin
America
At 31 December 2009 ........................................
At 31 December 2008 .........................................
3,759
3,800
1,165
1,805
1,996
1,863
1,661
2,457
27,989
35,247
3,508
3,250
40,078
48,422
For footnote, see page 291.
Past due but not impaired loans and advances to customers and banks by industry sector
(Audited)
Banks .......................................................................................................................................................
Customers ................................................................................................................................................
Personal ...............................................................................................................................................
Corporate and commercial ..................................................................................................................
Financial ..............................................................................................................................................
At 31 December
2009
US$m
12
40,066
34,306
5,522
238
40,078
Ageing analysis of days past due but not impaired gross financial instruments
(Audited)
At 31 December 2009
Loans and advances held at amortised cost ..........................
– loans and advances to banks .........................................
– loans and advances to customers ..................................
Other assets ...........................................................................
– endorsements and acceptances ......................................
– other ...............................................................................
Up to 29
days
US$m
24,330
12
24,318
609
9
600
30-59
days
US$m
9,920
–
9,920
130
1
129
60-89
days
US$m
5,259
–
5,259
63
–
63
90-179
days
US$m
180 days
and over
US$m
355
–
355
24
1
23
214
–
214
82
1
81
2008
US$m
41
48,381
39,592
8,603
186
48,422
Total
US$m
40,078
12
40,066
908
12
896
24,939
10,050
5,322
379
296
40,986
229
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Credit quality > Past due but not impaired // Impaired loans and advances / Impairment allowances
At 31 December 2008
Items in the course of collection from other banks ..............
Loans and advances held at amortised cost ..........................
– loans and advances to banks .........................................
– loans and advances to customers ..................................
Financial investments
– debt securities ................................................................
Other assets ...........................................................................
– endorsements and acceptances ......................................
– other ...............................................................................
Up to 29
days
US$m
66
31,034
41
30,993
32
45
21
24
30-59
days
US$m
–
10,814
–
10,814
–
22
6
16
60-89
days
US$m
–
5,493
–
5,493
–
118
1
117
90-179
days
US$m
180 days
and over
US$m
–
621
–
621
–
7
2
5
–
460
–
460
–
27
–
27
Total
US$m
66
48,422
41
48,381
32
219
30
189
31,177
10,836
5,611
628
487
48,739
Impaired loans and advances
Impaired loans and advances to customers and banks by industry sector
(Audited)
Impaired loans and advances at
31 December 2009
Collectively
assessed
US$m
Individually
assessed
US$m
Total
US$m
Individually
assessed26
US$m
Impaired loans and advances at
31 December 2008
Collectively
Banks ..........................................................
Customers ...................................................
Personal8 .................................................
Corporate and commercial .....................
Financial .................................................
239
14,767
1,977
11,839
951
–
15,839
15,451
387
1
239
30,606
17,428
12,226
952
70
7,922
1,538
6,086
298
assessed26
US$m
–
17,430
17,071
357
2
Total
US$m
70
25,352
18,609
6,443
300
15,006
15,839
30,845
7,992
17,430
25,422
For footnote, see page 291.
Collateral and other credit enhancements
obtained
(Audited)
HSBC obtained assets by taking possession of
collateral held as security, or calling upon other
credit enhancements, as follows:
Nature of assets
Residential property .....................
Commercial and industrial
property ...................................
Other ............................................
Carrying amount
obtained in:
2009
US$m
2008
US$m
1,587
93
355
2,035
2,562
21
382
2,965
Repossessed properties are made available for
sale in an orderly fashion, with the proceeds used to
reduce or repay the outstanding indebtedness. If
excess funds arise after the debt has been repaid,
they are made available either to repay other secured
lenders with lower priority or are returned to the
customer. HSBC does not generally occupy
repossessed properties for its business use.
Impairment allowances and charges on
loans and advances to customers and banks
(Audited)
The tables below analyse by geographical region the
impairment allowances recognised for impaired
loans and advances that are either individually
assessed or collectively assessed, and collective
impairment allowances on loans and advances
classified as not impaired.
230
Impairment allowances on loans and advances to customers by geographical region
(Audited)
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific7
US$m
Middle
East7
US$m
Latin
North
America
Total
America
US$m US$m US$m
At 31 December 2009
Gross loans and advances
Individually assessed impaired loans27 .....................
8,800
823
1,006
1,310
1,990
838
14,767
Collectively assessed28 ..............................................
Impaired loans8,27 ..................................................
Non-impaired loans29 ...........................................
436,816
1,922
434,894
99,362
18
99,344
80,033
194
79,839
22,912
336
22,576
218,539
11,256
207,283
49,344
2,113
47,231
907,006
15,839
891,167
Total gross loans and advances8 ...............................
445,616
100,185
81,039
24,222
220,529
50,182
921,773
Impairment allowances
Individually assessed ............................................
Collectively assessed8 ..........................................
Total impairment allowances8 ..................................
3,742
2,393
6,135
490
314
804
508
488
996
688
690
650
13,026
416
2,137
6,494
19,048
1,378
13,676
2,553
25,542
Net loans and advances ............................................
439,481
99,381
80,043
22,844
206,853
47,629
896,231
Individually assessed allowances as a
percentage of individually assessed loans
and advances ........................................................
Collectively assessed allowances as a
percentage of collectively assessed loans
and advances ........................................................
Total allowances as a percentage of total
gross loans and advances .....................................
%
%
%
%
%
%
%
42.5
59.5
50.5
52.5
32.7
49.7
44.0
0.5
1.4
0.3
0.8
0.6
1.2
3.0
5.7
6.0
4.3
6.2
5.1
2.1
2.8
At 31 December 2008
Gross loans and advances
Individually assessed impaired loans26,27 ..................
4,817
813
705
160
832
595
7,922
US$m
US$m
US$m
US$m
US$m
US$m US$m
Collectively assessed28 ..............................................
Impaired loans26,27 ................................................
Non-impaired loans29 ...........................................
425,233
1,957
423,276
100,140
39
100,101
80,769
130
80,639
27,549
119
27,430
271,472
13,453
258,019
43,692
1,732
41,960
948,855
17,430
931,425
Total gross loans and advances ................................
430,050
100,953
81,474
27,709
272,304
44,287
956,777
Impairment allowances
Individually assessed ............................................
Collectively assessed ............................................
Total impairment allowances ...................................
2,005
1,854
3,859
411
322
733
316
497
813
132
282
414
192
15,898
228
1,772
3,284
20,625
16,090
2,000
23,909
Net loans and advances ............................................
426,191
100,220
80,661
27,295
256,214
42,287
932,868
Individually assessed allowances as a
percentage of individually assessed loans
and advances ........................................................
Collectively assessed allowances as a
percentage of collectively assessed loans
and advances ........................................................
Total allowances as a percentage of total
gross loans and advances .....................................
For footnotes, see page 291.
%
%
%
%
%
%
%
41.6
50.6
44.8
82.5
23.1
38.3
41.5
0.4
0.9
0.3
0.7
0.6
1.0
1.0
1.5
5.9
4.1
5.9
4.5
2.2
2.5
231
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Impairment allowances > Movements
Impairment allowances on loans and advances to customers and banks by industry sector
(Audited)
Individually
assessed
allowances
US$m
At 31 December 2009
Collectively
assessed
allowances
US$m
Total
allowances
US$m
Individually
assessed
allowances
US$m
At 31 December 2008
Collectively
assessed
allowances
US$m
Total
allowances
US$m
Banks30 ........................................................
Customers ...................................................
Personal8 .................................................
Corporate and commercial .....................
Financial .................................................
107
6,494
572
5,528
394
–
19,048
16,517
2,354
177
107
25,542
17,089
7,882
571
63
3,284
312
2,845
127
–
20,625
18,657
1,795
173
63
23,909
18,969
4,640
300
6,601
19,048
25,649
3,347
20,625
23,972
For footnotes, see page 291.
Impairment allowances as a percentage of loans and advances31
(Unaudited)
Banks
Individually assessed impairment allowances32 ..................................................................................
Customers32 ..............................................................................................................................................
Individually assessed impairment allowances32 ..................................................................................
Collectively assessed impairment allowances32 ..................................................................................
For footnotes, see page 291.
Movement in impairment allowances on loans and advances
(Audited)
At 31 December
2009
%
0.09
2.96
0.75
2.21
2008
%
0.06
2.63
0.36
2.27
Customers
Collectively
Individually
assessed
US$m
3,284
(1,563)
128
4,388
257
6,494
2,699
(824)
113
2,010
(714)
3,284
assessed
US$m
20,625
(23,242)
756
20,484
425
19,048
16,506
(17,131)
721
22,067
(1,538)
20,625
Total
US$m
23,972
(24,840)
890
24,942
685
25,649
19,212
(17,955)
834
24,131
(2,250)
23,972
At 1 January 2009 .....................................................................
8 ................................................................
Amounts written off
Recoveries of loans and advances written off in
previous years .....................................................................
Charge to income statement .....................................................
Exchange and other movements ...............................................
At 31 December 2009 ..............................................................
At 1 January 2008 .....................................................................
Amounts written off .................................................................
Recoveries of loans and advances written off in
previous years .....................................................................
Charge to income statement .....................................................
Exchange and other movements ...............................................
At 31 December 2008 ...............................................................
For footnote, see page 291.
Banks
individually
assessed
US$m
63
(35)
6
70
3
107
7
–
–
54
2
63
232
Movement in impairment allowances by industry sector
(Audited)
Impairment allowances at 1 January ...........................................
23,972
19,212
13,585
11,366
12,559
2009
US$m
2008
US$m
2007
US$m
2006
US$m
2005
US$m
Amounts written off ....................................................................
Personal2 ..................................................................................
– residential mortgages2 ......................................................
– other personal2 ..................................................................
Corporate and commercial ......................................................
– commercial, industrial and international trade ................
– commercial real estate and other property-related ..........
– other commercial .............................................................
Financial33 ................................................................................
Recoveries of amounts written off in previous years...................
Personal ...................................................................................
– residential mortgages .......................................................
– other personal ...................................................................
Corporate and commercial ......................................................
– commercial, industrial and international trade ................
– commercial real estate and other property-related ..........
– other commercial .............................................................
Financial33 ................................................................................
Charge to income statement34 ......................................................
Personal ...................................................................................
– residential mortgages .......................................................
– other personal ...................................................................
Corporate and commercial ......................................................
– commercial, industrial and international trade ................
– commercial real estate and other property-related ..........
– other commercial .............................................................
Financial33 ................................................................................
Governments ...........................................................................
Exchange and other movements ..................................................
(24,840)
(22,703)
(4,704)
(17,999)
(1,984)
(1,093)
(327)
(564)
(153)
890
712
61
651
170
123
9
38
8
24,942
19,781
4,185
15,596
4,711
2,392
1,492
827
450
–
685
Impairment allowances at 31 December8 ................................
25,649
(17,955)
(16,625)
(2,110)
(14,515)
(1,294)
(789)
(115)
(390)
(36)
834
686
19
667
142
76
6
60
6
24,131
20,950
5,000
15,950
2,879
1,573
755
551
302
–
(2,250)
23,972
(12,844)
(11,670)
(930)
(10,740)
(1,163)
(897)
(98)
(168)
(11)
1,005
837
19
818
157
74
29
54
11
17,177
15,968
1,840
14,128
1,176
897
152
127
36
(3)
289
(9,473)
(8,281)
(628)
(7,653)
(1,153)
(782)
(111)
(260)
(39)
779
605
19
586
163
88
21
54
11
10,547
9,929
1,096
8,833
664
503
75
86
(9)
(37)
366
(9,043)
(8,046)
(508)
(7,538)
(984)
(673)
(117)
(194)
(13)
494
320
18
302
174
76
9
89
–
7,860
7,249
605
6,644
618
588
56
(26)
(13)
6
(504)
19,212
13,585
11,366
Impairment allowances against banks:
– individually assessed ............................................................
107
63
7
7
9
Impairment allowances against customers:
– individually assessed ............................................................
– collectively assessed8 ...........................................................
Impairment allowances at 31 December8 ....................................
Impairment allowances against customers as a percentage of
loans and advances to customers:
– individually assessed ............................................................
– collectively assessed .............................................................
At 31 December ...........................................................................
For footnotes, see page 291.
6,494
19,048
25,649
3,284
20,625
23,972
2,699
16,506
19,212
2,565
11,013
13,585
2,683
8,674
11,366
%
%
%
%
%
0.70
2.07
2.77
0.34
2.16
2.50
0.27
1.65
1.92
0.29
1.25
1.54
0.36
1.16
1.52
233
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Impairment allowances > Movements
Movement in impairment allowances by industry sector and by geographical region
(Audited)
2009
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific7
US$m
Middle
East7
US$m
Latin
North
Total
America
America
US$m US$m US$m
Impairment allowances at 1 January ........................
3,922
Amounts written off .................................................
Personal2 ................................................................
– residential mortgages2 ......................................
– other personal2 .................................................
(2,781)
(1,876)
(41)
(1,835)
Corporate and commercial .....................................
(810)
– commercial, industrial and international
733
(357)
(240)
(1)
(239)
(117)
trade ..................................................................
(438)
(114)
– commercial real estate and other property-
related ...............................................................
– other commercial .............................................
Financial33 ..............................................................
Recoveries of amounts written off in previous
years .......................................................................
Personal ..................................................................
– residential mortgages .......................................
– other personal ...................................................
Corporate and commercial .....................................
– commercial, industrial and international
trade ..................................................................
– commercial real estate and other property-
related ...............................................................
– other commercial .............................................
Financial33 ..............................................................
Charge to income statement34 ...................................
Personal ..................................................................
– residential mortgages .......................................
– other personal ...................................................
Corporate and commercial .....................................
– commercial, industrial and international
trade ..................................................................
– commercial real estate and other property-
related ...............................................................
– other commercial .............................................
Financial33 ..............................................................
Exchange and other movements ...............................
(148)
(224)
(95)
265
200
28
172
57
52
5
–
8
4,409
1,995
158
1,837
2,163
963
958
242
251
412
Impairment allowances at 31 December8 .............
6,227
Impairment allowances against banks:
– individually assessed .........................................
92
Impairment allowances against customers:
– individually assessed .........................................
– collectively assessed8,35 ......................................
Impairment allowances at 31 December8 .................
Impairment allowances against customers as a
percentage of loans and advances to customers:
– individually assessed .........................................
– collectively assessed35 .......................................
At 31 December ........................................................
3,742
2,393
6,227
%
0.84
0.54
1.38
(1)
(2)
–
34
32
6
26
2
2
–
–
–
450
206
(16)
222
244
164
70
10
–
(56)
804
–
490
314
804
%
0.49
0.31
0.80
813
(850)
(787)
(9)
(778)
(63)
(50)
(3)
(10)
–
132
123
1
122
9
7
1
1
–
874
654
14
640
220
154
29
37
–
27
414
16,090
2,000
23,972
(384)
(376)
–
(376)
(17,792)
(17,204)
(4,610)
(12,594)
(2,676)
(2,220)
(43)
(2,177)
(24,840)
(22,703)
(4,704)
(17,999)
(8)
(8)
–
–
–
27
25
–
25
2
2
–
–
–
(534)
(452)
(1,984)
(228)
(255)
(1,093)
(163)
(143)
(54)
(12)
(185)
(4)
(327)
(564)
(153)
93
60
7
53
33
16
2
15
–
339
272
19
253
67
44
1
22
–
890
712
61
651
170
123
9
38
8
1,333
593
20
573
706
413
106
187
34
3
15,372
14,390
3,955
10,435
818
309
288
221
164
(87)
2,504
1,943
54
1,889
24,942
19,781
4,185
15,596
560
4,711
389
41
130
1
386
2,392
1,492
827
450
685
996
1,393
13,676
2,553
25,649
–
508
488
996
%
0.63
0.60
1.23
15
688
690
–
–
107
650
13,026
416
2,137
6,494
19,048
1,393
13,676
2,553
25,649
%
%
%
%
2.84
2.85
5.69
0.29
5.91
0.83
4.26
6.20
5.09
0.70
2.07
2.77
234
Europe
US$m
Hong
Kong
US$m
2008
Rest of
Asia-
Pacific7
US$m
Middle
East7
US$m
North
Latin
America
Total
America
US$m US$m US$m
Impairment allowances at 1 January ........................
3,938
Amounts written off .................................................
Personal ..................................................................
– residential mortgages .......................................
– other personal ...................................................
(2,483)
(1,947)
(3)
(1,944)
Corporate and commercial .....................................
(515)
– commercial, industrial and international
376
(219)
(179)
(1)
(178)
(38)
trade ..................................................................
(367)
(33)
– commercial real estate and other property-
related ...............................................................
– other commercial .............................................
Financial33 ..............................................................
Recoveries of amounts written off in previous
years .......................................................................
Personal ..................................................................
– residential mortgages .......................................
– other personal ...................................................
Corporate and commercial .....................................
– commercial, industrial and international
trade ..................................................................
– commercial real estate and other property-
related ...............................................................
– other commercial .............................................
Financial33 ..............................................................
Charge to income statement34 ...................................
Personal ..................................................................
– residential mortgages .......................................
– other personal ...................................................
Corporate and commercial .....................................
– commercial, industrial and international
trade ..................................................................
– commercial real estate and other property-
related ...............................................................
– other commercial .............................................
Financial33 ..............................................................
(77)
(71)
(21)
294
275
–
275
19
19
–
–
–
3,411
1,961
18
1,943
1,304
537
540
227
146
Exchange and other movements ...............................
(1,238)
Impairment allowances at 31 December ..................
3,922
Impairment allowances against banks:
– individually assessed .........................................
63
Impairment allowances against customers:
– individually assessed .........................................
– collectively assessed35 .......................................
Impairment allowances at 31 December ..................
Impairment allowances against customers as a
percentage of loans and advances to customers:
– individually assessed .........................................
– collectively assessed35 .......................................
At 31 December ........................................................
For footnotes, see page 291.
2,005
1,854
3,922
%
0.47
0.43
0.90
650
(674)
(646)
(6)
(640)
(28)
(16)
(1)
(11)
–
107
97
1
96
6
5
1
–
4
815
641
9
632
173
132
17
24
1
(80)
813
–
316
497
813
%
(2)
(3)
(2)
39
36
7
29
3
1
–
2
–
556
160
–
160
363
316
28
19
33
(19)
733
–
411
322
733
%
0.41
0.32
0.73
0.39
0.61
1.00
235
276
11,980
1,992
19,212
(164)
(153)
–
(153)
(11)
(12,215)
(11,989)
(2,030)
(9,959)
(2,200)
(1,711)
(70)
(1,641)
(17,955)
(16,625)
(2,110)
(14,515)
(214)
(488)
(1,294)
(6)
(3)
(2)
–
30
27
–
27
2
1
–
1
1
274
219
20
199
47
39
4
4
8
(7)
(153)
(214)
(789)
(12)
(49)
(12)
100
54
–
54
45
27
5
13
1
16,589
16,006
4,943
11,063
472
213
132
127
111
(20)
(254)
(1)
(115)
(390)
(36)
264
197
11
186
67
23
–
44
–
834
686
19
667
142
76
6
60
6
2,486
1,963
10
1,953
24,131
20,950
5,000
15,950
520
2,879
336
1,573
34
150
3
755
551
302
(364)
(542)
(2,250)
414
16,090
2,000
23,972
–
132
282
414
%
0.48
1.02
1.50
–
–
63
192
15,898
228
1,772
3,284
20,625
16,090
2,000
23,972
%
%
%
0.07
5.84
0.51
4.00
5.91
4.51
0.34
2.16
2.50
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Impairment allowances > Net loan impairment charge
Individually and collectively assessed impairment charge to income statement by industry segment
(Unaudited)
Individually
assessed
US$m
2009
Collectively
assessed
US$m
Banks ..................................................................
Personal ...............................................................
Residential mortgages ....................................
Other personal ................................................
Corporate and commercial .................................
Commercial, industrial and international
70
316
171
145
3,699
trade ............................................................
1,681
Commercial real estate and other
property-related ..........................................
Other commercial ...........................................
Financial .............................................................
Total charge to income statement .......................
1,330
688
373
4,458
Net loan impairment charge to the income statement
(Unaudited)
Individually assessed impairment allowances
New allowances .......................................................................
Release of allowances no longer required ..............................
Recoveries of amounts previously written off ........................
Collectively assessed impairment allowances
New allowances net of allowance releases .............................
Release of allowances no longer required ..............................
Recoveries of amounts previously written off ........................
Total charge for impairment losses .............................................
Banks ......................................................................................
Customers ...............................................................................
20,484
24,942
2,064
22,067
24,131
Individually
assessed
2008
Collectively
assessed
US$m
US$m
54
110
26
84
–
20,840
4,974
15,866
1,782
1,097
Total
US$m
54
20,950
5,000
15,950
2,879
912
613
257
118
661
1,573
142
294
130
755
551
248
Total
US$m
70
19,781
4,185
15,596
4,711
2,392
1,492
827
380
2008
US$m
2,742
(565)
(113)
2,064
22,788
–
(721)
22,067
24,131
54
24,077
%
2.17
2007
US$m
2006
US$m
2005
US$m
1,533
(608)
(129)
796
17,257
–
(876)
16,381
17,177
–
17,177
1,297
(711)
(128)
458
10,740
–
(651)
10,089
10,547
(3)
10,550
1,715
(998)
(199)
518
8,425
(788)
(295)
7,342
7,860
(7)
7,867
%
%
%
1.39
0.99
0.90
–
19,465
4,014
15,451
1,012
711
162
139
7
2009
US$m
5,173
(581)
(134)
4,458
21,240
–
(756)
20,484
24,942
70
24,872
%
Charge for impairment losses as a percentage of closing
gross loans and advances ........................................................
2.26
At 31 December
Impaired loans8 ............................................................................
Impairment allowances8 ..............................................................
US$m
US$m
US$m
US$m
US$m
30,845
25,649
25,422
23,972
19,594
19,212
15,086
13,585
12,360
11,366
For footnote, see page 291.
236
Net loan impairment charge to the income statement by geographical region
(Unaudited)
2009
Individually assessed impairment allowances
New allowances ....................................................
Release of allowances no longer required ...........
Recoveries of amounts previously written off .....
Collectively assessed impairment allowances
New allowances net of allowance releases ..........
Recoveries of amounts previously written off .....
Total charge for impairment losses ..........................
Banks ...................................................................
Customers ............................................................
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific7
US$m
Middle
East7
US$m
Latin
North
America
Total
America
US$m US$m US$m
2,573
(255)
(70)
2,248
2,356
(195)
2,161
4,409
55
4,354
%
315
(64)
(9)
242
233
(25)
208
450
–
450
%
341
(82)
(15)
244
747
(117)
630
874
–
874
%
598
(16)
(2)
580
778
(25)
753
1,052
(112)
(24)
916
294
(52)
(14)
228
5,173
(581)
(134)
4,458
14,525
(69)
2,601
(325)
21,240
(756)
14,456
2,276
20,484
1,333
15
1,318
15,372
–
15,372
2,504
–
2,504
24,942
70
24,872
%
%
%
%
Charge for impairment losses as a percentage
of closing gross loans and advances ....................
0.86
0.33
0.75
4.08
6.52
3.64
2.26
At 31 December 2009
Impaired loans8 .........................................................
Impairment allowances8 ...........................................
2008
Individually assessed impairment allowances
New allowances ....................................................
Release of allowances no longer required ...........
Recoveries of amounts previously written off .....
Collectively assessed impairment allowances
New allowances net of allowance releases ..........
Recoveries of amounts previously written off .....
Total charge for impairment losses ..........................
Banks ...................................................................
Customers ............................................................
US$m
US$m
US$m
US$m
US$m
US$m
US$m
10,873
6,227
846
804
1,201
996
1,666
1,393
13,308
13,676
2,951
2,553
30,845
25,649
1,567
(340)
(38)
1,189
2,478
(256)
2,222
3,411
54
3,357
%
365
(25)
(10)
330
255
(29)
226
556
–
556
%
223
(53)
(17)
153
752
(90)
662
815
–
815
%
30
(36)
(3)
(9)
310
(27)
283
274
–
274
%
397
(80)
(40)
277
160
(31)
(5)
124
2,742
(565)
(113)
2,064
16,372
(60)
2,621
(259)
22,788
(721)
16,312
2,362
22,067
16,589
–
16,589
2,486
–
2,486
24,131
54
24,077
%
%
%
Charge for impairment losses as a percentage
of closing gross loans and advances ....................
0.68
0.43
0.74
0.78
5.85
4.22
2.17
At 31 December 2008
Impaired loans ..........................................................
Impairment allowances .............................................
For footnotes, see page 291.
US$m
US$m
US$m
US$m
US$m
US$m
US$m
6,844
3,922
852
733
835
813
279
414
14,285
16,090
2,327
2,000
25,422
23,972
237
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Impairment allowances > Charge // Impaired loans > 2009
Charge for impairment losses as a percentage of average gross loans and advances to customers8
(Unaudited)
New allowances net of allowance releases .................................
Recoveries ...................................................................................
Total charge for impairment losses .............................................
Amount written off net of recoveries ..........................................
For footnote, see page 291.
2009
%
2.92
(0.10)
2.82
2.71
2008
%
2.54
(0.09)
2.45
1.75
2007
%
2.09
(0.12)
1.97
1.36
2006
%
1.49
(0.10)
1.39
1.15
2005
%
1.25
(0.09)
1.16
1.26
Charge for impairment losses as a percentage of average gross loans and advances to customers by
geographical region8
(Unaudited)
Europe
%
Hong
Kong
%
Rest of
Asia-
Pacific7
%
Middle
East7
%
North
America
%
Latin
America
%
2009
New allowances net of allowance releases ..............
Recoveries ................................................................
1.19
(0.07)
0.49
(0.03)
1.31
(0.17)
5.25
(0.11)
6.24
(0.04)
6.11
(0.73)
Total charge for impairment losses ..........................
Amount written off net of recoveries .......................
1.12
0.63
0.46
0.33
1.14
0.94
5.14
1.40
6.20
5.38
7.14
5.03
2008
New allowances net of allowance releases ..............
Recoveries ................................................................
Total charge for impairment losses ..........................
Amount written off net of recoveries .......................
For footnotes, see page 291.
0.86
(0.07)
0.63
(0.04)
1.04
(0.12)
1.12
(0.11)
5.73
(0.03)
5.32
(0.51)
0.79
0.52
0.59
0.19
0.92
0.64
1.01
0.50
5.70
4.81
4.16
3.73
Total
%
2.92
(0.10)
2.82
2.71
2.54
(0.09)
2.45
1.75
Impaired loans and new loan impairment
allowances
2009 compared with 2008
(Unaudited)
Loan impairment charges increased by 3 per cent to
US$24.9 billion from US$24.1 billion in 2008. The
commentary on net loan impairment allowances is
on a constant currency basis while the commentary
on impaired loans is on a reported basis.
New allowances for loan impairment charges
rose by 7 per cent compared with 2008 to
US$26.4 billion. Releases and recoveries of
allowances increased by 17 per cent to US$1.5 billion.
Total impaired loans to customers at 31 December
2009 were US$31 billion, an increase of 21 per cent
compared with the end of 2008. Impaired loans
remained at 3 per cent of customer loans and
advances at 31 December 2009.
In Europe, new loan impairment allowances
increased by 37 per cent to US$4.9 billion in 2009,
driven by credit quality deterioration in individually
impaired loans. Impaired loans increased by 59 per
cent to US$10.9 billion at 31 December 2009.
In the UK, higher new loan impairment
allowances reflected a small number of large
individually assessed impairments against corporate
and commercial exposures, together with the effects
of credit quality deterioration in the personal lending
portfolio. In the unsecured portfolios, credit quality
declined in the cards and personal loans portfolios
reflecting the deterioration in the economic
environment. In the residential mortgage portfolios,
credit quality remained strong despite higher
unemployment in the UK. HSBC’s exposure to this
market remained well secured with typical loan-to-
value ratios of below 60 per cent.
In Europe, releases and recoveries were
US$520 million, a decrease of 5 per cent compared
with 31 December 2008.
In Hong Kong, new loan impairment
allowances were US$548 million, a decline of 12 per
cent compared with 2008. Credit quality within the
commercial lending portfolios improved compared
with 2008, when significant impairments were taken
on some exporters due to the contraction in global
trade. New loan impairment allowances increased in
the unsecured personal portfolios, reflecting the rise
238
in unemployment and bankruptcy filings. Impaired
loans were broadly stable at US$846 million.
In Rest of Asia-Pacific, new loan impairment
allowances rose by 18 per cent to US$1.1 billion,
mainly due to increased delinquencies on unsecured
lending, particularly in the credit card and personal
lending portfolios in India and, to a lesser extent,
in Indonesia. In the corporate and commercial
portfolios, new loan impairment allowances
increased, reflecting a deterioration in India’s
economic conditions. Impaired loans increased
by 44 per cent to US$1.2 billion.
Releases and recoveries in the Rest of
Asia-Pacific region rose by 42 per cent to
US$214 million at 31 December 2009.
New loan impairment allowances in the Middle
East increased significantly from a low base, to
US$1.4 billion. The increase reflected higher charges
in the UAE, largely in Dubai, due to a marked
deterioration in credit quality which particularly
affected the real estate and construction industries.
Infrastructure projects were delayed or cancelled and
unemployment levels increased. Delinquency rates
rose as a result, particularly in the credit card and
personal loan portfolios. Impaired loans increased by
US$1.4 billion to US$1.7 billion.
New loan impairment allowances rose by
7 per cent to US$26.4 billion despite falls of
12 per cent in Hong Kong and 7 per cent in
North America.
In North America, new loan impairment
allowances declined by 7 per cent to US$15.6 billion
against the backdrop of a widespread rise in
unemployment, continued weakness in the US
economy and housing markets, higher levels of
personal bankruptcy filings and portfolio seasoning.
This decline was the result of lower loan impairment
charges in the Mortgage Services real estate secured,
credit card and vehicle finance portfolios, partially
offset by higher loan impairment charges in the
branch-based Consumer Lending business. Apart
from the changes made to the write-off period, the
main contributing factors were as follows:
•
•
new loan impairment allowances in the
Mortgage Services business decreased in 2009
as the portfolio continued to run off. While loss
severities increased compared with 2008, a
higher percentage of impairment was in respect
of first lien loans which have less severity than
second lien loans;
new loan impairment allowances in the vehicle
finance loan portfolio decreased as a result of
239
•
lower loan levels reflecting the discontinuance
of vehicle finance originations in July 2008. In
addition, loss severities decreased as prices on
repossessed vehicles improved; and
new loan impairment allowances in the branch-
based Consumer Lending business increased in
2009, primarily in the unsecured portfolio due to
the deterioration in the 2006 and 2007 vintages
which were more pronounced in certain
geographic regions and, to a lesser extent, first
lien real estate secured loans. These increases
were partially offset by lower new loan
impairment allowances for second lien real
estate secured loans.
New loan impairment allowances in the Cards
and Retail Services portfolios declined due to lower
outstanding balances and management action taken
in the past two years to constrain origination
activities in riskier segments. In addition,
impairment provisioning reflects an improved
outlook on future loss estimates as the impact of
higher unemployment rates on losses has not been as
severe as initially expected due, in part, to lower fuel
prices and the boost to cash flow provided by
government stimulus programmes that meaningfully
benefit non-prime customers. In HSBC Bank USA
personal lending portfolios, new loan impairment
allowances increased, mainly in prime residential
mortgage lending.
New loan impairment allowances in the
corporate and commercial lending portfolios
increased as the weaker economy affected firms in
the commercial real estate and construction sectors
in the US. In Canada, higher new loan impairment
allowances were primarily against exposures in the
commercial real estate, manufacturing and trade
sectors.
In North America, releases and recoveries
increased by 14 per cent to US$205 million at
31 December 2009 due to an increase in the
repayment of loans previously impaired in the
corporate, commercial and financial portfolios.
Impaired loans decreased by 7 per cent to
US$13.3 billion at 31 December 2009.
New loan impairment allowances in Latin
America increased by 18 per cent to US$2.9 billion,
while impaired loans rose by 27 per cent to
US$3.0 billion. The increase in new loan impairment
allowances in Brazil was driven by higher
delinquencies, mainly in credit cards, overdrafts and
payroll loans, due to higher unemployment. In the
commercial portfolio, higher new loan impairment
allowances reflected the challenging economic
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Impaired loans > 2008 // HSBC Holdings / Risk elements
environment which particularly affected the business
banking and mid-market business segments.
Releases and recoveries in Latin America
increased by 56 per cent to US$391 million at
31 December 2009.
For an analysis of loan impairment charges and
other credit risk provisions by customer group, see
page 35.
2008 compared with 2007
(Unaudited)
Loan impairment charges increased by 40 per cent to
US$24.1 billion from US$17.2 billion in 2007. The
commentary that follows is on a constant currency
basis.
New allowances for loan impairment charges
rose by 37 per cent compared with 2007. Releases
and recoveries of allowances declined by 10 per cent
to US$1.4 billion. Impaired loans were 3 per cent of
customer loans and advances at 31 December 2008,
compared with 2 per cent at 31 December 2007.
In Europe, new loan impairment charges were
US$4.0 billion, a rise of 24 per cent compared with
2007. Impaired loans increased by 32 per cent to
US$6.8 billion at 31 December 2008.
Loan impairment charges increased in Global
Banking and Markets following a significant charge
against a single European commercial real estate
corporate customer. Impairment charges against
banks rose in the UK due to exposure to the
Icelandic banks in 2008. New loan impairment
charges rose in Turkey as delinquency rates
increased across credit cards, personal loans and
corporate lending in light of the deteriorating
economic environment. Elsewhere, impairment
charges on the commercial portfolio rose in the UK,
particularly in the final quarter of 2008 as the
weakening property market led to higher impairment
charges against construction companies and
businesses dependent upon the real estate sector. In
France, the impact of declining commercial credit
quality more than offset lower balances. Impairment
allowances against firms in the financial sector rose
due to exposure to a single asset management firm in
the UK. Credit quality in the UK personal lending
portfolio remained broadly stable, reflecting the
strength of HSBC’s loan book in a period of
significant economic uncertainty. Mortgage lending
in the UK remained well secured as actions taken
since 2006 reduced risk exposure. Credit quality in
the unsecured portfolios of M&S Money, HSBC
Bank and Partnership Cards deteriorated slightly in
2008, particularly in the second half of the year, due
to the weakening UK economy.
240
Releases and recoveries in Europe declined by
27 per cent, driven by the deterioration in economic
conditions.
In Hong Kong, new loan impairment charges
more than doubled from a low base, driven by
deterioration in credit quality in the commercial
portfolio in the second half of the year as the
economy and trade flows weakened. Residential
mortgage lending continued to be well secured, as
regulatory restrictions constrained origination loan-
to-value ratios to below 70 per cent. Impaired loans
increased from a low base to US$852 million at
31 December 2008.
In Rest of Asia-Pacific, new loan impairment
charges rose to US$975 million, primarily in India
due to a combination of rising delinquency rates in
consumer lending as credit conditions deteriorated,
and increased lending.
In the Middle East, new loan impairment
charges rose from a low base to US$340 million, due
to rising delinquencies as growth rates declined and
the property market slowed as economic conditions
weakened because of lower oil and gas prices.
New loan impairment charges in North America
rose by 37 per cent to US$16.8 billion, driven by the
continued deterioration in credit quality in the HSBC
Finance loan portfolio and, to a lesser extent, in
HSBC USA. Impaired loans increased by 49 per cent
to US$14.3 billion at 31 December 2008.
US credit quality showed significant
deterioration across the portfolio, driven by the
continued weakness of the US economy. The reasons
behind the deterioration in US credit quality, the
effects on the US personal lending portfolio and
actions taken as a result are discussed in more detail
on page 221. Partly offsetting the effect of the
deterioration was a reduction in overall lending as
HSBC continued to reduce its exposure in the US.
In Commercial Banking, impairment charges
rose from a low base driven by deterioration in the
commercial real estate loan book in the US, and
higher impairment charges against firms in the
manufacturing, export and commercial real estate
sectors in Canada. Higher impairment charges in
Global Banking and Markets reflected weaker credit
fundamentals in the US in 2008. Impairment
allowances against firms in the financial sector rose
due to rising delinquencies, despite government
intervention.
Releases and recoveries in North America rose
by 55 per cent to US$180 million.
In Latin America, new loan impairment
charges rose by 37 per cent to US$2.8 billion.
Impaired loans increased by 37 per cent to
US$2.3 billion at 31 December 2008.
HSBC Holdings
(Audited)
The most significant increase was in Mexico,
reflecting higher impairment charges in the credit
card portfolio due to a combination of higher
average balances from organic expansion and
growing delinquency rates driven by a deterioration
in credit quality as the 2006 and 2007 vintages
continued to season and move into later stages of
delinquency. Management action to improve the
quality of new business included tightened
underwriting, enhanced collection strategies and
better managed customer acquisition channels. The
commercial portfolio in Mexico also experienced
higher impairment charges due to credit quality
deterioration among small and medium sized
enterprises as the economy weakened. In Brazil,
higher impairment charges were driven by a
combination of balance growth and credit quality
deterioration in the vehicle finance and payroll loan
portfolios.
HSBC Holdings – maximum exposure to credit risk
(Audited)
Credit risk primarily arises in HSBC Holdings from
transactions with Group subsidiaries and from
guarantees issued in support of obligations assumed
by certain Group operations in the normal conduct of
their business.
These risks are reviewed and managed within
regulatory and internal limits for exposures by the
HSBC Global Risk function, which provides high-
level centralised oversight and management of
HSBC’s credit risks worldwide.
No collateral or other credit enhancements were
held by HSBC Holdings in respect of its transactions
with subsidiaries.
HSBC Holdings’ maximum exposure to credit
risk at 31 December 2009 is shown below. Its
financial assets principally represent claims on
Group subsidiaries in Europe and North America.
Derivatives ............................................................................................................................................
Loans and advances to HSBC undertakings ........................................................................................
Financial investments ...........................................................................................................................
Financial guarantees and similar contracts ..........................................................................................
Loan and other credit-related commitments ........................................................................................
Maximum exposure
2009
US$m
2,981
23,212
2,455
35,073
3,240
66,961
2008
US$m
3,682
11,804
2,629
47,341
3,241
68,697
All of the derivative transactions are with HSBC
undertakings which are banking counterparties
(2008: 100 per cent).
The credit quality of the loans and advances to
HSBC undertakings is assessed as satisfactory risk,
with 100 per cent of the exposure being neither past
due nor impaired (2008: 100 per cent).
The long-term debt ratings of the HSBC Group
issuers of the financial investments are within the
Standard & Poor’s ratings range of A+ to A– (2008:
AA– to A).
Risk elements in the loan portfolio
(Unaudited)
The disclosure of credit risk elements in this section
reflects US accounting practice and classifications.
The purpose of the disclosure is to present within the
US disclosure framework those elements of the loan
portfolios with a greater risk of loss. The three main
classifications of credit risk elements presented are:
•
•
•
impaired loans;
unimpaired loans contractually past due 90 days
or more as to interest or principal; and
troubled debt restructurings not included in the
above.
In the following tables, HSBC presents
information on its impaired loans and advances in
accordance with the classification approach
described on page 225.
Impaired loans
Loans are classified as impaired when there is
objective evidence that not all contractual cash flows
will be received. In accordance with IFRSs, HSBC
recognises interest income on assets after they have
been written down as a result of an impairment loss.
Unimpaired loans past due 90 days or more
Loans that are subject to individual impairment
assessment and are over 90 days past due as regards
241
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Credit risk > Risk elements
principal and/or interest are classified as unimpaired
loans when the Group expects to recover the
contractual cash flows in full.
Troubled debt restructurings
The SEC requires separate disclosure of any loans
whose terms have been modified by the lender
because of the borrower’s financial difficulties, as
a concession that the lender would not otherwise
consider. These are classified as troubled debt
restructurings (‘TDR’s). The definition of TDRs
differs from the definition of renegotiated loans as
disclosed under IFRSs, see page 224, as follows.
After restructuring, TDRs may continue to be
classified as impaired, as past due but not impaired
or, where appropriate, as neither past due nor
impaired. Under IFRSs, disclosure is required of
loans that would otherwise have been classified
as past due or impaired whose terms have been
renegotiated.
Furthermore, a loan is no longer classified as
a TDR after the end of the first year following the
restructuring if the loan performs in accordance with
the new terms, and the interest rate at the time of
restructuring was a market rate for a loan with
comparable risk.
Potential problem loans
Credit risk elements also cover potential problem
loans. These are loans where information on
possible credit problems among borrowers causes
management to seriously doubt their 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, and as
discussed in ‘Areas of special interest’ on page 214.
‘Areas of special interest’ includes further disclosure
about certain homogeneous groups of loans which
are collectively assessed for impairment, and
represent the Group’s most significant exposures to
potential problem loans, including ARMs and stated-
income products. Collectively assessed loans and
advances, as set out on page 231, although not
classified as impaired until more than 90 days, are
assessed collectively for losses that have been
incurred but have not yet been individually
identified. This policy is further described on
page 203.
242
Analysis of risk elements in the loan portfolio by geographical region
(Unaudited)
Impaired loans
Europe .........................................................
Hong Kong .................................................
Rest of Asia-Pacific7 ...................................
Middle East7 ................................................
North America8 ...........................................
Latin America .............................................
Unimpaired loans contractually past
due 90 days or more as to principal
or interest
Europe .........................................................
Hong Kong .................................................
Rest of Asia-Pacific7 ...................................
Middle East7 ................................................
North America ............................................
Latin America .............................................
Troubled debt restructurings (not
included in the classifications above)
Europe .........................................................
Hong Kong .................................................
Rest of Asia-Pacific7 ...................................
Middle East7 ................................................
North America ............................................
Latin America .............................................
Trading loans classified as in default
North America ............................................
Risk elements on loans
Europe .........................................................
Hong Kong .................................................
Rest of Asia-Pacific7 ...................................
Middle East7 ................................................
North America ............................................
Latin America .............................................
Assets held for resale
Europe .........................................................
Hong Kong .................................................
Rest of Asia-Pacific7 ...................................
Middle East7 ................................................
North America ............................................
Latin America .............................................
Total risk elements
Europe .........................................................
Hong Kong .................................................
Rest of Asia-Pacific7 ...................................
Middle East7 ................................................
North America ............................................
Latin America .............................................
Loan impairment allowances as a
percentage of risk elements on loans36 ...
For footnotes, see page 291.
2009
US$m
10,873
846
1,201
1,666
13,308
2,951
30,845
57
4
36
215
217
40
569
436
236
135
103
9,613
1,518
12,041
798
11,366
1,086
1,372
1,984
23,936
4,509
44,253
52
10
8
2
707
153
932
11,418
1,096
1,380
1,986
24,643
4,662
45,185
2008
US$m
6,844
852
835
279
14,285
2,327
25,422
635
43
84
190
108
21
1,081
366
165
90
29
5,618
1,067
7,335
561
7,845
1,060
1,009
498
20,572
3,415
34,399
81
26
11
2
1,758
113
1,991
7,926
1,086
1,020
500
22,330
3,528
36,390
At 31 December
2007
US$m
2006
US$m
6,266
433
779
309
9,662
2,145
5,858
454
807
381
6,108
1,478
2005
US$m
5,081
506
596
349
4,602
1,226
19,594
15,086
12,360
202
49
94
62
24
421
852
648
146
23
11
3,322
848
4,998
675
7,116
628
896
382
13,683
3,414
26,119
59
29
5
2
1,172
101
1,368
7,175
657
901
384
14,855
3,515
27,487
237
79
75
3
78
165
637
360
189
56
17
1,712
915
3,249
127
6,455
722
938
401
8,025
2,558
592
74
40
–
32
4
742
239
198
96
25
1,417
878
2,853
11
5,912
778
732
374
6,062
2,108
19,099
15,966
30
42
15
2
999
91
1,179
6,485
764
953
403
9,024
2,649
205
49
29
2
582
103
970
6,117
827
761
376
6,644
2,211
20,278
16,936
%
%
%
%
58.8
70.8
75.5
71.6
%
71.2
243
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Liquidity and funding > Policies and procedures / Primary sources of funding / Liquidity risk management
Liquidity and funding
(Audited)
Liquidity risk is the risk that HSBC does not have
sufficient financial resources to meet its obligations
as they fall due, or will have to do so at an excessive
cost. This risk arises from mismatches in the timing
of cash flows. Funding risk (a form of liquidity risk)
arises when the liquidity needed to fund illiquid asset
positions cannot be obtained at the expected terms
and when required.
The objective of HSBC’s liquidity and funding
management framework is to ensure that all
foreseeable funding commitments can be met when
due, and that access to the wholesale markets is
co-ordinated and cost-effective. To this end, HSBC
maintains a diversified funding base comprising
core retail and corporate customer deposits and
institutional balances. This is augmented with
wholesale funding and portfolios of highly liquid
assets diversified by currency and maturity which
are held to enable HSBC to respond quickly and
smoothly to unforeseen liquidity requirements.
HSBC requires its operating entities to maintain
strong liquidity positions and to manage the liquidity
profiles of their assets, liabilities and commitments
with the objective of ensuring that their cash flows
are balanced appropriately and that all their
anticipated obligations can be met when due.
HSBC adapts its liquidity and funding risk
management framework in response to changes in
the mix of business that it undertakes, and to changes
in the nature of the markets in which it operates. The
Group has continuously monitored the impact of
recent market events on its liquidity positions and
has changed customer behavioural assumptions and
assumed asset liquidity characteristics where
justified. The liquidity and funding risk management
framework will continue to evolve as the Group
assimilates knowledge from the recent market events,
the effects of which are discussed more fully below.
Policies and procedures
(Audited)
The management of liquidity and funding is
primarily undertaken locally in HSBC’s operating
entities in compliance with practices and limits set
by the Risk Management Meeting (‘RMM’). These
limits vary according to the depth and liquidity of
the market in which the entities operate. It is HSBC’s
general policy that each banking entity should be
self-sufficient when funding its own operations.
Exceptions are permitted for certain short-term
treasury requirements and start-up operations or for
branches which do not have access to local deposit
244
markets. These entities are funded from HSBC’s
largest banking operations and within clearly defined
internal and regulatory guidelines and limits. The
limits place formal restrictions on the transfer of
resources between HSBC entities and reflect the
broad range of currencies, markets and time zones
within which HSBC operates.
HSBC’s liquidity and funding management
process includes:
•
projecting cash flows by major currency under
various stress scenarios and considering the
level of liquid assets necessary in relation thereto;
• monitoring balance sheet liquidity and advances
to deposits ratios against internal and regulatory
requirements;
• maintaining a diverse range of funding sources
with back-up facilities;
• managing the concentration and profile of debt
maturities;
• managing contingent liquidity commitment
exposures within pre-determined caps;
• maintaining debt financing plans;
• monitoring depositor concentration in order to
avoid undue reliance on large individual
depositors and ensure a satisfactory overall
funding mix; and
• maintaining liquidity and funding contingency
plans. These plans identify early indicators of
stress conditions and describe actions to be
taken in the event of difficulties arising from
systemic or other crises, while minimising
adverse long-term implications for the business.
Primary sources of funding
(Audited)
Current accounts and savings deposits payable on
demand or at short notice form a significant part of
HSBC’s funding, and the Group places considerable
importance on maintaining their stability. For
deposits, stability depends upon preserving depositor
confidence in HSBC’s capital strength and liquidity,
and on competitive and transparent pricing.
HSBC also 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 interbank market,
placing significantly more funds with other banks
than they themselves borrow.
The main operating subsidiary that does not
accept deposits is HSBC Finance, which is funded
principally by taking term funding in the
professional markets and securitising assets.
At 31 December 2009, US$82 billion (2008:
US$111 billion) of HSBC Finance’s liabilities were
drawn from professional markets, utilising a range
of products, maturities and currencies. As the loan
portfolios within HSBC Finance are in run off it has
not accessed the term debt markets for more than
2 years.
Cash flows payable by HSBC under financial liabilities by remaining contractual maturities
(Audited)
Due
within 3
months
US$m
Due
between
3 and 12
months
US$m
Due
between
1 and 5
years
US$m
85,922
277,071
–
1,050
300
49,493
481
25,123
439,440
87,044
15,288
541,772
82,514
332,207
–
2,713
373
56,590
686
26,180
501,263
105,952
13,429
620,644
18,925
71,243
–
5,976
1,002
38,445
3,020
5,732
144,343
101,289
17,072
262,704
8,734
69,721
–
6,969
1,479
53,174
1,646
5,473
147,196
153,774
17,756
318,726
6,180
45,561
–
36,185
467
66,661
8,660
2,354
166,068
107,379
10,749
284,196
4,875
34,537
–
34,855
2,634
68,169
9,718
1,472
156,260
72,111
9,807
238,178
Due
after 5
years
US$m
1,359
7,911
–
67,209
320
22,663
52,304
1,103
152,869
41,147
4,031
198,047
2,356
5,798
–
64,853
1,003
22,920
41,701
1,022
139,653
32,432
5,577
177,662
similar contracts are classified on the basis of the
earliest date they can be called.
Cash flows payable in respect of customer
accounts are primarily contractually repayable on
demand or at short notice. However, in practice, short-
term deposit balances remain stable as inflows and
outflows broadly match and a significant portion of
loan commitments expire without being drawn upon.
The management of liquidity risk
(Audited)
The Group uses three principal measures to manage
liquidity risk, as described below.
At 31 December 2009
Deposits by banks .........................................................
Customer accounts ........................................................
Trading liabilities ..........................................................
Financial liabilities designated at fair value .................
Derivatives ....................................................................
Debt securities in issue .................................................
Subordinated liabilities .................................................
Other financial liabilities ..............................................
Loan and other credit-related commitments ................
Financial guarantees and similar contracts ..................
At 31 December 2008
Deposits by banks .........................................................
Customer accounts ........................................................
Trading liabilities ..........................................................
Financial liabilities designated at fair value .................
Derivatives ....................................................................
Debt securities in issue .................................................
Subordinated liabilities .................................................
Other financial liabilities ..............................................
Loan and other credit-related commitments ................
Financial guarantees and similar contracts ..................
On
demand
US$m
39,484
800,199
268,130
6,628
245,027
124
43
22,500
1,382,135
221,191
6,111
1,609,437
45,884
698,187
247,652
5,365
482,039
481
92
19,474
1,499,174
239,753
5,749
1,744,676
The balances in the above table will not agree
directly with the balances in the consolidated
balance sheet as the table incorporates, on an
undiscounted basis, all cash flows relating to
principal and future coupon payments (except for
trading liabilities and trading derivatives). In
addition, loan and other credit-related commitments
and financial guarantees and similar contracts are
generally not recognised on the balance sheet.
Trading liabilities and trading derivatives have been
included in the ‘On demand’ time bucket, and not by
contractual maturity, because trading liabilities are
typically held for short periods of time. The
undiscounted cash flows payable under hedging
derivative liabilities are classified according to their
contractual maturity. The undiscounted cash flows
potentially payable under financial guarantees and
245
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Liquidity and funding > Liquidity risk management / Contingent liquidity risk
Advances to deposits ratio
HSBC emphasises the importance of core current
accounts and savings accounts as a source of funds
to finance lending to customers, and discourages
reliance on short-term professional funding. This is
achieved by placing limits on Group banking entities
which restrict their ability to increase loans and
advances to customers without corresponding
growth in current accounts and savings accounts.
This measure is referred to as the ‘advances to
deposits’ ratio.
Advances to deposits ratio limits are set by the
RMM and monitored by Group Finance. The ratio
describes loans and advances to customers as a
percentage of the total of core customer current and
savings accounts and term funding with a remaining
term to maturity in excess of one year. Loans and
advances to customers which are part of reverse
repurchase arrangements, and where HSBC receives
securities which are deemed to be liquid, are
excluded from the advances to deposits ratio. The
classification of a deposit as ‘core’ includes
consideration of the size of the customer’s total
deposit balances, the pricing and the deposit’s
behavioural characteristics.
The three principal banking entities listed in the
table below represented 70 per cent of HSBC’s total
core deposits at 31 December 2009 (2008: 70 per
cent). The table shows that loans and advances to
customers in HSBC’s principal banking entities are
overwhelmingly financed by reliable and stable
sources of funding. HSBC would meet any
unexpected net cash outflows by selling securities
and accessing additional funding sources such as
interbank or collateralised lending markets. The
distinction between core and non-core deposits
generally means that the Group’s measure of
advances to deposits is more restrictive than that
which could be inferred from the published financial
statements. For example, HSBC’s consolidated
advances to deposits measure at 31 December 2009
based only on published balance sheet information
was 77.3 per cent (2008: 83.6 per cent).
Ratio of net liquid assets to customer
liabilities
Net liquid assets are the aggregated liquid assets
less all funds maturing in the next 30 days from
wholesale market sources and from customers who
are deemed to be professional. For this purpose,
HSBC defines liquid assets as cash balances, short-
term interbank deposits and highly-rated debt
securities available for immediate sale and for which
a deep and liquid market exists. Contingent liquidity
risk associated with committed loan facilities is not
reflected in the ratios. The Group’s framework for
monitoring this risk is described in ‘Contingent
liquidity risk’ below.
Limits for the ratio of net liquid assets to
customer liabilities are set for each bank operating
entity, but not for HSBC Finance. As HSBC Finance
does not accept customer deposits, it is not
appropriate to manage its liquidity using standard
liquidity ratios. See ‘HSBC Finance’ below.
Ratios of net liquid assets to customer liabilities
are provided in the following table, along with the
US dollar equivalents of net liquid assets.
HSBC’s principal banking entities – the management of liquidity risk
(Audited)
Advances to deposits ratios
Ratio of net liquid assets
to customer liabilities
HSBC Bank (UK operations)
Year-end ............................
Maximum .........................
Minimum ..........................
Average .............................
The Hongkong and Shanghai
Banking Corporation
Year-end ............................
Maximum .........................
Minimum ..........................
Average .............................
HSBC Bank USA
Year-end ............................
Maximum .........................
Minimum ..........................
Average .............................
2009
%
102.3
107.7
101.7
105.1
70.9
77.4
68.6
71.5
98.1
110.6
98.1
105.4
2009
%
8.8
13.6
6.5
10.2
30.0
35.0
25.0
30.7
17.8
31.5
16.7
22.2
2008
%
7.1
14.1
6.9
10.0
25.0
25.0
19.9
21.9
31.5
31.5
15.8
22.6
2008
%
106.0
106.7
97.5
101.5
77.4
82.9
76.7
80.6
103.7
117.3
103.7
111.8
246
Net liquid assets
2009
US$bn
2008
US$bn
29.2
46.2
19.5
32.6
84.9
97.8
64.6
85.1
14.1
27.4
13.2
18.9
21.3
52.5
21.3
35.8
64.6
64.6
51.1
56.5
27.4
27.4
17.1
21.5
Advances to deposits ratios
2009
%
2008
%
Ratio of net liquid assets
to customer liabilities
2009
%
2008
%
Net liquid assets
2009
US$bn
2008
US$bn
80.8
85.2
80.8
82.2
85.2
92.3
82.7
88.1
29.4
29.4
24.7
27.3
26.5
26.5
19.4
22.5
94.7
94.7
73.2
84.8
83.5
83.5
66.1
73.9
Total of HSBC’s other
principal banking entities37
Year-end ............................
Maximum .........................
Minimum ..........................
Average .............................
For footnote, see page 291.
The reduction in the quantum of net liquid
assets in HSBC Bank USA between 2008 and 2009
reflects the temporary high level of net liquid assets
maintained at the end of 2008 in anticipation of
funding requirements for the credit card portfolios
transferred to HSBC Bank USA from HSBC Finance
in early 2009.
Projected cash flow scenario analysis
The Group uses a number of standard projected cash
flow scenarios designed to model both Group-
specific and market-wide liquidity crises, in which
the rate and timing of deposit withdrawals and
drawdowns on committed lending facilities are
varied, and the ability to access interbank funding
and term debt markets and to generate funds from
asset portfolios is restricted. The scenarios are
modelled by all Group banking entities and by
HSBC Finance. The appropriateness of the
assumptions under each scenario is regularly
reviewed. In addition to the Group’s standard
projected cash flow scenarios, individual entities
are required to design their own scenarios to reflect
specific local market conditions, products and
funding bases.
Limits for cumulative net cash flows under
stress scenarios are set for each banking entity and
for HSBC Finance. Both ratio and cash flow limits
reflect the local market place, the diversity of
funding sources available and the concentration risk
from large depositors. Compliance with entity level
limits is monitored centrally by Group Finance and
reported regularly to the RMM.
HSBC Finance
As HSBC Finance is unable to accept standard
retail customer deposits, it takes funding from the
professional markets. HSBC Finance uses a range
of measures to monitor funding risk, including
projected cash flow scenario analysis and caps
placed on the amount of unsecured term funding
that can mature in any rolling three-month and
rolling 12-month periods. HSBC Finance also
maintains access to committed sources of secured
funding and has in place committed backstop lines
for short-term refinancing CP programmes.
HSBC Finance – funding
(Audited)
At 31 December
2009
US$bn
2008
US$bn
Maximum amounts of unsecured term
funding maturing in any rolling:
3 month period .................................
12 month period ...............................
Unused committed sources of secured
5.2
12.3
funding38 ...........................................
0.4
6.0
17.4
2.4
Committed backstop lines from
non-Group entities in support of
CP programmes ................................
5.3
7.3
For footnote, see page 291.
The need for HSBC Finance to refinance
maturing term funding is mitigated by the continued
run-down of its balance sheet.
Contingent liquidity risk
(Audited)
In the normal course of business, Group entities
provide customers with committed facilities,
including committed backstop lines to conduit
vehicles sponsored by the Group and standby
facilities to corporate customers. These facilities
increase the funding requirements of the Group
when customers choose to raise drawdown levels
over and above their normal utilisation rates. The
liquidity risk consequences of increased levels of
drawdown are analysed in the form of projected cash
flows under different stress scenarios. The RMM
also sets limits for non-cancellable contingent
funding commitments by Group entity after due
consideration of each entity’s ability to fund them.
The limits are split according to the borrower, the
liquidity of the underlying assets and the size of the
committed line.
247
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Liquidity and funding > Contingent liquidity risk / Impact of market turmoil / HSBC Holdings
The Group’s contractual exposures at 31 December monitored under the contingent liquidity risk limit structure
(Audited)
HSBC Bank
2009
2008
US$bn US$bn
HSBC Bank USA
HSBC Bank Canada
2009
US$bn
2008
US$bn
2009
US$bn
2008
2008
US$bn US$bn US$bn
The Hongkong and
Shanghai Banking
Corporation
2009
Conduits
Client-originated assets39 ............
– total lines .............................
– largest individual lines ........
HSBC-managed assets40 .............
Other conduits41 ..........................
Single-issuer liquidity facilities
– five largest42 .........................
– largest market sector43 .........
For footnotes, see page 291.
7.4
0.8
29.1
–
4.3
7.9
5.6
1.0
34.8
–
6.0
7.3
6.4
0.4
–
1.3
6.1
4.7
11.2
0.4
–
1.1
5.0
3.5
0.3
0.1
–
–
2.0
2.9
0.3
0.2
–
–
1.5
2.4
0.3
0.3
–
–
1.2
1.5
–
–
–
–
1.0
1.7
In times of market stress, the Group may choose
to provide non-contractual liquidity support to
certain HSBC-sponsored vehicles or HSBC-
promoted products. This support would only be
provided after careful consideration of the potential
funding requirement and the impact on the entity’s
overall liquidity.
The impact of market turmoil on the Group’s
liquidity risk position
(Audited)
Market turmoil continued to have significant adverse
effects on the liquidity and funding risk profile of
the banking system in 2009, although the effects
gradually moderated during the year:
•
interbank funding costs remained above pre-
market turmoil levels, although they declined
significantly from the peaks observed in the
latter part of 2008;
• many asset classes continued to suffer from
reduced liquidity;
•
the ability of many market participants to issue
either unsecured or secured debt continued to be
restricted, although the effect was mitigated in
part by the support provided by some central
bank and government programmes; and
• many special purpose entities with investments
linked to US sub-prime mortgages, or to ABSs
where the underlying credit exposures were not
fully transparent, continued to experience
difficulties in raising wholesale funding.
In general terms, the strains arising from the
credit crisis were concentrated in the wholesale
market. The retail market, the market from which
HSBC derives its core current and savings accounts,
(the importance of which as a source of funding for
the Group is discussed under ‘Advances to deposits
ratio’ above) was relatively unaffected. The Group’s
limited dependence on wholesale markets for
funding has been a significant competitive advantage
to HSBC through the recent period of dislocation in
the financial markets.
As a net provider of funds to the interbank
market, HSBC has not been significantly
affected by the scarcity of interbank funding.
HSBC’s customer deposit base grew between
30 June 2007, the reporting date closest to the onset
of the market turmoil, and 31 December 2009 by
US$178 billion. This growth in US dollar equivalent
terms was diluted by the strengthening of the US
dollar against other major currencies between these
two reporting dates, and therefore understates the
growth in customer deposits on an underlying
currency basis.
A number of central banks and governments
have taken action to alleviate the effects of the
market turmoil, including making available
government guaranteed term funding facilities.
In the US, bank issuance under such programmes
became normal market practice during 2008,
although many market participants successfully
issued non-government guaranteed debt in the
latter half of 2009. HSBC’s US-based operations
participated modestly at the outset in the US
government guaranteed term debt issuance scheme.
At 31 December 2009, US$2.67 billion had been
issued by HSBC USA, Inc. under the Federal
Deposit Insurance Corporation Temporary Liquidity
Guarantee Programme. This debt was issued in
2008.
The deterioration of the US sub-prime credit
market reduced the availability of term financing to
entities with exposures to the US sub-prime market.
However, HSBC Finance, by virtue of its position
248
within the Group, continued to enjoy committed
financing facilities, albeit at a lower level, and access
to CP markets at competitive interest rates. By
reducing the size of its balance sheet, issuing cost-
effective retail debt, receiving capital infusions from
the HSBC Group and utilising alternative sources of
funding, including from other members of the HSBC
Group, HSBC Finance eliminated the need to issue
institutional term debt in 2008 and 2009. Funding
plans are in place which would enable HSBC
Finance to deal with a recurrence of stress in the
credit markets. As part of liquidity management,
asset portfolios totalling US$15.3 billion were
transferred from HSBC Finance to HSBC Bank USA
in January 2009, resulting in US$8.0 billion of net
funding benefit to HSBC Finance.
The scheme set up by the US Federal Reserve in
2008 to provide support to US issuers in the CP
market was extended to 1 February 2010. Under this
scheme, HSBC Finance was eligible to issue a
maximum of US$12.0 billion. At 31 December 2009,
HSBC Finance did not have any outstanding CP
under this programme (31 December 2008:
US$520 million).
The effect of the market turmoil on liquidity and
funding elsewhere in HSBC was largely restricted to
the Group’s activities that historically depended
upon the asset-backed CP markets for funding,
specifically SIVs and conduits, and certain money
market funds. This is discussed in detail on
page 182.
HSBC Holdings
(Audited)
HSBC Holdings’ primary sources of cash are the
receipt of dividends from subsidiaries, interest on
and repayment of, intra-group loans, and interest
earned on its own liquid funds. HSBC Holdings also
received cash from its rights issue in April 2009 and,
on an ongoing basis, raises ancillary funds in the
debt capital markets through subordinated and senior
debt issuance. Primary uses of cash are investments
in subsidiaries, interest payments to debt holders and
dividend payments to shareholders.
HSBC Holdings is also subject to contingent
liquidity risk by virtue of loan and other credit-
related commitments and guarantees and similar
contracts issued. Such commitments and guarantees
are only issued after due consideration of HSBC
Holdings’ ability to finance the commitments and
guarantees and the likelihood of the need arising.
HSBC Holdings actively manages the cash
flows from its subsidiaries to optimise the amount of
cash held at the holding company level. The ability
of its subsidiaries to pay dividends or advance
monies to HSBC Holdings depends on, among other
things, their respective regulatory capital
requirements, statutory reserves, and financial and
operating performance. The wide range of HSBC’s
activities means that HSBC Holdings is not
dependent on a single source of profits to fund its
dividend payments to shareholders. During 2009
HSBC Holdings continued to have full access to
debt capital markets at market rates and issued
US$5.3 billion of capital instruments and senior debt
(2008: US$8.8 billion).
249
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Liquidity and funding > HSBC Holdings // Market risk > Sensitivity analysis
Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities
(Audited)
At 31 December 2009
Amounts owed to HSBC undertakings ...................
Financial liabilities designated at fair value ............
Derivatives ...............................................................
Debt securities in issue .............................................
Subordinated liabilities ............................................
Other financial liabilities .........................................
Loan commitments ..................................................
Financial guarantees and similar contracts ..............
At 31 December 2008
Amounts owed to HSBC undertakings ...................
Financial liabilities designated at fair value ............
Derivatives ...............................................................
Subordinated liabilities ............................................
Other financial liabilities .........................................
Loan commitments ..................................................
Financial guarantees and similar contracts ..............
On
demand
US$m
Due
within 3
months
US$m
Due
between
3 and 12
months
US$m
Due
between
1 and 5
years
US$m
–
–
362
–
–
–
362
3,240
35,073
38,675
–
–
1,324
–
–
1,324
3,241
47,341
51,906
292
229
–
37
243
1,239
2,040
–
–
2,040
133
587
–
235
1,805
2,760
–
–
2,760
25
687
–
112
728
–
1,552
–
–
1,552
539
1,762
–
706
–
3,007
–
–
3,007
3,477
6,205
–
2,346
3,881
–
15,909
–
–
15,909
3,590
5,977
–
3,764
–
13,331
–
–
13,331
Due
after 5
years
US$m
–
26,152
–
1,698
32,232
–
60,082
–
–
60,082
–
25,571
–
32,214
–
57,785
–
–
57,785
The balances in the above table will not agree
Market risk is the risk that movements in
directly with the balances in the balance sheet of
HSBC Holdings as the table incorporates, on an
undiscounted basis, all cash flows relating to
principal and future coupon payments (except
for trading derivatives).
In addition, loan and other credit-related
commitments and financial guarantees and similar
contracts are generally not recognised on the balance
sheet. Trading derivatives are included in the ‘On
demand’ time bucket, and not by contractual
maturity, because trading derivatives are typically
held for short periods of time. The undiscounted
cash flows potentially payable under financial
guarantees and similar contracts are classified on the
basis of the earliest date they can be called.
Market risk
(Audited)
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 one of
the world’s largest banking and financial services
organisations.
market factors, including foreign exchange rates and
commodity prices, interest rates, credit spreads and
equity prices, will reduce HSBC’s income or the
value of its portfolios.
HSBC separates exposures to market risk into
trading and non-trading portfolios. Trading portfolios
include those positions arising from market-making,
position-taking and other marked-to-market
positions so designated.
Non-trading portfolios include positions that
arise from the interest rate management of HSBC’s
retail and commercial banking assets and liabilities,
financial investments designated as available for sale
and held to maturity, and exposures arising from
HSBC’s insurance operations.
Market risk arising in HSBC’s insurance
businesses is discussed in ‘Risk management of
insurance operations’ on pages 265 to 285.
The management of market risk is principally
undertaken in Global Markets using risk limits
approved by the GMB. Limits are set for portfolios,
products and risk types, with market liquidity being
a principal factor in determining the level of limits
set. Group Risk, an independent unit within Group
Management Office, develops the Group’s market
250
risk management policies and measurement
techniques. Each major operating entity has an
independent market risk management and control
function which is responsible for measuring market
risk exposures in accordance with the policies
defined by Group 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 supervision 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 manage such risks professionally. In certain cases
where the market risks cannot be adequately
captured by the transfer process, simulation
modelling is used to identify the impact of varying
scenarios on valuations and net interest income.
HSBC uses a range of tools to monitor and limit
market risk exposures. These include sensitivity
analysis, value at risk (‘VAR’) and stress testing.
Sensitivity analysis
(Unaudited)
Sensitivity measures are used to monitor the market
risk positions within each risk type, for example,
present value of a basis point movement in interest
rates, for interest rate risk. Sensitivity limits are set
for portfolios, products and risk types, with the depth
of the market being one of the principal factors in
determining the level of limits set.
Value at risk
(Audited)
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.
The VAR models used by HSBC are based
predominantly on historical simulation. These
models derive plausible future scenarios from past
series of recorded market rates and prices, taking
account of inter-relationships between different
markets and rates such as interest rates and foreign
exchange rates. The models also incorporate the
effect of option features on the underlying
exposures.
The historical simulation models used by HSBC
incorporate the following features:
•
•
potential market movements are calculated with
reference to data from the past two years;
historical market rates and prices are calculated
with reference to foreign exchange rates and
commodity prices, interest rates, equity prices
and the associated volatilities; and
• VAR is calculated to a 99 per cent confidence
level and for a one-day holding period.
HSBC routinely validates the accuracy of its
VAR models by back-testing the actual daily profit
and loss results, adjusted to remove non-modelled
items such as fees and commissions, against the
corresponding VAR numbers. Statistically, HSBC
would expect to see losses in excess of VAR only
1 per cent of the time over a one-year period. The
actual number of excesses over this period can
therefore be used to gauge how well the models are
performing.
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 one-day holding period assumes that
all positions can be liquidated or the risk offset
in one day. This may not fully reflect the market
risk arising at times of severe illiquidity, when a
one-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; and
• VAR is unlikely to reflect loss potential on
exposures that only arise under significant
market moves.
251
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Market risk > Impact of market turmoil / Trading portfolios
Stress testing
In recognition of the limitations of VAR, HSBC
augments it with stress testing to evaluate the
potential impact on portfolio values of more
extreme, although plausible, events or movements
in a set of financial variables.
The process is governed by the Stress Testing
Review Group forum. This coordinates the Group’s
stress testing scenarios in conjunction with regional
risk managers, considering actual market risk
exposures and market events in determining the
scenarios to be applied at portfolio and consolidated
levels, as follows:
•
•
•
•
sensitivity scenarios, which consider the impact
of any single risk factor or set of factors that are
unlikely to be captured within the VAR models,
such as the break of a currency peg;
technical scenarios, which consider the largest
move in each risk factor, without consideration
of any underlying market correlation;
hypothetical scenarios, which consider potential
macro economic events, for example, a global
flu pandemic; and
historical scenarios, which incorporate historical
observations of market movements during
previous periods of stress which would not be
captured within VAR.
Stress testing results provide senior management
with an assessment of the financial impact such
events would have on HSBC’s profit. The daily
losses experienced during 2009 were within the
stress loss scenarios reported to senior management.
The following table provides an overview of the
reporting of risks within this section:
Risk type
Foreign exchange and
commodity ........................
Interest rate ...........................
Equity ....................................
Credit spread .........................
For footnotes, see page 291.
Portfolio
Trading Non-trading
VAR
VAR
VAR
VAR
VAR44
VAR45
Sensitivity
VAR46
The impact of market turmoil on market risk
(Audited)
The market turmoil that began in 2007 and
accelerated through 2008 was characterised by
extreme market volatility and, as a consequence,
increased levels of VAR notwithstanding reduced
underlying risk positions. High levels of market
volatility across all asset classes continued into early
2009. However, the overall impact was limited as a
result of further managing down the market risk
exposures in all asset classes during this period.
Continued high levels of volatility in interest
rates in 2009 caused a small increase in VAR.
Central banks’ monetary easing has led to the
progressive stabilisation of financial markets during
the second half of 2009. Credit spreads and volatility
levels have generally continued to decrease as
liquidity improved throughout the period.
Additionally, this period was characterised by high
levels of government borrowing, uncertainty around
the robustness of economic recovery in major
economies and concerns over the effect of any
developing inflationary pressures. As a result, this
led to the continuation of high levels of volatility in
interest rates which, together with the extension of
the asset profile in the non-trading books, caused a
small increase in the total VAR.
Value at risk of the trading and non-trading
portfolios
The VAR, both trading and non-trading, for the
Group was as follows:
Value at risk
(Audited)
At 31 December .................
Average ..............................
Minimum ............................
Maximum ...........................
2009
US$m
204.5
156.1
105.7
204.5
2008
US$m
191.2
158.9
59.8
287.1
The daily VAR, both trading and non-trading,
for the Group was as follows:
Daily VAR (trading and non-trading) (US$m)
(Unaudited)
350
300
250
200
150
100
50
0
D ec-07
May-08
Aug-08
De c-08
Apr-09
Aug-0 9
D ec-09
The major contributor to the trading and non-
trading VAR for the Group was Global Markets.
The histogram on page 253 illustrates the
frequency of daily revenue arising from Global
Markets’ trading, balance sheet management and
other trading activities.
252
The average daily revenue earned from Global
Markets’ trading, balance sheet management and
other trading activities in 2009 was US$59.9 million,
compared with US$21.7 million in the same period
ended 31 December 2008. The standard deviation of
these daily revenues was US$38.4 million compared
with US$53.4 million in 2008. 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 11 days with
negative revenue during 2009 compared with
66 days in 2008. The most frequent result was
daily revenue of between US$30 million and
US$40 million and US$40 million and
US$50 million with 29 occurrences each,
compared with between US$40 million and
US$50 million with 28 occurrences in 2008.
Daily distribution of Global Markets’ trading,
balance sheet management and other trading
revenues47
(Unaudited)
2009
Number of days
35
30
25
20
15
10
5
0
29 29
28
26
22
18
17
8
19
15
10
8
9
3
2
4
2
0
6
3
0
0
0
1
0
-50 -40
-30 -20
-1 0
0
10
20
30
40
50
60
70
80
90
100 110 120 130 140 150 160 170 180 190 200
(cid:31) Profit and loss frequency
US$m
11 days of negative revenue compared with
66 in 2008.
2008
Number of days
The effect of any month end adjustments, not
attributable to a specific daily market move, is
spread evenly over the days in the month in question.
Trading revenues generated by Global Markets
and Balance Sheet Management improved
considerably in 2009 compared with 2008 due to
strong client business and favourable positioning
against the backdrop of a low interest rate
environment. The histogram of daily revenues for
2009 below therefore shows the majority of trading
days closely concentrated around the average daily
revenues of US$59.9 million, with relatively few
loss days recorded during the year.
By contrast, in 2008, trading revenues were
more volatile, particularly across the Credit
businesses, which experienced significant losses on
legacy Credit Trading positions and monoline
exposures. The graph of daily revenues for 2008
shows a flatter profile and greater distribution of
revenues around the average daily revenue of
US$21.7 million, as the turmoil in the credit markets
caused volatile trading days where large daily profits
and losses were reported.
30
25
20
15
10
5
0
28
26 26
25
19
20
15
9
8
6
5
4 5
3
2 2
2
0
1
1 1
1
1
0
11 11
9
7
5
4
1
1
1
-180-170-160-150-140-130-120-110-100 -90 -8 0 -70 -60 -5 0 -40 -30 -2 0 -10
0
10 20 30
40 50 60 70 80 90 100 110 120 130 140 150
US$m
(cid:31) Profit and loss frequency
For footnote, see page 291.
For a description of HSBC’s fair value and price
verification controls, see page 166.
Trading portfolios
(Audited)
HSBC’s control of market risk is based on a policy
of restricting individual operations to trading within
a list of permissible instruments authorised for each
site by Group Risk, of enforcing rigorous new
product approval procedures, and of restricting
trading in the more complex derivative products only
to offices with appropriate levels of product
expertise and robust control systems.
Market making and position taking is
undertaken within Global Markets. The VAR for
such trading activity at 31 December 2009 was
US$45.3 million (2008: US$72.5 million). This is
analysed below by risk type:
253
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Market risk > Trading portfolios / Non-trading portfolios
VAR by risk type for the trading activities (excluding credit spread VAR)
(Audited)
Foreign
exchange and
commodity
US$m
19.5
29.8
20.6
19.0
11.1
8.7
46.7
54.9
Interest
rate
US$m
42.6
63.4
51.3
50.7
35.6
21.4
78.0
147.4
Equity
US$m
17.5
13.9
11.3
15.2
4.9
8.2
21.2
39.0
Total48
US$m
45.3
72.5
53.8
53.1
35.6
22.6
86.6
104.4
At 31 December 2009 ..................................................
At 31 December 2008 ...................................................
Average
2009 ..........................................................................
2008 ..........................................................................
Minimum
2009 ..........................................................................
2008 ..........................................................................
Maximum
2009 ..........................................................................
2008 ..........................................................................
For footnote, see page 291.
The VAR for overall trading activity as at
31 December 2009 was lower than in 2008 and
remained within a narrower band. The decrease was
driven primarily by the interest rate component due
to reduced levels of underlying exposure in the
trading book.
Credit spread risk
The risk associated with movements in credit
spreads is primarily managed through sensitivity
limits, stress testing, and VAR for those portfolios
where VAR is calculated. The Group has introduced
credit spread as a separate risk type within its VAR
models on a global basis. The VAR shows the effect
on trading income from a one-day movement in
credit spreads over a two-year period, calculated to a
99 per cent confidence level.
Increased market liquidity helped dampen
volatility of credit spreads and decrease
credit VAR in 2009.
At 31 December 2009, the credit VAR for
trading activities was US$72.7 million (2008:
US$218.4 million, calculated on a comparable
basis). The decrease in the credit VAR in 2009 was
due to the effect of a reduction in the volatility of
credit spreads observed during the year, in part
reflecting increased market liquidity. Also, the actual
positions within the trading portfolios exposed to
credit spread risk were lower on 31 December 2009
than on 31 December 2008. In addition to the above
measure, certain portfolios are also managed using
default risk measures where appropriate.
Credit spread risk also arises on credit derivative
transactions entered into by Global Banking in order
to manage the risk concentrations within the
corporate loan portfolio and so enhance capital
254
efficiency. The mark-to-market of these transactions
is reflected in the income statement.
At 31 December 2009, the credit VAR on the
credit derivatives transactions entered into by
Global Banking was US$13.8 million (2008:
US$23.0 million).
Gap risk
For certain transactions that are structured so that the
risk to HSBC is negligible under a wide range of
market conditions or events, there exists a remote
possibility that a significant gap event could lead
to loss. A gap event could arise from a change in
market price from one level to another with no
accompanying trading opportunity, where the price
change breaches the threshold beyond which the risk
profile changes from having no open risk to having
full exposure to the underlying structure. Such
movements may occur, for example, when there are
adverse news announcements and the market for a
specific investment becomes illiquid, making
hedging impossible.
Given the characteristics of these transactions,
they will make little or no contribution to VAR or to
traditional market risk sensitivity measures. HSBC
captures the risks of such transactions within its
stress testing scenarios and monitors gap risk arising
on an ongoing basis. HSBC regularly considers the
probability of gap loss and fair value adjustments are
booked against this risk. HSBC has not incurred any
material gap loss in respect of such transactions in
the 12 months ended 31 December 2009.
ABSs/MBSs positions
The ABSs/MBSs exposures within the trading
portfolios are managed within sensitivity and VAR
limits, as described on page 251, and are included
within the stress testing scenarios as described on
page 252.
Non-trading portfolios
(Audited)
The principal objective of market risk management
of non-trading portfolios is to optimise net interest
income.
Interest rate 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
embedded optionality within certain product areas
such as the incidence of mortgage prepayments,
and from behavioural assumptions regarding the
economic duration of liabilities which are
contractually repayable on demand such as current
accounts. The 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
supervision of the local ALCO. This transfer is
usually achieved by a series of internal deals between
the business units and these books. When the
behavioural characteristics of a product differ from
its contractual characteristics, the former are
assessed to determine the true underlying interest
rate risk. Local ALCOs are required to regularly
monitor all such behavioural assumptions and
interest rate risk positions to ensure they comply
with interest rate risk limits established by GMB.
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 alternative investment
products and the precise prepayment speeds of
mortgages will vary at different interest rate levels,
and where expectations about future moves in interest
rates change. 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. The VAR for
these portfolios is included within the Group VAR
(see ‘Value at risk of the trading and non-trading
portfolios’ above).
255
Credit spread risk
At 31 December 2009, the sensitivity of equity to
the effect of movements in credit spreads, based on
credit spread VAR, on the Group’s available-for-sale
debt securities was US$535 million (2008:
US$1,013 million). The sensitivity was calculated on
the same basis as applied to the trading portfolio.
Including the gross exposure for the SICs
consolidated within HSBC’s balance sheet at
31 December 2009, the sensitivity increased to
US$549 million. This sensitivity is struck, however,
before taking account of any losses which would be
absorbed by the capital note holders. At
31 December 2009, the capital note holders would
have absorbed the first US$2.2 billion (2008:
US$2.2 billion) of any losses incurred by the SICs
prior to HSBC incurring any equity losses.
The notable decrease in this sensitivity at
31 December 2009, compared with 31 December
2008, was due to the effect of lower volatility in
credit spreads observed during 2009. The overall
credit spread positions within the available-for-sale
portfolios were lower on 31 December 2009
compared with 31 December 2008.
Equity securities classified as available
for sale
Market risk arises on equity securities classified as
available for sale. The fair value of these securities
at 31 December 2009 was US$9.1 billion (2008:
US$7.3 billion) and included private equity holdings
of US$4.0 billion (2008: US$2.5 billion).
Investments in private equity are primarily made
through managed funds that are subject to limits
on the amount of investment. Potential new
commitments are subject to risk appraisal to ensure
that industry and geographical concentrations remain
within acceptable levels for the portfolio as a whole.
Regular reviews are performed to substantiate the
valuation of the investments within the portfolio.
Funds typically invested for short-term cash
management represented US$0.8 billion (2008:
US$0.9 billion). Investments held to facilitate
ongoing business, such as holdings in government-
sponsored enterprises and local stock exchanges,
represented US$1.2 billion (2008: US$1.0 billion).
Other strategic investments represented
US$3.1 billion (2008: US$2.4 billion). The fair value
of the constituents of equity securities classified as
available for sale can fluctuate considerably. A
10 per cent reduction in the value of the available-
for-sale equities at 31 December 2009 would have
reduced equity by US$0.9 billion (2008:
US$0.7 billion). For details of the impairment
incurred on available-for-sale equity securities, see
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Market risk > Sensitivity of NII / Structural FX exposure
‘Summary of significant accounting policies’ on
page 369.
effect on HSBC’s consolidated portfolio valuations
and net interest income.
Sensitivity of net interest income
(Unaudited)
A principal part of HSBC’s management of market
risk in non-trading portfolios is to monitor the
sensitivity of projected net interest income under
varying interest rate scenarios (simulation
modelling). HSBC aims, through its management of
market risk in non-trading portfolios, to mitigate the
effect of prospective interest rate movements which
could reduce future net interest income, while
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 and standard scenarios which are
required throughout HSBC. The standard scenarios
are consolidated to illustrate the combined pro forma
Sensitivity of projected net interest income
(Unaudited)
The table below sets out the effect on future net
interest income of an incremental 25 basis points
parallel fall or rise in all yield curves worldwide at
the beginning of each quarter during the 12 months
from 1 January 2010. Assuming no management
actions, a sequence of such rises would increase
planned net interest income for 2010 by
US$695 million (2009: US$463 million decrease),
while a sequence of such falls would decrease
planned net interest income by US$1,563 million
(2009: US$284 million decrease). These figures
incorporate the effect of any option features in the
underlying exposures.
Instead of assuming that all interest rates move
together, HSBC groups its interest rate exposures
into currency blocs whose rates are considered likely
to move together. The sensitivity of projected net
interest income, on this basis, is as follows:
US dollar
bloc
US$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 2010 projected net
interest income arising from
a shift in yield curves of:
+25 basis points at the
beginning of each quarter .....
13
–25 basis points at the
beginning of each quarter .....
(382)
Change in 2009 projected net
interest income arising from
a shift in yield curves of:
+25 basis points at the
beginning of each quarter .....
(243)
–25 basis points at the
beginning of each quarter .....
41
92
(46)
42
(42)
The interest rate sensitivities set out in the
table above are illustrative only and are based on
simplified scenarios.
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 would be
taken by Global Markets or in the business units to
mitigate the impact of this interest rate risk; in
reality, Global Markets seeks proactively to change
the interest rate risk profile to minimise losses and
optimise net revenues. The projections above also
assume that interest rates of all maturities move by
the same amount and, therefore, do not reflect the
256
416
(507)
112
(133)
363
(301)
695
(689)
194
(1,563)
(45)
(285)
100
(114)
28
(345)
(235)
351
(463)
(284)
potential effect on net interest income of some
rates changing while others remain unchanged. In
addition, the projections take account of the effect on
net interest income of anticipated differences in
changes between interbank interest rates and interest
rates linked to other bases (such as Central Bank
rates or product rates over which the entity has
discretion in terms of the timing and extent of rate
changes). The projections make other simplifying
assumptions too, including that all positions run to
maturity.
Projecting the movement in net interest income
from prospective changes in interest rates is a
complex interaction of structural and managed
exposures. HSBC’s exposure to the effect of
movements in interest rates on its net interest income
arises in two main areas, core deposit franchises and
Global Markets:
•
•
core deposit franchises: these are exposed to
changes in the cost of deposits raised and
spreads on wholesale funds. The net interest
income benefit of core deposits increases as
interest rates rise and decreases as interest rates
fall. This risk is asymmetrical in a very low
interest rate environment, however, as there is
limited room to lower deposit pricing in the
event of interest rate reductions; and
residual interest rate risk is managed within
Global Markets, under the Group’s policy of
transferring interest rate risk to Global Markets
to be managed within defined limits and with
flexibility as to the instruments used.
The main drivers of the year on year movements
in the sensitivity of the Group’s net interest income
to the changes in interest rates tabulated above were:
Sensitivity of reported reserves to interest rate movements
(Unaudited)
•
decreases in interest rates, particularly in US
dollar, Hong Kong dollar and sterling which
have restricted the Group’s ability to pass on
to depositors further rate reductions, thereby
increasing exposures to further rate falls; and
• Global Markets’ decreased net trading asset
positions, particularly in euros and US dollars.
The funding of net trading assets is recorded in
‘Net interest income’ whereas the income from
such assets is recorded in ‘Net trading income’.
HSBC monitors the sensitivity of reported
reserves to interest rate movements on a monthly
basis by assessing the expected reduction in
valuation of available-for-sale portfolios and cash
flow hedges due to parallel movements of plus or
minus 100 basis points in all yield curves. The table
below describes the sensitivity of HSBC’s reported
reserves to these movements at the end of 2009 and
2008 and the maximum and minimum month-end
figures during these years:
At 31 December 2009
+ 100 basis point parallel move in all yield curves .........................................
As a percentage of total shareholders’ equity .................................................
– 100 basis point parallel move in all yield curves .........................................
As a percentage of total shareholders’ equity .................................................
At 31 December 2008
+ 100 basis point parallel move in all yield curves .........................................
As a percentage of total shareholders’ equity .................................................
– 100 basis point parallel move in all yield curves .........................................
As a percentage of total shareholders’ equity .................................................
The sensitivities are illustrative only and are
based on simplified scenarios. The table shows the
potential sensitivity of reserves to valuation
changes in available-for-sale portfolios and from
cash flow hedges following the pro forma
movements in interest rates. These particular
exposures form only a part of the Group’s overall
interest rate exposures. The accounting treatment
under IFRSs of the Group’s remaining interest rate
exposures, while economically largely offsetting
the exposures shown in the above table, does not
require revaluation movements to go to reserves.
Structural foreign exchange exposures
(Unaudited)
Structural foreign exchange exposures represent
net investments in subsidiaries, branches and
associates, the functional currencies of which are
257
Maximum
impact
US$m
Minimum
impact
US$m
US$m
(3,096)
(2.4%)
3,108
2.4%
(2,740)
(2.9%)
2,477
2.6%
(3,438)
(2.7%)
3,380
2.6%
(2,740)
(2.9%)
2,609
2.8%
(2,715)
(2.1%)
2,477
1.9%
(1,737)
(1.9%)
1,944
2.1%
currencies other than the US dollar. An entity’s
functional currency is the currency of the primary
economic environment in which the entity operates.
Exchange differences on structural exposures
are recognised in other comprehensive income. The
main functional currencies in which HSBC’s
operations transact business are the US dollar, the
Hong Kong dollar, pound sterling, the euro, the
Mexican peso, the Brazilian real and the Chinese
renminbi. HSBC Holdings’ functional currency is
the US dollar because the US dollar and currencies
linked to it are the most significant currencies
relevant to the operations of its subsidiaries, as well
as representing a significant proportion of its funds
generated from financing activities. HSBC uses the
US dollar as its presentation currency in its
consolidated financial statements because the US
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Market risk > Structural FX exposure / Defined benefit schemes / HSBC Holdings
dollar and currencies linked to it form the major
currency bloc in which HSBC transacts and funds
its business. HSBC’s consolidated balance sheet is,
therefore, affected by exchange differences
between the US dollar and all the non-US dollar
functional currencies of underlying subsidiaries.
HSBC hedges structural foreign exchange
exposures only in limited circumstances. HSBC’s
structural foreign exchange exposures are managed
with the primary objective of ensuring, where
practical, that HSBC’s consolidated capital ratios
and the capital ratios of individual banking
subsidiaries are largely 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 capital ratio of the subsidiary
in question.
HSBC may also transact hedges where a
currency in which it has structural exposures is
considered to be significantly overvalued and it is
possible in practice to transact a hedge. Any
hedging is undertaken using forward foreign
exchange contracts which are accounted for under
IFRSs as hedges of a net investment in a foreign
operation, or by financing with borrowings in the
same currencies as the functional currencies
involved. No forward foreign exchange hedges
were in place during 2009 or at the end of 2008.
Defined benefit pension schemes
(Audited)
Market risk arises within HSBC’s defined benefit
pension schemes to the extent that the obligations
of the schemes are not fully matched by assets
with determinable cash flows. Pension scheme
obligations fluctuate with changes in long-term
interest rates, inflation, salary levels and the
longevity of scheme members. Pension scheme
assets include equities and debt securities, the cash
flows of which change as equity prices and interest
rates vary. There is a risk that market movements in
equity prices and interest rates could result in asset
values which, taken together with regular ongoing
contributions, are insufficient over time to cover
the level of projected obligations and these, in turn,
could increase with a rise in inflation and members
living longer. Management, together with the
trustees who act on behalf of the pension scheme
beneficiaries, assess these risks using reports
prepared by independent external actuaries, take
action and, where appropriate, adjust investment
strategies and contribution levels accordingly.
258
HSBC’s defined benefit pension schemes
(Audited)
2009
US$bn
2008
US$bn
Liabilities (present value) .......
30.6
24.0
Assets:
Equity investments .................
Debt securities ........................
Other (including property) .....
%
21
67
12
%
20
68
12
100
100
Lower corporate bond yields in the UK in
2009 resulted in a decrease of 160 basis points in
the real discount rate (net of the increase in
expected inflation) used to value the accrued
benefits payable under the HSBC Bank (UK)
Pension Scheme, the Group’s largest plan. There
was an increase in the liabilities of the scheme
which was partially offset by an increase in the
fair values of the scheme’s plan assets. As a
consequence, the deficit on the HSBC Bank (UK)
Pension Scheme increased to US$3,822 million
from US$392 million. For details of the latest
actuarial valuation of the HSBC Bank (UK) pension
scheme, see Note 8 on the Financial Statements.
HSBC Holdings
(Audited)
As a financial services holding company, HSBC
Holdings has limited market risk activity. Its
activities predominantly involve maintaining
sufficient capital resources to support the Group’s
diverse activities; allocating these capital resources
across the Group’s businesses; earning dividend
and interest income on its investments in the
Group’s businesses; providing dividend payments
to HSBC Holding’s equity shareholders and interest
payments to providers of debt capital; and
maintaining a supply of short-term cash resources.
It does not take proprietary trading positions.
The main market risks to which HSBC
Holdings is exposed are interest rate risk and
foreign currency risk. Exposure to these risks arises
from short-term cash balances, funding positions
held, loans to subsidiaries, investments in long-
term financial assets and financial liabilities
including debt capital issued. The objective of
HSBC Holdings’ market risk management strategy
is to reduce exposure to these risks and minimise
volatility in economic income, cash flows and
distributable reserves. Market risk for HSBC
Holdings is monitored by its Structural Positions
Review Group.
A number of cross-currency interest rate
swaps entered into as part of HSBC Holdings’
management of interest rate risk arising on certain
long-term debt capital issues do not qualify for
hedge accounting treatment. Changes in the market
values of these swaps are recognised directly in the
income statement. HSBC Holdings expects that
these swaps will be held to final maturity with the
accumulated changes in market value consequently
trending to zero.
Certain loans to subsidiaries of a capital nature
that are not denominated in the functional currency
of either the provider or the recipient are accounted
for as financial assets. Changes in the carrying
amount of these assets due to exchange differences
are taken directly to the income statement. These
loans, and the associated foreign exchange
exposures, are eliminated on a Group consolidated
basis.
The principal tools used in the management of
market risk are the projected sensitivity of HSBC
Holdings’ net interest income to future changes in
yield curves and interest rate gap re-pricing tables
for interest rate risk, and VAR for foreign exchange
rate risk.
Net interest income sensitivity
HSBC Holdings monitors net interest income
sensitivity over a 5-year time horizon reflecting the
longer-term perspective on interest rate risk
management appropriate to a financial services
holding company. The table below sets out the
effect on HSBC Holdings’ future net interest
income over a 5-year time horizon of an incremental
25 basis point parallel fall or rise in all yield curves
worldwide at the beginning of each quarter during
the 12 months from 1 January 2010.
Assuming no management action, a sequence
of such rises would increase HSBC Holdings’
planned net interest income for 2010 by
US$16 million (2009: decrease of US$60 million)
and decrease cumulative net interest income
by US$116 million over a 5-year period
from 1 January 2010 (2009: decrease of
US$554 million), while a sequence of such falls
would decrease planned net interest income for
2010 by US$17 million (2009: increase of
US$60 million) and increase cumulative net
interest income by US$115 million over a 5-year
period from 1 January 2010 (2009: increase of
US$554 million). These figures incorporate the
effect of any option features in the underlying
exposures.
Instead of assuming that all interest rates move
together, HSBC groups its interest rate exposures
into currency blocs whose interest rates are
considered likely to move together. The sensitivity
of projected net interest income, on this basis, is
described as follows:
Sensitivity of HSBC Holdings’ net interest income to interest rate movements
(Unaudited)
US dollar
bloc
US$m
Sterling
bloc
US$m
Euro
bloc
US$m
Total
US$m
Change in projected net interest income as at 31 December
2009 arising from a shift in yield curves of:
+ 25 basis points at the beginning of each quarter
0-1 year .................................................................................
2-3 years ...............................................................................
4-5 years ...............................................................................
– 25 basis points at the beginning of each quarter
0-1 year .................................................................................
2-3 years ...............................................................................
4-5 years ...............................................................................
Change in projected net interest income as at 31 December 2008
arising from a shift in yield curves of:
+ 25 basis points at the beginning of each quarter
0-1 year .................................................................................
2-3 years ...............................................................................
4-5 years ...............................................................................
– 25 basis points at the beginning of each quarter
0-1 year .................................................................................
2-3 years ...............................................................................
4-5 years ...............................................................................
(13)
(172)
(165)
12
172
165
(81)
(351)
(358)
81
351
358
18
75
105
(18)
(75)
(105)
10
20
54
(10)
(20)
(54)
11
19
6
(11)
(19)
(6)
11
77
64
(11)
(77)
(64)
16
(78)
(54)
(17)
78
54
(60)
(254)
(240)
60
254
240
259
be taken to mitigate this interest rate risk, however.
The projected decrease in HSBC Holdings’
sensitivity to moves in interest rates is mainly due to
the placing of funds received as a result of the rights
issue at short tenors.
Interest repricing gap table
The interest rate risk on the fixed-rate securities
issued by HSBC Holdings is not included within the
Group VAR but is managed on a repricing gap basis.
The interest rate repricing gap table below analyses
the full term structure of interest rate mismatches
within HSBC Holdings’ balance sheet. The year on
year decrease in the negative net interest rate gap in
the up to 1 year time bucket is due to funds received
as a result of the rights issue being invested in short-
term liquid assets.
Up to
1 year
US$m
224
–
16,980
–
1,866
–
19,070
(2,898)
–
–
–
–
(2,850)
–
–
(5,748)
More than
1-5 years
US$m
5-10 years
US$m
10 years
US$m
Non-
interest
bearing
US$m
–
2,981
1,252
545
82,289
674
87,741
(813)
(769)
(362)
–
(1,257)
(192)
(72,226)
(433)
–
–
–
300
–
–
300
–
(5,017)
–
–
–
(3,117)
–
–
–
–
1,896
1,610
875
–
4,381
–
(5,015)
–
(1,055)
–
(7,382)
(3,650)
–
(8,134)
(17,102)
(76,052)
6,306
(1,528)
4,051
(8,670)
(1,330)
10,359
(1,689)
(10,359)
–
–
–
3,084
–
1,217
–
4,301
–
(6,108)
–
(1,784)
–
(865)
–
–
(8,757)
6,275
1,819
(161)
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Market risk > HSBC Holdings // Residual value risk
HSBC Holdings’ principal exposure to changes
in its net interest income from movements in interest
rates arises on short-term cash balances, floating rate
loans advanced to subsidiaries and fixed rate debt
capital securities in issue which have been swapped
to floating rate.
The interest rate sensitivities tabulated above are
illustrative only and are based on simplified scenarios.
The figures represent the effect of pro forma
movements in net interest income based on the
projected yield curve scenarios, HSBC Holdings’
current interest rate risk profile and assumed changes
to that profile during the next five years. Changes to
assumptions concerning the risk profile over the next
five years can have a significant impact on the net
interest income sensitivity for that period. The figures
do not take into account the effect of actions that could
Repricing gap analysis of HSBC Holdings
(Audited)
At 31 December 2009
Cash at bank and in hand:
– balances with HSBC undertakings ............
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Investments in subsidiaries .................................
Other assets .........................................................
Total
US$m
224
2,981
23,212
2,455
86,247
674
Total assets ..........................................................
115,793
Amounts owed to HSBC undertakings ..............
Financial liabilities designated at fair values .....
Derivatives ..........................................................
Debt securities in issue .......................................
Other liabilities ...................................................
Subordinated liabilities .......................................
Total equity .........................................................
Other non-interest bearing liabilities ..................
(3,711)
(16,909)
(362)
(2,839)
(1,257)
(14,406)
(75,876)
(433)
Total liabilities and equity ..................................
(115,793)
Off-balance sheet items attracting interest rate
sensitivity ........................................................
Net interest rate risk gap .....................................
Cumulative interest rate gap ...............................
–
–
–
(15,302)
(1,980)
(1,980)
260
Non-
interest
bearing
US$m
–
3,682
1,076
444
78,565
131
83,898
(653)
969
(1,324)
(1,816)
(216)
(58,937)
(507)
At 31 December 2008
Cash at bank and in hand:
– balances with HSBC undertakings ............
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Investments in subsidiaries .................................
Other assets .........................................................
Total
US$m
443
3,682
11,804
2,629
81,993
131
Up to
1 year
US$m
443
–
8,995
–
1,459
–
Total assets ..........................................................
100,682
10,897
Amounts owed to HSBC undertakings ..............
Financial liabilities designated at fair values .....
Derivatives ..........................................................
Other liabilities ...................................................
Subordinated liabilities .......................................
Total equity .........................................................
Other non-interest bearing liabilities ..................
(4,042)
(16,389)
(1,324)
(1,816)
(14,017)
(62,587)
(507)
Total liabilities and equity ..................................
(100,682)
(3,389)
(4,210)
–
–
(1,500)
–
–
(9,099)
More than
1-5 years
US$m
5-10 years
US$m
10 years
US$m
–
–
511
–
1,094
–
1,605
–
(4,410)
–
–
(2,187)
–
–
(6,597)
–
–
–
300
–
–
300
–
(5,290)
–
–
(2,962)
–
–
–
–
1,222
1,885
875
–
3,982
–
(3,448)
–
–
(7,152)
(3,650)
–
(8,252)
(14,250)
(62,484)
Off-balance sheet items attracting interest rate
sensitivity ........................................................
Net interest rate risk gap .....................................
Cumulative interest rate gap ...............................
–
–
–
(12,353)
(10,555)
4,410
(582)
5,046
(2,906)
3,760
(6,508)
(863)
20,551
(10,555)
(11,137)
(14,043)
(20,551)
–
Value at risk
Total foreign exchange VAR arising within HSBC
Holdings in 2009 and 2008 was as follows:
HSBC Holdings – value at risk
(Audited)
At 31 December .............................
Average ..........................................
Minimum .......................................
Maximum .......................................
Foreign exchange
2009
US$m
83.2
76.6
55.2
190.8
2008
US$m
55.2
40.3
29.2
56.1
The foreign exchange risk largely arises from
loans to subsidiaries of a capital nature that are not
denominated in the functional currency of either the
provider or the recipient and which are accounted
for as financial assets. Changes in the carrying
amount of these loans due to foreign exchange rate
differences are taken directly to the income
statement. These loans, and the associated foreign
exchange exposures, are eliminated on a Group
consolidated basis.
The increased maximum VAR in 2009 related to
a portion of the proceeds of the Group’s rights issue
that was held in sterling.
Residual value risk
(Unaudited)
A significant part of a lessor’s return from operating
leases is dependent upon its management of residual
value risk. This arises from operating lease
transactions to the extent that the values recovered
from disposing of leased assets or re-letting them at
the end of the lease terms (the ‘residual values’)
differ from those projected at the inception of the
leases. The business regularly monitors residual
value exposure by reviewing the recoverability of
the residual value projected at lease inception. This
entails considering the potential of re-letting of
operating lease assets and their projected disposal
proceeds at the end of their lease terms. Provision is
made to the extent that the carrying values of leased
assets are impaired through residual values not being
fully recoverable.
The net carrying amount of equipment leased to
customers on operating leases by the Group takes
into account projected residual values at the end of
current lease terms, to be recovered through
re-letting or disposal in the following periods:
261
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Operational risk > Legal risk / Group security // Pension risk / Reputational risk
Residual values
(Unaudited)
Legal risk
(Unaudited)
2009
US$m
21
233
1,347
792
2,393
2008
US$m
108
59
530
1,549
2,246
Within 1 year ...........................
Between 1-2 years ....................
Between 2-5 years ....................
More than 5 years ....................
Total exposure .........................
Operational risk
(Unaudited)
Operational risk is relevant to every aspect of the
Group’s business and covers a wide spectrum of
issues. Losses arising through fraud, unauthorised
activities, errors, omission, inefficiency, systems
failure or from external events all fall within the
definition of operational risk.
The objective of HSBC’s operational risk
management is to manage and control
operational risk in a cost effective manner
within targeted levels of operational risk
consistent with the Group’s risk appetite, as
defined by GMB.
A formal governance structure provides
oversight over the management of operational risk.
A Global Operational Risk and Control Committee,
which reports to the Risk Management Meeting,
meets at least quarterly to discuss key risk issues and
review the effective implementation of the Group’s
operational risk management framework.
In each of HSBC’s subsidiaries, business
managers are responsible for maintaining an
acceptable level of internal control, commensurate
with the scale and nature of operations. They are
responsible for identifying and assessing risks,
designing controls and monitoring the effectiveness
of these controls. The operational risk management
framework helps managers to fulfil these
responsibilities by defining a standard risk
assessment methodology and providing a tool for
the systematic reporting of operational loss data.
A centralised database is used to record the
results of the operational risk management process.
Operational risk self-assessments are input and
maintained by the business unit. To ensure that
operational risk losses are consistently reported and
monitored at Group level, all Group companies are
required to report individual losses when the net loss
is expected to exceed US$10,000.
Further details of the HSBC approach to
Operational Risk Management can be found in the
Group pillar 3 disclosures.
262
Each operating company is required to implement
procedures to manage legal risk that conform to
HSBC standards. Legal risk falls within the
definition of operational risk and includes
contractual risk, dispute risk, legislative risk and
non-contractual rights risk.
• Contractual risk is the risk that the rights and/or
obligations of an HSBC company within a
contractual relationship are defective.
• Dispute risk is made up of the risks that an
HSBC company is subject to when it is involved
in or managing a potential or actual dispute.
• Legislative risk is the risk that an HSBC
company fails to adhere to the laws of the
jurisdictions in which it operates.
• Non-contractual rights risk is the risk that an
HSBC company’s assets are not properly owned
or are infringed by others, or an HSBC company
infringes another party’s rights.
HSBC has a global legal function to assist
management in controlling legal risk. The function
provides legal advice and support in managing
claims against HSBC companies, as well as in
respect of non-routine debt recoveries or other
litigation against third parties.
The GMO Legal department oversees the global
legal function and is headed by a Group General
Manager. There are legal departments in 58 of the
countries in which HSBC operates. There are also
regional legal functions in each of Europe, North
America, Latin America, the Middle East, and
Asia-Pacific.
Operating companies must notify the
appropriate legal department immediately any
litigation is either threatened or commenced against
HSBC or an employee. The appropriate regional
legal department must be immediately advised (and
must in turn immediately advise the GMO Legal
department) of any action by a regulatory authority,
where the proceedings are criminal, or where the
claim might materially affect the Group’s reputation.
Further, any claims which exceed US$1.5 million or
equivalent must also be advised to the appropriate
regional legal department and the regional legal
department must immediately advise the GMO Legal
department if any such claim exceeds US$5 million.
All such matters are then reported to the Risk
Management Meeting of the GMB in a monthly
paper.
An exception report must be made to the local
compliance function and escalated to the Head of
Group Compliance in respect of any breach which
has given rise to a fine and/or costs levied by a court
of law or regulatory body where the amount is
US$1,500 or more, and material or significant issues
are reported to the Risk Management Meeting of
GMB and/or the Group Audit Committee.
In addition, operating companies are required to
submit quarterly returns detailing outstanding claims
where the claim (or group of similar claims) exceeds
US$10 million, where the action is by a regulatory
authority, where the proceedings are criminal, where
the claim might materially affect the Group’s
reputation, or, where the GMO Legal department has
requested returns be completed for a particular
claim. These returns are used for reporting to the
Group Audit Committee and the Board, and
disclosure in the Interim Report and Annual Report
and Accounts, if appropriate.
Group security and fraud risk
(Unaudited)
Security and fraud risk issues are managed at Group
level by Group Security and Fraud Risk. This unit,
which has responsibility for physical risk, fraud,
information and contingency risk, and security and
business intelligence, is fully integrated within the
central GMO Risk function. This enables the Group
to identify and mitigate the permutations of these
and other non-financial risks to its business lines
across the jurisdictions in which it operates.
Pension risk
(Unaudited)
HSBC operates a number of pension plans
throughout the world, as described in Note 8 on the
Financial Statements. Some of them are defined
benefit plans, of which the largest is the HSBC Bank
(UK) Pension Scheme.
In order to fund the benefits associated with
these plans, sponsoring group companies (and, in
some instances, employees) make regular
contributions in accordance with advice from
actuaries and in consultation with the scheme’s
trustees (where relevant). The defined benefit plans
invest these contributions in a range of investments
designed to meet their long-term liabilities.
The level of these contributions has a direct
impact on the cash flow of the Group and would
normally be set to ensure that there are sufficient
funds to meet the cost of the accruing benefits for the
future service of active members. However, higher
contributions will be required when plan assets are
263
considered insufficient to cover the existing pension
liabilities as a deficit exists. Contribution rates are
typically revised annually or triennially, depending
on the plan. The agreed contributions to the HSBC
Bank (UK) Pension Scheme are revised triennially.
A deficit in a defined benefit plan may arise
from a number of factors, including:
•
•
•
•
investments delivering a return below that
required to provide the projected plan benefits.
This could arise, for example, when there is a
fall in the market value of equities, or when
increases in long-term interest rates cause a fall
in the value of fixed income securities held;
the prevailing economic environment leading to
corporate failures, thus triggering write-downs
in asset values (both equity and debt);
a change in either interest rates or inflation
which causes an increase in the value of the
scheme liabilities; and
scheme members living longer than expected
(known as longevity risk).
The plan’s investment strategy is determined
after taking into consideration the market risk
inherent in the investments and its consequential
impact on potential future contributions.
Ultimate responsibility for investment strategy
rests with either the trustees or, in certain
circumstances, a Management Committee. The
degree of independence of the trustees from HSBC
varies in different jurisdictions. For example, the
HSBC Bank (UK) Pension Scheme, which accounts
for approximately 70 per cent of the obligations
of the Group’s defined benefit pension plans, is
overseen by a corporate trustee who regularly
monitors the market risks inherent in the scheme.
Reputational risk
(Unaudited)
The safeguarding of HSBC’s reputation is
of paramount importance to its continued
prosperity and is the responsibility of every
member of staff.
HSBC regularly reviews its policies and procedures
for safeguarding against reputational and operational
risks. This is an evolutionary process which takes
account of relevant developments and industry
guidance such as The Association of British
Insurers’ guidance on best practice when responding
to environmental, social and governance (‘ESG’)
risks.
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Reputational risk / Sustainability risk // Insurance operations > Life insurance business
HSBC has always aspired to the highest
standards of conduct and, as a matter of routine,
takes account of reputational risks to its business.
Reputational risks can arise from a wide variety of
causes, including ESG issues and 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. The training of Directors on
appointment includes reputational matters.
A Group Reputational Risk Committee
(‘GRRC’) was established in 2008 at which Group
functions with responsibility for activities that attract
reputational risk are represented. The primary role
of the GRRC is to consider areas and activities
presenting significant reputational risk and, where
appropriate, to make recommendations to the Risk
Management Meeting and GMB for policy or
procedural changes to mitigate such risk. With effect
from 2010, Reputational Risk Committees have been
established in each of the Group’s regions. These
committees will ensure that reputational risks are
considered at a regional as well as Group level.
Minutes from the regional committees will be tabled
at GRRC.
Standards on all major aspects of business
are set for HSBC and for individual subsidiaries,
businesses and functions. Reputational risks,
including ESG matters, are considered and assessed
by the Board, GMB, the Risk Management Meeting,
subsidiary company boards, board committees and
senior management during the formulation of policy
and the establishment of HSBC standards. These
policies, which form an integral part of the internal
control system (see page 313), are communicated
through manuals and statements of policy and are
promulgated through internal communications and
training. The policies cover ESG issues and set out
operational procedures in all areas of reputational
risk, including money laundering deterrence,
counter-terrorist financing, environmental impact,
anti-corruption measures and employee relations.
The policy manuals address risk issues in detail and
co-operation between GMO departments and
businesses is required to ensure a strong adherence
to HSBC’s risk management system and its
sustainability practices.
Sustainability risk
(Unaudited)
Assessing the environmental and social impacts
of providing finance to the Group’s customers has
been firmly embedded into HSBC’s overall risk
management processes. Sustainability risks arise
from the provision of financial services to companies
or projects which run counter to the needs of
sustainable development; in effect this risk arises
when the environmental and social effects outweigh
economic benefits. Within GMO, a separate
function, Group Corporate Sustainability, is
mandated to manage these risks globally working
through local offices as appropriate. Sustainability
Risk Managers have regional or national
responsibilities for advising on and managing
environmental and social risks.
Group Corporate Sustainability’s risk
management responsibilities include:
•
•
•
formulating sustainability risk policies. This
includes oversight of HSBC’s sustainability
risk standards, management of the Equator
Principles for project finance lending, and
sector-based sustainability policies covering
those sectors with high environmental or social
impacts (forestry, freshwater infrastructure,
chemicals, energy, mining and metals, and
defence-related lending); undertaking an
independent review of transactions where
sustainability risks are assessed to be high, and
supporting HSBC’s operating companies to
assess similar risks of a lower magnitude;
building and implementing systems-based
processes to ensure consistent application of
policies, reduce the costs of sustainability risk
reviews and capture management information to
measure and report on the effect of HSBC’s
lending and investment activities on sustainable
development; and
providing training and capacity building within
HSBC’s operating companies to ensure
sustainability risks are identified and mitigated
consistently to either HSBC’s own standards,
international standards or local regulations,
whichever is the higher.
264
Risk management of insurance
operations
(Audited)
HSBC operates a bancassurance model which
provides insurance products for customers with
whom the Group has a banking relationship.
Insurance products are sold to all customer groups,
mainly utilising retail branches, the internet and
phone centres. Personal Financial Services
customers attract the majority of sales and comprise
the majority of policyholders.
HSBC offers its customers a wide range of
insurance and investment products, many of
which complement other bank and
consumer finance products.
Many of these insurance products are
manufactured by HSBC subsidiaries. The Group
underwrites the insurance risk and retains the risks
and rewards associated with writing insurance
contracts, retaining both the underwriting profit and
the commission paid by the manufacturer to the bank
distribution channel within the Group. When the
Group chooses to manage its exposure to insurance
risk through the use of third-party reinsurers, the
associated revenue and manufacturing profit is ceded
to them. HSBC’s exposure to risks associated with
manufacturing insurance contracts in its subsidiaries
and its management of these risks are discussed
below.
Where the Group considers it operationally
more effective, third parties are engaged to
manufacture insurance products for sale through
HSBC’s banking network. The Group works with a
limited number of market-leading partners to provide
the products. These arrangements earn HSBC a
commission.
HSBC’s bancassurance business operates in
all six of the Group’s geographical regions with
over 30 legal entities, the majority of which are
subsidiaries of banking legal entities, manufacturing
insurance products. Management of these insurance
manufacturers set their own control procedures in
addition to complying with guidelines issued by the
Group Insurance Head Office. This is headed by
HSBC’s Managing Director of Insurance, supported
by a Chief Operating Officer, Chief Financial
Officer and Chief Risk Officer. The role of Group
Insurance Head Office includes forming and
communicating the strategy for insurance, setting the
control framework for monitoring and measuring
insurance risk in line with Group practices, and
drawing up insurance-specific policies and
guidelines for inclusion in the Group Instruction
265
Manuals. The control framework for monitoring risk
includes the Group Insurance Risk Committee,
which oversees the status of the significant risk
categories in the insurance operations. Five sub-
committees report to the Committee, focusing on
products and pricing, market and liquidity risk,
credit risk, operational and insurance risk.
All insurance products, whether manufactured
internally or by a third party, are subjected to a
detailed product approval process. Approval is
provided by the Regional Insurance Head Office or
Group Insurance Head Office depending on the type
of product and its risk profile. The process consists
of an analysis of the inherent risks of a product,
including but not limited to market risk, credit risk,
insurance and pricing risk and regulatory risk.
Certain products, for example those of a particularly
complex nature or those providing a guarantee, are
reviewed by the Product and Pricing Committee as
part of the approval process. The committee
comprises the heads of the relevant risk functions
within insurance and sits at both regional and Group
Insurance levels.
The processes and controls employed to monitor
each risk are described under their respective
headings below.
The main contracts manufactured by HSBC are
as follows:
Life insurance business
(Audited)
• Life insurance contracts with discretionary
participation features (‘DPF’) allow
policyholders to participate in the profits
generated from such business, which may take
the form of annual bonuses and a final bonus, in
addition to providing cover on death. Certain
minimum return levels are also guaranteed. The
largest portfolio is in Hong Kong.
• Credit life insurance business is written to
underpin banking and finance products. The
policy pays a claim if the holder of the loan is
unable to make repayments due to early death
or unemployment.
• Annuities are contracts providing regular
payments of income from capital investment for
either a fixed period or during the annuitant’s
lifetime. Payments to the annuitant either begin
on inception of the policy (immediate annuities)
or at a designated future date (deferred
annuities).
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Non-life business / Insurance risk
• Term assurance and critical illness policies
provide cover in the event of death (term
assurance) and serious illness.
• Linked life insurance contracts pay benefits to
policyholders which are typically determined
by reference to the value of the investments
supporting the policies.
•
Investment contracts with DPF allow
policyholders to participate in the profits
generated by such business. The largest
portfolio is written in France. Policyholders
are guaranteed to receive a return on their
investment plus any discretionary bonuses.
In addition, certain minimum return levels are
guaranteed.
• Unit-linked investment contracts are those
where the principal benefit payable is the value
of assigned assets. Any benefits payable to
policyholders related to insurance risk are not
significant on these contracts.
• Other investment contracts include pension
contracts written in Hong Kong.
Non-life insurance business
(Audited)
Non-life insurance contracts include motor, fire and
other damage to property, accident and health,
repayment protection and commercial insurances.
Motor insurance business covers vehicle
damage and liability for personal injury. For fire and
other damage to property, the main focus in most
markets is providing individuals with home and
contents insurance. Cover is also provided for
selected commercial customers, largely written in
Asia and Latin America.
A very limited portfolio of liability business is
written, other than that included in the motor book.
Credit non-life insurance is concentrated in
North America, and is originated in conjunction with
the provision of loans. Following a decision taken to
close the Consumer Lending business in the US,
insurance products written in conjunction with this
business will now be run off. In December 2007, the
group decided to cease selling payment protection
insurance (‘PPI’) products in the UK and a phased
withdrawal was completed across the HSBC, first
direct and M&S Money brands during 2008. HFC
ceased selling single premium PPI in 2008 and sales
of regular PPI will reduce as HFC exits its remaining
retail relationships. HSBC continues to distribute its
UK short-term income protection (‘STIP’) product.
In January 2009, the Competition Commission
(‘CC’) published its report into the PPI market in
266
which it stipulated that STIP products will also be
subject to their remedies when sold in conjunction
with or as a result of a referral following the sale of a
loan or similar credit product. HSBC has undertaken
an analysis of the required changes to the STIP
product and its sales processes resulting from the
CC’s remedies. Following an appeal to the
Competition Appeal Tribunal, the CC continues to
consult on whether a ban on firms selling PPI at the
point of sale of the credit product is an appropriate
and justified remedy for the deficiencies it identified
in the PPI market.
Given the nature of the contracts written by the
Group, the risks to which HSBC’s insurance
operations are exposed fall into two principal
categories: insurance risk and financial risk. The
following section describes the nature and extent of
these risks and HSBC’s approach to managing them.
The majority of the risk in the insurance business
derives from manufacturing activities, and
consequently the following sections focus on how
the Group manages risk arising in the manufacturing
subsidiaries.
Insurance risk
(Audited)
Insurance risk is a risk, other than financial risk,
transferred from the holder of a contract to the
issuer, in this case HSBC.
The principal insurance risk faced by HSBC
is that, over time, the combined cost of
claims, benefits, administration and
acquisition of the contract may exceed the
aggregate amount of premiums received
and investment income.
The cost of claims and benefits can be
influenced by many factors, including mortality and
morbidity experience, lapse and surrender rates and,
if the policy has a savings element, the performance
of the assets held to support the liabilities.
Performance of the underlying assets is affected by
changes in both interest rates and equity prices (see
page 274).
During 2009, Group Insurance agreed to a
global risk appetite statement in relation to insurance
risks, encompassing limits on the largest exposures
the business will write in normal circumstances. In
addition to the global statement, local businesses
continue to propose their own risk appetites that are
authorised centrally.
Life and non-life business insurance risks are
controlled by high-level policies and procedures set
centrally, supplemented as appropriate with
measures which take account of specific local
market conditions and regulatory requirements.
Specifically, the Group manages its exposure
to insurance risk by applying formal underwriting,
reinsurance and claims-handling procedures
designed to ensure compliance with regulations.
This is supplemented with stress testing. In addition,
manufacturing entities are required to obtain
authorisation from Group Insurance Head Office to
write certain classes of business, with restrictions
applying to commercial and liability non-life
insurance, in particular.
Local ALCOs and Risk Management
Committees are required to monitor certain risk
exposures, mainly for life business where the focus
is on reviewing the risks associated with the duration
and cash flow matching of insurance assets and
liabilities.
Reinsurance is also used as a means of
mitigating exposure, in particular to aggregations of
catastrophe risk. Specific examples are as follows:
• Accident and health insurance. Potential
exposure to concentrations of claims arising
from isolated events such as earthquakes are
mitigated by the purchase of catastrophe
reinsurance.
• Motor insurance. Reinsurance protection is
arranged to avoid excessive exposure to larger
losses, particularly from personal injury claims.
• Fire and other damage to property. Portfolios at
risk from catastrophic losses are protected by
reinsurance in accordance with information
obtained from professional risk-modelling
organisations.
Although reinsurance provides a means of
managing insurance risk, such contracts expose the
Group to counterparty risk, the risk of default by the
reinsurer (see page 277).
The following tables provide an analysis of
HSBC’s insurance risk exposures by geographical
region and by type of business. By definition, HSBC
is not exposed to insurance risk on investment
contracts, so they are not included in the insurance
risk management analysis.
Insurance contracts sold by HSBC primarily
relate to core underlying banking activities, such as
savings and investment products, and credit life
products. The Group’s manufacturing focuses on
personal lines, e.g. contracts written for individuals,
which tend to be of higher value than commercial
lines. The focus on the higher volume, lower
individual value personal lines contributes to
diversifying insurance risk.
Life business tends to be longer-term in nature
than non-life business and frequently involves an
element of savings and investment in the contract.
Accordingly, separate tables are provided for life and
non-life businesses, reflecting their distinctive risk
characteristics. The life insurance risk table provides
an analysis of insurance liabilities as the best
available overall measure of insurance exposure,
because provisions for life contracts are typically set
by reference to expected future cash outflows
relating to the underlying policies. The table for
non-life business uses written premiums as the best
available measure of risk exposure because policies
are typically priced by reference to the risk being
underwritten.
267
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Insurance risk
Analysis of life insurance risk – liabilities to policyholders49
(Audited)
At 31 December 2009
Life (non-linked)..................................................
Insurance contracts with DPF50 ......................
Credit life ........................................................
Annuities .........................................................
Term assurance and other long-term
Europe
US$m
2,998
1,128
953
452
contracts .....................................................
465
Life (linked) ........................................................
Investment contracts with DPF50,51......................
Insurance liabilities to policyholders ..................
At 31 December 2008
Life (non-linked)..................................................
Insurance contracts with DPF50 ......................
Credit life ........................................................
Annuities .........................................................
Term assurance and other long-term
2,125
20,979
26,102
2,962
1,015
252
379
Hong
Kong
US$m
14,456
14,095
–
–
361
2,896
–
17,352
11,320
11,213
–
–
contracts .....................................................
1,316
107
Life (linked) ........................................................
Investment contracts with DPF50,51 .....................
Insurance liabilities to policyholders ..................
1,548
17,732
22,242
2,276
–
13,596
Rest of
Asia-
Pacific
US$m
North
Latin
America
US$m
America
US$m
1,026
–
50
777
199
–
–
1,973
–
–
1,554
419
3,528
–
1,026
5,501
1,006
–
65
805
1,739
–
–
1,363
Total
US$m
20,979
15,450
1,023
2,811
1,695
8,986
21,014
50,979
17,370
12,444
317
2,575
136
376
2,034
–
–
1,933
–
1,006
3,672
6,067
17,766
41,203
526
227
20
28
251
437
35
998
343
216
–
28
99
310
34
687
For footnotes, see page 291.
(Audited)
The above table of liabilities to life insurance
policyholders highlights that the most significant
products are investment contracts with DPF issued
in France, insurance contracts with DPF issued in
Hong Kong and unit-linked contracts issued in
Hong Kong, Latin America and Europe.
The liabilities for long-term contracts are set by
reference to a range of assumptions which include
lapse and surrender rates, mortality and expense
levels. These assumptions typically reflect each
entity’s own experience. Economic assumptions,
such as investment returns and interest rates, are
usually based on market observable data. Changes in
underlying assumptions affect the liabilities. The
sensitivity of profit after tax and shareholders’ equity
to changes in both economic and non-economic
assumptions are considered below in ‘Sensitivity of
HSBC’s insurance subsidiaries to risk factors’ and
‘Sensitivity analysis’.
Insurance risk arising from life insurance
depends on the type of business, and varies
considerably. The principal risks are mortality,
morbidity, lapse, surrender and expense levels.
The main contracts which generate exposure to
mortality and morbidity risks are term assurance
contracts and annuities. These risks are monitored on
a regular basis, and are primarily mitigated by
medical underwriting and by retaining the ability in
certain cases to amend premiums in the light of
experience. The risk associated with lapses and
surrenders is generally mitigated by the application
of surrender charges, though other management
actions, such as managing the level of bonus
payments to policyholders, may be taken. Expense
risk is generally managed through pricing. The level
of expenses in the contract will be one of the factors
considered when setting premiums.
268
Analysis of non-life insurance risk – net written insurance premiums49,52
(Audited)
2009
Accident and health ............................................
Motor ..................................................................
Fire and other damage ........................................
Liability ...............................................................
Credit (non-life) ..................................................
Marine, aviation and transport ............................
Other non-life insurance contracts .....................
Total net written insurance premiums ................
Net insurance claims incurred and movement
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific
US$m
North
Latin
America
US$m
America
US$m
Total
US$m
94
123
72
–
35
7
24
355
160
14
22
15
–
9
32
252
7
20
8
4
–
4
1
44
3
–
16
–
86
–
12
117
23
234
22
2
–
17
58
356
287
391
140
21
121
37
127
1,124
in liabilities to policyholders ..........................
(748)
(107)
(17)
(96)
(155)
(1,123)
2008
Accident and health ............................................
Motor ..................................................................
Fire and other damage ........................................
Liability ...............................................................
Credit (non-life) ..................................................
Marine, aviation and transport ............................
Other non-life insurance contracts .....................
Total net written insurance premiums ................
Net insurance claims incurred and movement
14
350
150
–
99
–
49
662
155
15
26
14
–
11
28
249
5
14
3
4
–
4
–
30
3
–
4
–
144
–
15
166
27
273
22
34
–
24
29
409
204
652
205
52
243
39
121
1,516
in liabilities to policyholders ..........................
(553)
(121)
(13)
(98)
(176)
(961)
2007
Accident and health ............................................
Motor ..................................................................
Fire and other damage ........................................
Liability ...............................................................
Credit (non-life) ..................................................
Marine, aviation and transport ............................
Other non-life insurance contracts .....................
Total net written insurance premiums ................
Net insurance claims incurred and movement
27
369
178
–
76
–
30
680
132
15
23
12
–
12
24
218
5
10
7
3
–
4
–
29
–
–
2
8
157
–
30
197
25
224
19
34
–
18
24
344
189
618
229
57
233
34
108
1,468
in liabilities to policyholders ..........................
(598)
(90)
(10)
(79)
(151)
(928)
For footnotes, see page 291.
(Audited)
The above table of non-life net written insurance
premiums provides an overall summary of the
non-life insurance activity of the Group. Motor
business is written predominantly in Europe and
Latin America and represented the largest class of
non-life business in 2009. However, following a
decision to close to new business in the second half
of 2009, the UK motor book is now in run-off. Fire
and other damage to property business is written in
all major markets, most significantly in Europe.
Credit non-life insurance, which is originated in
conjunction with the provision of loans, is
concentrated in the US and Europe.
The main risks associated with non-life business
are underwriting risk and claims experience risk.
269
Underwriting risk is the risk that HSBC does not
charge premiums appropriate to the cover provided
and claims experience risk is the risk that portfolio
experience differs from expectations. HSBC
manages these risks through pricing (for example,
imposing restrictions and deductibles in the policy
terms and conditions), product design, risk selection,
claims handling, investment strategy and reinsurance
policy. The majority of non-life insurance contracts
are renewable annually and the underwriters have
the right to refuse renewal or to change the terms and
conditions of the contract at that time. Management
may decide to withdraw a product from the market
when it is no longer considered commercially viable,
such as the closure of the UK motor book to new
business in 2009.
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Insurance risk
Balance sheet of insurance manufacturing
subsidiaries by type of contract
(Audited)
A principal tool used by HSBC to manage its
exposure to insurance risk, in particular for
life insurance contracts, is asset and liability
matching.
Models are used to assess the effect of a range of
future scenarios on the values of financial assets
and associated liabilities, and ALCOs employ
the outcomes in determining how the assets and
liabilities should be matched. The scenarios include
stresses applied to factors which affect insurance
risk such as mortality and lapse rates. In addition to
assessing the actual cash inflow required to meet
cash outflows, of particular importance is the need to
match the expected pattern of cash inflows with the
benefits payable on the underlying contracts, which
can extend for many years. The table below shows
the composition of assets and liabilities and
demonstrates that there were sufficient assets to
cover the liabilities to policyholders at the end of
2009.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Insurance contracts
Investment contracts
With
DPF
US$m
Unit-
linked
US$m
Annu-
ities
Term
assur-
ance53
US$m US$m
Non-life
With
DPF51
US$m US$m
Unit-
linked
US$m
Other
Other
assets52 Total
US$m
US$m US$m
At 31 December 2009
Financial assets ...................
– trading assets ................
– financial assets
designated at fair value
– derivatives ....................
– financial investments ...
– other financial assets ....
Reinsurance assets .............
PVIF55 ................................
Other assets and
15,322
–
599
16
13,013
1,694
6
–
8,204
–
7,837
1
–
366
831
–
2,567
–
2,053
–
2,290
10
20,501
–
7,366
–
4,008
–
7,252
–
69,563
10
446
–
1,511
610
376
–
482
3
1,033
535
389
–
63
–
742
1,475
467
–
5,498
144
13,948
911
–
–
6,572
299
–
495
2
1,582 2,085
3
1,701 3,901
723 1,263
–
–
–
–
60
2,780
25,164
468
35,849
8,072
2,129
2,780
investment properties ......
165
5
25
634
242
516
13
56
601
2,257
Total assets .........................
15,493
9,040
2,968
3,076
2,999
21,017
7,379
4,064 10,693
76,729
Liabilities under investment
contracts:
– designated at fair value .
– carried at amortised cost
Liabilities under
–
–
–
–
–
–
–
–
–
–
–
–
7,347
–
3,518
417
–
–
10,865
417
insurance contracts ..........
Deferred tax .......................
Other liabilities ..................
15,450
6
–
8,986
–
–
2,811
22
–
2,718
1
–
2,728
7
–
21,014
1
–
–
–
–
–
2
–
–
750
2,371
53,707
789
2,371
Total liabilities ...................
15,456
8,986
2,833
2,719
2,735
21,015
7,347
3,937
3,121
68,149
Total equity ........................
–
–
–
–
–
–
–
–
8,580
8,580
Total equity and liabilities53
15,456
8,986
2,833
2,719
2,735
21,015
7,347
3,937 11,701
76,729
270
Insurance contracts
Investment contracts
With
DPF
US$m
Unit-
linked
US$m
Annu-
ities
Term
assur-
ance53
US$m US$m
Non-life
With
DPF51
US$m US$m
Unit-
linked
US$m
Other
Other
assets52 Total
US$m
US$m US$m
12,336
–
5,141
–
2,378
–
2,209
–
2,053
35
17,312
–
6,138
–
3,739
–
6,684
4
57,990
39
959
27
9,383
1,967
6
–
4,738
3
–
400
956
–
457
–
1,282
639
311
–
496
26
399
1,288
320
–
52
–
860
1,106
430
–
4,597
60
12,482
173
–
–
5,525
170
–
443
91
1,481 1,970
24
1,482 2,576
685 2,110
–
–
60
2,033
20,275
401
28,464
8,811
2,083
2,033
–
–
55
At 31 December 2008
Financial assets ..................
– trading assets ................
– financial assets
designated at fair value
– derivatives ....................
– financial investments ...
– other financial assets ....
Reinsurance assets .............
PVIF55 ................................
Other assets and
investment properties ......
121
3
32
71
257
459
54
935
1,987
Total assets .........................
12,463
6,100
2,721
2,600
2,740
17,771
6,193
3,793
9,712
64,093
Liabilities under investment
contracts:
– designated at fair value
– carried at amortised cost
Liabilities under
–
–
–
–
–
–
–
–
–
–
–
–
6,012
–
3,271
284
–
–
9,283
284
insurance contracts ..........
Deferred tax .......................
Other liabilities ..................
12,444
8
–
6,067
7
–
2,575
22
–
2,351
30
–
2,480
1
–
17,766
1
–
–
–
–
–
3
–
–
515
2,679
43,683
587
2,679
Total liabilities ...................
12,452
6,074
2,597
2,381
2,481
17,767
6,012
3,558
3,194
56,516
Total equity ........................
–
–
–
–
–
–
–
–
7,577
7,577
Total equity and liabilities56
12,452
6,074
2,597
2,381
2,481
17,767
6,012
3,558 10,771
64,093
For footnotes, see page 291.
It may not always be possible to achieve a
complete matching of asset and liability durations,
partly because there is uncertainty over policyholder
behaviour, which introduces uncertainty over the
receipt of all future premiums and the timing of
claims, and partly because the duration of liabilities
may exceed the duration of the longest available
dated fixed interest investments. In an environment
where interest rates and yield curves are falling,
insurance operations are exposed to re-investment
risk as higher yielding assets held in the portfolio
mature and are replaced with lower yielding assets.
Given the objective to hold rather than trade
investments, the current portfolio of assets includes
debt securities issued at a time when yields were
higher than those observed in the current market. As
a result, the current yield of the debt securities
exceeds that which may be obtained on current
issues. Management action was taken in relation to
certain participating contracts to reduce short-term
bonus rates paid to policyholders to manage the
immediate strain on the business. Should interest
rates and yield curves return to lower levels for
prolonged periods, further management actions may
be needed.
The table below shows the composition of assets
and liabilities by region and demonstrates that there
were sufficient assets to cover the liabilities to
policyholders for each region at the end of 2009.
271
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Financial risks
Balance sheet of insurance manufacturing subsidiaries by geographical region49
(Audited)
At 31 December 2009
Financial assets ...................................................
– trading assets ...............................................
– financial assets designated at fair value ......
– derivatives ....................................................
– financial investments ...................................
– other financial assets ...................................
Reinsurance assets ..............................................
PVIF55 .................................................................
Other assets and investment properties ..............
Hong
Kong
US$m
22,337
–
4,758
18
14,771
2,790
849
1,248
498
Rest of
Asia-
Pacific
US$m
1,330
–
877
3
133
317
25
113
23
North
Latin
America
America
US$m
US$m
2,582
–
–
–
2,037
545
19
138
40
7,610
10
4,773
1
1,968
858
136
259
316
Total
US$m
69,563
10
25,164
468
35,849
8,072
2,129
2,780
2,257
Europe
US$m
35,704
–
14,756
446
16,940
3,562
1,100
1,022
1,380
Total assets ..........................................................
39,206
24,932
1,491
2,779
8,321
76,729
Liabilities under investment contracts:
– designated at fair value ................................
– carried at amortised cost ..............................
Liabilities under insurance contracts ..................
Deferred tax ........................................................
Other liabilities ...................................................
Total liabilities ....................................................
Total equity .........................................................
6,500
–
27,845
334
1,744
36,423
2,783
4,299
–
17,618
220
284
22,421
2,511
Total equity and liabilities56 ................................
39,206
24,932
At 31 December 2008
Financial assets ...................................................
– trading assets ...............................................
– financial assets designated at fair value ......
– derivatives ....................................................
– financial investments ...................................
– other financial assets ...................................
Reinsurance assets ..............................................
PVIF55 .................................................................
Other assets and investment properties ..............
31,246
–
12,605
258
14,240
4,143
920
845
933
17,865
–
4,153
117
10,689
2,906
1,004
905
400
66
–
1,072
27
54
1,219
272
1,491
961
–
581
–
91
289
20
81
9
–
–
1,268
82
3
1,353
1,426
2,779
2,625
–
–
–
2,040
585
13
–
354
–
417
5,904
126
286
6,733
1,588
8,321
5,293
39
2,936
26
1,404
888
126
202
291
10,865
417
53,707
789
2,371
68,149
8,580
76,729
57,990
39
20,275
401
28,464
8,811
2,083
2,033
1,987
Total assets ..........................................................
33,944
20,174
1,071
2,992
5,912
64,093
Liabilities under investment contracts:
– designated at fair value ................................
– carried at amortised cost ..............................
Liabilities under insurance contracts ..................
Deferred tax ........................................................
Other liabilities ...................................................
Total liabilities ....................................................
Total equity .........................................................
5,310
–
23,752
304
2,184
31,550
2,394
3,895
–
13,873
161
190
18,119
2,055
78
–
745
19
42
884
187
Total equity and liabilities56 ................................
33,944
20,174
1,071
–
–
1,237
–
11
1,248
1,744
2,992
–
284
4,076
103
252
4,715
1,197
5,912
9,283
284
43,683
587
2,679
56,516
7,577
64,093
For footnotes, see page 291.
Financial risks
(Audited)
HSBC’s insurance businesses are exposed to a range
of financial risks, including market risk, credit risk
and liquidity risk. Market risk includes interest rate
risk, equity risk and foreign exchange risk. The
nature and management of these risks is described
below.
Manufacturing subsidiaries are exposed to
financial risks, for example, when the proceeds
from financial assets are not sufficient to fund the
obligations arising from non-linked insurance and
investment contracts. Certain insurance-related
activities undertaken by HSBC subsidiaries such as
insurance broking, insurance management (including
captive management) and the administration and
272
intermediation of insurance, pensions and annuities
are exposed to financial risks, but not to a significant
extent.
Risk management procedures which reflect local
market conditions and regulatory requirements
may be implemented by HSBC’s insurance
manufacturing subsidiaries in addition to policies
provided for Group-wide application through the
Group Instruction Manuals. In many jurisdictions,
local regulatory requirements prescribe the type,
quality and concentration of assets that these
subsidiaries must maintain to meet insurance
liabilities. Within each subsidiary, ALCOs are
responsible for ensuring that exposures to financial
risks remain within local requirements and risk
mandates (as agreed with Group Insurance Head
Office), and ensure compliance with the control
framework established centrally through the Group
Instruction Manuals.
The following table analyses the assets held in
HSBC’s insurance manufacturing subsidiaries at
31 December 2009 by type of contract, and provides
a view of the exposure to financial risk:
Financial assets held by insurance manufacturing subsidiaries
(Audited)
Life linked Life non-linked
contracts58
US$m
contracts57
US$m
Non-life
insurance59
US$m
Other
assets54
US$m
Total60
US$m
At 31 December 2009
Trading assets
Debt securities ......................................
Financial assets designated at fair value
Treasury bills ........................................
Debt securities ......................................
Equity securities ...................................
Financial investments
Held-to-maturity:
– debt securities ....................................
Available-for-sale .....................................
– Treasury bills .....................................
– other eligible bills ..............................
– debt securities ....................................
– equity securities .................................
Derivatives ................................................
Other financial assets61 .............................
At 31 December 2008
Trading assets
Debt securities ......................................
Financial assets designated at fair value ...
Treasury bills ........................................
Debt securities ......................................
Equity securities ...................................
Financial investments
Held-to-maturity:
– debt securities ....................................
Available-for-sale .....................................
– Treasury bills .....................................
– other eligible bills ..............................
– debt securities ....................................
– equity securities .................................
Derivatives ................................................
Other financial assets61 .............................
For footnotes, see page 291.
–
14,409
46
5,086
9,277
–
–
–
–
–
–
300
861
15,570
–
10,263
31
4,091
6,141
–
–
–
–
–
–
173
843
11,279
–
8,607
174
3,428
5,005
13,995
17,211
–
26
17,169
16
165
4,473
44,451
–
7,990
197
3,109
4,684
10,411
14,617
4
–
14,602
11
204
4,752
37,974
273
10
63
–
63
–
186
556
211
127
199
19
–
1,475
2,290
35
52
–
52
–
170
690
130
272
254
34
–
1,106
2,053
–
2,085
3
1,220
862
670
3,231
86
126
2,787
232
3
1,263
7,252
4
1,970
8
1,625
337
510
2,066
128
126
1,596
216
24
2,110
6,684
10
25,164
223
9,797
15,144
14,851
20,998
297
279
20,155
267
468
8,072
69,563
39
20,275
236
8,877
11,162
11,091
17,373
262
398
16,452
261
401
8,811
57,990
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Financial risks > Market risk
The table demonstrates that for linked contracts,
HSBC typically designates assets at fair value. For
non-linked contracts, the classification of the assets
is driven by the nature of the underlying contract.
The table also shows that approximately
64.4 per cent of financial assets were invested in
debt securities at 31 December 2009 (2008: 62.9 per
cent) with 22.2 per cent (2008: 19.7 per cent)
invested in equity securities.
In life linked insurance, premium income less
charges levied is invested in a portfolio of assets.
HSBC manages the financial risks of this product on
behalf of the policyholders by holding appropriate
assets in segregated funds or portfolios to which the
liabilities are linked. Typically, HSBC retains some
exposure to market risk as the market value of the
linked assets influences the fees charged by HSBC
and thereby affects the recoverability of expenses
incurred by the Group in managing the product. The
assets held to support life linked liabilities
represented 22.4 per cent of the total financial assets
of HSBC’s insurance manufacturing subsidiaries at
the end of 2009 (2008: 19.4 per cent).
Market risk
(Audited)
Insurance and investment products manufactured
by HSBC’s insurance manufacturing subsidiaries
typically comprise features or combinations of
features which may not be easily or exactly
replicated by investments. Market risk arises when
mismatches occur between product liabilities and
the investment assets which back them; for example,
mismatches between asset and liability yields and
maturities give rise to interest rate risk.
Description of market risk
(Audited)
The main features of products manufactured by
HSBC’s insurance manufacturing subsidiaries which
Liabilities to policyholders62
(Audited)
generate market risk, and the market risk to which
these features expose the subsidiaries, are discussed
below.
Long-term insurance or investment products
may incorporate either one investment return
guarantee or a combination thereof, divided into the
following categories:
•
•
deferred annuities: these consist of two phases –
the savings and investing phase and the
retirement income phase;
annuities in payment;
•
•
annual return: the annual return is guaranteed to
be no lower than a specified rate. This may be
the return credited to the policyholder every
year, or the average annual return credited to the
policyholder over the life of the policy, which
may occur on the maturity date or the surrender
date of the contract;
capital: policyholders are guaranteed to receive
no less than the premiums paid plus declared
bonuses less expenses; and
• market performance: policyholders receive an
investment return which is guaranteed to be
within a prescribed range of average investment
returns earned by predetermined market
participants on the specified product.
Subsidiaries manufacturing products with
guarantees usually retain exposures to falls in market
interest rates as they result in lower available
yields on the assets bought to support guaranteed
investment returns payable to policyholders.
The table below shows, in respect of each
category of guarantee, the total liabilities to
policyholders established for guaranteed products,
the range of investment returns (net of operating
costs) implied by the guarantees, and the range of
current yields of the investment portfolios supporting
the guarantees.
2009
Investment
returns
implied by
guarantee63
%
Amount of
reserve
US$m
Current
yields
%
Amount of
reserve
US$m
2008
Investment
returns
implied by
guarantee63
%
Current
yields
%
Annuities in payment ..........................................
Deferred annuities ...............................................
Immediate annuities ............................................
Annual return ......................................................
Annual return ......................................................
Capital .................................................................
925
943
553
17,147
497
15,866
0.0 – 7.5
0.0 – 6.0
6.0 – 9.0
0.0 – 4.5
4.5 – 6.0
–
1.3 – 16.7
0.9 – 15.1
5.4 – 5.4
0.8 – 6.2
5.1 – 6.5
2.4 – 4.3
744
120
576
13,717
302
13,346
0.0 – 11.5 6.5 – 28.0
3.9 – 7.4
5.4 – 5.4
2.2 – 4.9
3.4 – 7.3
2.0 – 4.3
0.0 – 6.0
6.0 – 9.0
0.0 – 4.5
4.5 – 6.0
–
For footnotes, see page 291.
274
A certain number of these products have been
discontinued, including the US$553 million
immediate annuity portfolio in HSBC Finance
where, as highlighted in the above table, the current
portfolio yield is less than the guarantee. On
acquisition of this block of business by HSBC
Finance, a provision was established to mitigate the
shortfall in yields. There has been no further
deterioration in the shortfall since acquisition. There
are a limited number of additional contracts where
the current portfolio yield is less than the guarantee
implied by the contract.
The proceeds from insurance and investment
products with DPF are primarily invested in bonds
with a proportion allocated to equity securities in
order to provide customers with the potential for
enhanced returns. Subsidiaries with portfolios of
such products are exposed to the risk of falls in the
market price of equity securities when they cannot
be fully reflected in the discretionary bonuses. An
increase in market volatility could also result in
an increase in the value of the guarantee to the
policyholder.
Long-term insurance and investment products
typically permit the policyholder to surrender the
policy or let it lapse at any time. When the surrender
value is not linked to the value realised from the sale
of the associated supporting assets, the subsidiary
is exposed to market risk. In particular, when
customers seek to surrender their policies when asset
values are falling, assets may have to be sold at a
loss to fund redemptions.
A subsidiary holding a portfolio of long-term
insurance and investment products, especially with
DPF, may attempt to reduce exposure to its local
market by investing in assets in countries other
than that in which it is based. These assets may
be denominated in currencies other than the
subsidiary’s local currency. It is often not cost
effective for the subsidiary to hedge the foreign
exchange exposure associated with these assets, and
this exposes it to the risk that its local currency will
strengthen against the currency of the related assets.
For unit-linked contracts, market risk is
substantially borne by the policyholder, but HSBC
typically remains exposed to market risk as the
market value of the linked assets influences the fees
HSBC earns for managing them.
How the risks are managed
(Audited)
HSBC’s insurance manufacturing subsidiaries
manage market risk by using some or all of the
following techniques, depending on the nature of the
contracts they write:
•
•
•
for products with DPF, adjusting bonus rates to
manage the liabilities to policyholders. Bonus
rates are managed by regularly evaluating their
sustainability. The effect is that a significant
portion of the market risk is borne by the
policyholder;
as far as possible, matching assets to liabilities.
For example, for products with annual return or
capital guarantees, HSBC seeks to invest in
bonds which produce returns at least equal to
the investment returns implied by the guarantees
while remaining attentive to the overall portfolio
credit quality;
using derivatives in a limited number of
instances;
• when designing new products with investment
guarantees, evaluating the cost of the guarantee
and considering this cost when determining the
level of premiums or the price structure;
•
•
•
periodically reviewing products identified as
higher risk, which contain guarantees and
embedded optionality features linked to savings
and investment products. The scope of the
review would include pricing, risk management
and profitability (a control introduced during
2008). Guaranteed products which expose the
Group to risk beyond the levels deemed
acceptable in any of these categories are either
altered or are no longer offered to customers;
including features designed to mitigate market
risk in new products, such as charging surrender
penalties to recoup losses incurred when
policyholders surrender their policies; and
exiting, to the extent possible, investment
portfolios whose risk is considered unacceptable
– for example, by implementing asset
reallocation strategies in order to manage risk
exposures.
The product approval process includes the
identification and assessment of the risk
embedded in new products.
Group Insurance Head Office includes a Chief
Market and Liquidity Risk Officer reporting to the
Chief Risk Officer. Each regional insurance unit
275
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Financial risks > Market risk / Credit risk
includes an individual responsible for market and
liquidity risk.
As described above, the product approval
process includes an identification and assessment of
the risk embedded in new products, for example,
those including options and guarantees within the
contract. When such product features are identified,
the product proposal is reviewed by Group Insurance
Head Office to ensure that the key risks are
identified and appropriate risk management
procedures are in place. Management reviews certain
exposures more frequently when markets
demonstrate increased volatility to ensure that any
matters arising are dealt with in a timely fashion.
Each insurance manufacturing subsidiary is
required to have a market risk mandate which
specifies the investment instruments in which it is
permitted to invest and the maximum quantum of
market risk which it is permitted to retain. It is the
responsibility of the subsidiary’s ALCO and the
Market and Liquidity Risk Committee (sub-
committee to the Group Insurance Risk Committee)
to ensure that each mandate is consistent with local
regulations. All mandates are reviewed and agreed
annually by Group Insurance Head Office, and
aggregate limits are approved by the Risk
Management Meeting of GMB. All market risk
mandates include management action loss limits
designed to control risk.
How the exposures to risks are measured
(Audited)
HSBC’s insurance manufacturing subsidiaries
monitor exposures against mandated limits regularly
and report these quarterly to Group Insurance Head
Office. Exposures are aggregated and reported to
senior risk management forums in the Group,
including the Group Insurance Market and Liquidity
Risk Committee, Group Insurance Risk Committee
and the Group Stress Test Review Group.
The standard measures used to quantify the
market risks are as follows:
•
for interest rate risk, the sensitivities of the net
present values of asset and expected liability
cash flows, in total and by currency, to a one
basis point parallel shift in the discount curves
used to calculate the net present values;
for equity price risk, the total market value of
equity holdings and the market value of equity
holdings by region and country; and
for foreign exchange risk, the total net short
foreign exchange position and the net foreign
exchange positions by currency.
•
•
Although these measures are relatively
straightforward to calculate and aggregate, there
are limitations with them. The most significant
limitation is that a parallel shift in yield curves of
one basis point does not capture the non-linear
relationships between the values of certain assets and
liabilities and interest rates. Non-linearity arises, for
example, from investment return guarantees and
certain product features such as the ability of
policyholders to surrender their policies. If the
yields on investments held to support contracts
with guarantees are less than the investment returns
implied by the guarantees, shortfalls will be to the
account of HSBC.
HSBC recognises these limitations and
augments its standard measures with stress tests
which examine the effect of a range of market rate
scenarios on the aggregate annual profits and total
equity of the insurance manufacturing subsidiaries.
HSBC’s insurance manufacturing subsidiaries report
the results of their stress tests every quarter to Group
Insurance Head Office, where the reports are
consolidated and reviewed by the Group Insurance
Market and Liquidity Risk Meeting and the Group
Stress Test Review Group.
HSBC’s insurance manufacturing subsidiaries
identify the assets and liabilities in their financial
statements whose values are sensitive to each
category of market risk and revalue them at various
market rates. The outcome of the exercise is
expressed in terms of the effect on profit for the year
and total equity under the stress-tested assumptions,
after taking into consideration tax and accounting
treatments where material and relevant.
276
Sensitivity of HSBC’s insurance manufacturing subsidiaries to risk factors
(Audited)
2009
Effect on
profit for
the year
US$m
Effect on
total
equity
US$m
2008
Effect on
profit for
the year
US$m
Effect on
total
equity
US$m
+ 100 basis points parallel shift in yield curves ...........
– 100 basis points parallel shift in yield curves ...........
10 per cent increase in equity prices ............................
10 per cent decrease in equity prices ............................
10 per cent increase in US dollar exchange rate
compared to all currencies .......................................
10 per cent decrease in US dollar exchange rate
compared to all currencies .......................................
Sensitivity to credit spread increases ...........................
68
(69)
19
(20)
20
(20)
(36)
(82)
92
19
(20)
20
(20)
(91)
94
(82)
10
(12)
28
(28)
(73)
(13)
24
10
(12)
29
(29)
(134)
The above table illustrates the effect on the
aggregated profit for the year and total equity under
various interest rate, equity price, foreign exchange
rate and credit spread scenarios. Where appropriate,
the impact of the stress on the PVIF is included in
the results of the stress tests. The relationship
between the values of certain assets and liabilities
and the risk factors may be non-linear and, therefore,
the results disclosed cannot be extrapolated to
measure sensitivities to different levels of stress. The
sensitivities are stated before allowance for the effect
of management actions which may mitigate changes
in market rates, and for any factors such as
policyholder behaviour that may change in response
to changes in market risk.
The sensitivity of the net profit after tax of
HSBC’s insurance subsidiaries to the effects of
increases in credit spreads is a fall of US$36 million
(2008: US$73 million fall). The sensitivity is
calculated using simplified assumptions based on a
one-day movement in credit spreads over a two-year
period. A confidence level of 99 per cent, consistent
with the Group’s VAR, has been applied. Credit
spreads experienced some volatility during 2009 but
generally improved from the high level at the end of
2008.
Credit risk
(Audited)
Credit risk can give rise to losses through default
and can lead to volatility in income statement and
balance sheet figures through movements in credit
spreads, principally on the US$40.5 billion (2008:
US$33.2 billion) non-linked bond portfolio. The
exposure of the income statement to the effect of
changes in credit spreads is small (see the table
above). Fifty two per cent of the financial assets held
by insurance subsidiaries are classified as either held
to maturity or available for sale, and consequently
any changes in the fair value of these financial
investments, absent impairment, would have no
impact on the profit after tax.
The exposure of the income statement to the
effect of changes in credit spread is small.
HSBC sells certain unit-linked life insurance
contracts which are reinsured with a third party.
These insurance contracts include market return
guarantees which are underwritten by the third party.
HSBC is exposed to credit risk to the extent that the
third party (the counterparty) is unable to meet the
terms of the guarantees. As highlighted in ‘Market
Risk’ above, the cost to the Group of market return
guarantees increases when interest rates fall, equity
markets fall or market volatility increases. In
addition, when determined by reference to a
discounted cash flow model in which the discount
rate is based on current interest rates, guarantee costs
increase in a falling interest rate environment. As a
consequence of the improved market conditions in
2009, there has been a reduction in these costs, and
hence the Group’s counterparty exposure to the
guarantees under the reinsurance agreement at
31 December 2009 was lower than at 31 December
2008. The sale of these contracts ceased in 2008,
reflecting the adjusted risk appetite of the business.
Group Insurance Head Office includes a Chief
Credit Risk Officer reporting to the Chief Risk
Officer. Each regional insurance unit includes an
individual responsible for credit risk.
The exposure to credit risk products and the
management of the risks associated with credit
protection products are included in the description of
life and non-life insurance risk on pages 266 to 269.
HSBC’s insurance manufacturing subsidiaries
are responsible for the credit risk, quality and
performance of their investment portfolios.
Investment credit mandates and limits are set by the
subsidiaries and approved by their local insurance
ALCOs and Credit Risk functions before being
277
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Financial risks > Credit risk
submitted to Group Credit Risk for concurrence. The
form and content of the mandates must accord with
centrally set investment credit risk guidance
regarding credit quality, industry sector
concentration and liquidity restrictions, but allow for
the inclusion of local regulatory and country-specific
conditions. The assessment of the creditworthiness
of issuers and counterparties is based primarily upon
internationally recognised credit ratings and other
publicly available information.
Investment credit exposures are monitored
against limits by the local insurance manufacturing
subsidiaries, and are aggregated and reported to
Group Credit Risk, the Group Insurance Credit Risk
Meeting and the Group Insurance Risk Committee.
Stress testing is performed by Group Insurance Head
Office on the investment credit exposures using
credit spread sensitivities and default probabilities.
The stresses are reported to the Group Insurance
Risk Committee.
As noted above, under certain circumstances,
the Group is able to dilute the effect of investment
losses by sharing them with policyholders. However,
when, for example, a contract includes a guarantee,
losses which would result in a breach of the
guaranteed benefits due to the policyholder are borne
by the Group.
A number of tools are used to manage and
monitor credit risk. These include an Early Warning
Report which is produced on a weekly basis to
identify investments which may be at risk of future
impairment. This report is circulated to senior
management in Group Insurance Head Office and
the Regional Chief Risk Officers, and risk reduction
strategies are implemented when considered
appropriate. Similarly, a watch list of investments
with current credit concerns is circulated weekly.
Credit quality
(Audited)
The following table presents an analysis of treasury
bills, other eligible bills and debt securities within
HSBC’s insurance business by measures of credit
quality. The definitions of the five credit quality
classifications are included on page 225. Only assets
supporting non-linked liabilities are included in
the table as financial risk on assets supporting
linked liabilities is predominantly borne by the
policyholder. 90.9 per cent (2008: 93.7 per cent)
of the assets included in the table are invested in
investments rated as ‘Strong’.
278
Treasury bills, other eligible bills and debt securities in HSBC’s insurance manufacturing subsidiaries
(Audited)
Neither past due nor impaired
Strong
US$m
Medium-
good
US$m
Medium-
satisfactory
US$m
Sub-
standard Impaired64
US$m
US$m
Total
US$m
At 31 December 2009
Supporting liabilities under non-linked insurance and
investment contracts
Trading assets – debt securities ............................................
Financial assets designated at fair value ..............................
– treasury and other eligible bills .....................................
– debt securities ................................................................
Financial investments ...........................................................
– treasury and other similar bills ......................................
– other eligible bills ..........................................................
– debt securities ................................................................
Supporting shareholders’ funds65
Financial assets designated at fair value ..............................
– treasury and other eligible bills .....................................
– debt securities ................................................................
Financial investments ...........................................................
– treasury and other similar bills ......................................
– other eligible bills ..........................................................
– debt securities ................................................................
Total66
Trading assets – debt securities ............................................
Financial assets designated at fair value ..............................
– treasury and other eligible bills .....................................
– debt securities ................................................................
8
2,812
174
2,638
30,126
211
153
29,762
–
80
–
80
1,509
–
–
1,509
32,946
1,589
527
3
524
3,335
82
126
3,127
3,862
8
3,339
177
3,162
506
–
506
312
–
–
312
818
–
586
–
586
Financial investments ...........................................................
– treasury and other similar bills ......................................
– other eligible bills ..........................................................
– debt securities ................................................................
33,461
293
279
32,889
1,821
–
–
1,821
2
704
–
704
130
–
–
130
836
180
–
180
16
4
–
12
196
2
884
–
884
146
4
–
142
36,808
2,407
1,032
–
69
–
69
148
–
–
148
217
10
–
10
6
–
–
6
16
–
79
–
79
154
–
–
154
233
10
3,665
174
3,491
31,913
211
153
31,549
35,588
1,223
3
1,220
3,669
86
126
3,457
4,892
10
4,888
177
4,711
35,582
297
279
35,006
40,480
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
279
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Financial risks > Credit risk / Liquidity risk
Treasury bills, other eligible bills and debt securities in HSBC’s insurance manufacturing subsidiaries (continued)
Neither past due nor impaired
Medium-
good
US$m
Medium-
satisfactory
US$m
Strong
US$m
Sub-
standard Impaired64
US$m
US$m
Total
US$m
At 31 December 2008
Supporting liabilities under non-linked insurance and
investment contracts
Trading assets – debt securities ...........................................
Financial assets designated at fair value ..............................
– treasury and other eligible bills ....................................
– debt securities ...............................................................
Financial investments ..........................................................
– treasury and other similar bills .....................................
– debt securities ...............................................................
27
2,704
197
2,507
24,881
404
24,477
8
335
–
335
718
–
718
27,612
1,061
Supporting shareholders’ funds65
Trading assets – debt securities ...........................................
Financial assets designated at fair value ..............................
– treasury and other eligible bills ....................................
– debt securities ...............................................................
Financial investments ..........................................................
– treasury and other similar bills .....................................
– debt securities ...............................................................
Total66
Trading assets – debt securities ...........................................
Financial assets designated at fair value ..............................
– treasury and other eligible bills ....................................
– debt securities ...............................................................
Financial investments ..........................................................
– treasury and other similar bills .....................................
– debt securities ...............................................................
4
1,502
8
1,494
2,033
245
1,788
3,539
31
4,206
205
4,001
26,914
649
26,265
–
110
–
110
174
–
174
284
8
445
–
445
892
–
892
31,151
1,345
For footnotes, see page 291.
–
319
–
319
195
2
193
514
–
21
–
21
54
7
47
75
–
340
–
340
249
9
240
589
–
–
–
–
45
–
45
45
–
–
–
–
99
2
97
99
–
–
–
–
144
2
142
144
35
3,358
197
3,161
25,843
406
25,437
29,236
4
1,633
8
1,625
2,360
254
2,106
3,997
39
4,991
205
4,786
28,203
660
27,543
33,233
4
–
4
4
–
–
–
–
4
–
4
4
Issuers of treasury bills, other eligible bills and debt securities in HSBC’s insurance manufacturing subsidiaries
(Audited)
At 31 December 2009
Governments .............................................................................
Local authorities .......................................................................
Asset-backed securities .............................................................
Corporates and other .................................................................
At 31 December 2008
Governments .............................................................................
Local authorities .......................................................................
Asset-backed securities .............................................................
Corporates and other .................................................................
Treasury
bills
US$m
Other eligible
bills
US$m
Debt
securities
US$m
342
–
–
132
474
467
–
–
–
467
6
–
–
273
279
24
–
–
374
398
8,548
886
54
30,239
39,727
6,109
525
14
25,720
32,368
Total
US$m
8,896
886
54
30,644
40,480
6,600
525
14
26,094
33,233
280
Credit risk also arises when part of the insurance
risk incurred by HSBC is assumed by reinsurers. The
credit risk exposure to reinsurers is monitored by
Group Insurance Head Office and is reported
quarterly to the Group Insurance Risk Committee
and the Group Insurance Credit Risk Meeting.
Reinsurers’ share of liabilities under insurance contracts
(Audited)
The split of liabilities ceded to reinsurers and
outstanding reinsurance recoveries, analysed by
credit quality, is shown below. The definitions of the
five credit quality classifications are provided on
page 225. The Group’s exposure to third parties
under the reinsurance agreement described in the
Credit Risk section above is included in this table.
Neither past due nor impaired
Medium-
good
US$m
Medium-
satisfactory
US$m
Sub-
standard
US$m
Past due
but not
impaired
US$m
804
10
814
2
947
12
959
–
–
90
90
11
–
50
50
20
–
5
5
6
–
–
–
–
–
–
–
17
–
4
4
10
Total
US$m
831
1,238
2,069
60
956
1,067
2,023
60
•
•
cash resources; and
cash inflows from the sale of investments.
HSBC’s insurance manufacturing subsidiaries
manage liquidity risk by utilising some or all of the
following techniques:
• matching cash inflows with expected cash
outflows using specific cash flow projections or
more general asset and liability matching
techniques such as duration matching;
• maintaining sufficient cash resources;
•
investing in good credit-quality investments
with deep and liquid markets to the degree to
which they exist;
• monitoring investment concentrations and
restricting them where appropriate, for example,
by debt issues or issuers; and
•
establishing committed contingency borrowing
facilities.
Each of these techniques contributes to
mitigating the three types of liquidity risk described
above.
Every quarter, HSBC’s insurance manufacturing
subsidiaries are required to complete and submit
liquidity risk reports to Group Insurance Head Office
Strong
US$m
27
1,133
1,160
24
9
1,001
1,010
30
At 31 December 2009
Linked insurance contracts67 .........................
Non-linked insurance contracts67 ..................
Reinsurance debtors .......................................
At 31 December 2008
Linked insurance contracts67 .........................
Non-linked insurance contracts67 ..................
Reinsurance debtors .......................................
For footnote, see page 291.
Liquidity risk
(Audited)
It is an inherent characteristic of almost all insurance
contracts that there is uncertainty over the amount of
claims liabilities that may arise, and the timing of
their settlement and this leads to liquidity risk.
There are three aspects considered in liquidity
risk. The first of these arises in normal market
conditions and is referred to as funding liquidity risk;
specifically, the capacity to raise sufficient cash
when needed to meet payment obligations. Secondly,
market liquidity risk arises when the size of a
particular holding may be sufficiently large that a
sale cannot be completed around the market price.
Finally, there is standby liquidity risk, which refers
to the capacity to meet payment terms in abnormal
conditions.
HSBC’s insurance manufacturing subsidiaries
primarily fund cash outflows arising from claim
liabilities from the following sources:
•
•
cash inflows arising from premiums from new
business, policy renewals and recurring
premium products;
cash inflows arising from interest and dividends
on investments and principal repayments of
maturing debt investments;
281
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > Financial risks > Liquidity risk // PVIF
for collation and review by the Group Insurance
Market and Liquidity Risk Meeting. Liquidity risk
is assessed in these reports by measuring changes
in expected cumulative net cash flows under a
series of stress scenarios designed to determine the
effect of reducing expected available liquidity and
accelerating cash outflows. This is achieved by, for
example, assuming new business or renewals are
lower, and surrenders or lapses are greater, than
expected.
The following tables show the expected
undiscounted cash flows for insurance contract
liabilities and the remaining contractual maturity of
investment contract liabilities at 31 December 2009.
Expected maturity of insurance contract liabilities
(Audited)
As indicated in the analyses of life and non-life
insurance risks on pages 268 to 269, a significant
proportion of the Group’s non-life insurance
business is viewed as short-term, with the settlement
of liabilities expected to occur within one year of the
period of risk. There is a greater spread of expected
maturities for the life business where, in a large
proportion of cases, the liquidity risk is borne in
conjunction with policyholders (wholly in the case
of unit-linked business).
The profile of the expected maturity of the
insurance contracts as at 31 December 2009
remained comparable with 2008.
Expected cash flows (undiscounted)68
Within 1 year
US$m
1-5 years
US$m
5-15 years Over 15 years
US$m
US$m
Total
US$m
1,318
2,393
522
4,233
1,178
2,527
1,295
5,000
1,277
10,098
2,290
123
17,253
4,483
10
18,231
6,899
2,728
47,975
14,194
13,665
21,859
25,140
64,897
1,186
7,789
1,251
10,226
115
16,695
3,269
20,079
1
14,432
5,390
19,823
2,480
41,443
11,205
55,128
At 31 December 2009
Non-life insurance ....................................
Life insurance (non-linked) ......................
Life insurance (linked) ..............................
At 31 December 2008
Non-life insurance ....................................
Life insurance (non-linked) ......................
Life insurance (linked) ..............................
For footnote, see page 291.
Remaining contractual maturity of investment contract liabilities
(Audited)
At 31 December 2009
Remaining contractual maturity:
– due within 1 year ...............................................................
– due between 1 and 5 years ................................................
– due between 5 and 10 years ..............................................
– due after 10 years ..............................................................
– undated70 ............................................................................
At 31 December 2008
Remaining contractual maturity:
– due within 1 year ...............................................................
– due between 1 and 5 years ................................................
– due between 5 and 10 years ..............................................
– due after 10 years ..............................................................
– undated70 ............................................................................
For footnotes, see page 291.
Liabilities under investment contracts by
insurance manufacturing subsidiaries69
Linked
investment
contracts
Other
investment
contracts
Investment
contracts
with DPF
US$m
US$m
US$m
477
904
693
2,093
3,180
7,347
178
610
482
1,649
3,093
6,012
443
–
–
–
3,492
3,935
314
21
31
42
3,147
3,555
14
20
–
–
20,980
21,014
–
34
–
–
17,732
17,766
Total
US$m
934
924
693
2,093
27,652
32,296
492
665
513
1,691
23,972
27,333
282
Present value of in-force long-term
insurance business
(Audited)
Sensitivity of PVIF to changes in economic
assumptions
(Audited)
The HSBC life insurance business is accounted for
using the embedded value approach which, inter
alia, provides a comprehensive framework for the
evaluation of insurance and related risks. The present
value of the in-force long-term (‘PVIF’) asset at
31 December 2009 was US$2.8 billion (2008:
US$2.0 billion). The present value of the
shareholders’ interest in the profits expected to
emerge from the book of in-force policies at
31 December can be stress-tested to assess the ability
of the life business book to withstand adverse
developments. A key feature of the life insurance
business is the importance of managing the assets,
liabilities and risks in a coordinated fashion rather
than individually. This reflects the greater
interdependence of these three elements for life
insurance than is generally the case for non-life
insurance.
The following table shows the effect on the
PVIF of reasonably possible changes in the main
economic assumptions, namely the risk-free and risk
discount rates, across all insurance manufacturing
subsidiaries.
+ 100 basis point shift in
risk-free rate ..............
– 100 basis point shift in
risk-free rate ..............
+ 100 basis point shift in
risk discount rate .......
– 100 basis point shift in
risk discount rate .......
PVIF at 31 December
2009
US$m
2008
US$m
212
(145)
(140)
162
179
(100)
(109)
122
Due to certain characteristics of the contracts,
the relationships may be non-linear and the results of
the stress-testing disclosed above should not be
extrapolated to higher levels of stress. In calculating
the various scenarios, all assumptions are held stable
except when testing the effect of the shift in the risk-
free rate, when consequential changes to investment
returns, risk discount rates and bonus rates are also
incorporated. The sensitivities shown are before
actions that could be taken by management to
mitigate effects and before consequential changes in
policyholder behaviour.
The following table shows the movements
recorded during the year in respect of total equity
and PVIF of insurance operations:
283
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Insurance operations > PVIF > Non-economic assumptions // Capital management and allocation
Movements in total equity and PVIF of insurance operations
(Audited)
At 1 January ...............................................................................
Value of new business written during the year71 .......................
Movements arising from in-force business:
– expected return ...................................................................
– experience variances72 ........................................................
– change in operating assumptions .......................................
Investment return variances .......................................................
Changes in investment assumptions ..........................................
Return on net assets ...................................................................
Exchange differences and other .................................................
Capital transactions ....................................................................
2009
2008
Total
equity
US$m
7,577
600
(123)
(44)
48
16
19
522
(83)
48
PVIF
included in
total equity
US$m
2,033
600
(123)
(44)
48
16
19
–
231
–
Total
equity
US$m
8,430
452
(186)
(36)
(7)
(94)
12
(310)
(93)
(591)
PVIF
included in
total equity
US$m
1,965
452
(186)
(36)
(7)
(94)
12
–
(73)
–
At 31 December .........................................................................
8,580
2,780
7,577
2,033
For footnotes, see page 291.
Non-economic assumptions
(Audited)
The policyholder liabilities and PVIF are determined
by reference to non-economic assumptions which
include, for non-life manufacturers, claims costs and
expense rates and, for life manufacturers, mortality
and/or morbidity, lapse rates and expense rates. The
table below shows the sensitivity of profit for the
year to, and total equity at, 31 December 2009 to
reasonably possible changes in these non-economic
assumptions at that date across all insurance
manufacturing subsidiaries, with comparatives for
2008.
The cost of claims is a risk associated with non-
life insurance business. An increase in claims costs
would have a negative effect on profit. The main
exposures to this scenario are in the UK, Hong
Kong, Latin America and Bermuda.
Mortality and morbidity risk is typically
associated with life insurance contracts. The effect of
an increase in mortality or morbidity on profit
depends on the type of business being written. For a
portfolio of term assurance contracts, an increase in
mortality usually has a negative effect on profit as
the number of claims increases. For a portfolio of
annuity contracts, an increase in mortality rates
typically has a positive effect on profit as the period
over which the benefit is being paid to the
policyholder is shortened. However, when an
annuity contract includes life cover, the positive
effect on profit of the increase in mortality may be
offset by the benefits payable under the life
insurance. The largest exposures to mortality and
morbidity risk exist in France, Hong Kong, the UK
and the US.
Sensitivity to lapse rates is dependent on the
type of contracts being written. For insurance
contracts, the cost of claims is funded by premiums
received and income earned on the investment
portfolio supporting the liabilities. For a portfolio of
term assurance, an increase in lapse rates typically
has a negative effect on profit due to the loss of
future premium income on the lapsed policies. For a
portfolio of annuity contracts, an increase in lapse
rates has a positive effect on profit as the obligation
to pay future benefits on the lapsed contracts is
extinguished. France, Hong Kong, the UK and the
US are the sites which are most sensitive to a change
in lapse rates.
Expense rate risk is the exposure to a change in
expense rates. To the extent that increased expenses
cannot be passed on to policyholders, an increase in
expense rates will have a negative impact on profits.
284
Sensitivity analysis
(Audited)
Effect on profit for the year
to 31 December
Non-life
US$m
Life
US$m
Total
US$m
Effect on total equity
at 31 December
Non-life
US$m
Life
US$m
(191)
190
–
–
–
–
(11)
11
(122)
121
–
–
–
–
(9)
9
•
•
2009
20% increase in claims costs ..............................
20% decrease in claims costs .............................
10% increase in mortality and/or morbidity
rates .................................................................
10% decrease in mortality and/or morbidity
rates .................................................................
50% increase in lapse rates .................................
50% decrease in lapse rates ................................
10% increase in expense rates ............................
10% decrease in expense rates ...........................
2008
20% increase in claims costs ..............................
20% decrease in claims costs .............................
10% increase in mortality and/or morbidity
rates .................................................................
10% decrease in mortality and/or morbidity
rates .................................................................
50% increase in lapse rates .................................
50% decrease in lapse rates ................................
10% increase in expense rates ............................
10% decrease in expense rates ...........................
–
–
(51)
62
(162)
408
(52)
52
–
–
(28)
30
(96)
194
(42)
41
Capital management and allocation
Capital management
(Audited)
HSBC’s capital management approach is driven by
its strategic and organisational requirements, taking
into account the regulatory, economic and
commercial environment in which it operates.
It is HSBC’s objective to maintain a strong
capital base to support the development of its
business and to meet regulatory capital requirements
at all times. To achieve this, the Group’s policy is to
hold capital in a range of different forms and from
diverse sources and all capital raising is agreed with
major subsidiaries as part of their individual and the
Group’s capital management processes.
The Group’s policy is underpinned by the
Capital Management Framework, which enables
HSBC to manage its capital in a consistent and
aligned manner. The framework, which is approved
by GMB, incorporates a number of different capital
measures including market capitalisation, invested
capital, economic capital and regulatory capital,
defined by HSBC as follows:
• market capitalisation is the stock market value
of the company;
•
invested capital is the equity capital invested in
HSBC by its shareholders;
(191)
190
(51)
62
(162)
408
(63)
63
(122)
121
(28)
30
(96)
194
(51)
50
–
–
(51)
62
(162)
408
(52)
52
–
–
(28)
30
(96)
194
(42)
41
(191)
190
–
–
–
–
(11)
11
(122)
121
–
–
–
–
(9)
9
Total
US$m
(191)
190
(51)
62
(162)
408
(63)
63
(122)
121
(28)
30
(96)
194
(51)
50
economic capital is the internally calculated
capital requirement which is deemed necessary
by HSBC to support the risks to which it is
exposed at a confidence level consistent with a
target credit rating of AA; and
regulatory capital is the capital which HSBC is
required to hold in accordance with the rules
established by the FSA for the consolidated
Group and by HSBC’s local regulators for
individual Group companies.
The Group has identified the following as being
the material risks faced and managed through the
Capital Management Framework: credit, market,
operational, interest rate risk in the banking book,
pension fund, residual and insurance risks. All these
risks pose a significantly greater challenge in a
severe economic downturn and management’s
response to these risks has, correspondingly, been
intensified in the current conditions.
Stress testing is incorporated into the Capital
Management Framework and is used as an important
mechanism in understanding the sensitivities of the
core assumptions in the Group’s capital plans to the
adverse effect of extreme, but plausible, events.
Stress testing allows senior management to
formulate its response in advance of conditions
starting to exhibit the stress scenarios identified. The
actual market stresses which occurred throughout the
285
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Capital management and allocation > Capital measurement and allocation
financial system during the past two years have been
used to inform the capital planning process and
further develop the stress scenarios employed by the
Group.
The responsibility for global capital allocation
principles and decisions rests with GMB. Through
its structured internal governance processes, HSBC
maintains discipline over its investment and capital
allocation decisions and seeking to ensure that
returns on investment are adequate after taking
account of capital costs. HSBC’s strategy is to
allocate capital to businesses on the basis of their
economic profit generation, regulatory and economic
capital requirements and cost of capital.
HSBC’s capital management process is
articulated in an annual Group capital plan which is
approved by the Board. The plan is drawn up with
the objective of maintaining both the appropriate
amount of capital and the optimal mix between the
different components of capital. When HSBC
Holdings and its major subsidiaries raise non-equity
tier 1 capital and subordinated debt, this is done in
accordance with the Group’s guidelines on market
and investor concentration, cost, market conditions,
timing, effect on composition and maturity profile.
Each subsidiary manages its own capital to support
its planned business growth and meet its local
regulatory requirements within the context of the
approved annual Group capital plan. In accordance
with HSBC’s Capital Management Framework,
capital generated by subsidiaries in excess of
planned requirements is returned to HSBC Holdings,
normally by way of dividends.
HSBC Holdings is primarily the provider of
equity capital to its subsidiaries and these
investments are substantially funded by HSBC
Holdings’ own capital issuance and profit retention.
As part of its capital management process, HSBC
Holdings seeks to maintain a prudent balance
between the composition of its capital and that of its
investment in subsidiaries.
During 2009, the Group targeted a tier 1 ratio
within the range 7.5 to 10.0 per cent for the purposes
of its long-term capital planning. This was an
increase on the 2008 range of 7.5 to 9.0 per cent, and
reflected revised market expectations on capital
strength and the higher volatility of capital
requirements which resulted from pro-cyclicality
embedded within the Basel II rules. The tier 1 ratio
increased to 10.8 per cent at 31 December 2009
(2008: 8.3 per cent) and notwithstanding that this
lies outside the target range noted above, HSBC is
satisfied that, in light of the current evolution of the
regulatory framework, this is appropriate.
286
Capital measurement and allocation
The FSA supervises HSBC on a consolidated basis
and therefore receives information on the capital
adequacy of, and sets capital requirements for, the
Group as a whole. Individual banking subsidiaries
are directly regulated by their local banking
supervisors, who set and monitor their capital
adequacy requirements.
HSBC calculates capital at a Group level using
the Basel II framework of the Basel Committee on
Banking Supervision; local regulators are at different
stages of implementation and local rules may still
be on a Basel I basis, notably in the US. In most
jurisdictions, non-banking financial subsidiaries
are also subject to the supervision and capital
requirements of local regulatory authorities.
Basel II is structured around three ‘pillars’:
minimum capital requirements, supervisory review
process and market discipline. The Capital
Requirements Directive (‘CRD’) implemented
Basel II in the EU and the FSA then gave effect
to the CRD by including the requirements of the
CRD in its own rulebooks.
Capital
HSBC’s capital is divided into two tiers:
•
•
tier 1 capital is divided into core tier 1 and other
tier 1 capital. Core tier 1 capital comprises
shareholders’ equity and related minority
interests. The book values of goodwill and
intangible assets are deducted from core tier 1
capital and other regulatory adjustments are
made for items reflected in shareholders’ equity
which are treated differently for the purposes of
capital adequacy. Qualifying hybrid capital
instruments such as non-cumulative perpetual
preference shares and innovative tier 1 securities
are included in other tier 1 capital;
tier 2 capital comprises qualifying subordinated
loan capital, related minority interests, allowable
collective impairment allowances and unrealised
gains arising on the fair valuation of equity
instruments held as available-for-sale. Tier 2
capital also includes reserves arising from the
revaluation of properties.
To ensure the overall quality of the capital base,
the FSA’s rules set limits on the amount of hybrid
capital instruments that can be included in tier 1
capital relative to core tier 1 capital, and also limits
overall tier 2 capital to no more than tier 1 capital.
The basis of consolidation for financial
accounting purposes is described on page 367 and
differs from that used for regulatory purposes.
Investments in banking associates, which are equity
accounted in the financial accounting consolidation,
are proportionally consolidated for regulatory
purposes. Subsidiaries and associates engaged in
insurance and non-financial activities are excluded
from the regulatory consolidation and are deducted
from regulatory capital. The regulatory consolidation
does not include SPEs where significant risk has
been transferred to third parties. Exposures to these
SPEs are risk-weighted as securitisation positions for
regulatory purposes.
Pillar 1
Pillar 1 covers the capital resources requirements for
credit risk, market risk and operational risk. Credit
risk also covers both counterparty credit risk and
securitisation requirements. All these requirements
are expressed in terms of risk-weighted assets
(‘RWA’s).
Credit risk
Basel II provides three approaches of increasing
sophistication to the calculation of pillar 1 credit
risk capital requirements. The most basic, the
standardised approach, requires banks to use external
credit ratings to determine the risk weightings
applied to rated counterparties and group other
counterparties into broad categories and apply
standardised risk weightings to these categories.
The next level, the internal ratings-based (‘IRB’)
foundation approach, allows banks to calculate their
credit risk capital requirements on the basis of their
internal assessment of the probability that a
counterparty will default (‘PD’), but subjects their
quantified estimates of exposure at default (‘EAD’)
and loss given default (‘LGD’) to standard
supervisory parameters. Finally, the IRB advanced
approach allows banks to use their own internal
assessment in both determining PD and quantifying
EAD and LGD.
The capital resources requirement, which is
intended to cover unexpected losses, is derived from
a formula specified in the regulatory rules, which
incorporates these factors and other variables such as
maturity and correlation. Expected losses under the
IRB approaches are calculated by multiplying PD by
EAD and LGD. Expected losses are deducted from
capital to the extent that they exceed accounting
impairment allowances.
For credit risk, with the FSA’s approval, HSBC
has adopted the IRB advanced approach for the
majority of its business, with the remainder on either
IRB foundation or standardised approaches.
287
For consolidated group reporting, the FSA’s
rules permit the use of other regulators’ standardised
approaches where they are considered equivalent.
The use of other regulators’ IRB approaches is
subject to the agreement of the FSA. Under the
Group’s Basel II rollout plans, a number of Group
companies are in transition to advanced IRB
approaches. At December 2009, corporate portfolios
in France, Hong Kong and Rest of Asia- Pacific
completed the transition from foundation to
advanced IRB approaches. Other Group companies
and portfolios remain on the standardised or
foundation approaches under Basel II, pending
definition of local regulations or model approval, or
under exemptions from IRB treatment.
Counterparty credit risk
Counterparty credit risk in both the trading and non-
trading books is the risk that the counterparty to a
transaction may default before completing the
satisfactory settlement of the transaction. Three
approaches to calculating counterparty credit risk
and determining exposure values are defined by
Basel II: standardised, mark-to-market and internal
model method. These exposure values are used to
determine capital requirements under one of the
credit risk approaches; standardised, IRB foundation
and IRB advanced.
HSBC uses the mark-to-market and internal
model method approaches for counterparty credit
risk. Its longer-term aim is to migrate more positions
from the mark-to-market to the internal model
method approach.
Securitisation
Basel II specifies two methods for calculating credit
risk requirements for securitisation positions in the
non-trading book, being the standardised and IRB
approaches. Both approaches rely on the mapping
of rating agency credit ratings to risk weights,
which range between 7 per cent and 1,250 per cent.
Positions that would otherwise be weighted at
1,250 per cent are deducted from capital. Within
the IRB approach, HSBC uses the Ratings Based
Method for the majority of its non-trading book
securitisation positions, and the Internal Assessment
Approach for unrated liquidity facilities and
programme wide enhancements for asset-backed
securitisations.
HSBC uses the IRB approach for the majority of
its non-trading book securitisation positions, while
those in the trading book are treated like other
market risk positions.
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Capital management and allocation > Capital measurement and allocation > Capital structure
Market risk
Pillar 3
Pillar 3 of Basel II is related to market discipline and
aims to make firms more transparent by requiring
them to publish specific, prescribed details of their
risks, capital and risk management under the Basel II
framework. HSBC published its first full set of
pillar 3 disclosures for 31 December 2008, including
quantitative tables, on 11 May 2009. Pillar 3
Disclosures 2009 is published as a separate
document on the Group Investor Relations website.
Future developments
The regulation and supervision of financial
institutions is currently undergoing a period of
significant change in response to the global financial
crisis. Increased capital requirements for market risk
and securitisations have already been announced by
the Basel Committee and are due for implementation
in the EU in 2011. The Basel Committee issued
further proposals in a Consultative Document
‘Strengthening the resilience of the banking sector’
on 17 December 2009. The Committee’s proposals
are part of global initiatives to strengthen the
financial regulatory system, and have been endorsed
by the Financial Stability Board and the G20 leaders.
A comprehensive impact assessment will be carried
out on the proposals in the first half of 2010, with the
aim of developing a fully calibrated set of standards
by the end of 2010. The proposals will be phased in
as financial conditions improve and the economic
recovery is assured, with the aim of implementation
by the end of 2012. Within this context, the Basel
Committee will also consider appropriate transition
and grandfathering arrangements. The consultation
period for these proposals closes on 16 April 2010.
Market risk is the risk that movements in market risk
factors, including foreign exchange, commodity
prices, interest rates, credit spread and equity prices
will reduce HSBC’s income or the value of its
portfolios. Market risk is measured, with FSA
permission, using Value at Risk (‘VAR’) models,
or the standard rules prescribed by the FSA.
HSBC uses both VAR and standard rules
approaches for market risk. Its longer-term aim is to
migrate more positions from standard rules to VAR.
Operational risk
Basel II includes capital requirements for operational
risk, again utilising three levels of sophistication.
The capital required under the basic indicator
approach is a simple percentage of gross revenues,
whereas under the standardised approach it is one
of three different percentages of gross revenues
allocated to each of eight defined business lines.
Both these approaches use an average of the last
three financial years’ revenues. Finally, the advanced
measurement approach uses banks’ own statistical
analysis and modelling of operational risk data to
determine capital requirements.
HSBC has adopted the standardised approach
in determining its Group operational risk capital
requirements.
Pillar 2
The second pillar of Basel II (Supervisory Review
and Evaluation Process) involves both firms and
regulators taking a view on whether a firm should
hold additional capital against risks not covered in
pillar 1. Part of the pillar 2 process is the Internal
Capital Adequacy Assessment Process which is the
firm’s self assessment of the levels of capital that it
needs to hold. The pillar 2 process culminates in the
FSA providing firms with Individual Capital
Guidance (‘ICG’). The ICG is set as a capital
resources requirement higher than that required
under pillar 1.
288
Capital structure at 31 December
2009
US$m
2008
US$m
Composition of regulatory capital
(Audited)
Tier 1 capital
Shareholders’ equity .............................................................................................................................
Shareholders’ equity per balance sheet73 .........................................................................................
Preference share premium ................................................................................................................
Other equity instruments ..................................................................................................................
Deconsolidation of special purpose entities74 ..................................................................................
Minority interests ..................................................................................................................................
Minority interests per balance sheet ................................................................................................
Preference share minority interests ..................................................................................................
Minority interest transferred to tier 2 capital ...................................................................................
Minority interest in deconsolidated subsidiaries .............................................................................
Regulatory adjustments to the accounting basis ..................................................................................
Unrealised losses on available-for-sale debt securities75 ..................................................................
Own credit spread .............................................................................................................................
Defined benefit pension fund adjustment76 ......................................................................................
Reserves arising from revaluation of property and unrealised gains on
available-for-sale equities ................................................................................................................
Cash flow hedging reserve ...............................................................................................................
Deductions ............................................................................................................................................
Goodwill capitalised and intangible assets ......................................................................................
50% of securitisation positions .........................................................................................................
50% of tax credit adjustment for expected losses.............................................................................
50% of excess of expected losses over impairment allowances ......................................................
135,252
128,299
(1,405)
(2,133)
10,491
3,932
7,362
(2,395)
(678)
(357)
164
906
(1,050)
2,508
(2,226)
26
(33,088)
(28,680)
(1,579)
546
(3,375)
Core tier 1 capital ...............................................................................................................................
106,260
Other tier 1 capital before deductions ..................................................................................................
Preference share premium ................................................................................................................
Preference share minority interests ..................................................................................................
Innovative tier 1 securities ...............................................................................................................
Deductions ............................................................................................................................................
Unconsolidated investments77 ..........................................................................................................
50% of tax credit adjustment for expected losses ............................................................................
15,798
1,405
2,395
11,998
99
(447)
546
106,301
93,591
(1,405)
(2,133)
16,248
3,616
6,638
(2,110)
(626)
(286)
349
5,191
(5,744)
1,822
(1,726)
806
(29,994)
(26,861)
(989)
516
(2,660)
80,272
14,926
1,405
2,110
11,411
138
(378)
516
Tier 1 capital .......................................................................................................................................
122,157
95,336
Tier 2 capital
Total qualifying tier 2 capital before deductions .................................................................................
Reserves arising from revaluation of property and unrealised gains on
available-for-sale equities ................................................................................................................
Collective impairment allowances78 ................................................................................................
Perpetual subordinated debt .............................................................................................................
Term subordinated debt ....................................................................................................................
Minority interest in tier 2 capital ......................................................................................................
Total deductions other than from tier 1 capital ....................................................................................
Unconsolidated investments77 ..........................................................................................................
50% of securitisation positions ........................................................................................................
50% of excess of expected losses over impairment allowances ......................................................
Other deductions ..............................................................................................................................
50,075
2,226
4,120
2,987
40,442
300
(16,503)
(11,547)
(1,579)
(3,375)
(2)
49,394
1,726
3,168
2,996
41,204
300
(13,270)
(9,613)
(989)
(2,660)
(8)
Total regulatory capital .....................................................................................................................
155,729
131,460
Risk-weighted assets
(Unaudited)
Credit risk .............................................................................................................................................
Counterparty credit risk ........................................................................................................................
Market risk ............................................................................................................................................
Operational risk ....................................................................................................................................
903,518
51,892
51,860
125,898
882,597
73,999
70,264
121,114
Total ......................................................................................................................................................
1,133,168
1,147,974
For footnotes, see page 291.
289
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Capital management and allocation > Capital structure / Movement in tier 1 capital and RWAs // Subsidiaries’ RWAs // Footnotes
Capital ratios
(Unaudited)
Core tier 1 ratio .....................................................................................................................................
Tier 1 ratio ............................................................................................................................................
Total capital ratio ..................................................................................................................................
Source and application of tier 1 capital
Movement in tier 1 capital
(Audited)
Opening tier 1 capital79 ..........................................................................................................................
Contribution to tier 1 capital from profit for the year ......................................................................
Consolidated profits attributable to shareholders of the parent company .......................................
Removal of own credit spread net of tax .........................................................................................
Goodwill write-offs ..........................................................................................................................
Net dividends ........................................................................................................................................
Dividends ..........................................................................................................................................
Add back: shares issued in lieu of dividends ...................................................................................
Decrease/(increase) in goodwill and intangible assets deducted .........................................................
Ordinary shares issued ..........................................................................................................................
Rights issue (net of expenses)80 .......................................................................................................
Other .................................................................................................................................................
Innovative tier 1 securities issued ........................................................................................................
Foreign currency translation differences ..............................................................................................
Other79 ...................................................................................................................................................
2009
%
9.4
10.8
13.7
2009
US$m
95,336
10,247
5,834
4,413
–
(3,969)
(5,639)
1,670
(1,819)
18,399
18,326
73
–
4,837
(874)
Closing tier 1 capital .............................................................................................................................
122,157
Movement in risk-weighted assets
(Unaudited)
At 1 January79 ........................................................................................................................................
Movements ...........................................................................................................................................
1,147,974
(14,806)
At 31 December ....................................................................................................................................
1,133,168
2008
%
7.0
8.3
11.4
2008
US$m
101,685
11,682
5,728
(4,610)
10,564
(7,708)
(11,301)
3,593
1,430
470
–
470
2,133
(11,980)
(2,376)
95,336
1,164,649
(16,675)
1,147,974
For footnotes, see page 291.
Movement in tier 1 capital
(Audited)
HSBC complied with the FSA’s capital adequacy
requirements throughout 2009 and 2008. The rights
issue increased tier 1 capital by US$17.8 billion.
Profits attributable to shareholders of the parent
company of US$5.8 billion included losses of
US$4.4 billion from own credit spread, net of tax,
which do not impact regulatory capital. The
resulting contribution to tier 1 capital was therefore
US$10.2 billion less net dividends of US$4.0 billion
after taking account of shares issued in lieu of
dividends. The weakening US dollar caused foreign
currency translation differences to increase tier 1
capital by US$4.8 billion.
Movement in risk-weighted assets
(Unaudited)
Total risk-weighted assets decreased by
US$14.8 billion, or 1.3 per cent. Foreign currency
translation effects are estimated to have increased
RWAs by US$40 billion, mainly as a result of the
weakening of the US dollar, particularly against
sterling and the Brazilian real, resulting in an
estimated underlying decrease of US$55 billion in
RWAs. Of this underlying decrease, US$19 billion
was due to credit risk RWAs, reflecting decreases in
Europe and North America being offset by increases
in Asia. Market risk and counterparty credit risk
RWAs decreased by US$41 billion, primarily due
to reduced market volatility and active exposure
management. Operational risk RWAs increased by
US$4.8 billion because the three-year averaging of
gross revenues used in the calculation now includes
revenues for 2009 in place of 2006.
290
Risk-weighted assets by principal subsidiary
(Unaudited)
In order to give an indication of how HSBC’s capital
is deployed, the table below analyses the disposition
Risk-weighted assets by principal subsidiary
(Unaudited)
of RWAs by principal subsidiary. The RWAs are
calculated using FSA rules and exclude intra-HSBC
items.
The Hongkong and Shanghai Banking Corporation .........................................................................
Hang Seng Bank ............................................................................................................................
HSBC Bank Malaysia81 .................................................................................................................
The Hongkong and Shanghai Banking Corporation and other subsidiaries ................................
HSBC Bank .......................................................................................................................................
HSBC Private Banking Holdings (Suisse) ....................................................................................
HSBC France .................................................................................................................................
HSBC Bank and other subsidiaries ...............................................................................................
HSBC North America ........................................................................................................................
HSBC Finance ...............................................................................................................................
HSBC Bank Canada ......................................................................................................................
HSBC Bank USA and other subsidiaries ......................................................................................
HSBC Mexico ....................................................................................................................................
HSBC Bank Middle East ...................................................................................................................
HSBC Bank Malaysia ........................................................................................................................
HSBC Brazil ......................................................................................................................................
HSBC Bank Panama ..........................................................................................................................
Bank of Bermuda ...............................................................................................................................
Other ..................................................................................................................................................
2009
US$m
288,225
60,991
8,606
218,628
318,570
20,200
50,462
247,908
363,622
174,595
34,831
154,196
22,624
33,773
–
41,782
9,142
4,663
50,767
2008
US$m
247,626
44,211
–
203,415
379,695
20,422
65,557
293,716
373,955
187,660
35,336
150,959
21,037
35,217
11,182
30,851
9,498
4,759
34,154
1,133,168
1,147,974
For footnote, see below.
Footnotes to Risk
Credit risk
1 The amount of the loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by
mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of
US$62,286 million (2008: US$35,849 million), reflecting the full take-up of such irrevocable loan commitments. The take-up of such
offers is generally at modest levels.
2 As discussed further under ‘Write-off of loans and advances’, there was a change in the write-off period in North America during 2009.
The effect of this change was an acceleration of write-offs which reduced residential mortgages by US$1,924 million, other personal
loans by US$1,340 million and total personal lending by US$3,264 million, with a corresponding reduction in impairment allowances.
There was no significant effect on net loans and advances or loan impairment charges.
3 Residential mortgages include Hong Kong Government Home Ownership Scheme loans of US$3,456 million at 31 December 2009
(2008: US$3,882 million). Where disclosed, earlier comparatives were 2007: US$3,942 million; 2006: US$4,078 million; 2005:
US$4,680 million.
4 Other personal loans and advances include second lien mortgages and other property-related lending.
5 Other commercial loans and advances include advances in respect of agriculture, transport, energy and utilities.
6 Included within ‘Gross loans and advances to customers’ is credit card lending of US$68,289 million (2008: US$75,266 million).
Where disclosed, earlier comparatives were 2007: US$82,854 million; 2006: US$74,518 million; 2005: US$66,020 million.
7 The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of
Asia-Pacific. Comparative data have been restated accordingly.
8 As discussed further under ‘Write-off of loans and advances’, there was a change in the write-off period in North America during 2009.
The effect of this change was an acceleration of write-offs which reduced gross loans and advances to customers and loans classified as
impaired by US$3,264 million, with a corresponding reduction in impairment allowances. There was no significant effect on net
customer loans and advances or loan impairment charges.
9 Includes residential mortgages of HSBC Bank USA and HSBC Finance.
10 Comprising Hong Kong, Rest of Asia-Pacific, Middle East and Latin America.
11 As discussed further under ‘Write-off of loans and advances’, there was a change in the write-off period in North America during 2009.
The effect of this change was an acceleration of write-offs which reduced residential mortgages by US$1,924 million, second lien
mortgages by US$425 million and total mortgage lending by US$2,349 million, with a corresponding reduction in impairment
allowances. There was no significant effect on net loans and advances or loan impairment charges.
12 Negative equity arises when the value of the loan exceeds the value of available equity, generally based on values at origination date.
13 Loan-to-value ratios are generally based on values at the balance sheet date. The comparative data for the UK and the US are restated
accordingly (previously these ratios were presented based on origination date).
291
H S B C H O L D I N G S P L C
Report of the Directors: Risk (continued)
Footnotes
14 HSBC Finance lending is shown on a management basis and includes loans transferred to HSBC USA Inc. which are managed by
HSBC Finance.
15 As discussed further under ‘Write-off of loans and advances’ on page 205, there was a change in the write-off policy in North America
during 2009. The effect of this change was a one-off acceleration of write-offs. Excluding this, HSBC Finance mortgage lending at
31 December 2009 totalled US$63,724 million, of which US$52,914 million was fixed rate, US$9,537 million was adjustable rate and
US$1,274 million was interest only. Of the total, US$55,625 million was first lien and US$8,098 million was second lien.
16 Stated income lending forms a subset of total mortgage services lending across all categories.
17 By states which individually account for 5 per cent or more of HSBC Finance’s US customer loan portfolio.
18 Percentages are expressed as a function of the relevant loans and receivables balance.
19 The average loss on sale of foreclosed properties is calculated as cash proceeds after deducting selling costs and commissions, minus
the book value of the property when it was moved to ‘Real estate owned’, divided by the book value of the property when it was moved
to ‘Real estate owned’.
20 The average total loss on foreclosed properties sold during each quarter includes both the loss on sale and the cumulative write-downs
recognised on the loans up to and upon classification as ‘Real estate owned’. This average total loss on foreclosed properties is
expressed as a percentage of the book value of the property prior to its transfer to ‘Real estate owners’.
21 HSBC observes the disclosure convention that, in addition to those classified as EL9 to EL10, retail accounts classified EL1 to EL8 that
are delinquent by 90 days or more are considered impaired, unless individually they have been assessed as not impaired (see page 229,
‘Past due but not impaired financial instruments’).
22 The EL percentage is derived through a combination of PD and LGD, and may exceed 100 per cent in circumstances where the LGD is
above 100 per cent reflecting the cost of recoveries.
23 Impairment allowances are not reported for financial instruments whereby the carrying amount is reduced directly for impairment and
not through the use of an allowance account.
24 Impairment is not measured for assets held in trading portfolios or designated at fair value as assets in such portfolios are managed
according to movements in fair value, and the fair value movement is taken directly to the income statement. Consequently, all such
balances are reported under ‘Neither past due nor impaired’.
25 Includes asset-backed securities that have been externally rated as strong (2009: US$5,707 million; 2008: US$7,991 million), medium-
good (2009: US$881 million; 2008: nil), medium-satisfactory (2009: US$311 million; 2008: nil), sub-standard (2009: US$468 million;
2008: nil) and impaired (2009: US$460 million; 2008: nil).
26 The balances reported at 31 December 2008 for individually and collectively assessed impaired loans and advances to customers have
been restated by US$1.0 billion as a result of a reclassification, for disclosure purposes, of an element of a mortgage portfolio. There
has been no change to total impaired loans or total impairment allowances.
27 Impaired loans and advances are those classified as CRR 9, CRR 10, EL 9 or EL 10 and all retail loans 90 days or more past due,
unless individually they have been assessed as not impaired (see page 229, ‘Past due but not impaired financial instruments’).
28 Collectively assessed loans and advances comprise homogeneous groups of loans that are not considered individually significant, and
loans subject to individual assessment where no impairment has been identified on an individual basis, but on which a collective
impairment allowance has been calculated to reflect losses which have been incurred but not yet identified.
29 Collectively assessed loans and advances not impaired are those classified as CRR1 to CRR8 and EL1 to EL8 but excluding retail loans
90 days past due.
30 The impairment allowances on loans and advances to banks relate to the geographical regions, Europe and Middle East.
31 Net of reverse repo transactions, settlement accounts and stock borrowings.
32 As a percentage of loans and advances to banks and loans and advances to customers, as applicable.
33 Includes movement in impairment allowances against banks.
34 See table below ‘Net loan impairment charge to the income statement by geographical region’.
35 Collectively assessed impairment allowances are allocated to geographical segments based on the location of the office booking the
allowances or provisions. Consequently, the collectively assessed impairment allowances booked in Hong Kong may cover assets
booked in branches located outside Hong Kong, principally in Rest of Asia-Pacific, as well as those booked in Hong Kong.
36 Ratio excludes trading loans classified as in default.
Liquidity and funding
37 This comprises the Group’s other main banking subsidiaries and, as such, includes businesses spread across a range of locations, in
many of which HSBC may require a higher ratio of net liquid assets to customer liabilities to reflect local market conditions.
38 Unused committed sources of secured funding for which eligible assets were held.
39 Client-originated asset exposures relate to consolidated multi-seller conduits (see page 191). These vehicles provide funding to Group
customers by issuing debt secured by a diversified pool of customer-originated assets.
40 HSBC-managed asset exposures relate to consolidated securities investment conduits, primarily Solitaire and Mazarin (see page 191).
These vehicles issue debt secured by ABSs which are managed by HSBC. Of the total contingent liquidity risk under this category,
US$18.7 billion was already funded on-balance sheet at 31 December 2009 (2008: US$25.3 billion) leaving a net contingent exposure
of US$10.4 billion (2008: US$9.5 billion).
41 Other conduit exposures relate to third-party sponsored conduits (see page 194).
42 The five largest committed liquidity facilities provided to customers other than those facilities to conduits.
43 The total of all committed liquidity facilities provided to the largest market sector, other than those facilities to conduits.
Market risk
44 The structural foreign exchange risk is monitored using sensitivity analysis (see page 455). The reporting of commodity risk is
consolidated with foreign exchange risk and is not applicable to non-trading portfolios.
45 The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group VAR. The management of this
risk is described on page 258.
46 Credit spread sensitivity is reported separately for insurance operations (see page 277).
47 The effect of any month-end adjustments, not attributable to a specific daily market move, is spread evenly over the days in the month in
question.
48 The total VAR is non-additive across risk types due to diversification effects.
292
Risk management of insurance operations
49 HSBC has no insurance manufacturing subsidiaries in the Middle East.
50 Insurance contracts and investment contracts with discretionary participation features (‘DPF’) can give policyholders the contractual
right to receive, as a supplement to their guaranteed benefits, additional benefits that may be a significant portion of the total
contractual benefits, but whose amount and timing are determined by HSBC. These additional benefits are contractually based on the
performance of a specified pool of contracts or assets, or the profit of the company issuing the contracts.
51 Although investment contracts with DPF are financial investments, HSBC continues to account for them as insurance contracts as
permitted by IFRS 4.
52 Net written insurance premiums represent gross written premiums less gross written premiums ceded to reinsurers.
53 Term assurance includes credit life insurance.
54 Other assets comprise shareholder assets.
55 Present value of in-force long-term insurance contracts and investment contracts with DPF.
56 Does not include assets, liabilities and shareholders’ funds of associated insurance company, Ping An Insurance, or joint venture
insurance companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.
57 Comprise life linked insurance contracts and linked long-term investment contracts.
58 Comprise life non-linked insurance contracts and non-linked long-term investment contracts.
59 Comprises non-life insurance contracts.
60 Does not include financial assets of associated insurance company, Ping An Insurance, or joint venture insurance companies, Hana
Life and Canara HSBC Oriental Bank if Commerce Life Insurance Company Limited.
61 Comprise mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities.
62 The table excludes contracts where the market risk is 100 per cent reinsured.
63 Excluding guarantees from associated insurance company, Ping An Insurance, or joint venture insurance companies, Hana Life and
Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.
64 Impairment is not measured for debt securities held in trading portfolios or designated at fair value, as assets in such portfolios are
managed according to movements in fair value, and the fair value movement is taken directly through the income statement.
Consequently, all such balances are reported under ‘neither past due nor impaired’.
65 Shareholders’ funds comprise solvency and unencumbered assets.
66 Does not include treasury bills, other eligible bills and debt securities held by associated insurance company, Ping An Insurance, or
joint venture insurance companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.
67 Does not include reinsurers’ share of liabilities under insurance contracts and reinsurance debtors of associated insurance company,
Ping An Insurance, or joint venture insurance companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance
Company Limited.
68 Do not include insurance contracts issued by associated insurance company, Ping An Insurance, or joint venture insurance companies,
Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.
69 Do not include investment contracts issued by associated insurance company, Ping An Insurance, or joint venture insurance
companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited.
70 In most cases, policyholders have the option to terminate their contracts at any time and receive the surrender values of their policies.
These may be significantly lower than the amounts shown above.
71 Value of net new business during the year is the present value of the projected stream of profits from the business.
72 Experience variances include the effect of the difference between demographic, expense and persistency assumptions used in the
previous PVIF calculation and actual experience observed during the year.
Capital management and allocation
73 Includes externally verified profits for the year to 31 December 2009.
74 Mainly comprises unrealised losses on available-for-sale debt securities within special purpose entities which are excluded from the
regulatory consolidation.
75 Under FSA rules, unrealised gains/losses on debt securities net of tax must be excluded from capital resources.
76 Under FSA rules, the defined benefit liability may be substituted with the additional funding that will be paid into the relevant schemes
over the following five year period.
77 Mainly comprise investments in insurance entities.
78 Under FSA rules, collective impairment allowances on loan portfolios on the standardised approach are included in tier 2 capital.
79 Opening capital items as at 1 January 2008 are pro forma and unaudited.
80 Rights issue excludes US$493 million of losses arising on derivative contracts and certain fees, which are recognised in the income
statement.
81 HSBC Bank Malaysia was transferred within the Group to the ownership of The Hongkong and Shanghai Banking Corporation with
effect from 2 January 2009.
293
H S B C H O L D I N G S P L C
Report of the Directors: Governance
Corporate Governance / Biographies > Directors
Corporate Governance Report ......................
Directors .......................................................
Secretary .......................................................
Adviser to the Board ....................................
Group Managing Directors ...........................
Group General Managers .............................
Board of Directors ........................................
The Board .................................................
Corporate governance codes ....................
Board committees .....................................
Internal control .........................................
Going concern basis .................................
Directors’ interests ....................................
Employees ....................................................
Employee involvement ..............................
Employment of disabled persons ..............
Remuneration policy .................................
Employee share plans ...............................
Subsidiary company share plans ...............
Employee compensation and benefits .......
Bank payroll tax ........................................
Corporate sustainability ................................
Business sustainability ..............................
Environmental issues ................................
Community investment ..............................
Employee engagement ..............................
Sustainability governance .........................
Sustainability risk .....................................
Health and safety ......................................
Supplier payment policy ...........................
Share capital ..................................................
Issued share capital ..................................
Rights and obligations attaching to shares
Share capital during 2009 ........................
Dividends, shareholders and meetings .........
Dividends for 2009 ...................................
Dividends for 2010 ...................................
Communication with shareholders ...........
Notifiable interests in share capital ..........
Dealings in HSBC Holdings shares ..........
Annual General Meeting ...........................
Page
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Corporate Governance Report
The statement of corporate governance practices set
out on pages 294 to 351 and information
incorporated by reference constitutes the Corporate
Governance Report of HSBC Holdings.
294
Directors
S K Green, Group Chairman
Age 61. An executive Director since 1998; Group
Chief Executive from 2003 to 2006. Joined HSBC
in 1982. Chairman of the Nomination Committee
since 26 February 2010. Chairman of HSBC Bank
plc. A director of HSBC North America Holdings
Inc. and The Hongkong and Shanghai Banking
Corporation Limited. Chairman and a director of
HSBC Private Banking Holdings (Suisse) SA until
25 February 2010. Ceased to be a director of HSBC
France on 16 February 2010. Chairman of The
British Bankers’ Association and, since 30 April
2009, a non-executive Director of BASF SE.
Mr Green is a career banker having joined The
Hongkong and Shanghai Banking Corporation
Limited in 1982 with responsibility for corporate
planning activities. He was Group Treasurer, with
responsibility for HSBC’s treasury and capital
markets businesses globally from 1992 to 1998, and
executive Director, Corporate, Investment Banking
and Markets, from 1998 to 2003, when he was
appointed Group Chief Executive. He has worked in
Hong Kong, New York, the Middle East and London
and has extensive international experience and
knowledge of the HSBC Group.
M F Geoghegan, CBE, Group Chief Executive
Age 56. An executive Director since 2004. Joined
HSBC in 1973. Chairman of the Group Management
Board. Chairman of The Hongkong and Shanghai
Banking Corporation Limited since 1 February 2010
and chairman of HSBC Bank Canada. Deputy
chairman of HSBC Bank plc. A director of HSBC
Latin America Holdings (UK) Limited having
ceased to be chairman on 4 December 2009. A
director of HSBC North America Holdings Inc.
Ceased to be chairman and a director of HSBC Bank
USA, N.A. and HSBC USA Inc. on 7 May 2009.
Chief Executive of HSBC Bank plc from 2004 to
2006. Responsible for all of HSBC’s business
throughout South America from 2000 to 2003.
President of HSBC Bank Brasil S.A. – Banco
Múltiplo from 1997 to 2003.
Mr Geoghegan is a career banker with over
35 years’ international experience with HSBC. He
has worked in the Americas, Asia, the Middle East
and Europe. He established the Group’s operations
in Brazil in 1997 following the creation of Banco
HSBC Bamerindus S.A and in 2003 he was
honoured with a CBE in recognition of his
contribution to British business interests in Brazil.
† S A Catz
† M K T Cheung, GBS, OBE
Age 48. President of Oracle Corporation. A non-
executive Director since May 2008. Managing
Director of Donaldson, Lufkin & Jenrette from
1997 to 1999. Joined Oracle in 1999 and appointed
to the Board of Directors in 2001.
Ms Catz brings to the Board a background in
international business leadership, having helped
transform Oracle into the second biggest producer
of management software and the world’s leading
supplier of software for information management.
V H C Cheng, GBS, OBE
Age 61. Chairman of HSBC Bank (China) Company
Limited and, since 21 January 2010, of HSBC Bank
(Taiwan) Limited. An executive Director since
February 2008. Joined HSBC in 1978. Appointed a
Group General Manager in 1995 and a Group
Managing Director in 2005. A director of HSBC
Bank (Vietnam) Limited. An independent non-
executive director of Great Eagle Holdings Limited
and, since 10 July 2009, of MTR Corporation
Limited. Vice chairman of the China Banking
Association. A member of the National Committee
of the 11th Chinese People’s Political Consultative
Conference (‘CPPCC’) and a senior adviser to the
11th Beijing Municipal Committee of the CPPCC.
Chairman and a director of The Hongkong and
Shanghai Banking Corporation Limited until
1 February 2010 and of HSBC Global Asset
Management (Hong Kong) Limited until 4 February
2010. A director of HSBC Bank Australia Limited
and a member of the Exchange Fund Advisory
Committee of the Hong Kong Monetary Authority
until 1 February 2010. A non-executive director of
Swire Pacific Limited from 2005 to 2008. Awarded
the Gold Bauhinia Star by the Hong Kong
Government in 2005.
Mr Cheng is a career banker with extensive
international business experience particularly in
Asia. Mr Cheng is Vice President of the Hong Kong
Institute of Bankers and was chairman of the Process
Review Panel for the Securities and Futures
Commission and of the Standing Committee on
Directorate Salaries and Conditions of Service of the
Hong Kong Government. Chairman of the Council
of the Chinese University of Hong Kong since
24 October 2009. Seconded to the Hong Kong
Government’s Central Policy Unit from 1989 to
1991 serving as an adviser to the Governor of Hong
Kong.
Age 62. Non-executive chairman of the Airport
Authority Hong Kong. A non-executive Director
since 1 February 2009 and a member of the Group
Audit Committee since 1 March 2010. A non-
executive director of Hang Seng Bank Limited, HKR
International Limited and Hong Kong Exchanges
and Clearing Limited. A non-official member of the
Executive Council of the Hong Kong Special
Administrative Region. Non-executive chairman of
the Council of the Hong Kong University of Science
and Technology. A director of The Association of
Former Council Members of The Stock Exchange
of Hong Kong Limited and The Hong Kong
International Film Festival Society Limited. Ceased
to be a non-executive director of Sun Hung Kai
Properties Limited on 9 December 2009. Chairman
and Chief Executive Officer of KPMG Hong Kong
from 1996 to 2003. A Council Member of the Open
University of Hong Kong until 19 June 2009.
Awarded the Gold Bauhinia Star by the Hong Kong
Government in 2008.
Dr Cheung brings to the Board a background
in international business and financial accounting,
particularly in Greater China and the wider Asian
economy. He retired from KPMG Hong Kong in
2003 after more than 30 years’ distinguished service
with the firm. He is a Fellow of the Institute of
Chartered Accountants in England and Wales.
† J D Coombe
Age 64. Non-executive chairman of Hogg Robinson
Group plc. A non-executive Director since 2005. A
member of the Group Audit Committee, the
Remuneration Committee and, since 26 February
2010, the Group Risk Committee. A non-executive
director of Home Retail Group plc. A trustee of the
Royal Academy Trust. Former appointments
include: executive director and Chief Financial
Officer of GlaxoSmithKline plc; a non-executive
director of GUS plc; a member of the Supervisory
Board of Siemens AG; chairman of The Hundred
Group of Finance Directors and a member of the
Accounting Standards Board.
Mr Coombe brings to the Board a background in
international business, financial accounting and the
pharmaceutical industry. As Chief Financial Officer
of GlaxoSmithKline he had responsibility for the
Group’s financial operations globally. He is a Fellow
of the Institute of Chartered Accountants in England
and Wales.
295
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Biographies > Directors
† J L Durán
Age 45. Chief Executive Officer of Devanlay SA
since 1 July 2009. A non-executive Director since
January 2008. A non-executive director of France
Telecom. Senior adviser for the Boston Consulting
Group during the first half of 2009. Chief Executive
of Carrefour SA until December 2008. Former
appointments at Carrefour SA include: chairman of
its Management Board of Directors; Chief Financial
Officer and Managing Director, Organisation and
Systems.
Mr Durán brings to the Board a background
in international finance, retail and consulting in
developed and emerging markets. He joined
Carrefour SA in 1991 and held a number of positions
within Carrefour’s businesses in Spain, southern
Europe and the Americas.
† R A Fairhead
Age 48. Chairman, Chief Executive Officer and a
director of Financial Times Group Limited. A non-
executive Director since 2004. Chairman of the
Group Audit Committee and, since 26 February
2010, the Group Risk Committee. A member of the
Nomination Committee. A director of Pearson plc
and chairman of Interactive Data Corporation. A
non-executive director of The Economist Newspaper
Limited. Former appointments include: Executive
Vice President, Strategy and Group Control of
Imperial Chemical Industries plc; and Finance
Director of Pearson plc.
Mrs Fairhead brings to the Board a background
in international industry, publishing, finance and
general management. As the former Finance
Director of Pearson plc she oversaw the day to day
running of the finance function and was directly
responsible for global financial reporting and
control, tax and treasury. She has a Masters in
Business Administration from the Harvard Business
School.
D J Flint, CBE, Chief Financial Officer, Executive
Director, Risk and Regulation
Age 54. Joined HSBC as an executive Director in
1995. A non-executive director of BP p.l.c. and a
member of the Consultative Committee of the Large
Business Advisory Board of HM Revenue &
Customs and the Business Government Forum on
Tax and Globalisation. Chairman of HSBC Finance
Corporation and a director of HSBC North America
Holdings Inc. until 7 May 2009. Co-chairman of the
Counterparty Risk Management Policy Group III in
2008. Chaired the Financial Reporting Council’s
review of the Turnbull Guidance on Internal Control
296
in 2004. 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.
Mr Flint has extensive financial experience
particularly in banking, multinational financial
reporting, treasury and securities trading operations.
In 2006 he was honoured with a CBE in recognition
of his services to the finance industry. He is a
member of the Institute of Chartered Accountants of
Scotland and the Association of Corporate
Treasurers and he is a Fellow of The Chartered
Institute of Management Accountants.
A A Flockhart, CBE
Age 58. Chairman, Personal and Commercial
Banking and Insurance. An executive Director since
May 2008. Joined HSBC in 1974. Appointed a
Group General Manager in 2002 and a Group
Managing Director in 2006. Chairman of HSBC
Latin America Holdings (UK) Limited since 4
December 2009. Vice chairman and a director of
HSBC Bank (Vietnam) Limited. A director of Hang
Seng Bank Limited and HSBC Bank Australia
Limited. A member of the Visa Asia Pacific Senior
Advisory Council, Visa Inc. Chairman of HSBC
Bank Malaysia Berhad from 2007 to 5 February
2010. Chief Executive Officer of The Hongkong and
Shanghai Banking Corporation Limited from 2007 to
1 February 2010. Ceased to be a director of HSBC
Bank (China) Company Limited on 28 February
2010. President and Group Managing Director Latin
America and the Caribbean from 2006 to 2007.
Chief Executive Officer, Mexico from 2002 to 2006.
Senior Executive Vice-President, Commercial
Banking, HSBC Bank USA, N.A. from 1999 to
2002. Managing Director of The Saudi British Bank
from 1997 to 1999.
Mr Flockhart is a career banker, being an
emerging markets specialist with over 30 years’
experience with HSBC across Latin America, the
Middle East and Asia. In 2007 he was honoured with
a CBE in recognition of his services to British
business and charitable services and institutions in
Mexico.
* W K L Fung, SBS, OBE
Age 61. Group Managing Director of Li & Fung
Limited. A non-executive Director since 1998.
Chairman of the Corporate Sustainability
Committee. Non-executive deputy chairman of The
Hongkong and Shanghai Banking Corporation
Limited. A non-executive director of Integrated
Distribution Services Group Limited, Convenience
Retail Asia Limited and of Trinity Limited which
was listed on The Stock Exchange of Hong Kong
Limited on 3 November 2009. An independent non-
executive director of Shui On Land Limited, VTech
Holdings Limited, Singapore Airlines Limited (since
1 December 2009) and Sun Hung Kai Properties
Limited (since 1 February 2010). Former
appointments include: non-executive director of
Bank of Communications; chairman of the Hong
Kong General Chamber of Commerce; the Hong
Kong Exporters’ Association; and the Hong Kong
Committee for the Pacific Economic Cooperation
Council. Awarded the Silver Bauhinia Star by the
Hong Kong Government in 2008.
Mr Fung brings to the Board over 30 years’
experience in running a major international
conglomerate specialising in supply chain
management through the borderless manufacturing
of global consumer products. During his leadership
the family business of Li & Fung has become one
of the largest trading companies in Hong Kong
with over 80 offices worldwide.
S T Gulliver
Age 50. Chairman, Europe, Middle East and Global
Businesses. An executive Director since May 2008.
Joined HSBC in 1980. Appointed a Group General
Manager in 2000 and a Group Managing Director in
2004. Chairman of HSBC Private Banking Holdings
(Suisse) SA since 25 February 2010, of HSBC Bank
Middle East Limited since 15 February 2010 and of
HSBC France since 1 January 2009. A director of
The Hongkong and Shanghai Banking Corporation
Limited and HSBC Bank plc. Deputy chairman and
member of the Supervisory Board of HSBC Trinkaus
& Burkhardt AG. Chief Executive of Global Banking
and Markets. A director of HSBC North America
Holdings Inc. until 7 May 2009 and of HSBC Latin
America Holdings (UK) Limited until 4 December
2009. Co-Head of Global Banking and Markets from
2003 to 2006. Head of Global Markets from 2002 to
2003. Head of Treasury and Capital Markets in Asia-
Pacific from 1996 to 2002.
Mr Gulliver is a career banker with over
28 years’ international experience with HSBC.
He has held a number of key roles in the Group’s
operations worldwide, including in London, Hong
Kong, Tokyo, Kuala Lumpur and the United Arab
Emirates. Global Banking and Markets is the
wholesale banking division of the Group with
operations in more than 60 countries and territories.
† J W J Hughes-Hallett, SBS
Age 60. Chairman of John Swire & Sons Limited.
A non-executive Director since 2005. A member of
the Nomination Committee and, since 26 February
2010, of the Group Risk Committee. A member of
the Group Audit Committee until 1 March 2010. A
non-executive director and former chairman of
Cathay Pacific Airways Limited and Swire Pacific
Limited. A non-executive director of The Hongkong
and Shanghai Banking Corporation Limited from
1999 to 2004. A trustee of the Dulwich Picture
Gallery and the Esmée Fairbairn Foundation. A
member of The Hong Kong Association and of the
Governing Board of the Courtauld Institute of Art.
Awarded the Silver Bauhinia Star by the Hong Kong
Government in 2004.
Mr Hughes-Hallett brings to the Board a
background in financial accounting and the
management of a broad range of businesses in a
number of international industries, including
aviation, property, shipping, manufacturing and
trading, in the Far East, UK, US and Australia. He
is a Fellow of the Institute of Chartered Accountants
in England and Wales.
† W S H Laidlaw
Age 54. Chief Executive Officer of Centrica plc.
A non-executive Director since January 2008.
A member of the Remuneration Committee. Former
appointments include: Executive Vice President of
Chevron Corporation; non-executive director of
Hanson PLC; Chief Executive Officer of Enterprise
Oil plc; and President and Chief Operating Officer
of Amerada Hess Corporation.
Mr Laidlaw brings to the Board significant
international experience, particularly in the energy
sector, having had responsibility for businesses in
four continents. He has a Masters in Business
Administration from INSEAD.
† J R Lomax
Age 64. Former Deputy Governor, Monetary
Stability, at the Bank of England and member of the
Monetary Policy Committee. A non-executive
Director since December 2008. A member of the
Group Audit Committee since 1 March 2009 and of
the Group Risk Committee since 26 February 2010.
A non-executive director of The Scottish American
Investment Company PLC and, since 31 July 2009,
of Reinsurance Group of America Inc. A director
of the Council of Imperial College, London since
1 June 2009 and a member of the Board of the Royal
National Theatre. Former appointments include:
Deputy Governor of the Bank of England from 2003
297
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Biographies > Directors / Senior management
to 2008; Permanent Secretary at the UK Government
Departments for Transport and Work and Pensions
and at the Welsh Office from 1996 to 2003; and Vice
President and Chief of Staff to the President of the
World Bank from 1995 to 1996.
Ms Lomax brings to the Board business
experience in both the public and private sectors and
a deep knowledge of the operation of the UK
government and the financial system.
† Sir Mark Moody-Stuart, KCMG
Age 69. Chairman of Hermes Equity Ownership
Services Limited since 21 July 2009. A non-
executive Director since 2001. Chairman of the
Remuneration Committee and a member of the
Corporate Sustainability Committee. A non-
executive director of Accenture Limited and Saudi
Aramco. Chairman of the Global Business Coalition
on HIV/AIDS and the Global Compact Foundation
and a member of the board of the UN Global
Compact. Retired as a director and chairman of
Anglo American plc on 31 July 2009. Former
appointments include: director and chairman of
The ‘Shell’ Transport and Trading Company, plc;
chairman of the Committee of Managing Directors
of the Royal Dutch/Shell Group of Companies; and
a Governor of Nuffield Hospitals.
Sir Mark brings to the Board many years’
experience of leading global organisations, having
worked during his career in nine countries. He works
with many non-governmental organisations to
improve companies’ commitment to socially
responsible activities.
† G Morgan
Age 64. Non-executive chairman of SNC-Lavalin
Group Inc. A non-executive Director since 2006. A
member of the Remuneration Committee. A member
of the Board of Trustees of The Fraser Institute and
the Manning Centre for Building Democracy. A non-
executive director of HSBC Bank Canada from 1996
to 2006. Former appointments include: Founding
President, Chief Executive Officer and Vice
chairman of EnCana Corporation; a director of
Alcan Inc. and Lafarge North America, Inc.
Mr Morgan brings to the Board a background in
technical, operational, financial and management
positions and has led large international companies
in the energy and engineering sectors. He has been
recognised as Canada’s most respected Chief
Executive Officer in a national poll of Chief
Executives. He is currently a business columnist
for Canada’s largest national newspaper.
† N R N Murthy, CBE
Age 63. Chairman and Chief Mentor and former
Chief Executive Officer of Infosys Technologies
Limited. A non-executive Director since May 2008.
A member of the Corporate Sustainability
Committee and, from the conclusion of the Annual
General Meeting in 2010, chairman of the
Committee. A non-executive director of Unilever plc
and a director of the United Nations Foundation. A
non-executive director of New Delhi Television
Limited until 22 July 2009. A former non-executive
director of DBS Group Holdings Limited and DBS
Bank Limited.
Mr Murthy brings to the Board experience in
information technology, corporate governance and
education, particularly in India. He founded Infosys
Technologies Limited in India in 1981 and was its
Chief Executive Officer for 21 years. Under his
leadership, Infosys established a global footprint and
was listed on NASDAQ in 1999. During his career
he has worked in France and India.
† S M Robertson, senior independent non-executive
Director
Age 68. Non-executive chairman of Rolls-Royce
Group plc and the founder member of Simon
Robertson Associates LLP. A non-executive
Director since 2006 and senior independent non-
executive Director since 2007. A member of the
Nomination Committee. A non-executive director of
Berry Bros. & Rudd Limited, The Economist
Newspaper Limited and Royal Opera House Covent
Garden Limited. A trustee of the Eden Project Trust
and of the Royal Opera House Endowment Fund.
Former appointments include: Managing Director of
Goldman Sachs International; and chairman of
Dresdner Kleinwort Benson.
Mr Robertson brings to the Board a background
in international corporate advisory with a wealth of
experience in mergers and acquisitions, merchant
banking, investment banking and financial markets.
During his career he has worked in France,
Germany, the UK and the USA.
† J L Thornton
Age 56. A non-executive Director since December
2008. A member of the Remuneration Committee
since 24 April 2009 and, from the conclusion of the
Annual General Meeting in 2010, chairman of the
Committee. Non-executive chairman and a director
of HSBC North America Holdings Inc. since
December 2008. Professor and director of the Global
Leadership Programme at the Tsinghua University
School of Economics and Management. Chairman of
298
the Brookings Institution Board of Trustees. A non-
executive director of Ford Motor Company, Intel
Corporation, Inc., News Corporation, Inc. and China
Unicom (Hong Kong) Limited. A director of the
National Committee on United States-China
Relations and a Trustee of Asia Society, China
Institute, The China Foreign Affairs University, the
Palm Beach Civic Association and the United World
College of East Africa Trust. A member of the
Council on Foreign Relations, the China Securities
Regulatory Commission International Advisory
Committee and China Reform Forum International
Advisory Committee. Former appointments include:
a non-executive director of Industrial and
Commercial Bank of China Limited from 2005 until
2008; and President of the Goldman Sachs Group,
Inc. from 1999 until 2003.
Mr Thornton brings to the Board experience
that bridges developed and developing economies
and the public and private sectors. He has a deep
knowledge of financial services and education
systems, particularly in Asia. During his 23 year
career with Goldman Sachs, he played a key role in
the firm’s global development and was chairman of
Goldman Sachs Asia.
† Sir Brian Williamson, CBE
Age 65. Chairman of Electra Private Equity plc.
A non-executive Director since 2002. A member of
the Nomination Committee, having served as
chairman of the Committee until 26 February 2010.
A director of NYSE Euronext and Climate Exchange
plc. Former appointments include: chairman of
London International Financial Futures and Options
Exchange and Gerrard Group plc; and a non-
executive director of Resolution plc, the Financial
Services Authority and the Court of The Bank of
Ireland.
Sir Brian brings to the Board extensive
experience in money and bond markets, private
equity, futures, options and commodities trading
internationally. He established the London
International Financial Futures and Options
Exchange in the 1980s and led the Exchange’s
development of its electronic trading platform in
the mid-1990s. He is a member of the Guild of
International Bankers.
* Non-executive Director
† Independent non-executive Director
Secretary
R G Barber
Age 59. Group Company Secretary. Appointed a
Group General Manager in 2006. Joined HSBC in
1980. Company Secretary of HSBC Holdings plc
since 1990. Chairman of the Disclosure Committee.
A member of the Listing Authority Advisory
Committee of the Financial Services Authority and
of the Primary Markets Group of the London Stock
Exchange. Corporation Secretary of The Hongkong
and Shanghai Banking Corporation Limited from
1986 to 1992 and Company Secretary of HSBC
Bank plc from 1994 to 1996.
Adviser to the Board
D J Shaw
Age 63. An Adviser to the Board since 1998.
Solicitor. A former partner in Norton Rose. A
director of The Bank of Bermuda Limited and
HSBC Private Banking Holdings (Suisse) SA. An
independent non-executive director of Kowloon
Development Company Limited and Shui On Land
Limited.
Group Managing Directors
A Almeida
Age 53. Group Head of Human Resources. A Group
Managing Director since February 2008. Joined
HSBC in 1992. Appointed a Group General Manager
in 2007. Global Head of Human Resources for
Global Banking and Markets, Private Banking,
Global Transaction Banking and HSBC Amanah
from 1996 to 2007.
E Alonso
Age 54. Group Managing Director and Head of
HSBC Latin America and the Caribbean. A Group
Managing Director since May 2008. Joined HSBC in
1997. Appointed a Group General Manager in 2006.
Chairman Grupo Financiero HSBC, S.A. de C.V. and
HSBC México, S.A., Institución de Banca Múltiple,
Grupo Financiero HSBC. Deputy Chief Executive of
HSBC Investment Bank Brasil S.A. – Banco de
Investimento. A director of HSBC Latin America
Holdings (UK) Limited, HSBC Argentina Holdings
S.A. and HSBC Bank Brasil S.A. – Banco Múltiplo.
Managing Director of HSBC (Brasil)
Administradora de Consorcio Ltda. and HSBC
Serviços e Participaçoes Ltda. President of the Board
of Directors of HSBC Bank (Panamá) S.A.
299
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Biographies > Senior management
C C R Bannister
Age 51. Group Managing Director, Insurance until
his retirement from the Group on 31 March 2010. A
Group Managing Director since 2006. Joined HSBC
in 1994. Appointed a Group General Manager in
2001. Chairman of HSBC Insurance Holdings
Limited and HSBC Insurance Brokers Limited.
Chief Executive Officer, HSBC Group Private
Banking from 1998 to 2006. Deputy Chief Executive
Officer, HSBC Securities (USA) Inc. from 1996 to
1997.
K M Harvey
Age 49. Group Chief Technology and Services
Officer. A Group Managing Director since October
2008. Joined HSBC Finance Corporation in 1989.
Group Chief Information Officer from 2004 to
September 2008. President of HSBC Technology
and Services (USA) Inc. from 2003 to 2004. Group
Executive for HSBC Finance Corporation from 1993
to 2002. Managing Director of Data Processing,
HFC Bank Limited from 1992 to 1993. Director of
Banking Systems, HSBC Finance Corporation from
1990 to 1992.
A C Hungate
Age 43. Global Head of Personal Financial Services
and Marketing. Joined HSBC as a Group Managing
Director in 2007. Chairman of HSBC Bank A.S. and
a director of HSBC Bank Egypt S.A.E. Formerly
Managing Director, Asia Pacific at Reuters.
Worldwide Chief Marketing Officer of Reuters
between 2002 and 2005.
B P McDonagh
Age 51. Chief Executive Officer, HSBC North
America Holdings Inc. A Group Managing Director
since February 2008. Joined HSBC in 1979.
Appointed a Group General Manager in 2005.
Chairman of HSBC Finance Corporation, HSBC
USA Inc. and HSBC Bank USA, N.A. A director of
The Bank of Bermuda Limited and HSBC Bank
Canada. Former director of HSBC Latin America
Holdings (UK) Limited. Chief Executive Officer,
HSBC Finance Corporation and Chief Operating
Officer of HSBC North America Holdings Inc. from
2007 to 2008. Chief Operating Officer, HSBC Bank
USA, N.A. from 2004 to 2006.
B Robertson
Age 55. Group Chief Risk Officer. A Group
Managing Director since February 2008. Joined
HSBC in 1975. Appointed a Group General Manager
in 2003. Group General Manager, Group Credit and
300
Risk from 2005 to 2007. Head of Global Banking
and Markets for North America from 2003 to 2005.
P A Thurston
Age 56. Chief Executive, HSBC Bank plc since
1 April 2009. A Group Managing Director since May
2008. Joined HSBC in 1975. Appointed a Group
General Manager in 2003. A director of HSBC Bank
plc since June 2008. Former chairman of Grupo
Financiero HSBC, S.A. de C.V. and former Chief
Executive Officer of HSBC México, S.A.,
Institución de Banca Múltiple, Grupo Financiero
HSBC.
P T S Wong
Age 58. Chief Executive, The Hongkong and
Shanghai Banking Corporation Limited since
1 February 2010. A Group Managing Director since
1 February 2010. Joined HSBC and appointed a
Group General Manager in 2005. Deputy chairman
of HSBC Bank (China) Company Limited.
Chairman of HSBC’s seven rural banks in mainland
China. Chairman of HSBC Bank Malaysia Berhad,
and a director of HSBC Bank Australia Limited
since 5 February 2010. A director of Hang Seng
Bank Limited, Bank of Communications Co., Ltd.
and Ping An Insurance (Group) Company of China,
Ltd.
Group General Managers
P Y Antika
Age 49. Chief Executive Officer, Turkey. Joined
HSBC in 1990. Appointed a Group General Manager
in 2005.
S Assaf
Age 49. Head of Global Markets. Joined HSBC in
1994. Appointed a Group General Manager in May
2008.
R S Beck
Age 43. Group General Manager, Communications
Director. Joined HSBC in 1989. Appointed a Group
General Manager in May 2008.
R E T Bennett
Age 58. Group General Counsel. Joined HSBC in
1979. Appointed a Group General Manager in 1998.
N S K Booker
Age 51. Chief Executive Officer, HSBC Finance
Corporation and Deputy Chief Executive Officer,
HSBC North America Holdings Inc. Joined HSBC in
1981. Appointed a Group General Manager in 2004.
P W Boyles
Age 54. Chief Executive Officer Continental Europe
and deputy chairman, HSBC France. Joined HSBC
in 1975. Appointed a Group General Manager in
2006.
D C Budd
Age 56. Chairman of HFC Bank Limited and a
director of HSBC Bank plc. Joined HSBC in 1972.
Appointed a Group General Manager in 2005.
Z J Cama
Age 62. Group General Manager Group
Management Office. Joined HSBC in 1968.
Appointed a Group General Manager in 2001.
R P Contractor
Age 52. Group General Manager, Service Delivery.
Joined HSBC in 1987. Appointed a Group General
Manager in October 2008.
S N Cooper
Age 42. Deputy chairman and Chief Executive
Officer, HSBC Bank Middle East Limited. Joined
HSBC in 1989. Appointed a Group General Manager
in May 2008.
J E Coverdale
Age 53. Global Co-Head, Commercial Banking.
Joined HSBC in 1977. Appointed a Group General
Manager in May 2008.
I M Dorner
Age 55. President and Chief Executive Officer,
HSBC Bank USA, N.A. Joined HSBC in 1986.
Appointed a Group General Manager in 2007.
A S M El Anwar
Age 63. Chairman and Chief Executive Officer,
HSBC Bank Egypt S.A.E. Joined HSBC in 1991.
Appointed a Group General Manager in May 2008.
C Engel
Age 52. Chief Executive Officer, HSBC Bank Brazil
S.A. – Banco Múltiplo. Joined HSBC in 2003.
Appointed a Group General Manager in May 2008.
301
D L Fried
Age 48. Regional Head of Insurance, HSBC Asia
Pacific. Group Head of Insurance with effect from
1 April 2010. Joined HSBC in 1984. Appointed a
Group General Manager in May 2008.
A Y M Fung
Age 49. Head of Global Markets and Treasurer,
HSBC Asia Pacific. Joined HSBC in 1996.
Appointed a Group General Manager in May 2008.
J D Garner
Age 40. Group General Manager, Personal Financial
Services, UK. Joined HSBC in 2004. Appointed a
Group General Manager in 2006.
J L Gordon
Age 57. President and Chief Executive Officer,
HSBC Bank Canada. Joined HSBC in 1987.
Appointed a Group General Manager in 2005.
M M Hussain
Age 49. Head of HSBC Amanah and Chief
Executive Officer, Malaysia. Joined HSBC in 1982.
Appointed a Group General Manager in May 2008.
A M Keir
Age 51. Group General Manager, Global Co-Head
Commercial Banking. Joined HSBC in 1981.
Appointed a Group General Manager in 2006.
N L Kidwai
Age 52. Group General Manager and Country Head,
India. Joined HSBC in 2002. Appointed a Group
General Manager in 2006.
M J W King
Age 53. Group General Manager, Head of
Operational Risk. Joined HSBC in 1986. Appointed
a Group General Manager in 2002.
P J Lawrence
Age 48. Group General Manager, Group Head of
Audit. Joined HSBC in 1982. Appointed a Group
General Manager in 2005.
M Leung
Age 57. Vice chairman and Chief Executive Officer,
Hang Seng Bank Limited. Joined HSBC in 1978.
Appointed a Group General Manager in 2005.
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Biographies > Senior management // Board of Directors > The Board
A P Long
C D Spooner
Age 54. Group General Manager, Head of Global
Transaction Banking. Joined HSBC in 1977.
Appointed a Group General Manager in May 2008.
Age 59. Head of Group Financial Planning & Tax.
Joined HSBC in 1994. Appointed a Group General
Manager in 2007.
A M Losada
R J L Yorke
Age 55. President and Chief Executive Officer,
HSBC Argentina Holdings S.A. Joined HSBC in
1973. Appointed a Group General Manager in May
2008.
Age 42. President and Chief Executive Officer,
HSBC Bank (China) Company Limited. Joined
HSBC in 1989. Appointed a Group General Manager
in May 2008.
A M Mahoney
Age 47. Deputy Chief Executive Officer,
Continental Europe. Joined HSBC in 1983.
Appointed a Group General Manager in 2006.
M S McCombe
Age 43. Chief Executive Officer, Hong Kong. Joined
HSBC in 1987. Appointed a Group General Manager
in May 2008.
C M Meares
Age 52. Chief Executive Officer, Global Private
Banking. Joined HSBC in 1980. Appointed a Group
General Manager in 2006.
K Newman
Age 52. Group General Manager and Director of
One HSBC. Joined HSBC in 1989. Appointed a
Group General Manager in 2006.
K Patel
Age 61. Group General Manager, Chief Executive
Officer, Africa. Joined HSBC in 1984. Appointed a
Group General Manager in 2000.
L J Peña-Kegel
Age 50. Chief Executive, HSBC Mexico, S.A.,
Institucion de Banca Multiple, Grupo Financiero
HSBC. Joined HSBC in May 2008. Appointed a
Group General Manager in May 2008.
R C Picot
Age 52. Group Chief Accounting Officer. Joined
HSBC in 1993. Appointed a Group General
Manager in 2003.
Board of Directors
The Board
The objective of the management structures within
HSBC, headed by the Board of Directors of HSBC
Holdings and led by the Group Chairman, is 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 developing framework for corporate
governance best practice and regulation in the
financial services industry is actively considered by
the Board. The draft recommendations and HSBC’s
response to the consultation on a Review of
Corporate Governance in UK Banks and other
Financial Industry Entities led by Sir David Walker
(‘the Walker Review’) were discussed by the Board
in September 2009. Following publication of the
final recommendations in November 2009, the
Board agreed actions to bring HSBC’s practices into
line with the review’s recommendations. The
principal changes were the establishment of a
separate Board Risk Committee with effect from
26 February 2010 and broadening of the terms of
reference of the Remuneration Committee.
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 2010, the Board comprises the
Group Chairman, Group Chief Executive, four other
executive Directors and 15 non-executive Directors.
The names and brief biographical particulars of the
Directors are listed on pages 294 to 299. The Group
Chairman, Group Chief Executive and four other
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 bring an external perspective,
constructively challenge and help develop proposals
302
on strategy, scrutinise the performance of
management in meeting agreed goals and objectives
and monitor the reporting of performance. The non-
executive Directors have a wealth of experience
across a number of industries and business sectors,
including the leadership of large, complex
multinational enterprises. The roles of non-executive
Directors as members of Board committees are
described on pages 310 to 313.
Following the recommendations in the Walker
Review, the Nomination Committee undertook a
review of the time commitment of non-executive
Directors. On the recommendation of the
Nomination Committee the Board has agreed that
the time commitment expected of non-executive
Directors should remain at not less than 24 days per
annum and that the total time commitment of non-
executive Directors appointed to the Group Audit
Committee, Group Risk Committee and
Remuneration Committee and the senior
independent non-executive director would be not
less than 30 days per annum. The time commitment
of each non-executive Director is set out in the
Director’s letter of appointment, tailored to reflect
the individual’s Committee appointments from time
to time.
The Board is responsible for managing the
business of HSBC Holdings and, in doing so, may
exercise all of the powers of HSBC Holdings,
subject to any relevant laws and regulations and to
the Articles of Association. In particular, the Board
may exercise all the powers of the Company to
borrow money and to mortgage or charge all or any
part of the undertaking, property or assets (present or
future) of HSBC Holdings and may also exercise any
of the powers conferred on it by the Companies Act
2006 and/or by shareholders. The Board is able to
delegate and confer on certain Directors holding
executive office any of its powers, authorities and
discretions (including the power to sub-delegate) for
such time and on such terms as it thinks fit. In
addition, the Board may establish any local or
divisional boards or agencies for managing the
business of HSBC Holdings in any specified locality
and delegate and confer on any local or divisional
board, manager or agent so appointed any of its
powers, authorities and discretions (including the
power to sub-delegate) for such time and on such
terms as it thinks fit. The Board may also, by power
of attorney or otherwise, appoint any person or
persons to be the agent of HSBC Holdings and may
delegate to any such person or persons any of its
powers, authorities and discretions (including the
power to sub-delegate) for such time and on such
terms as it thinks fit. HSBC Holdings was registered
303
in Hong Kong under part IX of the Companies
Ordinance on 17 January 1991.
The Board sets the strategy for the Group and
approves the risk appetite, capital and operating
plans presented by management for the achievement
of the strategic objectives it has set. The risk
appetite, capital and operating plans ensure the
efficient disposition of HSBC’s resources for the
achievement of these objectives. Following
consideration of all relevant factors, the Board
determined on 2 March 2009 that a 5 for 12
rights issue to raise approximately £12.5 billion
(US$17.8 billion) was in the best interests of HSBC
Holdings and its shareholders. Shareholders
approved the rights issue at a General Meeting held
on 19 March 2009. The 5,060,239,065 new ordinary
shares were issued in April 2009.
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 operating plans, risk appetite and
performance targets, procedures for monitoring and
control of operations, the authority or the delegation
of authority to approve credit, market risk limits,
acquisitions, disposals, investments, capital
expenditure or realisation or creation of a new
venture, specified senior appointments, and any
substantial change in balance sheet management
policy.
The Directors who served during the year were
S A Catz, V H C Cheng, M K T Cheung (appointed
1 February 2009), J D Coombe, J L Durán,
R A Fairhead, D J Flint, A A Flockhart, W K L Fung,
M F Geoghegan, S K Green, S T Gulliver,
J W J Hughes-Hallett, W S H Laidlaw, J R Lomax,
Sir Mark Moody-Stuart, G Morgan, N R N Murthy,
S M Robertson, J L Thornton and Sir Brian
Williamson.
The Board of Directors meets regularly and
Directors receive information between meetings
about the activities of committees and developments
in HSBC’s business.
Eight Board meetings were held during 2009.
The annual schedule of Board meetings includes an
offsite meeting over three days to consider strategic
matters and business and geographical reviews/
proposals. At least one Board meeting each year is
held in a key strategic location outside the UK, with
an associated business awareness programme.
During 2009, Board meetings and business
awareness programmes were held in the US and
Hong Kong.
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Board of Directors > The Board
The table that follows gives details of each
Director’s attendance at meetings of the Board,
Group Audit Committee, Nomination Committee,
Remuneration Committee and Corporate
Sustainability Committee held whilst he or she was
a Director or member during 2009. During 2009, the
non-executive Directors and the Group Chairman
met four times without the other executive Directors.
In addition, the non-executive Directors met once
Attendance record
without the Group Chairman to appraise the Group
Chairman’s performance.
In addition to the meetings of the principal
Committees referred to in the following pages,
19 other meetings of Committees of the Board (not
shown in the table below) were held during the year
to discharge business delegated by the Board.
All those who were Directors at the time
attended the 2009 Annual General Meeting.
Number of meetings held ...........................
S A Catz ......................................................
V H C Cheng ..............................................
M K T Cheung1 ...........................................
J D Coombe ................................................
J L Durán ....................................................
R A Fairhead ...............................................
D J Flint ......................................................
A A Flockhart .............................................
W K L Fung ................................................
M F Geoghegan ..........................................
S K Green ....................................................
S T Gulliver ................................................
J W J Hughes-Hallett ..................................
W S H Laidlaw ...........................................
J R Lomax ...................................................
Sir Mark Moody-Stuart ..............................
G Morgan ....................................................
N R N Murthy .............................................
S M Robertson ............................................
J L Thornton ...............................................
Sir Brian Williamson ..................................
Meetings attended in 2009 of:
Board
8
Group Audit
Committee
8
Nomination
Committee
3
Remuneration
Committee
7
Corporate
Sustainability
Committee
5
7
8
7
8
7
7
8
8
8
8
8
8
8
8
8
8
7
6
8
8
8
–
–
–
8
–
8
–
–
–
–
–
–
6
–
62
–
–
–
–
–
–
–
–
–
–
–
3
–
–
–
–
–
–
3
–
–
–
–
–
2
–
3
–
–
–
7
–
–
–
–
–
–
–
–
–
7
–
7
6
–
–
33
–
–
–
–
–
–
–
–
–
5
–
–
–
–
–
–
5
–
4
–
–
–
1 Appointed 1 February 2009 – eligible to attend 7 Board Meetings.
2 Appointed as a member on 1 March 2009 – eligible to attend 6 Committee Meetings. Attended a further 2 meetings by invitation.
3 Appointed as a member on 24 April 2009 – eligible to attend 3 Committee Meetings.
Group Chairman and Group Chief Executive
There is a clear division of responsibilities at the
The roles of Group Chairman and Group Chief
Executive are separated and held by experienced
full-time Directors.
S K Green became Group Chairman at the
conclusion of the Annual General Meeting in 2006
and M F Geoghegan succeeded S K Green as Group
Chief Executive. The appointments were made after
consulting with representatives of major institutional
investors and explaining the succession planning and
independent external search process undertaken.
S K Green and M F Geoghegan stood for re-election
at the 2006 Annual General Meeting and were both
re-elected ahead of taking up their new roles from
the conclusion of that Meeting.
head of the Company between the running of the
Board and the executive responsibility for running
HSBC’s business. The Group Chairman’s
responsibilities include, in addition to the leadership
of the Board, the development of relationships with
governments and other significant external parties,
corporate reputation and culture and performance
management of the Group Chief Executive. Subject
to the Group Chief Executive’s recommendation, the
Group Chairman approves risk, capital allocation
and capital investment decisions within authorities
delegated by the Board. The Group Chief Executive
has responsibility for developing business plans and
delivering performance against these.
In September 2009, the Board announced
changes to the respective roles of the Group Chairman
304
and Group Chief Executive, the relocation of the
principal office of the Group Chief Executive to Hong
Kong and other senior executive management
changes. Under these arrangements M F Geoghegan
is located in the Group’s strategically most important
region, with a focus on ensuring its growth potential
is fully realised. M F Geoghegan has assumed
responsibility for developing Group strategy in
agreement with the Group Chairman and for
recommendation to the Board. As chairman of the
Group Management Board, M F Geoghegan continues
to drive performance within strategic goals and
commercial objectives agreed by the Board.
M F Geoghegan has also become chairman of The
Hongkong and Shanghai Banking Corporation
Limited.
V H C Cheng continues to report to the Group
Chairman as an executive Director and will work
to develop the Group’s business in China while
continuing as chairman of HSBC Bank (China)
Company Limited and HSBC Bank (Taiwan)
Limited. A A Flockhart has been appointed Chairman,
Personal and Commercial Banking and Insurance
reporting to the Group Chief Executive and is based
in Hong Kong. In addition to responsibility for
Personal Financial Services and Commercial
Banking business globally, A A Flockhart is
responsible for Insurance and HSBC’s businesses in
Latin America and Africa, the Group’s technology,
services and operations and most Group functions
including Human Resources, Marketing and Legal.
A A Flockhart will deputise within Asia-Pacific for
the Group Chief Executive when M F Geoghegan
is absent from the region. S T Gulliver has been
appointed Chairman, Europe, Middle East and Global
Businesses reporting to the Group Chief Executive
and is based in London. S T Gulliver will continue to
manage Global Banking and Markets and Asset
Management and has assumed overall responsibility
for all HSBC’s businesses across Europe, Middle
East and Global Businesses and for Global Private
Banking. S T Gulliver has become chairman of
HSBC Private Banking (Suisse) SA and HSBC Bank
Middle East Limited. D J Flint has assumed
responsibility for Compliance in addition to his
existing remit for Finance and Risk. D J Flint’s title
has changed to Chief Financial Officer, Executive
Director, Risk and Regulation. He reports to the
Group Chief Executive and is based in London.
During 2009 the Board endorsed S K Green’s
appointment as a non-executive director of BASF SE.
As a full-time HSBC executive with no other external
non-executive appointments, the Board is satisfied that
S K Green will continue to commit appropriate time to
his role as Group Chairman of HSBC Holdings.
305
Board balance and independence of
Directors
The Board includes a strong presence of both
executive and non-executive Directors such that no
individual or small group can dominate the Board’s
decision making. The size of the Board is
appropriate given the complexity and geographical
spread of HSBC’s business and the significant time
demands placed on the non-executive Directors,
particularly those who serve as members of Board
committees.
The Board appointed S M Robertson as the
senior independent non-executive Director in 2007.
The principal role of the senior independent non-
executive Director is to support the Group Chairman
in his role, to lead the non-executive Directors in the
oversight of the Group Chairman and to ensure there
is a clear division of responsibility between the
Group Chairman and Group Chief Executive.
The Board considers all of the non-executive
Directors to be independent in character and
judgement. W K L Fung has served on the Board for
more than nine years, however, and in that respect
only, does not meet the usual criteria for
independence set out in the UK Combined Code on
corporate governance. The Board has therefore
determined S A Catz, M K T Cheung, J D Coombe,
J L Durán, R A Fairhead, J W J Hughes-Hallett,
W S H Laidlaw, J R Lomax, Sir Mark Moody-Stuart,
G Morgan, N R N Murthy, S M Robertson,
J L Thornton and Sir Brian Williamson to be
independent. When determining independence the
Board considers that calculation of the length of
service of a non-executive Director begins on the
date of his or her first election by shareholders as a
Director of HSBC Holdings. Given the complexity
and geographical spread of HSBC’s business, the
experience of previous service on a subsidiary
company Board can be a considerable benefit to
HSBC and does not detract from a Director’s
independence. 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 a 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 an annual confirmation of his or her
independence to HSBC Holdings.
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Board of Directors > The Board
Information, induction and ongoing
development
The Board regularly reviews reports on progress
against financial objectives, on business
developments and on investor and external relations
and receives reports from the chairmen of Board
committees and from the Group Chief Executive.
The Board receives regular reports and presentations
on strategy and developments in the customer groups
and principal geographical areas. Regular reports are
also provided to the Board, the Group Audit
Committee and the Group Management Board on
credit exposures and the loan portfolio, asset,
liability and risk management, liquidity, litigation
and compliance and reputational issues. During
2009, the Board also reviewed the results of the 2009
Global People Survey and approved proposals to
further articulate HSBC’s values. The agenda and
supporting papers are distributed in advance of all
Board and Committee meetings to allow time for
appropriate review and to facilitate full discussion at
the meetings. All Directors have full and timely
access to all relevant information and may take
independent professional advice if necessary.
The Directors have free and open contact with
management at all levels. Group Managing Directors
and Group General Managers meet informally with
Directors after Board meetings. Board offsite visits
are made each year to enable Directors to see at first
hand the operations of subsidiary companies in local
environments and to meet management, employees
and customers. In 2009 the Board visited the US and
Hong Kong.
During 2009, the Board reviewed and approved
changes to the arrangements for Director induction
and development. Full, formal and tailored induction
programmes, with particular emphasis on internal
controls, are arranged for newly appointed Directors
by the Group Company Secretary. The programmes
consist of a series of meetings with other Directors
and senior executives to enable new Directors to
receive information and familiarise themselves with
HSBC’s strategy, operations and internal controls. As
part of the induction process the Group Company
Secretary will coordinate the production of a
development programme based on the individual
Director’s needs. Prior to their appointment, each
Director receives comprehensive guidance on the
duties and liabilities of a Director of HSBC
Holdings. Opportunities to update and develop skills
and knowledge, through externally run seminars and
through briefings by senior executives, are provided
to all Directors.
306
A personalised approach to training and
development is applied for Directors. Records of
development activities and plans are maintained by
the Group Company Secretary for annual review
with the Director concerned by the Group Chairman.
The Group Company Secretary coordinates the
delivery of any training required. Focused in-house
development programmes to enhance business
awareness, such as on the management of risk, are
arranged in conjunction with scheduled Board
Meetings. Since December 2009, Directors have
online access to HSBC’s internal training and
development resources.
Non-executive Directors have an open invitation
to attend meetings of the Group Management Board
to further enhance understanding and awareness of
HSBC’s businesses and the senior leadership team.
During 2009, W S H Laidlaw, J R Lomax and Sir
Brian Williamson each attended a meeting of the
Group Management Board.
Performance evaluation
In October 2009, Boardroom Review was
commissioned to prepare a report on the
effectiveness of the Board and its Committees. The
objective of the review was to assess the quality of
the Board’s decision making and debate, its overall
contribution to, and impact on, the long-term health
and success of HSBC Holdings, and its preparation
for future challenges. The Boardroom Review
assessment was used to facilitate the Board’s
evaluation of its performance and that of its
Committees and individual Directors’ performance.
There are no conflicts of interest between HSBC and
Boardroom Review, which does not offer other
services such as executive search, corporate finance
or strategic advice.
The Boardroom Review report was prepared
following structured interviews with each of the
Directors and the Group Company Secretary and has
been discussed by the Board. The factors assessed in
the report that are associated with board
effectiveness include Board roles and
responsibilities, individual and collective
contribution, Board processes, Committee processes
and roles, and the effectiveness of the Group
Chairman. The report has been used by the Group
Chairman in his evaluation of the performance of
each Director and by the non-executive Directors,
led by the senior independent non-executive Director
in their evaluation of the performance of the Group
Chairman. The review concluded that the Board and
its Committees were functioning effectively. It is the
intention of the Board of HSBC Holdings to
continue to review its performance and that of its
Directors annually with external facilitation of the
process at least every third year. The Group
Chairman has confirmed that all of the non-
executive Directors continue to perform effectively
and to demonstrate commitment to their roles.
served in office for a continuous period of nine years
or more at the date of the Annual General Meeting is
required to retire and may offer him or herself for re-
election by shareholders.
M K T Cheung was appointed a non-executive
The Board has approved actions arising from
Director on 1 February 2009.
the performance evaluation for implementation.
A quarterly status report will be used to monitor
progress. During 2009 the Board received quarterly
updates on the actions arising from the 2008 Board
performance evaluation, all of which have been
implemented.
The Nomination Committee leads the process of
identifying the skills and experience required by
Directors to address and challenge adequately key
risks and decisions that confront, or may confront,
the Board. 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 with regard to any changes. The
Nomination Committee maintains a forward-looking
schedule of potential candidates as Directors that
takes into account the needs and developments of the
Group’s businesses and the anticipated retirement
dates of existing Directors. The Board is kept
informed of shareholder views by regular updates
about investor meetings with the executive
Directors, senior independent non-executive Director
and Chairman of the Remuneration Committee.
Appointment, retirement and re-election of
Directors
The Board may at any time appoint any person who
is willing to act as a Director, either to fill a vacancy
or as an addition to the existing Board, but the total
number of Directors shall not exceed twenty-five.
Any Director so appointed by the Board shall retire
at the Annual General Meeting following his or her
appointment and shall be eligible for re-election but
is not taken into account in determining the number
of Directors who are to retire by rotation at such
meeting. The Board may appoint any Director to
hold any employment or executive office and may
revoke or terminate any such appointment.
Shareholders may, by ordinary resolution, appoint a
person as a Director or remove any Director before
the expiration of his period of office. At each Annual
General Meeting, one third of the Directors who are
subject to retirement by rotation are required to retire
and may offer themselves for re-election by
shareholders. In addition to those required to retire by
rotation, any Director who was not elected or re-
elected at either of the preceding two Annual General
Meetings and any non-executive Director who has
307
J L Durán, R A Fairhead, W K L Fung,
M F Geoghegan, S K Green, Sir Mark Moody-
Stuart, G Morgan, N R N Murthy, S M Robertson,
J L Thornton and Sir Brian Williamson will retire at
the forthcoming Annual General Meeting. With the
exception of J L Durán, W K L Fung and Sir Mark
Moody-Stuart, who are to retire, they offer
themselves for re-election. At the conclusion of the
2010 Annual General Meeting, the Board will then
comprise 18 Directors, 12 of whom are independent
non-executive Directors. None of the non-executive
Directors has a service contract. M F Geoghegan and
S K Green, who are seeking re-election at the Annual
General Meeting, are employed on rolling contracts
which require 12 months’ notice to be given by
either party.
Brief biographical particulars of all Directors
are given on pages 294 to 299.
Relations with shareholders
The Board ensures all Directors, including non-
executive Directors, develop an understanding of the
views of major shareholders. Non-executive
Directors are invited to attend analyst presentations
and other meetings with institutional investors and
their representative bodies. Directors also meet
representatives of institutional shareholders each
year to discuss corporate governance matters.
All executive Directors and other senior
executives hold regular meetings with institutional
investors and report to the Board on those meetings.
HSBC Holdings’ brokers, Goldman Sachs, give bi-
annual presentations to the Board on market views
and investor relations. The Board receives a regular
Investor Relations activity report which provides
feedback from institutional shareholders and brokers,
analysts’ forecasts, information from research reports
and share price performance data.
During 2009, S M Robertson, senior
independent non-executive Director, Sir Mark
Moody-Stuart and other non-executive Directors
met and corresponded with institutional investors
and their representatives to discuss strategy,
remuneration policy and governance. S M Robertson
is also available to shareholders should they have
concerns which contact through the normal channels
of Group Chairman, Group Chief Executive, Chief
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Board of Directors > The Board / Corporate governance codes
Financial Officer, Executive Director, Risk and
Regulation or other executives has failed to resolve
or for which such contact would be inappropriate.
Invitations to meet S M Robertson prior to his
appointment as senior independent non-executive
Director were extended to the Group’s largest
shareholders. The senior independent non-executive
Director may be contacted through the Group
Company Secretary at 8 Canada Square, London
E14 5HQ.
Conflicts of interest, indemnification of
Directors, relevant audit information and
contracts of significance
The Board has authority to approve Directors’
conflicts and potential conflicts of interest and has
adopted a policy and procedures for the
determination of terms of authorisation for such
situations. The Board’s powers to authorise conflicts
are operating effectively and the procedures are
being followed. A review of situational conflicts
which have been authorised and the terms of
authorisation is undertaken by the Board annually.
The Articles of Association of HSBC Holdings
provide that Directors are entitled to be indemnified
out of the assets of the Company against claims from
third parties in respect of certain liabilities arising in
connection with the performance of their functions
pursuant to the provisions of the UK Companies Act
2006. Such indemnity provisions have been in place
during the financial year but have not been utilised
by the Directors.
Each person who is a Director at the date of
approval of this report confirms that so far as the
Director is aware, there is no relevant audit
information of which the Company’s auditor is
unaware and the Director has taken all the steps that
he or she ought to have taken as a Director
in order to make himself or herself aware of any
relevant audit information and to establish that the
Company’s auditor is aware of that information. This
confirmation is given pursuant to section 418 of the
UK Companies Act 2006 and should be interpreted
in accordance therewith and subject to the provisions
thereof.
None of the Directors had, during the year or at
the end of the year, a material interest, directly or
indirectly, in any contract of significance with HSBC
Holdings or any of its subsidiary undertakings.
Corporate governance codes
HSBC is committed to high standards of corporate
governance. HSBC Holdings has complied
throughout the year with the applicable code
308
provisions of the Combined Code on Corporate
Governance issued by the Financial Reporting
Council and the Code on Corporate Governance
Practices in Appendix 14 to the Rules Governing the
Listing of Securities on The Stock Exchange of
Hong Kong Limited. The Combined Code on
Corporate Governance is available at
www.frc.org.uk and the Code on Corporate
Governance Practices is available at
www.hkex.com.hk.
The Board of HSBC Holdings has adopted a
code of conduct for transactions in HSBC Group
securities by Directors. The code of conduct
complies with The Model Code in the Listing Rules
of the FSA and 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, save that The Stock Exchange
of Hong Kong Limited has granted certain waivers
from strict compliance with the Hong Kong Model
Code. The waivers granted by The Stock Exchange
of Hong Kong Limited primarily 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
HSBC Group securities throughout the year.
Differences in HSBC Holdings/New York
Stock Exchange corporate governance
practices
Under the NYSE’s corporate governance rules for
listed companies and the applicable rules of the SEC,
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 FSA require
each listed company incorporated in the UK to
include in its Annual Report and Accounts a
statement of how it has applied the principles of the
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 2009 with the applicable 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 complies with the Combined
Code, which requires a majority of members to be
independent. All four members of the Committee
during 2009 were independent non-executive
Directors. On 26 February 2010, S K Green, Group
Chairman, became chairman of the Nomination
Committee in succession to Sir Brian Williamson,
who continues to serve as a member of the
Committee. 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 2009, HSBC Holdings’ non-executive
Directors met four times as a group with the Group
Chairman, but without 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 (on page 306) and provides
extensive information regarding Directors’
compensation in the Directors’ Remuneration Report
(on pages 334 to 348). The terms of reference of
HSBC Holdings’ Audit, Nomination, Remuneration
and Risk Committees are available at
www.hsbc.com/boardcommittees.
309
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 December 2009, the Board
endorsed three Group Values statements underpinned
by the continued use of HSBC’s Business Principles,
in replacement of the Group Business Principles and
Values. In addition to the Group Values statements
and Business Principles (and previously 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 and the Group
Chief Executive, as the principal executive officers,
and to the Chief Financial Officer, Executive
Director, Risk and Regulation and Group Chief
Accounting Officer. HSBC Holdings’ Code of Ethics
is available on www.hsbc.com/codeofethics or from
the Group Company Secretary at 8 Canada Square,
London E14 5HQ. 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 2009, HSBC Holdings made
no amendments to its Code of Ethics and granted no
waivers from its provisions. The references to the
standards to be followed by all employees have been
updated to reflect the Board’s endorsement of Group
Values statements underpinned by the continued use
of HSBC’s Business Principles. The Group Values
statements and Business Principles are available on
www.hsbc.com/groupvalues.
Under NYSE listing rules applicable to US
companies, independent directors must comprise a
majority of the Board of directors. Currently, two
thirds 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.
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Board of Directors > Board committees
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
Chief Executive 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
Chief Executive 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.
HSBC Holdings is 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.
Board committees
The Board has appointed a number of committees
consisting of certain Directors, Group Managing
Directors and, in the case of the Corporate
Sustainability Committee, certain co-opted
non-director members. The following are the
principal committees:
Group Management Board
The Group Management Board meets frequently and
operates as a general management committee under
the direct authority of the Board. The objective of
the Group Management Board is to maintain a
reporting and control structure whereby all of the
line operations of HSBC are accountable to
individual members of the Group Management
Board who report to the Group Chief Executive who
in turn reports to the Group Chairman. The Board
has set objectives and measures for the Group
Management Board. These align senior executives’
objectives and measures with the strategy and
operating plans throughout HSBC. The members of
the Group Management Board are M F Geoghegan
(Chairman), D J Flint, A A Flockhart and
S T Gulliver, who are executive Directors, and
A Almeida, E Alonso, K M Harvey, A C Hungate,
B P McDonagh, B Robertson, P A Thurston and
P T S Wong, 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 Holdings in accordance with such
310
policies and directions as the Board may from time
to time determine. Matters reserved for approval by
the Board are described on page 303.
The Group Chief Executive reports to each
meeting of the Board on the activities of the Group
Management Board.
Group Audit Committee
The Group Audit Committee meets regularly with
HSBC’s senior financial, credit and risk, 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, compliance and risk management.
The members of the Group Audit Committee
throughout 2009 were R A Fairhead (Chairman),
J D Coombe and J W J Hughes-Hallett. J R Lomax
was appointed a member of the Committee on
1 March 2009. On 1 March 2010, M K T Cheung
was appointed a member of the Committee in
succession to J W J Hughes-Hallett. All members of
the Committee are independent non-executive
Directors.
The Committee has discussed the risk
management recommendations of the Walker
Review. Following the Committee’s recommendation
of appropriate terms of reference, a separate Group
Risk Committee was established by the Board on
26 February 2010. The terms of reference of the
Group Risk Committee are available at
www.hsbc.com/boardcommittees. The members of
the Group Risk Committee are R A Fairhead
(Chairman), J D Coombe, J W J Hughes-Hallett and
J R Lomax, all of whom are independent non-
executive Directors. The following section on the
work of the Group Audit Committee describes its
activities and responsibilities up to the establishment
of the Group Risk Committee. Going forward the
Group Audit Committee will focus primarily on
financial reporting matters and the Group Risk
Committee on internal control and risk management
matters.
The Board has determined that M K T Cheung,
J D Coombe, R A Fairhead, J W J Hughes-Hallett
and J R Lomax are independent according to SEC
criteria. In addition, M K T Cheung, J D Coombe,
R A Fairhead, and J W J Hughes-Hallett may be
regarded as audit committee financial experts for the
purposes of section 407 of the Sarbanes-Oxley Act
and have recent and relevant financial experience.
Appointments to the Committee are 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 eight meetings of the Group Audit
Committee during 2009. The table on page 304 gives
details of Directors’ attendance at these meetings.
Following each meeting the Committee reports to
the Board on its activities.
At each meeting, the Committee has the
opportunity to meet 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 Committee also has the
opportunity to meet with the Group Chief Executive
at each of its meetings.
The terms of reference of the Committee,
which are reviewed annually, are available at
www.hsbc.com/boardcommittees. To ensure
consistency of scope and approach by subsidiary
company audit committees, the Group Audit
Committee has established core terms of reference to
guide subsidiary audit committees when adopting
terms of reference. The Committee’s endorsement is
required for any proposed changes to subsidiary
audit committee terms of reference and for
appointments to such committees. Subsidiary audit
committees are required to provide bi-annual
certificates to the Committee or to an intermediate
subsidiary audit committee, relating to the financial
statements and internal control procedures of the
relevant subsidiary audit committee.
The Group Audit Committee is accountable to
the Board and assists it in meeting its responsibilities
for maintaining an effective system of internal
control and compliance and for meeting its external
financial reporting obligations. The Committee
undertakes an annual review of the effectiveness
of HSBC’s system of internal control, which is
described on page 313. The Committee reviews the
Company’s financial statements before they are
considered by the Board and the Interim
Management Statements before they are approved
by management.
Regular reports are received on the risks
involved in HSBC’s business and how they are
controlled and monitored by management which
enable the Committee to review the effectiveness of
HSBC’s risk management framework. Each year the
311
Committee agrees a schedule of presentations to be
made to it by management during the ensuing year
on the operation of the risk control framework within
the Group. The presentations specifically address
risk indicators and performance measures such as
indicators of credit, liquidity and interest rate risk.
During 2009 the Committee received frequent
presentations on global market risk and liquidity and
reports on the US Mortgage Services business, credit
performance in the US and the impact of the
tightening of liquidity in the money markets.
Comprehensive reports are received at each regular
meeting from the Group Chief Risk Officer, the
Head of Group Compliance, the Group General
Counsel and the Group General Manager, Group
Head of Audit. Periodic presentations are made by
other function heads and line management.
In February 2009, the Committee considered a
working capital Board memorandum in connection
with the Company’s rights issue. The memorandum
summarised the liquidity, funding and capital
position of HSBC to support a statement by the
Directors on the sufficiency of working capital. The
memorandum defined possible stress events which
could materially impact HSBC’s liquidity, funding
and capital position, described the mitigants
available and the strategic actions that management
could take in response to such material stresses.
The reports from the Group General Manager,
Group Head of Audit include information on frauds
and weakness in internal controls identified through
internal audit reports, special investigations or
reviews of regulatory reports and external auditors’
reports. The Committee monitors and reviews the
effectiveness of the internal audit function and
receives summaries of periodic peer reviews of
HSBC’s principal internal audit functions. HSBC
has adopted the Principles of the International
Institute of Internal Auditors, which include a
periodic external quality assurance review of the
internal audit function. The first such review,
undertaken by Independent Audit Limited, was
presented to the Committee in 2008.
The Committee receives regular updates on
changes in law, regulations and accounting standards
and practices and the preparations being made to
respond to those requirements. During 2009, the
Committee received regular updates on the review of
internal financial reporting controls required by
section 404 of the Sarbanes-Oxley Act and the
implementation of the Basel II capital adequacy
requirements. The Committee also received updates
on a gap analysis against various risk management and
governance recommendations from reports issued in
2008 in response to the current financial crisis,
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Board of Directors > Board committees / Internal control
including the Credit Risk Management Policy Group
III report and the report of the Institute of International
Finance committee on Market Best Practices.
The Committee has approved procedures for the
receipt, retention and handling of complaints
regarding accounting, internal accounting controls
and 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 is directly responsible on behalf
of the Board for the selection, oversight and
remuneration of the external auditor. 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 reviews the strategy and
approves the terms for the engagement of the
external auditor for the audit of the Annual Report
and Accounts. Regular reports on the progress of the
audit facilitate the Committee’s assessment of the
effectiveness of the audit.
The Committee receives reports from the
external auditor on its own policies and procedures
regarding independence and quality control and
oversees the appropriate rotation of audit partners
within the external auditor. The external auditor
provides the Committee with an annual confirmation
of its independence in accordance with industry
standards.
On the recommendation of the Committee the
Board has approved a policy for the employment by
HSBC of former employees of the external auditor
or its affiliates. The Committee monitors this policy
through the receipt of an annual report of those
former employees of the external auditor employed
by HSBC and the number of former employees of
the external auditor currently employed in senior
positions in HSBC. The reports enable the
Committee to consider whether there has been any
impairment, or appearance of impairment, of the
auditor’s judgement or independence in respect of
the audit.
The Group Audit Committee has established
policies for the pre-approval of specific services that
may be provided by the principal auditor, KPMG
Audit Plc and its affiliates (‘KPMG’). 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,
while also ensuring that the auditor maintains the
312
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 influenced the choice of
KPMG. All services entered into with KPMG during
2009 were pre-approved by the Committee or were
entered into under pre-approval policies established
by the Committee. A quarterly update on non-audit
services provided by KPMG is presented to the
Committee by management.
The pre-approved services relate to regulatory
reviews, agreed-upon procedures reports, other types
of attestation reports, the provision of advice and
other non-audit services allowed under SEC
independence rules. They fall into the categories of
audit services, audit-related services, tax services
and other services.
An analysis of the remuneration paid in respect
of audit and non-audit services provided by KPMG
for each of the last three years is disclosed in Note 9
on the Financial Statements.
The Committee has recommended to the Board
that KPMG Audit Plc be reappointed 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 334.
Nomination Committee
The Nomination Committee is responsible for
leading the process for Board appointments and for
identifying and nominating, for approval by 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. Prospective Directors are asked to
identify any significant other commitments and
confirm they have sufficient time to discharge what
is expected of them. In accordance with the Articles
of Association all Directors are subject to election
by shareholders at the Annual General Meeting
following their appointment by the Board and to
re-election at least every three years. The members
of the Nomination Committee throughout 2009 were
Sir Brian Williamson (Chairman), R A Fairhead,
S M Robertson and J W J Hughes-Hallett, all
independent non-executive Directors. The Board
appointed S K Green, Group Chairman to succeed
Sir Brian Williamson as chairman of the Nomination
Committee on 26 February 2010. Sir Brian remains a
member of the Committee.
There were three meetings of the Nomination
Committee during 2009. The table on page 304 gives
details of Directors’ attendance at these meetings.
Following each meeting the Committee reports
to the Board on its activities.
The terms of reference of the Committee are
available at www.hsbc.com/boardcommittees.
The appointment of M K T Cheung as a non-
executive Director was made on the advice and
recommendation of the Nomination Committee. An
external consultancy was used in connection with the
appointment.
During 2009 the Committee considered the
recommendations of the Walker Review that
fall within its remit. The Committee made
recommendations to the Board regarding time
commitment and the re-election of Directors.
The terms and conditions of appointment 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 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 non-executive 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 committees as appropriate; any
matters relating to the continuation in office of any
Director at any time; 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 (including the skills,
knowledge and experience required) of the Board
and makes recommendations to the Board as
appropriate. It keeps under review the leadership
needs of HSBC, with a view to ensuring the
continued ability of HSBC to compete effectively in
the marketplace. The Board has satisfied itself that
appropriate plans are in place for orderly succession
to the Board and senior management positions as
313
well as procedures to ensure an appropriate balance
of skills and experience within HSBC and on the
Board.
Corporate Sustainability Committee
The role of the Corporate Sustainability Committee
and its membership are set out on page 328.
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 and usefulness 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 misstatement,
errors, losses or fraud. The procedures also enable
HSBC Holdings to discharge its obligations under
the Handbook of Rules and Guidance issued by the
FSA, 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: Revised Guidance for Directors on the
Combined Code issued by the Financial Reporting
Council. Such procedures for the ongoing
identification, evaluation and management of the
significant risks faced by HSBC have been in place
throughout the year and up to 1 March 2010, the date
of approval of the Annual Report and Accounts
2009. In the case of companies acquired during the
year, the internal controls in place are being
reviewed against HSBC’s benchmarks and
integrated into HSBC’s processes.
HSBC’s key internal control procedures include
the following:
• Authority to operate the various subsidiaries and
responsibilities for financial performance
against plans and for capital expenditure are
delegated to their respective chief executive
officers within limits set by the Board of
Directors of HSBC Holdings. Delegation of
authority from the Board to individuals requires
those individuals to maintain a clear and
appropriate apportionment of significant
responsibilities and to oversee the establishment
and maintenance of systems of control
appropriate to the business. The appointment of
executives to the most senior positions within
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Board of Directors > Internal control
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 Management Office
management committees 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, market, liquidity and
operational risk, (including accounting, tax,
legal, compliance, information, physical security
and fraud risk). Exposure to these risks is
monitored by risk management committees,
asset and liability committees and executive
committees in subsidiaries and, for HSBC as a
whole, by the Group Management Board. A
Risk Management Meeting of the Group
Management Board, chaired by the Chief
Financial Officer, Executive Director, Risk and
Regulation, is held monthly to address asset,
liability and risk management issues. The
minutes of this meeting are submitted to the
Group Audit Committee and to the Board of
Directors. The Global Operational Risk and
Control Committee (‘GORCC’), which reports
to the Risk Management Meeting of the Group
Management Board, meets at least quarterly to
monitor HSBC’s operational risk profile and
review the effective implementation of the
Group’s operational risk management
framework. The GORCC receives quarterly
reports on the Group’s operational risk profile,
including top risks, control issues, internal and
external operational loss events and key risk
indicators. The GORCC communicates the
lessons learned from operational events both
within HSBC and in the wider industry.
• A Disclosure Committee has been established to
review public disclosures made by HSBC
Holdings for any material errors, misstatements
or omissions. The membership of the Disclosure
Committee, which is chaired by the Group
Company Secretary, includes the heads of the
Finance, Legal, Risk, Compliance, Group
Communications, Investor Relations and
Internal Audit functions and representatives
from the principal regions, customer groups and
global businesses. The integrity of disclosures is
underpinned by structures and processes within
the Finance and Risk function that support
expert and rigorous analytical review of
314
financial reporting.
• The group financial reporting process for
preparing the consolidated Annual Report and
Accounts 2009 is controlled using documented
accounting policies and reporting formats,
supported by a chart of accounts with detailed
instructions and guidance on reporting
requirements, issued by Group Finance to all
reporting entities within the Group in advance of
each reporting period end. The submission of
financial information from each reporting entity
to Group Finance is subject to certification by
the responsible financial officer, and analytical
review procedures at reporting entity and Group
levels.
• Processes are in place to identify new risks from
changes in market conditions and practices or
customer behaviours which could expose HSBC
to heightened risk of loss or reputational
damage. During 2009, attention was focused on
evolving best practice in liquidity management
and stress testing; aggregating more efficiently
counterparty risk data and improving the
counterparty crisis management framework;
rolling out successfully piloted anti-fraud
systems; revised guidance on the
approval/review of new products and business
initiatives, with greater oversight by the Risk
function; the identification of market pricing
anomalies; changes in consumer protection
standards within personal financial services
markets and, more generally, changes in
regulation and public policy towards the
financial services industry, including the impact
of government interventions to address the
under-capitalisation and funding difficulties
of certain systemically important financial
institutions.
• Periodic strategic plans are prepared for key
customer groups, global product groups, support
functions and certain geographies within the
framework of the Group Strategic Roadmap.
Rolling operating plans, informed by detailed
analysis of risk appetite, are prepared and
adopted by all major HSBC operating
companies and set out the key business
initiatives and the likely financial effects of
those initiatives.
• Governance and oversight arrangements are in
place to ensure that risk analytical models are fit
for purpose, used accordingly and
complemented by a variety of model-specific
and enterprise-wide stress tests that evaluate the
impact of severe yet plausible events and other
unusual circumstances not fully captured by
quantitative models.
• Centralised functional control is exercised over
all IT developments and operations. Common
systems are employed for similar business
processes wherever practicable. Credit, market
and operational risks are measured and reported
on in subsidiaries and aggregated for review of
risk concentrations on a Group-wide basis.
• Functional management in Group Management
Office is responsible for setting policies,
procedures and standards in the following areas
of risk: credit; market; liquidity; operational;
IT; fraud; business continuity; security;
information; insurance; accounting; tax; legal
and regulatory compliance; fiduciary; human
resources; reputational; sustainability and
purchasing. Authorities to enter into credit and
market risk exposures are delegated with limits
to line management of Group companies. The
concurrence of Group Management Office is
required, however, to credit proposals with
specified higher risk characteristics.
• Policies 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 and
the Group Management Board, subsidiary
company boards, board committees and senior
management. Reputational risks can arise from
environmental, social or governance 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 or use financial
products and services.
• The establishment and maintenance of
appropriate systems of internal control is
primarily the responsibility of business
management. The internal audit function,
which is centrally controlled, monitors the
effectiveness of internal control structures
across the whole of HSBC focusing on the areas
of greatest risk to HSBC as determined using a
risk-based grading approach. The head of this
function reports to the Group Chairman and the
Group Audit Committee.
• Executive management is responsible for
ensuring that recommendations made by the
internal audit function are implemented within
an appropriate and agreed timetable.
Confirmation to this effect must be provided to
315
internal audit. Executive management must also
confirm annually as part of the internal audit
process that offices under their control have
taken or are in the process of taking the
appropriate actions to deal with all significant
recommendations made by external auditors in
management letters or by regulators following
regulatory inspections.
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 business
and operational risk assessments; regular reports
from the heads of key risk functions including
Internal Audit and Compliance; the production
annually of reviews of the internal control
framework applied at Group Management Office
and major operating subsidiary level measured
against HSBC benchmarks, which cover all internal
controls, both financial and non-financial; semi-
annual confirmations from chief executives of
principal subsidiary companies as to whether there
have been any material losses, contingencies or
uncertainties caused by weaknesses in internal
controls; internal audit reports; external audit
reports; prudential reviews; and regulatory reports.
The Group Audit Committee keeps under review a
‘Risk Map’ of the status of key risk areas which
impact the Group and considers whether the
mitigating actions put in place are appropriate. In
addition, where unexpected losses have arisen or
where incidents have occurred which indicate gaps
in the control framework or in adherence to Group
policies, the Group Audit Committee has reviewed
special reports, prepared at the instigation of
management, which analyse the cause of the issue,
the lessons learned and the actions proposed by
management to address the issue.
The Directors, through the Group Audit
Committee, have conducted an annual review of the
effectiveness of HSBC’s system of internal control
covering all material controls, including financial,
operational and compliance controls and risk
management systems and the adequacy of resources,
qualifications and experience of staff of the issuer’s
accounting and financial reporting function, and
their training programmes and budget. The Group
Audit Committee has received confirmation that
executive management has taken or is taking the
necessary action to remedy any failings or
weaknesses identified through the operation of
HSBC’s framework of controls.
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Board of Directors > Going concern / Directors’ interests
Going concern basis
The financial statements are prepared on a going
concern basis as the Directors are satisfied that the
Group and parent company have the resources to
continue in business for the foreseeable future. In
making this assessment, the Directors have considered
a wide range of information relating to present and
future conditions including future projections of
profitability, cash flows and capital resources. Further
information relevant to the assessment is provided
elsewhere in this Report. In particular, HSBC’s
principal activities, strategic direction and challenges
and uncertainties are described in the ‘Operating and
Financial Review’; a financial summary, including a
review of the consolidated income statement and
consolidated balance sheet, is provided in the
‘Operating and Financial Review’; HSBC’s objectives,
Directors’ interests
HSBC Holdings ordinary shares of US$0.50
policies and processes for managing credit, liquidity
and market risk, and its approach to capital
management and allocation, are described in the
‘Risk’ section; and the impact of the recent market
turmoil in markets for securitised and structured assets
is disclosed in the ‘Impact of Market Turmoil’ section.
Directors’ interests
Pursuant to the requirements of the UK Listing Rules
and according to the register of Directors’ interests
maintained by HSBC Holdings pursuant to section
352 of the Securities and Futures Ordinance of
Hong Kong, the Directors of HSBC Holdings at
31 December 2009 had the following interests, all
beneficial unless otherwise stated, in the shares and
loan capital of HSBC and its associated
corporations:
At 31 December 2009
At
1 January
2009
Beneficial
owner
Child
under 18
or spouse
Controlled
corporation
V H C Cheng ..............................
J D Coombe ................................
R A Fairhead ...............................
D J Flint ......................................
A A Flockhart .............................
W K L Fung ................................
M F Geoghegan ..........................
S K Green ....................................
S T Gulliver ................................
J W J Hughes-Hallett ..................
W S H Laidlaw ...........................
Sir Mark Moody-Stuart ..............
G Morgan ....................................
S M Robertson ............................
Sir Brian Williamson ..................
300,790
13,250
–
119,456
172,583
328,000
477,434
667,421
2,279,861
381,049
21,693
10,840
52,873
98,620
24,496
283,273
19,676
–
144,439
269,008
294,666
724,757
836,959
2,553,592
–
29,532
7,083
78,515
8,343
36,378
182,892
–
–
–
–
–
–
–
177,465
–
–
1,190
–
–
–
–
–
–
–
–
170,000
–
–
–
–
–
–
–
–
–
Jointly
with
another
person
–
–
21,300
–
–
–
–
64,252
–
–
–
–
–
–
–
Trustee
–
–
–
32,6622
–
–
–
100,0003
–
67,7553
1,4163
7,0833
–
131,7503
–
Total
interests1
466,165
19,676
21,300
177,101
269,008
464,666
724,757
1,001,211
2,731,057
67,755
30,948
15,356
78,515
140,093
36,378
1 Includes HSBC Holdings ordinary shares of US$0.50 taken up under the rights issue (as described on page 466). The Directors entitled
to acquire new ordinary shares under the rights issue took up their rights in full, other than the rights arising in connection with any
ordinary shares held by the executive Directors through the HSBC Holdings UK Share Ownership Plan. Details of executive Directors’
other interests in HSBC Holdings ordinary shares of US$0.50 arising from the HSBC Holdings savings-related share option plans and
the HSBC Share Plan are set out in the Directors’ Remuneration Report on pages 334 to 348. At 31 December 2009, the aggregate
interests under the Securities and Futures Ordinance of Hong Kong of V H C Cheng, D J Flint, A A Flockhart, M F Geoghegan,
S K Green and S T Gulliver in HSBC Holdings ordinary shares of US$0.50, including interests arising through employee share plans
were: V H C Cheng – 1,439,533; D J Flint – 961,587; A A Flockhart – 1,151,811; M F Geoghegan – 2,536,837; S K Green – 2,809,790
and S T Gulliver – 3,540,006. Each Director’s total interests represents less than 0.02 per cent of the shares in issue.
2 Non-beneficial interest in 21,775 shares.
3 Non-beneficial.
M F Geoghegan has an interest as beneficial
owner in 280,000 ordinary shares of HK$5 each in
Hang Seng Bank (representing less than 0.02 per
cent of the shares in issue), which he held throughout
the year.
S K Green had an interest as beneficial owner
in €75,000 of HSBC Holdings plc 5½ per cent
Subordinated Notes 2009 until they were redeemed
by HSBC Holdings on 15 July 2009.
316
As directors of HSBC France during 2009,
S K Green and S T Gulliver each held an interest as
beneficial owner in one share of €5 in that company
(representing less than 0.01 per cent of the shares
in issue). 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 HSBC France. Following
his resignation as a director of HSBC France on
16 February 2010, S K Green ceased to have an
interest as beneficial owner in one share of €5 in
that company.
Following a change in Swiss law so that
directors are no longer required to hold a
qualification share, S K Green and S T Gulliver each
ceased to have an interest as beneficial owner in one
share of CHF1,000 in HSBC Private Banking
Holdings (Suisse) (representing less than 0.01 per
cent of the shares in issue) on 4 August 2009.
V H C Cheng has an interest as beneficial owner
in RMB1,000,000 of retail bonds issued by HSBC
Bank (China), which he acquired during the year.
No Directors held any short position as defined
in the Securities and Futures Ordinance of Hong
Kong in the shares and loan capital of HSBC and its
associated corporations. Save as stated above, none
of the Directors had an interest in any shares or
debentures of HSBC or any associated corporation at
the beginning or at the end of the year, and none of
the Directors or members of their immediate families
were awarded or exercised any right to subscribe for
any shares or debentures in any HSBC corporation
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:
Increase in Directors’ interests since 31 December 2009
HSBC Holdings ordinary shares of US$0.50
V H C Cheng ..............................................................
J D Coombe ................................................................
D J Flint ......................................................................
A A Flockhart .............................................................
M F Geoghegan ..........................................................
S K Green ...................................................................
S T Gulliver ................................................................
G Morgan ....................................................................
S M Robertson ............................................................
Sir Brian Williamson ..................................................
Beneficial
owner
5,0882
1292
693
3,4772
2,3272
335
–
5142
542
2382
Child under
18 or spouse
1,1982
–
–
–
–
–
42
–
–
–
Controlled
corporation
Trustee
Beneficiary
of a trust1
–
–
–
–
–
–
–
–
–
–
–
–
2144
–
–
–
–
–
–
–
3,143
–
5,122
2,491
11,871
11,849
5,300
–
–
–
1 Scrip dividend on Performance Share and Restricted Share awards granted in 2007 and 2008 under the HSBC Share Plan.
2 Scrip dividend.
3 Comprises the automatic reinvestment of dividend income by an Individual Savings Account manager (36 shares), the acquisition of
shares in the HSBC Holdings UK Share Ownership Plan through regular monthly contributions (19 shares) and the automatic
reinvestment of dividend income on shares held in the plan (14 shares).
4 Scrip dividend. Non-beneficial interest in 142 HSBC Holdings ordinary shares of US$0.50.
5 Comprises the acquisition of shares in the HSBC Holdings UK Share Ownership Plan through regular monthly contributions
(19 shares) and the automatic reinvestment of dividend income on shares held in the plan (14 shares).
There have been no other changes in the share
At 31 December 2009, executive Directors and
and loan capital interests of the Directors from
31 December 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 2009, Directors and Senior
Management (being members of the Group
Management Board) held, in aggregate, beneficial
interests in 19,566,685 HSBC Holdings ordinary
shares (0.11 per cent of the issued ordinary shares).
Senior Management held, in aggregate, options to
subscribe for 1,032,688 HSBC Holdings ordinary
shares under the HSBC Holdings savings-related
share option plans, HSBC Holdings Group Share
Option Plan and HSBC Finance: 1996 Long-Term
Executive Incentive Compensation Plan. These
options are exercisable between 2010 and 2015
at prices ranging from £3.3116 to £6.1760 and
US$9.2895 to US$18.6226 per share.
317
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Employees > Involvement / Disabled / Remuneration policy / Share plans
Employees
At 31 December 2009, HSBC employed 302,000 full
and part-time employees worldwide, compared with
325,000 at 31 December 2008 and 330,000 at
31 December 2007. The main centres of employment
are the UK with approximately 53,000 employees;
the US 29,000, India 35,000, Hong Kong 28,000,
Brazil 24,000, Mexico 19,000, mainland China
14,000 and France 11,000. HSBC negotiates with
recognised unions. The five highest concentrations
of union membership are in Argentina, Brazil,
mainland China, Malta and Mexico. It is HSBC’s
policy to maintain well-developed communications
and consultation programmes with unions and there
have been no material disruptions to its operations
from labour disputes during the past five years.
The Group People Strategy was introduced in
2008. This set a number of priorities: strengthening
leadership capabilities and developing people skills
in general, robust performance management
complementing a reward strategy which is market
competitive, and improving employee engagement.
Continuing emphasis was given in 2009 to
increasing international mobility to broaden the
internationalism and diversity of employee
experience. Training was focused on risk awareness,
change management, customer orientation and
performance management. Employee engagement
continued to improve significantly in the year (see
non-financial KPIs on page 20).
HSBC remains committed to creating a diverse
and inclusive work environment reflective of its
customer base, international workforce, and the
communities in which it operates. It has a Group-
wide strategy to build an inclusive culture. Focus
is placed on improving gender, ethnicity and age
diversity to ensure the long term sustainability of the
organisation, taking into account global demographic
changes. Diversity initiatives are implemented at a
regional, country and global business level and local
and national laws are respected. Employee network
groups, flexible working and mentoring programmes
are promoted and established, where possible, to
facilitate open discussion of workplace issues for
employees and to foster an environment that
celebrates diversity and inclusion.
Employee involvement
HSBC values and encourages open communication
with employees. Employees have the opportunity to
share views via learning programmes, networking
events and management blogs, and to enrich their
experience and perspectives through international
and cross-business assignments. Employment
318
matters and the financial and economic factors
affecting HSBC’s performance are regularly shared
with employees via management channels, internal
seminars, and in-house communication channels
such as the company intranet, which is accessible to
the majority of HSBC’s employees worldwide. The
Group’s annual Global People Survey gives
employees the opportunity to provide systematic
feedback on their experience of HSBC, and survey
results are followed through and acted upon.
Employment of disabled persons
HSBC believes in providing equal opportunities to
all 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 while employed by the Group, efforts are
made to continue their employment and, if
necessary, appropriate training is provided.
Remuneration policy
As the quality and commitment of its human capital
is deemed fundamental to HSBC’s success, the
Board’s stated strategy is to attract, retain and
motivate the very best people; this strategy is
referenced to the overall business strategy and the
commercial environment.
In a business that is based on trust and
relationships, HSBC’s broad policy is to recruit
those who are committed to making a long-term
career with the organisation since trust and
relationships are built over time.
Remuneration is an important component in an
individual’s decision about which organisation to
join and to stay with but, in HSBC’s experience, it is
not the overriding one. HSBC seeks to attract people
who wish to work for an organisation with strong
and sound values, one which is meritocratic and
competitive, and which offers challenging career
development.
In line with the overall principles applied to
executive Directors by the Remuneration Committee
described on page 334 in the Directors’
Remuneration Report:
•
•
employees’ salaries are reviewed annually in the
context of business performance, market
practice and internal relativities. Allowances and
benefits are largely determined by local market
practice;
employees participate in various variable pay
arrangements. Discretionary variable pay is
dependent on the achievement of objectives
which derive from those determined at Group
level. Since 2008, these objectives have
typically been categorised in four segments –
financial, customer, process and people.
Financial and non-financial metrics are used to
measure performance against the objectives,
which include profitability, expense control,
customer recommendation, employee
engagement, adherence to HSBC’s ethical
standards, lending guidelines and internal
controls and procedures. Effective risk
management is emphasised to maintain a strong
and secure operating platform, and that
influences employee remuneration. Actual levels
of variable pay depend on the performance of
the Group, its constituent businesses and the
individual, taking into account competitive
market practice and relevant regulator
requirements;
to ensure that the interests of HSBC and its
employees are aligned with those of its
shareholders, that HSBC’s approach to risk
management supports the interests of all
stakeholders and that remuneration is consistent
with effective risk management, the Group
requires a proportion of variable pay awards
above certain thresholds to be deferred into
awards of Restricted Shares. In addition,
employees are encouraged to participate in
HSBC Holdings savings-related share option
plans and local share ownership arrangements.
•
Employee share plans
To help align the interests of employees with those
of shareholders, share options are granted under all-
employee share plans and discretionary awards of
Performance Shares and Restricted Shares are made
under the HSBC Share Plan. There have been no
awards of discretionary share options since
30 September 2005.
Set out on pages 320 to 326 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 by HSBC
during the year.
The Remuneration Committee agreed to make
adjustments to all unexercised share options and
319
share awards under HSBC’s various share plans and
share schemes as a consequence of the 2009 rights
issue. The adjustments were based on the theoretical
ex-rights price, which was considered to be the most
appropriate methodology to reflect the rights issue.
The adjustments under certain share plans and share
schemes were approved by the relevant tax
authorities, where necessary. In the case of the
HSBC France and HSBC Private Bank France share
plans, similar adjustments were made by these
subsidiaries as a consequence of the rights issue.
The adjustments were to the ratios at which the
subsidiary company shares are exchangeable for
HSBC Holdings ordinary shares of US$0.50
following the exercise of options.
Employee share plans are subject to the
following limits on the number of HSBC Holdings
ordinary shares that may be subscribed for. In any
10-year period not more than 10 per cent of the
HSBC Holdings ordinary shares in issue from time
to time (approximately 1,742 million HSBC
Holdings ordinary shares at 1 March 2010) may in
aggregate become issuable pursuant to the grant of
options or be issued other than pursuant to options
under all-employee share plans. In any 10-year
period not more than 5 per cent of the HSBC
Holdings ordinary shares in issue from time to time
(approximately 871 million HSBC Holdings
ordinary shares on 1 March 2010) may in aggregate
be put under option under the HSBC Share Plan or
be issuable pursuant to the HSBC Holdings Group
Share Option Plan, the HSBC Executive Share
Option Scheme, the HSBC Holdings Restricted
Share Plan 2000 or the HSBC Share Plan. The
number of HSBC Holdings ordinary shares that may
be issued on exercise of all options granted on or
after 27 May 2005 under the HSBC Share Plan and
any other plans must not exceed 1,585,250,000
(1,119,000,000 prior to adjustment for the rights
issue) HSBC Holdings ordinary shares. Under the
HSBC Holdings savings-related share option plans,
the HSBC Share Plan, HSBC Holdings Group Share
Option Plan and the HSBC Holdings Executive
Share Option Scheme there were options outstanding
over 337,038,157 HSBC Holdings ordinary shares at
31 December 2009 (1.9 per cent of the issued
ordinary shares). Particulars of options over HSBC
Holdings shares held by Directors of HSBC
Holdings are set out on page 347 of the Directors’
Remuneration Report.
The effect on earnings per share of granting
share options and share awards is shown in diluted
earnings per share on the face of the consolidated
income statement, with further details disclosed in
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Employees / Share plans
the Earnings per share Note 13 on the Financial
Statements.
the employing company, options may be exercised
before completion of the relevant savings contract.
All-employee share option plans
The HSBC Holdings Savings-Related Share Option
Plan and the HSBC Holdings Savings-Related Share
Option Plan: International are all-employee share
plans under which eligible HSBC employees (those
employed within the Group on the first working day
of the year of grant) may be granted options to
acquire HSBC Holdings ordinary shares. Employees
may make contributions of up to £250 (or
equivalent) each month over a period of one, three or
five years which may be used on the first, third or
fifth anniversary of the commencement of the
relevant savings contract, at the employee’s election,
to exercise the options. Alternatively, the employee
may elect to have the savings, plus (where
applicable) any interest or bonus, repaid in cash.
Options granted over a one-year period are only
available under the HSBC Holdings Savings-Related
Share Option Plan: International and will be
exercisable within three months following the first
anniversary of the commencement of the savings
contract. Options granted over three or five-year
periods will be 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
HSBC Holdings Savings-Related Share Option Plan
HSBC Holdings ordinary shares of US$0.50
Under the HSBC Holdings Savings-Related
Share Option Plan and the HSBC Holdings Savings-
Related Share Option Plan: International 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 (except for the one-year options awarded
under the US sub-plan where a 15 per cent discount
is applied). Where applicable, the US dollars, Hong
Kong dollars and euro exercise prices are converted
from the sterling exercise price at the applicable
exchange rate on the working day preceding the
relevant invitation date. The exercise period of the
options awarded under all-employee share plans may
be advanced to an earlier date in certain
circumstances, for example on retirement, and may
be extended in certain circumstances, for example on
the death of a participant, the executors may exercise
the option up to six months beyond the normal
exercise period. The closing price per HSBC
Holdings ordinary share on 28 April 2009, the day
before options were awarded in 2009 under the
HSBC Holdings Savings-Related Share Option Plan
and the HSBC Holdings Savings-Related Share
Option Plan: International, was £4.57. The all-
employee share option plans will terminate on
27 May 2015 unless the Directors resolve to
terminate the plans at an earlier date.
Exercise price (£)
At
31 Dec
20091
At
1 Jan
2009
Date of
award
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Awarded
during
year
Exercised
during
year2
Lapsed
during
year
At
31 Dec
2009
23 Apr 2003 5.3496 4.6618 1 Aug 2008 31 Jan 2009
21 Apr 2004 6.4720 5.6399 1 Aug 2009 31 Jan 2010
24 May 2005 6.6792 5.8205 1 Aug 2008 31 Jan 2009
24 May 2005 6.6792 5.8205 1 Aug 2010 31 Jan 2011
26 Apr 2006 7.6736 6.6870 1 Aug 2009 31 Jan 2010
26 Apr 2006 7.6736 6.6870 1 Aug 2011 31 Jan 2012
25 Apr 2007 7.0872 6.1760 1 Aug 2010 31 Jan 2011
25 Apr 2007 7.0872 6.1760 1 Aug 2012 31 Jan 2013
30 Apr 2008 6.8160 5.9397 1 Aug 2011 31 Jan 2012
30 Apr 2008 6.8160 5.9397 1 Aug 2013 31 Jan 2014
– 3.3116 1 Aug 2012 31 Jan 2013
29 Apr 2009
– 3.3116 1 Aug 2014 31 Jan 2015
29 Apr 2009
371,318
4,647,894
200,358
4,550,403
3,159,428
2,636,893
4,705,656
3,554,943
6,733,293
5,947,860
–
–
5,203
610,947
4,384
550,913
395,653
319,896
529,574
418,019
756,995
694,867
–
–
– 32,960,627
– 31,053,247
–
–
–
–
–
–
–
–
153,737
2,713,037
13,355
21,802
533,470
2,782
11,212
3,608
6,097
2,221
3,273
1,141
–
222,784
1,699,603
846,201
–
191,387
2,298,128
2,781,386
2,217,423
804,188
1,162,904
1,791,103
1,625,920
3,598,098
1,350,019
2,619,335
2,034,844
5,449,347
1,784,690
4,855,816
1,028,614 31,928,740
588,049 30,464,057
1 The exercise price of awards granted prior to 2009 adjusted for rights issue.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.78.
320
HSBC Holdings Savings-Related Share Option Plan: International
HSBC Holdings ordinary shares of US$0.50
Exercise price
At
31 Dec
20091
At
1 Jan
2009
Date of
award
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Awarded
during
year
Exercised
during
year2
Lapsed
during
year
At
31 Dec
2009
(£)
08 May 2003 5.3496
21 Apr 2004 6.4720
10 May 2004 6.4720
24 May 2005 6.6792
24 May 2005 6.6792
26 Apr 2006 7.6736
26 Apr 2006 7.6736
25 Apr 2007 7.0872
25 Apr 2007 7.0872
25 Apr 2007 7.0872
30 Apr 2008 6.8160
30 Apr 2008 6.8160
30 Apr 2008 6.8160
–
29 Apr 2009
–
29 Apr 2009
–
29 Apr 2009
(£)
– 1 Aug 2008 31 Jan 2009
5.6399 1 Aug 2009 31 Jan 2010
5.6399 1 Aug 2009 31 Jan 2010
– 1 Aug 2008 31 Jan 2009
5.8205 1 Aug 2010 31 Jan 2011
6.6870 1 Aug 2009 31 Jan 2010
6.6870 1 Aug 2011 31 Jan 2012
– 1 Aug 2008 31 Oct 2008
6.1760 1 Aug 2010 31 Jan 2011
6.1760 1 Aug 2012 31 Jan 2013
5.9397 1 Aug 2009 31 Oct 2009
5.9397 1 Aug 2011 31 Jan 2012
5.9397 1 Aug 2013 31 Jan 2014
3.3116 1 Aug 2010 31 Oct 2010
3.3116 1 Aug 2012 31 Jan 2013
3.3116 1 Aug 2014 31 Jan 2015
(US$)
(US$)
11.6154 1 Aug 2009 31 Jan 2010
26 Apr 2006 13.3290
11.6154 1 Aug 2011 31 Jan 2012
26 Apr 2006 13.3290
12.0958 1 Aug 2010 31 Jan 2011
25 Apr 2007 13.8803
25 Apr 2007 13.8803
12.0958 1 Aug 2012 31 Jan 2013
30 Apr 2008 14.48763 12.6250 1 Aug 2009 31 Oct 2009
11.8824 1 Aug 2009 31 Oct 2009
30 Apr 2008 13.6354
11.8824 1 Aug 2011 31 Jan 2012
30 Apr 2008 13.6354
11.8824 1 Aug 2013 31 Jan 2014
30 Apr 2008 13.6354
5.19313 1 Aug 2010 31 Oct 2010
–
29 Apr 2009
4.8876 1 Aug 2010 31 Oct 2010
–
29 Apr 2009
4.8876 1 Aug 2012 31 Jan 2013
–
29 Apr 2009
4.8876 1 Aug 2014 31 Jan 2015
–
29 Apr 2009
(€)
(€)
26 Apr 2006 11.0062 9.5912 1 Aug 2009 31 Jan 2010
26 Apr 2006 11.0062 9.5912 1 Aug 2011 31 Jan 2012
25 Apr 2007 10.4217 9.0818 1 Aug 2010 31 Jan 2011
25 Apr 2007 10.4217 9.0818 1 Aug 2012 31 Jan 2013
30 Apr 2008 8.6720 7.5571 1 Aug 2009 31 Oct 2009
30 Apr 2008 8.6720 7.5571 1 Aug 2011 31 Jan 2012
30 Apr 2008 8.6720 7.5571 1 Aug 2013 31 Jan 2014
3.6361 1 Aug 2010 31 Oct 2010
29 Apr 2009
3.6361 1 Aug 2012 31 Jan 2013
29 Apr 2009
3.6361 1 Aug 2014 31 Jan 2015
29 Apr 2009
–
–
–
380,020
7,456
2,281,863
621,324
2,804,273
1,525,575
323,674
264
2,816,884
773,845
1,839,871
3,291,771
1,195,576
–
–
–
1,148,429
305,353
2,044,643
590,169
549,534
399,466
1,837,345
507,206
–
–
–
–
124,371
21,831
254,482
74,809
149,323
482,470
196,833
–
–
–
–
1,098
239,792
–
254,169
–
–
–
–
–
–
191,701
–
40,882
–
–
–
340,681
–
89,634
–
204,574
–
387,480
–
146,309
4,625,837
–
– 12,639,343
8,014,194
–
151,349
40,157
268,319
78,253
71,547
50,322
246,992
69,969
–
–
–
–
16,114
3,084
34,383
10,211
16,379
60,300
23,563
–
–
–
–
–
–
–
–
–
–
–
1,082,798
604,897
5,084,031
2,599,092
–
–
–
–
–
–
–
369,886
1,466,146
1,058,095
(HK$)
(HK$)
26 Apr 2006 103.4401 90.1414 1 Aug 2009 31 Jan 2010
2,311,113
26 Apr 2006 103.4401 90.1414 1 Aug 2011 31 Jan 2012
574,365
25 Apr 2007 108.4483 94.5057 1 Aug 2010 31 Jan 2011
2,367,952
25 Apr 2007 108.4483 94.5057 1 Aug 2012 31 Jan 2013
676,123
30 Apr 2008 106.2478 92.5881 1 Aug 2009 31 Oct 2009 1,698,625
30 Apr 2008 106.2478 92.5881 1 Aug 2011 31 Jan 2012
2,756,295
30 Apr 2008 106.2478 92.5881 1 Aug 2013 31 Jan 2014
959,694
29 Apr 2009
–
37.8797 1 Aug 2010 31 Oct 2010
29 Apr 2009
–
37.8797 1 Aug 2012 31 Jan 2013
29 Apr 2009
–
37.8797 1 Aug 2014 31 Jan 2015
–
–
–
–
179,064
–
28,637
–
122,567
–
38,246
–
101,377
–
121,655
–
54,445
–
5,783,397
– 23,940,771
– 21,513,401
91,562
–
695,492
61,252
9,089
151,609
–
264
1,589
–
371,870
2,332
–
1,781
2,638
272
288,458
–
–
8,554
379,187
1,446,976
–
560,072
930,050
2,119,303
395,176
1,170,491
136,732
227,824
–
–
1,170,757
1,985,219
303,481
559,998
–
1,672,575
1,143,752
2,533,167
368,773
973,112
4,463,153
160,903
204,074 12,432,631
7,932,036
81,886
48,570
64
1,217
87
–
34,889
275
–
–
279
769
–
1,083
–
–
–
8,786
–
–
–
–
–
40,639
–
–
–
5,208
–
–
5,528
3,806
4,060
1,013,721
167,450
1,220,072
353,595
621,081
414,899
1,160,590
319,324
54,207
25,496
160,306
59,764
86,382
14,177
148,699
47,547
156,916
378,332
182,523
8,150
25,483
20,492
237,487
177,996
1,091,673
314,740
–
–
923,472
257,851
1,028,591
579,122
4,922,956
2,539,328
53,020
10,738
140,166
37,473
–
164,438
37,873
361,736
1,440,663
1,037,603
154,477
2,295,061
50,894
552,108
165,096
2,325,423
57,205
657,164
–
1,794,794
97,011
2,780,939
57,554
956,585
240,016
5,537,853
406,542 23,530,423
221,612 21,287,729
1 The exercise price of awards granted prior to 2009 adjusted for rights issue.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.52.
3 Exercisable at a 15 per cent discount to the average market value of the ordinary shares on the five business days immediately
preceding the invitation date.
321
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Employees > Share plans / Subsidiary company share plans
Discretionary Share Plans
Note 10 on the Financial Statements gives detail
on share-based payments, including awards of
Restricted Shares made in 2009.
The HSBC Share Plan was approved at the 2005
Annual General Meeting and amendments were
approved at the Annual General Meeting in 2008.
Awards of Performance Shares are made under this
Plan to executive Directors and other senior
executives. The performance conditions for these
awards are described under ‘Performance Shares’ on
page 339.
Awards of Performance Shares are directed to
those senior executives who can influence corporate
performance such as members of the Group
Management Board. Due to market context it was
decided that no awards of Performance Shares would
be made in 2009.
Awards of Restricted Shares may be made to
other senior executives. In addition, awards are
typically made to employees as part of the Group’s
bonus deferral policy. Awards of Restricted Shares
define the number of shares to which the employee
will become entitled, generally between one and
three years from the date of the award, and normally
subject to the individual remaining in employment.
To date, all vesting awards of Performance Shares
and Restricted Shares have been satisfied by the
transfer of existing shares. To create additional core
tier 1 capital and retain funds within HSBC, the
Board has agreed that new shares may be issued to
satisfy the vesting of awards of Restricted Shares
and Performance Shares that cannot be satisfied
from shares held by employee benefit trusts
commencing in 2011.
The maximum value of awards that may be
granted to an employee in any one year under
the HSBC Share Plan is 700 per cent of the
employee’s annual salary at the date of grant. For the
purpose of the limit, any Restricted Share awards
made on or shortly after the commencement of
employment or in substitution for all or any part of
any bonus to which the employee would otherwise
have been entitled, are excluded.
Since September 2005, no share options have
been granted under the HSBC Share Plan. There
may be particular circumstances in the future where
option grants could be appropriate.
Prior to 2005, discretionary awards of share
options, with vesting subject to the attainment of a
322
predetermined TSR performance condition, were
made to employees at all levels of HSBC.
The vesting of these options was subject to the
attainment of pre-determined relative TSR
performance criteria, except in HSBC France (which
was acquired in 2000) where performance criteria
were phased in. There are no outstanding
performance conditions that remain to be satisfied
for the exercise of discretionary share options. Under
the HSBC Holdings Group Share Option Plan, the
maximum grant of options which could be made to
an employee in any one year (together with the
Performance Share awards under the HSBC
Holdings Restricted Share Plan 2000) was 150 per
cent (or in exceptional circumstances 225 per cent)
of the employee’s annual salary at the date of grant
plus any bonus paid in the previous year.
Under the HSBC Holdings Executive Share
Option Scheme the maximum value of options
which could be granted to an employee in any one
year was four times the employee’s relevant
earnings.
The options are generally exercisable between
the third and the tenth anniversary of the date of
grant.
The exercise price of options granted under the
HSBC Share Plan, and previously under the HSBC
Holdings Group Share Option Plan, is 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, or the nominal value of a
share. The exercise price of options granted under
the HSBC Holdings Executive Share Option Scheme
was the market value of the ordinary shares on the
business day prior to the grant of the option. The
HSBC Share Plan will terminate on 27 May 2015
unless the Directors resolve to terminate the Plan at
an earlier date.
The exercise period of the options awarded
under discretionary share incentive plans may be
advanced to an earlier date in certain circumstances,
for example on the sale of a business. In the case
of the HSBC Holdings Executive Share Option
Scheme, the exercise period of the options awarded
may be extended in certain circumstances, for
example, on the death of a participant the executors
may exercise the option beyond the normal exercise
period.
HSBC Holdings Executive Share Option Scheme1
HSBC Holdings ordinary shares of US$0.50
Exercise price (£)
At
31 Dec
At
1 Jan
2009
20092
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Exercised
during
year3
Lapsed
during
year
At
31 Dec
2009
6.3754
7.4210
7.8710
7.4600
5.5557 3 Apr 2002 29 Mar 2009
10 Aug 2009
6.4669 10 Aug 2002
31 Aug 2009
6.8591 31 Aug 2002
3 Apr 2010
6.5009 3 Apr 2003
6,858,013
71,100
4,000
7,030,893
1,005,752
10,490
590
1,028,887
6,300
–
–
912,232
7,857,465
81,590
4,590
440,700
–
–
–
6,706,848
Date of award
29 Mar 1999
10 Aug 1999
31 Aug 1999
3 Apr 2000
1 The HSBC Holdings Executive Share Option Scheme expired on 26 May 2000. No options have been granted under the Scheme since
that date.
2 Adjusted for rights issue.
3 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.20.
HSBC Holdings Group Share Option Plan1
HSBC Holdings ordinary shares of US$0.50
Exercise price (£)
At
31 Dec
At
1 Jan
2009
20092
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Exercised
during
year3
Lapsed
during
year
At
31 Dec
2009
9.6420
8.7120
8.2280
8.4050
7.4550
6.9100
8.1300
9.1350
8.2830
8.6500
8.3620
8.4024 4 Oct 2003
7.5919 23 Apr 2004
7.1702 30 Aug 2004
7.3244 7 May 2005
6.4966 30 Aug 2005
6.0216 2 May 2006
7.0848 29 Aug 2006
7.9606 3 Nov 2006
7.2181 30 Apr 2007
7.5379 27 Aug 2007
7.2869 20 Apr 2008
4 Oct 2010
299,016
23 Apr 2011 26,148,186
30 Aug 2011
147,768
7 May 2012 28,369,933
30 Aug 2012
337,142
2 May 2013 25,860,244
367,644
29 Aug 2013
3 Nov 2013
4,019,800
30 Apr 2014 50,891,202
299,200
27 Aug 2014
6,660,770
20 Apr 2015
43,745
3,900,975
21,766
4,203,127
50,554
3,866,806
52,884
593,054
7,544,767
44,142
1,011,194
–
574
–
39,355
–
1,230,221
–
–
277,525
–
–
–
3,034
339,727
797,516 29,251,071
154,481
15,053
1,329,471 31,204,234
387,696
578,851 27,917,978
371,782
48,746
4,612,854
–
1,888,126 56,270,318
324,947
6,884,397
18,395
787,567
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
20 Apr 2005
1 The HSBC Holdings Group Share Option Plan expired on 26 May 2005. No options have been granted under the Plan since that date.
2 Adjusted for rights issue.
3 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.17.
HSBC Share Plan
HSBC Holdings ordinary shares of US$0.50
Exercise price (£)
At
31 Dec
At
1 Jan
2009
20091
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Exercised
during
Lapsed
during
year
year
8.794
9.170
7.6634 21 Jun 2008
7.9911 30 Sep 2008
21 Jun 2009
30 Sep 2015
224,727
74,985
33,155
11,061
–
–
257,882
–
At
31 Dec
2009
–
86,046
Date of award
21 Jun 2005
30 Sep 2005
1 Adjusted for rights issue.
Subsidiary company share plans
HSBC France and subsidiary company
When it was acquired in 2000, HSBC France and
one of its subsidiary companies, HSBC Private Bank
France, operated employee share option plans under
which options could be granted over their respective
shares. No further options will be granted under
either of these companies’ plans. The following are
details of outstanding options to acquire shares in
HSBC France and HSBC Private Bank France.
323
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Employees > Subsidiary company share plans
HSBC France
Shares of €5
Date of
award
7 Apr 1999
12 Apr 2000
Exercise
price (€)
Exercisable
from
Options at
1 January
until
2009
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
20091
81.71
142.50
7 Jun 2000
7 Apr 2009
1 Jan 2002 12 Apr 2010
183,627
604,250
–
–
183,627
–
–
604,250
1 Following exercise of the options, the HSBC France shares will be exchanged for HSBC Holdings ordinary shares in the ratio of
14.917916 HSBC Holdings ordinary shares for each HSBC France share. At 31 December 2009, The HSBC Holdings Employee Benefit
Trust 2001 (No. 1) held 9,963,718 HSBC Holdings ordinary shares which may be exchanged for HSBC France shares arising from the
exercise of these options.
HSBC Private Bank France
Shares of €2
Date of
award
21 Dec 1999
10 Mar 2000
15 May 2001
1 Oct 2002
Exercise
price (€)
Exercisable
from
Options at
1 January
until
2009
Options
exercised
during year1
Options
lapsed
during year
Options at
31 December
20091
10.84 21 Dec 2000 21 Dec 2009
12.44 27 Jun 2004 31 Dec 2010
20.80 15 May 2002 15 May 2011
1 Oct 2012
2 Oct 2005
22.22
26,250
20,626
141,525
145,575
17,250
16,206
–
–
9,000
–
–
–
–
4,420
141,525
145,575
1 Following exercise of the options, the HSBC Private Bank France shares will be exchanged for HSBC Holdings ordinary shares in the
ratio of 2.099984 HSBC Holdings ordinary shares for each HSBC Private Bank France share. At 31 December 2009, The CCF
Employee Benefit Trust 2001 held 998,783 HSBC Holdings ordinary shares which may be exchanged for HSBC Private Bank France
shares arising from the exercise of these options.
HSBC Finance
Following the acquisition of HSBC Finance in 2003,
all outstanding options and equity-based awards over
HSBC Finance 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 (2.675 HSBC
Holdings ordinary shares for each HSBC Finance
common share) and the exercise prices per share
were adjusted accordingly. No further options will
be granted under the plans.
All outstanding options and other equity-based
awards over HSBC Finance common shares granted
before 14 November 2002, being the date the
transaction was announced, vested on completion of
the acquisition. Options granted after 14 November
2002 are exercisable on their original terms, save
that they were adjusted to reflect the exchange ratio.
The following are details of options to acquire
shares in HSBC Holdings.
At 31 December 2009, the HSBC (Household)
Employee Benefit Trust 2003 held 2,642,279 HSBC
Holdings ordinary shares and 1,455 American
Depositary Shares, each of which represents five
HSBC Holdings ordinary shares, which may be used
to satisfy the exercise of employee share options.
HSBC Finance: 1996 Long-Term Executive Incentive Compensation Plan
HSBC Holdings ordinary shares of US$0.50
Exercise price (US$)
At
1 Jan
2009
At
31 Dec
20091
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Exercised
during
year2
Lapsed
during
year
At
31 Dec
2009
16.99
13.96
16.96
13.26
15.70
18.40
21.37
10.66
14.81 17 May 2000
17 May 2009
12.17 31 Aug 2000
31 Aug 2009
14.78 8 Nov 2000
8 Nov 2009
11.56 8 Feb 2001
8 Feb 2010
13.68 30 Jun 2001
30 Jun 2010
16.03 13 Nov 2001
13 Nov 2010
18.62 12 Nov 2002
12 Nov 2011
9.29 20 Nov 2003 20 Nov 2012
334,375
300,938
4,250,577
66,875
26,846
5,728,514
7,571,322
2,402,135
49,331
44,397
627,096
9,866
3,959
845,109
1,116,966
354,367
–
–
–
–
–
–
–
20,000
383,706
345,335
4,877,673
–
–
–
–
–
–
–
–
76,741
30,805
6,573,623
8,688,288
2,736,502
Date of award
17 May 1999
31 Aug 1999
8 Nov 1999
8 Feb 2000
30 Jun 2000
13 Nov 2000
12 Nov 2001
20 Nov 2002
1 Adjusted for rights issue.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.172.
324
Bank of Bermuda
Following the acquisition of Bank of Bermuda in
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 acquisition. No
Bank of Bermuda: Executive Share Option Plan 1997
HSBC Holdings ordinary shares of US$0.50
Exercise price (US$)
further options will be granted under any of these
plans.
All outstanding options over Bank of Bermuda
shares vested on completion of the acquisition. The
following are details of options to acquire shares in
HSBC Holdings. At 31 December 2009, the HSBC
(Bank of Bermuda) Employee Benefit Trust 2004
held 2,113,611 HSBC Holdings ordinary shares
which may be used to satisfy the exercise of
employee share options.
Date of award
23 Feb 1999
3 Aug 1999
4 Feb 2000
1 Jun 2000
31 Jul 2000
11 Jan 2001
At
1 Jan
2009
7.40
7.10
7.21
7.04
10.11
14.27
At
31 Dec
20091
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Exercised
during
year2
Lapsed
during
year
6.45 23 Feb 2000
6.19 3 Aug 2000
6.28 4 Feb 2001
6.13 1 Jun 2001
8.81 31 Jul 2001
12.44 11 Jan 2002
23 Feb 2009
3 Aug 2009
4 Feb 2010
1 Jun 2010
31 Jul 2010
11 Jan 2011
4,904
7,634
31,678
61,649
27,744
53,943
723
1,125
4,674
9,095
4,093
7,958
–
5,841
10,613
–
–
–
5,627
2,918
–
–
–
–
1 Adjusted for rights issue.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.58.
Bank of Bermuda: Share Option Plan 2000
HSBC Holdings ordinary shares of US$0.50
Exercise price (US$)
Date of award
11 Jan 2001
6 Feb 2001
29 Mar 2001
16 Apr 2001
6 Jun 2001
16 Jul 2001
28 Aug 2001
26 Sep 2001
30 Jan 2002
5 Feb 2002
10 Jul 2002
4 Feb 2003
21 Apr 2003
At
1 Jan
2009
14.27
16.41
15.39
15.57
18.35
16.87
15.39
12.79
15.60
16.09
15.84
10.69
11.85
At
31 Dec
20091
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Exercised
during
year2
Lapsed
during
year
12.44 11 Jan 2002
14.30 6 Feb 2002
13.41 29 Mar 2002
13.57 16 Apr 2002
15.99 6 Jun 2002
14.70 16 Jul 2002
13.41 28 Aug 2002
11.15 26 Sep 2002
13.59 30 Jan 2003
14.02 5 Feb 2003
13.80 10 Jul 2003
9.32 4 Feb 2004
10.33 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
30 Jan 2012
5 Feb 2012
10 Jul 2012
4 Feb 2013
21 Apr 2013
134,857
556,353
270
539
8,091
14,930
13,486
350,196
1,226
740,461
12,260
128,904
6,833
19,896
81,148
40
80
1,194
2,203
1,990
51,667
181
108,165
1,809
14,877
1,009
–
–
–
–
–
–
–
–
–
–
–
1,699
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1 Adjusted for rights issue.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.33.
At
31 Dec
2009
–
–
25,739
70,744
31,837
61,901
At
31 Dec
2009
154,753
637,501
310
619
9,285
17,133
15,476
401,863
1,407
848,626
14,069
142,082
7,842
325
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Employees > Compensation / Bank payroll tax // Sustainability
Bank of Bermuda: Directors’ Share Option Plan
HSBC Holdings ordinary shares of US$0.50
Exercise price (US$)
At
1 Jan
2009
At
31 Dec
20091
Exercisable
from
until
At
1 Jan
2009
Adjustment
for rights
issue
Exercised
during
Lapsed
during
year
year
8.02
11.31
15.76
16.01
12.23
6.99 22 Sep 2000
9.86 20 Sep 2001
13.73 28 Mar 2002
13.95 3 Apr 2003
10.66 30 Apr 2004
22 Sep 2009
20 Sep 2010
28 Mar 2011
3 Apr 2012
30 Apr 2013
3,082
4,046
12,811
24,520
4,904
455
597
1,890
3,615
723
–
–
–
–
–
3,537
4,643
2,321
5,627
–
At
31 Dec
2009
–
–
12,380
22,508
5,627
Date of award
22 Sep 1999
20 Sep 2000
28 Mar 2001
3 Apr 2002
30 Apr 2003
1 Adjusted for rights issue.
Employee compensation and benefits
Note 8 on the Financial Statements gives details
about employee compensation and benefits including
pension plans.
Set out below is information in respect of the
five individuals (including two Directors of HSBC
Holdings) whose emoluments were the highest in
HSBC for the year ended 31 December 2009.
Emoluments of 5 highest paid employees
Basic salaries, allowances and benefits in
kind ..........................................................
Pension contributions ..................................
Bonuses paid or receivable ..........................
Inducements to join paid or receivable ........
Total .............................................................
Total (US$000) ............................................
£000
3,190
324
35,017
–
38,531
60,103
Their emoluments were within the following
bands:
£4,300,001 – £4,400,000 .............................
£5,600,001 – £5,700,000 .............................
£9,000,001 – £9,100,000 .............................
£9,300,001 – £9,400,000 .............................
£10,000,001 – £10,100,000 .........................
Number of
employees
1
1
1
1
1
Performance-related variable pay awards for the
five individuals reported above were fully deferred
and will vest pro rata over three years from the date
of the award.
The aggregate remuneration of Directors and
Senior Management (being members of the Group
Management Board) for the year ended
31 December 2009 was US$70,620,005.
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 2009 was US$1,790,072.
326
Executive Directors and members of Senior
Management are generally subject to notice periods
of up to 12 months and a normal retirement age
of 65.
Bank payroll tax
Both the UK and French governments announced in
late 2009 their intention to introduce one-off taxes in
respect of certain bonuses payable by banks and
banking groups. In both countries the taxes are to be
levied at 50 per cent on bonuses awarded in a certain
period and over a threshold amount. The taxes will
be liabilities of the employer and will be payable on
awards of both cash and shares.
In the UK, draft provisions have been issued by
HM Revenue & Customs. It is the UK government’s
intention to include the bank payroll tax in the 2010
Finance Bill. The Bill will not be enacted until later
in 2010 and will apply retrospectively to certain
bonuses awarded in the period from 9 December
2009 to 5 April 2010. In France, the legislation
has not yet been enacted. In both countries there are
uncertainties as to the interpretation of the draft
proposals, and detailed analysis of individual awards
in the context of the final legislation will be required
to determine the precise effect of the taxes.
The estimated tax payable under the proposals,
as currently drafted, both in respect of cash and
deferred awards, is US$355 million in the UK and
US$45 million in France. The taxes will be payable
and accounted for in 2010 once the legislation is
enacted. The actual amount paid may be different
depending on the final details of each tax.
Corporate sustainability
HSBC’s values promote ethical and sustainable
business practices, making sustainability central to
the Group’s strategy and culture. It is about the
Group’s long-term approach to managing economic,
social and environmental issues that are within its
ability to influence. Primarily, this concerns
achieving sustainable profit growth so that HSBC
can continue to reward shareholders and employees,
build long-lasting relationships with customers and
suppliers, pay taxes and duties in those countries
where it operates, and invest in communities for
future growth.
HSBC’s continuing financial success depends,
in part, on its ability to identify and address certain
non-financial considerations which are material to
the business, and to mitigate the risks and maximise
the opportunities arising from them. These generally
fall into one or more of the following four broad
areas:
• Business sustainability
• Environmental issues
• Community investment
• Employee engagement
Business sustainability
HSBC aims to build long-term customer
relationships around the world through the provision
of a consistent and high-quality service and customer
experience. The Group uses the benefits of its scale,
financial strength, geographical reach and strong
brand value to achieve this.
HSBC aims to take advantage of the
opportunities and manage the risks presented by
emerging global trends by leading the development
of sustainable business models to address them. The
Group understands that the world is changing, with
increased longevity, a widening gap in the relative
growth rates of emerging and mature economies and
the need to move to a lower-carbon economy in
order to mitigate some of the effects of climate
change being significant examples. Over the long
term, HSBC anticipates playing a leading role in
shaping the market response to these challenges and
is among those financial institutions identifying how
business can respond in ways that bring both
environmental and social benefits, as well as
providing viable economic returns.
Environmental issues
HSBC focuses its environmental initiatives primarily
on addressing and responding to issues associated
with climate change, including energy, water
management and biodiversity. Climate change has
the potential to materially affect HSBC’s customers
and, by extension, the Group’s long-term success,
introducing new risks to business activity. However,
it also has the potential to stimulate a new era of low
carbon growth, innovation and development. In
2009, HSBC continued to deepen its understanding
327
of the likely effects that climate change and the
responses to it will have upon its business and those
of its customers. The Group further developed its
ability to research the commercial implications of
climate change mitigation initiatives, improved the
make up and distribution of its investable index
offering, ‘The Global Climate Change Benchmark
Index’ and benefited from the continuing counsel of
Lord Stern as advisor to the Group Chairman on
economic development and climate change.
Community investment
HSBC has a long-standing commitment to the
communities in which it operates. Many of the
Group’s key markets are emerging economies.
HSBC’s operations bring benefits to its host
countries through tax contributions, and to local
people and businesses through employment, training,
purchasing and investment. Beyond the impact of its
core business, the Group aims to encourage social
and economic opportunity through its community
investment activity.
HSBC focuses this activity on education and the
environment because it believes they are essential
building blocks for the development of communities
and are prerequisites for economic growth. Global
education programmes such as Future First, JA More
Than MoneyTM and Eco-Schools focus on helping
disadvantaged children, promoting financial literacy
and environmental education and understanding. The
Group’s flagship environmental programme is the
HSBC Climate Partnership, a US$100 million
commitment to working with The Climate Group,
Earthwatch, Smithsonian Tropical Research Institute
and WWF on tackling climate change.
In 2009, HSBC donated a total of
US$100 million to community investment projects
(2008: US$102 million, or US$99 million at constant
exchange rates).
Employee engagement
‘Employee engagement’ describes employees’
emotional and intellectual commitment to their
organisation and its success and is critical to the
long-term ability of the Group to deliver the highest
quality of financial services. HSBC’s annual Global
People Survey shows that employees value the
Group’s commitment to sustainable business
practices and view the Group as being a leader in
this regard. HSBC has made sustainability a key
element of the employee induction and senior
management training programmes, and has fully
integrated sustainability risk issues into the Group’s
risk management processes covering corporate
clients.
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Sustainability / Share capital > Issued / Rights and obligations
Sustainability governance
Sustainability at HSBC exists as a GMO function,
with senior executives charged with implementing
sustainable business practice in all major regions
through inclusion in the Group Standards Manuals
and through induction and developmental training.
The Corporate Sustainability Committee, a
Committee of the Board, is responsible for advising
the Board, committees of the Board and executive
management on corporate sustainability policies,
including environmental, social and ethical issues.
At an operational level, implementation of these
policies is managed primarily by Group Human
Resources, Group Risk, Group Compliance and
Group Corporate Sustainability.
The terms of reference of the Corporate
Sustainability Committee are available at
www.hsbc.com/boardcommittees. The members of
the Committee throughout 2009 were W K L Fung
(Chairman), Sir Mark Moody-Stuart and N R N
Murthy, each of whom is a non-executive Director,
G V I Davis, Lord May and Dame Mary Marsh
(appointed a member on 31 July 2009), who are non-
director members of the Committee. There were five
meetings of the Corporate Sustainability Committee
during 2009. Following each meeting, the
Committee reports to the Board on its activities.
HSBC reports on its progress in developing and
implementing its sustainability strategy annually in
the HSBC Sustainability Report, which is externally
verified and prepared using the Global Reporting
Initiative. PricewaterhouseCoopers has been
re-appointed for 2009 and will verify the Group’s
commitment to carbon neutrality and adherence to
the Equator Principles. The HSBC Sustainability
Report 2009 will be issued on 28 May 2010 and will
be available at www.hsbc.com/sustainability.
Sustainability risk
HSBC’s approach to managing sustainability risk is
detailed on page 264.
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 proactively 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.
Group standards, instructions and related
policies and procedures are set by Group Corporate
328
Real Estate and implemented by Health, Safety and
Fire Co-ordinators (‘HSFC’s) based in each country
in which HSBC operates. The HSFC may call upon
regional and Group resource by way of support at
any time.
Despite the considerable international pressure
on terrorist networks over the past few years, the
global threat from terrorism persists. HSBC remains
committed to maintaining its preparedness and to
ensuring the highest standards of health and safety
wherever in the world it operates.
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.
Supplier payment policy
The Company does not currently subscribe to any
code or standard on payment practice. It is the
Company’s policy, however, to settle terms of
payment with those suppliers when agreeing the
terms of each transaction, to ensure that those
suppliers are made aware of the terms of payment,
and to abide by the terms of payment.
It is HSBC Holdings’ practice to organise
payment to its suppliers through a central accounts
payable function operated by its subsidiary, HSBC
Bank. Included in the balance with HSBC Bank
is the amount due to trade creditors which, at
31 December 2009, represented 24 days’ average
daily purchases of goods and services received from
such creditors, calculated in accordance with the
Companies Act 2006, as amended by Statutory
Instrument 2008 No. 410.
Share capital
Issued share capital
The nominal value of the issued share capital of
HSBC Holdings paid up at 31 December 2009 was
US$8,704,117,884 divided into 17,408,206,768
ordinary shares of US$0.50 each and 1,450,000 non-
cumulative preference shares of US$0.01 each; and
£301,500 comprising 301,500 non-voting deferred
shares of £1 each.
The percentage of the nominal value of the total
issued share capital of HSBC Holdings paid up at
31 December 2009 represented by the ordinary
shares of US$0.50 each, non-cumulative preference
shares of US$0.01 each and non-voting deferred
shares of £1 each was approximately 99.9942,
0.0002, and 0.0056 per cent respectively.
Rights and obligations attaching to shares
The rights and obligations attaching to each class of
share in the share capital of HSBC Holdings are set
out in the Articles of Association of HSBC
Holdings. Set out below is a summary of the rights
and obligations attaching to each class of shares
with respect to voting, dividends, capital and, in the
case of the preference shares, redemption.
To be registered, a transfer of shares must be in
relation to a share which is fully paid up and on
which the Company has no lien and to one class of
shares denominated in the same currency. The
transfer must be in favour of a single transferee or
no more than four joint transferees and it must be
duly stamped (if required). The transfer must be
delivered to the registered office of the Company or
to its Registrars accompanied by the certificate to
which it relates or such other evidence that proves
the title of the transferor.
If a shareholder or any person appearing to be
interested in the Company’s shares has been sent a
notice under section 793 of the Companies Act 2006
(which confers upon public companies the power to
require information from any person whom the
Company knows or has reasonable cause to believe
to be interested in the shares) and has failed in
relation to any shares (the ‘default shares’) to supply
the information requested within the period set out
in the notice, then the member, unless the Board
otherwise determines, is not entitled to be present at
or to vote the default shares at any general meeting
or to exercise any other right conferred by being a
shareholder. If the default shares represent at least
0.25 per cent in nominal value of the issued shares
of that class, unless the Board otherwise determines,
any dividend shall be withheld by the Company
without interest, no election may be made for any
scrip dividend alternative, and no transfer of any
shares held by the member will be registered except
in limited circumstances.
Ordinary shares
Subject to the Companies Act 2006 and the Articles
of Association of HSBC Holdings, HSBC Holdings
may, by ordinary resolution, declare dividends to be
paid to the holders of ordinary shares, however, no
dividend shall exceed the amount recommended by
the Board. The Board may pay interim dividends as
appears to the Board to be justified by the profits
of HSBC Holdings available for distribution.
All dividends shall be apportioned and paid
proportionately to the percentage of the nominal
329
amount paid up on the shares during any portion or
portions of the period in respect of which the
dividend is paid, but if any share is issued on terms
providing that it shall rank for dividend as from a
particular date, it shall rank for dividend
accordingly. Subject to the Articles of Association
of HSBC Holdings, the Board may, with the prior
authority of an ordinary resolution of HSBC
Holdings and subject to such terms and conditions
as the Board may determine, offer to any holders of
ordinary shares the right to elect to receive ordinary
shares of the same or a different currency, credited
as fully paid, instead of cash in any currency in
respect of the whole (or some part, to be determined
by the Board) of any dividend specified by the
ordinary resolution. At the 2007 Annual General
Meeting shareholders gave authority to the Directors
to determine to offer a scrip dividend alternative
until the conclusion of the Annual General Meeting
in 2012.
Preference shares
The non-cumulative preference shares of
£0.01 each, the non-cumulative preference shares of
US$0.01 each (the ‘Dollar Preference Shares’) and
the non-cumulative preference shares of €0.01 each
carry the same rights and obligations under the
Articles of Association save in respect of the timing
of and payment of proceeds from the redemption of
each class of share, to the extent issued, and certain
rights and obligations that attach to each class of
preference share as determined by the Board prior to
allotment of the relevant preference shares. The
Dollar Preference Shares are the only class of the
preference shares which have been issued and
allotted to date.
Holders of the preference shares will only be
entitled to attend and vote at general meetings of
HSBC Holdings if any dividend payable on the
relevant preference shares in respect of such period
as the Board shall determine prior to allotment
thereof (which, in the case of the Dollar Preference
Shares in issue at 1 March 2010, is four consecutive
dividend payment dates) is not paid in full or in such
other circumstances, and upon and subject to such
terms, as the Board may determine prior to allotment
of the relevant preference shares. Whenever holders
of the relevant preference shares are entitled to vote
on a resolution at a general meeting, on a show of
hands every such holder who is present in person or
by proxy shall have one vote and on a poll every
such holder who is present in person or by proxy
shall have one vote per preference share held by him
or her or such number of votes per share as the Board
shall determine prior to allotment of such share.
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Share capital > Rights and obligations / 2009 // Dividends, shareholders and meetings > 2009
Subject to the Articles of Association, holders
of the relevant preference shares shall have the right
to a non-cumulative preferential dividend at such
rate, on such dates and on such other terms and
conditions as may be determined by the Board prior
to allotment thereof in priority to the payment of any
dividend to the holders of ordinary shares and any
other class of shares of HSBC Holdings in issue
(other than (i) the other preference shares in issue
and any other shares expressed to rank pari passu
therewith as regards income; and (ii) any shares
which by their terms rank in priority to the relevant
preference shares as regards income). Dividends on
the Dollar Preference Shares in issue at 1 March
2010 are paid quarterly at the sole and absolute
discretion of the Board of Directors. The Board of
Directors will not declare a dividend on the Dollar
Preference Shares if payment of the dividend would
cause HSBC Holdings not to meet the applicable
capital adequacy requirements of the FSA or the
profit of HSBC Holdings available for distribution
as dividends is not sufficient to enable HSBC
Holdings to pay in full both dividends on the
relevant preference shares and dividends on any
other shares that are scheduled to be paid on the
same date and that have an equal right to dividends.
HSBC Holdings may not declare or pay dividends
on any class of its shares ranking lower in the right
to dividends than the preference shares nor redeem
nor purchase in any manner any of its other shares
ranking equal with or lower than the preference
shares unless it has paid in full, or set aside an
amount to provide for payment in full, the dividends
on the preference shares for the then-current
dividend period.
The preference shares carry no rights to
participate in the profits or assets of HSBC Holdings
other than as set out in the Articles of Association
and subject to the Companies Act 2006, do not
confer any right to participate in any offer or
invitation by way of rights or otherwise to subscribe
for additional shares in HSBC Holdings, do not
confer any right of conversion and do not confer any
right to participate in any issue or bonus shares or
shares issued by way of capitalisation of reserves.
Subject to the relevant insolvency laws and the
Articles of Association of HSBC Holdings, holders
of the relevant preference shares have the right in a
winding up of HSBC Holdings to receive out of the
assets of HSBC Holdings available for distribution
to its shareholders, in priority to any payment to the
holders of the ordinary shares and any other class of
shares of HSBC Holdings in issue (other than (i) the
other relevant preference shares and any other shares
expressed to rank pari passu therewith as regards
330
repayment of capital; and (ii) any shares which by
their terms rank in priority to the relevant preference
shares as regards repayment of capital), a sum equal
to any unpaid dividend on the relevant preference
shares which is payable as a dividend in accordance
with or pursuant to the Articles of Association and
the amount paid up or credited as paid up on the
relevant preference shares together with such
premium (if any) as may be determined by the
Board prior to allotment thereof.
HSBC Holdings may redeem the relevant
preference shares in accordance with the Articles of
Association and the terms on which the relevant
preference shares were issued and allotted. In the
case of the Dollar Preference Shares in issue at
1 March 2010, HSBC Holdings may redeem such
shares in whole at any time on or after 16 December
2010, subject to prior notification to the FSA.
Non-voting deferred shares
The non-voting deferred shares are held by a
subsidiary undertaking of HSBC Holdings. Holders
of the non-voting deferred shares are not entitled to
receive dividends on these shares. In addition, on
winding up or other return of capital, holders are
entitled to receive the amount paid up on their
shares after distribution to ordinary shareholders
of £10 million in respect of each ordinary share held
by them. The holders of the non-voting deferred
shares are not entitled to receive notice of or to
attend (either personally or by proxy) any general
meeting of HSBC Holdings or to vote (either
personally or by proxy) on any resolution to be
proposed thereat.
Share capital during 2009
The following events occurred during the year in
relation to the ordinary share capital of HSBC
Holdings:
Scrip dividends
1. 38,963,783 ordinary shares were issued at par in
January 2009 to shareholders who elected to
receive new shares in lieu of the third interim
dividend for 2008. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$9.7631, being the US dollar
equivalent of £6.4785.
2. 109,826,747 ordinary shares were issued at par
in May 2009 to shareholders who elected to
receive new shares in lieu of the fourth interim
dividend for 2008. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$5.6847, being the US dollar
equivalent of £3.907.
the HSBC Holdings Group Share Option Plan.
Options over 5,466,759 ordinary shares lapsed.
3. 21,713,706 ordinary shares were issued at par in
July 2009 to shareholders who elected to receive
new shares in lieu of the first interim dividend
for 2009. The market value per share used to
calculate shareholders’ entitlements to new
shares was US$8.7461, being the US dollar
equivalent of £5.4595.
4. 64,721,433 ordinary shares were issued at par in
October 2009 to shareholders who elected to
receive new shares in lieu of the second interim
dividend for 2009. The market value per share
used to calculate shareholders’ entitlements to
new shares was US$10.7597, being the
US dollar equivalent of £6.566.
Rights issue
5. 5,060,239,065 new ordinary shares were issued
at 254 pence per new ordinary share in April
2009 in connection with a rights issue
announced on 2 March 2009.
All-Employee share plans
6.
In connection with the exercise of options under
the HSBC Holdings savings-related share option
plans: 4,855,485 ordinary shares were issued
at prices ranging from £3.3116 to £7.6736 per
share; 59,241 ordinary shares were issued
at prices ranging from HK$37.8797 to
HK$92.5881per share; 86,150 ordinary shares
were issued at prices ranging from US$4.8876
to US$13.8803 per share; and 9,869 ordinary
shares were issued at prices ranging from
€7.5571 to €9.5912 per share. Options over
57,629,816 ordinary shares lapsed.
7. Options over 152,795,762 ordinary shares were
granted at nil consideration under the HSBC
Holdings savings-related share option plans on
29 April 2009 as a result of more than 90,000
applications received from HSBC employees
resident in over 70 countries and territories.
Discretionary share incentive plans
8. 918,532 ordinary shares were issued at prices
ranging from £5.5557 to £6.5009 per share in
connection with the exercise of options under
the HSBC Holdings Executive Share Option
Scheme. Options over 8,384,345 ordinary shares
lapsed.
9. 1,547,675 ordinary shares were issued at prices
ranging from £6.0216 to £8.4050 per share in
connection with the exercise of options under
331
10. No options were exercised under and no
ordinary shares were issued in connection with
the HSBC Share Plan. Options over 257,882
ordinary shares lapsed.
Authority to purchase ordinary shares
11. At the Annual General Meeting in 2009,
shareholders renewed the authority for the
Company to make market purchases of ordinary
shares. The authority is to make market
purchases of up to 1,720,481,200 ordinary
shares. The Directors have not exercised this
authority. In accordance with the terms of a
waiver granted by the Hong Kong Stock
Exchange on 19 December 2005, HSBC
Holdings will comply with the applicable law
and regulation in the UK in relation to the
holding of any shares in treasury and with the
conditions of the waiver, in connection with
any shares it may hold in treasury.
Authority to allot shares
12. At the Annual General Meeting in 2009,
shareholders renewed the general authority for
the Directors to allot new shares. The general
authority is to allot up to 3,440,962,400 ordinary
shares, 10,000,000 non-cumulative preference
shares of £0.01 each, 8,550,000 non-cumulative
preference shares of US$0.01 each and
10,000,000 non-cumulative preference shares
of €0.01 each. Within this, the Directors
have authority to allot up to a maximum of
860,240,600 ordinary shares wholly for cash to
persons other than existing shareholders.
Other than as described in paragraphs 1 to 6 and
8 to 9 above, the Directors did not allot any shares
during 2009.
Dividends, shareholders and
meetings
Dividends for 2009
First, second and third interim dividends for 2009,
each of US$0.08 per ordinary share, were paid on
8 July 2009, 7 October 2009 and 13 January 2010
respectively. Note 12 on the Financial Statements
gives more information on the dividends declared in
2009. On 1 March 2010, the Directors declared a
fourth interim dividend for 2009 of US$0.10 per
ordinary share in lieu of a final dividend, which will
be payable on 5 May 2010 in cash in US dollars, or
in sterling or Hong Kong dollars at exchange rates
H S B C H O L D I N G S P L C
Report of the Directors: Governance (continued)
Dividends, shareholders and meetings > 2010 / Communications / Notifiable interests / Dealings / AGM
to be determined on 26 April 2010, with a scrip
dividend alternative. As the fourth interim dividend
for 2009 was declared after the balance sheet date it
has not been included as a creditor at 31 December
2009. The reserves available for distribution at
31 December 2009 were US$34,460 million.
A quarterly dividend of US$15.50 per 6.20 per
cent non-cumulative US dollar preference share,
Series A (‘Series A dollar preference share’),
equivalent to a dividend of US$0.3875 per Series A
American Depositary Share, each of which
represents one-fortieth of a Series A dollar
preference share, was paid on 16 March, 15 June,
15 September and 15 December 2009.
Dividends for 2010
The proposed timetable for interim dividends in
respect of 2010 on the ordinary shares of US$0.50 is
set out in the Shareholder Information section on
page 473.
A quarterly dividend of US$15.50 per Series A
dollar preference share (equivalent to a dividend of
US$0.3875 per Series A American Depositary Share,
each of which represents one-fortieth of a Series A
dollar preference share) was declared on 10 February
2010 for payment on 15 March 2010.
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 to
shareholders which are available on www.hsbc.com.
There is regular dialogue with institutional investors
and enquiries from individuals on matters relating to
their shareholdings and the business of HSBC are
welcomed and are dealt with in an informative and
timely manner. All shareholders are encouraged to
attend the Annual General Meeting or the informal
meeting of shareholders held in Hong Kong to
discuss the progress of HSBC.
Notifiable interests in share capital
At 31 December 2009, the following disclosures of
major holdings of voting rights had been received
by the Company (and have not been subsequently
amended or withdrawn) pursuant to the requirements
of the Financial Services Authority Disclosure and
Transparency Rule 5:
• Barclays PLC gave notice on 17 April 2007 that
it had an indirect interest on 16 April 2007 in
518,233,657 HSBC Holdings ordinary shares,
representing 4.47 per cent of the ordinary shares
in issue at that date.
• Legal & General Group Plc gave notice on
18 April 2008 that it had a direct interest on
16 April 2008 in 593,425,216 HSBC Holdings
ordinary shares, representing 5.00 per cent of
the ordinary shares in issue at that date and gave
notice on 21 April 2008 that on 18 April 2008
its holding of HSBC ordinary shares fell below
5.00 per cent of the ordinary shares in issue at
that date.
As at 31 December 2009, according to the
register maintained by HSBC Holdings pursuant to
section 336 of the Securities and Futures Ordinance
of Hong Kong, JPMorgan Chase & Co. had given
notice that on 30 December 2009 it had a long
position of 1,024,160,585 HSBC Holdings ordinary
shares, representing 5.88 per cent of the ordinary
shares in issue, a short position of 63,293,272 HSBC
Holdings ordinary shares, representing 0.36 per cent
of the ordinary shares in issue and a lending pool
of 771,012,503 HSBC Holdings ordinary shares,
representing 4.43 per cent of the ordinary shares
in issue. Since 31 December 2009, and following
interim notifications on 26 and 27 January 2010 and
5 February 2010, JPMorgan Chase & Co. gave
notice that on 9 February 2010 it had a long position
of 1,044,033,679 HSBC Holdings ordinary shares,
representing 5.99 per cent of the ordinary shares in
issue, a short position of 57,605,424 HSBC Holdings
ordinary shares, representing 0.33 per cent of the
ordinary shares in issue and a lending pool of
769,997,063 HSBC Holdings ordinary shares,
representing 4.42 per cent of the ordinary shares in
issue.
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 2009 and up to the
date of this Report.
Dealings in HSBC Holdings shares
Except for dealings as intermediaries by HSBC
Bank, HSBC Financial Products (France) and The
Hongkong and Shanghai Banking Corporation,
which are members of a European Economic
Area exchange, neither HSBC Holdings nor any
subsidiary has bought, sold or redeemed any
securities of HSBC Holdings during the year
ended 31 December 2009.
332
Annual General Meeting
The Annual General Meeting of HSBC Holdings
will be held at the Barbican Hall, Barbican Centre,
London EC2 on 28 May 2010 at 11.00am.
An informal meeting of shareholders will be
held at 1 Queen’s Road Central, Hong Kong on
Monday 24 May 2010 at 4.30pm.
Resolutions to receive the Annual Report
and Accounts, approve the Directors’ Remuneration
Report, re-elect Directors and reappoint KPMG
Audit Plc as Auditor will be submitted to the Annual
General Meeting. KPMG Audit Plc has expressed its
willingness to continue in office and the Group
Audit Committee and the Board has recommended
that KPMG Audit Plc be reappointed. Resolutions
will also be submitted to the Annual General
Meeting to renew the authorities for the allotment of
shares and the disapplication of pre-emption rights.
In addition, resolutions will be proposed to seek
approval for changes to the Articles of Association,
to amend the HSBC Holdings UK Incentive Plan and
to continue to be able to call general meetings (other
than Annual General Meetings) on 14 days’ notice.
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
2010 a recording of the proceedings will be available
on www.hsbc.com.
On behalf of the Board
S K Green, Group Chairman
HSBC Holdings plc
Registered number 617987
1 March 2010
333
H S B C H O L D I N G S P L C
Directors’ Remuneration Report
Remuneration committee / Principles / Application to executive Directors / HSBC performance and context
Remuneration policy (unaudited)
Remuneration Committee .............................
Overall principles ..........................................
Application to executive Directors ................
HSBC performance and market context ........
Key achievements ......................................
Management of risk ...................................
Executive Director remuneration ..................
Salary .........................................................
Annual bonus .............................................
Performance Shares ...................................
Funding ......................................................
Total shareholder return ............................
Pensions .....................................................
Share ownership guidelines .......................
Service contracts ........................................
Other directorships ....................................
Non-executive Directors ...............................
Fees ...........................................................
Remuneration review (audited)
Directors’ 2009 remuneration .......................
Pensions ........................................................
Share plans ....................................................
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Remuneration Committee
The Remuneration Committee meets regularly to
consider human resource issues relating to terms
and conditions of employment, remuneration and
retirement benefits. Within the authority delegated
by the Board, the Committee is responsible for
approving the remuneration policy of HSBC and in
doing so takes into account the pay and conditions
across the Group. This includes the terms of bonus
plans, share plans, other long-term incentive plans
and the individual remuneration packages
of executive Directors and other senior Group
employees, including all in positions of significant
influence and those having an impact on HSBC’s
risk profile. No Directors are involved in deciding
their own remuneration.
Following each meeting the Committee reports
to the Board on its activities. The terms of reference
of the Committee are available at
www.hsbc.com/boardcommittees.
The members of the Remuneration Committee
throughout 2009 were Sir Mark Moody-Stuart
(Chairman), J D Coombe, W S H Laidlaw and
G Morgan. J L Thornton became a member of the
Committee on 24 April 2009.
334
There were seven meetings of the Remuneration
Committee during 2009. The table on page 304 gives
details of Directors’ attendance at these meetings.
The Committee has appointed Deloitte LLP
to provide independent advice on executive
remuneration issues and Towers Watson (formerly
Towers Perrin) to provide remuneration data. As
global firms, each of these firms also provided other
consulting services to various parts of HSBC. Other
consultants are used from time to time to advise on
specific issues. During the year the Group Chief
Executive provided regular briefings to the
Committee and the Committee received advice from
the Group Managing Director, Human Resources,
A Almeida, the Head of Group Performance and
Reward, S J Walker and subsequently T Roberts,
and the Group Chief Risk Officer, B Robertson.
Overall principles
A global reward strategy for the Group was approved
by the Remuneration Committee in 2007. This
strategy provided a framework for the Remuneration
Committee in carrying out its responsibilities during
the year and includes the following key elements:
•
•
•
•
an assessment of reward with reference to clear
and relevant objectives set within a balanced
scorecard framework. This framework facilitates
a rounded approach to objective setting. Under
this framework, objectives are set under four
categories – financial, process (including risk
mitigation), customer and people. Significant
importance is given to the achievement of
efficiency and risk objectives as well as
financial objectives. Objectives relating to
customer development and the productivity of
the Group’s human capital are also key to
financial performance and the development and
sustainability of the Group over the short and
medium term;
a focus on total compensation (salary, bonus and
the value of long-term incentives) with variable
pay (namely bonus and the value of long-term
incentives) differentiated by performance;
the use of considered discretion to assess the
extent to which performance has been achieved
rather than applying a formulaic approach
which, by its nature, may encourage
inappropriate risk taking and cannot cover all
scenarios;
a significant proportion of variable pay being
deferred into, predominantly, awards of HSBC
Holdings Restricted Shares to tie recipients to
the future performance of the Group and to
retain key talent. All Restricted Share awards
made from 2010 are subject to claw back; and
•
a total remuneration package (salary, bonus,
long-term incentive awards and other benefits)
which is competitive in relation to comparable
organisations in each of the markets in which
HSBC operates.
The Committee also takes into account
environmental, social and governance aspects when
determining executive Directors’ remuneration and
oversees senior management incentive structures to
ensure that such structures take account of possible
inadvertent consequences from these aspects.
Application to executive Directors
In order to ensure that executive Directors’
compensation packages are competitive, having
regard to the market in which HSBC competes for
executive talent, the Remuneration Committee
considers market data from a defined remuneration
comparator group. This group initially comprised
nine global financial services companies, namely
Banco Santander, Bank of America, Barclays, BNP
Paribas, Citigroup, Deutsche Bank, Royal Bank of
Scotland, Standard Chartered and UBS. These
companies were selected on the basis of their
broadly similar business coverage, size and
international scope, and are subject to annual review
for continuing relevance. During 2009, the
Remuneration Committee determined that the Royal
Bank of Scotland should be replaced by JPMorgan
Chase & Co. in the remuneration comparator group.
The positioning of total compensation (salary,
bonus and the expected value of long term
incentives) for the executive Directors depends on
the performance of the Group and individual
performance assessed against a combination of
financial and non-financial objectives within an
annual balanced scorecard. Remuneration is
structured to provide an opportunity for top quartile
total compensation for higher levels of performance.
The performance-related aspects of the
remuneration package consist of an annual bonus of
up to four times salary and Performance Share
awards with a face value of up to seven times salary.
Taking into account the expected value of awards,
the performance-related elements of pay make up a
considerable proportion of the total remuneration
package whilst maintaining an appropriate balance
between fixed and variable elements. Annual bonus
payments and Performance Share awards are not
pensionable.
335
A significant proportion of total compensation
will be delivered in HSBC Holdings shares.
Executive Directors and other senior executives are
subject to share ownership guidelines.
The above approach applies to all executive
Directors with the exception of the Group Chairman,
S K Green who, at his request, is remunerated
through salary only, i.e. he no longer receives annual
bonus payments or awards of Performance Shares;
and S T Gulliver, whose variable compensation
arrangements take into account wholesale banking
market practice.
The approach will continue to be carefully and
regularly reviewed during 2010 to take account of
current market conditions and emerging regulatory
guidelines (see ‘HSBC performance and market
context’ below) and, where appropriate, shareholders
will be consulted on any proposed changes in policy.
Any changes will also be described in future
Directors’ Remuneration Reports.
The application of this policy to each
component of executive Directors’ remuneration for
2009 is outlined in more detail within ‘Executive
Director remuneration’.
HSBC performance and market
context
2009 was a year of unprecedented initiatives by
governments and central banks designed to provide
timely support for global financial markets and
reduce the volatility and turbulence that had
characterised 2008. These actions were largely
successful and contributed to improved market
liquidity, a recovery in market confidence which was
reflected in a broad reduction in credit spreads, and a
re-opening of global capital markets which allowed
banks and corporates alike to raise the equity and
debt capital essential to their future. In determining
remuneration levels for 2009, the Committee took
these events and their context into account. The
Committee also recognised that the actions taken
by governments and central banks were primarily
designed to assist ‘overlent’ banks in developed
markets and that many of the measures applied were
not only of no assistance but were detrimental to
banks such as HSBC with highly liquid, emerging
market-facing banking operations. In particular
HSBC’s retail businesses earned less interest income
on the excess of deposits over lending because of
low interest rates and this reduced profitability when
set against the largely fixed cost base of the retail
infrastructure.
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
HSBC performance and context > Key achievements / Risk management // Executive Director remuneration > Salary
Within this market context, HSBC did not need
taxpayers’ money and its overall financial and non-
financial performance was strong relative to its
peers. This was evident in consistently favourable
assessments of HSBC’s corporate and management
structure and its liquidity framework in regulatory
policy initiatives which explored why some banks
fared better than others during the crisis. HSBC’s
share price since the announcement of its 2008
results has more than doubled and HSBC has
returned to being the most valuable bank, in terms of
market capitalisation, outside mainland China.
Key achievements
The annual financial objectives the Group set itself
for 2009 were achieved, although in some areas they
were below the longer-term targets established. In
the Group’s 2009 performance, particular note was
made of the following:
•
•
•
•
•
•
•
•
the strengthening of the Group’s tier 1 ratio by
250 basis points to 10.8 per cent, exceeding the
target range;
the maintenance of a highly liquid balance sheet
with the ratio of advances to deposits ending
below 80 per cent, notwithstanding the impact
on profit of the low interest rate environment;
the reduction in loan impairment charges in
the US consumer finance business and the
contribution to that reduction made by
management’s decisions to curtail origination
activity progressively from 2007 then finally
close the Consumer Lending branch network
in 2009;
the broad base of strong performances within
the Global Banking and Markets business,
consistent with its continuing strategy;
the successful and accelerated wind-down of
the legacy exit portfolios of asset-backed and
structured credit exposures in the Global
Banking and Markets business;
recovery in shareholders’ equity in line with
expectations, as the available-for-sale portfolio
in the Global Banking and Markets business
recovered value;
the resilient performance of HSBC in Hong
Kong, notwithstanding it is a market
significantly affected by the low interest rate
environment;
effective cost control reflected in the underlying
cost reduction of 4 per cent excluding the
goodwill impairment charge in 2008;
336
•
•
the significant reduction in the Group’s own
credit spread; and
decisive management initiatives taken to address
the causes of the disappointing performances in
certain personal and commercial portfolios in
Latin America and the Middle East.
Key non-financial achievements of the Group in
2009, which reference the objectives set for senior
management in their relevant balanced scorecard
categories, are summarised below:
•
•
•
process objectives focused on efficiency and
qualitative measures which, in turn, affect
financial performance and mitigate risk. The
Group met the target it set for operational losses
as a percentage of revenue and embedded the
HSBC Risk Appetite Framework, establishing
the nature and quantum of risks which the
Group is prepared to accept in undertaking its
activities. The overall management of risk
mitigation was judged to be strong;
progress in meeting customer recommendation
and brand health targets was mixed in a
challenging environment for retail and
commercial banking. The Group met its brand
health target for Personal Financial Services and
customer penetration targets for wealth
insurance, but narrowly missed the brand health
target for Commercial Banking. Customer
recommendation targets were not met; and
regarding the Group’s human capital, HSBC
exceeded its 2009 employee engagement target
as measured in its Global People Survey,
improved on the 2008 score, and exceeded the
global financial sector and global norms scores
for employee engagement in 2009. The target
for the ratio of revenue to staff costs was also
met.
Management of risk
Since 2008, the Group’s Risk function has been
involved in the approval of relevant incentive plans.
Within the Group’s wholesale businesses, where
appropriate, specific conditionality has been applied
to the release of Restricted Shares awarded by way
of deferred bonuses. From 2009, the concept of
imputing the cost of capital in the determination of
bonus funding was being expanded progressively
across HSBC, starting with the Group’s Global
Banking and Markets business.
The Group’s deferral policy for 2009 is
compliant with the Financial Services Authority and
the Financial Stability Board guidelines. Vesting of
Restricted Shares may be subject to forfeiture (claw
A A Flockhart was appointed Chairman
Personal and Commercial Banking and Insurance.
His remit includes overseeing HSBC’s Global
Personal Financial Services, Commercial Banking
and Insurance businesses, HSBC’s Latin American
and African businesses, and most Group functions
including Corporate Sustainability. He continues to
be based in Hong Kong.
S T Gulliver was appointed Chairman, Europe,
Middle East and Global Businesses. In this capacity,
he has assumed overall responsibility for all HSBC’s
businesses across Europe, the Middle East and
Global Private Banking and continues to oversee the
Global Banking and Markets business. S T Gulliver
has become Chairman of HSBC Bank Middle East
Limited. He continues to be based in London.
D J Flint has assumed responsibility for
Compliance in addition to his existing remit for
Finance and Risk. His title has changed to Chief
Financial Officer, Executive Director, Risk and
Regulation, and his role continues to be based in
London.
To reflect the significantly increased
responsibilities and maintain and reinforce a
collegiate executive team, the salaries for two
executive Directors have been adjusted from 2010,
equalising the salaries of D J Flint, S T Gulliver and
A A Flockhart. In addition, with effect from 2010
the employer pension contribution or executive
allowance for D J Flint, A A Flockhart and
S T Gulliver has been equalised at 50 per cent of
annual basic salary.
The Committee also approved an increase
to the salary of the Group Chief Executive,
M F Geoghegan, in light of the international
competitive position and the increased
responsibilities listed above. However,
M F Geoghegan subsequently did not consider it
appropriate to accept such an increase at present.
The non-executive Directors have unanimously
agreed that his remuneration, including salary, will
be brought up to internationally competitive levels
within the next twelve months.
No other salary increases are proposed for
executive Directors.
The table below shows salaries for 2008, 2009
and for 2010. Changes in salaries are applicable
from 1 February 2010.
back) at the sole discretion of the Remuneration
Committee after review by the Committee of all
relevant circumstances.
From 2009, the Group Chief Risk Officer
has provided advice to the Committee on the
implications of the remuneration policy on risk
and risk management. As discussed in ‘Overall
principles’ above, risk mitigation objectives are
included in the balanced scorecard framework.
Economic Profit is also included as a performance
measure for the long-term incentive Performance
Share awards described below.
Further information relating to the Group’s
approach to risk management is set out on page 199.
Executive Director remuneration
Salary
The Committee reviews salary levels for executive
Directors each year.
No increases in salaries were made in 2008 or
2009 other than to reflect promotions to the Board.
In September 2009, HSBC announced that the
Group Chief Executive, M F Geoghegan, would
assume responsibility for the Group’s strategy. In
addition, to underscore that the Group’s strategy of
focusing on emerging markets was most effectively
achieved in Asia, HSBC’s largest emerging market,
it was announced that the principal office of the
Group Chief Executive would be moved to Hong
Kong and, on 1 February 2010, M F Geoghegan
would also succeed V H C Cheng as Chairman of
The Hongkong and Shanghai Banking Corporation
Limited. These changes have now taken place and
M F Geoghegan is now based in Hong Kong.
In support of these changes and the relocation of
the principal office of the Group Chief Executive,
the Group also made complementary executive
management appointments which reflect widened
responsibilities with effect from 1 February 2010.
The changes affecting the executive Directors are set
out below.
V H C Cheng’s focus is on developing HSBC’s
business in China, and he continues to oversee key
mainland China initiatives. He remains an executive
Director of the Board of HSBC Holdings, continues
as Chairman of HSBC Bank (China) Company
Limited and was appointed Chairman of HSBC
Bank (Taiwan) Limited on 21 January 2010. To
complement his new remit, his principal base will
move to mainland China from Hong Kong.
337
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Executive Director remuneration > Salary / Annual bonus / Performance Shares
2010
£000
800
–
1,250
800
Salary
2009
£000
700
1,070
1,250
800
2008
£000
700
1,070
1,250
800
D J Flint ................
M F Geoghegan ....
S K Green .............
S T Gulliver1 .........
HK$000
HK$000
HK$000
V H C Cheng1 .......
A A Flockhart1 ......
M F Geoghegan2 ...
9,300
10,000
13,495
9,300
8,000
–
9,300
8,000
–
1 V H C Cheng joined the Board on 1 February 2008 and
A A Flockhart and S T Gulliver on 1 May 2008. The salaries
shown above for 2008 represent the full year equivalent
salary for these individuals.
2 Currency change reflects the change in location of the
principal office of the Group Chief Executive. 2010 salary is
equivalent to 2009 salary. With effect from 26 January 2010,
in recognition of the relocation to Hong Kong and the
associated additional costs of living that will be incurred, a
fixed allowance of HK$3,767,256 (equivalent to £300,000)
per annum, is payable together with housing and other
benefits in kind that are normal within this location. The
fixed allowance is not pensionable and is not considered as
part of salary in determining the maximum annual bonus
and Performance Share awards.
Annual bonus
In determining annual bonus awards, the Committee
took into account the extent to which the Group’s
annual objectives had been met under the balanced
scorecard approach, the Group’s absolute and
relative performance compared to its peers and
competitive market practice. The individual awards
are fully discretionary rather than formulaic,
enabling a rounded and balanced view of
performance.
In 2009, the Group Chief Executive,
M F Geoghegan, the then Group Finance Director,
D J Flint and the then Chief Executive of Global
Banking and Markets and HSBC Global Asset
Management, S T Gulliver, requested that they not
be considered for a bonus in respect of 2008 in view
of the general financial market conditions. The
Committee decided not to award these individuals
a bonus in respect of 2008 notwithstanding the
performance of HSBC and the wholesale businesses
in relation to their comparators.
As noted above the Group Chairman,
S K Green, at his request, no longer receives an
annual bonus payment. In line with this, no bonus
award is being made to him in respect of 2009.
The awards made in 2010 to the Group Chief
Executive, M F Geoghegan, and the Chief Financial
Officer, Executive Director, Risk and Regulation,
D J Flint, reflect the overall achievements and
performance of the Group under the balanced
scorecard framework as described in ‘HSBC
338
performance and market context’, set within the
context of each role.
The award made to the Chairman, Europe,
Middle East and Global Businesses, S T Gulliver,
reflects the delivery of exceptional performance
within Global Banking and Markets which
contributed pre-tax profits of US$10.5 billion, an
increase of 201 per cent. Robust revenues were
reported in core constituent businesses such as Rates
and Balance Sheet Management which delivered
strong growth. A significant reduction in write-
downs on legacy positions in credit trading,
leveraged and acquisition finance and monoline
exposures also contributed to the strong revenue
performance. Revenues grew faster than costs and
consequently the cost efficiency ratio improved by
29.1 percentage points to 39.1 per cent on an
underlying basis. Global Banking and Markets was
recognised for the continuing success of its emerging
markets-led and financing focused strategy, with
numerous industry awards.
Awards for executive Directors with
responsibilities for Asia reflect robust performance
underpinned by a market-leading share in deposits,
residential mortgages, cards and insurance, within a
challenging environment. In Hong Kong, HSBC
reported a decline in pre-tax profit of 8 per cent on
an underlying basis due to lower revenue from
compressed deposit spreads, partly offset by a
reduced level of loan impairment charges and credit
risk provisions. Overall, customer lending balances
were flat, as higher lending in Personal Financial
Services and Global Banking and Markets was
broadly offset by a decline in Commercial Banking,
reflecting weakened demand for exports. In the Rest
of Asia-Pacific region, HSBC reported an 8 per cent
decline in pre-tax profit on an underlying basis,
reflecting the difficult economic conditions; this
masked, however, a strong contribution from HSBC’s
associates in the region, notably in mainland China.
Bonus awards to be made in 2010 in respect
of 2009 performance, and bonus awards made in
respect of 2008 and 2007, are shown in the table
below. The awards made to executive Directors and
seven Group Managing Directors in respect of 2009
performance will be fully deferred. All executive
Directors’ awards will be fully deferred into awards
of Restricted Shares issued under the HSBC Share
Plan. With the exception of the award for V H C
Cheng, 33 per cent of the executive Directors’
awards will vest on each of the first and second
anniversaries of the date of the award, with the
balance vesting on the third anniversary of the date
of the award. The award for V H C Cheng has a
vesting date three years from the date of the award.
2009 performance1
Cash
£000
Restricted
Shares
£000
–
–
–
–
HK$000
–
–
US$000
–
2,100
4,000
–
9,000
HK$000
15,600
24,000
US$000
–
2008 performance
2007 performance
Cash
£000
–
–
–
–
HK$000
–
–
US$000
–
Restricted
Shares
£000
–
–
–
–
HK$000
18,533
18,705
US$000
–
Cash
£000
800
2,140
1,750
5,592
HK$000
23,864
–
US$000
2,598
Restricted
Shares
£000
–
–
–
3,600
HK$000
9,832
–
US$000
1,184
D J Flint2 ............................
M F Geoghegan2 .................
S K Green3 .........................
S T Gulliver2 ......................
V H C Cheng .....................
A A Flockhart4 ...................
A A Flockhart4 ...................
1 The awards made in respect of 2009 performance will be fully deferred into awards of Restricted Shares, issued under the HSBC Share
Plan. With the exception of the award for V H C Cheng, 33 per cent of the executive Directors’ awards will vest on each of the first and
second anniversaries of the date of the award, with the balance vesting on the third anniversary of the date of the award. The award for
V H C Cheng has a vesting date three years from the date of the award.
2 M F Geoghegan, D J Flint and S T Gulliver requested that they not be considered for a bonus in respect of 2008.
3 At the Chairman’s request, he is not considered for an annual bonus award.
4 The change in currency for A A Flockhart reflects a change of expatriate terms. The 2008 figure is on a gross equivalent basis.
Performance Shares
Under the HSBC Share Plan, executive Directors, as
with other participants in the Plan, are eligible to
receive awards of Performance Shares with a face
value at grant of up to a maximum of seven times
salary. The Group Chairman, S K Green, at his
request is no longer considered for awards of
Performance Shares. The performance conditions
associated with these awards are detailed in
‘Description of performance conditions’ below.
No awards of Performance Shares were made
in 2009, and no awards have been made to date in
2010. Awards may be considered later in 2010,
taking into account performance and the market
context at the time.
The average actual vesting of Performance
Share awards made in 2004, 2005 and 2006 (which
were tested in 2007, 2008 and 2009) has been 23 per
cent of their face value. The awards made in 2006
did not satisfy the earnings per share (‘EPS’)
condition but did satisfy the total shareholder return
(‘TSR’) condition and accordingly, 39.5 per cent of
the TSR element of the award (19.75 per cent of the
overall award) vested. The awards made in 2007
have not satisfied the earnings per share measure.
The extent to which the TSR part of the award will
vest will be determined following the completion of
the three year comparison period on 26 March 2010.
Description of performance conditions
The performance measures for the long-term
incentive awards of Performance Shares under the
HSBC Share Plan remain as follows.
The vesting of awards is based on
three independent performance measures and an
overriding ‘sustained improvement’ judgement by
339
the Committee. The three Group measures are
relative TSR (40 per cent of the award); economic
profit (40 per cent); and growth in EPS (20 per cent).
These measures provide a basis on which to
measure HSBC’s relative and absolute performance
over the long-term taking into account an external
measure of value creation, a measure of the extent
to which the return on capital invested in HSBC is
in excess of a benchmark return and a direct measure
of the profits generated for shareholders.
Awards will not vest unless the Remuneration
Committee is satisfied that HSBC Holdings’
financial performance has shown a sustained
improvement in the period since the award date. In
determining whether HSBC Holdings has achieved
such sustained improvement the Remuneration
Committee will take account of all relevant factors,
in particular, comparisons against the TSR
comparator group in areas such as revenue growth
and mix, cost efficiency, credit performance, cash
return on cash invested, dividends and TSR.
The performance conditions are measured over
a three year performance period and awards forfeited
to the extent that they have not been met.
The performance measures and the targets
described below apply to awards made in 2008
and any awards to be made in the future. The
Remuneration Committee will review annually
whether the performance targets remain appropriate
and challenging, or whether they should be
recalibrated for any future awards, taking into
account factors such as economic expectations,
the industry’s outlook and shareholders’ interests.
The Committee will consult in accordance with
institutional shareholder guidelines on any further
changes proposed to the nature of the performance
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Executive Director remuneration > Performance Shares
measures and their percentage weighting referred to
above.
TSR award
TSR is measured against a comparator group
comprising the largest global banks in the world as
well as other banks against which HSBC competes
for business at a regional and/or local level. These
companies are:
Banco Bradesco
Banco Itau
Banco Santander
Bank of America
Bank of China
Barclays
BBVA
BNP Paribas
Citigroup
Credit Suisse Group
DBS Group
Deutsche Bank
Fortis
ICBC
JP Morgan Chase
Lloyds Banking Group
National Australia Bank
Royal Bank of Canada
Royal Bank of Scotland
Société Générale
Standard Chartered
UBS
UniCredito Italiano
Wells Fargo
During 2008, HBOS and Wachovia merged with
other banks in the comparator group and in 2009 the
remainder of the banking activities of Fortis were
acquired by BNP Paribas, an existing member of
the comparator group. For awards made in 2008,
performance from the point of acquisition will track
that of the acquirer. This approach retains the free
float market capitalisation (‘FFMC’) weighting of
the combined entities. The Committee determined
that the comparator group remains large enough to
be statistically valid and as such it was not necessary
to introduce any replacement banks.
To reflect the fact that the range of market
capitalisations within the comparator group is very
wide, a FFMC weighted method is used to calculate
TSR performance. Under this approach, HSBC’s
out-performance of the comparator group will be
calculated by dividing the total FFMC of all of the
companies that HSBC has outperformed in terms of
TSR by the total FFMC of all of the companies in
the comparator group.
The extent to which the TSR award will vest
will be determined as follows:
Proportion of TSR Award
If HSBC’s TSR outperforms
companies comprising
75 per cent of the total FFMC
50 per cent of the total FFMC
< 50 per cent of the total FFMC
vesting1
100%
20%
nil
1 Vesting will occur in a straight line between 20 per cent and
100 per cent where HSBC’s performance falls between these
incremental steps.
340
Economic profit award
Economic profit (‘EP’) is calculated as the average
annual difference between return on invested capital
and the Group’s benchmark cost of capital and is
expressed as a percentage. EP is a key measure of
shareholder value creation as it rewards management
progressively to the extent that the return on the
capital invested in HSBC by its shareholders is in
excess of a threshold return, which itself exceeds the
Group’s benchmark cost of capital.
For the awards made in 2008 the benchmark
cost of capital was 10 per cent. Return on invested
capital is based on the profit attributable to
shareholders as defined on page 19. The extent to
which the EP award will vest will be determined as
follows:
Average annual EP over
three years
Proportion of EP Award
vesting1
8 per cent or above
< 3 per cent
100%
nil
1 Vesting will occur in a straight line between 0 per cent and
100 per cent where HSBC’s performance falls between these
incremental steps.
Earnings per share award
Growth in EPS is measured on a point to point basis,
by comparing EPS in the third financial year of the
performance period with EPS in the financial year
preceding that in which the award is made. This
approach is aimed at simplifying the use of EPS as
a performance measure and takes into account
feedback received during consultation with
institutional shareholders in 2007/2008.
EPS growth in Year 3 over
the base EPS
Proportion of EPS
award vesting1
28 per cent or above
16 per cent
< 16 per cent
100%
20%
nil
1 Vesting will occur in a straight line between 20% and 100%
where HSBC’s performance falls between these incremental
steps.
If events occur which cause the Remuneration
Committee to consider that a performance condition
has become unfair or impractical in either direction,
the right is reserved to the Remuneration Committee,
if it considers it appropriate, to amend, relax or
waive the condition.
Awards will vest in full and immediately in
cases of death. In the event of redundancy,
retirement on grounds of injury or ill health 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
the performance conditions have been satisfied. In
the event of a change of control, awards will
normally vest immediately and on a time-
apportioned basis to the extent that the performance
conditions have been satisfied. Awards will normally
be forfeited if the participant is dismissed for cause
or resigns from HSBC. In all circumstances the
Committee retains discretion to ensure fair and
reasonable treatment.
Arrangements from 2005 to 2007
Vesting of the awards of Performance Shares made
under the HSBC Share Plan from 2005 to 2007 is
based on two independent measures, relative TSR
and growth in EPS. The performance conditions are
measured over a three-year performance period and
awards forfeited to the extent that they have not been
met. The vesting of 50 per cent of the awards is
based on TSR and the remaining 50 per cent on
growth in EPS.
TSR award
The comparator group of 28 banks for the TSR
award comprises the largest banks in the world,
on the basis of their market capitalisation, their
geographic spread and the nature of their activities:
ABN AMRO1
Banco Santander
Bank of America
Bank of New York
Barclays
BBVA
BNP Paribas
Citigroup
Crédit Agricole
Credit Suisse Group
Deutsche Bank
HBOS1
JP Morgan Chase
Lloyds Banking Group Westpac Banking Corporation
Mitsubishi UFJ Financial Group2
Mizuho Financial Group
Morgan Stanley
National Australia Bank
Royal Bank of Canada
Royal Bank of Scotland
Société Générale
Standard Chartered
UBS
UniCredito Italiano
US Bancorp
Wachovia1
Wells Fargo
1 ABN AMRO, HBOS and Wachovia have delisted since the
start of the performance period for the 2006 and 2007
awards. These comparators have been replaced from the
point of delisting by Fortis, Commonwealth Bank of
Australia and Toronto Dominion Bank respectively. In 2009
the remainder of the banking activities of Fortis were
acquired by BNP Paribas. The treatment of Fortis in the
comparator group will be considered in line with the plan
rules.
2 Mitsubishi UFJ Financial Group Inc was previously known
as Mitsubishi Tokyo Financial Group prior to the
acquisition of UFJ Holdings on 1 October 2005.
The extent to which the TSR award vests is
determined on a sliding scale based on HSBC’s
relative TSR ranking, measured over the three years,
against the comparator group as shown below:
341
If HSBC’s performance
matches
Banks ranking 1st to 7th
Bank ranking 8th
Bank ranking 9th
Bank ranking 10th
Bank ranking 11th
Bank ranking 12th
Bank ranking 13th
Bank ranking 14th
Banks ranking below 14th
Proportion of TSR Award
vesting1
100%
90%
80%
70%
60%
50%
40%
30%
nil
1 Vesting will occur in a straight line where HSBC’s
performance falls between these incremental steps.
Earnings per share award
The method for calculating EPS growth is described
below. This is in line with the approach described in
the 2005, 2006, 2007 and 2008 Directors’
Remuneration Reports, and in the circular containing
the Notice of Annual General Meeting for 2005.
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.
For clarity, this has been set out in graphical form in
the chart below.
g
n
i
t
s
e
V
d
r
a
w
A
S
P
E
f
o
n
o
i
t
r
o
p
o
r
P
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
0%
10%
20%
24%
30%
40%
50%
52%
60%
Total Incremental EPS Delivered
For the EPS element of the award, the base
measure is 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. Incremental EPS will be calculated by
expressing as a percentage of the EPS of the base
year, the difference each year of the three-year
performance period between the EPS of that year
and the EPS of the base year. These percentages will
then be aggregated to arrive at the total incremental
EPS for the performance period. As illustrated in the
table below, an incremental EPS of 51 per cent over
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Executive Directors > Funding / TSR / Pensions / Share ownership / Service contracts / Other directorships // Non-executive Directors
three years would equate to a compound annual
growth rate of 8 per cent.
Illustration of incremental EPS of 51 per cent over
three years.
Percentage difference between:
Year 1 EPS
and Base Year
EPS
Year 2 EPS
and Base Year
EPS
+
Year 3 EPS
and Base year
EPS
=
+
Total
incremental
EPS for the
performance
period
8%
17%
26%
51%
If EPS in any of the Years 1, 2 or 3 is below the
base year, then the percentage difference between
that particular year and the base year is negative.
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 published EPS for the
base year is restated during the performance period
to adjust for changes in accounting standards, that
restated EPS will be used for the purposes of the
EPS performance condition.
In addition, awards will not vest unless the
Remuneration Committee is satisfied that HSBC
Holdings’ financial performance has shown a
sustained improvement in the period since the award
date. In determining whether HSBC Holdings has
achieved a sustained improvement in performance,
the Remuneration Committee will take account of all
relevant factors but in particular comparisons against
the comparator group in areas such as revenue
growth and mix, cost efficiency, credit performance,
cash return on cash invested, dividend performance
and TSR.
If events occur which cause the Remuneration
Committee to consider that a performance condition
has become unfair or impractical in either direction,
the right is reserved to the Remuneration Committee,
if it considers it appropriate, to amend, relax or
waive the condition.
Awards will vest in full immediately in cases
of death. In the event of redundancy, retirement on
grounds of injury or ill health, early retirement
by agreement, 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 the
performance conditions have been satisfied. In the
event of a change of control, awards will normally
vest immediately and on a time-apportioned basis to
the extent that the performance conditions have been
342
satisfied. Awards will normally be forfeited if the
participant is dismissed for cause or resigns from
HSBC. In all circumstances the Committee retains
discretion to ensure fair and reasonable treatment.
Funding
The dilution limits set out in the HSBC share plans
comply with the Association of British Insurers’
guidelines. To date, all vesting awards of
Performance Shares and Restricted Shares under the
HSBC Share Plan have been satisfied by the transfer
of existing shares. To create additional core tier 1
capital and retain funds within HSBC, the Board has
agreed that new shares may be issued to satisfy the
vesting of awards of Restricted and Performance
Shares that cannot be satisfied from shares already
held by employee benefit trusts commencing in
2011.
Total shareholder return
Pursuant to the Directors’ Remuneration Report
Regulations 2002, the graph below shows HSBC’s
TSR performance against the FTSE 100 Index, for
the five-year period ended 31 December 2009.
The FTSE 100 Index has been chosen as this is a
recognised broad equity market index of which
HSBC Holdings is a member.
HSBC TSR and FTSE 100 Index
160%
150%
140%
130%
120%
110%
100%
90%
Dec 2004
D ec 2005
D ec 2006
Dec 2007
Dec 2008
Dec 2009
HSBC TSR
FTSE 100
Source: IDC
Pensions
The normal retirement age for executive Directors
is 65 with the exception of V H C Cheng, for whom
no retirement age is specified in keeping with
local legislation. The pension entitlements of the
executive Directors for 2009 are set out on page 346.
Share ownership guidelines
To ensure appropriate alignment with shareholders,
HSBC operates a formal share ownership policy,
expressed as a number of shares, for executive
Directors and the Group Managing Directors. The
Committee considers that material share ownership
by executives creates a community of interest
between senior management and shareholders.
To demonstrate further alignment with
shareholders the share ownership guidelines
were significantly increased in 2008 and
will be reviewed during 2010 in light of the
recommendations in the Walker Review of corporate
governance.
Under the existing guidelines, the shareholding
is expected to be achieved within five years of the
executive’s appointment or three years from the date
of approval of amendments to the HSBC Share Plan
on 30 May 2008, whichever is the later. The
executive Directors and Group Managing Directors
are now required to build and retain the following
shareholdings:
Number of shares1
held at 31
December
2009
to be held
V H C Cheng ....................................
D J Flint ............................................
A A Flockhart ...................................
M F Geoghegan ................................
S K Green .........................................
S T Gulliver ......................................
Group Managing Directors ...............
200,000
200,000
200,000
600,000
600,000
200,000
125,000
1,063,646
155,326
846,817
724,757
901,211
3,311,056
–2
1 For the purposes of the guidelines, unvested awards of
Restricted Shares are included. Unvested Performance
Share awards are excluded.
2 All of the Group Managing Directors exceed the expected
holdings.
The Remuneration Committee monitors
compliance with the share ownership guidelines
annually. The Committee will have full discretion
in determining any penalties in cases of non-
compliance, which could include a reduction of
future awards of long-term incentives and/or an
increase in the proportion of the annual bonus that
is deferred into shares.
Service contracts
HSBC’s policy is to employ executive Directors on
one-year rolling contracts although longer initial
terms may be approved by the Remuneration
Committee if considered appropriate. The
Remuneration Committee will, consistent with
the best interests of the Group, seek to minimise
termination payments.
S K Green, M F Geoghegan, V H C Cheng,
D J Flint, A A Flockhart and S T Gulliver have
rolling service contracts with a notice period of
12 months for either party.
343
In the event of early termination of employment
other than for cause, of S K Green, M F Geoghegan,
V H C Cheng, D J Flint, A A Flockhart or
S T Gulliver, HSBC is entitled to make a payment
in lieu of notice equal to base salary, pension
entitlements and other benefits.
D J Flint, A A Flockhart and S T Gulliver will be
eligible to be considered for a bonus on termination
of employment by HSBC other than for cause.
S T Gulliver will also be eligible to be considered for
a bonus upon termination of employment by either
party within 12 months following a change of control.
On termination of employment by HSBC, other
than for cause (or termination by either party within
12 months following a change of control), S K Green
and M F Geoghegan will be eligible for a bonus
calculated as not less than the average of the
previous two years of bonus payments received,
pro-rated for any part-year worked to termination.
Dates of service contracts – executive Directors
V H C Cheng .....................................
D J Flint .............................................
A A Flockhart ....................................
M F Geoghegan .................................
S K Green ...........................................
S T Gulliver .......................................
Other directorships
Contract date
29 August 2008
14 October 2008
2 December 2008
26 February 2010
28 February 2008
5 September 2008
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 nor the chairmanship of such a
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 HSBC, unless
otherwise approved by the Remuneration
Committee. D J Flint has elected to donate his fees
as a non-executive Director of BP p.l.c. to charity.
S K Green was appointed to the Supervisory Board
of BASF SE on 30 April 2009 and has elected to
donate his fees to charity.
Non-executive Directors
Non-executive Directors are appointed for fixed
terms not exceeding three years, subject to their
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Non-executive Directors > Fees // Directors’ 2009 remuneration
re-election by shareholders at Annual General
Meetings. Non-executive directors have no service
contract and are not eligible to participate in HSBC’s
share plans. Current non-executive Directors’ terms
of appointment will expire as follows:
•
in 2011, S A Catz, J D Coombe, J W J Hughes-
Hallett, W S H Laidlaw and N R N Murthy;
•
•
in 2012, M K T Cheung, J R Lomax,
S M Robertson, J L Thornton and Sir Brian
Williamson; and
in 2013, R A Fairhead and G Morgan.
J L Durán, W K L Fung and Sir Mark Moody-
Stuart will retire at the Annual General Meeting in
2010.
Fees
Non-executive Directors’ fees are regularly reviewed
and compared with other large international
companies. The current fee, which was approved
by shareholders in 2006, is £65,000 per annum.
A fee of £30,000 per annum is payable to the
senior independent non-executive Director. In
addition, non-executive Directors received the
following fees for service on Board Committees:
Fees – non-executive Directors
Chairman, Group Audit Committee ...................... £50,000 p.a.
Member, Group Audit Committee ........................ £20,000 p.a.
During 2009, 8 meetings of the Group Audit Committee were held.
Chairman, Remuneration Committee .................... £40,000 p.a.
Member, Remuneration Committee ...................... £20,000 p.a.
During 2009, 7 meetings of the Remuneration Committee were held.
Chairman, Nomination Committee ....................... £30,000 p.a.
Member, Nomination Committee .......................... £20,000 p.a.
During 2009, 3 meetings of the Nomination Committee were held.
Chairman, Corporate Sustainability Committee ... £30,000 p.a.
Member, Corporate Sustainability Committee ...... £20,000 p.a.
During 2009, 5 meetings of the Corporate Sustainability
Committee were held.
In line with the recommendations of the Walker
Review, the Board approved the formation of a
separate Group Risk Committee with effect from
26 February 2010. A fee of £40,000 per annum will
be payable to the Chairman of the Group Risk
Committee and a fee of £20,000 per annum will be
payable to the Members of the Committee. As a
consequence, the fee for the Chairman of the Group
Audit Committee will reduce to £40,000 per annum.
344
Directors’ 2009 remuneration
The remuneration of the Group Chairman and executive Directors of HSBC Holdings for 2009 was as follows:
V H C Cheng
2009
20081
D J Flint
2009
2008
A A Flockhart M F Geoghegan
2008
2009
20081
2009
S K Green
2009
2008
S T Gulliver
2009
20081
£000
(Audited)
Salary .........................
Allowances2 ...............
Benefits in kind2,3 ......
(Unaudited)
Bonus (deferred)4 ....... 1,240
769
191
663
(Unaudited)
Total remuneration5 ... 2,863
(Audited)
Total emoluments6 ..... 1,623
US$000
(Unaudited)
Total remuneration5 ... 4,466
(Audited)
Total emoluments6 ..... 2,532
534
67
545
700
394
8
700
394
13
662
–
437
229
–
355
1,070
548
57
1,070
544
53
1,250
8
4
1,250
8
7
800
8
18
533
5
9
1,639
2,100
–
1,908
1,655
4,000
–
–
–
9,000
–
2,785
3,202
1,107
3,007
2,239
5,675
1,667
1,262
1,265
9,826
547
1,146
1,102
1,107
1,099
584
1,675
1,667
1,262
1,265
826
547
5,108
4,995
2,030
4,691
4,106
8,852
3,057
1,969
2,320 15,327
1,003
2,102
1,719
2,030
1,714
1,071
2,613
3,057
1,969
2,320
1,288
1,003
1 The comparative emoluments figures in respect of 2008 are for the period from the date of appointment of the Director (V H C Cheng,
1 February 2008; and A A Flockhart and S T Gulliver, 1 May 2008).
2 Allowances include an executive allowance paid to fund personal pension arrangements and a company car allowance. Following the
categorisation of the company car benefit in 2009 as an allowance and not a benefit in kind, the comparative figures for 2008 for
D J Flint, M F Geoghegan, S K Green and S T Gulliver have been adjusted accordingly.
3 Benefits in kind include provision of medical insurance, other insurance cover, accountancy advice and travel assistance. V H C Cheng
and A A Flockhart receive housing and other benefits in kind that are normal within the location in which they are employed.
4 These deferred bonuses represent 100 per cent of the annual bonus in respect of 2009, all of which will be deferred into awards of HSBC
Holdings Restricted Shares. See page 338 for further details of the deferral and vesting arrangements.
5 Total remuneration, pursuant to the UK Listing Rules, includes deferred bonuses.
6 Total emoluments, pursuant to the UK Companies Act 2006, exclude the annual bonus that has been deferred and is not receivable for at
least a further 12 months.
The total of fees paid to each of the non-executive Directors of HSBC Holdings for 2009, being emoluments for
the purposes of the Companies Act 2006, is as follows:
(Audited)
S A Catz ................................................................................................................................................
M K T Cheung1 .....................................................................................................................................
J D Coombe ..........................................................................................................................................
J L Durán ..............................................................................................................................................
R A Fairhead .........................................................................................................................................
W K L Fung2 .........................................................................................................................................
J W J Hughes-Hallett ............................................................................................................................
W S H Laidlaw .....................................................................................................................................
J R Lomax3 ...........................................................................................................................................
Sir Mark Moody-Stuart ........................................................................................................................
G Morgan ..............................................................................................................................................
N R N Murthy .......................................................................................................................................
S M Robertson ......................................................................................................................................
J L Thornton4 ........................................................................................................................................
Sir Brian Williamson ............................................................................................................................
Total ......................................................................................................................................................
Total (US$000) .....................................................................................................................................
2009
£000
65
89
105
65
135
132
105
85
82
125
85
85
115
1,040
95
2,408
3,756
2008
£000
43
–
105
65
127
122
105
77
5
125
85
45
115
89
95
1,203
2,206
1 Appointed a Director of HSBC Holdings on 1 February 2009. Includes fees as a non-executive Director and member of the Audit
Committee of Hang Seng Bank Limited.
2 Includes fees as non-executive Deputy Chairman of The Hongkong and Shanghai Banking Corporation Limited.
3 Appointed a Director of HSBC Holdings on 1 December 2008. The comparative figure in respect of 2008 is for the period from the date
of appointment.
4 Appointed a Director of HSBC Holdings on 1 December 2008. The comparative figure in respect of 2008 is for the period from the date
of appointment as a Director. Includes fees as non-executive Chairman of HSBC North America Holdings Inc.
345
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Pensions / Share plans
Pensions
(Audited)
V H C Cheng is a member of the Hong Kong Special
Administrative Region Mandatory Provident Fund
(‘MPF’) and received an executive allowance of
25 per cent of annual basic salary during 2009, less
the mandatory contributions to the MPF by both the
employer and employee, to fund personal pension
arrangements (HK$2,313,000). During 2009, the
mandatory employer contribution to the MPF in
respect of Mr Cheng was HK$12,000.
D J Flint received an executive allowance
during 2009 of 55 per cent of annual basic salary to
fund personal pension arrangements (£385,000).
From 1 February 2010 this executive allowance will
be 50 per cent of annual basic salary.
A A Flockhart received employer contributions
during 2009 of 40 per cent of annual basic salary into a
personal pension plan (HK$3,200,000). From
1 February 2010 employer contributions will be
equivalent to 50 per cent of annual basic salary.
Defined Benefit Pension Arrangements
Accrued
annual
pension at
31 December
Increase in
accrued
pension
during
Increase in
accrued
pension
during 2009,
excluding
any increase
for inflation
£000
2009
£000
A A Flockhart2 .
S K Green .........
S T Gulliver5 .....
2009
£000
270
711
–
M F Geoghegan received an executive
allowance during 2009 of 50 per cent of annual
basic salary to fund personal pension arrangements
(£535,000). No employer contribution was made to
the HSBC Asia Holdings Pension Plan in 2009. (In
2008, an employer contribution of £225,000 was
made arising entirely from a bonus sacrifice in
respect of 2007.)
S K Green ceased membership of the HSBC Bank
(UK) Pension Scheme on 5 April 2006. Since 6 April
2006, Mr Green has been entitled to receive benefits
from an Employer Funded Retirement Benefits Scheme
which together with entitlements from the HSBC Bank
(UK) Pension Scheme will provide benefits to
Mr Green that will be broadly comparable to an accrual
rate of one-thirtieth of pensionable salary for each year
of pensionable service.
S T Gulliver received employer contributions
during 2009 of 30 per cent of annual basic salary
into a personal pension plan (£240,000). From
1 February 2010 employer contributions will be
equivalent to 50 per cent of annual basic salary.
Transfer
value
of accrued
pension at
31 December
20081
£000
Transfer
value
of accrued
pension at
31 December
20091
£000
Increase of
transfer value
of accrued
pension (less
personal
contributions)
in 20091
£000
Transfer value
(less personal
contributions) at
31 December 2009
relating to increase
in accrued pensions
during 2009,
excluding any
increase for inflation1
£000
163
424
83
6
42
2
4,644
17,716
2,749
4,863
19,119
–
219
1,403
125
100
1,121
–
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 A A Flockhart ceased accrual of pension benefits in the International Staff Retirement Benefits Scheme (‘ISRBS’) on 30 November 2008
and he has deferred commencement of his pension. The ISRBS retains a liability for a contingent spouse’s pension of £131,655 per
annum as at 31 December 2009.
3 A A Flockhart and S T Gulliver received increases for inflation to their accrued pensions on 1 January 2009 of 4.2 per cent, based on
the increase in the UK Retail Prices Index over the year to 31 October 2008.
4 S K Green’s total accrued pension received no increase in respect of inflation in 2009. The part of S K Green’s pension payable from the
HSBC Bank (UK) Pension Scheme receives an annual increase in line with the UK Government’s statutory revaluation order for 2009,
which is based on the increase in the UK Retail Prices Index over the last year to 30 September 2009. As this was negative, no increase
was applied. The additional accrual of benefits is provided by the Employer Funded Retirement Benefits Scheme.
5 S T Gulliver ceased accrual of pension benefits in the ISRBS on 31 March 2006 and at that time deferred commencement of his pension.
S T Gulliver commuted all his benefits out of the ISRBS on 31 May 2009 except for a contingent spouse’s pension. A commutation lump
sum of £2,743,437 was paid to S T Gulliver in lieu of his entire pension. The ISRBS retains a contingent spouse’s liability pension of
£63,563 per annum as at 31 December 2009. After 31 May 2009, S T Gulliver stopped accruing pension benefits, and as such he is no
longer eligible to take transfers from the Scheme in respect of any spouse’s liability.
The following table shows unfunded pension
payments, in respect of which provision has been
made, during 2009 to five former Directors of HSBC
Holdings plc.
B H Asher ...................................
C F W de Croisset ......................
R Delbridge ................................
Sir Brian Pearse ..........................
Sir William Purves .....................
2009
£
101,858
247,115
146,507
61,095
107,827
2008
£
97,752
221,100
140,601
58,632
103,481
664,402
621,566
346
The payments in respect of R Delbridge and
Sir Brian Pearse were made by HSBC Bank plc as
former directors of that bank. The payment in
respect of C F W de Croisset was made by HSBC
France as a former director of that bank.
HSBC Holdings savings-related share option plans
(Audited)
HSBC Holdings ordinary shares of US$0.50
Share plans
(Audited)
At 31 December 2009, the undernamed Directors
held options and awards of Performance Shares and
Restricted Shares to acquire the number of HSBC
Holdings ordinary shares set against their respective
names.
Exercise price (£)
At
1 Jan
2009
At
31 Dec
2009
Date of
award
Exercisable
from1
until
D J Flint ................ 25 Apr 2007 7.0872
A A Flockhart ....... 25 Apr 2007 7.0872
–
A A Flockhart ....... 29 Apr 2009
6.17602
6.17602
3.3116
1 Aug 2012 31 Jan 2013
1 Aug 2010 31 Jan 2011
1 Aug 2014 31 Jan 2015
Adjust-
ment
for rights
issue
Awarded
during the
year
340
196
–
–
–
4,529
At
1 Jan
2009
2,310
1,332
–
At
31 Dec
2009
2,650
–3
4,529
The HSBC Holdings savings-related share option plans are all-employee share plans under which eligible HSBC employees may be
granted options to acquire HSBC Holdings ordinary shares. Employees may make contributions of up to £250 (or equivalent) each month
over a period of one, three or five years which may be used on the first, third or fifth anniversary of the commencement of the relevant
savings contract, at the employee’s election, to exercise the options. The plans help align the interests of employees with the creation of
shareholder value and, as such, exercise of the options is not subject to any performance conditions. The options were awarded for nil
consideration and are exercisable at a 20 per cent discount to the average market value of the ordinary shares on the five business days
immediately preceding the invitation date. No options lapsed during the year. There are no performance criteria conditional upon which
the outstanding options are exercisable and there have been no variations to the terms and conditions since the awards were made. The
market value per ordinary share at 31 December 2009 was £7.088. The highest and lowest market values per ordinary share during the
year were £7.612 and £3.0413. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the
relevant date. Under the Securities and Futures Ordinance of Hong Kong, the options are categorised as unlisted physically settled equity
derivatives.
1 May be advanced to an earlier date in certain circumstances, e.g. retirement.
2 Adjusted for rights issue.
3 Options lapsed on 29 April 2009 following closure of the associated savings-related account by the Director.
Awards of Performance Shares
HSBC Share Plan
(Audited)
HSBC Holdings ordinary shares of US$0.50
Year in
which
awards
may vest
Date of
award
Awards
held at
1 Jan
2009
Awards vested during
year1,2,3
Number
Monetary
value
£000
Adjustment
for rights
issue
V H C Cheng .......................... 6 Mar 2006
5 Mar 2007
3 Jun 2008
D J Flint .................................. 6 Mar 2006
5 Mar 2007
3 Jun 2008
A A Flockhart ......................... 6 Mar 2006
5 Mar 2007
3 Jun 2008
M F Geoghegan ...................... 6 Mar 2006
5 Mar 2007
3 Jun 2008
S K Green ............................... 6 Mar 2006
5 Mar 2007
3 Jun 2008
S T Gulliver ............................ 6 Mar 2006
5 Mar 2007
3 Jun 2008
21,722
–
–
43,444
–
–
16,291
–
–
54,305
–
–
67,881
–
–
27,152
–
–
95
–
–
191
–
–
71
–
–
238
–
–
298
–
–
119
–
–
13,927
27,156
19,661
27,854
40,682
56,696
10,445
18,089
19,333
34,817
92,458
133,237
43,521
69,344
155,915
17,409
20,092
8,423
2009
2010
2011
2009
2010
2011
2009
2010
2011
2009
2010
2011
2009
2010
2011
2009
2010
2011
92,689
180,739
130,852
185,378
270,755
377,343
69,518
120,395
128,675
231,724
615,351
886,755
289,653
461,513
1,037,692
115,861
133,725
56,063
347
Awards
held at
31 Dec
20092
–3
218,035
157,852
–3
326,626
455,210
–3
145,238
155,227
–3
742,334
1,069,746
–3
556,750
1,251,829
–3
161,319
67,631
H S B C H O L D I N G S P L C
Directors’ Remuneration Report (continued)
Share plans // Statement of Directors’ Responsibilities
Vesting of these awards of Performance Shares is subject to the achievement of the corporate performance conditions set out on pages 339
to 342. Interests in awards of Performance Shares are categorised under the Securities and Futures Ordinance of Hong Kong as the
interests of a beneficiary of a trust. No awards of Performance Shares were made in 2009.
1 A part of the total shareholder return element of the performance conditions was met and the related part of the award vested on 8 April
2009, when the market value per share was £4.37, as follows: V H C Cheng, 21,394 shares; D J Flint, 42,788 shares; A A Flockhart,
16,045 shares; M F Geoghegan, 53,485 shares; S K Green, 66,856 shares; and S T Gulliver, 26,742 shares. Awards representing the
fourth interim dividend for 2008 vested on 6 May 2009, when the market value per share was £5.39, as follows: V H C Cheng, 328
shares; D J Flint, 656 shares; A A Flockhart, 246 shares; M F Geoghegan, 820 shares; S K Green, 1,025 shares; and S T Gulliver, 410
shares. The market value per share on the date of the award, 6 March 2006, was £9.89.
2 Includes additional shares arising from scrip dividends.
3 The earnings per share element and part of the total shareholder return element of the performance conditions were not met and, under
the terms of the Plan, the following awards were forfeited on 8 April 2009: V H C Cheng, 86,931 shares; D J Flint, 173,862 shares;
A A Flockhart, 65,199 shares; M F Geoghegan, 217,328 shares; S K Green, 271,659; and S T Gulliver, 108,664 shares. As a
consequence, the fourth interim dividend for 2008 did not accrue on the forfeited shares.
Awards of Restricted Shares
HSBC Share Plan
(Audited)
HSBC Holdings ordinary shares of US$0.50
Year in
which
awards
may vest
Awards
held on
1 Jan
2009
Date of
award
V H C Cheng ....... 3 Mar 2008
2 Mar 2009
A A Flockhart ..... 31 Oct 2007
3 Mar 2008
2 Mar 2009
2011
2012
2010
2011
2012
S T Gulliver ........ 6 Mar 2006
20093
5 Mar 2007 2009-20103
3 Mar 2008 2009-20113
86,158
–
53,568
12,488
–
150,421
319,934
480,237
Number
–
416,662
–
–
420,528
–
–
–
Awards made during
year1
Awards vested during
year2
Monetary
value
£000
Number
Monetary
value
£000
Adjustment
for rights
issue
Awards
held at
31 Dec
20092
–
1,662
–
–
1,678
–
–
–
–
–
–
–
–
153,1934
163,8744
161,3994
–
–
–
–
–
6114
6544
6444
12,945
61,471
103,936
493,545
8,048
1,877
62,041
–
23,894
48,345
64,621
15,064
498,124
–
191,842
388,157
Vesting of Restricted Share awards is normally subject to the Director remaining an employee on the vesting date. The vesting date may be
advanced to an earlier date in certain circumstances, e.g. death or retirement. Interests in Restricted Share awards granted in 2007 and
2008 are categorised under the Securities and Futures Ordinance of Hong Kong as the interests of a beneficiary of a trust and interests in
Restricted Share awards granted in 2009 are categorised under the Securities and Futures Ordinance of Hong Kong as the interests of a
beneficial owner.
1 At the date of the award, 2 March 2009, the market value per share was £3.99.
2 Includes additional shares arising from scrip dividends.
3 33 per cent of the award vests on each of the first and second anniversaries of the date of the award, with the balance vesting on the
third anniversary of the date of the award.
4 At the date of vesting, 2 March 2009, the market value per share was £3.99. The market value per share on the dates of the awards,
6 March 2006, 5 March 2007 and 3 March 2008, was £9.89, £8.96 and £7.90 respectively.
On behalf of the Board
1 March 2010
Sir Mark Moody-Stuart, Chairman of Remuneration Committee
348
H S B C H O L D I N G S P L C
Statement of Directors’ Responsibilities in respect of the Annual Report and
Accounts 2009 and the Financial Statements
The following statement, which should be read in conjunction with the Auditor’s statement of their responsibilities
set out in their report on pages 350 and 351, is made with a view to distinguishing for shareholders the respective
responsibilities of the Directors and of the Auditor in relation to the financial statements.
The Directors are responsible for preparing the Annual Report, the consolidated financial statements of HSBC
Holdings and its subsidiaries (the ‘Group’) and holding company financial statements for HSBC Holdings (the
‘parent company’) in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent company financial statements for each
financial year. The Directors are required to prepare the Group financial statements in accordance with IFRSs as
adopted by the EU and have elected to prepare the parent company financial statements on the same basis. The
Directors 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 Group and parent company financial statements are required by law and IFRSs as adopted by the EU to
present fairly the financial position of the Group and the parent company and the performance for that period; the
Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act
to financial statements giving a true and fair view are references to their achieving a fair presentation. In addition, in
order to meet certain US requirements, HSBC is required to present its financial statements in accordance with IFRSs
as adopted by the International Accounting Standards Board (‘IASB’). Currently, there are no differences in
application to HSBC between IFRSs endorsed by the EU and IFRSs issued by the IASB.
In preparing each of the Group and parent company financial statements, the Directors are required to:
•
select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent; and
•
state whether they have been prepared in accordance with IFRSs as adopted by the EU.
The Directors are required to prepare the financial statements on the going concern basis unless it is not
appropriate. Since the Directors are satisfied that the Group and parent company have the resources to continue in
business for the foreseeable future, the financial statements continue to be prepared on the going concern basis.
The Directors have responsibility for ensuring that sufficient accounting records are kept that disclose with
reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its
financial statements comply with the Companies Act 2006.
The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the
Directors also have responsibility for preparing a Directors’ Report, Directors’ Remuneration Report and the
Corporate Governance statement on pages 294 to 348 that comply with that law and those regulations.
The Directors have responsibility for the maintenance and integrity of the Annual Report and Accounts as they
appear on the company’s website. Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
The Directors, the names of whom are set out in the ‘Report of Directors: Governance’ section on page 294 of
this Annual Report, confirm to the best of their knowledge:
•
•
in accordance with rule 4.1.12(3)(a) of the Disclosure and Transparency Rules, the consolidated financial
statements, which have been prepared in accordance with IFRSs as issued by the IASB and as endorsed by the
EU, have been prepared in accordance with the applicable set of accounting standards and give a true and fair
view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in
the consolidation taken as a whole; and
the management report represented by the Report of the Directors has been prepared in accordance with rule
4.1.12(3)(b) of the Disclosure and Transparency Rules, and includes a fair review of the development and
performance of the business and the position of the Group and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks and uncertainties that the Group faces.
On behalf of the Board, S K Green Group Chairman
1 March 2010
349
H S B C H O L D I N G S P L C
Independent Auditor’s Report to the Members of HSBC Holdings plc
We have audited the Group and parent company financial statements of HSBC Holdings plc for the year ended
31 December 2009 set out on pages 353 to 471. The financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the EU and as
issued by the International Accounting Standards Board (‘IASB’) and, as regards the parent company financial
statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006 and, in respect of the separate opinion in relation to IFRSs as issued by the IASB, on terms that
have been agreed. Our audit work has been undertaken so that we might state to the company’s members those
matters we are required to state to them in an auditors’ report and in respect of the separate opinion in relation to
IFRSs as issued by IASB, those matters that we have agreed to state to them in our report, and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company
and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
As explained more fully in the Directors’ Responsibilities Statement set out on page 349, the Directors are
responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit the financial statements in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (‘APB’s)
Ethical Standards for Auditors.
Scope of the audit opinion
A description of the scope of an audit of financial statements is provided on the APB’s website at
www.frc.org.uk/apb/scope/UKP.
Opinion
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs
as at 31 December 2009 and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by
the EU and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006
and, as regards the Group financial statements, Article 4 of the IAS Regulation.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in Note 1(a) to the Group financial statements, the Group in addition to complying with its legal
obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the IASB.
In our opinion, the Group financial statements comply with IFRSs as issued by the IASB.
Opinion on other matters prescribed by the Companies Act, 2006
In our opinion:
•
•
the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006; and
the information given in the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
350
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not
in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
•
•
•
• we have not received all the information and explanations we require for our audit.
•
•
Under the Listing Rules of the Financial Services Authority, we are required to review:
the directors’ statement, set out on page 316, in relation to going concern; and
the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions
of the June 2008 Combined Code specified for our review.
Brendan Nelson, Senior Statutory Auditor
For and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
London, England
1 March 2010
351
H S B C H O L D I N G S P L C
Financial Statements
Contents / Consolidated income statement
Page
Page
Financial Statements
Consolidated income statement .....................
Consolidated statement of comprehensive
income .......................................................
Consolidated balance sheet ...........................
Consolidated statement of cash flows ............
Consolidated statement of changes in
equity .........................................................
HSBC Holdings balance sheet ......................
HSBC Holdings statement of cash flows .......
HSBC Holdings statement of changes in
equity .........................................................
Footnotes to Financial Statements .............
Notes on the Financial Statements
1 Basis of preparation ...............................
2 Summary of significant accounting
policies ...............................................
3 Net income/(expense) from financial
instruments designated at fair value ...
4 Gains arising from dilution of interests
in associates ........................................
5 Net earned insurance premiums .............
6 Net insurance claims incurred and
movement in liabilities to
policyholders ......................................
7 Net operating income .............................
8 Employee compensation and benefits ....
9 Auditors’ remuneration ..........................
10 Share-based payments ...........................
11 Tax expense ...........................................
12 Dividends ...............................................
13 Earnings per share ..................................
14 Segmental analysis .................................
15 Analysis of financial assets and
liabilities by measurement basis .........
353
354
355
356
357
360
361
362
364
365
369
385
386
386
387
388
388
400
401
407
410
411
412
418
16 Trading assets ........................................
17 Financial assets designated at fair
value ...................................................
18 Derivatives .............................................
19 Financial investments ............................
20 Transfers of financial assets not
qualifying for de-recognition .............
21 Interests in associates and joint
ventures ..............................................
22 Goodwill and intangible assets ..............
23 Property, plant and equipment ...............
24 Investments in subsidiaries ....................
25 Other assets ............................................
26 Trading liabilities ...................................
27 Financial liabilities designated at fair
value ...................................................
28 Debt securities in issue ..........................
29 Other liabilities ......................................
30 Liabilities under insurance contracts .....
31 Provisions ..............................................
32 Subordinated liabilities ..........................
33 Maturity analysis of assets and
liabilities .............................................
34 Foreign exchange exposures ..................
35 Assets charged as security for
liabilities and collateral accepted as
security for assets ...............................
36 Minority interests ...................................
37 Called up share capital and other equity
instruments .........................................
38 Notes on the statement of cash flows .....
39 Contingent liabilities, contractual
commitments and guarantees .............
40 Lease commitments ...............................
41 Rights issue ............................................
42 Litigation ...............................................
43 Related party transactions ......................
44 Events after the balance sheet date ........
422
423
424
428
431
432
434
439
442
444
445
445
446
447
447
450
450
454
455
456
457
457
461
463
465
466
467
468
471
352
Consolidated income statement for the year ended 31 December 2009
Interest income .............................................................................................
Interest expense ............................................................................................
Net interest income .......................................................................................
Fee income ....................................................................................................
Fee expense ...................................................................................................
Net fee income ..............................................................................................
Trading income excluding net interest income ............................................
Net interest income on trading activities ......................................................
Net trading income .......................................................................................
Changes in fair value of long-term debt issued and related derivatives ......
Net income/(expense) from other financial instruments designated
at fair value ..............................................................................................
Net income/(expense) from financial instruments designated at fair value
Gains less losses from financial investments ...............................................
Gains arising from dilution of interests in associates ..................................
Dividend income ...........................................................................................
Net earned insurance premiums ...................................................................
Gains on disposal of French regional banks ................................................
Other operating income ................................................................................
Total operating income ..............................................................................
Net insurance claims incurred and movement in liabilities to
Notes
2009
US$m
62,096
(21,366)
40,730
21,403
(3,739)
17,664
6,236
3,627
9,863
(6,247)
2,716
(3,531)
520
–
126
10,471
–
2,788
78,631
3
4
5
2008
US$m
91,301
(48,738)
42,563
24,764
(4,740)
20,024
847
5,713
6,560
6,679
(2,827)
3,852
197
–
272
10,850
2,445
1,808
88,571
2007
US$m
92,359
(54,564)
37,795
26,337
(4,335)
22,002
4,458
5,376
9,834
2,812
1,271
4,083
1,956
1,092
324
9,076
–
1,439
87,601
policyholders ...........................................................................................
6
(12,450)
(6,889)
(8,608)
Net operating income before loan impairment charges and
other credit risk provisions ...................................................................
Loan impairment charges and other credit risk provisions ..........................
Net operating income .................................................................................
Employee compensation and benefits ..........................................................
General and administrative expenses ...........................................................
Depreciation and impairment of property, plant and equipment .................
Goodwill impairment ....................................................................................
Amortisation and impairment of intangible assets .......................................
7
7
8
23
22
22
Total operating expenses ............................................................................
Operating profit ..........................................................................................
Share of profit in associates and joint ventures ............................................
21
Profit before tax ..........................................................................................
Tax expense ..................................................................................................
11
Profit for the year .......................................................................................
Profit attributable to shareholders of the parent company ...........................
Profit attributable to minority interests ........................................................
Basic earnings per ordinary share1 ...............................................................
Diluted earnings per ordinary share1 ............................................................
13
13
For footnote, see page 364.
66,181
(26,488)
39,693
(18,468)
(13,392)
(1,725)
–
(810)
(34,395)
5,298
1,781
7,079
(385)
6,694
5,834
860
81,682
(24,937)
56,745
(20,792)
(15,260)
(1,750)
(10,564)
(733)
(49,099)
7,646
1,661
9,307
(2,809)
6,498
5,728
770
US$
0.34
0.34
US$
0.41
0.41
78,993
(17,242)
61,751
(21,334)
(15,294)
(1,714)
–
(700)
(39,042)
22,709
1,503
24,212
(3,757)
20,455
19,133
1,322
US$
1.44
1.42
The accompanying notes on pages 365 to 471, the audited sections of ‘Report of the Directors: Risk’ on pages 196 to 293, ‘Critical
accounting policies’ on pages 61 to 65 and the audited sections of ‘Report of the Directors: Impact of Market Turmoil’ on pages 151 to
195 form an integral part of these financial statements.
353
H S B C H O L D I N G S P L C
Financial Statements (continued)
Consolidated statement of comprehensive income / Consolidated balance sheet
Consolidated statement of comprehensive income for the year ended 31 December 2009
2009
2008
Profit for the year .....................................................................................................
Other comprehensive income/(expense)
Available-for-sale investments ................................................................................
– fair value gains/(losses) ...................................................................................
– fair value gains transferred to income statement on disposal .........................
– amounts transferred to the income statement in respect of impairment
losses ...............................................................................................................
– income taxes ....................................................................................................
Cash flow hedges .....................................................................................................
– fair value gains/(losses) ...................................................................................
– fair value (gains)/losses transferred to income statement ...............................
– income taxes ....................................................................................................
Actuarial gains/(losses) on defined benefit plans ...................................................
– before income taxes .........................................................................................
– income taxes ....................................................................................................
Share of other comprehensive income/(expense) of associates and joint
ventures ...............................................................................................................
Exchange differences ...............................................................................................
Other comprehensive income/(expense) for the year, net of tax ............................
Total comprehensive income/(expense) for the year ..............................................
Total comprehensive income/(expense) for the year attributable to:
– shareholders of the parent company ...............................................................
– minority interests .............................................................................................
US$m
6,694
10,817
9,821
(648)
2,391
(747)
772
481
808
(517)
(2,608)
(3,586)
978
149
4,975
14,105
20,799
19,529
1,270
20,799
US$m
6,498
(21,904)
(23,722)
(1,316)
1,779
1,355
124
(1,720)
1,754
90
(1,175)
(1,609)
434
(559)
(12,123)
(35,637)
(29,139)
(29,143)
4
(29,139)
2007
US$m
20,455
(973)
756
(1,826)
86
11
(791)
625
(1,886)
470
1,525
2,167
(642)
372
5,946
6,079
26,534
24,866
1,668
26,534
The accompanying notes on pages 365 to 471, the audited sections of ‘Report of the Directors: Risk’ on pages 196 to 293, ‘Critical
accounting policies’ on pages 61 to 65 and the audited sections of ‘Report of the Directors: Impact of Market Turmoil’ on pages 151 to
195 form an integral part of these financial statements.
354
Consolidated balance sheet at 31 December 2009
Notes
2009
US$m
2008
US$m
ASSETS
Cash and balances at central banks .............................................................................................
Items in the course of collection from other banks .....................................................................
Hong Kong Government certificates of indebtedness ................................................................
Trading assets ..............................................................................................................................
Financial assets designated at fair value .....................................................................................
Derivatives ...................................................................................................................................
Loans and advances to banks ......................................................................................................
Loans and advances to customers ...............................................................................................
Financial investments ..................................................................................................................
Other assets ..................................................................................................................................
Current tax assets .........................................................................................................................
Prepayments and accrued income ...............................................................................................
Interests in associates and joint ventures ....................................................................................
Goodwill and intangible assets ....................................................................................................
Property, plant and equipment .....................................................................................................
Deferred tax assets .......................................................................................................................
16
17
18
19
25
21
22
23
11
60,655
6,395
17,463
421,381
37,181
250,886
179,781
896,231
369,158
44,534
2,937
12,423
13,011
29,994
13,802
8,620
52,396
6,003
15,358
427,329
28,533
494,876
153,766
932,868
300,235
37,822
2,552
15,797
11,537
27,357
14,025
7,011
Total assets ..................................................................................................................................
2,364,452
2,527,465
LIABILITIES AND EQUITY
Liabilities
Hong Kong currency notes in circulation ...................................................................................
Deposits by banks ........................................................................................................................
Customer accounts .......................................................................................................................
Items in the course of transmission to other banks .....................................................................
Trading liabilities .........................................................................................................................
Financial liabilities designated at fair value ................................................................................
Derivatives ...................................................................................................................................
Debt securities in issue ................................................................................................................
Other liabilities ............................................................................................................................
Current tax liabilities ...................................................................................................................
Liabilities under insurance contracts ...........................................................................................
Accruals and deferred income .....................................................................................................
Provisions ....................................................................................................................................
Deferred tax liabilities .................................................................................................................
Retirement benefit liabilities .......................................................................................................
Subordinated liabilities ................................................................................................................
26
27
18
28
29
30
31
11
8
32
17,463
124,872
1,159,034
5,734
268,130
80,092
247,646
146,896
68,640
2,140
53,707
13,190
1,965
1,837
6,967
30,478
15,358
130,084
1,115,327
7,232
247,652
74,587
487,060
179,693
72,384
1,822
43,683
15,448
1,730
1,855
3,888
29,433
Total liabilities .............................................................................................................................
2,228,791
2,427,236
Equity
Called up share capital .................................................................................................................
Share premium account ...............................................................................................................
Other equity instruments .............................................................................................................
Other reserves ..............................................................................................................................
Retained earnings ........................................................................................................................
37
Total shareholders’ equity ...........................................................................................................
Minority interests .........................................................................................................................
36
Total equity ..................................................................................................................................
8,705
8,413
2,133
22,236
86,812
128,299
7,362
135,661
6,053
8,463
2,133
(3,747)
80,689
93,591
6,638
100,229
Total equity and liabilities ...........................................................................................................
2,364,452
2,527,465
The accompanying notes on pages 365 to 471, the audited sections of ‘Report of the Directors: Risk’ on pages 196 to 293, ‘Critical
accounting policies’ on pages 61 to 65 and the audited sections of ‘Report of the Directors: Impact of Market Turmoil’ on pages 151 to
195 form an integral part of these financial statements.
S K Green, Group Chairman
355
H S B C H O L D I N G S P L C
Financial Statements (continued)
Consolidated statement of cash flows / Consolidated statement of changes in equity
Consolidated statement of cash flows for the year ended 31 December 2009
Cash flows from operating activities
Profit before tax ............................................................................................
7,079
9,307
24,212
Notes
2009
US$m
2008
US$m
2007
US$m
Adjustments for:
– non-cash items included in profit before tax ........................................
– change in operating assets .....................................................................
– change in operating liabilities ...............................................................
– elimination of exchange differences2 ....................................................
– net gain from investing activities ..........................................................
– share of profits in associates and joint ventures ...................................
– dividends received from associates .......................................................
– contributions paid to defined benefit plans ...........................................
– tax paid ..................................................................................................
38
38
38
Net cash generated from operating activities ...............................................
Cash flows from investing activities
Purchase of financial investments ................................................................
Proceeds from the sale and maturity of financial investments ....................
Purchase of property, plant and equipment ..................................................
Proceeds from the sale of property, plant and equipment ............................
Proceeds from the sale of loan portfolios .....................................................
Net purchase of intangible assets .................................................................
Net cash inflow/(outflow) from acquisition of or increase in stake
of subsidiaries ...........................................................................................
Net cash inflow from disposal of subsidiaries .............................................
Net cash outflow from acquisition of or increase in stake
of associates ..............................................................................................
Net cash inflow from the consolidation of funds .........................................
Proceeds from disposal of associates and joint ventures .............................
31,384
(20,803)
14,645
(19,024)
(1,910)
(1,781)
414
(974)
(2,132)
6,898
(304,629)
241,341
(2,000)
4,701
4,852
(956)
(677)
45
(62)
–
308
41,305
18,123
(63,413)
36,132
(4,195)
(1,661)
655
(719)
(5,114)
30,420
(277,023)
223,138
(2,985)
2,467
9,941
(1,169)
1,313
2,979
(355)
16,500
101
21,701
(176,538)
250,095
(18,602)
(2,209)
(1,503)
363
(1,393)
(5,088)
91,038
(260,980)
238,647
(2,720)
3,178
1,665
(950)
(623)
187
(351)
1,600
69
Net cash used in investing activities ............................................................
(57,077)
(25,093)
(20,278)
Cash flows from financing activities
Issue of ordinary share capital ......................................................................
– rights issue .............................................................................................
– other .......................................................................................................
Issue of other equity instruments .................................................................
Net (purchases)/sales of own shares for market-making and
investment purposes .................................................................................
Purchases of own shares to meet share awards and share
option awards ...........................................................................................
On exercise of share options ........................................................................
Subordinated loan capital issued ..................................................................
Subordinated loan capital repaid ..................................................................
Dividends paid to shareholders of the parent company ...............................
Dividends paid to minority interests ............................................................
Dividends paid to holders of other equity instruments ................................
Net cash generated from/(used in) financing activities ................................
Net increase/(decrease) in cash and cash equivalents .............................
Cash and cash equivalents at 1 January .......................................................
Exchange differences in respect of cash and cash equivalents ....................
Cash and cash equivalents at 31 December .................................................
38
For footnote, see page 364.
18,398
18,326
72
–
(176)
(51)
12
2,959
(4,637)
(4,264)
(702)
(269)
11,270
(38,909)
278,872
10,803
250,766
467
–
467
2,133
(194)
(808)
27
7,094
(350)
(7,211)
(714)
(92)
352
5,679
297,009
(23,816)
278,872
474
–
474
–
126
(636)
104
5,705
(689)
(6,003)
(718)
–
(1,637)
69,123
215,486
12,400
297,009
The accompanying notes on pages 365 to 471, the audited sections of ‘Report of the Directors: Risk’ on pages 196 to 293, ‘Critical
accounting policies’ on pages 61 to 65 and the audited sections of ‘Report of the Directors: Impact of Market Turmoil’ on pages 151 to
195 form an integral part of these financial statements.
356
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F
H S B C H O L D I N G S P L C
Financial Statements (continued)
HSBC Holdings balance sheet / HSBC Holdings statement of cash flows
HSBC Holdings balance sheet at 31 December 2009
Notes
2009
US$m
2008
US$m
ASSETS
Cash at bank and in hand:
– balances with HSBC undertakings ...................................................................................
Derivatives ................................................................................................................................
Loans and advances to HSBC undertakings ............................................................................
Financial investments ...............................................................................................................
Other assets ...............................................................................................................................
Current tax assets ......................................................................................................................
Prepayments and accrued income ............................................................................................
Investments in subsidiaries .......................................................................................................
Property, plant and equipment ..................................................................................................
Deferred tax assets ....................................................................................................................
18
24
11
224
2,981
23,212
2,455
4
562
102
86,247
6
–
443
3,682
11,804
2,629
25
–
58
81,993
6
42
Total assets ...............................................................................................................................
115,793
100,682
LIABILITIES AND EQUITY
Liabilities
Amounts owed to HSBC undertakings ....................................................................................
Financial liabilities designated at fair value .............................................................................
Derivatives ................................................................................................................................
Debt securities in issue .............................................................................................................
Other liabilities .........................................................................................................................
Current tax liabilities ................................................................................................................
Accruals and deferred income ..................................................................................................
Deferred tax liabilities ..............................................................................................................
Subordinated liabilities .............................................................................................................
Total liabilities ..........................................................................................................................
Equity
Called up share capital ..............................................................................................................
Share premium account ............................................................................................................
Other equity instruments ..........................................................................................................
Merger reserve and other reserves ...........................................................................................
Other reserves ...........................................................................................................................
Retained earnings .....................................................................................................................
Total equity ...............................................................................................................................
27
18
28
29
11
32
37
37
3,711
16,909
362
2,839
1,257
–
419
14
14,406
39,917
8,705
8,413
2,133
35,127
3,642
17,856
75,876
4,042
16,389
1,324
–
1,816
219
288
–
14,017
38,095
6,053
8,463
2,133
25,341
3,503
17,094
62,587
Total equity and liabilities ........................................................................................................
115,793
100,682
The accompanying notes on pages 365 to 471, the audited sections of ‘Report of the Directors: Risk’ on pages 196 to 293, ‘Critical
accounting policies’ on pages 61 to 65 and the audited sections of ‘Report of the Directors: Impact of Market Turmoil’ on pages 151 to
195 form an integral part of these financial statements.
S K Green, Group Chairman
360
HSBC Holdings statement of cash flows for the year ended 31 December 2009
Cash flows from operating activities
Profit before tax ...........................................................................................................................
Notes
2009
US$m
(2,058)
Adjustments for:
– non-cash items included in profit before tax .......................................................................
– change in operating assets ....................................................................................................
– change in operating liabilities ..............................................................................................
– elimination of exchange differences2 ...................................................................................
– tax (paid)/received ................................................................................................................
38
38
38
Net cash (used in)/generated from operating activities ...............................................................
Cash flows from investing activities
Purchase of financial investments ...............................................................................................
Proceeds from sale of financial investments ...............................................................................
Purchase of property, plant and equipment .................................................................................
Net cash outflow from acquisition of or increase in stake of subsidiaries .................................
Net cash used in investing activities ...........................................................................................
Cash flows from financing activities
Issue of ordinary share capital .....................................................................................................
– rights issue ............................................................................................................................
– other ......................................................................................................................................
Issue of other equity instruments ................................................................................................
Purchases of own shares to meet share awards and share option awards ...................................
On exercise of share options .......................................................................................................
Subordinated loan capital issued .................................................................................................
Subordinated loan capital repaid .................................................................................................
Debt securities issued ..................................................................................................................
Dividends paid .............................................................................................................................
Dividends paid to holders of other equity instruments ...............................................................
Net cash generated from financing activities ..............................................................................
Net increase/(decrease) in cash and cash equivalents ............................................................
Cash and cash equivalents at 1 January ......................................................................................
Cash and cash equivalents at 31 December ................................................................................
38
For footnote, see page 364.
5,974
(11,077)
2,040
1
266
(4,854)
–
275
(2)
(10,344)
(10,071)
18,333
18,261
72
–
–
12
2,456
(4,380)
2,818
(4,264)
(269)
14,706
(219)
443
224
2008
US$m
7,931
3,619
3,263
(2,035)
–
(370)
12,408
(300)
349
(5)
(14,320)
(14,276)
467
–
467
2,133
(54)
3
6,705
–
–
(7,211)
(92)
1,951
83
360
443
The accompanying notes on pages 365 to 471, the audited sections of ‘Report of the Directors: Risk’ on pages 196 to 293, ‘Critical
accounting policies’ on pages 61 to 65 and the audited sections of ‘Report of the Directors: Impact of Market Turmoil’ on pages 151 to
195 form an integral part of these financial statements.
361
H S B C H O L D I N G S P L C
Financial Statements (continued)
HSBC Holdings statement of changes in equity
HSBC Holdings statement of changes in equity for the year ended 31 December 2009
2009
Other reserves
Called up
share
capital
US$m
Share
premium4
US$m
Other
equity
instru-
ments
US$m
Available-
for-sale
fair value
reserve
US$m
Other
paid-in
capital
US$m
Share-
based
payment
reserve
US$m
Merger
and other
reserves7
US$m
Total
share-
holders’
equity
US$m
Retained
earnings9
US$m
6,053
–
8,463
–
2,133
–
17,094
(1,096)
1,318
–
1,995
–
25,341
–
62,587
(1,096)
At 1 January ......................
Profit for the year ..............
Other comprehensive
income (net of tax) .......
Available-for-sale
investments ...................
Income tax .........................
Total comprehensive
income for the year .......
Shares issued under
employee share plans ...
Shares issued in lieu of
dividends and amounts
arising thereon4 .............
Shares issued in respect of
rights issue ....................
Dividends to shareholders ..
Own shares adjustment .....
Exercise and lapse of share
options and vesting of
share awards .................
Cost of share-based
payment arrangements ..
Income taxes on share-
based payments .............
Equity investments granted
to employees of
subsidiaries under
employee share plans ...
Other movements ..............
Transfers7 ..........................
–
–
–
–
4
–
–
–
–
69
118
(119)
2,530
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
190
–
63
103
(40)
–
–
–
(1,096)
63
–
1,670
–
(5,639)
(188)
–
–
19
–
51
5,945
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
15,731
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
146
(146)
163
–
–
–
–
–
–
(99)
12
–
–
–
(5,945)
63
103
(40)
(1,033)
73
1,669
18,261
(5,639)
(188)
–
163
19
(99)
63
–
At 31 December ................
8,705
8,413
2,133
17,856
253
1,464
1,925
35,127
75,876
362
2008
Other reserves
Available-
for-sale
fair value
reserve
US$m
Other
paid-in
capital
US$m
Share-
based
payment
reserve
US$m
Merger
and other
reserves7
US$m
Total
share-
holders’
equity
US$m
482
–
1,181
–
1,968
–
28,942
–
60,831
7,644
Retained
earnings9
US$m
14,209
7,644
–
–
–
(292)
(356)
64
7,644
(292)
–
Called up
share
capital
US$m
Share
premium4
US$m
Other
equity
instru-
ments8
US$m
At 1 January ......................
Profit for the year ..............
5,915
–
8,134
–
Other comprehensive
income (net of tax) .......
Available-for-sale
investments ...................
Income tax ........................
Total comprehensive
income for the year ......
Shares issued under
–
–
–
–
–
–
–
–
employee share plans ...
20
450
–
–
–
–
–
–
–
Shares issued in lieu of
dividends and amounts
arising thereon4 .............
Capital securities issued8 ..
Dividends to shareholders
Own shares adjustment .....
Exercise and lapse of share
options and vesting of
share awards .................
Cost of share-based
payment arrangements .
Income taxes on share-
based payments ............
Equity investments granted
to employees of
subsidiaries under
employee share plans ...
Other movements ..............
Transfers7 ..........................
118
–
–
–
(121)
–
–
–
–
2,133
–
–
3,596
(11,301)
(647)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2)
–
(6)
3,601
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
137
(75)
–
–
–
–
–
14
–
87
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3,601)
(292)
(356)
64
7,352
470
3,593
2,133
(11,301)
(647)
62
14
(2)
87
(5)
–
–
–
–
–
–
–
–
–
–
–
–
At 31 December ................
6,053
8,463
2,133
17,094
190
1,318
1,995
25,341
62,587
Dividends per ordinary share at 31 December 2009 were US$0.34 (2008: US$0.93; 2007: US$0.87).
For footnotes, see 364.
The accompanying notes on pages 365 to 471, the audited sections of ‘Report of the Directors: Risk’ on pages 196 to 293, ‘Critical
accounting policies’ on pages 61 to 65 and the audited sections of ‘Report of the Directors: Impact of Market Turmoil’ on pages 151 to
195 form an integral part of these financial statements.
363
H S B C H O L D I N G S P L C
Financial Statements (continued)
Footnotes // Note 1
Footnotes to Financial Statements
1 The effect of the bonus element within the rights issue has been included within the calculation of basic and diluted earnings per share
for the period, through an adjustment to the weighted average number of ordinary and dilutive potential ordinary shares outstanding.
Comparative data has been restated on this basis.
2 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.
3 Cumulative goodwill amounting to US$5,138 million has been charged against reserves in respect of acquisitions of subsidiaries prior
to 1 January 1998, including US$3,469 million charged against the merger reserve arising on the acquisition of HSBC Bank plc. The
balance of US$1,669 million has been charged against retained earnings.
4 Share premium includes the deduction of US$1 million in respect of issuance costs incurred during the year (2008: US$3 million; 2007:
US$3 million).
5 Retained earnings include 179,964,968 (US$2,572 million) of own shares held within HSBC’s insurance business, retirement funds for
the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee
share schemes or bonus plans, and the market-making activities in Global Markets (2008: 194,751,829 (US$3,094 million); 2007:
158,706,463 (US$2,649 million)).
6 Amounts transferred to the income statement in respect of cash flow hedges include US$502 million (2008: US$152 million; 2007:
US$57 million) taken to ‘Net interest income’ and US$306 million (2008: US$1,602 million; 2007: US$1,829 million) taken to ‘Net
trading income’.
7 Statutory share premium relief under Section 131 of the Companies Act 1985 (the ‘Act’) was taken in respect of the acquisition of HSBC
Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003 and the shares issued were recorded at their nominal
value only. In HSBC’s consolidated financial statements the fair value differences of US$8,290 million in respect of HSBC France and
US$12,768 million in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on the
acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited (‘HOHU’),
following a number of inter-group reorganisations. At 31 December 2009, an amount of US$5,945 million (2008: US$3,601 million)
was transferred from this reserve to retained earnings as a result of impairment in HSBC Holdings’ investment in HOHU. During 2009,
pursuant to section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and
US$15,796 million was recognised in the merger reserve. The merger reserve includes the deduction of US$614 million in respect of
costs relating to the rights issue, of which US$149 million was subsequently transferred to the income statement. Of this US$149 million,
US$121 million was a loss arising from accounting for the agreement with the underwriters as a contingent forward contract. The
merger reserve excludes the loss of US$344 million on a forward foreign exchange contract associated with hedging the proceeds of the
rights issue. For further details see Note 41 on the Financial Statements.
8 In April 2008, HSBC Holdings issued US$2,200 million of Perpetual Subordinated Capital Securities, including US$67 million of
issuance costs, which are classified as equity under IFRSs.
9 Retained earnings include 38,446,053 (US$562 million) of own shares held to fund employee share plans (2008: 36,995,330
(US$562 million)).
364
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) Compliance with International Financial Reporting Standards
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have
been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the
International Accounting Standards Board (‘IASB’) and as endorsed by the EU. EU-endorsed IFRSs may differ
from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the
EU. At 31 December 2009, there were no unendorsed standards effective for the year ended 31 December 2009
affecting these consolidated and separate financial statements, and there was no difference between IFRSs
endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC’s
financial statements for the year ended 31 December 2009 are prepared in accordance with IFRSs as issued by
the IASB.
IFRSs comprise accounting standards issued by the IASB and its predecessor body as well as interpretations
issued by the International Financial Reporting Interpretations Committee (‘IFRIC’) and its predecessor body.
During 2009, HSBC adopted the following significant standards and amendments to standards:
•
•
•
‘Classification of Rights Issues – Amendment to IAS 32’, (‘the amendment’) which is effective for annual
periods beginning on or after 1 February 2010, with early adoption permitted. HSBC has elected to adopt the
amendment in advance of the effective date and, as required by IAS 8, has applied the amendment
retrospectively. The amendment requires that rights issues, options or warrants to acquire a fixed number of
the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity
offers the rights issues, options or warrants pro rata to all of its existing owners of the same class of its
own non-derivative equity instruments. The offer of rights by HSBC Holdings plc to its shareholders on
20 March 2009 was accounted for as an equity instrument, as required by the amendment, in the
consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.
IFRS 8 ‘Operating Segments’ (‘IFRS 8’), which replaced IAS 14 ‘Segment Reporting’ requires an entity to
disclose information about its segments which enables users to evaluate the nature and financial effects of its
business activities and the economic environments in which it operates. HSBC’s operating segments are
organised into six geographical regions; Europe, Hong Kong, Rest of Asia-Pacific, Middle East, North
America and Latin America. Due to the nature of the Group, HSBC’s chief operating decision-maker
regularly reviews operating activity on a number of bases, including by geographical region, customer group
and global business, and retail businesses by geographical region. HSBC’s IFRS 8 operating segments were
determined to be geographical regions because the chief operating decision-maker primarily uses
information on geographical regions in order to make decisions about allocating resources and assessing
performance.
IFRS 8 requires segment financial information to be reported using the same measures reported to the chief
operating decision-maker for the purpose of making decisions about allocating resources to the operating
segments and assessing their performance. Information provided to the chief operating decision-maker of
HSBC to make decisions about allocating resources and assessing performance of operating segments is
measured in accordance with IFRSs.
IAS 1 ‘Presentation of Financial Statements’ (‘IAS 1’) (Revised 2007) aims to improve users’ ability to
analyse and compare information given in financial statements. The adoption of the revised standard had no
effect on the results reported in HSBC’s consolidated financial statements or the separate financial
statements of HSBC Holdings. It did, however, result in certain presentational changes in HSBC’s
consolidated financial statements, including:
–
–
the presentation of all items of income and expenditure in two financial statements, the ‘Consolidated
income statement’ and the ‘Consolidated statement of comprehensive income’; and
the presentation of the ‘Consolidated statement of changes in equity’ as a financial statement replaces
the previous ‘Equity’ note on the financial statements.
• An amendment to IFRS 7 ‘Financial Instruments: Disclosures – Improving Disclosures about Financial
Instruments’. The most significant additional disclosures required by this amendment in the consolidated
financial statements of HSBC and the separate financial statements of HSBC Holdings include tables of fair
365
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 1
value measurements disclosing the source of inputs using a three level fair value hierarchy, and reconciliations of
the movements between opening and closing balances of Level 3 financial instruments, being those measured at
fair value using a valuation technique with significant unobservable inputs.
During 2009, in addition to the above, HSBC adopted a number of standards, interpretations and amendments
thereto which had an insignificant effect on the consolidated financial statements of HSBC and the separate
financial statements of HSBC Holdings.
(b) Differences between IFRSs and Hong Kong Financial Reporting Standards
There are no significant differences between IFRSs and Hong Kong Financial Reporting Standards in terms of
their application to HSBC and consequently there would be no significant differences had the financial
statements been prepared in accordance with Hong Kong Financial Reporting Standards. The Notes on the
Financial Statements, taken together with the Report of the Directors, include the aggregate of all disclosures
necessary to satisfy IFRSs and Hong Kong reporting requirements.
(c) Presentation of information
Disclosures under IFRS 4 ‘Insurance Contracts’ (‘IFRS 4’) and IFRS 7 concerning the nature and extent of risks
relating to insurance contracts and financial instruments have been included in the audited sections of the
‘Report of the Directors: Risk’ on pages 196 to 293.
Capital disclosures under IAS 1 have been included in the audited sections of ‘Capital management and
allocation’ on pages 285 to 291.
Disclosures relating to the effect of the recent market turmoil on HSBC’s securitisation activities and structured
products, and disclosures under IFRS 7 relating to the fair value of financial instruments, have been included in
the audited section of ‘Report of the Directors: Impact of Market Turmoil’ on pages 151 to 195.
In publishing the parent company financial statements here together with the Group financial statements, HSBC
Holdings has taken advantage of the exemption in section 408(3) of the Companies Act 2006 not to present its
individual income statement and related notes that form a part of these financial statements.
HSBC’s consolidated financial statements are presented in US dollars which is also HSBC Holdings’ functional
currency. HSBC Holdings’ functional currency is the US dollar because the US dollar and currencies linked to it
are the most significant currencies relevant to the underlying transactions, events and conditions of its
subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.
HSBC uses the US dollar as its presentation currency in its consolidated financial statements because the US
dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business.
(d) Comparative information
As required by US public company reporting requirements, these consolidated financial statements include
two years of comparative information for the consolidated income statement, consolidated statement of
comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity
and related notes on the financial statements.
(e) Use of estimates and assumptions
The preparation of financial information requires the use of estimates and assumptions about future conditions.
The use of available information and the application of judgement are inherent in the formation of estimates;
actual results in the future may differ from estimates upon which financial information is prepared. Management
believes that HSBC’s critical accounting policies where judgement is necessarily applied are those which relate
to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, the
impairment of available-for-sale financial assets and deferred tax assets (see ‘Critical Accounting Policies’
on pages 61 to 65, which form an integral part of these financial statements).
Further information about key assumptions concerning the future, and other key sources of estimation
uncertainty, are set out in the notes on the financial statements.
366
(f) Consolidation
The consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its
subsidiaries 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 their audited interim financial statements, drawn up to 31 December annually.
Subsidiaries are consolidated from the date that HSBC gains control. The purchase method of accounting is used
to account for the acquisition of subsidiaries by HSBC. The cost of an acquisition is measured at the fair value of
the consideration given at the date of exchange, together with costs directly attributable to that acquisition. The
acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of
acquisition. Any excess of the cost of acquisition over the fair value of HSBC’s share of the identifiable assets,
liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair
value of HSBC’s share of the identifiable assets, liabilities and contingent liabilities of the business acquired, the
difference is recognised immediately in the income statement.
Entities that are controlled by HSBC are consolidated until the date that control ceases.
In the context of Special Purpose Entities (‘SPE’s), the following circumstances may indicate a relationship in
which, in substance, HSBC controls and consequently consolidates an SPE:
–
the activities of the SPE are being conducted on behalf of HSBC according to its specific business needs so
that HSBC obtains benefits from the SPE’s operation;
– HSBC has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or,
by setting up an ‘autopilot’ mechanism, HSBC has delegated these decision-making powers;
– HSBC has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks
incident to the activities of the SPE; or
– HSBC retains the majority of the residual or ownership risks related to the SPE or its assets in order to
obtain benefits from its activities.
HSBC performs a re-assessment of consolidation whenever there is a change in the substance of the relationship
between HSBC and an SPE.
All intra-HSBC transactions are eliminated on consolidation.
The consolidated financial statements of HSBC also include the attributable share of the results and reserves of
joint ventures and associates. These are based on financial statements made up to 31 December, with the
exception of the Bank of Communications, Ping An Insurance and Industrial Bank which are included on the
basis of financial statements made up for the twelve months to 30 September. These are equity accounted three
months in arrears in order to meet the requirements of the Group’s reporting timetable. HSBC has taken into
account the effect of significant transactions or events that occur between the period from 1 October to
31 December that would have a material effect on its results.
(g) Future accounting developments
At 31 December 2009, a number of standards and interpretations, and amendments thereto, had been issued by
the IASB, which are not effective for HSBC’s consolidated financial statements or the separate financial
statements of HSBC Holdings as at 31 December 2009. Those which are expected to have a significant effect on
HSBC’s consolidated financial statements and the separate financial statements of HSBC Holdings are discussed
below.
Standards and Interpretations issued by the IASB and endorsed by the EU
A revised IFRS 3 ‘Business Combinations’ and amendments to IAS 27 ‘Consolidated and Separate Financial
Statements’ were issued on 10 January 2008. The revisions and amendments to the standards apply prospectively
to business combinations for which the acquisition date is on or after the beginning of the first annual financial
reporting period beginning on or after 1 July 2009. The main changes under the standards are that:
–
acquisition-related costs are recognised as an expense in the income statement in the period in which they
are incurred;
367
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 1 and 2
–
–
–
–
all consideration transferred, including contingent consideration, is recognised and measured at fair value at
the acquisition date;
equity interests held prior to control being obtained are remeasured to fair value at the date of obtaining
control, and any gain or loss is recognised in the income statement;
changes in a parent’s ownership interest in a subsidiary that do not result in a change of control are treated
as transactions between equity holders and are reported in equity; and
an option is available, on a transaction-by-transaction basis, to measure any non-controlling (previously
referred to as minority) interests in the entity acquired either at fair value, or at the non-controlling interests’
proportionate share of the net identifiable assets of the entity acquired.
The effect that the changes will have on HSBC’s consolidated financial statements and the separate financial
statements of HSBC Holdings will depend on the incidence and timing of business combinations occurring after
31 December 2009.
Standards and Interpretations issued by the IASB but not endorsed by the EU
IFRS 9 ‘Financial Instruments’ introduces new requirements for the classification and measurement of financial
assets. The standard is effective for annual periods beginning on or after 1 January 2013 with early adoption
permitted. IFRS 9 is required to be applied retrospectively. If the standard is adopted prior to 1 January 2012, an
entity will be exempt from the requirement to restate prior period comparative information. IFRS 9 is subject to
EU endorsement, the timing of which is uncertain. Accordingly, HSBC is unable to provide a date by which it
plans to apply IFRS 9.
The main changes to the requirements of IAS 39 are summarised below.
– All financial assets that are currently in the scope of IAS 39 will be classified as either amortised cost or fair
value. The available-for-sale and held-to-maturity categories will no longer exist.
– Classification is based on an entity’s business model for managing the financial assets and the contractual
cash flow characteristics of the financial assets. Reclassifications between the two categories are prohibited
unless there is a change in the entity’s business model.
– A financial asset is measured at amortised cost if two criteria are met: i) the objective of the business model
is to hold the financial asset for the collection of the contractual cash flows; and ii) the contractual cash
flows of the instrument are solely payments of principal and interest on the principal outstanding. All other
financial assets are measured at fair value. Movements in the fair value of financial assets classified at fair
value are recognised in profit or loss, except for equity investments where an entity takes the option to
designate an equity instrument that is not held for trading at fair value through other comprehensive income.
If this option is taken, all subsequent changes in fair value are recognised in other comprehensive income
with no recycling of gains or losses to the income statement. Dividend income would continue to be
recognised in the income statement.
– An entity is only permitted to designate a financial asset otherwise meeting the amortised cost criteria at fair
value through profit or loss if doing so significantly reduces or eliminates an accounting mismatch. This
designation is made on initial recognition and is irrevocable.
– Financial instruments which contain embedded derivatives are to be classified in their entirety either at fair
value or amortised cost depending on whether the contracts as a whole meet the relevant criteria under
IFRS 9.
IFRS 9 is the first instalment in the IASB’s planned phased replacement of IAS 39 with a less complex and
improved standard for financial instruments. The next steps in the IASB’s project will address the classification
and measurement requirements for financial liabilities, the impairment of financial assets measured at amortised
cost and hedge accounting. The IASB has indicated that it aims to finalise the replacement of IAS 39 by the end
of 2010. In addition, the IASB is working with the US Financial Accounting Standards Board to reduce
inconsistencies between US GAAP and IFRS in accounting for financial instruments. The impact of IFRS 9 may
change as a consequence of further developments resulting from the IASB’s financial instruments project. As a
result, it is impracticable to quantify the impact of IFRS 9 as at the date of publication of these financial
statements.
368
2 Summary of significant accounting policies
(a) Interest income and expense
Interest income and expense for all financial instruments except for those classified as held for trading or
designated at fair value (other than debt securities issued by HSBC and derivatives managed in conjunction with
such debt securities issued) are recognised in ‘Interest income’ and ‘Interest expense’ in the income statement
using the effective interest method. The latter is a way of calculating the amortised cost of a financial asset or a
financial liability (or groups of financial assets or financial liabilities) and of allocating the interest income or
interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through
the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of
the financial asset or financial liability. When calculating the effective interest rate, HSBC estimates cash flows
considering all contractual terms of the financial instrument but excluding future credit losses. The calculation
includes all amounts paid or received by HSBC that are an integral part of the effective interest rate of a financial
instrument, including transaction costs and all other premiums or discounts.
Interest on impaired financial assets is recognised using the rate of interest used to discount the future cash flows
for the purpose of measuring the impairment loss.
(b) Non-interest income
Fee income is earned from a diverse range of services provided by HSBC to its customers. Fee income is
accounted for as follows:
−
−
−
income earned on the execution of a significant act is recognised as revenue when the act is completed (for
example, fees arising from negotiating, or participating in the negotiation of, a transaction for a third party,
such as an arrangement for the acquisition of shares or other securities);
income earned from the provision of services is recognised as revenue as the services are provided (for
example, asset management, portfolio and other management advisory and service fees); and
income which forms an integral part of the effective interest rate of a financial instrument is recognised as
an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in
‘Interest income’ (Note 2a).
Net trading income comprises all gains and losses from changes in the fair value of financial assets and
financial liabilities held for trading, together with the related interest income, expense and dividends.
Net income from financial instruments designated at fair value includes all gains and losses from changes
in the fair value of financial assets and financial liabilities designated at fair value through profit or loss. Interest
income and expense and dividend income arising on these financial instruments are also included in ‘Net income
from financial instruments designated at fair value’, except for interest arising from debt securities issued, and
derivatives managed in conjunction with those debt securities, which is recognised in ‘Interest expense’
(Note 2a).
Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for
listed equity securities, and usually the date when shareholders have approved the dividend for unlisted equity
securities.
(c) Operating segments
HSBC’s operating segments are organised into six geographical regions; Europe, Hong Kong, Rest of Asia-
Pacific, Middle East, North America and Latin America. Due to the nature of the Group, HSBC’s chief operating
decision-maker regularly reviews operating activity on a number of bases, including by geographical region,
customer group and global business, and retail businesses by geographical region. HSBC’s operating segments
were determined to be geographical regions because the chief operating decision-maker primarily uses
information on geographical regions in order to make decisions about allocating resources and assessing
performance.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group’s accounting
policies. Segmental income and expenses include transfers between segments and these transfers are conducted
369
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 2
on arm’s length terms and conditions. Shared costs are included in segments on the basis of the actual recharges
made.
(d) Determination of fair value
All financial instruments are recognised initially at fair value. In the normal course of business, the fair value of
a financial instrument on initial recognition is the transaction price (that is, the fair value of the consideration
given or received). In certain circumstances, however, the fair value will be based on other observable current
market transactions in the same instrument, without modification or repackaging, or on a valuation technique
whose variables include only data from observable markets, such as interest rate yield curves, option volatilities
and currency rates. When such evidence exists, HSBC recognises a trading gain or loss on inception of the
financial instrument, being the difference between the transaction price and the fair value. When unobservable
market data have a significant impact on the valuation of financial instruments, the entire initial difference in fair
value indicated by the valuation model from the transaction price is not recognised immediately in the income
statement but is recognised over the life of the transaction on an appropriate basis, or when the inputs become
observable, or the transaction matures or is closed out, or when HSBC enters into an offsetting transaction.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value that are quoted in
active markets are based on bid prices for assets held and offer prices for liabilities issued. When independent
prices are not available, fair values are determined by using valuation techniques which refer to observable
market data. These include comparison with similar instruments where market observable prices exist,
discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market
participants. Fair values of financial instruments may be determined in whole or in part using valuation
techniques based on assumptions that are not supported by prices from current market transactions or observable
market data, where current prices or observable market data are not available.
Valuation techniques incorporate assumptions about factors that other market participants would use in their
valuations, including interest rate yield curves, exchange rates, volatilities, and prepayment and default rates. If
there are additional factors that are not incorporated within the valuation model but would be considered by
market participants, further fair value adjustments are applied to model calculated fair values. These fair value
adjustments include adjustments for bid-offer spread, model uncertainty, credit risk and model limitation. Where
a financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the
portfolio is calculated as the product of the number of units and quoted price and no block discounts are made.
If the fair value of a financial asset measured at fair value becomes negative, the financial instrument is recorded
as a financial liability until the fair value becomes positive, at which time the financial instrument is recorded as
a financial asset.
The fair values of financial liabilities are measured using quoted market prices where available, or using
valuation techniques. These fair values include market participants’ assessments of the appropriate credit spread
to apply to HSBC’s liabilities. The amount of change during the period, and cumulatively, in the fair value of
designated financial liabilities and loans and advances that is attributable to changes in their credit spread is
determined as the amount of change in the fair value that is not attributable to changes in market conditions that
give rise to market risk.
(e) Reclassification of financial assets
Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial
recognition) may be reclassified out of the fair value through profit or loss category in the following
circumstances:
−
−
financial assets that would have met the definition of loans and receivables at initial recognition (if the
financial asset had not been required to be classified as held for trading) may be reclassified out of the fair
value through profit or loss category if there is the intention and ability to hold the financial asset for the
foreseeable future or until maturity; and
financial assets (except financial assets that would have met the definition of loans and receivables at initial
recognition) may be reclassified out of the fair value through profit or loss category and into another
category in rare circumstances.
370
When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at
its fair value on the date of reclassification. Any gain or loss already recognised in the income statement is not
reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortised
cost, as applicable.
(f) Loans and advances to banks and customers
Loans and advances to banks and customers include loans and advances originated by HSBC which are not
classified either as held for trading or designated at fair value. Loans and advances are recognised when cash is
advanced to a borrower. They are derecognised when either the borrower repays its obligations, or the loans are
sold or written off, or substantially all the risks and rewards of ownership are transferred. They are initially
recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised
cost using the effective interest method, less any impairment losses. Where exposures are hedged by derivatives
designated and qualifying as fair value hedges, the carrying value of the loans and advances so hedged includes a
fair value adjustment for the hedged risk only.
HSBC may commit to underwrite loans on fixed contractual terms for specified periods of time, where the
drawdown of the loan is contingent upon certain future events outside the control of HSBC. Where the loan
arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as a
derivative and measured at fair value through profit or loss. On drawdown, the loan is classified as held for
trading and measured at fair value through profit or loss. Where it is not HSBC’s intention to trade but hold the
loan, a provision on the loan commitment is only recorded where it is probable that HSBC will incur a loss. This
may occur, for example, where a loss of principal is probable or the interest rate charged on the loan is lower
than the cost of funding. On inception, the loan to be held is recorded at its fair value and subsequently measured
at amortised cost using the effective interest method. However, where the initial fair value is lower than the cash
amount advanced (for example, due to the rate of interest charged on the loan being below the market rate of
interest), the write-down is charged to the income statement. The write-down will be recovered over the life of
the loan, through the recognition of interest income using the effective interest method, unless the loan becomes
impaired. The write-down is recorded as a reduction to other operating income.
Financial assets which have been reclassified out of the fair value through profit or loss category into the loans
and receivables category are initially recorded at the fair value at the date of reclassification. The reclassified
assets are subsequently measured at amortised cost, using the effective interest rate determined at the date of
reclassification.
(g) Impairment of loans and advances
Losses for impaired loans are recognised promptly when there is objective evidence that impairment of a loan or
portfolio of loans has occurred. Impairment allowances are calculated on individual loans and on groups of loans
assessed collectively. Impairment losses are recorded as charges to the income statement. The carrying amount
of impaired loans on the balance sheet is reduced through the use of impairment allowance accounts. Losses
expected from future events are not recognised.
Individually assessed loans and advances
For all loans that are considered individually significant, HSBC assesses on a case-by-case basis at each balance
sheet date whether there is any objective evidence that a loan is impaired. For those loans where objective
evidence of impairment exists, impairment losses are determined considering the following factors:
– HSBC’s aggregate exposure to the customer;
–
–
–
–
the viability of the customer’s business model and their capacity to trade successfully out of financial
difficulties and generate sufficient cash flow to service debt obligations;
the amount and timing of expected receipts and recoveries;
the likely dividend available on liquidation or bankruptcy;
the extent of other creditors’ commitments ranking ahead of, or pari passu with, HSBC and the likelihood
of other creditors continuing to support the company;
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 2
–
–
–
–
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 realisable value of security (or other credit mitigants) and likelihood of successful repossession;
the likely deduction of any costs involved in recovery of amounts outstanding;
the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in
local currency; and
– when available, the secondary market price of the debt.
Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective
interest rate, and comparing the resultant present value with the loan’s current carrying amount.
Collectively assessed loans and advances
Impairment is assessed on a collective basis in two circumstances:
–
to cover losses which have been incurred but have not yet been identified on loans subject to individual
assessment; and
–
for homogeneous groups of loans that are not considered individually significant.
Incurred but not yet identified impairment
Individually assessed loans for which no evidence of loss has been specifically identified on an individual basis
are grouped together according to their credit risk characteristics for the purpose of calculating an estimated
collective loss. This reflects impairment losses that HSBC has incurred as a result of events occurring before
the balance sheet date, which HSBC is not able to identify on an individual loan basis, and that can be reliably
estimated. These losses will only be individually identified in the future. As soon as information becomes
available which identifies losses on individual loans within the group, those loans are removed from the group
and assessed on an individual basis for impairment.
The collective impairment allowance is determined after taking into account:
–
–
historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector,
loan grade or product);
the estimated period between impairment occurring and the loss being identified and evidenced by the
establishment of an appropriate allowance against the individual loan; and
– management’s experienced judgement as to whether current economic and credit conditions are such that
the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested
by historical experience.
The period between a loss occurring and its identification is estimated by local management for each identified
portfolio.
Homogeneous groups of loans and advances
Statistical methods are used to determine impairment losses on a collective basis for homogeneous groups of
loans that are not considered individually significant, because individual loan assessment is impracticable.
Losses in these groups of loans are recorded on an individual basis when individual loans are written off, at
which point they are removed from the group. Two alternative methods are used to calculate allowances on a
collective basis:
− When appropriate empirical information is available, HSBC utilises roll rate methodology. This
methodology employs statistical analyses of historical data and experience of delinquency and default to
estimate the amount of loans that will eventually be written off as a result of the events occurring before the
balance sheet date which HSBC is not able to identify on an individual loan basis, and that can be reliably
estimated. Under this methodology, loans are grouped into ranges according to the number of days past due,
and statistical analysis is used to estimate the likelihood that loans in each range will progress through the
various stages of delinquency and ultimately prove irrecoverable. Current economic conditions are also
evaluated when calculating the appropriate level of allowance required to cover inherent loss. The estimated
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loss is the difference between the present value of expected future cash flows, discounted at the original
effective interest rate of the portfolio, and the carrying amount of the portfolio. In certain highly developed
markets, sophisticated models also take into account behavioural and account management trends as
revealed in, for example, bankruptcy and rescheduling statistics.
− When the portfolio size is small or when information is insufficient or not reliable enough to adopt a roll rate
methodology, HSBC adopts a basic formulaic approach based on historical loss rate experience.
In normal circumstances, historical experience provides the most objective and relevant information from which
to assess inherent loss within each portfolio. In certain circumstances, historical loss experience provides less
relevant information about the inherent loss in a given portfolio at the balance sheet date, for example, where
there have been changes in economic, regulatory or behavioural conditions, such that the most recent trends in
the portfolio risk factors are not fully reflected in the statistical models.
These additional portfolio risk factors may include recent loan portfolio growth and product mix, unemployment
rates, bankruptcy trends, geographic concentrations, loan product features (such as the ability of borrowers to
repay adjustable-rate loans where reset interest rates give rise to increases in interest charges), economic
conditions such as national and local trends in housing markets and interest rates, portfolio seasoning, account
management policies and practices, current levels of write-offs, changes in laws and regulations and other items
which can affect customer payment patterns on outstanding loans, such as natural disasters. These risk factors,
where relevant, are taken into account when calculating the appropriate level of impairment allowances by
adjusting the impairment allowances derived solely from historical loss experience.
Roll rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual
outcomes to ensure they remain appropriate.
Write-off of loans and advances
Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when
there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds
from the realisation of security. In circumstances where the net realisable value of any collateral has been
determined and there is no reasonable expectation of further recovery, write off may be earlier.
Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively
to an event occurring after the impairment was recognised, the excess is written back by reducing the loan
impairment allowance account accordingly. The write-back is recognised in the income statement.
Reclassified loans and advances
Where financial assets have been reclassified out of the fair value through profit or loss category to the loans and
receivables category, the effective interest rate determined at the date of reclassification is used to calculate any
impairment losses.
Following reclassification, where there is a subsequent increase in the estimates of future cash receipts as a result
of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the
effective interest rate from the date of change in the estimate rather than as an adjustment to the carrying amount
of the asset at the date of change in the estimate.
Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans as part of an orderly realisation are recorded as assets held
for sale and reported in ‘Other assets’. The asset acquired is recorded at the lower of its fair value (less costs to
sell) and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No depreciation
is charged in respect of assets held for sale. Any subsequent write-down of the acquired asset to fair value less
costs to sell is recognised in the income statement, in ‘Other operating income’. Any subsequent increase in the
fair value less costs to sell, to the extent this does not exceed the cumulative write-down, is also recognised in
‘Other operating income’, together with any realised gains or losses on disposal.
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 2
Renegotiated loans
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered
past due, but are treated as up to date loans for measurement purposes once the minimum number of payments
required under the new arrangements have been received. These renegotiated loans are segregated from other
parts of the loan portfolio for the purposes of collective impairment assessment, to reflect their risk profile.
Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing
review to determine whether they remain impaired or should be considered past due. The carrying amount of
loans that have been classified as renegotiated retain this classification until maturity or derecognition.
(h) Trading assets and trading liabilities
Treasury bills, debt securities, equity securities, loans, deposits, debt securities in issue, and short positions in
securities are classified as held for trading if they have been acquired or incurred principally for the purpose of
selling or repurchasing in the near term, or they form part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent pattern of short-term profit-taking. These
financial assets or financial liabilities are recognised on trade date, when HSBC enters into contractual
arrangements with counterparties to purchase or sell the financial instruments, and are normally derecognised
when either sold (assets) or extinguished (liabilities). Measurement is initially at fair value, with transaction costs
taken to the income statement. Subsequently, the fair values are remeasured, and gains and losses from changes
therein are recognised in the income statement in ‘Net trading income’.
(i) Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of
the criteria set out below, and are so designated by management. HSBC may designate financial instruments at
fair value when the designation:
–
eliminates or significantly reduces measurement or recognition inconsistencies that would otherwise arise
from measuring financial assets or financial liabilities, or recognising gains and losses on them, on different
bases. Under this criterion, the main classes of financial instruments designated by HSBC are:
Long-term debt issues. The interest payable on certain fixed rate long-term debt securities issued has been
matched with the interest on ‘receive fixed/pay variable’ interest rate swaps as part of a documented interest
rate risk management strategy. An accounting mismatch would arise if the debt securities issued were
accounted for at amortised cost, because the related derivatives are measured at fair value with changes in
the fair value recognised in the income statement. By designating the long-term debt at fair value, the
movement in the fair value of the long-term debt will also be recognised in the income statement.
Financial assets and financial liabilities under investment contracts. Liabilities to customers under
linked contracts are determined based on the fair value of the assets held in the linked funds, with changes
recognised in the income statement. If no designation was made for the assets relating to the customer
liabilities they would be classified as available-for-sale and the changes in fair value would be recorded
in other comprehensive income. These financial instruments are managed on a fair value basis and
management information is also prepared on this basis. Designation at fair value of the financial assets
and liabilities under investment contracts allows the changes in fair values to be recorded in the income
statement and presented in the same line.
–
applies to groups of financial assets, financial liabilities or combinations thereof that are managed, and their
performance evaluated, on a fair value basis in accordance with a documented risk management or
investment strategy, and where information about the groups of financial instruments is reported to
management on that basis. Under this criterion, certain financial assets held to meet liabilities under
insurance contracts are the main class of financial instrument so designated. HSBC has documented risk
management and investment strategies designed to manage such assets at fair value, taking into
consideration the relationship of assets to liabilities in a way that mitigates market risks. Reports are
provided to management on the fair value of the assets. Fair value measurement is also consistent with the
regulatory reporting requirements under the appropriate regulations for these insurance operations.
–
relates to financial instruments containing one or more embedded derivatives that significantly modify the
cash flows resulting from those financial instruments, including certain debt issues and debt securities held.
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The fair value designation, once made, is irrevocable. Designated financial assets and financial liabilities are
recognised when HSBC enters into the contractual provisions of the arrangements with counterparties, which
is generally on trade date, and are normally derecognised when either sold (assets) or extinguished (liabilities).
Measurement is initially at fair value, with transaction costs taken to the income statement. Subsequently, the
fair values are remeasured, and gains and losses from changes therein are recognised in the income statement in
‘Net income from financial instruments designated at fair value’.
(j) Financial investments
Treasury bills, debt securities and equity securities intended to be held on a continuing basis, other than those
designated at fair value, are classified as available-for-sale or held-to-maturity. Financial investments are
recognised on trade date when HSBC enters into contractual arrangements with counterparties to purchase
securities, and are normally derecognised when either the securities are sold or the borrowers repay their
obligations.
(i) Available-for-sale financial assets are initially measured at fair value plus direct and incremental transaction
costs. They are subsequently remeasured at fair value, and changes therein are recognised in other
comprehensive income in ‘Available-for-sale investments – fair value gains/(losses)’ until the financial
assets are either sold or become impaired. When available-for-sale financial assets are sold, cumulative
gains or losses previously recognised in other comprehensive income are recognised in the income statement
as ‘Gains less losses from financial investments’.
Interest income is recognised on available-for-sale debt securities using the effective interest rate, calculated
over the asset’s expected life. Premiums and/or discounts arising on the purchase of dated investment
securities are included in the calculation of their effective interest rates. Dividends are recognised in the
income statement when the right to receive payment has been established.
At each balance sheet date an assessment is made of whether there is any objective evidence of impairment
in the value of a financial asset. Impairment losses are recognised if, and only if, there is objective evidence
of impairment as a result of one or more events that occurred after the initial recognition of the financial
asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the
financial asset that can be reliably estimated.
If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition
cost (net of any principal repayments and amortisation) and the current fair value, less any previous
impairment loss recognised in the income statement, is removed from other comprehensive income and
recognised in the income statement.
Impairment losses for available-for-sale debt securities are recognised within ‘Loan impairment charges and
other credit risk provisions’ in the income statement and impairment losses for available-for-sale equity
securities are recognised within ‘Gains less losses from financial investments’ in the income statement.
Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent
accounting treatment for changes in the fair value of that asset differs depending on the nature of the
available-for-sale financial asset concerned:
–
–
for an available-for-sale debt security, a subsequent decline in the fair value of the instrument is
recognised in the income statement when there is further objective evidence of impairment as a result of
further decreases in the estimated future cash flows of the financial asset. Where there is no further
objective evidence of impairment, the decline in the fair value of the financial asset is recognised in other
comprehensive income. If the fair value of a debt security increases in a subsequent period, and the
increase can be objectively related to an event occurring after the impairment loss was recognised in the
income statement, the impairment loss is reversed through the income statement to the extent of the
increase in fair value;
for an available-for-sale equity security, all subsequent increases in the fair value of the instrument are
treated as a revaluation and are recognised in other comprehensive income. Impairment losses recognised
on the equity security are not reversed through the income statement. Subsequent decreases in the fair
value of the available-for-sale equity security are recognised in the income statement, to the extent that
further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity
security.
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 2
(ii) Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that HSBC positively intends, and is able, to hold to maturity. Held-to-maturity investments
are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently
measured at amortised cost using the effective interest rate method, less any impairment losses.
(k) Sale and repurchase agreements (including stock lending and borrowing)
When securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they
remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities
purchased under commitments to sell (‘reverse repos’) 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’ as
appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the
life of the agreement.
Securities lending and borrowing transactions are generally secured, with collateral taking the form of securities
or cash advanced or received. The transfer of securities to counterparties under these agreements is not normally
reflected on the balance sheet. Cash collateral advanced or received is recorded as an asset or a liability
respectively.
Securities borrowed are not recognised on the balance sheet. If they are sold on to third parties, an obligation to
return the securities is recorded as a trading liability and measured at fair value, and any gains or losses are
included in ‘Net trading income’.
(l) Derivatives and hedge accounting
Derivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values of exchange-
traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are
obtained using valuation techniques, including discounted cash flow models and option pricing models.
Derivatives may be embedded in other financial instruments, for example, a convertible bond with an embedded
conversion option. Embedded derivatives are treated as separate derivatives when their economic characteristics
and risks are not clearly and closely related to those of the host contract; the terms of the embedded derivative
would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the
combined contract is not held for trading or designated at fair value. These embedded derivatives are measured
at fair value with changes therein recognised in the income statement.
Derivatives are classified as assets when their fair value is positive, or as liabilities when their fair value is
negative. Derivative assets and liabilities arising from different transactions are only offset if the transactions are
with the same counterparty, a legal right of offset exists, and the parties intend to settle the cash flows on a net
basis.
The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are
designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses
from changes in the fair value of derivatives held for trading are recognised in the income statement. When
derivatives are designated as hedges, HSBC classifies them as either: (i) hedges of the change in fair value of
recognised assets or liabilities or firm commitments (‘fair value hedges’); (ii) hedges of the variability in highly
probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (‘cash flow
hedges’); or (iii) a hedge of a net investment in a foreign operation (‘net investment hedges’). Hedge accounting
is applied to derivatives designated as hedging instruments in a fair value, cash flow or net investment hedge
provided certain criteria are met.
Hedge accounting
At the inception of a hedging relationship, HSBC documents the relationship between the hedging instruments
and the hedged items, its risk management objective and its strategy for undertaking the hedge. HSBC also
requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the
hedging instruments, primarily derivatives, that are used in hedging transactions are highly effective in offsetting
the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. Interest on
designated qualifying hedges is included in ‘Net interest income’.
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Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are
recorded in the income statement, along with changes in the fair value of the hedged assets, liabilities or group
thereof that are attributable to the hedged risk.
If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the
carrying amount of the hedged item is amortised to the income statement based on a recalculated effective
interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case,
it is released to the income statement immediately.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow
hedges is recognised in other comprehensive income within the ‘Cash flow hedges – fair value gains/(losses)’.
Any gain or loss in fair value relating to an ineffective portion is recognised immediately in the income
statement.
The accumulated gains and losses recognised in other comprehensive income are reclassified to the income
statement in the periods in which the hedged item will affect profit or loss. However, when the forecast
transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains
and losses previously recognised in other comprehensive income are removed from equity and included in the
initial measurement of the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting,
any cumulative gain or loss recognised in other comprehensive income at that time remains in equity until the
forecast transaction is eventually recognised in the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was recognised in other comprehensive income is
immediately reclassified to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain
or loss on the effective portion of the hedging instrument is recognised in other comprehensive income; a gain or
loss on the ineffective portion is recognised immediately in the income statement. Gains and losses previously
recognised in other comprehensive income are reclassified to the income statement on the disposal of the foreign
operation.
Hedge effectiveness testing
To qualify for hedge accounting, HSBC requires that at the inception of the hedge and throughout its life, each
hedge must be expected to be highly effective (prospective effectiveness), and demonstrate actual effectiveness
(retrospective effectiveness) on an ongoing basis.
The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The
method adopted by an entity to assess hedge effectiveness will depend on its risk management strategy.
For prospective effectiveness, the hedging instrument must be expected to be highly effective in offsetting
changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is
designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each other
in the range of 80 per cent to 125 per cent.
Hedge ineffectiveness is recognised in the income statement in ‘Net trading income’.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are
recognised immediately in the income statement. These gains and losses are reported in ‘Net trading income’,
except where derivatives are managed in conjunction with financial instruments designated at fair value (other
than derivatives managed in conjunction with debt securities issued by the Group), in which case gains and
losses are reported in ‘Net income from financial instruments designated at fair value’. The interest on
derivatives managed in conjunction with debt securities issued by the Group which are designated at fair value is
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H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 2
recognised in ‘Interest expense’. All other gains and losses on these derivatives are reported in ‘Net income from
financial instruments designated at fair value’.
(m) Derecognition of financial assets and liabilities
Financial assets are derecognised when the contractual right to receive cash flows from the assets has expired; or
when HSBC has transferred its contractual right to receive the cash flows of the financial assets, and either:
–
substantially all the risks and rewards of ownership have been transferred; or
– HSBC has neither retained nor transferred substantially all the risks and rewards, but has not retained
control.
Financial liabilities are derecognised when they are extinguished, that is when the obligation is discharged, is
cancelled, or expires.
(n) Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when there is
a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
(o) Subsidiaries, associates and joint ventures
HSBC classifies investments in entities which it controls as subsidiaries. Where HSBC is a party to a contractual
arrangement whereby, together with one or more parties, it undertakes an economic activity that is subject to
joint control, HSBC classifies its interest in the venture as a joint venture. HSBC classifies investments in
entities over which it has significant influence, and that are neither subsidiaries nor joint ventures, as associates.
For the purpose of determining this classification, control is considered to be the power to govern the financial
and operating policies of an entity so as to obtain benefits from its activities.
HSBC Holdings’ investments in subsidiaries are stated at cost less any impairment losses. An impairment loss
recognised in prior periods shall be reversed through the income statement if, and only if, there has been a
change in the estimates used to determine the investment in subsidiary’s recoverable amount since the last
impairment loss was recognised.
Investments in associates and interests in joint ventures are recognised using the equity method. Under this
method, such investments are initially stated at cost, including attributable goodwill, and are adjusted thereafter
for the post-acquisition change in HSBC’s share of net assets.
Profits on transactions between HSBC and its associates and joint ventures are eliminated to the extent of
HSBC’s interest in the respective associates or joint ventures. Losses are also eliminated to the extent of HSBC’s
interest in the associates or joint ventures unless the transaction provides evidence of an impairment of the asset
transferred.
(p) Goodwill and intangible assets
(i) Goodwill arises on business combinations, including the acquisition of subsidiaries, and on the acquisition
of interests in joint ventures and associates, when the cost of acquisition exceeds the fair value of HSBC’s
share of the identifiable assets, liabilities and contingent liabilities acquired. If HSBC’s interest in the fair
value of the identifiable assets, liabilities and contingent liabilities of an acquired business is greater than the
cost of acquisition, the excess is recognised immediately in the income statement.
Intangible assets are recognised separately from goodwill when they are separable or arise from contractual
or other legal rights, and their fair value can be measured reliably.
Goodwill is allocated to cash-generating units for the purpose of impairment testing, which is undertaken at
the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is
performed at least annually, and whenever there is an indication that the cash-generating unit may be
impaired, by comparing the recoverable amount from a cash-generating unit with the carrying amount of its
net assets, including attributable goodwill. The recoverable amount of an asset is the higher of its fair value
less cost to sell, and its value in use. Value in use is the present value of the expected future cash flows from
378
a cash-generating unit. If the recoverable amount is less than the carrying value, an impairment loss is
charged to the income statement. Goodwill is stated at cost less accumulated impairment losses.
Goodwill on acquisitions of interests in joint ventures and associates is included in ‘Interests in associates
and joint ventures’ and is not tested separately for impairment.
At the date of disposal of a business, attributable goodwill is included in HSBC’s share of net assets in the
calculation of the gain or loss on disposal.
(ii) Intangible assets include the present value of in-force long-term insurance business, computer software,
trade names, mortgage servicing rights, customer lists, core deposit relationships, credit card customer
relationships and merchant or other loan relationships. 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.
Where:
–
–
intangible assets have an indefinite useful life, or are not yet ready for use, they are tested for
impairment annually. This impairment test may be performed at any time during the year, provided it is
performed at the same time every year. An intangible asset recognised during the current period is
tested before the end of the current year; and
intangible assets have a finite useful life, except for the present value of in-force long-term insurance
business, they are stated at cost less amortisation and accumulated impairment losses and are amortised
over their estimated useful lives. Estimated useful life is the lower of legal duration and expected useful
life. The amortisation of mortgage servicing rights is included within ‘Net fee income’.
For the accounting policy governing the present value of in-force long-term insurance business (see
Note 2y).
(iii) Intangible assets with finite useful lives are amortised, generally on a straight-line basis, over their useful
lives as follows:
Trade names ...........................................................................................................................
Mortgage servicing rights ......................................................................................................
Internally generated software .................................................................................................
Purchased software .................................................................................................................
Customer/merchant relationships ...........................................................................................
Other .......................................................................................................................................
10 years
generally between 5 and 12 years
between 3 and 5 years
between 3 and 5 years
between 3 and 10 years
generally 10 years
(q) Property, plant and equipment
Land and buildings are stated at historical cost, or fair value at the date of transition to IFRSs (‘deemed cost’),
less any impairment losses and depreciation calculated to write-off the assets over their estimated useful lives as
follows:
–
–
–
freehold land is not depreciated;
freehold buildings are depreciated at the greater of two per cent per annum on a straight-line basis or over
their remaining useful lives; and
leasehold buildings are depreciated over the unexpired terms of the leases, or over their remaining useful
lives.
Equipment, fixtures and fittings (including equipment on operating leases where HSBC is the lessor) are stated
at cost less any impairment losses and depreciation calculated on a straight-line basis to write-off the assets over
their useful lives, which run to a maximum of 35 years but are generally between 5 years and 20 years.
Property, plant and equipment is subject to an impairment review if there are events or changes in circumstances
which indicate that the carrying amount may not be recoverable.
HSBC holds certain properties as investments to earn rentals or for capital appreciation, or both. Investment
properties are included in the balance sheet at fair value with changes therein recognised in the income statement
in the period of change. Fair values are determined by independent professional valuers who apply recognised
valuation techniques.
379
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 2
(r) Finance and operating leases
Agreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of
assets, but not necessarily legal title, are classified as finance leases. When 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’ as appropriate. The finance income receivable is recognised in
‘Net interest income’ over the periods of the leases so as to give a constant rate of return on the net investment
in the leases.
When HSBC is a lessee under finance leases, the leased assets are capitalised and included in ‘Property, plant
and equipment’ and the corresponding liability to the lessor is included in ‘Other liabilities’. A finance lease and
its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of
the minimum lease payments. Finance charges payable are recognised in ‘Net interest income’ over the period of
the lease based on the interest rate implicit in the lease so as to give a constant rate of interest on the remaining
balance of the liability.
All other leases are classified as operating leases. When acting as lessor, HSBC includes the assets subject to
operating leases in ‘Property, plant and equipment’ and accounts for them accordingly. Impairment losses are
recognised to the extent that residual values are not fully recoverable and the carrying value of the assets is
thereby impaired. When HSBC is the lessee, leased assets are not recognised on the balance sheet. Rentals
payable and receivable under operating leases are accounted for on a straight-line basis over the periods of the
leases and are included in ‘General and administrative expenses’ and ‘Other operating income’, respectively.
(s) Income tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to
the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it
is recognised in the same statement in which the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted
or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous
years. Current tax assets and liabilities are offset when HSBC intends to settle on a net basis and the legal right
to offset exists.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the
balance sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are
generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent
that it is probable that future taxable profits will be available against which deductible temporary differences can
be utilised.
Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised
or the liabilities settled, based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.
Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income
taxes levied by the same taxation authority, and when HSBC has a legal right to offset.
Deferred tax relating to actuarial gains and losses on post-employment benefits is recognised in other
comprehensive income. Deferred tax relating to share-based payment transactions is recognised directly in
equity to the extent that the amount of the estimated future tax deduction exceeds the amount of the related
cumulative remuneration expense. Deferred tax relating to fair value re-measurements of available-for-sale
investments and cash flow hedging instruments which are charged or credited directly to other comprehensive
income, is also charged or credited to other comprehensive income and is subsequently recognised in the income
statement when the deferred fair value gain or loss is recognised in the income statement.
(t) Pension and other post-employment benefits
HSBC operates a number of pension and other post-employment benefit plans throughout the world. These plans
include both defined benefit and defined contribution plans and various other post-employment benefits such as
post-employment healthcare.
Payments to defined contribution plans and state-managed retirement benefit plans, where HSBC’s obligations
under the plans are equivalent to a defined contribution plan, are charged as an expense as they fall due.
380
The defined benefit pension costs and the present value of defined benefit obligations are calculated at the
reporting date by the schemes’ actuaries using the Projected Unit Credit Method. The net charge to the income
statement mainly comprises the current service cost, plus the unwinding of the discount rate on plan liabilities,
less the expected return on plan assets, and is presented in operating expenses. Past service costs are charged
immediately to the income statement to the extent that the benefits have vested, and are otherwise recognised
on a straight-line basis over the average period until the benefits vest. Actuarial gains and losses comprise
experience adjustments (the effects of differences between the previous actuarial assumptions and what has
actually occurred), as well as the effects of changes in actuarial assumptions. Actuarial gains and losses are
recognised in other comprehensive income in the period in which they arise.
The defined benefit liability recognised in the balance sheet represents the present value of defined benefit
obligations adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Any net
defined benefit surplus is limited to unrecognised past service costs plus the present value of available refunds
and reductions in future contributions to the plan.
The cost of obligations arising from other post-employment defined benefit plans, such as defined benefit health-
care plans, are accounted for on the same basis as defined benefit pension plans.
(u) Share-based payments
The cost of share-based payment arrangements with employees is measured by reference to the fair value of
equity instruments on the date they are granted, and recognised as an expense on a straight-line basis over the
vesting period, with a corresponding credit to the ‘Share-based payment reserve’. The vesting period is the
period during which all the specified vesting conditions of a share-based payment arrangement are to be
satisfied. The fair value of equity instruments that are made available immediately, with no vesting period
attached to the award, are expensed immediately.
Fair value is determined by using appropriate valuation models, taking into account the terms and conditions
upon which the equity instruments were granted. Vesting conditions include service conditions and performance
conditions; any other features of a share-based payment arrangement are non-vesting conditions. Market
performance conditions and non-vesting conditions are taken into account when estimating the fair value of
equity instruments at the date of grant, so that an award is treated as vesting irrespective of whether the market
performance condition or non-vesting condition is satisfied, provided all other vesting conditions are satisfied.
Vesting conditions, other than market performance conditions, are not taken into account in the initial estimate
of the fair value at the grant date. They are taken into account by adjusting the number of equity instruments
included in the measurement of the transaction, so that the amount recognised for services received as
consideration for the equity instruments granted shall be based on the number of equity instruments that
eventually vest. On a cumulative basis, no expense is recognised for equity instruments that do not vest because
of a failure to satisfy non-market performance or service conditions.
Where an award has been modified, as a minimum, the expense of the original award continues to be recognised
as if it had not been modified. Where the effect of a modification is to increase the fair value of an award or
increase the number of equity instruments, the incremental fair value of the award or incremental fair value of
the extra equity instruments is recognised in addition to the expense of the original grant, measured at the date of
modification, over the modified vesting period.
A cancellation that occurs during the vesting period is treated as an acceleration of vesting, and recognised
immediately for the amount that would otherwise have been recognised for services over the vesting period.
Where HSBC Holdings enters into share-based payment arrangements involving employees of subsidiaries, the
cost is recognised in ‘Investment in subsidiaries’ and credited to the ‘Share-based payment reserve’ over the
vesting period. Where a subsidiary funds the share-based payment arrangement, ‘Investment in subsidiaries’ is
reduced by the fair value of equity instruments.
(v) Foreign currencies
Items included in the financial statements of each of HSBC’s entities are measured using the currency of the
primary economic environment in which the entity operates (‘the functional currency’). HSBC’s consolidated
financial statements are presented in US dollars which is also HSBC Holdings’ functional currency.
381
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 2
Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into
the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange
differences are included in the income statement. Non-monetary assets and liabilities that are measured at
historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the
date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are
translated into the functional currency using the rate of exchange at the date the fair value was determined. Any
exchange component of a gain or loss on a non-monetary item is recognised in other comprehensive income if
the gain or loss on the non-monetary item is recognised in other comprehensive income. Any exchange
component of a gain or loss on a non-monetary item is recognised in the income statement if the gain or loss on
the non-monetary item is recognised in the income statement.
In the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of
branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated
into the Group’s presentation currency at the rate of exchange ruling at the balance sheet date. The results of
branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars are translated
into US dollars at the average rates of exchange for the reporting period. Exchange differences arising from the
retranslation of opening foreign currency net assets, and exchange differences arising from retranslation of the
result for the reporting period from the average rate to the exchange rate prevailing at the period end, are
recognised in other comprehensive income. Exchange differences on a monetary item that is part of a net
investment in a foreign operation are recognised in the income statement of the separate financial statements. In
consolidated financial statements these exchange differences are recognised in other comprehensive income. On
disposal of a foreign operation, exchange differences relating thereto and previously recognised in other
comprehensive income are recognised in the income statement.
(w) Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a
current legal or constructive obligation, which has arisen as a result of past events, and for which a reliable
estimate can be made of the amount of the obligation.
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, are
possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or
non-occurrence, of one or more uncertain future events not wholly within the control of HSBC; or are present
obligations that have arisen from past events but are not recognised because it is not probable that settlement will
require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured.
Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of
settlement is remote.
(x) Financial guarantee contracts
Liabilities under financial guarantee contracts which are not classified as insurance contracts are recorded
initially at their fair value, which is generally the fee received or receivable. Subsequently, financial guarantee
liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate
of the expenditure required to settle the obligations.
HSBC Holdings has issued financial guarantees and similar contracts to other Group entities. Where it has
previously asserted explicitly that it regards such contracts as insurance contracts and has used accounting
applicable to insurance contracts, HSBC may elect to account for guarantees as an insurance contract. This
election is made on a contract by contract basis, but the election for each contract is irrevocable. Where these
guarantees have been classified as insurance contracts, they are measured and recognised as insurance liabilities.
(y) Insurance contracts
Through its insurance subsidiaries, HSBC issues contracts to customers that contain insurance risk, financial risk
or a combination thereof. A contract under which HSBC accepts significant insurance risk from another party by
agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an
insurance contract. An insurance contract may also transfer financial risk, but is accounted for as an insurance
contract if the insurance risk is significant.
382
While investment contracts with discretionary participation features are financial instruments, they continue to
be treated as insurance contracts as permitted by IFRS 4.
Insurance contracts are accounted for as follows:
Premiums
Gross insurance premiums for non-life insurance business are reported as income over the term of the insurance
contracts based on the proportion of risks borne during the accounting period. The unearned premium (the
proportion of the business underwritten in the accounting year relating to the period of risk after the balance
sheet date) is calculated on a daily or monthly pro rata basis.
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance
contracts where premiums are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance
contracts to which they relate.
Claims and reinsurance recoveries
Gross insurance claims for non-life insurance contracts include paid claims and movements in outstanding
claims liabilities.
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year,
including claim handling costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
Claims arising during the year include maturities, surrenders and death claims.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date
on which, following notification, the policy ceases to be included within the calculation of the related insurance
liabilities. Death claims are recognised when notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
Liabilities under insurance contracts
Outstanding claims liabilities for non-life insurance contracts are based on the estimated ultimate cost of all
claims incurred but not settled at the balance sheet date, whether reported or not, together with related claim-
handling costs and a reduction for the expected value of salvage and other recoveries. Liabilities for claims
incurred but not reported are made on an estimated basis, using appropriate statistical techniques.
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on
local actuarial principles.
Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value
which is calculated by reference to the value of the relevant underlying funds or indices.
A liability adequacy test is carried out on insurance liabilities to ensure that the carrying amount of the liabilities
is sufficient in the light of current estimates of future cash flows. When performing the liability adequacy test, all
contractual cash flows are discounted and compared with the carrying value of the liability. When a shortfall is
identified it is charged immediately to the income statement.
Present value of in-force long-term insurance business
The value placed on insurance contracts that are classified as long-term insurance business or long-term
investment contracts with discretionary participating features (‘DPF’) and are in force at the balance sheet date is
recognised as an asset. The asset represents the present value of the shareholders’ interest in the profits expected
to emerge from these contracts written at the balance sheet date.
The present value of in-force long-term insurance business and long-term investment contracts with DPF,
referred to as ‘PVIF’, is determined by discounting the shareholders’ interest in future profits expected to emerge
from business currently in force using appropriate assumptions in assessing factors such as future mortality,
lapse rates and levels of expenses and a risk discount rate that reflects the risk premium attributable to the
respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial
383
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 2 and 3
options and guarantees. The PVIF asset is presented gross of attributable tax in the balance sheet and movements
in the PVIF asset are included in ‘Other operating income’ on a gross of tax basis.
Future profit participation
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts
include provisions for the future discretionary benefits to policyholders. These provisions reflect actual
performance of the investment portfolio to date and management expectation on the future performance in
connection with the assets backing the contracts, as well as other experience factors such as mortality, lapses and
operational efficiency, where appropriate. This benefit may arise from the contractual terms, regulation, or past
distribution policy.
In the case of net unrealised investment gains on contracts whose discretionary benefits principally reflect the
actual performance of the investment portfolio, the corresponding increase in the liabilities is recognised in
either the income statement or other comprehensive income, following the treatment of the unrealised gains on
the relevant assets. In the case of net unrealised losses, a deferred participating asset is recognised only to the
extent that its recoverability is highly probable. Movements in the liabilities arising from realised gains and
losses on relevant assets are recognised in the income statement.
Investment contracts
Customer liabilities under linked and certain non-linked investment contracts and the corresponding financial
assets are designated at fair value. Movements in fair value are recognised in ‘Net income from financial
investments designated at fair value’. Premiums receivable and amounts withdrawn are accounted for as
increases or decreases in the liability recorded in respect of investment contracts.
Liabilities under linked investment contracts are at least equivalent to the surrender or transfer value which is
calculated by reference to the value of the relevant underlying funds or indices.
Investment management fees receivable are recognised in the income statement over the period of the provision
of the investment management services, in ‘Net fee income’.
The incremental costs directly related to the acquisition of new investment contracts or renewing existing
investment contracts are deferred and amortised over the period during which the investment management
services are provided.
(z) Debt securities issued and deposits by customers and banks
Financial liabilities are recognised when HSBC enters into the contractual provisions of the arrangements with
counterparties, which is generally on trade date, and initially measured at fair value, which is normally the
consideration received net of directly attributable transaction costs incurred. Subsequent measurement of
financial liabilities, other than those measured at fair value through profit or loss and financial guarantees, is at
amortised cost, using the effective interest method to amortise the difference between proceeds received, net of
directly attributable transaction costs incurred, and the redemption amount over the expected life of the
instrument.
(aa) Share capital
Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets.
Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from
the proceeds, net of tax.
HSBC Holdings plc shares held by HSBC are recognised in equity as a deduction from retained earnings until
they are cancelled. When such shares are subsequently sold, reissued or otherwise disposed of, any consideration
received is included in equity, net of any directly attributable incremental transaction costs and related income
tax effects.
(ab) Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash equivalents include highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in
384
value. Such investments are normally those with less than three months’ maturity from the date of acquisition,
and include cash and balances at central banks, treasury bills and other eligible bills, loans and advances to
banks, items in the course of collection from or in transmission to other banks, and certificates of deposit.
(ac) Rights issues
Rights issues to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency
are equity instruments if the entity offers the rights issues pro rata to all of its existing owners of the same class
of its own non-derivative equity instruments. On initial recognition, these rights are recognised in shareholders’
equity and are not subsequently re-measured during the offer period. Following the exercise of the rights and the
allotment of new shares, the cash proceeds of the rights issue are recognised in shareholders’ equity. Incremental
costs directly attributable to the rights issue are shown as a deduction from the proceeds, net of tax.
3 Net income/(expense) from financial instruments designated at fair value
Net income/(expense) from financial instruments designated at fair value includes:
•
•
•
all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value,
including liabilities under investment contracts;
all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial
assets and liabilities designated at fair value; and
interest income, interest expense and dividend income in respect of:
– financial assets and liabilities designated at fair value; and
– derivatives managed in conjunction with the above,
except for interest arising from HSBC’s issued debt securities and derivatives managed in conjunction with those
debt securities, which is recognised in ‘Interest expense’.
Net income/(expense) arising on:
– financial assets held to meet liabilities under insurance and investment
contracts ..........................................................................................................
– other financial assets designated at fair value .....................................................
– derivatives managed in conjunction with financial assets designated
at fair value ......................................................................................................
– liabilities to customers under investment contracts ............................................
– HSBC’s long-term debt issued and related derivatives ......................................
– changes in own credit spread on long-term debt ............................................
– derivatives managed in conjunction with HSBC’s issued debt securities ......
– other changes in fair value ..............................................................................
– other financial liabilities designated at fair value ...............................................
– derivatives managed in conjunction with other financial liabilities
designated at fair value ...................................................................................
Net income/(expense) from financial instruments designated at fair value ............
HSBC Holdings
Net income/(expense) arising on:
– HSBC’s long-term debt issued and related derivatives
– changes in own credit spread on long-term debt ............................................
– derivatives managed in conjunction with HSBC’s issued debt securities ......
– other changes in fair value ..............................................................................
Net income/(expense) from financial instruments designated at fair value ............
385
2009
US$m
3,793
2
(249)
3,546
(1,329)
(6,247)
(6,533)
(1,726)
2,012
492
7
(7,077)
(3,531)
2009
US$m
(2,612)
(352)
201
(2,763)
2008
US$m
(5,064)
1,738
77
(3,249)
1,751
6,679
6,570
4,413
(4,304)
(1,368)
39
7,101
3,852
2008
US$m
2,262
688
37
2,987
2007
US$m
2,056
581
(18)
2,619
(940)
2,812
3,055
2,476
(2,719)
(395)
(13)
1,464
4,083
2007
US$m
876
1,094
(1,054)
916
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 4, 5 and 6
4 Gains arising from dilution of interests in associates
Gains arising
from dilution
of HSBC’s
interests
US$m
HSBC’s
interests after
issue of
new shares
HSBC’s
interests before
issue of
new shares
%
%
2007
Industrial Bank1 .......................................................................................................
Ping An Insurance ...................................................................................................
Bank of Communications2 .......................................................................................
Financiera Independencia S.A. de C.V. ..................................................................
Vietnam Technological and Commercial Joint Stock Bank ...................................
187
485
404
11
5
12.78
16.78
18.60
18.68
14.44
15.98
19.90
19.90
19.90
15.00
Gains arising from dilution of interests in associates .............................................
1,092
1 Investment held through Hang Seng Bank, a 62.14 per cent owned subsidiary of HSBC. The dilution gains therefore include a minority
interest of US$71 million.
2 Subsequent to the dilution of its interests in Bank of Communications, HSBC increased its holding from 18.60 per cent to 19.01 per cent
at 31 December 2007 (Note 21).
In 2007, certain HSBC associates issued new shares. HSBC did not subscribe and, as a result, its interests in the
associates’ equity decreased. The assets of each associate substantially increased as a result of the new share issue
and, as a consequence, HSBC’s share of the associates’ underlying net assets increased notwithstanding the reduction
in the Group’s proportionate ownership interests. This increase is a gain arising from the dilution of the Group’s
interests in the associates, and is presented in the income statement.
5 Net earned insurance premiums
2009
Gross earned premiums ...........................................
– gross written premiums ....................................
– movement in unearned premiums ....................
Reinsurers’ share of gross earned premiums ...........
– gross written premiums ceded to reinsurers .....
– reinsurers’ share of movement in unearned
premiums ..........................................................
2008
Gross earned premiums ...........................................
– gross written premiums ....................................
– movement in unearned premiums ....................
Reinsurers’ share of gross earned premiums ...........
– gross written premiums ceded to reinsurers .....
– reinsurers’ share of movement in unearned
premiums ..........................................................
2007
Gross earned premiums ...........................................
– gross written premiums ....................................
– movement in unearned premiums ....................
Reinsurers’ share of gross earned premiums ...........
– gross written premiums ceded to reinsurers .....
– reinsurers’ share of movement in unearned
premiums ..........................................................
1 Discretionary participation features.
Non-life
insurance
US$m
Life
insurance
(non-linked)
US$m
Life
insurance
(linked)
US$m
Investment
contracts
with DPF1
US$m
1,572
1,339
233
(225)
(215)
(10)
5,218
5,285
(67)
(278)
(280)
2
1,427
1,427
–
(17)
(11)
(6)
2,774
2,774
–
–
–
–
Total
US$m
10,991
10,825
166
(520)
(506)
(14)
1,347
4,940
1,410
2,774
10,471
1,834
1,776
58
(263)
(260)
(3)
6,086
6,257
(171)
(851)
(878)
27
1,825
1,825
–
(583)
(564)
(19)
2,802
2,802
–
–
–
–
12,547
12,660
(113)
(1,697)
(1,702)
5
1,571
5,235
1,242
2,802
10,850
1,855
1,853
2
(407)
(385)
(22)
4,906
4,892
14
(357)
(357)
–
2,350
2,350
–
(1,161)
(1,166)
5
1,890
1,890
–
–
–
–
11,001
10,985
16
(1,925)
(1,908)
(17)
1,448
4,549
1,189
1,890
9,076
386
6 Net insurance claims incurred and movement in liabilities to policyholders
2009
Gross claims incurred and movement in liabilities .....
– claims, benefits and surrenders paid ................
– movement in liabilities .....................................
Reinsurers’ share of claims incurred and
movement in liabilities .......................................
– claims, benefits and surrenders paid ................
– movement in liabilities .....................................
2008
Gross claims incurred and movement in liabilities .....
– claims, benefits and surrenders paid ................
– movement in liabilities .....................................
Reinsurers’ share of claims incurred and
movement in liabilities .......................................
– claims, benefits and surrenders paid ................
– movement in liabilities .....................................
2007
Gross claims incurred and movement in liabilities .....
– claims, benefits and surrenders paid ................
– movement in liabilities .....................................
Reinsurers’ share of claims incurred and
movement in liabilities .......................................
– claims, benefits and surrenders paid ................
– movement in liabilities .....................................
1 Discretionary participation features.
Non-life
insurance
US$m
Life
insurance
(non-linked)
US$m
Life
insurance
(linked)
US$m
Investment
contracts
with DPF1
US$m
1,281
987
294
(158)
(156)
(2)
4,669
2,098
2,571
(98)
(159)
61
2,676
325
2,351
146
(21)
167
3,934
1,818
2,116
–
–
–
Total
US$m
12,560
5,228
7,332
(110)
(336)
226
1,123
4,571
2,822
3,934
12,450
1,044
1,044
–
(83)
(158)
75
961
1,099
1,017
82
(171)
(207)
36
928
5,480
1,491
3,989
(792)
(172)
(620)
939
481
458
(1,442)
(44)
(1,398)
1,743
1,911
(168)
–
–
–
9,206
4,927
4,279
(2,317)
(374)
(1,943)
4,688
(503)
1,743
6,889
3,377
940
2,437
349
(169)
518
2,886
790
2,096
(1,120)
(45)
(1,075)
2,188
1,080
1,108
–
–
–
9,550
3,827
5,723
(942)
(421)
(521)
3,726
1,766
2,188
8,608
387
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 7 and 8
7 Net operating income
Net operating income is stated after the following items of income, expense, gains and losses:
Income
Interest recognised on impaired financial assets .....................................................
Fees earned on financial assets or liabilities not held for trading nor
designated at fair value, other than fees included in effective interest
rate calculations on these types of assets and liabilities .....................................
Fees earned on trust and other fiduciary activities where HSBC holds
or invests assets on behalf of its customers ........................................................
Income from listed investments ...............................................................................
Income from unlisted investments ...........................................................................
Losses from the fraud at Bernard L Madoff Investment Securities LLC ...............
Expense
Interest on financial instruments, excluding interest on financial liabilities
2009
US$m
941
2008
US$m
1,040
12,310
14,511
2,735
9,201
7,085
(72)
3,314
11,425
11,359
(984)
2007
US$m
404
15,140
3,695
10,944
10,429
–
held for trading or designated at fair value .........................................................
(19,737)
(45,525)
(50,876)
(1,580)
(1,866)
(1,923)
Fees payable on financial assets or liabilities not held for trading nor
designated at fair value, other than fees included in effective interest rate
calculations on these types of assets and liabilities ............................................
Fees payable relating to trust and other fiduciary activities where
HSBC holds or invests assets on behalf of its customers ...................................
Gains/(losses)
Gain on disposal or settlement of loans and advances ............................................
Impairment of available-for-sale equity securities ..................................................
Gains on disposal of property, plant and equipment, intangible assets
and non-financial investments ............................................................................
Gain on sale/repurchase of 8 Canada Square1..........................................................
Loan impairment charges and other credit risk provisions ..............................
Net impairment charge on loans and advances ...................................................
Impairment of available-for-sale debt securities .................................................
Impairment in respect of other credit risk provisions .........................................
1 The repurchase of 8 Canada Square occurred in 2008. See Note 23 for further details.
8 Employee compensation and benefits
Wages and salaries ...................................................................................................
Social security costs .................................................................................................
Post-employment benefits .......................................................................................
(116)
244
(358)
457
576
(26,488)
(24,942)
(1,474)
(72)
2009
US$m
16,268
1,512
688
18,468
The average number of persons employed by HSBC during the year was as follows:
Europe ......................................................................................................................
Hong Kong ..............................................................................................................
Rest of Asia-Pacific1 ................................................................................................
Middle East1 .............................................................................................................
North America .........................................................................................................
Latin America ..........................................................................................................
2009
84,056
28,894
88,122
8,468
42,202
57,774
(159)
(163)
94
(1,042)
465
416
(24,937)
(24,131)
(737)
(69)
2008
US$m
18,169
1,625
998
20,792
2008
87,864
30,030
87,954
8,201
53,090
64,319
64
(42)
213
–
(17,242)
(17,177)
(44)
(21)
2007
US$m
18,535
1,587
1,212
21,334
2007
86,918
27,702
75,095
8,008
58,117
66,442
Total .........................................................................................................................
309,516
331,458
322,282
1 The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of
Asia-Pacific. Comparative data have been adjusted accordingly.
388
Post-employment benefit plans
Income statement charge
2009
US$m
2008
US$m
Defined benefit pension plans .................................................................................
– HSBC Bank (UK) Pension Scheme .................................................................
– Other plans ........................................................................................................
Defined contribution pension plans .........................................................................
Defined benefit healthcare plans .............................................................................
Defined contribution healthcare plans .....................................................................
161
(179)
340
492
653
31
4
688
Net liabilities recognised on balance sheet in respect of defined benefit plans
Defined benefit pension plans .................................................................................................................
– HSBC Bank (UK) Pension Scheme .................................................................................................
– Other plans ........................................................................................................................................
Defined benefit healthcare plans .............................................................................................................
477
255
222
498
975
13
10
998
2009
US$m
6,147
3,822
2,325
820
6,967
2007
US$m
694
490
204
484
1,178
33
1
1,212
2008
US$m
3,154
392
2,762
734
3,888
HSBC pension plans
HSBC operates 211 pension plans throughout the world, covering 88 per cent of HSBC’s employees, with a total
pension cost of US$653 million (2008: US$975 million; 2007: US$1,178 million). The income statement charge for
plans outside the UK was US$760 million (2008: US$678 million; 2007: US$626 million). This was partly offset by
a gain of US$107 million on the UK plans, which included a one-off accounting gain of US$499 million due to a
change in the basis of delivering death-in-service, ill health and early retirement benefits for some UK employees.
HSBC has been progressively offering all new employees membership of defined contribution plans. At
31 December 2009, 59 per cent of HSBC’s staff were members of defined contribution plans. The related
pension cost for the year was US$492 million (2008: US$498 million; 2007: US$484 million).
Defined benefit plans cover 29 per cent of HSBC’s employees. For these plans, the long-term investment objectives
of both HSBC and, where relevant and appropriate, the trustees are:
•
•
to limit the risk of the assets failing to meet the liabilities of the plans over the long-term; and
to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the defined
benefit plans.
Both HSBC and, where relevant and appropriate, the trustees consider that the investment policy should be consistent
with meeting their mutual overall long-term investment objectives. In pursuit of these long-term objectives, a
benchmark is established for the allocation of the defined benefit plan assets between asset classes. In addition, each
permitted asset class has its own benchmarks, such as stock market or property valuation indices and, where relevant,
desired levels of out-performance. The benchmarks are reviewed at least triennially within 18 months of the date at
which an actuarial valuation is made, or more frequently if required by local legislation or circumstances. The
process generally involves an extensive asset and liability review.
The majority of the Group’s defined benefit plans are funded plans. The assets of most of the larger ones are held in
trusts or similar funds separate from HSBC. The plans are reviewed at least annually or in accordance with local
practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit
obligations and related current service costs vary according to the economic conditions of the countries in which the
plans are situated.
The largest plan exists in the UK, where the HSBC Bank (UK) Pension Scheme covers employees of HSBC Bank plc
and certain other employees of HSBC. This comprises a funded defined benefit plan (‘the principal plan’), which is
389
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 8
closed to new entrants, and a defined contribution plan which was established in July 1996 for new employees.
The principal plan holds a diversified portfolio of investments to meet future cash flow liabilities arising from
accrued benefits as they fall due to be paid. The Trustee of the principal plan is required to produce a written
Statement of Investment Principles which governs decision-making about how investments are made.
In 2006, HSBC and the Trustee of the principal plan agreed to change the investment strategy in order to reduce the
investment risk. This involved switching from a mainly equity-based strategy to one based largely on holding bonds
and a more diverse range of investments, and included a commitment to undertake a programme of swap
arrangements by which the principal plan makes LIBOR-related interest payments in exchange for the receipt of cash
flows which are based on projected future benefit payments to be made from the principal plan. The asset allocation
for this strategy was:
Equities ................................................................................................................................................................................
Bonds ...................................................................................................................................................................................
Alternative assets1 ................................................................................................................................................................
Property ................................................................................................................................................................................
Cash .....................................................................................................................................................................................
%
15.0
50.0
10.0
10.0
15.0
100.0
1 Alternative assets include emerging market bonds, loans, and infrastructure assets.
At 31 December 2009, the above strategy remained substantially in place with details of the swap arrangements
included in Note 43.
The latest actuarial investigation of the principal plan was made as at 31 December 2008 by C G Singer, Fellow of
the Institute of Actuaries, of Watson Wyatt Limited, a Towers Watson company. At that date, the market value of the
HSBC Bank (UK) Pension Scheme’s assets was £10.6 billion (US$15.5 billion) (including assets relating to the defined
benefit plan, the defined contribution plan and additional voluntary contributions). The market value of the plan assets
represented 77 per cent of the amount expected to be required, on the basis of the assumptions adopted, to provide the
benefits accrued to members after allowing for expected future increases in earnings, and the resulting deficit
amounted to £3.2 billion (US$4.7 billion). The method adopted for this investigation was the projected unit method.
The expected cash flows from the plan were projected by reference to the Retail Price Index (‘RPI’) swap break-even
curve at 31 December 2008. Salary increases were assumed to be 0.5 per cent per annum above RPI and inflationary
pension increases, subject to a minimum of zero per cent and a maximum of 5 per cent (maximum of 3 per cent per
annum in respect of service accrued since 1 July 2009), were assumed to be in line with RPI. The projected cash
flows were discounted at the LIBOR swap curve at 31 December 2008 plus a margin for the expected return on the
investment strategy of 190 basis points per annum. The mortality experience of the plan’s pensioners over the three
year period since the previous valuation was analysed and, on the basis of this analysis, the mortality assumptions
were set based on the SAPS S1 series of tables which best fit the pensioner experience. Allowance was made for
future improvements to mortality rates in line with the medium cohort projections with a minimum improvement rate
set at 1.75 per cent for males and 1.25 per cent for females.
HSBC Bank plc has agreed with the Trustee to reduce the deficit of the plan by meeting a schedule of additional
future funding payments as set out below (unless a mutually agreed alternative is adopted by 30 June 2010):
2009 .........................................................................................................................................................
2010 .........................................................................................................................................................
2011 .........................................................................................................................................................
2012 .........................................................................................................................................................
2013 .........................................................................................................................................................
2014 .........................................................................................................................................................
2015 .........................................................................................................................................................
2016 .........................................................................................................................................................
2017 .........................................................................................................................................................
2018 .........................................................................................................................................................
US$m1
nil
nil
nil
754
754
754
1,022
1,022
1,022
1,022
£m
nil
nil
nil
465
465
465
630
630
630
630
1 The payment schedule was agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the exchange
rate effective as at 31 December 2009.
390
The payments of £465 million (US$754 million) to be made in each of 2012, 2013 and 2014 reflect the funding
payments agreed following the 2005 triennial actuarial valuation.
HSBC considers that the contributions set out above, together with investment returns at an expected level of
240 basis points above the LIBOR swap curve, would be sufficient to meet the deficit as at 31 December 2008 over
the agreed period. At each subsequent actuarial valuation, HSBC has agreed with the Trustee that any shortfall in
investment returns relative to this expected level, subject to a maximum of 50 basis points per annum, will be
eliminated by payment of equal cash instalments over the remaining years to the end of this recovery plan period.
HSBC Bank plc also agreed to make ongoing contributions to the principal plan in respect of the accrual of benefits
of defined benefit section members at various rates dependent on the benefit accrual options selected. The average
rate is estimated to be 34 per cent of pensionable salaries (less member contributions) payable from 1 April 2010 until
the completion of the next actuarial valuation, due as at 31 December 2011. The average rate is reflective of the
different membership groups following changes made to the Scheme during 2009. During 2009, HSBC paid
contributions at the rate of 38 per cent of pensionable salaries and will continue contributions at this rate until
31 March 2010.
On 1 July 2009, changes to the design of the defined benefit section of the principal plan were introduced. This
included the introduction of employee contributions, optionality concerning future benefit accrual and, with effect
from 1 April 2010, an increased Normal Retirement Age of 65 years. In addition, enhancements to the defined
contribution section were also introduced.
As part of the 31 December 2008 valuation, calculations were also carried out as to the amount of assets that
might be needed to meet the liabilities if the Scheme was discontinued and the members’ benefits bought out with an
insurance company (although in practice this may not be possible for a plan of this size) or the Trustee continued to
run the plan without the support of HSBC. The amount required under this approach is estimated to be £19.8 billion
(US$28.9 billion) as at 31 December 2008. In arriving at this estimation, a more prudent assumption about future
mortality was made than for the assessment of the ongoing position and it was assumed that the Trustee would alter
the investment strategy to be an appropriately matched portfolio of UK government bonds. An explicit allowance
for expenses was also included.
Benefit payments (US$m)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
The benefits payable from the defined benefit plan are expected to be as shown in the chart above.
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 Group. The scheme comprises
a funded defined benefit scheme (which provides a lump sum on retirement but is now closed to new members) 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 2008, and was performed by Estella Chiu, fellow
of the Society of Actuaries of the United States of America, of HSBC Insurance (Asia) Limited, a subsidiary of
HSBC Holdings. At that valuation date, the market value of the defined benefit scheme’s assets was
US$1,072 million. On an ongoing basis, the actuarial value of the scheme’s assets represented 103 per cent of the
actuarial present value of the benefits accrued to members, after allowing for expected future increases in salaries,
and the resulting surplus amounted to US$34 million. On a wind-up basis, the scheme’s assets represented
104 per cent of the members’ vested benefits, based on current salaries, and the resulting surplus amounted to
US$44 million. The attained age method has been adopted for the valuation and the major assumptions used in this
valuation were a discount rate of 6 per cent per annum and long-term salary increases of 5 per cent per annum.
391
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 8
The HSBC North America (US) Retirement Income Plan covers all employees of HSBC Bank USA, HSBC Finance
and HSBC USA who have reached the age of 21 and met the one year of service participation requirement. The
Retirement Income Plan provides final average pay benefits to legacy participants and cash balance benefits to all
other participants. All new employees participate in the cash balance section of the plan. The most recent actuarial
valuation of the plan was made at 1 January 2009 by Jennifer Jakubowski, Fellow of the Society of Actuaries,
Enrolled Actuary and member of the American Academy of Actuaries, and Emily Carlson, Associate of the Society
of Actuaries, and member of the American Academy of Actuaries. At that date, the actuarial value of the plan’s assets
was US$2,429 million. The assets represented 113 per cent of the benefits accrued to members as valued under the
provisions of the Pension Protection Act of 2006 that was effective for the plan year beginning 1 January 2008. The
resulting surplus amounted to US$280 million. The method employed for this valuation was the traditional unit credit
method and the discount rate was determined using a full yield curve method, which resulted in an effective interest
rate of 8.01 per cent per annum.
In February 2010, HSBC North America announced a plan to cease all future benefit accruals for legacy participants
under the final average pay formula components of the HSBC North America (US) Retirement Income Plan with
effect from 1 January 2011. HSBC currently estimates that as a result of these changes, HSBC North America will
record a reduction to total pension expense in 2010 of approximately US$13 million and a one-time curtailment gain
of approximately US$144 million.
The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and
the HSBC North America (US) Retirement Income Plan cover 34 per cent of HSBC’s employees.
HSBC healthcare benefits plans
HSBC also provides post-employment healthcare benefits under plans in the UK, the US, Canada, Mexico and Brazil,
the majority of which are unfunded. The majority of post-employment healthcare benefits plans are defined benefit
plans and are accounted for in the same manner as defined benefit pension plans. The plans are reviewed at least
annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used
to calculate the defined benefit obligation and related current service cost vary according to the economic conditions
of the countries in which they are situated. Total healthcare cost was US$35 million (2008: US$23 million; 2007:
US$34 million).
Post-employment defined benefit plans’ principal actuarial financial assumptions
The principal actuarial financial assumptions used to calculate the Group’s obligations under its defined benefit
pension and post-employment healthcare plans at 31 December 2009, were as follows. These assumptions will also
form the basis for measuring periodic costs under the plans in 2010:
Healthcare cost trend
Discount
rate
Inflation
rate
Rate of
increase for
pensions1
Rate
of pay
increase
Initial
rate
Ultimate
Year of
ultimate
rate
n/a
n/a
2027
n/a
n/a
2019
n/a
2015
n/a
n/a
rate
%
7.70
n/a
4.50
n/a
6.75
5.50
n/a
5.00
n/a
n/a
%
%
%
UK2 ....................................
Hong Kong ........................
US ......................................
Jersey .................................
Mexico ...............................
Brazil ..................................
France ................................
Canada ...............................
Switzerland ........................
Germany .............................
5.70
2.58
5.92
5.70
8.50
11.25
5.50
6.25
3.25
5.50
3.70
n/a
2.50
3.70
3.50
4.50
2.00
2.50
1.50
2.00
3.50
n/a
n/a
3.70
3.50
4.50
2.00
n/a
n/a
2.00
%
4.20
5.00
3.50
5.45
4.50
5.50
3.00
3.72
2.50
3.00
%
7.70
n/a
7.40
n/a
6.75
10.00
n/a
8.00
n/a
n/a
1 Rate of increase for pensions in payment and deferred pension (except for the UK).
2 Rate of increase for pensions in the UK is for pensions in payment only.
392
Year of
ultimate
rate
n/a
n/a
2018
n/a
n/a
2018
n/a
2012
n/a
n/a
rate
%
6.90
n/a
5.00
n/a
6.75
5.50
n/a
4.90
n/a
n/a
Year of
ultimate
rate
n/a
n/a
2014
n/a
n/a
2017
n/a
2012
n/a
n/a
rate
%
7.30
n/a
5.00
n/a
6.00
5.50
6.00
4.90
n/a
n/a
The principal actuarial financial assumptions used to calculate the Group’s obligations under its defined benefit
pension and post-employment healthcare plans at 31 December 2008, were as follows. These assumptions also
formed the basis for measuring periodic costs under the plans in 2009:
Healthcare cost trend
Discount
rate
Inflation
rate
Rate of
increase for
pensions1
Rate
of pay
increase
Initial
rate
Ultimate
%
%
%
UK2 ....................................
Hong Kong .........................
US ......................................
Jersey ..................................
Mexico ...............................
Brazil ..................................
France .................................
Canada ...............................
Switzerland ........................
Germany .............................
6.50
1.19
6.05
6.50
8.10
10.75
5.75
7.19
2.60
5.75
2.90
n/a
2.50
2.90
3.50
4.50
2.00
2.50
1.50
2.00
3.00
n/a
n/a
2.90
2.00
4.50
2.00
n/a
n/a
2.00
%
3.40
5.00
3.50
4.65
4.50
5.50
3.00
3.85
2.39
3.00
%
6.90
n/a
8.90
n/a
6.75
10.00
n/a
8.20
n/a
n/a
1 Rate of increase for pensions in payment and deferred pension (except for the UK).
2 Rate of increase for pensions in the UK is for pensions in payment only.
The principal actuarial financial assumptions used to calculate the Group’s obligations under its defined benefit
pension and post-employment healthcare plans at 31 December 2007, were as follows. These assumptions also
formed the basis for measuring periodic costs under the plans in 2008:
Healthcare cost trend
Discount
rate
Inflation
rate
Rate of
increase for
pensions1
Rate
of pay
increase
Initial
rate
Ultimate
UK ..........................................
Hong Kong .............................
US ..........................................
Jersey ......................................
Mexico ...................................
Brazil ......................................
France .....................................
Canada ...................................
Switzerland ............................
Germany .................................
%
5.80
3.45
6.55
5.80
7.88
10.75
5.50
5.43
3.30
5.50
%
3.30
n/a
2.50
3.30
3.50
4.50
2.00
2.50
1.50
2.00
%
3.30
n/a
n/a
3.30
2.00
4.50
2.00
n/a
n/a
2.00
%
4.30
5.02
3.75
5.05
4.50
4.50
3.00
3.86
2.38
3.00
%
7.30
n/a
9.60
n/a
6.00
10.50
6.00
9.00
n/a
n/a
1 Rate of increase for pensions in payment and deferred pension.
HSBC determines the discount rates to be applied to its obligations in consultation with the plans’ local actuaries,
on the basis of current average yields of high quality (AA rated or equivalent) debt instruments, with maturities
consistent with those of the defined benefit obligations. In countries where there is no deep market in corporate
bonds, government bond yields have been used. The yield curve has been extrapolated where the term of the
liabilities is longer than the duration of available bonds and the discount rate used then takes into account the term
of the liabilities and the shape of the yield curve.
When determining the discount rate with reference to a bond index, an appropriate index for the specific region has
been used. The expected return on plan assets represents the best estimate of long-term future asset returns, which
takes into account historical market returns plus additional factors such as the current rate of inflation and interest
rates.
393
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 8
Mortality assumptions are significant in measuring the Group’s obligations under its defined benefit pension and
post-employment healthcare plans, particularly given the maturity of the plans. The mortality tables and average life
expectancy at 65 used at 31 December 2009 were as follows:
Mortality table
UK .............................................. SAPS MC1
Hong Kong ................................ n/a
US .............................................. RP 2000 fully generational
Jersey ......................................... 80% of PNA002
Mexico ....................................... EMSSA-97, AA generational scale from
RP 2000 series
Brazil .......................................... RP 2000 fully generational
France ........................................ TG 05
Canada ....................................... UP94 generational
Switzerland ................................ BVG 20053
Germany ..................................... Heubeck 2005 G
Life expectancy at
age 65 for a male
member currently:
Aged 65
Aged 45
Life expectancy at
age 65 for a female
member currently:
Aged 65
Aged 45
22.3
n/a
19.2
24.1
18.5
19.2
23.2
19.5
17.9
18.3
24.2
n/a
20.7
26.1
20.1
20.7
26.0
21.1
17.9
21.0
23.3
n/a
21.2
26.5
21.1
21.2
26.7
22.0
21.0
22.4
25.2
n/a
22.1
28.4
22.0
22.1
29.6
22.8
21.0
25.0
1 SAPS MC projections with 1 per cent minimum improvement beyond 2002. Light table with 1.08 rating for male and standard table with
1.06 rating for female.
2 PNA00 year of birth and medium cohort with 1 per cent minimum improvement thereafter.
3 Additional 8.5 per cent liability loading for future mortality improvements.
The mortality tables and average life expectancy at 65 used at 31 December 2008 were as follows:
Mortality table
UK .............................................. PA921
Hong Kong ................................ n/a
US .............................................. RP 2000 fully generational
Jersey ......................................... 90% of PNA002
Mexico ....................................... EMSSA-97, AA generational scale
from RP 2000 series
Brazil .......................................... RP 2000 fully generational
France ........................................ TG 05
Canada pension plans ................ Between UP94 C2015 and
UP94 C2027
Canada healthcare plan .............. UP94 C2025
Switzerland ................................ BVG 20053
Germany ..................................... Heubeck 2005 G
Life expectancy at
age 65 for a male
member currently:
Life expectancy at
age 65 for a female
member currently:
Aged 65
Aged 45
Aged 65
Aged 45
20.8
n/a
19.1
23.0
18.3
19.1
23.1
18.5
and 19.4
19.3
17.9
18.0
22.8
n/a
20.6
25.0
19.8
20.6
25.9
18.5
and 19.4
19.3
17.9
20.7
24.1
n/a
21.1
25.4
21.0
21.1
26.6
21.1
and 21.6
21.5
21.0
22.1
26.2
n/a
22.0
27.3
21.9
22.0
29.4
21.1
and 21.6
21.5
21.0
24.7
1 PA92 with standard improvements to 2005 and medium cohort with 1 per cent minimum improvement thereafter.
2 PNA00 year of birth and medium cohort with 1 per cent minimum improvement thereafter.
3 Additional 8.5 per cent liability loading for future mortality improvements.
Actuarial assumption sensitivities
The discount rate is sensitive to changes in market conditions arising during the reporting period. The mortality rates
used are sensitive to experience from the plan member profile. The following table shows the effect of changes in
these and the other key assumptions on the principal plan:
394
HSBC Bank (UK) Pension Scheme
2008
US$m
2009
US$m
Discount rate
Change in pension obligation at year end from a 25bps increase ...........................................................
Change in pension obligation at year end from a 25bps decrease ..........................................................
Change in 2010 pension cost from a 25bps increase ..............................................................................
Change in 2010 pension cost from a 25bps decrease ..............................................................................
Rate of inflation
Change in pension obligation at year end from a 25bps increase ...........................................................
Change in pension obligation at year end from a 25bps decrease ..........................................................
Change in 2010 pension cost from a 25bps increase ..............................................................................
Change in 2010 pension cost from a 25bps decrease ..............................................................................
Rate of increase for pensions in payment and deferred pensions
Change in pension obligation at year end from a 25bps increase ...........................................................
Change in pension obligation at year end from a 25bps decrease ..........................................................
Change in 2010 pension cost from a 25bps increase ..............................................................................
Change in 2010 pension cost from a 25bps decrease ..............................................................................
Rate of pay increase
Change in pension obligation at year end from a 25bps increase ...........................................................
Change in pension obligation at year end from a 25bps decrease ..........................................................
Change in 2010 pension cost from a 25bps increase ..............................................................................
Change in 2010 pension cost from a 25bps decrease ..............................................................................
Investment return
Change in 2010 pension cost from a 25bps increase ..............................................................................
Change in 2010 pension cost from a 25bps decrease ..............................................................................
Mortality
Change in pension obligation from each additional year of longevity assumed ....................................
(879)
946
(13)
13
964
(907)
65
(63)
800
(766)
50
(49)
195
(174)
18
(16)
(44)
44
487
(559)
595
(9)
10
525
(493)
45
(41)
349
(328)
29
(23)
172
(168)
16
(15)
(36)
36
365
The following table shows the effect of changes in the discount rate and in mortality rates on plans other than the
principal plan:
Change in defined benefit obligation at year end from a 25bps increase in discount rate .....................
Change in 2010 defined benefit charge from a 25bps increase in discount rate ....................................
Increase in defined benefit obligation from each additional year of longevity assumed .......................
Defined benefit pension plans
Other plans
2009
US$m
(269)
(3)
120
2008
US$m
(255)
(4)
91
The calculation of the net liability under the Group’s defined benefit pension plans is set out below together with the
expected rates of return and plan assets used to measure the net defined benefit pension costs in each subsequent year.
HSBC Bank (UK) Pension Scheme
2009
Expected
rates of return
%
2008
Value
US$m
Expected
rates of return
%
Fair value of plan assets ............................................................
Equities .................................................................................
Bonds ....................................................................................
Property ................................................................................
Other .....................................................................................
Defined benefit obligation ........................................................
Present value of funded obligations .....................................
Net liability ...............................................................................
8.4
5.3
7.7
5.3
17,701
2,770
12,597
1,502
832
(21,523)
(21,523)
(3,822)
8.1
5.7
6.9
4.2
Value
US$m
14,865
2,242
10,999
1,184
440
(15,257)
(15,257)
(392)
395
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 8
2009
Expected
rates of return1
%
Other plans
2008
Value
US$m
Expected
rates of return1
%
Fair value of plan assets ...........................................................
Equities .................................................................................
Bonds ....................................................................................
Property ................................................................................
Other .....................................................................................
Defined benefit obligation ........................................................
Present value of funded obligations .....................................
Present value of unfunded obligations .................................
Effect of limit on plan surpluses ...............................................
Unrecognised past service cost .................................................
Net liability ...............................................................................
8.2
5.0
6.4
3.5
6,822
2,302
3,809
55
656
(9,109)
(8,588)
(521)
(47)
9
(2,325)
1 The expected rates of return are weighted on the basis of the fair value of the plan assets.
8.3
5.0
6.3
3.8
Value
US$m
6,024
1,856
3,261
87
820
(8,787)
(8,271)
(516)
(9)
10
(2,762)
Plan assets of the Group’s pension schemes included US$62 million (2008: US$52 million) of equities and
US$2 million (2008: US$2 million) of bonds issued by HSBC and US$1,925 million (2008: US$2,204 million) of
other assets placed or transacted with HSBC. The fair value of plan assets included derivatives entered into with the
HSBC Bank (UK) Pension Scheme with a positive fair value of US$1,049 million at 31 December 2009 (2008:
US$1,779 million positive fair value) and US$27 million positive fair value (2008: US$388 million positive fair
value) in respect of the HSBC International Staff Retirement Benefits Scheme. Further details of these swap
arrangements are included in Note 43.
Changes in the present value of defined benefit obligations
At 1 January ..............................................................................
Current service cost ..................................................................
Interest cost ...............................................................................
Contributions by employees .....................................................
Actuarial (gains)/losses ............................................................
Benefits paid .............................................................................
Past service cost – vested immediately ....................................
Past service cost – unvested benefits ........................................
Disposals ...................................................................................
Business combinations .............................................................
Reduction in liabilities resulting from curtailments .................
Liabilities extinguished on settlements ....................................
Exchange differences ................................................................
At 31 December ........................................................................
Changes in the fair value of plan assets
HSBC Bank (UK) Pension Scheme
2008
US$m
2009
US$m
15,257
260
1,019
5
4,563
(884)
–
–
–
–
–
(499)
1,802
21,523
23,512
387
1,227
2
(3,032)
(873)
–
–
–
–
–
–
(5,966)
15,257
HSBC Bank (UK) Pension Scheme
2008
US$m
2009
US$m
At 1 January ..............................................................................
Expected return on plan assets .................................................
Contributions by HSBC ............................................................
– normal ................................................................................
– special ................................................................................
Contributions by employees .....................................................
Experience gains/(losses) .........................................................
Benefits paid .............................................................................
Assets distributed on curtailments ............................................
Assets distributed on settlements .............................................
Exchange differences ................................................................
14,865
959
367
367
–
5
871
(884)
–
–
1,518
At 31 December ........................................................................
17,701
22,704
1,359
462
462
–
2
(2,861)
(873)
–
–
(5,928)
14,865
Other plans
2009
US$m
8,787
334
397
17
(114)
(608)
20
–
–
4
(41)
(1)
314
9,109
Other plans
2009
US$m
6,024
381
596
178
418
17
65
(522)
(5)
(6)
272
6,822
2008
US$m
8,873
357
466
40
358
(596)
9
10
(44)
–
(20)
(81)
(585)
8,787
2008
US$m
7,768
549
238
223
15
40
(1,452)
(576)
–
(40)
(503)
6,024
396
The special contributions of US$418 million include an additional contribution of US$240 million to the HSBC
North America (US) Retirement Income Plan. Special contributions also include US$160 million in respect of the
HSBC International Staff Retirement Benefits Scheme which was made to fund the deficit shown in the actuarial
valuation report as at 31 December 2008. US$91 million of the contribution to the HSBC International Staff
Retirement Benefits Scheme was made in the form of cash and US$69 million was contributed in the form of asset-
backed securities previously held within the Group.
The actual return on plan assets for the year ended 31 December 2009 was a positive return of US$2,276 million
(2008: negative US$2,405 million). HSBC expects to make US$520 million of contributions to defined benefit
pension plans during 2010. Benefits expected to be paid from the plans to retirees over each of the next five years,
and in aggregate for the five years thereafter, are:
HSBC Bank (UK) Pension
Scheme ....................................
Other significant plans ................
2010
US$m
683
453
2011
US$m
725
512
2012
US$m
756
534
2013
US$m
801
560
2014
US$m
2015-2019
US$m
847
592
5,359
3,561
Total (income)/expense recognised in the income statement in ‘Employee compensation and benefits’
Current service cost ....................
Interest cost .................................
Expected return on plan assets ...
Past service cost ..........................
Gains on curtailments .................
(Gains)/losses on settlements ......
Total (income)/expense ..............
HSBC Bank (UK) Pension Scheme
2009
US$m
260
1,019
(959)
–
–
(499)
(179)
2008
US$m
387
1,227
(1,359)
–
–
–
255
2007
US$m
454
1,247
(1,211)
–
–
–
490
2009
US$m
334
397
(381)
21
(36)
5
340
Other plans
2008
US$m
357
466
(549)
9
(20)
(41)
222
2007
US$m
347
398
(486)
7
(63)
1
204
The US$499 million settlement gain in 2009 relates to an accounting benefit following a restructuring of the basis of
delivery of death in service and ill health early retirement benefits to certain UK employees.
Summary
Defined benefit obligation .....................................
Fair value of plan assets .........................................
Net deficit ..............................................................
Experience gains/(losses) on plan liabilities .........
Experience gains/(losses) on plan assets ...............
Gains/(losses) from changes in actuarial
assumptions .......................................................
Total net actuarial gains/(losses) ...........................
Defined benefit obligation .....................................
Fair value of plan assets .........................................
Net deficit ..............................................................
Experience gains/(losses) on plan liabilities .........
Experience gains/(losses) on plan assets ...............
Gains/(losses) from changes in actuarial
assumptions .......................................................
Total net actuarial gains/(losses) ...........................
HSBC Bank (UK) Pension Scheme
2008
US$m
(15,257)
14,865
(392)
(49)
(2,861)
3,081
171
2008
US$m
(8,787)
6,024
(2,763)
(52)
(1,452)
(306)
(1,810)
2007
US$m
(23,512)
22,704
(808)
(64)
29
2,459
2,424
Other plans
2007
US$m
(8,873)
7,768
(1,105)
(354)
157
(121)
(318)
2006
US$m
(24,332)
20,587
(3,745)
540
–
(570)
(30)
2006
US$m
(7,916)
7,116
(800)
(167)
203
(44)
(8)
2005
US$m
(20,587)
17,396
(3,191)
70
1,623
(2,038)
(345)
2005
US$m
(7,102)
6,356
(746)
(113)
78
(393)
(428)
2009
US$m
(21,523)
17,701
(3,822)
(234)
871
(4,329)
(3,692)
2009
US$m
(9,109)
6,822
(2,287)
20
65
94
179
397
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 8
Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments
arising from changes in actuarial assumptions. Total cumulative actuarial losses recognised in other comprehensive
income at 31 December 2009 were US$4,589 million (2008: losses of US$1,076 million).
The total effect of the limit on plan surpluses recognised within actuarial losses in other comprehensive income
during 2009 was a US$37 million loss excluding exchange differences of US$1 million (2008: US$41 million gain
excluding exchange differences of US$5 million).
Defined benefit healthcare plans
2009
Expected
rates of return1
Fair value of plan assets ...........................................................
Equities .................................................................................
Bonds ....................................................................................
Other ......................................................................................
Defined benefit obligation ........................................................
Present value of funded obligations .....................................
Present value of unfunded obligations .................................
Unrecognised negative past service cost ..................................
Net liability ...............................................................................
%
12.2
8.7
4.6
2008
Expected
rates of return1
%
11.6
8.0
–
Value
US$m
142
43
72
27
(937)
(148)
(789)
(25)
(820)
1 The expected rates of return are weighted on the basis of the fair value of the plan assets.
Changes in the present value of defined benefit obligations
At 1 January .............................................................................................................................................
Current service cost .................................................................................................................................
Interest cost ..............................................................................................................................................
Contributions by employees ....................................................................................................................
Actuarial (gains)/losses ...........................................................................................................................
Benefits paid ............................................................................................................................................
Reduction in liabilities resulting from curtailments ................................................................................
Liabilities extinguished on settlements ...................................................................................................
Exchange differences ...............................................................................................................................
At 31 December .......................................................................................................................................
Changes in the fair value of plan assets
2009
US$m
839
11
55
2
44
(43)
(22)
(4)
55
937
Value
US$m
128
39
89
–
(839)
(172)
(667)
(23)
(734)
2008
US$m
1,038
19
65
2
2
(76)
(31)
(38)
(142)
839
2009
US$m
2008
US$m
At 1 January .............................................................................................................................................
Expected return on plan assets ................................................................................................................
Contributions by HSBC ...........................................................................................................................
Experience gains/(losses) ........................................................................................................................
Benefits paid ............................................................................................................................................
Assets distributed on settlements ............................................................................................................
Exchange differences ...............................................................................................................................
At 31 December .......................................................................................................................................
128
11
11
8
(4)
(4)
(8)
142
146
12
19
(14)
(9)
(12)
(14)
128
The actual return on plan assets for the year ended 31 December 2009 was a positive return of US$19 million (2008:
negative US$2 million).
398
HSBC expects to make US$56 million (2008: US$4 million) of contributions to post-employment healthcare benefit
plans during 2010. Benefits expected to be paid from the plans to retirees over each of the next five years, and in
aggregate for the five years thereafter, are:
Significant plans .........................
2010
US$m
52
2011
US$m
53
2012
US$m
54
2013
US$m
56
2014
US$m
58
2015-2019
US$m
323
Total expense recognised in the income statement in ‘Employee compensation and benefits’
Current service cost .................................................................................................
Interest cost ..............................................................................................................
Expected return on plan assets ................................................................................
Past service cost .......................................................................................................
Gains on curtailments ..............................................................................................
Gains on settlements ................................................................................................
Total expense ...........................................................................................................
Summary
Defined benefit obligation .......................................
Fair value of plan assets ...........................................
Net deficit ................................................................
Experience gains/(losses) on plan liabilities ...........
Experience gains/(losses) on plan assets .................
Gains/(losses) from changes in actuarial
assumptions .........................................................
Total net actuarial gains/(losses) .............................
2009
US$m
(937)
142
(795)
13
8
(57)
(36)
2008
US$m
(839)
128
(711)
(34)
(14)
32
(16)
2009
US$m
2008
US$m
2007
US$m
11
55
(11)
(2)
(22)
–
31
2007
US$m
(1,038)
146
(892)
15
(6)
94
103
19
65
(12)
(2)
(31)
(26)
13
2006
US$m
(1,106)
133
(973)
(12)
(1)
(25)
(38)
25
67
(13)
(4)
(42)
–
33
2005
US$m
(1,004)
107
(897)
19
1
(63)
(43)
Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments
arising from changes in actuarial assumptions. Total cumulative net actuarial losses recognised in other
comprehensive income at 31 December 2009 were US$25 million (2008: gains of US$11 million).
The actuarial assumptions of the healthcare cost trend rates have a significant effect on the amounts recognised. A
one percentage point change in assumed healthcare cost trend rates would have the following effects on amounts
recognised in 2009:
2009
2008
1% increase
US$m
1% decrease
US$m
1% increase
US$m
1% decrease
US$m
Increase/(decrease) of the aggregate of the current service
cost and interest cost .............................................................
Increase/(decrease) of defined benefit obligation ....................
8
86
(7)
(75)
9
77
(7)
(62)
HSBC Holdings
Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2009 amounted to
US$217 million (2008: US$218 million). The average number of persons employed by HSBC Holdings during 2009
was 876 (2008: 730).
Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either
the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC
Holdings pays contributions to plans in accordance with schedules determined by the Trustees following consultation
with qualified actuaries.
399
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 8, 9 and 10
Directors’ emoluments
The aggregate emoluments of the Directors of HSBC Holdings, computed in accordance with the Companies Act
2006 as amended by statutory instrument 2008 No.410, were:
Fees ..........................................................................................................................
Salaries and other emoluments ................................................................................
Bonuses ....................................................................................................................
Gains on the exercise of share options ....................................................................
Vesting of Long-Term Incentive awards .................................................................
2009
US$000
3,756
11,835
–
15,591
–
1,579
2008
US$000
2,529
11,584
–
14,113
23
7,147
2007
US$000
2,626
7,929
8,938
19,493
13
4,563
In addition, there were payments under retirement benefit agreements with former Directors of US$1,036,385 (2008:
US$1,139,968). The provision at 31 December 2009 in respect of unfunded pension obligations to former Directors
amounted to US$16,296,028 (2008: US$15,164,791).
During the year, aggregate contributions to pension schemes in respect of Directors were US$788,734 (2008:
US$664,174).
Discretionary bonuses for Directors are based on a combination of individual and corporate performance and are
determined by the Remuneration Committee. Details of Directors’ remuneration, share options and conditional
awards under the Restricted Share Plan 2000 and the HSBC Share Plan are included in the ‘Directors’ Remuneration
Report’ on pages 334 to 348.
9 Auditors’ remuneration
Auditors’ remuneration in relation to the statutory audit amounted to US$50.7 million (2008: US$54.9 million; 2007:
US$52.3 million). The following fees were payable by HSBC to the Group’s principal auditor, KPMG Audit Plc and
its associates (together ‘KPMG’):
Audit fees for HSBC Holdings’ statutory audit1 .....................................................
– fees relating to current year .............................................................................
– fees relating to prior year ................................................................................
Fees payable to KPMG for other services provided to HSBC ................................
Audit-related services:
– audit of HSBC’s subsidiaries, pursuant to legislation2 ..............................
– other services pursuant to legislation3 ........................................................
Tax services4 ........................................................................................................
Other services:
– services relating to information technology5 ..............................................
– services related to corporate finance transactions6 .....................................
– all other services7 ........................................................................................
2009
US$m
2008
US$m
2007
US$m
2.3
2.1
0.2
77.1
45.9
24.2
2.6
0.3
0.1
4.0
2.1
2.5
(0.4)
88.3
48.6
26.5
3.1
0.6
1.4
8.1
3.0
3.0
–
79.1
45.2
19.4
2.9
0.4
1.8
9.4
Total fees payable ....................................................................................................
79.4
90.4
82.1
1 Fees payable to KPMG Audit Plc for the statutory audit of the consolidated financial statements of HSBC and the separate financial
statements of HSBC Holdings. They exclude amounts payable for the statutory audit of HSBC Holdings’ subsidiaries which have been
included in ‘Fees payable to KPMG for other services provided to HSBC’.
2 Including fees payable to KPMG for the statutory audit of HSBC’s subsidiaries.
3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim
reviews. Other services pursuant to legislation included no fees paid to KPMG in respect of work relating to preparation for reporting
under section 404 of the Sarbanes-Oxley Act (2008: nil; 2007: US$1.6 million). No other accounting firms were paid for work on this
project in 2009 (2008: US$1.2 million; 2007: US$2.5 million).
4 Including tax compliance services and tax advisory services.
5 Including advice on IT security and business continuity and performing agreed-upon IT testing procedures.
6 Including fees payable to KPMG for transaction-related work, including US debt issuances.
7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of financial models.
400
No fees were payable by HSBC to KPMG for the following types of services: internal audit services, valuation and
actuarial services, services related to litigation, and services related to recruitment and remuneration. The following
fees were payable by HSBC’s associated pension schemes to KPMG:
Audit fees .................................................................................................................
Tax services .............................................................................................................
All other services .....................................................................................................
Total fees payable ....................................................................................................
2009
US$000
2008
US$000
2007
US$000
670
–
260
930
720
73
–
793
612
14
36
662
No fees were payable by HSBC’s associated pension schemes to KPMG for the following types of services: other
services pursuant to legislation, services relating to information technology, internal audit services, valuation and
actuarial services, services related to litigation, services related to recruitment and remuneration, and services related
to corporate finance transactions.
In addition to the above, KPMG estimate they have been paid fees of US$8.1 million (2008: US$4.8 million; 2007:
US$3.4 million) by parties other than HSBC but where HSBC is connected with the contracting party and therefore
may be involved in appointing KPMG. These fees arise from services such as auditing mutual funds managed by
HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.
Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are
disclosed on a consolidated basis for HSBC Group.
10 Share-based payments
During 2009, US$683 million was charged to the income statement in respect of share-based payment transactions
settled in equity (2008: US$819 million; 2007: US$870 million). This expense, which was computed from the fair
values of the share-based payment transactions when contracted, arose under employee share awards made in
accordance with HSBC’s reward structures.
In April 2009, HSBC Holdings completed a rights issue, details of which are provided in Note 41. The terms of the
share plans have been adjusted based on the theoretical ex-rights price, which was considered to be the most
appropriate methodology to reflect the rights issue. These adjustments are set out in the tables below.
Calculation of fair values
Fair values of share options/awards, measured at the date of grant of the option/award, are calculated using a Black-
Scholes model. When modelling options/awards with vesting dependent on HSBC’s Total Shareholder Return
(‘TSR’) over a period, the TSR 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
on the basis of historic observable data. The fair values calculated are inherently subjective and uncertain due to the
assumptions made and the limitations of the model used.
The significant weighted average assumptions used to estimate the fair value of the options granted were as follows:
1-year savings-
related share
option plan
3-year savings-
related share
option plans
5-year savings-
related share
option plans
2009
Risk-free interest rate1 (%) ......................................................................................
Expected life2 (years) ...............................................................................................
Expected volatility3 (%) ...........................................................................................
Share price at grant date (£) .....................................................................................
2008
Risk-free interest rate1 (%) ......................................................................................
Expected life2 (years) ...............................................................................................
Expected volatility3 (%) ...........................................................................................
Share price at grant date (£) .....................................................................................
2007
Risk-free interest rate1 (%) ......................................................................................
Expected life2 (years) ...............................................................................................
Expected volatility3 (%) ...........................................................................................
Share price at grant date (£) .....................................................................................
0.7
1
50
4.65
4.5
1
25
8.80
5.6
1
17
9.24
2.1
3
35
4.65
4.5
3
25
8.80
5.5
3
17
9.24
2.4
5
30
4.65
4.5
5
25
8.80
5.4
5
17
9.24
401
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 10
1 The risk-free rate was determined from the UK gilts yield curve for the UK Savings-Related Share Option Plans. A similar yield curve
was used for the International Savings-Related Share Option Plans.
2 Expected life is not a single input parameter but a function of various behavioural assumptions.
3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded
options over HSBC shares of similar maturity to those of the employee options.
The expected US dollar denominated dividend yield was determined to be 4.5 per cent per annum in line with
consensus analyst forecasts. Prior to 2009, HSBC adopted a dividend growth model and incorporated expected
dividends into the valuation model for share options and awards. In 2008, the expected dividend growth was
determined to be 7 per cent for the first year and 8 per cent thereafter.
The HSBC Share Plan
The HSBC Share Plan was approved at the 2005 Annual General Meeting and amendments were approved at the
2008 Annual General Meeting. Under this plan, Performance Share awards, Restricted Share awards and share option
awards may be made. The aim of the HSBC Share Plan is to align the interests of executives with the creation of
shareholder value and recognise individual performance and potential. Awards are also made under this plan for
recruitment and retention purposes.
Performance Share awards
Awards of Performance Shares are made to executive Directors and other senior executives after taking into account
individual performance in the previous year. For awards made prior to 2008, each award is divided into two equal
parts for testing attainment against pre-determined benchmarks. One half of the award is subject to a TSR measure,
based on HSBC’s ranking against a comparator group of 28 major banks; the other half is subject to an earnings per
share target. For each element of the award, shares are released to the employee on a sliding scale from 30 to 100 per
cent of the award, depending on the scale of achievement against the benchmarks, providing that the minimum
criteria for each performance measure have been met.
For awards made during 2008 and prospectively, each award is divided into three parts for testing attainment against
pre-determined benchmarks. 40 per cent of the award is subject to a TSR measure, based on a free-float market
capitalisation ranking method; 40 per cent is subject to an economic profit measure, calculated as the average annual
difference between return on invested capital and HSBC’s benchmark cost of capital; and 20 per cent is subject to an
earnings per share target. For the TSR and EPS elements of the awards, shares are released to the employee on a
sliding scale from 20 to 100 per cent of the award, depending on the scale of achievement against the benchmarks.
For the economic profit element of the awards, shares are released to the employee on a sliding scale from zero to
100 per cent, depending on the scale of achievement against the benchmark. In all cases, shares are only released
when the minimum criteria for each performance measure has been met. The performance conditions are measured
over a three year performance period and awards forfeited to the extent they have not been met.
In addition to the performance conditions mentioned above, before an award can vest, the Remuneration Committee needs
to be satisfied that the Group has shown a sustained improvement in the period since the award was made. In determining
whether HSBC Holdings has achieved such sustained improvement the Remuneration Committee will take account of all
relevant factors, in particular, comparisons against the TSR comparator group in areas such as revenue growth and mix, cost
efficiency, credit performance as measured by risk-adjusted revenues, cash return on cash invested, dividend performance
and TSR.
Outstanding at 1 January .........................................................................................................................
Additions during the year1........................................................................................................................
Adjustment for rights issue ......................................................................................................................
Released in the year .................................................................................................................................
Forfeited in the year .................................................................................................................................
Outstanding at 31 December ...................................................................................................................
1 Additions in 2009 comprised reinvested dividend equivalents
2009
Number
(000s)
11,619
333
1,712
(1,076)
(5,228)
7,360
2008
Number
(000s)
12,318
5,664
–
(2,246)
(4,117)
11,619
No Performance Shares were awarded by HSBC in 2009. The weighted average fair value of Performance Shares
awarded in 2008 was US$13.61.
402
Restricted Share awards
Awards of Restricted Shares are made to employees on the basis of their performance, potential and retention
requirements, to aid recruitment or as a part-deferral of annual bonuses. Shares are awarded without corporate
performance conditions and generally vest between one and three years from the date of award, providing the
employees have remained continually employed by HSBC for this period.
Outstanding at 1 January .........................................................................................................................
Additions during the year .........................................................................................................................
Adjustment for rights issue ......................................................................................................................
Released in the year .................................................................................................................................
Forfeited in the year .................................................................................................................................
Outstanding at 31 December ...................................................................................................................
2009
Number
(000s)
122,206
108,439
26,119
(49,718)
(22,728)
184,318
2008
Number
(000s)
79,256
72,120
–
(17,092)
(12,078)
122,206
The weighted average fair value of Restricted Share awards in 2009 was US$6.31 (2008: US$14.64).
Share options
A small number of discretionary share options were granted in 2005 under the HSBC Share Plan rules, after the
expiry of the Group Share Option Plan rules. The options granted in 2005 were awarded exclusively to individuals
employed by HSBC France.
Nil-cost share options were granted to senior executives on the basis of their performance in the previous year. The
share options were subject to the achievement of the same corporate performance conditions as the 2005 Performance
Share awards, which consisted of an absolute earnings per share measure and a TSR measure based on HSBC
Holdings’ ranking against a comparator group of 28 major banks. The options vested after three years in the same
proportion as the 2005 Performance Shares but were only exercisable up to the fourth anniversary of the date of
grant. These options have now lapsed and there are currently no options with outstanding performance conditions.
Additionally, share options were awarded to a number of employees under the HSBC Share Plan rules. These options
may vest after three years and are exercisable up to the tenth anniversary of the date of the grant, after which they
will lapse.
2009
2008
Weighted
average
exercise
Number
(000s)
price
£
Number
(000s)
Outstanding at 1 January ..........................................................
Adjustment for rights issue .......................................................
Forfeited and expired in the year ..............................................
Outstanding and exercisable at 31 December ..........................
300
44
(258)
86
8.89
7.75
7.66
7.99
524
–
(224)
300
Weighted
average
exercise
price
£
8.85
–
8.79
8.89
No share options were granted in 2009 and 2008. The weighted average remaining contractual life of options
outstanding at the balance sheet date was 5.8 years (2008: 2.1 years). The exercise price of options outstanding at the
balance sheet date was £7.99 (2008: £8.79 – £9.17).
Savings-related share option plans
Savings-related share option plans invite eligible employees to enter into savings contracts to save up to £250 per
month (or its equivalent in US dollars, Hong Kong dollars or euros), with the option to use the savings to acquire
shares. The aim of the plans is to align the interests of all employees with the creation of shareholder value. The
options are exercisable within three months following the first anniversary of the commencement of a one-year
savings contract or within six months following either the third or the fifth anniversaries of the commencement of
three-year or five-year savings contracts, respectively. The exercise price is set at a 20 per cent (2008: 20 per cent)
discount to the market value immediately preceding the date of invitation (except for the one-year options granted
under the US sub-plan where a 15 per cent discount is applied).
403
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 10
Outstanding at 1 January ..........................................................
Granted in the year ...................................................................
Adjustment for rights issue .......................................................
Exercised in the year..................................................................
Forfeited, cancelled and expired in the year ............................
Outstanding at 31 December ....................................................
2009
2008
Weighted
average
exercise
price
£
6.97
3.32
6.08
5.72
5.96
3.69
Number
(000s)
74,401
152,796
7,970
(5,011)
(57,630)
172,526
Weighted
average
exercise
price
£
6.83
6.82
–
6.10
7.04
6.97
Number
(000s)
89,739
32,951
–
(30,126)
(18,163)
74,401
The weighted average fair value of options granted during the year was US$2.03 (2008: US$3.89). The weighted
average share price at the date the share options were exercised was US$10.23 (2008: US$15.48). The exercise price
range and weighted average remaining contractual life for options outstanding at the balance sheet date were as follows:
Exercise price range (£) ...........................................................................................................................
Weighted average remaining contractual life (years) .............................................................................
Of which exercisable:
2009
2008
3.31 – 6.69
3.47
5.35 – 7.67
1.87
Number (000s) .....................................................................................................................................
Weighted average exercise price (£) ...................................................................................................
5,145
6.26
1,751
6.03
HSBC Holdings Restricted Share Plan 2000
Performance Share awards made under the HSBC Holdings Restricted Share Plan 2000 (the ‘Restricted Share
Plan’)
Awards of Performance Shares were made under the Restricted Share Plan to senior executives from 2000 to 2004.
The aim of the plan was to align the interests of executives with the creation of shareholder value. This was achieved
by setting certain TSR targets against a peer group of major banks which would normally have to be attained in order
for the awards to vest. 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 sustained growth.
Following adoption of the HSBC Share Plan in 2005, no further awards have been made under this Plan other than
from reinvested dividend equivalents.
Outstanding at 1 January .........................................................................................................................
Additions during the year1 .......................................................................................................................
Released in the year .................................................................................................................................
Forfeited in the year .................................................................................................................................
Outstanding at 31 December ...................................................................................................................
1 Additions during the year comprised reinvested dividend equivalents.
Restricted Share awards made under the Restricted Share Plan
2009
Number
(000s)
–
–
–
–
–
2008
Number
(000s)
4,811
159
(11)
(4,959)
–
Awards of Restricted Shares were made under the Restricted Share Plan were granted to eligible employees from
2000 to 2005, after taking into account the employees’ performance in the previous year, their potential and retention
requirements. Restricted shares were also awarded as part-deferral of annual bonuses or for recruitment purposes.
Shares were awarded without corporate performance conditions and in most cases fully vest within three years from
the date of award, providing the employees have remained continuously employed by HSBC for the period.
404
Outstanding at 1 January .........................................................................................................................
Additions during the year1 .......................................................................................................................
Adjustment for rights issue ......................................................................................................................
Released in the year .................................................................................................................................
Forfeited in the year .................................................................................................................................
Outstanding at 31 December ...................................................................................................................
1 Additions during the year principally comprised reinvested dividend equivalents.
2009
Number
(000s)
2,717
30
376
(2,916)
(34)
173
2008
Number
(000s)
19,299
934
–
(16,405)
(1,111)
2,717
The weighted average remaining vesting period as at 31 December 2009 was 0.3 years (2008: 0.5 years).
HSBC Holdings Group Share Option Plan
The HSBC Holdings Group Share Option Plan was a long-term incentive plan under which certain HSBC employees
between 2000 and 2005 were awarded share options. The aim of the plan was to align the interests of those higher
performing employees with the creation of shareholder value. In most jurisdictions, this was achieved by setting
certain TSR targets which would normally have to be attained in order for the awards to vest. Options were granted at
market value and are normally exercisable between the third and tenth anniversaries of the date of grant, subject to
vesting conditions. Options granted after May 2005 are made under the HSBC Share Plan.
Outstanding at 1 January ..........................................................
Adjustment for rights issue .......................................................
Exercised in the year .................................................................
Forfeited and expired in the year ..............................................
Outstanding at 31 December ....................................................
2009
2008
Weighted
average
exercise
price
£
8.16
7.12
6.28
7.15
7.12
Number
(000s)
142,593
21,333
(1,548)
(4,659)
157,719
Weighted
average
exercise
price
£
8.15
–
7.38
8.28
8.16
Number
(000s)
152,216
–
(3,734)
(5,889)
142,593
The weighted average share price at the date the share options were exercised was US$9.14 (2008: US$14.65). The
number of options, weighted average exercise price, and weighted average remaining contractual life of options
outstanding at the balance sheet date, analysed by exercise price range, were as follows:
2009
2008
Exercise price range (£) .............................................................
6.00-7.00
7.01-8.50
6.00-8.00
8.01-10.00
Number (000s) ..........................................................................
Weighted average exercise price (£) ........................................
Weighted average remaining contractual life (years) ...............
Of which exercisable:
Number (000s) ......................................................................
Weighted average exercise price (£) ....................................
28,406
6.03
3.33
28,406
6.03
129,313
7.36
3.34
129,313
7.36
25,947
6.91
4.33
25,947
6.91
116,646
8.44
4.34
116,646
8.44
HSBC Holdings Executive Share Option Scheme
The HSBC Holdings Executive Share Option Scheme was a long-term incentive plan under which certain senior
HSBC employees were awarded share options before the adoption of the HSBC Holdings Group Share Option Plan
in 2000. The aim of the plan was to align the interests of those higher performing senior employees with the creation
of shareholder value. This was achieved by setting certain TSR targets to be attained in order for the awards to vest.
Options were granted at market value and were exercisable between the third and tenth anniversaries of the date of
grant, subject to vesting conditions. No awards have been made under this plan since 2000 and the remaining
unexercised options are summarised below:
405
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 10 and 11
2009
2008
Weighted
average
exercise
Number
(000s)
price
£
Number
(000s)
Outstanding at 1 January ..........................................................
Adjustment for rights issue .......................................................
Exercised in the year .................................................................
Expired in the year ....................................................................
Outstanding at 31 December ....................................................
13,964
2,046
(920)
(8,383)
6,707
6.92
6.04
6.39
5.61
6.50
18,239
–
(4,051)
(224)
13,964
Weighted
average
exercise
price
£
6.85
–
6.58
7.70
6.92
The weighted average share price at the date the share options were exercised was US$9.14 (2008: US$14.65).
The number of options, weighted average exercise price and weighted average remaining contractual life of options
outstanding at the balance sheet date, analysed by exercise price range, were as follows:
Exercise price range (£) ...........................................................................................................................
5.50 – 7.00
6.01 – 7.87
Number (000s) .........................................................................................................................................
Weighted average exercise price (£) .......................................................................................................
Weighted average remaining contractual life (years) .............................................................................
Of which exercisable:
Number (000s) .....................................................................................................................................
Weighted average exercise price (£) ...................................................................................................
6,707
6.50
0.26
6,707
6.50
13,964
6.92
0.75
13,964
6.92
2009
2008
HSBC France and subsidiary company plans
Before its acquisition by HSBC in 2000, HSBC France and certain of its subsidiaries operated employee share plans
under which share options were granted over their respective shares.
Options over HSBC France shares granted between 1994 and 1999 vested upon announcement of HSBC’s agreement
to acquire HSBC France and were therefore included in the valuation of HSBC France.
HSBC France 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 HSBC France shares obtained on exercise of the options are exchangeable for HSBC Holdings
ordinary shares of US$0.50. As a consequence of the rights issue, the ratio of HSBC Holdings ordinary shares
exchangeable for each HSBC France share was adjusted from 13 to 14.92. Options were granted at market value and
are exercisable within 10 years of the date of grant.
Outstanding and exercisable at 1 January and 31 December ...
604
Number
(000s)
Exercise
price
€
142.5
Number
(000s)
604
Exercise
price
€
142.5
2009
2008
No share options were exercised in 2009 and 2008. The remaining contractual life for options outstanding at the
balance sheet date was 0.3 years (2008: 1.3 years).
At the date of its acquisition in 2000, certain of HSBC France’s subsidiary companies also operated employee share
option plans under which options could be granted over their respective shares. On exercise of certain of these
options, the subsidiary shares are exchanged for HSBC ordinary shares. The total number of HSBC ordinary shares
exchanged under such arrangements in 2009 was 70,257 (2008: 12,810).
HSBC Finance
Upon acquisition, HSBC Finance share options previously granted were converted to share options over HSBC
ordinary shares of US$0.50 each at a rate of 2.675 HSBC share options (the same ratio as the Exchange Offer for
HSBC Finance) for each HSBC Finance share option. Options granted under HSBC Finance’s own share option
schemes prior to the announcement of the acquisition by HSBC in November 2002 vested as options over HSBC
shares upon acquisition by HSBC. Options granted after the announcement of the acquisition but prior to its
completion on 28 March 2003 generally vest equally over four years and expire ten years from the date of grant.
406
2009
Number
(000s)
Exercise
price
US$
2008
Number
(000s)
Outstanding at 1 January ..........................................................
Adjustment for rights issue .......................................................
Exercised in the year .................................................................
Expired in the year ....................................................................
Outstanding and exercisable at 31 December ..........................
2,402
354
(20)
–
2,736
10.66
9.29
9.29
9.29
9.29
2,455
–
(12)
(41)
2,402
Exercise
price
US$
10.66
–
10.66
10.66
10.66
The weighted average share price at the date the share options were exercised was US$9.14 (2008: US$14.65). The
remaining contractual life for options outstanding at the balance sheet date was 2.9 years (2008: 3.9 years).
11 Tax expense
Current tax
UK Corporation tax .................................................................................................
– on current year profit ........................................................................................
– adjustments in respect of prior years ................................................................
Overseas tax .............................................................................................................
– on current year profit ........................................................................................
– adjustments in respect of prior years ................................................................
Deferred tax
Origination and reversal of temporary differences .................................................
Effect of changes in tax rates ...................................................................................
Adjustments in respect of prior years ......................................................................
Tax expense .............................................................................................................
2009
US$m
206
280
(74)
1,847
1,826
21
2,053
(1,672)
(10)
14
(1,668)
385
2008
US$m
1,671
1,738
(67)
1,703
1,732
(29)
3,374
(504)
(89)
28
(565)
2,809
2007
US$m
1,326
1,372
(46)
3,879
3,976
(97)
5,205
(1,247)
(35)
(166)
(1,448)
3,757
The UK corporation tax rate applying to HSBC Holdings and its subsidiaries was 28 per cent (2008: 30 per cent to 31
March 2008 and 28 per cent thereafter; 2007: 30 per cent). Overseas tax included Hong Kong profits tax of
US$783 million (2008: US$846 million; 2007: US$1,137 million). The Hong Kong tax rate applying to the profits of
subsidiaries assessable in Hong Kong was 16.5 per cent (2008: 16.5 per cent; 2007: 17.5 per cent). Other overseas
subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they
operate.
407
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 11
The following table reconciles the tax expense which would apply if all profits had been taxed at the UK corporation
tax rate:
2009
US$m
%
2008
US$m
%
2007
US$m
Analysis of tax expense
Taxation at UK corporation tax rate of 28%
(2008: 28.5%; 2007: 30%)1 ..................................
Goodwill impairment ................................................
Non-deductible loss on foreign exchange swaps
on rights issue proceeds2 ......................................
Effect of taxing overseas profits in principal
locations at different rates ....................................
Gains not subject to tax ............................................
Adjustments in respect of prior period liabilities .....
Low income housing tax credits3 .............................
Effect of profit in associates and joint ventures .......
Release of deferred tax consequent on
restructuring of Group interests ...........................
Impact of gains arising from dilution of interests
in associates5 .........................................................
Deferred tax temporary differences not provided4....
Non taxable income ..................................................
Permanent disallowables ..........................................
Additional provision for tax on overseas dividends ....
Other items ................................................................
Overall tax expense1 .................................................
1,982
–
28.0
–
2,652
3,010
28.5
32.3
96
1.4
–
–
(1,345)
(238)
(39)
(98)
(499)
–
–
360
(365)
223
341
(33)
385
(19.0)
(3.4)
(0.6)
(1.4)
(7.1)
–
–
5.1
(5.2)
3.2
4.8
(0.4)
5.4
(1,339)
(1,016)
(67)
(103)
(473)
–
–
157
(519)
217
294
(4)
(14.4)
(10.9)
(0.7)
(1.1)
(5.1)
–
–
1.7
(5.6)
2.3
3.2
–
%
30.0
–
–
(6.0)
(1.2)
(1.3)
(0.4)
(1.9)
7,264
–
–
(1,460)
(296)
(309)
(107)
(450)
(359)
(1.5)
(253)
(432)
(404)
202
335
26
(1.0)
(1.8)
(1.7)
0.8
1.4
0.1
2,809
30.2
3,757
15.5
1 The change in the UK corporation tax rate from 30 per cent to 28 per cent with effect from 1 April 2008 gave rise to a blended tax rate
for 2008 of 28.5 per cent.
2 In August 2009, the UK Government enacted legislation that gains or losses on transactions designated to hedge foreign exchange
exposures connected to rights issues should be disregarded for tax purposes.
3 Low income housing tax credits arise in the US and are designed to encourage the provision of rental housing for low income
households.
4 2008 includes the effect of previously unrecognised temporary differences principally related to the recognition of trading losses (2007:
capital losses).
5 The gains arising from the dilution of HSBC’s interests in associates were not subject to tax and, as such, there is a reconciling item
which reduces the effective tax rate for 2007 (see Note 4).
In addition to the amount charged to the income statement, the aggregate amount of the current and deferred tax
relating to items that are taken to other comprehensive income and directly to equity amounted to US$227 million
reduction in other comprehensive income and equity (2008: US$1,879 million increase in other comprehensive
income and equity; 2007: US$226 million reduction in other comprehensive income and equity).
Deferred taxation
HSBC
At 1 January .............................................................................................................................................
Income statement credit ...........................................................................................................................
Equity:
– available-for-sale investments ..........................................................................................................
– cash flow hedges ..............................................................................................................................
– actuarial losses ..................................................................................................................................
– share-based payments .......................................................................................................................
Foreign exchange and other adjustments ................................................................................................
2009
US$m
5,156
1,668
(587)
(517)
978
9
76
2008
US$m
3,425
565
582
90
434
–
60
At 31 December .......................................................................................................................................
6,783
5,156
The amount of deferred taxation accounted for in the consolidated balance sheet comprised the following deferred tax
assets and liabilities:
408
Deferred tax assets
Retirement benefits ..................................................................................................................................
Loan impairment allowances ...................................................................................................................
Unused tax losses .....................................................................................................................................
Accelerated capital allowances ................................................................................................................
Available-for-sale investments ................................................................................................................
Cash flow hedges .....................................................................................................................................
Share-based payments .............................................................................................................................
Other short-term temporary differences ..................................................................................................
Deferred tax liabilities
Assets leased to customers ......................................................................................................................
Revaluation of property ...........................................................................................................................
Accelerated capital allowances ................................................................................................................
Other short-term temporary differences ..................................................................................................
Provision for tax on profit remitted from overseas .................................................................................
Available-for-sale investments ................................................................................................................
Cash flow hedges .....................................................................................................................................
Fee income ...............................................................................................................................................
Other temporary differences ....................................................................................................................
Net deferred tax assets before offsetting balances within countries .......................................................
2009
US$m
1,772
6,363
164
215
68
229
196
1,778
10,785
1,121
399
129
564
–
340
91
1,080
278
4,002
6,783
2008
US$m
927
5,891
282
99
518
1,145
245
457
9,564
916
374
167
419
78
121
280
930
1,123
4,408
5,156
HSBC presents deferred tax balances in the consolidated balance sheet after offsetting asset and liability balances
where HSBC has the legal right to set off, and intends to settle on a net basis, as follows:
Deferred tax assets ...................................................................................................................................
Deferred tax liabilities .............................................................................................................................
The deferred tax assets are recognised in respect of the following countries:
US ............................................................................................................................................................
Brazil ........................................................................................................................................................
Mexico .....................................................................................................................................................
UK ............................................................................................................................................................
Other ........................................................................................................................................................
2009
US$m
8,620
(1,837)
6,783
2009
US$m
5,110
1,289
620
395
1,206
8,620
2008
US$m
7,011
(1,855)
5,156
2008
US$m
5,073
850
456
–
632
7,011
The amount of temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is
recognised in the balance sheet is US$2,068 million (2008: US$1,651 million). Of this amount, US$502 million
(2008: US$1,003 million) has no expiry date and US$972 million (2008: US$648 million) is scheduled to expire
within 10 years (2008: 10 years). The amounts for 2008 have been restated as a result of temporary differences,
unused tax losses and unused tax credits not previously reported, resulting in an increase in the unrecognised deferred
tax asset of US$773 million.
Deferred tax of US$94 million (2008: nil) has been provided in respect of distributable reserves of associates that, on
distribution, would attract withholding tax.
Deferred tax is not recognised in respect of the Group’s investments in subsidiaries and branches where remittance
is not contemplated, and for those associates and interests in joint ventures where it has been determined that no
additional tax will arise. The aggregate amount of temporary differences associated with investments where no
deferred tax liability is recognised is nil (2008: US$38,443 million; 2007: US$29,947 million). Following the change
in the UK tax treatment of dividends on 1 July 2009, no UK tax is expected to arise on distributions from group
entities and no temporary difference exists except where withholding tax or other foreign tax could arise on the
409
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 11, 12 and 13
investments. No amount is disclosed for the unrecognised deferred tax or the 2009 temporary differences associated
with such investments, as it is impracticable to determine the amount of income taxes that would be payable when
any temporary differences reverse.
Of the total net deferred tax assets of US$8.6 billion at 31 December 2009 (2008: US$7.0 billion), US$5.1 billion
(2008: US$5.1 billion) arose in respect of HSBC’s US operations where there has been a recent history of losses.
Management’s analysis of the recognition of these deferred tax assets significantly discounts any future expected
profits from the US operations and relies to a greater extent on capital support to the US operations from HSBC,
including tax planning strategies implemented in relation to such support. US legislation enacted on 6 November
2009 allowed for an extended carryback period for certain federal tax net operating losses. This had the effect of
reducing the net deferred tax assets related to such losses at 31 December 2009 by approximately US$1.6 billion.
Management’s updated analysis is consistent with the assumption that it is probable that there will be sufficient
taxable income to support the resulting deferred tax assets that have been recognised in respect of the US operations
as at 31 December 2009.
The deferred tax asset relating to HSBC’s Brazil operation is US$1.3 billion (2008: US$0.9 billion). On the evidence
available, including management projections of income and the state of the Brazilian economy, there will be
sufficient taxable income generated by the business to support this asset.
HSBC Holdings
Temporary differences:
– short-term timing differences ...........................................................................................................
– fair valued assets and liabilities .......................................................................................................
– share-based payments .......................................................................................................................
12 Dividends
Dividends to shareholders of the parent company were as follows:
Deferred tax asset/(liability)
2009
US$m
2008
US$m
1
(23)
8
(14)
1
30
11
42
2009
2008
2007
Per
share
US$
Total
US$m
Settled
in scrip
US$m
Per
share
US$
Total
US$m
Settled
in scrip
US$m
Per
share
US$
Total
US$m
Settled
in scrip
US$m
Dividends declared on ordinary shares
In respect of previous year:
– fourth interim dividend .......................
0.10
1,210
624
0.39
4,620
2,233
0.36 4,161
2,116
In respect of current year:
– first interim dividend ...........................
– second interim dividend ......................
– third interim dividend ..........................
0.08
0.08
0.08
1,384
1,385
1,391
190
696
160
0.18
0.18
0.18
2,158
2,166
2,175
256
727
380
0.17 1,986
0.17 1,997
0.17 2,007
712
912
614
0.34
5,370
1,670
0.93
11,119
3,596
0.87 10,151
4,354
Quarterly dividends on preference
shares classified as equity
March dividend ........................................... 15.50
June dividend .............................................. 15.50
September dividend .................................... 15.50
December dividend ..................................... 15.50
62.00
Quarterly coupons on capital
securities classified as equity1
January coupon ........................................... 0.508
April coupon ............................................... 0.508
July coupon ................................................. 0.508
October coupon ........................................... 0.508
22
23
22
23
90
44
45
45
45
2.032
179
15.50
15.50
15.50
15.50
62.00
–
–
0.541
0.508
1.049
22
23
22
23
90
–
–
47
45
92
15.50
15.50
15.50
15.50
62.00
–
–
–
–
–
22
23
22
23
90
–
–
–
–
–
1 During April 2008, HSBC Holdings issued US$2,200 million of Perpetual Subordinated Capital Securities, which are classified as
equity under IFRSs.
410
The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended
31 December 2009 of US$0.10 per ordinary share, a distribution of approximately US$1,741 million. The fourth
interim dividend will be payable on 5 May 2010 to holders of record on 18 March 2010 on the Hong Kong Overseas
Branch Register and 19 March 2010 on the Principal Register in the UK or the Bermuda Overseas Branch Register.
No liability is recorded in the financial statements in respect of the fourth interim dividend for 2009.
On 15 January 2010, HSBC paid a further coupon on the capital securities of US$0.508 per security, a distribution of
US$44 million. No liability is recorded in the balance sheet at 31 December 2009 in respect of this coupon payment.
13 Earnings per share
Basic earnings per ordinary share was calculated by dividing the profit attributable to ordinary shareholders of the
parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted
earnings per ordinary share was calculated by dividing the basic earnings, which require no adjustment for the effects
of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own
shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive
potential ordinary shares.
In April 2009, HSBC Holdings completed a rights issue, details of which are provided in Note 41. The effect of the
bonus element included within the rights issue has been included within the calculation of basic and diluted earnings
per share. The effect of the rights issue was to increase the weighted average number of ordinary shares for 2008 and
2007 by 1,743 million and 1,703 million respectively, and dilutive potential ordinary shares by 15 million and
17 million, respectively.
Profit attributable to the ordinary shareholders of the parent company
Profit attributable to shareholders of the parent company ......................................
Dividend payable on preference shares classified as equity ...................................
Coupon payable on capital securities classified as equity ......................................
Profit attributable to the ordinary shareholders of the parent company ..................
Basic and diluted earnings per share
2009
US$m
5,834
(90)
(179)
5,565
2008
US$m
5,728
(90)
(92)
5,546
2007
US$m
19,133
(90)
–
19,043
Basic ............................................................
Effect of dilutive potential ordinary shares .
Profit
US$m
5,565
2009
Number
of shares
(millions)
16,277
143
Per
share
US$
Profit
US$m
0.34
5,546
2008
Number
of shares
(millions)
13,555
118
Per
share
US$
Profit
US$m
0.41 19,043
2007
Number
of shares
(millions)
13,248
133
Per
share
US$
1.44
Diluted ........................................................
5,565
16,420
0.34
5,546
13,673
0.41 19,043
13,381
1.42
The effect of dilutive potential ordinary shares on the weighted average number of ordinary shares outstanding was as
follows:
Number of shares (millions)
Weighted average number of ordinary shares outstanding .....................................
Weighted average number of dilutive potential ordinary shares ............................
– Savings-related Share Option Plan ...................................................................
– Executive Share Option Scheme ......................................................................
– Group Share Option Plan .................................................................................
– Restricted and performance share awards ........................................................
– HSBC France share options .............................................................................
– HSBC Finance share options ...........................................................................
2009
16,277
143
26
–
–
117
–
–
Weighted average number of ordinary shares outstanding assuming dilution .......
16,420
2008
13,555
118
13
3
5
95
1
1
13,673
2007
13,248
133
23
6
18
77
6
3
13,381
The weighted average number of dilutive potential ordinary shares excludes 214 million employee share options that
were anti-dilutive (2008: 166 million; 2007: 22 million).
411
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 14
14 Segmental analysis
HSBC’s operating segments are organised into six geographical regions, Europe, Hong Kong, Rest of Asia-Pacific,
Middle East, North America and Latin America. Due to the nature of the Group, HSBC’s chief operating decision-
maker regularly reviews operating activity on a number of bases, including by geographical region, customer group
and global business, and retail businesses by geographical region. The segmental analysis is presented on a
geographical basis because, although information is reviewed on a number of bases, capital resources are allocated
and performance is assessed primarily by geographical region. Also, the economic conditions of each geographical
region are highly influential in determining the performance of the different businesses carried out in each region. As
a result, provision of segmental information on a geographical basis provides the most meaningful basis from which
to assess performance. HSBC’s chief operating decision-maker is the Group Management Board which operates as a
general management committee under the direct authority of the Board.
Geographical information is classified by the location of the principal operations of the subsidiary or, for The
Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by the
location of the branch responsible for reporting the results or advancing the funds.
Information provided to HSBC’s chief operating decision-maker to make decisions about allocating resources to, and
assessing the performance of, operating segments is measured in accordance with IFRSs. The financial information
shown below includes the effects of intra-HSBC transactions between operating segments which are conducted on an
arm’s length basis and eliminated in a separate column. Shared costs are included in operating segments on the basis
of the actual recharges made.
The Middle East is presented as a separate operating segment with effect from 1 January 2009. Previously, it was
included within the Rest of Asia-Pacific segment. The change was made to align the segmental analysis with the
information reviewed by the chief operating decision-maker and comparative figures have been restated accordingly.
Products and services
HSBC provides a comprehensive range of banking and related financial services to its customers in its six
geographical regions. The products and services offered to customers are organised by customer group and global
business.
• Personal Financial Services offers a broad range of products and services to meet the personal banking,
consumer finance and wealth management needs of individual customers. Personal banking products typically
include current and savings accounts, mortgages and personal loans, credit cards, insurance, wealth management
and local and international payment services.
• Commercial Banking product offerings include the provision of financing services, payments and cash
management, international trade finance, treasury and capital markets, commercial cards, insurance, wealth
management and investment banking services.
• Global Banking and Markets provides tailored financial solutions to major government, corporate and
institutional clients worldwide. The client-focused business lines deliver a full range of banking capabilities
including investment banking and financing solutions; a markets business that provides services in credit, rates,
foreign exchange, money markets and securities services; global asset management services and principal
investment activities.
• Private Banking provides a range of services to meet the banking, investment and wealth advisory needs of high
net worth individuals.
Financial information
In the following segmental analysis, the benefit of shareholders’ funds impacts the analysis only to the extent that
these funds are actually allocated to businesses in the segment by way of intra-HSBC capital and funding structures.
412
Profit/(loss) for the year
Europe
US$m
Interest income ............................
Interest expense ..........................
20,283
(8,015)
Net interest income .....................
12,268
Fee income ..................................
Fee expense .................................
8,576
(2,309)
Net fee income ............................
6,267
Hong
Kong
US$m
5,327
(1,132)
4,195
3,099
(430)
2,669
5,877
(2,338)
3,539
1,972
(415)
1,557
Trading income excluding
net interest income .................
2,861
1,068
1,264
Net interest income
on trading activities ................
Net trading income .....................
Changes in fair value of long-
term debt issued and related
derivatives ...............................
Net income from other
financial instruments
designated at fair value ...........
Net income from financial
instruments designated at
fair value .................................
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums ..
Other operating income ..............
2,598
5,459
157
342
1,225
1,606
(2,746)
(3)
(1)
1,321
788
111
(1,425)
785
110
50
29
4,223
2,262
9
28
3,674
1,274
(19)
2
365
1,238
8,398
Year ended 31 December 2009
Rest of
Asia-
Pacific1
US$m
Middle
East1
US$m
North
America
US$m
Latin
America
US$m
Intra-
HSBC
Items
US$m
Total
US$m
10,091
(4,518)
(1,268)
1,268
62,096
(21,366)
2,260
(775)
1,485
682
(57)
625
369
25
394
–
–
–
16
3
–
71
19,526
(5,856)
13,670
5,496
(679)
4,817
35
296
331
5,573
2,230
(501)
1,729
639
209
848
(3,497)
–
1
495
–
40,730
(652)
652
–
–
–
–
–
–
21,403
(3,739)
17,664
6,236
3,627
9,863
(6,247)
2,716
(3,496)
495
–
(3,531)
296
53
309
566
168
11
1,900
133
–
–
–
(2,756)
520
126
10,471
2,788
Total operating income ............
29,133
13,859
2,594
16,546
10,857
(2,756)
78,631
Net insurance claims incurred
and movement in liabilities to
policyholders ..........................
Net operating income before
loan impairment charges
and other credit risk
provisions ...............................
(5,589)
(4,392)
(395)
–
(241)
(1,833)
–
(12,450)
23,544
9,467
8,003
2,594
16,305
9,024
(2,756)
66,181
Loan impairment charges and
other credit risk provisions .....
(5,568)
Net operating income ................
17,976
(500)
8,967
Employee compensation and
(896)
(1,334)
(15,664)
(2,526)
–
(26,488)
7,107
1,260
641
6,498
(2,756)
39,693
benefits ..................................
(7,174)
(2,102)
(2,363)
(545)
(4,085)
(2,199)
–
(18,468)
General and administrative
expenses ..................................
(5,775)
(1,502)
(1,872)
(419)
(3,794)
(2,786)
2,756
(13,392)
Depreciation and impairment of
property, plant and equipment
Amortisation and impairment of
(762)
intangible assets ......................
(277)
(224)
(118)
(172)
(43)
(31)
(6)
Total operating expenses ..........
(13,988)
(3,946)
(4,450)
(1,001)
Operating profit/(loss) ..............
3,988
5,021
2,657
Share of profit in associates
and joint ventures ...................
21
Profit/(loss) before tax ..............
4,009
Tax income/(expense) .................
(776)
Profit/(loss) for the year ...........
3,233
8
5,029
(869)
4,160
1,543
4,200
(753)
3,447
259
196
455
(94)
361
(329)
(183)
(8,391)
(7,750)
12
(7,738)
2,285
(5,453)
(207)
(183)
–
–
(1,725)
(810)
(5,375)
2,756
(34,395)
1,123
1
1,124
(178)
946
–
–
–
–
–
5,298
1,781
7,079
(385)
6,694
413
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 14
Profit/(loss) for the year (continued)
Year ended 31 December 2008
Rest of
Asia-
Pacific1
US$m
Middle
East1
US$m
North
America
US$m
Latin
America
US$m
Intra-
HSBC
items
US$m
Total
US$m
Europe
US$m
Interest income ............................
Interest expense ..........................
35,117
(25,421)
Net interest income .....................
9,696
Fee income ..................................
Fee expense .................................
10,225
(2,733)
Net fee income ............................
7,492
Trading income/(expense)
excluding net interest income .
1,691
Net interest income
on trading activities ................
Net trading income/(expense) .....
Changes in fair value of long-
term debt issued and related
derivatives ..............................
Net income/(expense) from
other financial instruments
designated at fair value ...........
Net income/(expense) from
financial instruments
designated at fair value ...........
Gains less losses from financial
investments .............................
Dividend income .........................
Net earned insurance premiums .
Gains on disposal of French
regional banks ........................
Other operating income ..............
Hong
Kong
US$m
9,530
(3,832)
5,698
3,062
(482)
2,580
856
337
9,066
(5,129)
3,937
2,414
(547)
1,867
1,443
599
3,666
5,357
1,193
2,042
2,939
3
1
(1,826)
(1,194)
(172)
1,113
(1,191)
(171)
418
130
5,299
2,445
2,096
(309)
41
3,247
–
817
24
2
197
–
1,055
8,953
2,451
(895)
1,556
740
(49)
691
380
22
402
–
–
–
8
2
–
–
9
25,897
(10,679)
11,632
(5,174)
(2,392)
2,392
91,301
(48,738)
15,218
6,458
–
42,563
6,292
(1,065)
5,227
(3,879)
744
(3,135)
2,716
(549)
2,167
356
345
701
3,736
–
1
364
3,737
364
(120)
77
390
–
23
176
20
1,717
–
300
(685)
685
–
–
–
–
–
–
–
–
–
–
–
(2,492)
24,764
(4,740)
20,024
847
5,713
6,560
6,679
(2,827)
3,852
197
272
10,850
2,445
1,808
2,668
21,417
11,903
(2,492)
88,571
Total operating income ...............
34,046
12,076
Net insurance claims incurred
and movement in liabilities to
policyholders ..........................
Net operating income before
loan impairment charges
and other credit risk provisions
(3,367)
(1,922)
28
–
(238)
(1,390)
–
(6,889)
30,679
10,154
8,981
2,668
21,179
10,513
(2,492)
81,682
Loan impairment charges and
other credit risk provisions .....
(3,754)
Net operating income ..................
26,925
Employee compensation and
(765)
9,389
(852)
8,129
(279)
(16,795)
(2,492)
–
(24,937)
2,389
4,384
8,021
(2,492)
56,745
benefits ...................................
(8,551)
(2,069)
(2,475)
(544)
(4,609)
(2,544)
–
(20,792)
General and administrative
expenses ..................................
(6,428)
(1,562)
(2,037)
(384)
(4,282)
(3,059)
2,492
(15,260)
Depreciation and impairment of
property, plant and equipment
(865)
Amortisation and impairment of
intangible assets ......................
Goodwill impairment ..................
(228)
–
(209)
(103)
–
(163)
(29)
–
(25)
(6)
–
(265)
(203)
(10,564)
(223)
(164)
–
–
–
–
(1,750)
(733)
(10,564)
Total operating expenses ............
(16,072)
(3,943)
(4,704)
(959)
(19,923)
(5,990)
2,492
(49,099)
Operating profit/(loss) ................
10,853
5,446
3,425
1,430
(15,539)
2,031
Share of profit in associates
and joint ventures ...................
16
Profit/(loss) before tax ................
10,869
Tax income/(expense) .................
(2,199)
Profit/(loss) for the year ..............
8,670
15
5,461
(899)
4,562
1,297
4,722
(928)
3,794
316
11
6
1,746
(15,528)
2,037
(245)
1,715
(253)
1,501
(13,813)
1,784
–
–
–
–
–
7,646
1,661
9,307
(2,809)
6,498
414
Year ended 31 December 2007
Rest of
Asia-
Pacific1
US$m
Middle
East1
US$m
North
America
US$m
Latin
America
US$m
Intra-
HSBC
items
US$m
Total
US$m
8,002
(4,953)
3,049
2,201
(426)
1,775
946
400
Europe
US$m
Interest income ............................
Interest expense ..........................
33,144
(25,398)
Net interest income .....................
7,746
Fee income ..................................
Fee expense .................................
10,973
(2,542)
Net fee income ............................
8,431
Hong
Kong
US$m
12,580
(7,097)
5,483
3,860
(498)
3,362
Trading income/(expense)
excluding net interest income .
3,003
1,270
Net interest income/(expense)
on trading activities ................
Net trading income/(expense) .....
Changes in fair value of long-
term debt issued and related
derivatives ...............................
Net income from other financial
instruments designated at fair
value ........................................
Net income from financial
instruments designated at
fair value .................................
Gains less losses from financial
1,226
investments .............................
1,326
Gains arising from dilution of
interests in associates ..............
Dividend income .........................
Net earned insurance premiums ..
Other operating income ..............
–
171
4,010
1,193
3,940
6,943
(28)
1,242
1,346
1,059
2
1
167
674
110
676
94
–
31
2,797
845
111
36
1,081
6
226
781
8,411
2,156
(1,062)
30,183
(15,336)
9,471
(3,895)
(3,177)
3,177
92,359
(54,564)
1,094
14,847
5,576
–
37,795
508
(37)
471
256
41
297
–
–
–
2
–
2
–
17
6,733
(923)
5,810
(1,289)
747
(542)
2,647
(494)
2,153
272
276
548
1,750
–
–
320
1,750
245
–
105
449
360
320
253
11
9
1,594
228
(585)
585
–
–
–
–
–
–
–
–
–
–
–
(1,985)
26,337
(4,335)
22,002
4,458
5,376
9,834
2,812
1,271
4,083
1,956
1,092
324
9,076
1,439
1,883
23,024
10,692
(1,985)
87,601
Total operating income ...............
31,046
14,530
Net insurance claims incurred
and movement in liabilities to
policyholders ..........................
Net operating income before
loan impairment charges
and other credit risk provisions
Loan impairment charges and
(3,479)
(3,208)
(253)
–
(241)
(1,427)
–
(8,608)
27,567
11,322
8,158
1,883
22,783
9,265
(1,985)
78,993
other credit risk provisions .....
(2,542)
(231)
Net operating income ..................
25,025
11,091
(561)
7,597
(55)
(12,156)
(1,697)
–
(17,242)
1,828
10,627
7,568
(1,985)
61,751
Employee compensation and
benefits ...................................
(9,022)
(2,124)
(2,084)
(447)
(5,384)
(2,273)
–
(21,334)
General and administrative
expenses ..................................
(6,429)
(1,386)
(1,741)
(300)
(4,653)
(2,770)
1,985
(15,294)
Depreciation and impairment of
property, plant and equipment
(848)
(180)
(139)
Amortisation and impairment of
intangible assets ......................
(226)
(90)
(27)
(20)
(6)
(317)
(202)
(210)
(149)
–
–
(1,714)
(700)
Total operating expenses ............
(16,525)
(3,780)
(3,991)
(773)
(10,556)
(5,402)
1,985
(39,042)
Operating profit ..........................
8,500
7,311
3,606
1,055
Share of profit in associates
and joint ventures ...................
95
28
Profit before tax ..........................
8,595
7,339
Tax income/(expense) .................
(1,505)
(1,206)
Profit for the year ........................
7,090
6,133
1,096
4,702
(721)
3,981
252
1,307
(178)
1,129
71
20
91
332
423
2,166
12
2,178
(479)
1,699
–
–
–
–
–
22,709
1,503
24,212
(3,757)
20,455
For footnote, see page 417.
415
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 14
Other information about the profit/(loss) for the year
Rest of
Asia-
Pacific1
US$m
Hong
Kong
US$m
Middle
East1
US$m
North
America
US$m
Latin
America
US$m
Intra-
HSBC
items
US$m
Europe
US$m
Year ended 31 December 2009
Net operating income...................
External ..................................
Inter-segment ..........................
17,976
16,734
1,242
8,967
8,352
615
7,107
6,056
1,051
1,260
1,283
(23)
641
767
(126)
6,498
6,501
(3)
(2,756)
–
(2,756)
Total
US$m
39,693
39,693
–
Profit/(loss) for the year includes
the following significant non-
cash items:
Depreciation, amortisation
and impairment ...................
1,039
342
215
37
515
390
Loan impairment losses gross
of recoveries and other
credit risk provisions ..........
Impairment of financial
5,833
investments .........................
137
534
129
Year ended 31 December 2008
1,028
1,361
15,757
2,865
50
4
38
–
–
–
–
2,538
27,378
358
Net operating income...................
External ..................................
Inter-segment ..........................
26,925
25,887
1,038
9,389
8,205
1,184
8,129
7,010
1,119
2,389
2,386
3
4,384
5,236
(852)
8,021
8,021
–
(2,492)
–
(2,492)
56,745
56,745
–
Profit/(loss) for the year includes
the following significant non-
cash items:
Depreciation, amortisation
and impairment ...................
1,093
312
192
31
11,352
387
Loan impairment losses gross
of recoveries and other
credit risk provisions ..........
Impairment of financial
4,050
investments .........................
278
803
535
Year ended 31 December 2007
960
309
16,892
2,757
–
–
229
–
–
–
–
13,367
25,771
1,042
Net operating income ..................
External ..................................
Inter-segment ..........................
25,025
23,772
1,253
11,091
10,168
923
7,599
6,620
979
1,826
1,836
(10)
10,627
11,784
(1,157)
7,568
7,571
(3)
(1,985)
–
(1,985)
61,751
61,751
–
Profit for the year includes the
following significant non-cash
items:
Depreciation, amortisation
and impairment ...................
1,074
270
166
26
627
359
Loan impairment losses gross
of recoveries and other
credit risk provisions ..........
Impairment of financial
3,085
273
656
83
12,218
1,932
investments .........................
42
–
–
–
–
–
For footnote, see page 417.
–
–
–
2,522
18,247
42
416
Performance ratios
Europe
US$m
Hong
Kong
US$m
Rest of
Asia-
Pacific1
US$m
Middle
East1
US$m
North
America
US$m
Latin
America
US$m
Year ended 31 December 2009
Share of HSBC’s profit before
tax ...........................................
Cost efficiency ratio ....................
Year ended 31 December 2008
Share of HSBC’s profit before
56.7
59.4
71.0
41.7
59.3
55.6
6.4
38.6
(109.3)
51.5
15.9
59.6
tax ...........................................
Cost efficiency ratio ....................
116.7
52.4
58.7
38.8
50.7
52.4
18.8
35.9
(166.8)
94.1
21.9
57.0
Year ended 31 December 2007
Share of HSBC’s profit before
tax ...........................................
Cost efficiency ratio ....................
1 For footnote, see below.
Balance sheet information
35.5
59.9
30.3
33.4
19.4
48.9
5.4
41.1
0.4
46.3
9.0
58.3
Total
US$m
100.0
52.0
100.0
60.1
100.0
49.4
Rest of
Asia-
Pacific1
US$m
Hong
Kong
US$m
Middle
East1
US$m
North
America
US$m
Latin
America
US$m
Intra-
HSBC
items
US$m
Total
US$m
Europe
US$m
At 31 December 2009
Loans and advances to
customers (net) .......................
439,481
99,381
80,043
22,844
206,853
47,629
–
896,231
Interests in associates and
joint ventures ..........................
147
Total assets .................................. 1,268,600
495,019
Customer accounts ......................
Total liabilities ............................ 1,213,907
157
399,243
275,441
384,912
11,083
222,139
133,999
203,243
1,573
48,107
32,529
42,325
42
475,014
149,157
447,530
9
115,967
72,889
101,492
–
13,011
(164,618) 2,364,452
1,159,034
(164,618) 2,228,791
–
Capital expenditure incurred2 .....
983
290
159
102
658
540
–
2,732
At 31 December 2008
Loans and advances to
customers (net) .......................
426,191
100,220
80,661
27,295
256,214
42,287
–
932,868
Interests in associates and
joint ventures ..........................
137
Total assets .................................. 1,392,049
Customer accounts ......................
502,476
Total liabilities ............................ 1,361,960
153
414,484
250,517
400,637
9,728
225,573
124,194
210,478
1,383
50,952
35,165
45,416
128
596,302
143,532
571,657
8
102,946
59,443
91,929
–
11,537
(254,841) 2,527,465
1,115,327
(254,841) 2,427,236
–
Capital expenditure incurred2 .....
2,078
440
426
85
726
617
–
4,372
At 31 December 2007
Loans and advances to
customers (net) .......................
452,275
89,638
80,245
21,607
289,860
47,923
–
981,548
Interests in associates and
joint ventures ..........................
158
Total assets .................................. 1,256,220
Customer accounts ......................
504,954
Total liabilities ............................ 1,198,413
155
359,386
234,488
344,011
8,602
208,195
119,296
194,675
1,265
45,669
30,937
41,576
127
574,318
145,173
542,549
77
102,649
61,292
89,797
–
10,384
(192,171) 2,354,266
1,096,140
(192,171) 2,218,850
–
Capital expenditure incurred2 .....
1,722
441
239
38
833
599
–
3,872
1 The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of
Asia-Pacific. Comparative data have been restated accordingly.
2 Expenditure incurred on property, plant and equipment and other intangible assets. Excludes assets acquired as part of business
combinations and goodwill.
417
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 14 and 15
Other financial information
Net operating income by customer group and global business
Personal
Financial
Services
US$m
Commercial
Banking
US$m
Global
Banking
& Markets
US$m
Private
Banking
US$m
Year ended 31 December 2009
Net operating income ..................
External ..................................
Inter-segment ..........................
Year ended 31 December 2008
Net operating income ..................
External ..................................
Inter-segment ..........................
Year ended 31 December 2007
Net operating income ..................
External ..................................
Inter-segment ..........................
15,513
13,804
1,709
20,269
15,023
5,246
27,067
21,059
6,008
9,571
9,285
286
13,144
13,080
64
12,943
11,442
1,501
18,652
21,383
(2,731)
12,047
17,739
(5,692)
15,172
23,595
(8,423)
2,984
2,275
709
3,563
2,231
1,332
3,534
2,144
1,390
Intra-
HSBC
items
US$m
(4,996)
–
(4,996)
(4,568)
–
(4,568)
(3,912)
–
(3,912)
Other1
US$m
(2,031)
(7,054)
5,023
12,290
8,672
3,618
6,947
3,511
3,436
Total
US$m
39,693
39,693
–
56,745
56,745
–
61,751
61,751
–
1 The main items reported in the ‘Other’ segment are certain property activities, unallocated investment activities, centrally held
investment companies and HSBC’s holding company and financing operations. The ‘Other’ segment also includes gains and losses on
the disposal of certain significant subsidiaries or business units.
Information by country
2009
2008
2007
External net
operating
income1
US$m
Non-
current
assets2
US$m
External net
operating
income1
US$m
Non-
current
assets2
US$m
External net
operating
income1
US$m
UK .......................................................................
Hong Kong .........................................................
USA ....................................................................
France .................................................................
Brazil ...................................................................
Other countries ...................................................
9,958
8,352
(1,042)
3,322
3,368
15,735
39,693
19,704
3,374
5,499
11,782
1,868
25,557
67,784
15,789
8,205
2,862
6,457
3,886
19,546
56,745
12,491
3,527
4,660
11,862
1,421
23,020
56,981
15,955
10,168
9,304
4,597
3,659
18,068
61,751
Non-
current
assets2
US$m
12,394
3,226
20,403
12,868
1,735
22,420
73,046
1 External net operating income is attributed to countries on the basis of the location of the branch responsible for reporting the results or
advancing the funds.
2 Non-current assets consist of property, plant and equipment, goodwill, other intangible assets, interests in associates and joint ventures
and certain other assets expected to be recovered more than twelve months after the reporting period.
15 Analysis of financial assets and liabilities by measurement basis
Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. The
summary of significant accounting policies in Note 2 describes how the classes of financial instruments are measured,
and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the
carrying amounts of the financial assets and liabilities by category as defined in IAS 39 and by balance sheet heading.
418
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419
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 15
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F
420
HSBC Holdings
Financial assets
Cash at bank and in hand ....................................
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Other assets .........................................................
Total financial assets ..........................................
Financial liabilities
Amounts owed to HSBC undertakings ..............
Financial liabilities designated at fair value .......
Derivatives ..........................................................
Debt securities in issue .......................................
Other liabilities ...................................................
Accruals ..............................................................
Subordinated liabilities .......................................
Total financial liabilities .....................................
Financial assets
Cash at bank and in hand ....................................
Derivatives ..........................................................
Loans and advances to HSBC undertakings ......
Financial investments .........................................
Other assets .........................................................
Total financial assets ..........................................
Financial liabilities
Amounts owed to HSBC undertakings ..............
Financial liabilities designated at fair value .......
Derivatives ..........................................................
Other liabilities ...................................................
Accruals ..............................................................
Subordinated liabilities .......................................
Total financial liabilities .....................................
At 31 December 2009
Held for
trading
US$m
Designated
at fair value
US$m
Loans and
receivables
US$m
Financial
assets and
liabilities at
amortised
cost
US$m
Available-
for-sale
securities
US$m
–
2,981
–
–
–
2,981
–
–
362
–
–
–
–
362
–
–
–
–
–
–
–
–
23,212
–
–
23,212
–
16,909
–
–
–
–
–
16,909
–
–
–
–
–
–
–
–
–
–
–
2,455
–
2,455
–
–
–
–
–
–
–
–
224
–
–
–
4
228
3,711
–
–
2,839
8
419
14,406
21,383
At 31 December 2008
Held for
trading
US$m
Designated
at fair value
US$m
Loans and
receivables
US$m
–
3,682
–
–
–
3,682
–
–
1,324
–
–
–
1,324
–
–
–
–
–
–
–
–
11,804
–
–
11,804
–
16,389
–
–
–
–
16,389
–
–
–
–
–
–
–
Financial
assets and
liabilities at
amortised
cost
US$m
Available-
for-sale
securities
US$m
–
–
–
2,629
–
2,629
–
–
–
–
–
–
–
443
–
–
–
25
468
4,042
–
–
10
288
14,017
18,357
Total
US$m
224
2,981
23,212
2,455
4
28,876
3,711
16,909
362
2,839
8
419
14,406
38,654
Total
US$m
443
3,682
11,804
2,629
25
18,583
4,042
16,389
1,324
10
288
14,017
36,070
421
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 16 and 17
16 Trading assets
Trading assets:
– not subject to repledge or resale by counterparties .........................................................................
– which may be repledged or resold by counterparties .....................................................................
Treasury and other eligible bills ..............................................................................................................
Debt securities .........................................................................................................................................
Equity securities ......................................................................................................................................
Trading securities at fair value ................................................................................................................
Loans and advances to banks ..................................................................................................................
Loans and advances to customers ...........................................................................................................
Trading securities valued at fair value
US Treasury and US Government agencies2 ...........................................................................................
UK Government .......................................................................................................................................
Hong Kong Government .........................................................................................................................
Other government ....................................................................................................................................
Asset-backed securities3 ..........................................................................................................................
Corporate debt and other securities .........................................................................................................
Equity securities ......................................................................................................................................
2009
US$m
320,155
101,226
421,381
22,346
201,598
35,311
259,255
78,126
84,000
421,381
Fair value1
2009
US$m
17,620
12,113
10,649
94,264
5,308
83,990
35,311
2008
US$m
340,675
86,654
427,329
32,458
199,619
21,878
253,955
73,055
100,319
427,329
2008
US$m
26,621
10,586
6,648
98,983
6,566
82,673
21,878
259,255
253,955
1 Included within these figures are debt securities issued by banks and other financial institutions of US$41,466 million (2008:
US$49,997 million), of which US$7,280 million (2008: US$3,449 million) are guaranteed by various governments.
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.
Trading securities listed on a recognised exchange and unlisted
Fair value at 31 December 2009
Listed on a recognised exchange1 ............................................
Unlisted .....................................................................................
Fair value at 31 December 2008
Listed on a recognised exchange1 ............................................
Unlisted .....................................................................................
Treasury
and other
eligible bills
US$m
Debt
securities
Equity
securities
US$m
US$m
3,107
19,239
22,346
1
32,457
32,458
159,030
42,568
201,598
145,370
54,249
199,619
33,428
1,883
35,311
20,871
1,007
21,878
1 Included within listed investments are US$3,229 million (2008: US$3,870 million) of investments listed in Hong Kong.
Loans and advances to banks held for trading
Reverse repos ...........................................................................................................................................
Settlement accounts .................................................................................................................................
Stock borrowing ......................................................................................................................................
Other ........................................................................................................................................................
2009
US$m
50,357
10,128
4,711
12,930
78,126
Total
US$m
195,565
63,690
259,255
166,242
87,713
253,955
2008
US$m
48,188
4,337
1,888
18,642
73,055
422
Loans and advances to customers held for trading
Reverse repos ...........................................................................................................................................
Stock borrowing .......................................................................................................................................
Settlement accounts .................................................................................................................................
Other ........................................................................................................................................................
2009
US$m
42,172
18,042
12,134
11,652
84,000
2008
US$m
58,285
13,740
10,116
18,178
100,319
17 Financial assets designated at fair value
Financial assets designated at fair value:
– not subject to repledge or resale by counterparties .........................................................................
– which may be repledged or resold by counterparties ......................................................................
Treasury and other eligible bills ..............................................................................................................
Debt securities .........................................................................................................................................
Equity securities .......................................................................................................................................
Securities designated at fair value ...........................................................................................................
Loans and advances to banks ..................................................................................................................
Loans and advances to customers ............................................................................................................
Securities designated at fair value
US Treasury and US Government agencies2 ...........................................................................................
UK Government .......................................................................................................................................
Hong Kong Government .........................................................................................................................
Other government ....................................................................................................................................
Asset-backed securities3 ..........................................................................................................................
Corporate debt and other securities .........................................................................................................
Equities ....................................................................................................................................................
2009
US$m
37,166
15
37,181
223
20,718
14,983
35,924
354
903
37,181
Fair value1
2009
US$m
78
4,799
177
3,491
6,463
5,933
14,983
35,924
1 Included within these figures are debt securities issued by banks and other financial institutions of US$13,745 million (2008:
US$10,351 million), of which US$49 million (2008: US$14 million) are guaranteed by various governments.
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.
Securities listed on a recognised exchange and unlisted
Fair value at 31 December 2009
Listed on a recognised exchange1 .............................................
Unlisted .....................................................................................
Fair value at 31 December 2008
Listed on a recognised exchange1 .............................................
Unlisted .....................................................................................
Treasury
and other
eligible bills
US$m
Debt
securities
Equity
securities
US$m
US$m
78
145
223
80
155
235
7,168
13,550
20,718
3,490
12,859
16,349
10,549
4,434
14,983
8,140
2,853
10,993
1 Included within listed investments are US$506 million of investments listed in Hong Kong (2008: US$576 million).
423
2008
US$m
28,522
11
28,533
235
16,349
10,993
27,577
230
726
28,533
2008
US$m
93
992
284
3,624
6,492
5,099
10,993
27,577
Total
US$m
17,795
18,129
35,924
11,710
15,867
27,577
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 18
18 Derivatives
Fair values of derivatives by product contract type held by HSBC
At 31 December 2009
Foreign exchange ................................................
Interest rate .........................................................
Equity ..................................................................
Credit ..................................................................
Commodity and other .........................................
Trading
US$m
55,036
212,102
15,729
28,479
1,135
Gross total fair values .........................................
312,481
Netting ................................................................
Total ....................................................................
At 31 December 2008
Foreign exchange ................................................
Interest rate .........................................................
Equity ..................................................................
Credit ..................................................................
Commodity and other .........................................
115,803
317,796
18,660
91,271
2,979
Gross total fair values .........................................
546,509
2,010
4,481
–
–
–
6,491
Netting ................................................................
Total ....................................................................
Assets
Hedging
US$m
1,695
3,506
–
–
–
5,201
Total
US$m
Trading
US$m
56,731
215,608
15,729
28,479
1,135
54,502
209,351
19,013
27,042
960
317,682
310,868
(66,796)
250,886
117,813
322,277
18,660
91,271
2,979
115,311
310,255
21,913
89,715
2,729
553,000
539,923
(58,124)
494,876
Liabilities
Hedging
US$m
300
3,274
–
–
–
3,574
826
4,435
–
–
–
5,261
Total
US$m
54,802
212,625
19,013
27,042
960
314,442
(66,796)
247,646
116,137
314,690
21,913
89,715
2,729
545,184
(58,124)
487,060
The 49 per cent decrease in the fair value of derivative assets during 2009 was driven by steepening yield curves in
major currencies, narrowing credit spreads and reduced market volatility. The 5 per cent increase in the notional
contract amounts of HSBC’s derivative assets in the year was primarily driven by increased trading volumes on
interest rate contracts.
Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
Foreign exchange ......................................................................
Interest rate ...............................................................................
Total fair values ........................................................................
2009
2008
Trading
assets
US$m
2,250
731
2,981
Trading
liabilities
US$m
362
–
362
Trading
assets
US$m
1,772
1,910
3,682
Trading
liabilities
US$m
1,324
–
1,324
Derivatives are financial instruments that derive their value from the price of underlying items such as equities,
bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives enable
users to increase, reduce or alter exposure to credit or market risks. HSBC makes markets in derivatives for its
customers and uses derivatives to manage its exposure to credit and market risks.
Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. A
description of how the fair value of derivatives is derived is set out on page 171. Derivative assets and liabilities on
different transactions are only set off if the transactions are with the same counterparty, a legal right of set-off exists
and the cash flows are intended to be settled on a net basis.
Use of derivatives
HSBC transacts 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. Derivatives (except for derivatives which
are designated as effective hedging instruments as defined in IAS 39) are held for trading. The held for trading
classification includes two types of derivatives: those used in sales and trading activities, and those used for risk
management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The
424
second category includes derivatives managed in conjunction with financial instruments designated at fair value.
These activities are described more fully below.
HSBC’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions are
managed constantly to ensure that they remain within acceptable risk levels, with matching deals being utilised to
achieve this where necessary. When entering into derivative transactions, HSBC employs the same credit risk
management procedures to assess and approve potential credit exposures that are used for traditional lending.
Trading derivatives
Most of HSBC’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 exchange rates, interest rates, equity prices or other market parameters. Trading includes
market-making, positioning and arbitrage activities. Market-making entails quoting bid and offer prices to other
market participants for the purpose of generating revenues based on spread and volume; positioning means managing
market risk positions in the expectation of benefiting from favourable movements in prices, rates or indices; arbitrage
involves identifying and profiting from price differentials between markets and products.
As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives,
ineffective hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge
effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the
criteria for hedge accounting. These include derivatives managed in conjunction with financial instruments
designated at fair value.
Gains and losses from changes in the fair value of derivatives, including the contractual interest, that do not qualify
for hedge accounting are reported in ‘Net trading income’, except for derivatives managed in conjunction with
financial instruments designated at fair value, where gains and losses are reported in ‘Net income from financial
instruments designated at fair value’, together with the gains and losses on the hedged items. Where the derivatives
are managed with debt securities in issue, the contractual interest is shown in ‘interest expense’ together with the
interest payable on the issued debt. Substantially all of HSBC Holdings’ derivatives entered into with HSBC
undertakings are managed in conjunction with financial liabilities designated at fair value.
The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions
outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for trading purposes by product type
HSBC
2009
US$m
Foreign exchange ......................................................................
Interest rate ...............................................................................
Equity ........................................................................................
Credit ........................................................................................
Commodity and other ...............................................................
2,883,201
13,874,355
217,828
1,237,055
53,720
2008
US$m
3,045,017
12,435,965
221,053
1,583,337
63,103
18,266,159
17,348,475
HSBC Holdings
2009
US$m
17,150
6,804
–
–
–
23,954
2008
US$m
14,312
7,804
–
–
–
22,116
Credit derivatives
HSBC trades credit derivatives through its principal dealing operations and acts 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 offsetting credit derivative contracts with other
counterparties.
HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related
credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives is
restricted to a small number of offices within the major centres which have the control infrastructure and market
skills to manage effectively the credit risk inherent in the products.
425
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 18
Credit derivatives are also deployed to a limited extent for the risk management of the Group’s loan portfolios.
The notional contract amount of credit derivatives of US$1,237,055 million (2008: US$1,583,337 million) consisted
of protection bought of US$614,690 million (2008: US$777,556 million) and protection sold of US$622,365 million
(2008: US$805,781 million).
The difference between the notional amounts bought and sold is attributable to HSBC selling protection on large,
diversified, predominantly investment grade portfolios (including the most senior tranches) and then offsetting risk
on these positions by buying protection on the more subordinated tranches of the same portfolios. In addition, HSBC
uses securities to mitigate risks on certain derivative positions and credit derivative contracts to reduce counterparty
exposures. Consequently, while there is a mismatch in notional amounts of credit derivatives bought and sold this
should not be interpreted as representing the open risk position. The credit derivative business operates within the
market risk management framework described on pages 250 to 261.
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been
derived had valuation techniques used for subsequent measurement been applied at initial recognition, less
subsequent releases, is as follows:
Unamortised balance of derivatives valued using models with unobservable inputs
Unamortised balance at 1 January ...........................................................................................................
Deferral on new transactions ...................................................................................................................
Recognised in the income statement during the period:
– amortisation ......................................................................................................................................
– subsequent to unobservable inputs becoming observable ...............................................................
– maturity, termination or offsetting derivative ..................................................................................
Exchange differences ...............................................................................................................................
Risk hedged .............................................................................................................................................
Unamortised balance at 31 December1 ....................................................................................................
1 This amount is yet to be recognised in the consolidated income statement.
Hedging instruments
2009
US$m
2008
US$m
204
192
(86)
(19)
(42)
11
–
260
306
326
(168)
(118)
(99)
(38)
(5)
204
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing
debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the
maturity and other profiles of its assets and liabilities.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type
of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash
flow hedges, or hedges in net investment of foreign operations. These are described under the relevant headings
below.
The notional contract amounts of derivatives held for hedging purposes indicate the nominal value of transactions
outstanding at the balance sheet date; they do not represent amounts at risk.
Notional contract amounts of derivatives held for hedging purposes by product type
Foreign exchange ......................................................................
Interest rate ...............................................................................
At 31 December 2009
At 31 December 2008
Cash flow
hedge
US$m
Fair value
hedge
US$m
Cash flow
hedge
US$m
12,359
236,388
248,747
2,469
42,224
44,693
14,931
229,785
244,716
Fair value
hedge
US$m
2,602
27,305
29,907
426
Fair value hedges
HSBC’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair
value of fixed-rate long-term financial instruments due to movements in market interest rates. For qualifying fair
value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk
being hedged are recognised in the income statement. If the hedge relationship is terminated, the fair value
adjustment to the hedged item continues to be reported as part of the basis of the item and is amortised to the income
statement as a yield adjustment over the remainder of the hedging period.
Fair value of derivatives designated as fair value hedges
At 31 December 2009
Fair value
At 31 December 2008
Fair value
Assets
US$m
Liabilities
US$m
Assets
US$m
Liabilities
US$m
Foreign exchange ......................................................................
Interest rate ...............................................................................
342
242
584
Gains or losses arising from fair value hedges
Gains/(losses):
– on hedging instruments .......................................................................................
– on the hedged items attributable to the hedged risk ............................................
–
1,085
1,085
2009
US$m
114
(159)
(45)
265
574
839
2008
US$m
(296)
301
5
10
1,257
1,267
2007
US$m
(186)
205
19
The gains and losses on ineffective portions of fair value hedges are recognised immediately in ‘Net trading income’.
Cash flow hedges
HSBC’s cash flow hedges consist principally of interest rate and cross-currency swaps that are used to protect against
exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at
variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future
cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and
liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and
defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for
identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast
transactions. Gains and losses are initially recognised in other comprehensive income, and accumulated in the cash
flow hedging reserve, and are transferred to the income statement when the forecast cash flows affect the income
statement.
Fair value of derivatives designated as cash flow hedges
Foreign exchange ......................................................................
Interest rate ...............................................................................
At 31 December 2009
Fair value
At 31 December 2008
Fair value
Assets
US$m
1,353
3,264
4,617
Liabilities
US$m
300
2,189
2,489
Assets
US$m
1,745
3,907
5,652
Liabilities
US$m
816
3,178
3,994
427
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 18 and 19
Forecast principal balances on which interest cash flows are expected to arise
At 31 December 2009
Assets ........................................................................................
Liabilities ..................................................................................
Net cash inflows/(outflows) exposure ......................................
At 31 December 2008
Assets ........................................................................................
Liabilities ..................................................................................
Net cash inflows/(outflows) exposure ......................................
3 months
or less
US$m
More than 3
months but less
than 1 year
US$m
5 years or less
but more than
1 year
US$m
More than
5 years
US$m
120,915
(71,143)
49,772
99,426
(83,019)
16,407
111,456
(78,841)
32,615
71,491
(77,656)
(6,165)
53,184
(39,377)
13,807
52,988
(62,633)
(9,645)
476
(6,559)
(6,083)
2,081
(7,817)
(5,736)
This table reflects the interest rate repricing profile of the underlying hedged items.
The gains and losses on ineffective portions of such derivatives are recognised immediately in ‘Net trading income’.
During the year to 31 December 2009 a gain of US$90 million (2008 loss of US$40 million; 2007: loss of
US$77 million) was recognised due to hedge ineffectiveness.
Hedges of net investments in foreign operations
HSBC’s consolidated balance sheet is affected by exchange differences between the US dollar and all the non-US
dollar functional currencies of subsidiaries. HSBC hedges structural foreign exchange exposures only in limited
circumstances. Hedging is undertaken using forward foreign exchange contracts which are accounted for as hedges of
a net investment in a foreign operation, or by financing with borrowings in the same currencies as the functional
currencies involved.
At 31 December 2009, the fair values of outstanding financial instruments designated as hedges of net investments
in foreign operations were liabilities of US$28 million (2008: US$52 million) and notional contract values of
US$566 million (2008: US$161 million).
The ineffectiveness recognised in ‘Net trading income’ in the year ended 31 December 2009 that arose from hedges
in foreign operations was nil (2008 and 2007: nil).
19 Financial investments
Financial investments:
– not subject to repledge or resale by counterparties .........................................................................
– which may be repledged or resold by counterparties .....................................................................
2009
US$m
356,864
12,294
369,158
Treasury and other eligible bills ...............................................
– available for sale ..............................................................
– held to maturity ................................................................
Debt securities ..........................................................................
– available for sale ..............................................................
– held to maturity ................................................................
Equity securities .......................................................................
– available for sale ..............................................................
2009
2008
Carrying
amount
US$m
58,434
58,333
101
301,600
284,074
17,526
9,124
9,124
Fair
value
US$m
58,434
58,333
101
302,171
284,074
18,097
9,124
9,124
Carrying
amount
US$m
41,027
41,027
–
251,957
237,944
14,013
7,251
7,251
2008
US$m
287,479
12,756
300,235
Fair
value
US$m
41,027
41,027
–
253,001
237,944
15,057
7,251
7,251
Total financial investments .......................................................
369,158
369,729
300,235
301,279
428
At 31 December 2009
US Treasury .............................................................................................................................................
US Government agencies2 .......................................................................................................................
US Government sponsored entities2 ........................................................................................................
UK Government .......................................................................................................................................
Hong Kong Government .........................................................................................................................
Other government ....................................................................................................................................
Asset-backed securities3 ..........................................................................................................................
Corporate debt and other securities .........................................................................................................
Equities ....................................................................................................................................................
At 31 December 2008
US Treasury .............................................................................................................................................
US Government agencies2 .......................................................................................................................
US Government sponsored entities2 ........................................................................................................
UK Government .......................................................................................................................................
Hong Kong Government .........................................................................................................................
Other government ....................................................................................................................................
Asset-backed securities3 ..........................................................................................................................
Corporate debt and other securities .........................................................................................................
Equities ....................................................................................................................................................
At 31 December 2007
US Treasury .............................................................................................................................................
US Government agencies2 .......................................................................................................................
US Government sponsored entities2 ........................................................................................................
UK Government .......................................................................................................................................
Hong Kong Government .........................................................................................................................
Other government ....................................................................................................................................
Asset-backed securities3 ..........................................................................................................................
Corporate debt and other securities .........................................................................................................
Equities ....................................................................................................................................................
Amortised
cost
US$m
17,650
12,539
4,885
9,653
37,747
87,122
48,500
153,639
7,051
378,786
11,528
8,131
15,109
16,077
966
60,755
55,685
145,269
5,901
319,421
6,799
5,709
14,732
757
3,941
60,109
64,186
114,955
8,405
279,593
Fair
value1
US$m
17,635
12,804
4,924
9,782
37,763
87,881
34,914
154,902
9,124
369,729
11,755
8,307
15,240
16,217
989
61,528
36,052
143,940
7,251
301,279
6,831
5,732
14,533
749
3,942
60,320
63,976
114,709
12,594
283,386
1 Included within the above figures are debt securities issued by banks and other financial institutions of US$133,256 million (2008:
US$140,878 million; 2007: US$142,863 million), of which US$55,324 million (2008: US$39,213 million; 2007: US$2,490 million) are
guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions was
US$133,461 million (2008: US$141,526 million; 2007: US$143,023 million).
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Government agencies and sponsored entities.
Financial investments listed on a recognised exchange and unlisted
Carrying amount at 31 December 2009
Listed on a recognised exchange1 .........................
Unlisted .................................................................
Carrying amount at 31 December 2008
Listed on a recognised exchange1 .........................
Unlisted .................................................................
Treasury
and other
eligible bills
available
for sale
US$m
Treasury
and other
eligible bills
held to
maturity
US$m
2,334
55,999
58,333
3,539
37,488
41,027
–
101
101
–
–
–
Debt
securities
available
for sale
US$m
135,653
148,421
Debt
securities
held to
maturity
US$m
2,743
14,783
Equity
securities
available
for sale
US$m
Total
US$m
911
8,213
141,641
227,517
284,074
17,526
9,124
369,158
108,972
128,972
2,332
11,681
471
6,780
115,314
184,921
237,944
14,013
7,251
300,235
1 The fair value of listed held-to-maturity debt securities as at 31 December 2009 was US$2,769 million (2008: US$2,345 million).
Included within listed investments were US$1,670 million (2008: US$1,475 million) of investments listed in Hong Kong.
429
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 19 and 20
Maturities of investments in debt securities at their carrying amount
At 31 December
2009
US$m
Remaining contractual maturity of total debt securities:
1 year or less ........................................................................................................................................
5 years or less but over 1 year .............................................................................................................
10 years or less but over 5 years .........................................................................................................
Over 10 years .......................................................................................................................................
Remaining contractual maturity of debt securities 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 .......................................................................................................................................
Remaining contractual maturity of debt securities 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 .......................................................................................................................................
75,782
141,683
31,934
52,201
301,600
75,160
135,187
26,105
47,622
284,074
622
6,496
5,829
4,579
2008
US$m
72,551
93,824
28,141
57,441
251,957
71,967
89,931
22,402
53,644
237,944
584
3,893
5,739
3,797
17,526
14,013
Contractual maturities and weighted average yields of investment debt securities at 31 December 2009
Available-for-sale
US Treasury .........................................
US Government agencies ....................
US Government-sponsored agencies ...
UK Government ...................................
Hong Kong Government .....................
Other governments ..............................
Asset-backed securities .......................
Corporate debt and other securities .....
Total amortised cost .............................
Total carrying value .............................
Held-to-maturity
US Treasury .........................................
US Government agencies ....................
US Government-sponsored agencies ...
Hong Kong Government .....................
Other governments ..............................
Asset-backed securities .......................
Corporate debt and other securities .....
Total amortised cost .............................
Total carrying value .............................
Within one year
After one year but
within five years
After five years but
within ten years
After ten years
Amount
US$m
Yield Amount
US$m
%
Yield Amount
US$m
%
Yield Amount
US$m
%
Yield
%
13,816
4
521
33
99
25,772
616
34,239
75,100
75,160
–
–
1
–
36
–
585
622
622
1.72
4.44
1.15
0.79
0.37
3.08
0.61
2.18
–
–
4.56
–
3.36
–
3.91
2,450
6
176
6,532
573
33,895
3,004
89,120
135,756
135,187
31
–
56
2
389
–
6,018
6,496
6,496
1.02
2.76
2.59
1.95
2.24
4.24
0.69
2.16
4.71
–
6.70
3.30
3.56
–
4.29
1.37
4.71
3.84
–
–
4.19
0.39
2.64
7.56
7.59
7.12
5.03
4.28
–
4.67
170
297
1,567
–
–
5,482
6,471
11,816
25,803
26,105
57
6
5
8
330
–
5,423
5,829
5,829
4.47
3.56
3.99
3.15
–
3.97
0.91
3.46
9.64
6.58
6.14
–
6.88
6.13
5.93
700
11,777
743
1,683
–
2,384
38,217
3,603
59,107
47,622
56
447
1,817
–
582
192
1,485
4,579
4,579
The maturity distributions of asset-backed securities are presented in the above table on the basis of contractual
maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised
interest income for the year ended 31 December 2009 by the book amount of available-for-sale debt securities at that
date. The yields do not include the effect of related derivatives.
430
20 Transfers of financial assets not qualifying for de-recognition
HSBC enters into transactions in the normal course of business by which it transfers recognised financial assets
directly to third parties or to SPEs. These transfers may give rise to the full or partial derecognition of the financial
assets concerned.
–
–
Full derecognition occurs when HSBC transfers its contractual right to receive cash flows from the financial
assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, and transfers
substantially all the risks and rewards of ownership. The risks include credit, interest rate, currency, prepayment
and other price risks.
Partial derecognition occurs when HSBC sells or otherwise transfers financial assets in such a way that some but
not substantially all of the risks and rewards of ownership are transferred but control is retained. These financial
assets are recognised on the balance sheet to the extent of HSBC’s continuing involvement.
The majority of financial assets that do not qualify for derecognition are (i) debt securities held by counterparties as
collateral under repurchase agreements or (ii) equity securities lent under securities lending agreements. The
following table analyses the carrying amount of financial assets that did not qualify for derecognition and their
associated financial liabilities:
Financial assets and associated financial liabilities not qualifying for derecognition
Nature of transaction
Repurchase agreements ............................................................
Securities lending agreements ..................................................
2009
Carrying
amount of
transferred
assets
US$m
Carrying
amount of
associated
liabilities
US$m
2008
Carrying
amount of
transferred
assets
US$m
108,518
7,363
115,881
107,525
7,264
114,789
94,154
4,497
98,651
Carrying
amount of
associated
liabilities
US$m
91,139
4,096
95,235
A small proportion of financial assets that do not qualify for derecognition relate to loans, credit cards, debt securities
and trade receivables that have been securitised under arrangements by which HSBC retains a continuing
involvement in such transferred assets. Continuing involvement may entail retaining the rights to future cash flows
arising from the assets after investors have received their contractual terms (for example, interest rate strips);
providing subordinated interest; liquidity support; continuing to service the underlying asset; or entering into
derivative transactions with the securitisation vehicles. As such, HSBC continues to be exposed to risks associated
with these transactions.
The rights and obligations that HSBC retains from its continuing involvement in securitisations are initially recorded
as an allocation of the fair value of the financial asset between the part that is derecognised and the part that continues
to be recognised on the date of transfer. The following analyses the carrying amount of financial assets to the extent
of HSBC’s continuing involvement that qualified for partial derecognition during the year, and their associated
liabilities:
HSBC’s continuing involvement in financial assets qualifying for partial derecognition
Carrying amount of assets (original) .......................................................................................................
Carrying amount of assets (currently recognised) ...................................................................................
Carrying amount of associated liabilities (currently recognised) ...........................................................
Securitisations at 31 December
2009
US$m
17,427
139
69
2008
US$m
17,427
299
149
431
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 21
21 Interests in associates and joint ventures
Associates
Principal associates of HSBC
At 31 December 2009
Carrying
At 31 December 2008
Carrying
Listed
Bank of Communications Co., Limited ....................................
Industrial Bank Co., Limited ....................................................
Ping An Insurance (Group) Company of China, Limited ........
SABB Takaful Company ..........................................................
The Saudi British Bank ............................................................
amount
US$m
5,110
1,084
4,391
29
1,376
11,990
Fair
value
US$m
10,820
3,774
10,803
99
3,472
28,968
amount
US$m
4,612
913
3,727
4
1,214
Fair
value
US$m
6,717
1,368
5,965
29
3,453
10,470
17,532
At 31 December 2009
Country of
incorporation
HSBC’s
interest in
equity capital
Issued
equity
capital
Listed
Bank of Communications Co., Limited ...........................................................
Industrial Bank Co., Limited2 ..........................................................................
Ping An Insurance (Group) Company of China, Limited ...............................
SABB Takaful Company .................................................................................
The Saudi British Bank ...................................................................................
PRC1
PRC1
PRC1
Saudi Arabia
Saudi Arabia
Unlisted
Barrowgate Limited2,3 ......................................................................................
British Arab Commercial Public Limited Company .......................................
Hong Kong
England
Vietnam Technological and Commercial Joint Stock Bank ............................
Yantai City Commercial Bank2 ........................................................................
Wells Fargo HSBC Trade Bank, N.A.4 ...........................................................
Vietnam
PRC
United States
1 People’s Republic of China.
2 Investment held through Hang Seng Bank Limited, a 62.14 per cent owned subsidiary of HSBC.
3 Issued equity capital is less than HK$1 million.
4 Issued equity capital is less than US$1 million. HSBC disposed of its equity interest on 12 February 2010.
19.01% RMB48,994m
RMB5,000m
12.78%
RMB7,345m
16.78%
SR340m
32.50%
SR7,500m
40.00%
24.64%
–
48.92% US$77m fully paid
£30m fully paid
£5m nil paid
19.91% VND5,400,417m
RMB2,000m
20.00%
–
20.00%
All the above investments in associates are owned by subsidiaries of HSBC Holdings.
Details of all HSBC associates and joint ventures, as required under S.409 Companies Act 2006, will be annexed to
the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.
HSBC had US$9,501 million (2008: US$8,339 million) of investments in associates and joint ventures listed in Hong
Kong.
For the year ended 31 December 2009, HSBC’s share of associates and joint ventures’ tax on profit was
US$491 million (2008: US$515 million), which is included within share of profit in associates and joint ventures
in the income statement.
Summarised aggregate financial information on associates
HSBC’s share of:
– assets .................................................................................................................................................
– liabilities ...........................................................................................................................................
– revenues ............................................................................................................................................
– profit after tax ...................................................................................................................................
2009
US$m
157,366
147,501
7,514
1,722
2008
US$m
123,283
114,578
5,939
1,600
432
HSBC’s investment in Industrial Bank Co., Limited was equity accounted with effect from May 2004, reflecting
HSBC’s significant influence over this associate. HSBC’s significant influence was established as a result of
representation on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements,
HSBC is assisting in the development of financial and operating policies.
HSBC’s investment in Ping An Insurance (Group) Company of China, Limited was equity accounted with effect
from 31 August 2005, reflecting HSBC’s significant influence over this associate. HSBC’s significant influence was
established as a result of representation on the Board of Directors.
HSBC’s significant influence in Bank of Communications Co., Limited was established as a result of representation
on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is
assisting in the development of financial and operating policies and a number of staff have been seconded to assist in
this process.
The statutory accounting reference date of Bank of Communications Co., Limited, Ping An Insurance (Group)
Company of China, Limited and Industrial Bank Company Limited is 31 December. For the year ended 31 December
2009, these companies were included on the basis of financial statements made up for the twelve months to
30 September 2009, taking into account changes in the subsequent period from 1 October 2009 to 31 December 2009
that would have materially affected their results.
HSBC also had a 100 per cent interest in the issued preferred stock (less than US$1 million) of Wells Fargo HSBC
Trade Bank, N.A. HSBC held 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 were being held. HSBC
disposed of its equity interest in Wells Fargo HSBC Trade Bank, N.A. on 12 February 2010. As at 31 December
2009, this interest in associate was classified as held for sale.
HSBC acquired 15 per cent of Vietnam Technological & Commercial Joint Stock Bank in October 2007. This
investment was equity accounted from that date due to HSBC’s representation on the Board of Directors and
involvement in the Technical Support and Assistance Agreement. In December 2007, as a result of a rights issue in
which HSBC did not participate, HSBC’s equity interest was diluted to 14.44 per cent. In September 2008, HSBC
increased its equity interest to 20 per cent. HSBC’s equity interest was diluted to 19.91 per cent in June 2009,
following an issue of shares by the associate to its own employees.
Joint ventures
Principal interests in joint ventures
Country of
incorporation
At 31 December 2009
Principal
activity
HSBC’s interest
in equity
capital
Issued
equity
capital
HSBC Saudi Arabia Limited .....................................
Vaultex UK Limited ..................................................
Hana HSBC Life Insurance Co., Ltd .........................
Canara HSBC Oriental Bank of Commerce
Saudi Arabia
England
Investment banking
Cash management
South Korea Insurance manufacturing
SR50m
60.00%
50.00%
£10m
49.99% KRW60,201m
Life Insurance Company Limited ..........................
India Insurance manufacturing
26.00%
INR5,000m
433
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 21 and 22
Summarised aggregate financial information on joint ventures
HSBC’s share of:
– current assets ....................................................................................................................................
– non-current assets .............................................................................................................................
– current liabilities ...............................................................................................................................
– non-current liabilities .......................................................................................................................
– income ..............................................................................................................................................
– expenses ............................................................................................................................................
Goodwill included in carrying amount of associates and joint ventures
Gross amount
At 1 January .............................................................................................................................................
Additions .................................................................................................................................................
Disposals ..................................................................................................................................................
Exchange differences ...............................................................................................................................
Other changes ..........................................................................................................................................
At 31 December1 ......................................................................................................................................
2009
US$m
2008
US$m
700
513
621
416
370
324
2009
US$m
1,453
5
–
(12)
–
1,446
594
281
260
449
301
240
2008
US$m
1,308
88
(46)
86
17
1,453
1 Includes the carrying amount of goodwill arising from joint ventures of US$32 million (2008: US$39 million).
22 Goodwill and intangible assets
Goodwill and intangible assets includes goodwill arising on business combinations, the present value of in-force
long-term insurance business, and other intangible assets.
Goodwill
Reconciliation of goodwill
Gross amount
At 1 January 2009 .................................
Additions ..............................................
Disposals ...............................................
Exchange differences ............................
Other changes .......................................
Europe
US$m
15,511
–
(3)
460
(53)
At 31 December 2009 ...........................
15,915
Accumulated impairment losses
At 1 January 2009 .................................
Impairment losses .................................
At 31 December 2009 ...........................
Net carrying amount at
–
–
–
Hong
Kong
US$m
122
–
–
1
–
123
–
–
–
Rest of
Asia-
Pacific1
US$m
364
570
–
119
–
1,053
–
–
–
Middle
East1
US$m
North
Latin
America
America
US$m
US$m
Total
US$m
32,419
580
(3)
874
(65)
12,487
–
–
–
(4)
3,866
10
–
294
(8)
12,483
4,162
33,805
(10,564)
–
(10,564)
–
–
–
(10,564)
–
(10,564)
69
–
–
–
–
69
–
–
–
31 December 2009 ...........................
15,915
123
1,053
69
1,919
4,162
23,241
434
Gross amount
At 1 January 2008 .................................
Additions ...............................................
Disposals ...............................................
Exchange differences ............................
Other changes .......................................
Europe
US$m
16,744
12
(415)
(775)
(55)
At 31 December 2008 ...........................
15,511
Accumulated impairment losses
At 1 January 2008 .................................
Impairment losses .................................
At 31 December 2008 ...........................
Net carrying amount at
–
–
–
Hong
Kong
US$m
Rest of
Asia-
Pacific1
US$m
Middle
East1
US$m
North
Latin
America
America
US$m
US$m
124
–
–
(2)
–
122
–
–
–
281
142
–
(59)
–
364
–
–
–
69
–
–
–
–
69
–
–
–
Total
US$m
34,253
155
(428)
(1,506)
(55)
12,561
–
(13)
(61)
–
4,474
1
–
(609)
–
12,487
3,866
32,419
–
(10,564)
(10,564)
–
–
–
–
(10,564)
(10,564)
31 December 2008 ............................
15,511
122
364
69
1,923
3,866
21,855
1 The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of
Asia-Pacific. Comparative data have been restated accordingly.
During 2009, there was no impairment of goodwill (2008: US$10.6 billion; 2007: nil).
Impairment testing
Timing of impairment testing
HSBC’s impairment test in respect of goodwill allocated to each cash-generating unit (‘CGU’) is performed as at
1 July each year. In line with the accounting policy set out in Note 2, goodwill is also retested for impairment
whenever there is an indication that goodwill may be impaired. There was no indication of impairment in the period
to 31 December 2009 and therefore goodwill has not been retested since 1 July 2009. In 2008, an additional
impairment test was performed on all CGUs within the Group as at 31 December due to the extraordinary market
events experienced globally during the year. For the purpose of impairment testing, the Group’s CGUs are based on
customer groups and global business separated by geographical region. The CGUs represent the lowest level at which
goodwill is monitored for internal management purposes.
Basis of the recoverable amount – value in use or fair value less costs to sell
The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use (‘VIU’) at
each respective testing date for 2008 and 2009.
For each significant CGU, the VIU is calculated by discounting management’s two year cash flow projections for
each CGU. The discount rate used is based on the cost of capital HSBC allocates to investments in the countries
within which the CGU operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because
of the long-term perspective within the Group of the business units making up the CGUs. However, due to the current
economic conditions in Personal Financial Services – Latin America, a 10 year cash flow projection was used.
435
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 22
Key assumptions in VIU calculation and management’s approach to determining the values assigned to each key
assumption
2009
2008
Cash-generating unit
Goodwill at
1 July
2009
US$m
Discount
rate
%
Nominal
growth rate
beyond
initial
cash flow
projections
%
Goodwill at
31 December
2008
US$m
Discount
rate
%
Nominal
growth rate
beyond
initial
cash flow
projections
%
Personal Financial Services – Europe ...............
Commercial Banking – Europe .........................
Private Banking – Europe ..................................
Global Banking and Markets – Europe .............
Personal Financial Services – North America ...
Personal Financial Services – Latin America ....
4,507
3,480
4,483
3,489
–
2,350
Total goodwill in the CGUs listed above ..........
18,309
11.0
11.0
11.0
11.0
–
15.0
3.1
3.1
3.1
3.1
–
8.0
4,422
3,427
4,470
3,451
–
2,189
17,959
10.0
10.0
9.0
11.0
13.6
16.8
3.5
3.5
3.5
3.5
3.9
8.8
At 1 July 2009, aggregate goodwill of US$4,475 million (31 December 2008: US$3,896 million) had been allocated
to CGUs that were not considered individually significant. These CGUs do not carry on their balance sheets any
significant intangible assets with indefinite useful lives, other than goodwill.
Nominal long-term growth rate: external data that reflects the market’s assessment of GDP and inflation for the
countries within which the CGU operates. The rates used for 2008 and 2009 are taken as an average of the last
10 years.
Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU,
which is derived using a Capital Asset Pricing Model (‘CAPM’). The CAPM depends on inputs reflecting a number
of financial and economic variables including the risk-free rate in the country concerned and a premium to reflect the
inherent risk of the business being evaluated. These variables are based on the market’s assessment of the economic
variables and management’s judgement. In addition, for the purposes of testing goodwill for impairment,
management supplements this process by comparing the discount rates derived using the internally generated CAPM
with cost of capital rates produced by external sources. HSBC uses externally-sourced cost of capital rates where, in
management’s judgement, those rates reflect more accurately the current market and economic conditions. In 2008,
the rates used in the impairment test for Personal Financial Services – Latin America were based on externally
sourced rates.
Management’s judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are
based on plans approved by the Group Management Board. The key assumptions in addition to the discount rate and
nominal long-term growth rate for each significant CGU are discussed below.
Personal Financial Services – Europe and Commercial Banking – Europe: the assumptions included in the cash
flow projections for Personal Financial Services – Europe and Commercial Banking – Europe reflect the economic
environment and financial outlook of the European countries within these two segments. Key assumptions include the
level of interest rates and the level and change in unemployment rates, particularly in the UK. While current
economic conditions in Europe continue to be challenging, management’s cash flow projections are based primarily
on these prevailing conditions. Although the prospects for near term economic growth are uncertain, management
does not expect these conditions to continue over the longer term. The downside risks to this assessment include the
risk of a prolonged economic downturn and the continuation of base rates at their current record low levels. Based on
the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key
assumptions described above would not cause an impairment to be recognised in respect of Personal Financial
Services – Europe or Commercial Banking – Europe.
Private Banking – Europe: the revenues in Private Banking – Europe are predominately generated through HSBC’s
client relationships. For 2010, a modest recovery in client risk appetite is expected, reducing the pressure on
brokerage and portfolio management fees. Thereafter, the nominal long-term growth rates described in the table
above have been used. Based on the conditions at the balance sheet date, management determined that a reasonably
possible change in any of the key assumptions described above would not cause an impairment to be recognised in
respect of Private Banking – Europe.
436
Global Banking and Markets – Europe: the cash flows generated by Global Banking and Markets – Europe are
diversified and there is no one key assumption that drives the cash flow projection of this CGU.
The forecast cash flows in the 2010 plan reflect the effect of current flatter yield curves, more stable risk positions
and lower volumes offset by increased transaction and management revenue as client risk appetite recovers. One of
the key factors which may impact the carrying value of this CGU is the level of impairment charges which may
emerge in the future, particularly in respect of holdings of available-for-sale sub-prime and Alt-A Residential MBSs.
Based on management’s current assessment of the credit quality of these securities, which includes stressed scenarios
for collateral defaults and house prices, and the level of credit support available, management determined that a
reasonably possible change in key assumptions would not cause an impairment to be recognised in respect of Global
Banking and Markets – Europe.
Personal Financial Services – Latin America: the assumptions included in the cash flow projections for Personal
Financial Services – Latin America reflect the economic environment and financial outlook of the countries within
this segment, with Brazil and Mexico being two of the largest countries included within this segment. Key
assumptions include the growth in lending and deposit volumes, the credit quality of the loan portfolios and
operational efficiency improvements. Based on the conditions at the balance sheet date, management determined that
a reasonably possible change in any of the key assumptions described above would not cause an impairment to be
recognised in respect of Personal Financial Services – Latin America.
The present value of in-force long-term insurance business
Movement on the PVIF
At 1 January ..................................................................................................................................................
Value of new business written during the year ............................................................................................
Movement from in-force business (including investment return variances and changes in
investment assumptions) ..........................................................................................................................
Exchange differences and other movements ................................................................................................
2009
US$m
2,033
600
(84)
231
At 31 December ............................................................................................................................................
2,780
PVIF-specific assumptions
The key assumptions used in the computation of PVIF for HSBC’s main life insurance operations were:
2009
2008
UK Hong Kong
%
%
France
%
UK Hong Kong
%
%
Risk free rate ...............................
Risk discount rate .......................
Expenses inflation .......................
3.50
7.00
3.50
2.58
11.00
3.00
3.46
8.00
2.00
4.30
8.00
3.50
1.14
11.00
3.00
2008
US$m
1,965
452
(311)
(73)
2,033
France
%
4.03
8.00
2.00
The PVIF represents the value of the shareholder’s interest in the in-force business of the life insurance operations.
The calculation of the PVIF is based upon assumptions that take into account risk and uncertainty. To project these
cash flows, a variety of assumptions regarding future experience is made by each insurance operation which reflects
local market conditions and management’s judgement of local future trends. Some of the Group’s insurance
operations incorporate risk margins separately in the projection assumptions for each product, while others
incorporate risk margins into the overall discount rate. Both factors are reflected in the wide range of risk discount
rates applied.
437
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 22 and 23
Other intangible assets
Movement of intangible assets excluding goodwill and the PVIF
Mortgage
servicing
Internally
generated
Purchased
Customer/
merchant
relation-
rights
US$m
software
US$m
software
US$m
ships
US$m
Other
US$m
Total
US$m
1,360
116
–
(29)
(757)
–
(1)
689
(1,023)
(3)
–
29
757
–
–
(240)
3,429
763
–
(14)
(45)
247
20
4,400
(1,992)
(433)
(6)
6
45
(131)
–
(2,511)
867
65
–
(18)
(1)
53
(12)
954
(631)
(98)
(5)
18
1
(32)
–
(747)
1,749
20
58
(25)
(15)
201
–
1,988
(681)
(228)
(6)
15
15
(72)
2
(955)
421
10
–
–
–
9
62
502
(52)
(30)
–
–
–
(1)
(42)
(125)
7,893
974
58
(86)
(818)
511
69
8,601
(4,424)
(796)
(17)
68
818
(237)
(40)
(4,628)
Trade
names
US$m
67
–
–
–
–
1
–
68
(45)
(4)
–
–
–
(1)
–
(50)
Cost
At 1 January 2009 ........................
Additions1 ....................................
Acquisition of subsidiaries ..........
Disposals ......................................
Amount written off ......................
Exchange differences ...................
Other changes ..............................
At 31 December 2009 ..................
Accumulated amortisation
At 1 January 2009 ........................
Charge for the year2 .....................
Impairment ...................................
Disposals ......................................
Amount written off ......................
Exchange differences ...................
Other changes ..............................
At 31 December 2009 ..................
Net carrying amount at
31 December 2009 ..................
18
449
1,889
207
1,033
377
3,973
Cost
At 1 January 2008 ........................
Additions1 ....................................
Acquisition of subsidiaries ..........
Disposals ......................................
Exchange differences ...................
Other changes ..............................
At 31 December 2008 ..................
Accumulated amortisation
At 1 January 2008 ........................
Charge for the year2 .....................
Impairment ...................................
Disposals ......................................
Exchange differences ...................
Other changes ..............................
At 31 December 2008 ..................
Net carrying amount at
63
–
10
–
(8)
2
67
(44)
(6)
–
–
5
–
(45)
1,202
158
–
–
–
–
1,360
(724)
(299)
–
–
–
–
(1,023)
3,473
764
–
(43)
(561)
(204)
3,429
(2,167)
(365)
–
18
311
211
(1,992)
760
118
68
(26)
(59)
6
867
(549)
(114)
(1)
6
36
(9)
(631)
1,866
169
4
(25)
(264)
(1)
1,749
(541)
(227)
–
10
80
(3)
(681)
165
23
267
(3)
(24)
(7)
421
(33)
(20)
–
–
1
–
(52)
7,529
1,232
349
(97)
(916)
(204)
7,893
(4,058)
(1,031)
(1)
34
433
199
(4,424)
31 December 2008 ..................
22
337
1,437
236
1,068
369
3,469
1 At 31 December 2009, HSBC had US$0.2 million (2008: US$2 million) of contractual commitments to acquire intangible assets.
2 The amortisation charge for the year is recognised within the income statement under ‘Amortisation and impairment of intangible
assets’, with the exception of the amortisation of mortgage servicing rights that is charged to net fee income.
438
23 Property, plant and equipment
HSBC
Property, plant and equipment
Freehold
land and
buildings
US$m
Long
leasehold
land and
buildings
US$m
Short
leasehold
land and
buildings1
US$m
Equipment,
fixtures
and fittings2
US$m
Equipment
on
operating
leases
US$m
Cost or fair value
At 1 January 2009 .................................................
Additions at cost4 ..................................................
Acquisition of subsidiaries ...................................
Fair value adjustments ..........................................
Disposals ...............................................................
Reclassified to held for sale ..................................
Transfers ...............................................................
Exchange differences ............................................
Other changes .......................................................
At 31 December 2009 ...........................................
Accumulated depreciation and impairment
At 1 January 2009 .................................................
Depreciation charge for the year ..........................
Disposals ...............................................................
Reclassified to held for sale ..................................
Impairment losses recognised ...............................
Exchange differences ............................................
Other changes .......................................................
At 31 December 2009 ...........................................
4,126
344
–
(58)
(201)
(697)
–
342
59
3,915
(368)
(82)
39
46
(30)
(25)
(30)
(450)
1,736
35
–
16
(510)
–
(2)
62
(10)
1,327
(228)
(44)
46
–
(1)
(7)
5
(229)
Net carrying amount at 31 December 2009 ..........
3,465
1,098
Cost or fair value
At 1 January 2008 .................................................
Additions at cost4 ..................................................
Acquisition of subsidiaries ...................................
Fair value adjustments ..........................................
Disposals ...............................................................
Reclassified from/(to) held for sale ......................
Transfers ...............................................................
Exchange differences ............................................
Other changes .......................................................
At 31 December 2008 ...........................................
Accumulated depreciation and impairment
At 1 January 2008 .................................................
Depreciation charge for the year ..........................
Disposals ...............................................................
Reclassified (from)/to held for sale ......................
Transfers ...............................................................
Impairment losses recognised ...............................
Exchange differences ............................................
Other changes .......................................................
At 31 December 2008 ...........................................
Net carrying amount at 31 December 2008 ..........
Net carrying amount at 1 January 2008 ................
4,701
466
29
(93)
(138)
16
–
(611)
(244)
4,126
(344)
(82)
7
1
–
(30)
73
7
(368)
3,758
4,357
1,438
26
–
4
(102)
469
3
(62)
(40)
1,736
(175)
(53)
2
(18)
(3)
(2)
9
12
(228)
1,508
1,263
2,924
179
15
18
(98)
(20)
2
90
25
3,135
(886)
(193)
90
3
(26)
(42)
(11)
(1,065)
2,070
2,856
327
–
(3)
(41)
(2)
(3)
(214)
4
2,924
(826)
(184)
14
–
3
–
107
–
(886)
2,038
2,030
10,320
1,253
7
–
(640)
(63)
–
737
(62)
11,552
(6,614)
(1,160)
495
30
(20)
(496)
22
(7,743)
3,809
10,957
1,813
16
–
(803)
98
–
(1,876)
115
10,320
(7,003)
(1,201)
537
(30)
–
(11)
1,257
(163)
(6,614)
3,706
3,954
Total3
US$m
23,653
2,110
22
(24)
(1,566)
(780)
–
1,738
12
25,165
(9,628)
(1,648)
666
79
(77)
(743)
(12)
4,547
299
–
–
(117)
–
–
507
–
5,236
(1,532)
(169)
(4)
–
–
(173)
2
(1,876)
(11,363)
3,360
13,802
6,054
353
–
–
(175)
–
–
(1,685)
–
26,006
2,985
45
(92)
(1,259)
581
–
(4,448)
(165)
4,547
23,653
(1,964)
(187)
57
–
–
–
561
1
(1,532)
3,015
4,090
(10,312)
(1,707)
617
(47)
–
(43)
2,007
(143)
(9,628)
14,025
15,694
1 Including assets held on finance leases with a net book value of US$18 million (2008: US$13 million).
2 Including assets held on finance leases with a net book value of US$513 million (2008: US$315 million).
3 Including assets with a net book value of US$36 million (2008: US$28 million) pledged as security for liabilities.
4 At 31 December 2009, HSBC had US$878 million (2008: US$1,498 million) of contractual commitments to acquire property, plant and
equipment.
439
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 23
In November 2009, HSBC entered into a contract for the sale and leaseback of 8 Canada Square in London for a
consideration of £772.5 million (US$1,271 million). The transaction was effected through the sale of HSBC’s 100
per cent shareholding in Project Maple II B.V. (‘PMII’) which is the legal owner of the building and long leasehold
interest in 8 Canada Square.
On completion of the transaction on 30 November 2009, ‘Property, plant and equipment’ of £307 million
(US$505 million) and ‘Prepayments and accrued income’ (representing the long leasehold on the land) of
£106 million (US$174 million) were derecognised from HSBC’s balance sheet and a gain of £353 million
(US$576 million) was recognised within ‘Other operating income’.
Under the terms of the arrangement, HSBC is leasing the building back from PMII for the remaining 17.5 years of the
existing 20 year lease. The lease was originally entered into in May 2007, when HSBC had entered into a previous
contract for the sale and leaseback of 8 Canada Square to Metrovacesa. The sale to Metrovacesa was not recognised
for accounting purposes as HSBC retained a significant interest by virtue of a bridging loan. When HSBC took back
ownership of 8 Canada Square in December 2008 by acquiring PMII, a then subsidiary of Metrovacesa, the impact on
HSBC’s operating profit for the year ended 31 December 2008 was a net gain of £244 million (US$383 million),
comprising a gain of £265 million (US$416 million) included within ‘Other operating income’ and a charge of
£21 million (US$33 million) included within ‘Depreciation and impairment of property, plant and equipment’.
Leasehold land and buildings
Leasehold land and buildings are considered to be held under finance lease contracts where the value of the land
cannot reliably be separated from the value of the lease and the respective contracts do not meet the criteria for
classification as operating leases.
Included within ‘Short leasehold land and buildings’ are the following amounts in respect of assets classed as
improvements to buildings, which are carried at depreciated historical cost:
2009
Cost
US$m
Accumulated
depreciation
US$m
2008
Cost
US$m
Accumulated
depreciation
US$m
At 1 January ..............................................................................
Additions ...................................................................................
Disposals ...................................................................................
Depreciation charge for the year ..............................................
Impairment loss recognised ......................................................
Exchange differences ................................................................
Other changes ...........................................................................
At 31 December ........................................................................
Net carrying amount at 31 December .......................................
1,621
175
(89)
–
–
86
31
1,824
993
(675)
–
71
(133)
(24)
(40)
(30)
(831)
1,490
314
(40)
–
–
(141)
(2)
1,621
946
(671)
–
12
(116)
–
100
–
(675)
440
Investment properties
The composition of the investment properties at fair value in the year was as follows:
Freehold
land and
buildings
US$m
Long
leasehold
land and
buildings
US$m
Short
leasehold
land and
buildings
US$m
Fair value
At 1 January 2009 .....................................................................
Additions at cost .......................................................................
Fair value adjustments ..............................................................
Disposals ...................................................................................
Exchange differences ................................................................
Other changes ...........................................................................
At 31 December 2009 ...............................................................
Fair value
At 1 January 2008 .....................................................................
Additions at cost .......................................................................
Fair value adjustments ..............................................................
Disposals ...................................................................................
Transfers ...................................................................................
Exchange differences ................................................................
Other changes ...........................................................................
At 31 December 2008 ...............................................................
566
36
(58)
–
57
39
640
925
78
(93)
(2)
–
(196)
(146)
566
188
–
16
(25)
5
–
184
205
–
4
–
–
(15)
(6)
188
217
–
18
–
–
2
237
216
–
(3)
–
(1)
5
–
217
Total
US$m
971
36
(24)
(25)
62
41
1,061
1,346
78
(92)
(2)
(1)
(206)
(152)
971
Investment properties are valued on an open market value basis as at 31 December each year by independent
professional valuers who have recent experience in the location and type of properties. Investment properties in
Hong Kong, the Macau Special Administrative Region and mainland China, which represent more than 35 per cent
by value of HSBC’s investment properties subject to revaluation, were valued by an independent valuer who is a
member of the Hong Kong Institute of Surveyors and who has recent experience in the locations and categories of the
investment properties.
Included within ‘Other operating income’ was rental income of US$81 million (2008: US$23 million; 2007:
US$42 million) earned by HSBC on its investment properties. Direct operating expenses of US$2 million (2008:
US$2 million; 2007: US$3 million) incurred in respect of the investment properties during the year were recognised
in ‘General and administrative expenses’. Direct operating expenses arising in respect of investment properties that
did not generate rental income during 2009 amounted to nil (2008 and 2007: nil).
HSBC recognised no contractual obligations to purchase, construct, develop, maintain or enhance investment
properties (2008: nil).
HSBC Holdings had no investment properties at 31 December 2009 or 2008.
HSBC properties leased to customers
HSBC properties leased to customers included US$434 million at 31 December 2009 (2008: US$396 million) let
under operating leases, net of accumulated depreciation of US$18 million (2008: US$9 million). None was held by
HSBC Holdings.
441
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 24
24 Investments in subsidiaries
Principal subsidiaries of HSBC Holdings
At 31 December 2009
Country of
incorporation
or registration
HSBC’s
interest in
equity capital
%
Issued
equity
capital
Share
class
Europe
HSBC Asset Finance (UK) Limited .......................................
HSBC Bank A.S. ....................................................................
HSBC Bank Malta p.l.c. .........................................................
HSBC Bank plc .......................................................................
England
Turkey
Malta
England
HSBC France ..........................................................................
HSBC Bank International Limited .........................................
HSBC Life (UK) Limited .......................................................
HSBC Private Banking Holdings (Suisse) S.A. .....................
HSBC Trinkaus & Burkhardt AG ..........................................
France
Jersey
England
Switzerland
Germany
£797m
€88m
£265m
TRL652m
100
100
70.03
100
Ordinary £1
A-Common TRL1
B-Common TRL1
Ordinary €0.30
Ordinary £1
Preferred Ordinary £1
Series 2 Third Dollar
Preference US$0.01
Third Dollar
Preference US$0.01
Shares €5.00
99.99
Ordinary £1
100
100
Ordinary £1
100 CHF1,363m Ordinary CHF1,000
Shares of no par value
value
€337m
£1m
£94m
78.60
€26m
Marks and Spencer Retail Financial Services Holdings
Limited ................................................................................
England
100
£67m
Ordinary £1
Hong Kong
Hang Seng Bank Limited7 ......................................................
HSBC Insurance (Asia) Limited .............................................
HSBC Life (International) Limited ........................................
The Hongkong and Shanghai Banking Corporation Limited
Hong Kong
Hong Kong
Bermuda
Hong Kong
Rest of Asia-Pacific
HSBC Bank Australia Limited ...............................................
HSBC Bank (China) Company Limited .................................
HSBC Bank Malaysia Berhad ................................................
Australia
PRC4
Malaysia
100
100
100 HK$22,494m
62.14 HK$9,559m Ordinary HK$5.00
HK$125m Ordinary HK$1,000
HK$327m Ordinary HK$1.00
Ordinary HK$2.50
CIP1 US$1.00
CRP2 US$1.00
NIP3 US$1.00
100
A$657m
Ordinary A$1.00
Pref A$10,000
100 RMB8,000m Ordinary CNY1.00
Ordinary RM0.50
100
RM114m
Middle East
HSBC Bank Middle East Limited ..........................................
Jersey
100
HSBC Bank Egypt S.A.E. ......................................................
Egypt
94.53
US$931m
CRP2 US$1.00
Ordinary US$1.00
EGP1,509m Ordinary EGP84.00
North America
The Bank of Bermuda Limited ...............................................
HSBC Bank Canada ...............................................................
Bermuda
Canada
HSBC Bank USA, N.A. .......................................................... United States
HSBC Finance Corporation .................................................... United States
HSBC Securities (USA) Inc. .................................................. United States
C$1,225m
100
100
US$30m Common BMD1.00
Class 1 Pref of NPV5
Class 2 Pref of NPV5
Common of NPV
Common US$100
100
100 US$3,038m Common US$0.01
–6 Common US$0.05
100
US$2m
Latin America
HSBC Bank Argentina S.A. ...................................................
Argentina
99.99 ARS1,244m
HSBC Bank Brasil S.A. – Banco Múltiplo ............................
Brazil
100 BRL3,483m
Ordinary-A ARS1.00
Ordinary-B ARS1.00
Ordinary BRL1.14
Ordinary BRL1.89
Ordinary BRL1.17
HSBC Mexico, S.A., Institucion de Banca Multiple,
Grupo Financiero HSBC ....................................................
HSBC Bank (Panama) S.A. ....................................................
Mexico
Panama
99.99 MXN4,334m Ordinary MXN2.00
US$10m Ordinary PAB 1.00
100
1 Cumulative Irredeemable Preference shares.
2 Cumulative Redeemable Preference shares.
3 Non-cumulative Irredeemable Preference shares.
4 People’s Republic of China.
5 Preference shares of nil par value.
6 Issued equity capital is less than US$1 million.
7 Listed in Hong Kong.
Details of the debt, subordinated debt and preference shares issued by the principal subsidiaries to parties external to the Group are
included in the Notes 28 ‘Debt securities in issue’, 32 ‘Subordinated liabilities’ and 36 ‘Minority interests’, respectively.
442
All the above subsidiaries are included in the HSBC consolidated financial statements.
Details of all HSBC subsidiaries will be annexed to the next Annual Return of HSBC Holdings filed with the UK
Registrar of Companies.
All the above make their financial statements up to 31 December except for HSBC Bank Argentina S.A., whose
financial statements are made up to 30 June annually.
The principal countries of operation are the same as the countries of incorporation except for HSBC Bank Middle
East Limited which operates mainly in the Middle East and HSBC Life (International) Limited which operates
mainly in Hong Kong.
Subsidiaries which experience significant restrictions on their ability to transfer funds to HSBC in the form of
cash dividends or to repay loans and advances
During 2009 and 2008, none of the Group’s subsidiaries experienced significant restrictions on paying dividends or
repaying loans and advances.
Subsidiaries excluding SPEs where HSBC owns less than 50 per cent of the voting rights
Subsidiary
HSBC’s
interest in
equity capital
%
Description of relationship that gives HSBC control
2009
HSBC Private Equity Fund 3 ..................................
2008
HSBC Private Equity Fund 3 ..................................
38.8
HSBC has control under IAS 27 because it is the investment
adviser/manager of the fund and has a significant equity interest.
38.8
HSBC has control under IAS 27 because it is the investment
adviser/manager of the fund and has a significant equity interest.
SPEs consolidated by HSBC where HSBC owns less than 50 per cent of the voting rights
Carrying value of total
consolidated assets
Nature of SPE
US$bn
2009
Barion Funding Limited .............................................................................................
Bryant Park Funding LLC ..........................................................................................
HSBC Affinity Corporation I .....................................................................................
HSBC Auto Receivables Corporation ........................................................................
HSBC Corporate Money Fund (Euro) .......................................................................
HSBC Funding Inc V .................................................................................................
HSBC Home Equity Loan Corporation I ...................................................................
HSBC Home Equity Loan Corporation II ..................................................................
HSBC Investor Prime Money Market Fund ...............................................................
HSBC Receivables Funding, Inc I .............................................................................
HSBC Receivables Inc Funding II .............................................................................
HSBC Sterling Liquidity Fund ...................................................................................
HSBC US Dollar Liquidity Fund ...............................................................................
Malachite Funding Limited ........................................................................................
Mazarin Funding Limited ...........................................................................................
Metrix Funding Ltd ....................................................................................................
Metrix Securities plc ...................................................................................................
Regency Assets Limited .............................................................................................
Solitaire Funding Ltd ..................................................................................................
Turquoise Receivable Trustee Ltd .............................................................................
4.4 Structured investment conduit
3.8 Conduit
4.9 Securitisation
1.3 Securitisation
0.8 Money market fund
5.3 Securitisation
3.1 Securitisation
3.3 Securitisation
10.7 Money market fund
5.4 Securitisation
1.8 Securitisation
7.5 Money market fund
23.4 Money market fund
4.3 Structured investment conduit
11.3 Structured investment conduit
3.7 Securitisation
4.2 Securitisation
6.8 Conduit
12.8 Conduit
0.5 Securitisation
In addition to the above, HSBC consolidates a number of individually insignificant SPEs with total assets of
US$12.1 billion. For further details, see ‘Special Purpose Entities’ on page 181.
443
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 24, 25, 26 and 27
Carrying value of total
consolidated assets
Nature of SPE
US$bn
2008
Barion Funding Limited .............................................................................................
Bryant Park Funding LLC ..........................................................................................
Cullinan Funding Ltd ..................................................................................................
HSBC Affinity Corporation I .....................................................................................
HSBC Auto Receivables Corporation ........................................................................
HSBC Corporate Money Fund (Euro) ........................................................................
HSBC Home Equity Loan Corporation I ...................................................................
HSBC Investor Prime Money Market Fund ...............................................................
HSBC Receivables Funding, Inc I ..............................................................................
HSBC Sterling Liquidity Fund ...................................................................................
HSBC US Dollar Liquidity Fund ...............................................................................
Malachite Funding Limited ........................................................................................
Mazarin Funding Limited ...........................................................................................
Metris Receivables Inc ...............................................................................................
Metrix Funding Ltd ....................................................................................................
Metrix Securities plc ...................................................................................................
Regency Assets Limited .............................................................................................
Solitaire Funding Ltd ..................................................................................................
Turquoise Receivable Trustee Ltd ..............................................................................
4.5 Structured investment conduit
5.5 Conduit
0.4 Structured investment vehicle
6.0 Securitisation
3.5 Securitisation
0.6 Money market fund
3.5 Securitisation
10.5 Money market fund
5.7 Securitisation
7.7 Money market fund
25.0 Money market fund
4.2 Structured investment conduit
11.5 Structured investment conduit
3.6 Securitisation
3.6 Securitisation
4.2 Securitisation
8.1 Conduit
12.1 Conduit
2.3 Securitisation
In each of the above cases, HSBC has less than 50 per cent of the voting rights, but consolidates because it has the
majority of risks and rewards of ownership of the SPE, or the substance of the relationship with the SPE is such that
its activities are conducted on behalf of HSBC according to its specific business needs so that HSBC obtains benefit
from the SPE’s operation. HSBC also consolidates a number of other individually insignificant SPEs where it owns
less than 50 per cent of the voting rights. The consolidation of SPEs sponsored by HSBC is discussed on page 181.
Acquisitions
There were minor acquisitions and increases in investment in subsidiaries which increased goodwill by
US$580 million.
25 Other assets
Bullion .....................................................................................................................................................
Assets held for sale ..................................................................................................................................
Reinsurers’ share of liabilities under insurance contracts (Note 30) ......................................................
Endorsements and acceptances ................................................................................................................
Other accounts .........................................................................................................................................
Assets held for sale
Non-current assets held for sale
Interests in associates ...............................................................................................................................
Property, plant and equipment .................................................................................................................
Investment properties ...............................................................................................................................
Financial assets ........................................................................................................................................
Other ........................................................................................................................................................
Total assets classified as held for sale .....................................................................................................
2009
US$m
13,757
3,118
2,069
9,311
16,279
44,534
2009
US$m
105
1,639
1
1,359
14
3,118
2008
US$m
6,095
2,075
2,023
10,482
17,147
37,822
2008
US$m
2
2,007
2
62
2
2,075
Property, plant and equipment
In October 2009, HSBC entered into a contract for the sale of 452 Fifth Avenue and 1W. 39th Street in New York for
a combined consideration of US$330 million. Under the terms of the arrangement, HSBC will lease back the entire
452 Fifth Avenue building for one year and certain parts of the building for 10 years. The transaction is
444
expected to complete in the second quarter of 2010. The carrying amount of the property included in assets held for
sale at 31 December 2009 was (US$257 million).
In December 2009, HSBC entered into a contract for the sale of 103 Champs Elysées and 15 Rue Vernet in Paris for
a combined consideration of EUR 400 million (US$576 million). Under the terms of the arrangement, HSBC will
lease the buildings back for a period of 9 years. The carrying amount of the buildings included in assets held for sale
at 31 December 2009 was EUR257 million (US$370 million). The transaction completed on 25 February 2010.
The remaining property, plant and equipment classified as held for sale is the result of repossession of property that
had been pledged as collateral by customers. These assets are disposed of within 12 months of acquisition. The
majority arose within the geographical segment of North America.
Financial assets
At 31 December 2009, financial assets classified as held for sale included US$972 million of vehicle finance loans
and US$366 million of credit card portfolios. These are presented in North America geographical segment.
Neither a gain nor loss was recognised on reclassifying assets as held for sale during the year.
26 Trading liabilities
Deposits by banks ....................................................................................................................................
Customer accounts ...................................................................................................................................
Other debt securities in issue ...................................................................................................................
Other liabilities – net short positions in securities ...................................................................................
2009
US$m
41,165
99,306
37,592
90,067
268,130
2008
US$m
36,537
113,053
31,288
66,774
247,652
At 31 December 2009, the cumulative amount of change in fair value attributable to changes in credit risk was a gain
of US$119 million (2008: gain of US$563 million).
27 Financial liabilities designated at fair value
HSBC
Deposits by banks and customer accounts ..............................................................................................
Liabilities to customers under investment contracts ...............................................................................
Debt securities in issue (Note 28) ............................................................................................................
Subordinated liabilities (Note 32) ...........................................................................................................
Preference shares (Note 32) .....................................................................................................................
2009
US$m
6,586
10,865
38,208
20,180
4,253
80,092
2008
US$m
6,618
9,283
34,969
20,316
3,401
74,587
The carrying amount at 31 December 2009 of financial liabilities designated at fair value was US$1,346 million more
than the contractual amount at maturity (2008: US$1,851 million less). The cumulative amount of the change in fair
value attributable to changes in credit risk was a gain of US$1,510 million (2008: gain of US$7,978 million).
HSBC Holdings
Subordinated liabilities (Note 32):
– owed to third parties .........................................................................................................................
– owed to HSBC undertakings ............................................................................................................
2009
US$m
12,549
4,360
16,909
2008
US$m
13,321
3,068
16,389
The carrying amount at 31 December 2009 of financial liabilities designated at fair value was US$769 million more
than the contractual amount at maturity (2008: US$969 million less). The cumulative amount of the change in fair
value attributable to changes in credit risk was a loss of US$191 million (2008: gain of US$2,638 million).
445
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 28, 29 and 30
28 Debt securities in issue
Bonds and medium-term notes ................................................................................................................
Other debt securities in issue ...................................................................................................................
Of which debt securities in issue reported as:
– trading liabilities (Note 26) ...............................................................................................................
– financial liabilities designated at fair value (Note 27) .....................................................................
2009
US$m
160,295
62,401
222,696
(37,592)
(38,208)
146,896
2008
US$m
160,927
85,023
245,950
(31,288)
(34,969)
179,693
Certain debt securities in issue are managed on a fair value basis as part of HSBC’s interest rate risk management
policies. The hedged portion of these debt securities is presented within the balance sheet caption ‘Financial liabilities
designated at fair value’, with the remaining portion included within ‘Trading liabilities’. The following table
analyses the carrying amount of bonds and medium-term notes in issue at 31 December with original maturities
greater than one year:
Fixed rate
Secured financing:
0.01% to 3.99%: due 2010 to 2019 .....................................................................................................
4.00% to 4.99%: due 2010 to 2015 .....................................................................................................
5.00% to 5.99%: due 2010 to 2021 .....................................................................................................
7.00% to 7.99%: due 2010 to 2011 .....................................................................................................
8.00% to 9.99%: due 2010 to 2028 .....................................................................................................
10.00% or higher: due 2010 ................................................................................................................
Other fixed rate senior debt:
0.01% to 3.99%: due 2010 to 2051 .....................................................................................................
4.00% to 4.99%: due 2010 to 2046 .....................................................................................................
5.00% to 5.99%: due 2010 to 2036 .....................................................................................................
6.00% to 6.99%: due 2010 to 2033 .....................................................................................................
7.00% to 7.99%: due 2010 to 2039 .....................................................................................................
8.00% to 9.99%: due 2010 to 2037 .....................................................................................................
10.00% or higher: due 2010 to 2017 ...................................................................................................
Variable interest rate
Secured financings – 0.01% to 13.99%: due 2010 to 2021 ....................................................................
FHLB advances – 0.01% to 0.99%: due 2010 to 2036 ...........................................................................
Other variable interest rate senior debt – 0.01% to 12.99%: due 2010 to 2057 .....................................
Structured notes
Interest rate linked ...................................................................................................................................
Equity, equity index or credit-linked .......................................................................................................
2009
US$m
5,929
1,948
1,315
9
417
43
22,554
15,754
25,619
11,066
3,900
1,737
280
90,571
13,971
1,000
50,258
65,229
5
4,490
4,495
2008
US$m
767
1,590
2,754
14
462
–
21,790
13,088
22,357
11,176
4,995
1,822
884
81,699
27,741
3,156
43,849
74,746
348
4,134
4,482
Total bonds and medium-term notes .......................................................................................................
160,295
160,927
HSBC Holdings
Bonds and medium-term notes
Fixed rate senior debt, unsecured:
4.00% to 4.99%: due 2010 to 2014 .....................................................................................................
6.00% to 6.99%: due 2010 to 2024 .....................................................................................................
2009
US$m
1,791
1,048
2,839
2008
US$m
–
–
–
446
29 Other liabilities
HSBC
2009
US$m
Amounts due to investors in funds consolidated
by HSBC ...............................................................................
Obligations under finance leases (Note 40) .............................
Dividend declared and payable by HSBC Holdings ................
Endorsements and acceptances .................................................
Other liabilities .........................................................................
48,193
644
1,231
9,313
9,259
68,640
30 Liabilities under insurance contracts
At 31 December 2009
Non-life insurance liabilities
Unearned premium provision ..................................................................................
Notified claims .........................................................................................................
Claims incurred but not reported .............................................................................
Other ........................................................................................................................
Life insurance liabilities to policyholders
Life (non-linked) ......................................................................................................
Investment contracts with discretionary participation features1 ..............................
Life (linked) .............................................................................................................
Total liabilities under insurance contracts ...............................................................
At 31 December 2008
Non-life insurance liabilities
Unearned premium provision ..................................................................................
Notified claims .........................................................................................................
Claims incurred but not reported .............................................................................
Other ........................................................................................................................
Life insurance liabilities to policyholders
Life (non-linked) ......................................................................................................
Investment contracts with discretionary participation features1 ..............................
Life (linked) .............................................................................................................
Total liabilities under insurance contracts ...............................................................
2008
US$m
44,539
563
1,795
10,482
15,005
72,384
Gross
US$m
833
1,032
685
178
2,728
20,979
21,014
8,986
50,979
53,707
1,136
908
368
68
2,480
17,370
17,766
6,067
41,203
43,683
HSBC Holdings
2009
US$m
–
–
1,231
–
26
1,257
Reinsurers’
share
US$m
(135)
(245)
(82)
(5)
(467)
(771)
–
(831)
(1,602)
(2,069)
(159)
(230)
(41)
–
(430)
(637)
–
(956)
(1,593)
(2,023)
2008
US$m
–
–
1,795
–
21
1,816
Net
US$m
698
787
603
173
2,261
20,208
21,014
8,155
49,377
51,638
977
678
327
68
2,050
16,733
17,766
5,111
39,610
41,660
1 Though investment contracts with discretionary participation features are financial instruments, HSBC continues to treat them as
insurance contracts as permitted by IFRS 4.
447
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 30
The movement of liabilities under insurance contracts during the year was as follows:
Non-life insurance liabilities
2009
Unearned premium reserve (‘UPR’)
At 1 January .............................................................................................................
Changes in UPR recognised as (income)/expense ..................................................
Gross written premiums ......................................................................................
Gross earned premiums .......................................................................................
Exchange differences and other movements ...........................................................
At 31 December .......................................................................................................
Notified and incurred but not reported claims
At 1 January .............................................................................................................
Notified claims ....................................................................................................
Claims incurred but not reported .........................................................................
Claims paid in current year ......................................................................................
Claims incurred in respect of current year ..............................................................
Claims incurred in respect of prior years ................................................................
Exchange differences and other movements ...........................................................
At 31 December .......................................................................................................
Notified claims ....................................................................................................
Claims incurred but not reported .........................................................................
Other ........................................................................................................................
Total non-life insurance liabilities ...........................................................................
2008
Unearned premium reserve (‘UPR’)
At 1 January .............................................................................................................
Changes in UPR recognised as (income)/expense ..................................................
Gross written premiums ......................................................................................
Gross earned premiums .......................................................................................
Exchange differences and other movements ...........................................................
At 31 December .......................................................................................................
Notified and incurred but not reported claims
At 1 January .............................................................................................................
Notified claims ....................................................................................................
Claims incurred but not reported .........................................................................
Claims paid in current year ......................................................................................
Claims incurred in respect of current year ..............................................................
Claims incurred in respect of prior years ................................................................
Exchange differences and other movements ...........................................................
At 31 December .......................................................................................................
Notified claims ....................................................................................................
Claims incurred but not reported .........................................................................
Other ........................................................................................................................
Total non-life insurance liabilities ...........................................................................
Gross
US$m
1,136
(233)
1,339
(1,572)
(70)
833
1,276
908
368
(987)
939
342
147
1,717
1,032
685
178
2,728
1,279
(58)
1,776
(1,834)
(85)
1,136
1,483
1,063
420
(1,044)
975
69
(207)
1,276
908
368
68
2,480
Reinsurers’
share
US$m
(159)
10
(215)
225
14
(135)
(271)
(230)
(41)
156
(156)
(2)
(54)
(327)
(245)
(82)
(5)
(467)
(181)
3
(260)
263
19
(159)
(429)
(380)
(49)
158
(68)
(15)
83
(271)
(230)
(41)
–
(430)
Net
US$m
977
(223)
1,124
(1,347)
(56)
698
1,005
678
327
(831)
783
340
93
1,390
787
603
173
2,261
1,098
(55)
1,516
(1,571)
(66)
977
1,054
683
371
(886)
907
54
(124)
1,005
678
327
68
2,050
448
Life insurance liabilities to policyholders
2009
Life (non-linked)
At 1 January .............................................................................................................
Benefits paid ............................................................................................................
Increase in liabilities to policyholders .....................................................................
Exchange differences and other movements ...........................................................
At 31 December .......................................................................................................
Investment contracts with discretionary participation features
At 1 January .............................................................................................................
Benefits paid ............................................................................................................
Increase in liabilities to policyholders .....................................................................
Exchange differences and other movements1 ..........................................................
At 31 December .......................................................................................................
Life (linked)
At 1 January .............................................................................................................
Benefits paid ............................................................................................................
Increase in liabilities to policyholders .....................................................................
Exchange differences and other movements2 ..........................................................
At 31 December .......................................................................................................
Gross
US$m
17,370
(2,098)
4,669
1,038
20,979
17,766
(1,818)
3,934
1,132
21,014
6,067
(325)
2,676
568
8,986
Reinsurers’
share
US$m
(637)
159
(98)
(195)
(771)
–
–
–
–
–
(956)
21
146
(42)
(831)
Net
US$m
16,733
(1,939)
4,571
843
20,208
17,766
(1,818)
3,934
1,132
21,014
5,111
(304)
2,822
526
8,155
Total liabilities to policyholders ..............................................................................
50,979
(1,602)
49,377
2008
Life (non-linked)
At 1 January .............................................................................................................
Benefits paid ............................................................................................................
Increase in liabilities to policyholders .....................................................................
Exchange differences and other movements ...........................................................
At 31 December .......................................................................................................
Investment contracts with discretionary participation features
At 1 January .............................................................................................................
Benefits paid ............................................................................................................
Increase in liabilities to policyholders .....................................................................
Exchange differences and other movements1...........................................................
At 31 December .......................................................................................................
Life (linked)
At 1 January .............................................................................................................
Benefits paid ............................................................................................................
Increase in liabilities to policyholders .....................................................................
Exchange differences and other movements2 ..........................................................
At 31 December .......................................................................................................
14,370
(1,491)
5,480
(989)
17,370
18,983
(1,911)
1,743
(1,049)
17,766
6,399
(481)
939
(790)
6,067
Total liabilities to policyholders ..............................................................................
41,203
(605)
172
(792)
588
(637)
–
–
–
–
–
(57)
44
(1,442)
499
(956)
(1,593)
13,765
(1,319)
4,688
(401)
16,733
18,983
(1,911)
1,743
(1,049)
17,766
6,342
(437)
(503)
(291)
5,111
39,610
1 Includes movement in liabilities relating to discretionary profit participation benefits due to policyholders arising from net unrealised
investment gains recognised in other comprehensive income.
2 Includes amounts arising under reinsurance agreements.
The increase in liabilities to policyholders represents the aggregate of all events giving rise to additional liabilities to
policyholders in the year. The key factors contributing to the movement in liabilities to policyholders include death
claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of
bonuses and other amounts attributable to policyholders.
449
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 31 and 32
31 Provisions
At 1 January .............................................................................................................................................
Additional provisions/increase in provisions1 .........................................................................................
Provisions utilised ....................................................................................................................................
Amounts reversed ....................................................................................................................................
Exchange differences and other movements ...........................................................................................
At 31 December .......................................................................................................................................
2009
US$m
1,730
894
(684)
(225)
250
1,965
2008
US$m
1,958
738
(624)
(147)
(195)
1,730
1 The increase in provisions includes the unwinding of discounts of US$3 million (2008: US$3 million) in relation to vacant space
provisions and US$32 million (2008: US$21 million) in relation to Brazilian provisions for civil and fiscal labour claims.
Included within provisions are:
(i) Provisions for onerous property contracts of US$158 million (2008: US$85 million), of which US$32 million
(2008: US$20 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 while finding new
tenants, shortfalls in expected rent receivable compared with rent payable and the cost of refurbishing the
buildings to attract tenants. Uncertainties arise from movements in market rents, delays in finding new tenants
and the timing of rental reviews.
(ii) Labour, civil and fiscal litigation provisions in HSBC’s Brazil operations of US$538 million (2008:
US$334 million). These relate to labour and overtime litigation claims brought by employees after leaving the
bank. The provisions are based on the expected number of departing employees, their individual salaries and
historical trends. The timing of the settlement of these claims is uncertain.
(iii) Provisions of US$449 million (2008: US$439 million) have been made in respect of costs arising from
contingent liabilities and contractual commitments (Note 39), including guarantees of US$56 million
(2008: US$35 million) and commitments of US$172 million (2008: US$192 million).
32 Subordinated liabilities
HSBC
Subordinated liabilities
At amortised cost ..............................................................................................................................
– subordinated liabilities .................................................................................................................
– preferred securities .......................................................................................................................
Designated at fair value (Note 27) ...................................................................................................
– subordinated liabilities .................................................................................................................
– preferred securities .......................................................................................................................
Subordinated liabilities
HSBC Holdings ................................................................................................................................
Other HSBC ......................................................................................................................................
2009
US$m
30,478
23,893
6,585
24,433
20,180
4,253
54,911
23,048
31,863
54,911
2008
US$m
29,433
24,618
4,815
23,717
20,316
3,401
53,150
23,544
29,606
53,150
450
HSBC’s subordinated liabilities
Amounts owed to third parties by HSBC Holdings (see below) .......................................................
Other HSBC subordinated liabilities
€1,400m
US$1,350m
€800m
£700m
US$1,250m
US$1,000m
US$1,000m
£600m
€750m
US$1,000m
€600m
US$900m
€600m
£500m
£500m
£500m
US$750m
US$750m
US$700m
€500m
£350m
£350m
£350m
US$500m
US$500m
£300m
US$450m
£300m
US$400m
US$400m
US$400m
CAD400m
£225m
US$300m
US$300m
US$300m
US$300m
BRL500m
US$250m
BRL383m
US$250m
US$200m
US$200m
CAD200m
US$200m
US$200m
5.3687% non-cumulative step-up perpetual preferred securities1 ..............................
9.547% non-cumulative step-up perpetual preferred securities, series 11 ..................
Callable subordinated floating rate notes 20162 .........................................................
5.844% non-cumulative step-up perpetual preferred securities3 ................................
4.61% non-cumulative step-up perpetual preferred securities1 ..................................
4.625% subordinated notes 2014 ................................................................................
5.911% trust preferred securities 20354 ......................................................................
4.75% subordinated notes 2046 ..................................................................................
5.13% non-cumulative step-up perpetual preferred securities1 ..................................
5.875% subordinated notes 2034 ................................................................................
4.25% callable subordinated notes 20165 ...................................................................
10.176% non-cumulative step-up perpetual preferred securities, series 21 ................
8.03% non-cumulative step-up perpetual preferred securities1 ..................................
8.208% non-cumulative step-up perpetual preferred securities1 ................................
4.75% callable subordinated notes 20206 ...................................................................
5.375% subordinated notes 2033 ................................................................................
Undated floating rate primary capital notes ................................................................
5.625% subordinated notes 2035 ................................................................................
7.00% subordinated notes 2039 ..................................................................................
Callable subordinated floating rate notes 20207 .........................................................
Callable subordinated variable coupon notes 20178 ...................................................
5% callable subordinated notes 20239 ........................................................................
5.375% callable subordinated step-up notes 203010 ...................................................
6.00% subordinated notes 2017 ..................................................................................
Undated floating rate primary capital notes ................................................................
6.5% subordinated notes 2023 ....................................................................................
Callable subordinated floating rate notes 20162 .........................................................
5.862% non-cumulative step-up perpetual preferred securities3 ................................
Primary capital undated floating rate notes .................................................................
Primary capital undated floating rate notes (second series) .......................................
Primary capital undated floating rate notes (third series) ...........................................
4.80% subordinated notes 2022 ..................................................................................
6.25% subordinated notes 2041 ..................................................................................
6.95% subordinated notes 2011 ..................................................................................
7.65% subordinated notes 2025 ..................................................................................
Undated floating rate primary capital notes, series 3 .................................................
Callable subordinated floating rate notes 201711 ........................................................
Subordinated certificates of deposit 2016 ...................................................................
Non-convertible subordinated obligations 2019 .........................................................
Subordinated certificates of deposit 2015 ..................................................................
7.20% subordinated debentures 2097 .........................................................................
7.808% capital securities 2026 ...................................................................................
8.38% capital securities 2027 .....................................................................................
4.94% subordinated debentures 2021 .........................................................................
7.75% subordinated notes 2009 ..................................................................................
6.625% subordinated notes 2009 ................................................................................
Other subordinated liabilities each less than US$200m .............................................
2009
US$m
23,048
2008
US$m
23,544
1,804
1,339
1,152
1,136
1,077
1,002
993
961
960
950
904
900
862
806
785
776
750
712
688
639
608
550
531
521
500
483
449
412
407
404
400
382
363
321
312
300
299
287
247
220
213
200
200
190
–
–
3,868
1,532
1,337
1,116
1,021
745
1,001
992
863
790
953
831
900
834
724
675
659
750
715
694
567
518
481
461
498
500
436
449
333
410
404
400
277
325
324
384
300
299
215
–
–
218
200
200
163
203
198
3,711
Subordinated loan capital is repayable at par on maturity, but some is repayable prior to maturity at the option of the
borrower, generally subject to prior notification to the Financial Services Authority and, where relevant, the consent
of the local banking regulator, and 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 10.176 per cent.
31,863
54,911
29,606
53,150
451
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 32
1 See ‘Step-up perpetual preferred securities’ below, note (a) ‘Guaranteed by HSBC Holdings’.
2 The interest margin on the €800 million and US$450 million callable subordinated floating rate notes 2016 increases by 0.5 per cent
from March 2011 and July 2011, respectively.
3 See ‘Step-up perpetual preferred securities’ below, note (b) ‘Guaranteed by HSBC Bank’.
4 The distributions on the trust preferred securities change in November 2015 to three-month dollar LIBOR plus 1.926 per cent.
5 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.
6 The interest rate on the 4.75 per cent callable subordinated notes 2020 changes in September 2015 to three-month sterling LIBOR plus
0.82 per cent.
7 The interest margin on the callable subordinated floating rate notes 2020 increases by 0.5 per cent from September 2015.
8 The interest rate on the callable subordinated variable coupon notes 2017 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.
9 The interest rate on the 5 per cent callable subordinated notes 2023 changes in March 2018 to become the rate per annum which is the
sum of the gross redemption yield of the then prevailing five-year UK gilt plus 1.80 per cent.
10 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.
11 The interest margin on the callable subordinated floating rate notes 2017 increases by 0.5 per cent from July 2012.
Footnotes 2, and 4 to 10 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 prior notification to the Financial Services
Authority and, where relevant, the consent of 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, 2012 and 2015,
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, the former 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.
(b) Guaranteed by HSBC Bank
The two issues of non-cumulative step-up perpetual preferred securities (footnote 3) 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 two issues of 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 apply to HSBC Bank as to HSBC Holdings,
as described above. HSBC Bank has provided a similar covenant to that provided by HSBC Holdings, also as
described above.
452
If (i) any of the two issues of 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.
HSBC Holdings
Subordinated liabilities:
– at amortised cost ..............................................................................................................................
– designated at fair value (Note 27) ...................................................................................................
HSBC Holdings subordinated borrowings
2009
US$m
14,406
16,909
31,315
2008
US$m
14,017
16,389
30,406
2009
US$m
2008
US$m
Amounts owed to third parties
€1,750m
US$2,500m
€1,600m
US$2,000m
€1,000m
£900m
US$1,400m
US$1,500m
£750m
£650m
€700m
£650m
US$750m
US$750m
US$488m
£250m
US$222m
€2,000m
US$1,000m
€300m
6.0% subordinated notes 2019 ....................................................................................
6.5% subordinated notes 2037 ....................................................................................
6.25% subordinated notes 2018 ..................................................................................
6.5% subordinated notes 2036 ....................................................................................
5.375% subordinated notes 2012 ................................................................................
6.375% callable subordinated notes 20221 .................................................................
5.25% subordinated notes 2012 ..................................................................................
6.8% subordinated notes 2038 ....................................................................................
7.0% subordinated notes 2038 ....................................................................................
6.75% subordinated notes 2028 ..................................................................................
3.625% callable subordinated notes 20202 .................................................................
5.75% subordinated notes 2027 ..................................................................................
Callable subordinated floating rate notes 20163 .........................................................
Callable subordinated floating rate notes 20154 .........................................................
7.625% subordinated notes 2032 ................................................................................
9.875% subordinated bonds 20185 .............................................................................
7.35% subordinated notes 2032 ..................................................................................
Callable subordinated floating rate notes 20146 .........................................................
7.5% subordinated notes 2009 ....................................................................................
5.5% subordinated notes 2009 ....................................................................................
2,835
2,659
2,306
2,052
1,549
1,517
1,488
1,484
1,267
1,043
1,005
1,000
750
750
587
496
260
–
–
–
–
2,669
2,231
2,052
1,403
1,330
1,455
1,484
1,140
938
840
878
750
750
609
441
269
2,805
1,068
432
Amounts owed to HSBC undertakings
€1,400m
US$1,350m
US$1,250m
€750m
US$900m
€600m
£500m
5.3687% fixed/floating subordinated notes 2043 –
HSBC Capital Funding (Euro 2) LP ...........................................................................
9.547% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Dollar 1) LP ........................................................................
4.61% fixed/floating subordinated notes 2043 –
HSBC Capital Funding (Dollar 2) LP ........................................................................
5.13% fixed/floating subordinated notes 2044 –
HSBC Capital Funding (Euro 3) LP ...........................................................................
10.176% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Dollar 1) LP ........................................................................
8.03% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Euro 1) LP ...........................................................................
8.208% subordinated step-up cumulative notes 2040 –
HSBC Capital Funding (Sterling 1) LP ......................................................................
23,048
23,544
2,042
1,339
1,223
1,095
900
862
806
8,267
31,315
1,532
1,337
745
790
900
834
724
6,862
30,406
1 The interest rate on the 6.375 per cent callable subordinated notes 2022 changes in October 2017 to become three-month sterling
LIBOR plus 1.3 per cent. The notes may be redeemed at par from October 2017 at the option of the borrower, subject to the prior
notification of the FSA.
453
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 33 and 34
2 The interest rate on the 3.625 per cent callable subordinated notes 2020 changes in June 2015 to become three-month EURIBOR plus
0.93 per cent. The notes may be redeemed at par from June 2015 at the option of the borrower, subject to the prior notification of the
FSA.
3 The interest margin on the callable subordinated floating rate notes 2016 increases by 0.5 per cent from October 2011. The notes are
repayable from their step up date at the option of the borrower, subject to the prior notification of the FSA.
4 On 11 February 2010, HSBC Holdings gave notice to holders of its US$750 million callable subordinated floating rate notes due 2015
that it will call and redeem the notes at par on 16 March 2010.
5 The interest rate on the 9.875 per cent subordinated bonds 2018 changes in April 2013 to become the higher of (i) 9.875 per cent or (ii)
the sum of the yield on the relevant benchmark treasury stock plus 2.5 per cent. The bonds may be redeemed in April 2013 at par and
redemption has also been allowed from April 1998, subject to the prior notification of the FSA, for an amount based on the redemption
yields of the relevant benchmark treasury stocks.
6 In September 2009, HSBC Holdings redeemed its €2,000 million callable subordinated floating rate notes due 2014 at par.
33 Maturity analysis of assets and liabilities
The following is an analysis, by remaining contractual maturities at the balance sheet date, of asset and liability line
items that represent amounts expected to be recovered or settled within one year, and after more than one year.
Trading assets and liabilities are excluded because they are not held for collection or settlement over the period of
contractual maturity.
HSBC
At 31 December 2009
Due within
one year
US$m
3,786
172,916
381,967
134,824
26,189
719,682
118,308
1,114,149
4,666
83,590
67,061
369
1,388,143
Due within
one year
US$m
4,735
146,268
407,582
111,027
27,642
697,254
123,835
1,083,426
7,368
107,094
70,898
745
1,393,366
Due after
more than
one year
US$m
33,395
6,865
514,264
234,334
7,383
796,241
6,564
44,885
75,426
63,306
3,606
30,109
Total
US$m
37,181
179,781
896,231
369,158
33,572
1,515,923
124,872
1,159,034
80,092
146,896
70,667
30,478
223,896
1,612,039
At 31 December 2008
Due after
more than
one year
US$m
23,798
7,498
525,286
189,208
6,308
752,098
6,249
31,901
67,219
72,599
4,860
28,688
Total
US$m
28,533
153,766
932,868
300,235
33,950
1,449,352
130,084
1,115,327
74,587
179,693
75,758
29,433
211,516
1,604,882
Assets
Financial assets designated at fair value ..................................................................
Loans and advances to banks ..................................................................................
Loans and advances to customers ............................................................................
Financial investments ..............................................................................................
Other financial assets ...............................................................................................
Liabilities
Deposits by banks ....................................................................................................
Customer accounts ...................................................................................................
Financial liabilities designated at fair value ............................................................
Debt securities in issue ............................................................................................
Other financial liabilities .........................................................................................
Subordinated liabilities ............................................................................................
Assets
Financial assets designated at fair value ..................................................................
Loans and advances to banks ..................................................................................
Loans and advances to customers ............................................................................
Financial investments ..............................................................................................
Other financial assets ...............................................................................................
Liabilities
Deposits by banks ....................................................................................................
Customer accounts ...................................................................................................
Financial liabilities designated at fair value ............................................................
Debt securities in issue ............................................................................................
Other financial liabilities .........................................................................................
Subordinated liabilities ............................................................................................
454
HSBC Holdings
Assets
Loans and advances to HSBC undertakings ...........................................................
Financial investments ..............................................................................................
Other financial assets ...............................................................................................
Liabilities
Amounts owed to HSBC undertakings ...................................................................
Financial liabilities designated at fair value ............................................................
Debt securities in issue .............................................................................................
Other financial liabilities .........................................................................................
Subordinated liabilities ............................................................................................
Assets
Loans and advances to HSBC undertakings ...........................................................
Financial investments ..............................................................................................
Other financial assets ...............................................................................................
Liabilities
Amounts owed to HSBC undertakings ...................................................................
Financial liabilities designated at fair value ............................................................
Other financial liabilities .........................................................................................
Subordinated liabilities ............................................................................................
34 Foreign exchange exposures
Structural foreign exchange exposures
At 31 December 2009
Due within
one year
US$m
Due after
more than
one year
US$m
18,067
–
4
18,071
277
–
–
1,240
–
1,517
5,145
2,455
–
7,600
3,434
16,909
2,839
17
14,406
37,605
At 31 December 2008
Due within
one year
US$m
Due after
more than
one year
US$m
4,842
–
25
4,867
176
1,500
1,805
–
3,481
6,962
2,629
–
9,591
3,866
14,889
11
14,017
32,783
Total
US$m
23,212
2,455
4
25,671
3,711
16,909
2,839
1,257
14,406
39,122
Total
US$m
11,804
2,629
25
14,458
4,042
16,389
1,816
14,017
36,264
HSBC’s structural foreign exchange exposures are represented by the net asset value of its foreign exchange equity
and subordinated debt investments in subsidiaries, branches, joint ventures and associates with non-US dollar
functional currencies. Gains or losses on structural foreign exchange exposures are recognised in other
comprehensive income. HSBC’s management of its structural foreign exchange exposures is discussed in the ‘Report
of the Directors: Risk’ on page 257.
In its separate financial statements, HSBC Holdings recognises its foreign exchange gains and losses on structural
foreign exchange exposures in the income statement.
455
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 34, 35, 36 and 37
Net structural foreign exchange exposures
Currency of structural exposure
Euro ..........................................................................................................................................................
Pound sterling ..........................................................................................................................................
Chinese renminbi .....................................................................................................................................
Mexican pesos .........................................................................................................................................
Brazilian reais ..........................................................................................................................................
Hong Kong dollars ...................................................................................................................................
Indian rupees ............................................................................................................................................
Canadian dollars ......................................................................................................................................
Swiss francs .............................................................................................................................................
UAE dirhams ...........................................................................................................................................
Turkish lira ...............................................................................................................................................
Korean won ..............................................................................................................................................
Malaysian ringgit .....................................................................................................................................
Indonesian rupiah ....................................................................................................................................
Australian dollars .....................................................................................................................................
Argentine pesos .......................................................................................................................................
Saudi riyals ..............................................................................................................................................
Egyptian pounds ......................................................................................................................................
Singapore dollars .....................................................................................................................................
Taiwanese dollars ....................................................................................................................................
Vietnamese dong .....................................................................................................................................
Philippine pesos .......................................................................................................................................
Qatari rial .................................................................................................................................................
Costa Rican colon ....................................................................................................................................
Thai baht ..................................................................................................................................................
Russian rouble .........................................................................................................................................
Honduran lempira ....................................................................................................................................
Chilean pesos ...........................................................................................................................................
Japanese yen ............................................................................................................................................
Colombian pesos ......................................................................................................................................
Omani rial ................................................................................................................................................
South African rand ...................................................................................................................................
New Zealand dollars ................................................................................................................................
Jordanian dinar .........................................................................................................................................
Algerian dinar ..........................................................................................................................................
Sri Lankan rupee ......................................................................................................................................
Brunei dollars ...........................................................................................................................................
Bahraini dinar ..........................................................................................................................................
Others, each less than US$100 million ....................................................................................................
2009
US$m
25,284
21,369
13,398
5,393
5,234
3,842
3,836
3,620
2,910
2,209
1,741
1,412
1,300
1,057
1,017
675
657
561
556
547
505
473
384
375
357
295
282
230
228
220
210
201
161
159
146
141
132
85
587
Total .........................................................................................................................................................
101,789
2008
US$m
23,137
15,319
11,927
4,127
3,381
3,929
3,252
3,423
2,192
3,472
1,505
1,243
1,148
221
690
510
530
517
534
485
483
445
272
378
404
268
341
176
263
185
210
151
124
147
27
96
91
114
518
86,235
Shareholders’ equity would decrease by US$2,222 million (2008: US$1,830 million) if euro and sterling foreign
currency exchange rates weakened by 5 per cent relative to the US dollar.
35 Assets charged as security for liabilities and collateral accepted as security for assets
Financial assets pledged to secure liabilities were as follows:
Treasury bills and other eligible securities ..............................................................................................
Loans and advances to banks ..................................................................................................................
Loans and advances to customers ............................................................................................................
Debt securities .........................................................................................................................................
Equity shares ............................................................................................................................................
Other ........................................................................................................................................................
Assets pledged at 31 December
2009
US$m
3,970
6,767
77,699
203,766
7,305
646
300,153
2008
US$m
3,434
6,949
70,209
185,224
4,326
439
270,581
These transactions are conducted under terms that are usual and customary to collateralised transactions, including,
where relevant, standard securities lending and repurchase agreements.
456
Collateral accepted as security for assets
The fair value of assets accepted as collateral that HSBC is permitted to sell or repledge in the absence of default is
US$362,560 million (2008: US$290,469 million). The fair value of any such collateral that has been sold or
repledged was US$215,940 million (2008: US$159,256 million). HSBC is obliged to return equivalent securities.
These transactions are conducted under terms that are usual and customary to standard securities borrowing and
reverse repurchase agreements.
36 Minority interests
Minority interests attributable to holders of ordinary shares in subsidiaries ..........................................
Preference shares issued by subsidiaries .................................................................................................
Preference shares issued by subsidiaries
2009
US$m
4,665
2,697
7,362
2008
US$m
4,227
2,411
6,638
2009
US$m
2008
US$m
US$575m
US$518m
US$374m
US$374m
CAD250m
CAD175m
CAD175m
US$150m
US$150m
6.36% non-cumulative preferred stock, Series B1 ......................................................
Floating rate non-cumulative preferred stock, Series F2 ............................................
Floating rate non-cumulative preferred stock, Series G3 ............................................
6.50% non-cumulative preferred stock, Series H3 ......................................................
Non-cumulative 5 year rate reset class 1 preferred shares, Series E4 .........................
Non-cumulative redeemable class 1 preferred shares, Series C5 ................................
Non-cumulative class 1 preferred shares, Series D5 ...................................................
Depositary shares each representing 25% interest in a share of
adjustable-rate cumulative preferred stock, Series D6 ............................................
Cumulative preferred stock7 .......................................................................................
559
518
374
374
238
167
167
150
150
559
518
374
374
–
143
143
150
150
2,697
2,411
1 The Series B preferred stock is redeemable at the option of HSBC Finance Corporation, in whole or in part, from 24 June 2010 at par.
2 The Series F preferred stock is redeemable at par at the option of HSBC USA Inc., in whole or in part, on any dividend payment date on
or after 7 April 2010.
3 The Series G and Series H preferred stock are redeemable at par at the option of HSBC USA Inc., in whole or in part, at any time from
1 January 2011 and 1 July 2011, respectively.
4 The Series E preferred shares are redeemable at par at the option of HSBC Bank Canada, in whole or in part from 30 June 2014.
5 The Series C and Series D preferred shares are redeemable at a declining premium above par at the option of HSBC Bank Canada, in
whole or in part, from 30 June 2010 and 31 December 2010, respectively.
6 The preferred stock has been redeemable at the option of HSBC USA Inc., in whole or in part, from 1 July 1999 at par.
7 The preferred stock has been redeemable at the option of HSBC USA Inc., in whole or in part, from 1 October 2007 at par.
All redemptions are subject to prior notification to the Financial Services Authority and, where relevant, the local
banking regulator.
37 Called up share capital and other equity instruments
Authorised
The concept of authorised share capital was abolished under the UK Companies Act 2006 with effect from 1 October
2009 and consequential amendments to the Company’s Articles of Association were approved by shareholders at the
2009 Annual General Meeting.
At 31 December 2008, the authorised ordinary share capital of HSBC Holdings was US$7,500 million divided into
15,000 million ordinary shares of US$0.50 each.
At 31 December 2008, 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$0.01 each, and 10 million non-
cumulative preference shares of €0.01 each.
457
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Note 37
At 31 December 2008, the authorised non-voting deferred share capital of HSBC Holdings was £301,500 divided into
301,500 non-voting deferred shares of £1 each.
Issued
HSBC Holdings ordinary shares1 ............................................................................................................
2009
US$m
8,705
2008
US$m
6,053
Number
US$m
HSBC Holdings ordinary shares1
At 1 January 2009 .................................................................................................................................... 12,105,265,082
7,476,952
Shares issued under HSBC employee share plans ..................................................................................
235,225,669
Shares issued in lieu of dividends ...........................................................................................................
Shares issued in respect of rights issue2 ..................................................................................................
5,060,239,065
At 31 December 2009 .............................................................................................................................. 17,408,206,768
At 1 January 2008 .................................................................................................................................... 11,829,052,317
65,198
Shares issued under HSBC Finance share plans .....................................................................................
40,578,468
Shares issued under HSBC employee share plans ..................................................................................
235,569,099
Shares issued in lieu of dividends ...........................................................................................................
At 31 December 2008 .............................................................................................................................. 12,105,265,082
1 All ordinary shares in issue confer identical rights in respect of capital, dividends, voting and otherwise.
2 See Note 41 for details of the rights issue.
6,053
4
118
2,530
8,705
5,915
–
20
118
6,053
HSBC Holdings non-cumulative preference shares of US$0.01 each
At 1 January 2009 and 31 December 2009 .............................................................................................
1,450,000
At 1 January 2008 and 31 December 2008 .............................................................................................
1,450,000
–
–
Number
US$m
Dividends on the HSBC Holdings non-cumulative dollar preference shares in issue are paid quarterly at the sole and
absolute discretion of the Board of Directors. The Board of Directors will not declare a dividend on the preference
shares in issue if payment of the dividend would cause HSBC Holdings not to meet the applicable capital adequacy
requirements of the FSA or the profit of HSBC Holdings available for distribution as dividends is not sufficient to
enable HSBC Holdings to pay in full both dividends on the preference shares in issue and dividends on any other
shares that are scheduled to be paid on the same date and that have an equal right to dividends. HSBC Holdings may
not declare or pay dividends on any class of its shares ranking lower in the right to dividends than the preference
shares in issue nor redeem nor purchase in any manner any of its other shares ranking equal with or lower than the
preference shares in issue unless it has paid in full, or set aside an amount to provide for payment in full, the
dividends on the preference shares in issue for the then-current dividend period. The preference shares in issue carry
no rights to conversion into ordinary shares of HSBC Holdings. Holders of the preference shares in issue will only be
entitled to attend and vote at general meetings of shareholders of HSBC Holdings if the dividend payable on the
preference shares in issue has not been paid in full for four consecutive dividend payment dates. In such
circumstances, holders of the preference shares in issue will be entitled to vote on all matters put to general meetings
until such time as HSBC Holdings has paid a full dividend on the preference shares in issue. HSBC Holdings may
redeem the preference shares in issue in whole at any time on or after 16 December 2010, subject to prior notification
to the FSA.
HSBC Holdings non-voting deferred shares
The 301,500 non-voting deferred shares were in issue throughout 2008 and 2009 and are held by a subsidiary of
HSBC Holdings. Holders of the non-voting deferred shares are not entitled to receive dividends on these shares. On
winding-up or other return of capital, holders are entitled to receive the amount paid up on their shares after
distribution to ordinary shareholders of £10 million in respect of each ordinary share held by them.
458
Other equity instruments
On 9 April 2008, HSBC Holdings issued, in bearer form, 88 million 8.125 per cent Perpetual Subordinated Capital
Securities (‘Capital Securities’), each with a par value of US$25 and with an aggregate nominal value of
US$2,200 million. The securities were issued at par value, raising US$2,133 million, net of issuance costs. The
Capital Securities were issued to support the development of and to strengthen further HSBC’s capital base. Coupon
payments on the Capital Securities are paid quarterly in arrears from 15 July 2008 and may be deferred at the
discretion of HSBC Holdings. The Capital Securities have no fixed maturity and are redeemable at HSBC’s option on
or after 15 April 2013 at their principal amounts together with any accrued, unpaid and deferred coupon payments.
While any coupon payments are unpaid or deferred, HSBC Holdings will not declare, pay dividends or make
distributions or similar periodic payments in respect of, or repurchase, redeem or otherwise acquire any securities of
lower or equal rank. At the Company’s discretion, and subject to certain conditions being satisfied, the Capital
Securities may be exchanged on any coupon payment date for non-cumulative preference shares to be issued by
HSBC Holdings and which would rank pari passu with the dollar preference shares in issue at 2 March 2009. The
preference shares will be issued at a nominal value of US$0.01 per share and a premium of US$24.99 per share, with
both such amounts being subscribed and fully paid.
Shares under option
Details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings Group
Share Option Plan, HSBC Holdings Executive Share Option Scheme, the HSBC Share Plan and HSBC Holdings
savings-related share option plans are given in Note 10. In aggregate, options outstanding under these plans were as
follows:
31 December 20091..................................................
31 December 2008 ...................................................
31 December 2007 ...................................................
Number of
HSBC Holdings
ordinary shares
270,742,989
50,938,242
3,283,710
12,073,216
211,226,573
11,344,167
1,304,119
7,382,145
240,726,775
12,839,412
823,472
6,324,920
Period of exercise
Exercise price
2010 to 2015
2010 to 2015
2010 to 2015
2010 to 2015
£3.3116 – 8.4024
HK$37.8797 – 94.5057
€3.6361 – 9.5912
US$4.8876 – 12.0958
2009 to 2015
£5.3496 – 9.642
2009 to 2014 HK$103.4401 – 108.4483
€8.6720 – 11.0062
2009 to 2014
US$13.3290 – 14.7478
2009 to 2014
2008 to 2015
£5.3496 – 9.642
2008 to 2013 HK$103.4401 – 108.4483
€10.4217 – 11.0062
2008 to 2013
US$13.3290 – 14.7478
2008 to 2013
1 During 2009, the number and prices of unexercised share options were adjusted for the rights issue.
HSBC France and subsidiary company plans
Following the acquisition of HSBC France in 2000, outstanding employee share options over HSBC France shares
vested. On exercise of the options, the HSBC France shares are exchangeable for HSBC Holdings ordinary shares.
As a consequence of the rights issue, the ratio of HSBC Holdings ordinary shares exchangeable for each HSBC
France share was adjusted from 13 to 14.917916.
During 2009, no HSBC France shares were issued following the exercise of employee share options (2008: 221,154)
and no shares were exchanged for HSBC Holdings ordinary shares (2008: 2,875,002 HSBC Holdings ordinary
shares). During 2009, 183,627 options over HSBC France shares lapsed (2008: nil). At 31 December 2009, the
HSBC Holdings Employee Benefit Trust 2001 (No. 1) held 9,963,718 (2008: 8,790,276) HSBC Holdings ordinary
shares which may be exchanged for HSBC France shares arising from the exercise of options.
459
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 37 and 38
HSBC France options effectively outstanding over HSBC Holdings ordinary shares under this arrangement were as
follows:
Number of
HSBC France
shares exchangeable
for HSBC Holdings
31 December 2009 .......................................................
31 December 2008 ........................................................
31 December 2007 ........................................................
604,250
787,877
1,009,031
2010
2009 to 2010
2008 to 2010
€142.50
€81.71 – 142.50
€73.48 – 142.50
ordinary shares
Period of exercise
Exercise price
HSBC Private Bank France plan
There are also outstanding options over the shares of HSBC Private Bank France, a subsidiary of HSBC France.
On exercise of the options, the HSBC Private Bank France shares are exchangeable for HSBC Holdings ordinary
shares. As a consequence of the rights issue, the ratio of HSBC Holdings ordinary shares exchangeable for each
HSBC Private Bank France share was adjusted from 1.83 to 2.099984. During 2009, 33,456 (2008: 7,000) HSBC
Private Bank France shares were issued following the exercise of employee share options and exchanged for 70,248
(2008: 12,810) HSBC Holdings ordinary shares, such shares being delivered from The CCF Employee Benefit Trust
2001 (Private Banking France). During 2009, 9,000 options over HSBC Private Bank France shares lapsed (2008:
nil). At 31 December 2009, The CCF Employee Benefit Trust 2001 (Private Banking France) held 998,783 (2008:
943,142) 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 were as follows:
Number of HSBC
Private Bank France
shares exchangeable
for HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 2009 .......................................................
31 December 2008 ........................................................
31 December 2007 ........................................................
291,520
333,976
340,976
2010 to 2012
2009 to 2012
2008 to 2012
€12.44 – 22.22
€10.84 – 22.22
€10.84 – 22.22
HSBC Finance
Following the acquisition of HSBC Finance in 2003, all outstanding options and equity-based awards over HSBC
Finance common shares were converted into rights to receive HSBC Holdings ordinary shares in the same ratio as the
share exchange offer for HSBC Finance (2.675 HSBC Holdings ordinary shares for each HSBC Finance common
share) and the exercise prices per share adjusted accordingly. During 2009, 20,000 options (2008: 327,635) over
HSBC Holdings ordinary shares were exercised and 20,000 (2008: 169,138) HSBC Holdings ordinary shares
delivered from The HSBC (Household) Employee Benefit Trust 2003 to satisfy the exercise of these options. During
2009, options over 5,606,714 (2008: 718,793) HSBC Holdings ordinary shares lapsed. In April 2009, 195,000 ADSs
held in the Trust were cancelled, increasing the number of HSBC Holdings ordinary shares held by 975,000. At
31 December 2009, the Trust held a total of 2,642,279 (2008: 1,687,279) HSBC Holdings ordinary shares and 1,455
(2008: 196,455) ADSs, which may be used to satisfy the exercise of these options and equity-based awards under the
HSBC Finance share plans. Each ADS represents five HSBC Holdings ordinary shares.
Options (and, in 2008 and 2007, equity-based awards) outstanding over HSBC Holdings ordinary shares under the
HSBC Finance share plans were as follows:
Number of
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
31 December 20091 ......................................................
31 December 2008 ........................................................
31 December 2007 ........................................................
18,105,959
20,681,582
21,728,010
2010 to 2012
2009 to 2012
2008 to 2012
US$9.29 – 18.62
US$10.66 – 21.37
nil – US$21.37
1 During 2009, the number and prices of unexercised share options were adjusted for the rights issue.
460
Bank of Bermuda plan
Following the acquisition of Bank of Bermuda in 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 2009, options over 18,153 HSBC Holdings ordinary shares were exercised (2008: 12,847) and
satisfied by delivery from the HSBC (Bank of Bermuda) Employee Benefit Trust 2004. During 2009, options over
24,673 (2008: 95,915) HSBC Holdings ordinary shares lapsed. At 31 December 2009, the HSBC (Bank of Bermuda)
Employee Benefit Trust 2004 held 2,113,611 (2008: 1,877,056) HSBC Holdings ordinary shares which may be used
to satisfy the exercise of options.
Options outstanding over HSBC Holdings ordinary shares under the Bank of Bermuda share plans were as follows:
31 December 20091.......................................................
31 December 2008 ........................................................
31 December 2007 ........................................................
Number of HSBC
Holdings
ordinary shares
2,481,702
2,205,321
2,314,083
Period of exercise
Exercise price
2010 to 2013
2009 to 2013
2008 to 2013
US$6.13 – 15.99
US$7.04 – 18.35
US$7.04 – 18.35
1 During 2009, the number and prices of unexercised share options were adjusted for the rights issue.
Maximum obligation to deliver HSBC Holdings ordinary shares
At 31 December 2009, the maximum obligation to deliver HSBC Holdings ordinary shares under all of the above
option arrangements, together with awards of Performance Shares and Restricted Shares under the HSBC Holdings
Restricted Share Plan 2000 and the HSBC Share Plan, was 559,960,290 (2008: 400,887,713). The total number of
shares at 31 December 2009 held by employee benefit trusts that may be used to satisfy such obligations to deliver
HSBC Holdings ordinary shares was 134,903,061 (2008: 164,985,811).
38 Notes on the statement of cash flows
Non-cash items included in profit before tax
2009
US$m
HSBC
2008
US$m
HSBC Holdings
2007
US$m
2009
US$m
2008
US$m
3,601
–
–
14
–
–
–
–
4
5,947
–
–
21
–
–
–
–
6
5,974
3,619
Depreciation, amortisation and impairment ...............
Gains arising from dilution of interests in associates .
Revaluations on investment property .........................
Share-based payment expense ....................................
Loan impairment losses gross of recoveries and
other credit risk provisions .....................................
Provisions ...................................................................
Impairment of financial investments ..........................
Charge for defined benefit plans ................................
Accretion of discounts and amortisation of
premiums ................................................................
2,538
–
24
683
27,378
669
358
192
(458)
31,384
13,367
–
92
819
25,771
591
1,042
490
(867)
41,305
2,522
(1,092)
(152)
870
18,247
989
42
727
(452)
21,701
461
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 38 and 39
Change in operating assets
Change in loans to HSBC undertakings .....................
Change in prepayments and accrued income .............
Change in net trading securities and net derivatives ..
Change in loans and advances to banks .....................
Change in loans and advances to customers ..............
Change in financial assets designated at fair value ....
Change in other assets ................................................
Change in operating liabilities
Change in accruals and deferred income ....................
Change in deposits by banks ......................................
Change in customer accounts .....................................
Change in debt securities in issue ...............................
Change in financial liabilities designated at fair value
Change in other liabilities ...........................................
Cash and cash equivalents
Cash at bank with HSBC undertakings ......................
Cash and balances at central banks ............................
Items in the course of collection from other banks ....
Loans and advances to banks of one month or less ...
Treasury bills, other bills and certificates of deposit
2009
US$m
–
3,198
15,388
(30,354)
6,149
(8,911)
(6,273)
(20,803)
2009
US$m
(2,258)
(5,216)
41,983
(32,797)
7,430
5,503
14,645
2009
US$m
–
60,655
6,395
160,673
HSBC
2008
US$m
–
4,178
(23,293)
22,596
7,279
12,757
(5,394)
HSBC
2008
US$m
(6,169)
(3,038)
32,372
(67,152)
(15,352)
(4,074)
(63,413)
HSBC
2008
US$m
–
52,396
6,003
165,066
HSBC Holdings
2007
US$m
2009
US$m
–
(5,069)
(4,972)
(8,922)
(131,886)
(13,360)
(12,329)
(11,408)
(44)
352
–
–
2
21
(11,077)
18,123
(176,538)
2008
US$m
3,129
166
(16)
–
–
(12)
(4)
3,263
HSBC Holdings
2007
US$m
2009
US$m
5,119
32,594
199,806
(12,489)
12,304
12,761
250,095
131
–
–
21
2,411
(523)
2,040
2008
US$m
138
–
–
–
(2,299)
126
(2,035)
HSBC Holdings
2007
US$m
2009
US$m
2008
US$m
–
21,765
9,777
232,320
224
–
–
–
–
–
224
443
–
–
–
–
–
443
less than three months ............................................
28,777
62,639
41,819
Less: items in the course of transmission to
other banks ..............................................................
(5,734)
(7,232)
(8,672)
Total cash and cash equivalents .................................
250,766
278,872
297,009
Interest and dividends
Interest paid .................................................................
Interest received ..........................................................
Dividends received .....................................................
2009
US$m
(29,030)
74,062
1,023
HSBC
2008
US$m
(60,342)
107,019
1,876
2007
US$m
(63,626)
103,393
1,833
HSBC Holdings
2009
US$m
(2,513)
1,560
7,488
2008
US$m
(2,525)
1,619
10,779
462
39 Contingent liabilities, contractual commitments and guarantees
Guarantees and contingent liabilities
Guarantees and irrevocable letters of credit pledged as
collateral security .............................................................
Other contingent liabilities ...................................................
Commitments
Documentary credits and short-term trade-related
transactions .......................................................................
Forward asset purchases and forward forward deposits
placed ...............................................................................
Undrawn formal standby facilities, credit lines and other
commitments to lend ........................................................
HSBC
2009
US$m
73,385
174
73,559
9,066
192
548,792
558,050
2008
US$m
72,895
259
73,154
9,789
197
594,036
604,022
HSBC Holdings
2009
US$m
35,073
–
35,073
–
–
3,240
3,240
2008
US$m
47,341
–
47,341
–
–
3,241
3,241
The above table discloses the nominal principal amounts of commitments excluding capital commitments, which are
separately disclosed below, guarantees and other contingent liabilities; mainly credit-related instruments including
both financial and non-financial guarantees and commitments to extend credit. Contingent liabilities arising from
litigation against the Group are disclosed in Note 42. Nominal principal amounts represent the amounts at risk should
contracts be fully drawn upon and clients default. The amount of the loan commitments shown above reflects, where
relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. As a
significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the
nominal principal amounts is not representative of future liquidity requirements.
Guarantees
HSBC provides guarantees and similar undertakings on behalf of both third-party customers and other entities within
the HSBC Group. These guarantees are generally provided in the normal course of HSBC’s banking business. The
principal types of guarantees provided, and the maximum potential amount of future payments which HSBC could be
required to make at 31 December 2009, were as follows:
Guarantee type
Financial guarantees and similar contracts1 .............................
Standby letters of credit that are financial guarantee contracts2
Other direct credit substitutes3 ..................................................
Performance bonds4 ..................................................................
Bid bonds4 .................................................................................
Standby letters of credit related to particular transactions4 ......
Other transaction-related guarantees4 .......................................
Other items ................................................................................
At 31 December 2009
At 31 December 2008
Guarantees
by HSBC
Holdings
in favour of
other HSBC
Group entities
US$m
Guarantees in
favour of
third parties
US$m
23,558
10,712
4,676
14,468
728
4,944
13,577
722
73,385
35,073
–
–
–
–
–
–
–
35,073
Guarantees
by HSBC
Holdings
in favour of
other HSBC
Group entities
US$m
47,341
–
–
–
–
–
–
–
47,341
Guarantees
in favour of
third parties
US$m
20,879
11,171
4,613
15,304
627
4,791
15,028
482
72,895
1 Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred
because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
Similar contracts are contracts that provide protection against credit risk on a specified exposure but do not meet the definition of
financial guarantees. The amounts in the above table are nominal principal amounts.
2 Standby letters of credit which are financial guarantee contracts are irrevocable obligations on the part of HSBC to pay third parties
when customers fail to make payments when due.
3 Other direct credit substitutes include re-insurance letters of credit and trade-related letters of credit issued without provision for the
issuing entity to retain title to the underlying shipment.
4 Performance bonds, bid bonds, standby letters of credit and other transaction-related guarantees are undertakings by which the
obligation on HSBC to make payment depends on the outcome of a future event.
463
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 39 and 40
The amounts disclosed in the above table 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 half of the above guarantees
have a term of less than one year. Guarantees with terms of more than one year are subject to HSBC’s annual credit
review process.
Financial Services Compensation Scheme
The UK Financial Services Compensation Scheme (‘FSCS’) has provided compensation to consumers following the
collapse of a number of deposit takers such as Bradford & Bingley plc, Heritable Bank plc, Kaupthing Singer &
Friedlander Limited, Landsbanki ‘Icesave’, London Scottish Bank plc and Dunfermline Building Society. The
compensation paid out to consumers is currently funded through loans from the Bank of England and HM Treasury.
HSBC Bank plc (‘the bank’) could be liable to pay a proportion of the outstanding borrowings that the FSCS has
borrowed from HM Treasury which at 30 September 2009 stood at US$32 billion. The bank is also obligated to pay
its share of forecast management expenses based on the bank’s market share of deposits protected under the FSCS.
The bank expensed US$212 million at 31 December 2009 in respect of the share of forecast management expense,
including interest costs, for the 2008/9, 2009/10 and 2010/11 levy years. The fee in respect of the 2008/9 levy year
was paid during the second half of 2009.
At 31 December 2009, the bank accrued US$182 million in respect of the 2009/10 and 2010/11 levy years, based on
the bank’s estimated share of total market protected deposits at 31 December 2008 and 2009, respectively.
At 31 December 2008, the bank had accrued US$125 million in respect of the 2008/9 and 2009/10 levy years, based
on the bank’s estimated share of total market protected deposits at 31 December 2007 and 2008, respectively.
However, the ultimate FSCS levy to the industry as a result of the 2008 collapses cannot currently be estimated
reliably as it is dependent on various uncertain factors including the potential recoveries of assets by the FSCS and
changes in the interest rate, the level of protected deposits and the population of FSCS members at the time.
Sales of Payment Protection Insurance
On 1 July 2008 the Financial Ombudsman Service (‘FOS’) wrote to the FSA to draw to its attention under the ‘Wider
Implications’ process the issues arising from past payment protection insurance (‘PPI’) sales. The FOS considered
that there was evidence of widespread and regular failure on the part of many firms to comply with the FSA’s rules
and insurance law in the sale of PPI and that, in the circumstances, simply allowing consumers individually to bring
complaints was not the right way to tackle what it regarded as a systemic problem. The FOS therefore called upon the
FSA to frame and implement an appropriate regulatory solution which would ensure that firms took appropriate and
proportionate remedial action.
On 29 September 2009, the FSA published a Consultation Paper (‘CP (09/23)’) setting out proposals, and draft Rules
and Guidance, on how firms should assess PPI complaints and, where they up-held such complaints, calculate
redress. At the same time, it also published an open letter to eight trade associations, including the British Bankers
Association, setting out what it considered to be common failings by firms in sales of PPI. When announcing the
publication of CP (09/23), the FSA also reported that it had obtained agreement from firms representing 40 per cent
of the market for face to face single premium PPI sales to review all such sales since July 2007. No HSBC subsidiary
or associate was included in that group of firms.
The Consultation Paper anticipated new FSA rules and guidance covering how firms should deal with PPI complaints
with effect from the beginning of 2010. However, the FSA subsequently announced that, owing to the large number
of responses it had received to the Consultation Paper, this date would be deferred to give it sufficient opportunity to
fully consider those responses.
On 2 February 2010, the FSA stated that the course of action it will take in relation to PPI remains under
consideration and that no final decision on the matter has yet been taken. The precise form and content of the FSA’s
final rules and guidance in relation to PPI complaint handling therefore remains unclear at this stage. In the
circumstances, it is not possible for HSBC to determine what impact, if any, the FSA’s proposals will eventually
have.
In December 2007, HSBC decided to cease selling PPI (but not short-term income protection products) under its
HSBC, first direct and M&S Money brands. A phased withdrawal was completed across these brands and channels in
464
2008. HFC Bank Limited (‘HFC’) ceased selling single premium PPI in 2008 and sales of regular premium PPI will
reduce as HFC exits its remaining retail relationships.
Commitments
In addition to the commitments disclosed on page 463, at 31 December 2009, HSBC had US$1,359 million (2008:
US$1,541 million) of capital commitments contracted but not provided for and US$227 million (2008:
US$267 million) of capital commitments authorised but not contracted for.
Associates
HSBC’s share of associates’ contingent liabilities amounted to US$19,770 million at 31 December 2009 (2008:
US$17,943 million). No matters arose where HSBC was severally liable.
40 Lease commitments
Finance lease commitments
HSBC leases land and buildings (including branches) and equipment from third parties under finance lease
arrangements to support its operations.
Total future
minimum
payments
US$m
2009
Future
interest
charges
US$m
Present value
of finance
lease
commitments
US$m
Total future
minimum
payments
US$m
2008
Future
interest
charges
US$m
Present value
of finance
lease
commitments
US$m
103
249
619
971
(29)
(116)
(182)
(327)
74
133
437
644
55
188
736
979
(28)
(130)
(258)
(416)
27
58
478
563
Lease commitments:
– no later than one year .........
– later than one year and no
later than five years ............
– later than five years ............
At 31 December 2009, future minimum sublease payments of US$512 million (2008: US$458 million) are expected
to be received under non-cancellable subleases at the balance sheet date.
Operating lease commitments
At 31 December 2009, HSBC was obligated under a number of non-cancellable operating leases for properties, plant
and equipment on which the future minimum lease payments extend over a number of years.
Future minimum lease payments under non-cancellable
operating leases:
– no later than one year .......................................................
– later than one year and no later than five years ...............
– later than five years ..........................................................
2009
Land and
buildings
US$m
Equipment
US$m
2008
Land and
buildings
US$m
Equipment
US$m
846
2,253
2,534
5,633
11
11
–
22
757
1,791
1,573
4,121
9
9
–
18
In 2009, US$1,100 million (2008: US$861 million; 2007: US$849 million) was charged to ‘General and
administrative expenses’ in respect of lease and sublease agreements, of which US$833 million (2008:
US$635 million; 2007: US$838 million) related to minimum lease payments, US$16 million (2008: US$22 million;
2007: US$8 million) to contingent rents, and US$251 million (2008: US$204 million; 2007: US$3 million) to
sublease payments.
The contingent rent represents escalation payments made to landlords for operating, tax and other escalation expenses.
Finance lease receivables
HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft),
property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for
465
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 40, 41 and 42
further terms. Lessees may participate in any sales proceeds achieved. Lease rentals arising during the lease terms
will either be fixed in quantum or be varied to reflect changes in, for example, tax or interest rates. Rentals are
calculated to recover the cost of assets less their residual value, and earn finance income.
Lease receivables:
– no later than one year ......
– later than one year and
no later than five years ....
– later than five years .........
Total future
minimum
payments
US$m
2009
Unearned
finance
income
US$m
Present
value
US$m
Total future
minimum
payments
US$m
2008
Unearned
finance
income
US$m
Present
value
US$m
2,874
(328)
2,546
3,013
(389)
2,624
9,525
6,902
19,301
(1,061)
(1,737)
(3,126)
8,464
5,165
16,175
8,783
8,114
19,910
(1,186)
(2,334)
(3,909)
7,597
5,780
16,001
At 31 December 2009, unguaranteed residual values of US$230 million (2008: US$197 million) had been accrued,
and the accumulated allowance for uncollectible minimum lease payments receivable amounted to US$21 million
(2008: US$21 million).
During the year, no contingent rents were received (2008: US$10 million) and recognised in the income statement.
Operating lease receivables
HSBC leases a variety of different assets to third parties under operating lease arrangements, including transport
assets (such as rolling stock), property and general plant and machinery.
Future minimum lease payments under
non-cancellable operating leases:
– no later than one year .......................................................
– later than one year and no later than five years ...............
– later than five years ..........................................................
2009
Land and
buildings
US$m
Equipment
US$m
2008
Land and
buildings
US$m
Equipment
US$m
37
21
23
81
857
917
447
2,221
37
31
21
89
678
625
110
1,413
At 31 December 2009, future minimum sublease payments of US$21 million (2008: nil) are expected to be received
under non-cancellable subleases at the balance sheet date.
41 Rights issue
On 2 March 2009, HSBC Holdings announced its proposal to raise £12.5 billion (US$17.8 billion), net of expenses,
by way of a fully underwritten rights issue. Under the proposal, HSBC offered its shareholders the opportunity to
acquire 5 new ordinary shares for every 12 ordinary shares at a price of 254 pence per new ordinary share. For
shareholders on the Hong Kong and Bermuda Overseas Branch Registers this offer was expressed in Hong Kong
dollars and US dollars, respectively, fixed at published exchange rates on 27 February 2009. The proposal was
subject to authorisation by the shareholders which was obtained at a general meeting held on 19 March 2009. The
offer period commenced on 20 March 2009 and closed for acceptance on 3 April 2009. Dealing in the new shares
began on 6 April 2009.
For details of called-up share capital and other equity instruments see Note 37.
Merger reserve
As part of the arrangement for the rights issue, HSBC Holdings entered into a share-for-share exchange with
Chinnery Limited, thereby availing itself of Statutory Share Premium Relief under Section 612 of the Companies Act
2006. The nominal value of the new shares issued was credited to share capital and the remaining consideration was
credited to the merger reserve and translated into US dollars at the foreign exchange rate on that date.
466
Share options and share awards
The Remuneration Committee agreed to make adjustments to all unexercised share options and share awards under
HSBC’s various share plans and share schemes as a consequence of the rights issue. The adjustments were based on
the theoretical ex-rights price, which was considered to be the most appropriate methodology to reflect the rights
issue. The adjustments under certain share plans and share schemes have been approved by the relevant tax
authorities, where necessary.
42 Litigation
Unauthorised overdraft charges in the UK
On 27 July 2007, the UK Office of Fair Trading (‘OFT’) issued High Court legal proceedings against a number of
UK financial institutions, including HSBC Bank, to determine the legal status and enforceability of certain of the
charges applied to their personal customers in relation to unauthorised overdrafts (the ‘charges’). Pending the
resolution of the proceedings, the Financial Services Authority (‘FSA’) granted firms (including HSBC Bank) a
waiver enabling them to place relevant complaints about the charges on hold and the County Courts stayed all
individual customer claims.
In a judgement given on 25 November 2009, the Supreme Court unanimously allowed the financial institutions’
appeal against the Court of Appeal ruling given on 26 February 2009 and held that, provided the relevant charges
were in plain and intelligible language, the amount of those charges could not be assessed for fairness under the
regulations by either the OFT or the Courts. This is because the charges are part of the price the customer pays for the
package of banking services he or she receives in exchange, and hence an assessment of their amount is outside the
scope of the regulations.
While the Supreme Court left open the possibility that the terms could be challenged on some other basis, HSBC
Bank does not believe that any other realistic basis for challenge exists.
On 22 December 2009, the OFT announced that, following detailed consideration of the Supreme Court judgement,
and discussions with consumer groups, campaigners, banks, the Government, the FSA and the Financial Ombudsman
Service, it would not be continuing the investigation it began in March 2007 into the fairness of unauthorised
overdraft charges as, were the investigation to continue, it would have a very limited scope and low prospects of
success. The OFT also decided not to investigate the charges using certain other enforcement tools. Its initial
assessment was that there were not good grounds for concluding that a collective challenge alleging breach of such
other provisions generally would have good prospects of success. The OFT also confirmed that it would address its
ongoing concerns about the operation of the market for personal current accounts, by discussing the issues with
banks, consumer groups and other organisations, with the aim of reporting on progress by the end of March 2010.
The Supreme Court judgement means that the legal proceedings between the OFT and the banks relating to
unauthorised overdraft charges are concluded. Accordingly, the FSA confirmed on 25 November 2009 the waiver
enabling firms to place relevant charges complaints on hold had therefore lapsed. Normal complaint handling rules
therefore applied.
Bernard L. Madoff Investment Securities LLC
On 11 December 2008, Bernard L. Madoff (‘Madoff’) was arrested and charged in the United States District Court
for the Southern District of New York with one count of securities fraud. That same day, the US Securities and
Exchange Commission (‘SEC’) filed securities fraud charges against Madoff and his firm Bernard L. Madoff
Investment Securities LLC (‘Madoff Securities’), a broker dealer and investment adviser registered with the SEC.
The criminal complaint and SEC complaint each alleged that Madoff had informed senior Madoff Securities
employees, in substance, that his investment advisory business was a fraud. On 15 December 2008, on the application
of the Securities Investor Protection Corporation, the United States District Court for the Southern District of New
York appointed a trustee for the liquidation of the business of Madoff Securities, and removed the liquidation
proceeding to the United States Bankruptcy Court for the Southern District of New York. The Madoff Securities
trustee has begun processing claims filed by investors allegedly damaged by the Madoff fraud. On 9 February 2009,
on Madoff’s consent, the United States District Court for the Southern District of New York entered a partial
judgement in the SEC action, permanently enjoining Madoff from violating certain antifraud provisions of the US
securities laws, ordering Madoff to pay disgorgement, prejudgement interest and a civil penalty in amounts to be
determined at a later time, and continuing certain other relief previously imposed, including a freeze on Madoff’s
467
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 42 and 43
assets. On 12 March 2009, Madoff pleaded guilty to 11 felony charges, including securities fraud, investment adviser
fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, false filings with the SEC
and theft from an employee benefit plan. On 29 June 2009, Madoff was sentenced to 150 years in prison. The
relevant US authorities are continuing their investigations into the fraud, and have brought charges against others,
including several Madoff Securities employees as well as its external auditor. Some details of the fraud have come to
light as a result of these and other investigations and proceedings; however, significant uncertainty remains as to the
facts of the fraud and the total amount of assets that will ultimately be available for distribution by the Madoff
Securities trustee.
Various non-US HSBC companies provide custodial, administration and similar services to a number of funds
incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by
Madoff Securities, as at 30 November 2008, the aggregate net asset value of these funds (which would include
principal amounts invested and unrealised gains) was US$8.4 billion. Proceedings concerning Madoff and Madoff
Securities have been issued by different plaintiffs (including funds, fund investors, and the Madoff Securities trustee)
in various jurisdictions against numerous defendants and HSBC expects further proceedings may be brought. Various
HSBC companies have been named as defendants in suits in the US, Ireland, Luxembourg, and other jurisdictions.
All of the cases where HSBC companies are named as a defendant are at an early stage. HSBC considers that it has
good defences to these claims and will continue to defend them vigorously. HSBC is unable reliably to estimate the
liability, if any, that might arise as a result of such claims.
Various HSBC companies have also received requests for information from various regulatory and law enforcement
authorities, and from the Madoff Securities trustee, in connection with the fraud by Madoff. HSBC companies are co-
operating with these requests for information.
Other litigation
These actions apart, HSBC is party to legal actions in a number of jurisdictions including the UK, Hong Kong and
the US arising out of its normal business operations. HSBC considers that none of the actions is material, and none is
expected to result in a significant adverse effect on the financial position of HSBC, either individually or in the
aggregate. Management believes that adequate provisions have been made in respect of the litigation arising out of its
normal business operations. HSBC has not disclosed any contingent liability associated with these legal actions
because it is not practical to do so.
43 Related party transactions
Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment
benefit plans for HSBC employees, Key Management Personnel, close family members of Key Management
Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant
voting power is held, by Key Management Personnel or their close family members.
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing
and controlling the activities of HSBC Holdings, being the Directors and Group Managing Directors of HSBC
Holdings.
Compensation of Key Management Personnel
Short-term employee benefits ..................................................................................
Post-employment benefits .......................................................................................
Termination benefits ................................................................................................
Share-based payments .............................................................................................
2009
US$m
22
3
–
27
52
HSBC
2008
US$m
31
5
–
16
52
2007
U$m
62
4
9
40
115
468
Transactions, arrangements and agreements involving related parties
Particulars of advances (loans and quasi-loans), credits and guarantees entered into by subsidiaries of HSBC
Holdings during 2009 with Directors, disclosed pursuant to section 413 of the Companies Act 2006, are shown
below:
At 31 December
2009
US$000
20081
US$000
Advances and credits ...............................................................................................................................
Guarantees ...............................................................................................................................................
5,352
–
2,051
–
1 Comparative figures for 2008 represents loans, quasi-loans, transactions, arrangements and agreements disclosed pursuant to section
232 of the Companies Act 1985. The number of Directors with such facilities during 2008 was 19.
Particulars of transactions with related parties, disclosed pursuant to the requirements of IAS 24, are shown below.
The disclosure of the year-end balance and the highest amounts outstanding during the year in the table below is
considered to be the most meaningful information to represent the amount of the transactions and the amount of
outstanding balances during the year.
2009
2008
Balance at
31 December
Highest
amounts
outstanding
during year
Balance at
31 December
US$000
US$000
US$000
Highest
amounts
outstanding
during year
US$000
Key Management Personnel1
Advances and credits ................................................................
Guarantees ................................................................................
736,112
31,785
1,406,877
34,048
217,383
25,249
475,048
42,178
1 Includes Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly
controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family
members.
Some of the transactions were connected transactions, as defined by the Rules Governing The Listing of Securities on
The Stock Exchange of Hong Kong Limited but were exempt from any disclosure requirements under the provisions
of those Rules.
The above 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.
Shareholdings, options and other securities of Key Management Personnel
Number of options held over HSBC Holdings ordinary shares under employee share plans ................
Number of HSBC Holdings ordinary shares held beneficially and non-beneficially .............................
Number of HSBC Holdings preference shares held beneficially and non-beneficially .........................
Number of HSBC Holdings 8.125% Perpetual Subordinated Capital Securities held
beneficially and non-beneficially ........................................................................................................
At 31 December
2009
(000s)
1,033
19,567
8
25
20,633
2008
(000s)
943
16,733
8
21
17,705
469
H S B C H O L D I N G S P L C
Notes on the Financial Statements (continued)
Notes 43 and 44
Transactions with other related parties of HSBC
Associates and joint ventures
The Group provides certain banking and financial services to associates and joint ventures, including loans,
overdrafts, interest and non-interest bearing deposits and current accounts. Details of the interests in associates and
joint ventures are given in Note 21. Transactions and balances during the year with associates and joint ventures were
as follows:
Amounts due from joint ventures:
– unsubordinated ..................................................................
Amounts due from associates:
– subordinated ......................................................................
– unsubordinated ..................................................................
Amounts due to joint ventures ..................................................
Amounts due to associates ........................................................
2009
2008
Highest
balance during
the year1
US$m
Balance at
31 December1
US$m
Highest
balance during
the year1
US$m
Balance at
31 December1
US$m
423
17
1,343
1,783
130
1,494
1,624
378
17
1,239
1,634
129
136
265
424
59
1,060
1,543
66
735
801
343
59
280
682
64
293
357
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year.
The above outstanding balances arose from the ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable transactions with third-party counterparties.
Post-employment benefit plans
At 31 December 2009, US$4.2 billion (2008: US$3.5 billion) of HSBC post-employment benefit plan assets were
under management by HSBC companies. Fees of US$15 million (2008: US$26 million) were earned by HSBC
companies for these management services provided to its post-employment benefit plans. HSBC’s post-employment
benefit plans had placed deposits of US$929 million (2008: US$430 million) with its banking subsidiaries, on which
interest payable to the schemes amounted to US$3 million (2008: US$55 million). The above outstanding balances
arose from the ordinary course of business and on substantially the same terms, including interest rates and security,
as for comparable transactions with third-party counterparties.
In the first half of 2009, a gain of US$499 million was recognised by HSBC following a restructuring of the basis of
delivery of death in service and ill health early retirement benefits to certain UK employees. These benefits were
provided by the HSBC Bank (UK) Pension Scheme but will now be provided outside the scheme.
HSBC Bank (UK) Pension Scheme entered into swap transactions with HSBC as part of the management of the
inflation and interest rate sensitivity of its liabilities. At 31 December 2009, the gross notional value of the swaps was
US$23.7 billion (2008: US$17.7 billion), the swaps had a positive fair value of US$1.0 billion (2008: positive fair
value of US$1.8 billion) to the scheme and HSBC had delivered collateral of US$2.8 billion (2008: US$2.4 billion)
to the scheme in respect of these swaps, on which HSBC earned interest amounting to US$7 million (2008:
US$59 million). All swaps were executed at prevailing market rates and within standard market bid/offer spreads.
In order to satisfy diversification requirements, there are special collateral provisions for the swap transactions
between HSBC and the scheme. The collateral agreement stipulates that the scheme never posts collateral to HSBC.
Collateral is posted to the scheme by HSBC at an amount that provides the Trustee with a high level of confidence
that would be sufficient to replace the swaps in the event of default by HSBC Bank plc. With the exception of the
special collateral arrangements detailed above, all other aspects of the swap transactions between HSBC and the
scheme are on substantially the same terms as comparable transactions with third-party counterparties.
470
HSBC International Staff Retirements Benefits Scheme entered into swap transactions with HSBC to manage the
inflation and interest rate sensitivity of the liabilities and selected assets. At 31 December 2009, the gross notional
value of the swaps was US$1.8 billion (2008: US$1.5 billion), and the swaps had a net positive fair value of
US$27 million to the scheme (2008: US$388 million).
The special contributions of US$160 million in respect of the HSBC International Staff Retirement Benefits Scheme
which were made to fund the deficit shown in the actuarial valuation report as at 31 December 2008 included a
contribution in specie of US$69 million in the form of asset-backed securities previously held within the Group.
HSBC Holdings
Details of HSBC Holdings’ principal subsidiaries are shown in Note 24. Transactions and balances during the year
with subsidiaries were as follows:
Subsidiaries
Assets
Cash at bank ..............................................................................
Derivatives ................................................................................
Loans and advances ..................................................................
Financial investments ...............................................................
Investments in subsidiaries .......................................................
2009
2008
Highest
balance during
the year1
Balance at
31 December1
Highest
balance during
the year1
US$m
US$m
US$m
Balance at
31 December1
US$m
443
3,682
26,156
2,629
90,914
224
2,981
23,212
2,455
86,247
443
3,682
17,242
2,844
86,233
443
3,682
11,804
2,629
81,993
Total related party assets ..........................................................
123,824
115,119
110,444
100,551
Liabilities
Amounts owed to HSBC undertakings ....................................
Derivatives ................................................................................
Subordinated liabilities:
– at amortised cost ................................................................
– designated at fair value ......................................................
Total related party liabilities .....................................................
Guarantees ................................................................................
Commitments ............................................................................
5,669
1,324
3,907
4,360
15,260
47,341
3,241
3,711
362
3,907
4,360
12,340
35,073
3,240
4,042
1,324
4,168
4,186
13,720
56,733
3,638
4,042
1,324
3,795
3,067
12,228
47,341
3,241
1 The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent transactions during the year. The above outstanding balances arose in the ordinary course of business and are on
substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties, with
the exception of US$529 million (2008: US$476 million) in respect of loans from HSBC subsidiaries to HSBC Holdings made at an
agreed zero per cent interest rate.
Some employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a
separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into
the scheme on their behalf. Disclosure in relation to the scheme is made in Note 8 to the accounts.
44 Events after the balance sheet date
A fourth interim dividend for 2009 of US$0.10 per ordinary share (US$1,741 million) (2008: US$0.10 per ordinary
share, US$1,210 million) was declared by the Directors after 31 December 2009.
On 14 January 2010, the US Government announced its intention to propose a Financial Crisis Responsibility Fee for
a period of at least ten years to be applied to financial institutions with more than US$50 billion of consolidated
assets. It is not possible to assess the financial impact of this proposal until final legislation has been enacted.
On 31 January 2010, HSBC Bank Canada which was part of the sub-group headed by HSBC North America
Holdings Inc. was transferred to HSBC Overseas Holdings (UK) Limited (‘HOHU’) as part of an internal
reorganisation. The transfer was effected by HSBC Holdings subscribing for one new share in HOHU for a cash
consideration of US$6,093 million.
These accounts were approved by the Board of Directors on 1 March 2010 and authorised for issue.
471
H S B C H O L D I N G S P L C
Shareholder Information
Enforceability of judgements / Exchange controls / Dividends
Information about the enforceability of
judgements made in the US ........................
Exchange controls and other limitations
affecting equity security holders ................
Fourth interim dividend for 2008 ...................
Fourth interim dividend for 2009 ...................
Interim dividends for 2010 .............................
Dividends on the ordinary shares of HSBC
Holdings .....................................................
American Depositary Shares ..........................
Nature of trading market ................................
Shareholder profile ........................................
Memorandum and Articles of Association ....
Annual General Meeting ................................
Interim Management Statements and
Interim results .............................................
Shareholder enquiries and communications ...
Investor relations ............................................
Where more information about HSBC is
available .....................................................
Taxation of shares and dividends ...................
History and development of HSBC ...............
Organisational structure .................................
Page
472
472
472
472
473
473
474
475
476
476
477
478
478
479
480
480
482
484
Information about the enforceability
of judgements made in the US
HSBC Holdings is a public limited company
incorporated in England and Wales. Most of HSBC
Holdings’ Directors and executive officers live
outside the US. As a result, it may not be possible to
Fourth interim dividend for 2008
serve process on such persons or HSBC Holdings in
the US or to enforce judgements obtained in US
courts against them or HSBC Holdings based on
civil liability provisions of the securities laws of the
US. 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 US or elsewhere may be
unenforceable in the UK. The enforceability of any
judgement in the UK 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 UK. There are also no restrictions
under the laws of the UK 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.
The market value of HSBC Holdings ordinary shares on the first day that the scrip dividend shares in respect of the
fourth interim dividend for 2008 were traded on the London Stock Exchange was more than 15 per cent greater than
the cash equivalent value used to calculate the scrip dividend entitlements. The market value of each HSBC Holdings
share for the purposes of UK income tax and capital gains tax calculations on 6 May 2009 was £5.3129 and the cash
equivalent value used to calculate scrip dividend entitlements was £3.906.
Accordingly, the UK HM Revenue and Customs will substitute the market value of £5.3129 per scrip dividend
share for UK income tax and capital gains tax purposes for the cash equivalent value of £3.906 per scrip dividend
share.
A replacement Notional Tax Voucher was sent on 3 June 2009 to shareholders on the Principal Register in the
UK who elected for the scrip dividend alternative in respect of the fourth interim dividend for 2008.
Fourth interim dividend for 2009
The Directors have declared a fourth interim dividend for 2009 of US$0.10 per ordinary share. Information on the
scrip dividend scheme and currencies in which shareholders may elect to have the cash dividend paid will be sent to
shareholders on or about 30 March 2010. The timetable for the dividend is:
472
Announcement .......................................................................................................................................................................
Shares quoted ex-dividend in London, Hong Kong, Paris and Bermuda .............................................................................
ADSs quoted ex-dividend in New York ...............................................................................................................................
Record date in Hong Kong ....................................................................................................................................................
Record date in London, New York, Paris and Bermuda1 .....................................................................................................
Mailing of Annual Report and Accounts 2009 and/or Annual Review 2009, Notice of Annual General Meeting and
1 March 2010
17 March 2010
17 March 2010
18 March 2010
19 March 2010
dividend documentation ....................................................................................................................................................
30 March 2010
Final date for receipt by registrars of forms of election, Investor Centre electronic instructions and revocations of
standing instructions for scrip dividends ..........................................................................................................................
Exchange rate determined for payment of dividends in sterling and Hong Kong dollars ...................................................
Payment date: dividend warrants, new share certificates or transaction advices and notional tax vouchers mailed and
22 April 2010
26 April 2010
shares credited to stock accounts in CREST ....................................................................................................................
5 May 2010
1 Removals to and from the Overseas Branch register of shareholders in Hong Kong will not be permitted on this date.
Interim dividends for 2010
The Board has adopted a policy of paying quarterly interim dividends on the ordinary shares. 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 2010 will be US$0.08 per ordinary share. The proposed timetables for the
dividends in respect of 2010 are:
Announcement ...................................................
Shares quoted ex-dividend in London,
Hong Kong, Paris and Bermuda ...................
ADSs quoted ex-dividend in New York ...........
Record date in Hong Kong ................................
Record date in London, New York, Paris and
Bermuda1 .......................................................
Payment date ......................................................
Interim dividends for 2010
First
Second
Third
Fourth
4 May 2010
2 August 2010 1 November 2010 28 February 2011
19 May 2010
19 May 2010
20 May 2010
18 August 2010 17 November 2010
18 August 2010 17 November 2010
19 August 2010 18 November 2010
16 March 2011
16 March 2011
17 March 2011
21 May 2010
7 July 2010
20 August 2010 19 November 2010
12 January 2011
6 October 2010
18 March 2011
5 May 2011
1 Removals to and from the Overseas Branch Register of shareholders in Hong Kong will not be permitted on these dates.
Dividends on the ordinary shares of HSBC Holdings
HSBC Holdings has paid dividends on its ordinary shares every year without interruption since it became the HSBC
Group holding company by a scheme of arrangement in 1991. The dividends declared, per ordinary share, in respect
of each of the last five years were:
First
interim
Second
interim
Third
interim
Fourth
interim1
2009
2008
2007
2006
2005
US$ .......................................
£ ............................................
HK$ ......................................
US$ .......................................
£ ............................................
HK$ .......................................
US$ .......................................
£ ............................................
HK$ .......................................
US$ .......................................
£ ............................................
HK$ .......................................
US$ .......................................
£ ............................................
HK$ .......................................
0.080
0.048
0.620
0.180
0.090
1.403
0.170
0.085
1.328
0.150
0.082
1.164
0.140
0.077
1.088
0.080
0.050
0.620
0.180
0.100
1.398
0.170
0.084
1.322
0.150
0.079
1.167
0.140
0.079
1.086
0.080
0.048
0.620
0.180
0.124
1.395
0.170
0.086
1.325
0.150
0.078
1.168
0.140
0.079
1.085
0.100
0.062
0.775
0.100
0.069
0.775
0.390
0.194
3.041
0.360
0.183
2.799
0.310
0.169
2.403
Total2
0.340
0.208
2.635
0.640
0.383
4.971
0.900
0.449
7.016
0.810
0.422
6.298
0.730
0.404
5.662
1 The fourth interim dividend for 2009 of US$0.10 per share has been translated into pounds sterling and Hong Kong dollars at the
closing rate on 31 December 2009. The dividend will be paid on 5 May 2010.
2 The above dividends declared are accounted for as disclosed in Note 12 on the Financial Statements.
473
H S B C H O L D I N G S P L C
Shareholder Information (continued)
American Depositary Shares / Nature of trading market
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, subject to the Board’s determination that a scrip
dividend is to be offered in respect of that dividend, may be satisfied in whole or in part by the issue of new shares in
lieu of a cash dividend.
American Depositary Shares
A holder of HSBC Holdings’ American Depositary Shares (‘ADS’s) may have to pay, either directly or indirectly
(via the intermediary through whom their ADSs are held) fees to the Bank of New York Mellon as depositary. Fees
may be paid or recovered in several ways: by deduction from amounts distributed; by selling a portion of the
distributable property; by annual charge deducted from dividend distributions, by directly invoicing the holder, or by
charging the intermediaries who act for them. The fees for which the holders of the HSBC ADSs will be responsible
include:
For:
HSBC ADS holders must pay:
Each issuance of HSBC ADSs, including as a result of a
US$5.00 (or less) per 100 HSBC ADSs or portion thereof
distribution of shares (through stock dividend or stock split
or rights or other property)
Each cancellation of HSBC ADSs, including if the deposit
US$5.00 (or less) per 100 HSBC ADSs or portion thereof
agreement terminates
Transfer and registration of shares on HSBC’s share register
Registration or transfer fees (of which there currently are none)
from the holder’s name to the name of The Bank of New York
Mellon or its agent when the holder deposits or withdraws shares
Conversion of non-US currency to US dollars
Charges and expenses incurred by The Bank of New York Mellon
with respect to the conversion
Each cash distribution to HSBC ADS holders
US$0.02 or less per ADS
Cable, telex and facsimile transmission expenses
As provided in the Deposit Agreement
Transfers or issues of HSBC ordinary shares to the depositary
in exchange for HSBC ADSs
Distribution of securities to holders of deposited securities
which are distributed by the depositary to ADS holders
Subject to the exceptions described in the ‘Stamp duty and stamp
duty reserve tax’ paragraphs in the Shareholder Information
section on page 481, stamp duty or stamp duty reserve tax equal to
1.5 per cent (rounded up, in the case of stamp duty, to the nearest
£5) of the amount of the consideration given for the transfer, or the
value of the shares if there is no such consideration, or their issue
price
A fee equivalent to the fee that would be payable if securities
distributed to you had been shares and the shares had been
deposited for issuance of ADSs
Any charges incurred by the depositary or its agents for
As applicable
servicing the deposited securities
The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
The depositary has agreed to reimburse HSBC for expenses incurred in the administration and maintenance of
the ADS programme. There are limits on the amount of expenses for which the depositary will reimburse the
Company. The amount of reimbursement available is not tied to the amount of fees the depositary collects from
holders of ADSs. In respect of the year ended 31 December 2009, the depositary reimbursed a total of US$301,218 to
HSBC relating to the administration of the programme, as detailed below:
Category of expense
Stock exchange listing fees ....................................................................................................................................................
Fulfilment costs ......................................................................................................................................................................
– shareholder meeting costs (printing and distribution of materials and vote tabulation) ................................................
– beneficial holder searches ...............................................................................................................................................
– sundry costs including: postage and envelopes for mailing annual and interim financial reports, dividend warrants,
electronic filing of US Federal tax information, mailing required tax forms, stationery, postage, facsimile and
telephone calls ................................................................................................................................................................
2009
US$
104,906
196,312
21,785
167,300
7,227
474
Nature of trading market
HSBC Holdings ordinary shares are listed or admitted to trading on the London Stock Exchange, the Hong Kong
Stock Exchange (‘HKSE’), Euronext Paris, the New York Stock Exchange (‘NYSE’) and the Bermuda Stock
Exchange. HSBC Holdings maintains its principal share register in England and overseas branch share registers in
Hong Kong and Bermuda (collectively, the ‘share register’).
As at 31 December 2009, there were a total of 220,089 holders of record of HSBC Holdings ordinary shares on
the share register.
As at 31 December 2009, a total of 17,422,388 of the HSBC Holdings ordinary shares were registered in the
HSBC Holdings’ share register in the name of 14,267 holders of record with addresses in the US. These shares
represented 0.10 per cent of the total HSBC Holdings ordinary shares in issue.
As at 31 December 2009, there were 9,613 holders of record of ADSs holding approximately 154 million ADSs,
representing approximately 768 million HSBC Holdings ordinary shares. 9,419 of these holders had addresses in the
US, holding approximately 153.5 million ADSs, representing 767.7 million HSBC Holdings ordinary shares. As at
31 December 2009, approximately 4.4 per cent of the HSBC Holdings ordinary shares were represented by ADSs
held by holders of record with addresses in the US.
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, as adjusted for the 5-for-
12 rights issue completed in April 2009.
Past share price performance should not be regarded as a guide to future performance.
High and low mid-market closing prices
London
US$0.50 shares
High
pence
Low
pence
Hong Kong
US$0.50 shares
New York
ADSs1
Low
HK$
High
US$
Paris
US$0.50 shares
High
euro
Low
euro
Bermuda
US$0.50 shares
High
US$
Low
US$
2009 .......................
2008 .......................
2007 .......................
2006 .......................
2005 .......................
2009
4th Quarter ..............
3rd Quarter ..............
2nd Quarter ..............
1st Quarter ..............
2008
4th Quarter ..............
3rd Quarter ..............
2nd Quarter ..............
1st Quarter ..............
761
809
840
896
828
761
730
578
594
809
801
782
734
High
HK$
98.0
125.4
140.6
139.1
122.8
98.0
91.8
70.8
71.8
304
534
700
796
719
668
493
411
304
30.6
67.4
119.2
114.5
110.5
85.3
61.4
42.9
30.6
534
624
676
621
113.7
119.2
125.4
121.2
67.4
103.8
111.2
96.1
64.0
79.5
90.3
89.3
77.8
64.0
59.5
45.5
45.0
74.9
76.2
79.5
75.9
Low
US$
22.0
41.3
74.8
73.0
70.3
54.9
39.9
29.5
22.0
41.3
65.2
69.4
63.4
8.6
10.3
12.4
13.2
12.0
8.6
8.1
6.6
6.3
10.3
10.2
9.9
9.8
3.3
5.5
9.7
11.5
10.3
7.5
5.7
4.4
3.3
5.5
7.7
8.4
8.2
12.5
15.9
17.6
17.6
15.4
12.5
11.6
9.2
8.6
14.4
14.9
15.9
15.0
4.6
8.0
14.8
14.7
14.1
11.0
8.2
6.9
4.6
8.0
12.8
14.1
12.6
Bermuda
London
US$0.50 shares
High
pence
Low
pence
Hong Kong
US$0.50 shares
New York
ADSs1
High
HK$
Low
HK$
High
US$
Low
US$
Paris
US$0.50 shares
High
euro
Low
euro
US$0.50 shares
High
US$
Low
US$
2010
January ...................
2009
December ...............
November ..............
October ..................
September ..............
August ....................
July .........................
740
660
92.4
83.6
59.3
53.5
8.3
7.6
11.6
10.7
726
761
723
730
672
606
680
668
671
640
627
493
93.8
98.0
90.4
91.8
86.4
77.1
86.5
85.3
85.7
80.7
77.7
61.4
60.2
64.0
58.3
59.5
55.8
50.7
55.3
55.3
54.9
52.0
52.5
39.9
8.1
8.6
7.8
8.1
7.9
7.1
7.7
7.5
7.5
7.4
7.4
5.7
12.0
12.5
11.7
11.6
11.2
9.6
11.2
11.0
11.0
11.4
10.5
8.2
1 In New York each ADS represents 5 underlying ordinary shares.
475
H S B C H O L D I N G S P L C
Shareholder Information (continued)
Stock symbols // Shareholder profile / Memorandum and Articles of Association / Annual General Meeting
Stock symbols
HSBC Holdings ordinary shares trade under the following stock symbols:
London Stock Exchange
Hong Kong Stock Exchange
New York Stock Exchange (ADS)
Euronext Paris
Bermuda Stock Exchange
Shareholder profile
HSBA
5
HBC
HSB
HSBC
At 31 December 2009 the share register recorded the following details:
Ordinary shares held
1-100 ........................................................................................................................................................
101-400 ....................................................................................................................................................
401-500 ....................................................................................................................................................
501-1,000 .................................................................................................................................................
1,001-5,000 ..............................................................................................................................................
5,001-10,000 ............................................................................................................................................
10,001-20,000 ..........................................................................................................................................
20,001-50,000 ..........................................................................................................................................
50,001-200,000 ........................................................................................................................................
200,001-500,000 ......................................................................................................................................
500,001 and above ...................................................................................................................................
Number of
shareholders
Total
shares held
33,140
31,295
8,047
32,745
73,547
18,792
10,858
6,541
3,210
757
1,157
1,041,849
7,610,861
3,620,690
23,569,774
171,133,596
131,845,068
151,471,115
201,655,152
296,820,337
238,071,012
16,181,367,314
Total .........................................................................................................................................................
220,089
17,408,206,768
Memorandum and Articles of Association
The disclosure under the caption ‘Memorandum and Articles of Association’ contained in HSBC Holdings’ Annual
Reports on Form 20-F for the years ended 31 December 2000 and 2001 is incorporated by reference herein, together
with the disclosure below.
Interested directors
Subject to the provisions of the Companies Act 2006 and provided that the Articles are complied with, a Director,
notwithstanding his office:
• may enter into or otherwise be interested in any contract, arrangement, transaction or proposal with HSBC
Holdings or in which HSBC Holdings is otherwise interested;
• may hold any other office or place of profit under HSBC Holdings (except that of auditor or auditor of a
subsidiary of HSBC Holdings) in conjunction with the office of Director and may act by himself or through his
firm in a professional capacity for HSBC Holdings, and in any such case on such terms as to remuneration and
otherwise as the Board may arrange;
• may be a director or other officer, or employed by, or a party to any transaction or arrangement with or otherwise
interested in, any company promoted by HSBC Holdings or in which HSBC Holdings is otherwise interested or
as regards which HSBC Holdings has any powers of appointment; and
•
shall not be liable to account to HSBC Holdings for any profit, remuneration or other benefit realised by any
such office, employment, contract, arrangement, transaction or proposal or from any interest in any body
corporate and no such contract, arrangement, transaction, proposal or interest shall be avoided on the grounds of
any such interest or benefit nor shall the receipt of any such profit, remuneration or any other benefit constitute a
breach of his or her duty under the Companies Act 2006 not to accept benefits from third parties.
Since 1 October 2008, the Board may authorise any matter proposed to it which would, if not so authorised,
involve a breach by a Director of his or her duty to avoid conflicts of interest under the Companies Act 2006,
including, without limitation, any matter which relates to a situation in which a Director has, or can have, an interest
which conflicts, or possibly may conflict, with the interest of HSBC Holdings (including the exploitation of any
property, information or opportunity, whether or not HSBC Holdings could take advantage of it, but excluding any
476
situation which cannot reasonably be regarded as likely to give rise to a conflict of interest). Any such authorisation
will be effective only if:
•
any requirement as to quorum at the meeting at which the matter is considered is met without counting the
Director in question or any other interested Director; and
•
the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
The Board may (whether at the time of the giving of the authorisation or subsequently) make any such authorisation
subject to any limits or conditions it expressly imposes but such authorisation is otherwise given to the fullest extent
permitted. The Board may vary or terminate any such authorisation at any time.
A Director shall be under no duty to HSBC Holdings with respect to any information which he obtains or has
obtained otherwise than as a Director of HSBC Holdings and in respect of which he has a duty of confidentiality to
another person.
Retirement
There is no mandatory retirement age for Directors of HSBC Holdings.
Annual General Meeting
The 2010 Annual General Meeting will be held at the Barbican Hall, Barbican Centre, London EC2 on Friday,
28 May 2010 at 11 am.
An informal meeting of shareholders will be held at 1 Queen’s Road Central, Hong Kong on Monday, 24 May
2010 at 4.30 pm.
All resolutions considered at the 2009 Annual General Meeting were passed on a poll as follows:
Resolution
1 To receive the Report and Accounts for 2008 ...........................................
2 To approve the Directors’ Remuneration Report for 2008 .......................
3 To re-elect the following as Directors:
(a) S A Catz .............................................................................................
(b) V H C Cheng .....................................................................................
(c) M K T Cheung ...................................................................................
(d) J D Coombe .......................................................................................
(e) J L Durán ............................................................................................
(f) R A Fairhead .....................................................................................
(g) D J Flint .............................................................................................
(h) A A Flockhart ....................................................................................
(i) W K L Fung .......................................................................................
(j) M F Geoghegan .................................................................................
(k) S K Green ..........................................................................................
(l) S T Gulliver .......................................................................................
(m) J W J Hughes-Hallett ........................................................................
(n) W S H Laidlaw ..................................................................................
(o) J R Lomax .........................................................................................
(p) Sir Mark Moody-Stuart .....................................................................
(q) G Morgan ..........................................................................................
(r) N R N Murthy ...................................................................................
(s) S M Robertson ...................................................................................
(t)
J L Thornton ......................................................................................
(u) Sir Brian Williamson .........................................................................
4 To reappoint the Auditor at remuneration to be determined by the
Group Audit Committee ........................................................................
5 To authorise the Directors to allot shares ..................................................
6 To disapply pre-emption rights (Special Resolution) ...............................
7 To authorise the Company to purchase its own Ordinary Shares .............
8 To alter the Articles of Association with effect from 1 October 2009
Total votes
For1
Against Vote withheld2
7,901,287,647
7,060,582,014
40,358,760
681,527,638
35,340,460
233,742,167
7,929,542,903
7,941,676,475
7,939,025,380
7,935,388,445
7,940,220,049
7,937,758,292
7,912,074,791
7,929,977,258
7,827,043,012
7,908,649,043
7,791,903,013
7,907,643,866
7,935,557,101
7,936,661,889
7,925,965,357
7,936,652,035
7,937,695,742
7,939,721,249
7,939,561,457
7,939,757,360
7,939,497,300
7,885,940,600
7,865,611,572
7,898,555,932
7,866,095,619
22,920,267
11,270,381
11,377,699
13,017,095
12,282,606
14,728,893
37,587,208
17,696,949
66,722,011
38,351,123
56,527,889
35,501,686
16,848,745
13,720,447
26,348,115
15,533,759
12,657,251
12,600,587
12,763,612
12,291,883
12,796,977
38,605,986
80,639,173
52,061,875
20,259,041
31,655,980
31,134,247
33,777,308
35,791,573
31,706,996
31,726,248
34,389,735
36,519,295
90,363,781
37,448,198
135,700,002
39,631,531
31,718,789
33,737,012
31,806,338
31,931,899
33,729,241
31,798,598
31,776,474
31,909,754
31,784,282
52,015,387
32,860,563
29,723,057
92,366,735
(Special Resolution) ..............................................................................
7,950,959,375
5,013,812
24,681,152
9 To approve general meetings (other than annual general meetings)
being called on 14 clear days’ notice (Special Resolution) ..................
7,769,003,251
178,874,096
32,468,298
1 Includes discretionary votes.
2 A ‘Vote withheld’ is not a ‘vote’ in law and is not counted in the calculation of the votes ‘For’ and ‘Against’ the resolution.
477
H S B C H O L D I N G S P L C
Shareholder Information (continued)
Interim Management Statements / Enquiries / Investor relations
Interim Management Statements and Interim results
Interim Management Statements are expected to be issued on 7 May 2010 and 5 November 2010. The interim results
for the six months to 30 June 2010 are expected to be issued on 2 August 2010.
Shareholder enquiries and communications
Enquiries
Any enquiries relating to shareholdings on the share register, for example transfers of shares, change of name or
address, lost share certificates or dividend cheques, should be sent to the Registrars at the address given below. The
Registrars offer an online facility, Investor Centre, which enables shareholders to manage their shareholding
electronically.
Principal Register:
Hong Kong Overseas Branch Register:
Bermuda Overseas Branch Register:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Telephone: 44 (0) 870 702 0137
Email via website:
www.investorcentre.co.uk/contactus
Computershare Hong Kong Investor
Services Limited
Hopewell Centre
Rooms 1712-1716, 17th Floor
183 Queen’s Road East
Hong Kong
Telephone: 852 2862 8555
Email: hsbc.ecom@computershare.com.hk
Corporate Shareholder Services
The Bank of Bermuda Limited
6 Front Street
Hamilton HM 11
Bermuda
Telephone: 1 441 299 6737
Email: bob.bda.shareholder.services@
bob.hsbc.com
Investor Centre:
www.investorcentre.co.uk
Investor Centre:
www.computershare.com/hk/investors
Investor Centre:
www.computershare.com/investor/bm
Any enquiries relating to ADSs should be sent to the depositary:
BNY Mellon Shareowner Services
PO Box 358516
Pittsburgh, PA 15252-8516
USA
Telephone (US): 1 877 283 5786
Telephone (International): 1 201 680 6825
Email: shrrelations@bnymellon.com
Website: www.bnymellon.com/shareowner
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:
HSBC France
103, avenue des Champs Elysées
75419 Paris Cedex 08
France
Telephone: 33 1 40 70 22 56
Email: ost-agence-des-titres-hsbc-reims.hbfr-do@hsbc.fr
Website: www.hsbc.fr
If you have been nominated to receive general shareholder communications directly from HSBC Holdings, it is
important to remember that your main contact in terms of your investment remains as it was (so the registered
shareholder, or perhaps custodian or broker, who administers the investment on your behalf). Therefore any changes
or queries relating to your personal details and holding (including any administration thereof) must continue to be
directed to your existing contact at your investment manager or custodian. HSBC Holdings cannot guarantee dealing
with matters directed to it in error.
478
Further copies of this Annual Report and Accounts 2009 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 Communications
HSBC Holdings plc
8 Canada Square
London E14 5HQ
UK
Group Communications (Asia)
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Internal Communications
HSBC – North America
26525 N Riverwoods Boulevard
Mettawa
Illinois 60045
USA
Electronic communications
Shareholders may at any time choose to receive corporate communications in printed form or to receive a notification
of their availability on HSBC’s website. To receive future notifications of the availability of a corporate
communication on HSBC’s website by email, or revoke or amend an instruction to receive such notifications by
email, go to www.hsbc.com/ecomms. If you provide an email address to receive electronic communications from
HSBC, we will also send notifications of your dividend entitlements by email. If you received a notification of the
availability of this document on HSBC’s website and would like to receive a printed copy of it, or if you would like
to receive future corporate communications in printed form, please write or send an email to the appropriate
Registrars at the address given above. Printed copies will be provided without charge.
Chinese translation
A Chinese translation of this Annual Report and Accounts 2009 is available upon request after 30 March 2010 from
the Registrars:
Computershare Hong Kong Investor Services Limited
Hopewell Centre, Rooms 1712-1716, 17th Floor
183 Queen’s Road East
Hong Kong
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
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:
Manager Investor Relations
HSBC Holdings plc
8 Canada Square
London E14 5HQ
UK
Telephone: 44 (0)20 7991 8041
Facsimile: 44 (0)845 587 0225
Email:
investorrelations@hsbc.com
SVP Investor Relations
HSBC North America Holdings Inc.
26525 N. Riverwoods Boulevard
Mettawa, Illinois 60045
USA
1 224 544 4400
1 224 552 4400
investor.relations.usa@us.hsbc.com
Head of Investor Relations, Asia-Pacific
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
852 2822 4908
852 2537 5109
investorrelations@hsbc.com.hk
479
H S B C H O L D I N G S P L C
Shareholder Information (continued)
Where more information is available / Taxation of shares and dividends
Where more information about
HSBC is available
This Annual Report and Accounts 2009, and other
information on HSBC, may be viewed on HSBC’s
website: www.hsbc.com.
Reports, statements or information that HSBC
Holdings files with the Securities and Exchange
Commission are available at www.sec.gov. Investors
can also request hard copies of these documents
upon payment of a duplicating fee, by writing to the
SEC at the Office of Investor Education and
Advocacy, 100 F Street N.E., Washington, DC
20549-0123 or by emailing PublicInfo@sec.gov.
Investors should call the Commission at (202) 551
8090 if they require further assistance. Investors may
also obtain the reports and other information that
HSBC Holdings files at www.nyse.com (telephone
number (1) 212 656 3000).
Taxation of shares and dividends
Taxation – UK residents
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 UK 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 UK 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
480
HSBC Holdings. Individual shareholders who are
liable to UK income tax at the dividend higher rate
or additional rate (which applies for the tax year
2010-11 and subsequent years) on UK dividend
income (currently 32.5 per cent and 42.5 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 and additional rate
liability. Individual UK resident shareholders are
not entitled to any tax credit repayment.
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 UK. 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
2008 fourth interim dividend and the first, second
and third interim dividends for 2009 was set out in
the Secretary’s letters to shareholders of 31 March,
3 June, 1 September and 1 December 2009. In the
case of the 2008 fourth interim dividend, the
difference between the cash dividend foregone and
the market value of the scrip dividend exceeded
15 per cent of the market value. Accordingly, the
amount of the dividend income chargeable to tax,
and, the acquisition price of HSBC Holdings
US$0.50 ordinary shares (the ‘shares’) for UK
capital gains tax purposes, was the market value of
£5.39 per share. In each other case the difference
was less than 15 per cent and the price of the shares
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 tax on capital gains 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. Any
capital gain arising on a disposal by a UK company
may also be adjusted to take account of indexation
allowance. If in doubt, shareholders are
recommended to consult their professional advisers.
Inheritance tax
Shares or ADSs held by an individual whose
domicile is determined to be the US 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 UK 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 US and was not a national of the UK), (ii) is
part of the business property of a UK permanent
establishment of an enterprise, or (iii) pertains to
a 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 UK 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 the current practice of UK HM Revenue and
Customs 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 is generally
payable by the transferee.
Paperless transfers of shares within CREST, the
UK’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. Following the
case pursued by HSBC before the European Court of
Justice (Case C-569/07 HSBC Holdings plc and
Vidacos Nominees v The Commissioners for HM
481
Revenue & Customs) HMRC now accepts that the
charge to SDRT at 1.5 per cent on the issue of shares
to a depositary receipt issuer or a clearance service
located within the European Union is prohibited.
HMRC has invited claims from individuals for
repayment for any such tax paid in the last six years.
Taxation – US residents
The following is a summary, under current law, of
the principal UK tax and US federal income 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 US for US federal
income tax purposes (a ‘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 US holders that hold shares
or ADSs as capital assets, and does not address the
tax treatment of holders that are subject to special
tax rules, such as banks, tax-exempt entities,
insurance companies, dealers in securities or
currencies, persons that hold shares or ADSs as part
of an integrated investment (including a ‘straddle’)
comprised of a share or ADS and one or more
other positions, and persons that own, directly or
indirectly, 10 per cent or more of the voting stock
of HSBC Holdings. This discussion is based on
laws, treaties, judicial decisions and regulatory
interpretations in effect on the date hereof, all of
which are subject to change. Under the current
income tax treaty between the UK and the US,
US holders are no longer entitled to claim a
special foreign tax credit in respect of dividends.
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.
Any US federal tax advice included in this
Annual Report is for informational purposes only;
it was not intended or written to be used, and cannot
be used, for the purpose of avoiding US federal tax
penalties.
Taxation of dividends
A US holder must include cash dividends paid on the
shares or ADSs in ordinary income on the date that
such holder or the ADS depositary receives them,
translating dividends paid in UK pounds sterling into
US dollars using the exchange rate in effect on the
date of receipt. A US holder that elects to receive
shares in lieu of a cash dividend must include in
H S B C H O L D I N G S P L C
Shareholder Information (continued)
Taxation of shares and dividends / History of HSBC
ordinary income the fair market value of such shares
on the dividend payment date, and the tax basis of
those shares will equal such fair market value.
Subject to certain exceptions for positions that
are held for less than 61 days or are hedged, and
subject to a foreign corporation being considered a
‘qualified foreign corporation’ (which includes not
being classified for US federal income tax purposes
as a passive foreign investment company), certain
dividends (‘qualified dividends’) received by an
individual US holder before 2011 generally will be
subject to US taxation at a maximum rate of 15 per
cent. Based on the company’s audited financial
statements and relevant market and shareholder
data, HSBC Holdings does not anticipate being
classified as a passive foreign investment company.
Accordingly, dividends paid on the shares generally
should be treated as qualified dividends.
Taxation of capital gains
Gains realised by a 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 UK 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 before
2011 generally will be subject to US tax at a
maximum rate of 15 per cent.
Stamp duty and stamp duty reserve tax –
ADSs
If shares are transferred into a clearance service or
depository receipt (‘ADR’) 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 UK, and provided further that any such
482
transfer or written agreement to transfer is not
executed in the UK. 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 US,
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
US or through certain financial intermediaries.
History and development of HSBC
1865 The founding member of the HSBC Group,
The Hongkong and Shanghai Banking
Corporation, is established in both Hong
Kong and Shanghai.
1959 The Mercantile Bank of India Limited and
The British Bank of the Middle East, now
HSBC Bank Middle East Limited, are
purchased.
1965 A 51 per cent interest (subsequently increased
to 62.14 per cent) is acquired in Hang Seng
Bank Limited. Hang Seng Bank is the fourth-
largest listed bank in Hong Kong by market
capitalisation.
1980 A 51 per cent interest in Marine Midland
Banks, Inc., now HSBC USA, Inc, is acquired
(with the remaining interest acquired in 1987).
1981 The Hongkong and Shanghai Banking
Corporation incorporates its then existing
Canadian operations. HSBC Bank Canada
subsequently makes numerous acquisitions,
expanding rapidly to become the largest
foreign-owned bank in Canada.
1987 A 14.9 per cent interest in Midland Bank plc,
now HSBC Bank plc, one of the UK’s
principal clearing banks, is purchased.
1991 HSBC Holdings plc is established as the
parent company of the HSBC Group.
1992 HSBC purchases the remaining interest in
Midland Bank plc.
1993 As a consequence of the Midland acquisition,
HSBC’s Head Office is transferred from
Hong Kong to London in January.
1997 HSBC assumes selected assets, liabilities and
subsidiaries of Banco Bamerindus do Brasil
S.A., now HSBC Bank Brazil, following the
intervention of the Central Bank of Brazil,
and in Argentina completes the acquisition of
Grupo Roberts, now part of HSBC Bank
Argentina S.A.
1999 HSBC acquires Republic New York
Corporation, subsequently merged with
HSBC USA, Inc., and Safra Republic
Holdings S.A.
2000 HSBC completes its acquisition of 99.99 per
cent of the issued share capital of Crédit
Commercial de France S.A., now HSBC
France.
2002 HSBC acquires 99.59 per cent of Grupo
Financiero Bital, S.A. de C.V., the holding
company of what is now HSBC Mexico.
2003 HSBC acquires Household International, Inc.,
now HSBC Finance Corporation.
2003 HSBC acquires Banco Lloyds TSB S.A.–
Banco Múltiplo in Brazil and the country’s
leading consumer finance company, Losango
Promotora de Vendas Limitada.
2004 HSBC Bank USA, Inc. merges with HSBC
Bank & Trust (Delaware) N.A. to form HSBC
Bank USA, N.A.
2004 HSBC acquires Marks and Spencer Retail
Financial Services Holdings Limited, which
trades as Marks and Spencer Money (‘M&S
Money’) in the UK.
2004 HSBC acquires 19.9 per cent of Bank of
Communications, and Hang Seng Bank
acquires 15.98 per cent of Industrial Bank.
2005 HSBC increases its holding in Ping An
Insurance to 19.9 per cent, having made its
initial investment in 2002. Ping An Insurance
is the second-largest life insurer and the third-
largest property and casualty insurer in
mainland China.
2005 HSBC Finance completes the acquisition of
Metris Companies Inc., making HSBC the
fifth-largest issuer of MasterCard and Visa
cards in the USA.
2006 HSBC acquires Grupo Banistmo S.A.
(‘Banistmo’), the leading banking group in
Central America, through a tender offer to
acquire 99.98 per cent of the outstanding
shares of Banistmo.
2007 HSBC’s three associates in mainland China,
Industrial Bank, Ping An Insurance and Bank
of Communications, issue new shares. HSBC
does not subscribe and, as a result, its
interests in the associates’ equity decrease
from 15.98 per cent to 12.78 per cent, from
19.90 per cent to 16.78 per cent and from
19.90 per cent to 18.60 per cent, respectively.
Subsequently, HSBC increases its holding in
Bank of Communications from 18.60 per cent
to 19.01 per cent.
2007 HSBC is named the successful bidder in a
government auction to acquire the assets,
liabilities and operations of The Chinese
Bank in Taiwan.
2008 HSBC completes the sale of its seven French
regional banks.
2004 The acquisition of The Bank of Bermuda
Limited is completed.
2009
In May, HSBC completes the acquisition of
88.89 per cent of PT Bank Ekonomi Raharja
Tbk in Indonesia for US$608 million in cash
and, in August, increases its holding to
98.96 per cent at a total cost of
US$680 million.
483
H S B C H O L D I N G S P L C
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H S B C H O L D I N G S P L C
Glossary
Accounting term
US equivalent or brief description
Accounts
Articles of Association
Associates
Attributable profit
Balance sheet
Bills
Called up share capital
Capital allowances
Creditors
Debtors
Deferred tax
Depreciation
Finance lease
Freehold
Interests in associates and
joint ventures
Loans and advances
Loan capital
Nominal value
One-off
Ordinary shares
Overdraft
Preference shares
Premises
Provisions
Share capital
Shareholders’ equity
Share premium account
Shares in issue
Write-offs
Financial Statements
Bylaws
Long-term equity investments accounted for using the equity method
Net income
Statement of financial position
Notes
Ordinary shares, issued and fully paid
Tax depreciation allowances
Payables
Receivables
Deferred income tax
Amortisation
Capital lease
Ownership with absolute rights in perpetuity
Long-term equity investments accounted for using the equity method
Lendings
Long-term debt
Par value
Non-recurring
Common stock
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
Liabilities
Ordinary shares or common stock issued and fully paid
Stockholders’ equity
Additional paid-in capital
Shares outstanding
Charge-offs
485
H S B C H O L D I N G S P L C
Glossary (continued)
Abbreviation
Brief description
ABS1
ADR
ADS
AIEA
ALCO
ARM
ASEAN
ASF
Asscher
ATM
Bank of Bermuda
Bank of Communications
Bao Viet
Barion
Basel Committee
Basel I
Basel II1
BBA
Bps
Brazilian operations
CD
CDS1
CDO1
CGU
CNAV1
Combined Code
CP1
CPI
CRR1
Cullinan
Decision One
DPF
Enhanced VNAV1
EPS
EU
Fannie Mae
FDIC
Financiera Independencia
Freddie Mac
FSA
FTSE
GAAP
GCRO
GDP
Ginnie Mae
Global Markets
GMB
GMO
Group
H1N1
Hang Seng Bank
Asset-backed security
American Depositary Receipt
American Depositary Share
Average interest-earning assets
Asset and Liability Management Committee
Adjustable-rate mortgage
Association of Southeast Asian Nations
Asset and Structured Finance
Asscher Finance Ltd, a structured investment vehicle managed by HSBC
Automated teller machine
The Bank of Bermuda Limited
Bank of Communications Co., Limited, mainland China’s fourth largest bank by market
capitalisation, in which HSBC currently has 19.01 per cent interest
BaoViet Holdings
Barion Funding Limited, a term funding vehicle
Basel Committee on Banking Supervision
1988 Basel Capital Accord
2006 Basel Capital Accord
British Bankers’ Association
Basis points. One basis point is equal to one hundredth of a percentage point
HSBC Bank Brasil S.A.–Banco Múltiplo and subsidiaries, plus HSBC Serviços e
Participações Limitada
Certificate of deposit
Credit default swap
Collateralised debt obligation
Cash-generating unit
Constant Net Asset Value
Combined Code on Corporate Governance issued by the Financial Reporting Council
Commercial paper
Consumer price index
Customer risk rating
Cullinan Finance Ltd, a structured investment vehicle managed by HSBC
Decision One Mortgage Company, HSBC Finance’s subsidiary which originates loans
referred by mortgage brokers
Discretionary participation feature of insurance and investment contracts
Enhanced Variable Net Asset Value
Earnings per share
European Union
Federal National Mortgage Association, US
Federal Deposit Insurance Corporation (US)
Financiera Independencia S.A.B. de C.V.
Federal Home Loan Mortgage Corporation, US
Financial Services Authority (UK)
Financial Times - Stock Exchange index
Generally Accepted Accounting Principles
Group Chief Risk Officer
Gross domestic product
Government National Mortgage Association, US
HSBC’s treasury and capital markets services in Global Banking and Markets
Group Management Board
Group Management Office
HSBC Holdings together with its subsidiary undertakings
Influenza ‘A’ (H1N1) virus, commonly referred to as swine flu
Hang Seng Bank Limited, the third largest bank listed in Hong Kong by market
capitalisation
486
Abbreviation
Brief description
HELoC
HFC
HIBOR
HKMA
HKSE
Hong Kong
HSBC
HSBC Assurances
Home equity lines of credit
HFC Bank Limited, the UK-based consumer finance business acquired through the
acquisition by HSBC of HSBC Finance
Hong Kong Interbank Offer Rate
Hong Kong Monetary Authority
The Stock Exchange of Hong Kong Limited
The Hong Kong Special Administrative Region of the People’s Republic of China
HSBC Holdings together with its subsidiary undertakings
HSBC Assurances, comprising Erisa S.A., the French life insurer, and Erisa I.A.R.D., the
property and casualty insurer (together, formerly Erisa)
HSBC Bank
HSBC Bank Argentina
HSBC Bank Brazil
HSBC Bank China
HSBC Bank plc, formerly Midland Bank plc
HSBC Bank Argentina S.A.
HSBC Bank Brasil S.A.–Banco Múltiplo
HSBC Bank (China) Company Limited, HSBC’s banking subsidiary in mainland China
which was incorporated in March 2007
HSBC Bank Malaysia
HSBC Bank Middle East
HSBC Bank Panama
HSBC Bank USA
HSBC Bank Malaysia Berhad
HSBC Bank Middle East Limited, formerly The British Bank of the Middle East
HSBC Bank (Panama) S.A., formerly Grupo Banistmo S.A.
HSBC’s retail bank in the US. From 1 July 2004, HSBC Bank USA, N.A. (formerly
HSBC Direct
HSBC Finance
HSBC France
HSBC Holdings
HSBC Mexico
HSBC Bank USA, Inc.)
HSBC’s online banking and savings proposition
HSBC Finance Corporation, the US consumer finance company (formerly Household
International, Inc.)
HSBC’s French banking subsidiary, formerly CCF S.A.
HSBC Holdings plc, the parent company of HSBC
HSBC México S.A., the commercial banking subsidiary of Grupo Financiero HSBC,
S.A. de C.V.
HSBC Premier
HSBC Private Bank (Suisse)
HSBC’s premium global banking service
HSBC Private Bank (Suisse) S.A., HSBC’s private bank in Switzerland (merged with
IAS
IASB
IFRSs
IFRIC
Industrial Bank
IPO
IRB1
KPI
KPMG
LIBOR
Madoff Securities
Mainland China
Malachite
MasterCard
Mazarin
MBS1
Metrovacesa
Monoline1
M&S Money
MSCI
MTN1
NA
NYSE
HSBC Guyerzeller Bank in 2009)
International Accounting Standard
International Accounting Standards Board
International Financial Reporting Standards
International Financial Reporting Interpretations Committee
Industrial Bank Co. Limited, a national joint-stock bank in mainland China in which
Hang Seng Bank currently has a 12.78 per cent interest
Initial public offering
Internal ratings-based
Key performance indicator
KPMG Audit Plc and its affiliates
London Interbank Offer Rate
Bernard L Madoff Investment Securities LLC
People’s Republic of China excluding Hong Kong
Malachite Funding Limited, a term funding vehicle
MasterCard Inc.
Mazarin Funding Limited, an asset-backed CP conduit
US mortgage-backed security
Metrovacesa, S.A.
Monoline insurance company
Marks and Spencer Retail Financial Services Holdings Limited
Morgan Stanley Capital International index
Medium-term note
Nationally Chartered, a designation for certain categories of banks in the US
New York Stock Exchange
487
H S B C H O L D I N G S P L C
Glossary (continued)
Abbreviation
Brief description
OFT
OTC1
Performance Shares
Office of Fair Trading (UK)
Over-the-counter
Awards of HSBC Holdings ordinary shares under employee share plans that are subject
Ping An Insurance
Ping An Insurance (Group) Company of China, Limited, the second-largest life insurer
to corporate performance conditions
PPI
Premier
PVIF
Repo
Restricted Shares
Reverse repo
RMM
RPI
RWA1
S&P
SEC
SIC
SIP
SIV1
SME
Solitaire
SPE1
STIP
Techcombank
The Chinese Bank
The Hongkong and Shanghai
in the PRC, in which HSBC currently has 16.78 per cent interest
Payment protection insurance product
See HSBC Premier
Present value of in-force long-term insurance business
Sale and repurchase transaction
Awards of Restricted Shares define the number of HSBC Holdings ordinary shares to
which the employee will become entitled, generally between one and three years from
the date of the award, and normally subject to the individual remaining in employment
Security purchased under commitments to sell
Risk Management Meeting of the Group Management Board
Retail price index (UK)
Risk weighted asset
Standard and Poor’s rating agency
Securities and Exchange Commission (US)
Securities investment conduit
Statement of investment principles produced by trustees of defined pension plans
Structured investment vehicle
Small and medium-sized enterprise
Solitaire Funding Limited, a special purpose entity managed by HSBC
Special purpose entity
Short-term income protection insurance product
Vietnam Technological and Commercial Joint Stock Bank
The Chinese Bank Co., Ltd., the business in Taiwan
The Hongkong and Shanghai Banking Corporation Limited, the founding member of the
Banking Corporation
HSBC Group
TSR
UAE
UK
US
VAR1
Visa
VNAV
WWF
Total shareholder return
United Arab Emirates
United Kingdom
United States
Value at risk
Visa Inc.
Variable Net Asset Value
World Wide Fund for Nature
1 For full definitions see pages 489 to 494.
488
Term
Alt-A
Arrears
Asset-backed securities
(‘ABS’s)
Definition
A US description for loans regarded as lower risk than sub-prime, but with higher
risk characteristics than lending under normal criteria.
Customers are said to be in arrears (or in a state of delinquency) when they are
behind in fulfilling their obligations, with the result that an outstanding loan is
unpaid or overdue. When a customer is in arrears, the total outstanding loans on
which payments are overdue are described as delinquent.
Securities that represent an interest in an underlying pool of referenced assets. The
referenced pool can comprise any assets which attract a set of associated cash
flows but are commonly pools of residential or commercial mortgages.
Back-testing
A statistical technique used to monitor and assess the accuracy of a model, and how
that model would have performed had it been applied in the past.
Basel II
The capital adequacy framework issued by the Basel Committee on Banking
Supervision in June 2006 in the form of the ‘International Convergence of Capital
Measurement and Capital Standards’.
Collectively assessed
Impairment assessment on a collective basis for homogeneous groups of loans that
impairment
are not considered individually significant.
Collateralised debt obligation
A security issued by a third party which references ABSs and/or certain other related
(‘CDO’)
Commercial paper (‘CP’)
assets purchased by the issuer. CDOs may feature exposure to sub-prime
mortgage assets through the underlying assets.
An unsecured, short-term debt instrument issued by a corporation, typically for the
financing of accounts receivable, inventories and meeting short-term liabilities.
The debt is usually issued at a discount, reflecting prevailing market interest rates.
Commercial real estate
Any real estate investment, comprising buildings or land, intended to generate a
Conduits
profit, either from capital gain or rental income.
A vehicle that holds asset-backed securities such as mortgages, vehicle finance loans
and credit card loans which is financed by short-term debt normally issued in the
form of commercial paper which is collateralised by the asset-backed debt.
Constant net asset value fund
A fund that prices its assets on an amortised cost basis, subject to the amortised book
(‘CNAV’)
value of the portfolio remaining within 50 basis points of its market value.
Contractual maturities
The date on which the final payment (principal or interest) of any financial
Core tier 1 capital
Credit default swap
instrument is due to be paid, at which point all the remaining outstanding principal
and interest have been repaid.
The highest quality form of regulatory capital that comprises total shareholders’
equity and related minority interests, less goodwill and intangible assets and
certain other regulatory adjustments.
A derivative contract whereby a buyer pays a fee to a seller in return for receiving a
payment in the event of a defined credit event (e.g. bankruptcy, payment default
on a reference asset or assets, or downgrades by a rating agency) on an underlying
obligation (which may or may not be held by the buyer).
Credit derivative product
companies (‘CDPC’s)
Independent companies that specialise in selling credit default protection on
corporate exposures in the form of credit derivatives.
Credit enhancements
Facilities used to enhance the creditworthiness of financial obligations and cover
Credit risk
losses due to asset default.
Risk of financial loss if a customer or counterparty fails to meet an obligation under
a contract. It arises mainly from direct lending, trade finance and leasing business,
but also from products such as guarantees, derivatives and debt securities.
Credit risk adjustment
An adjustment to the valuation of OTC derivative contracts to reflect the
creditworthiness of OTC derivative counterparties.
489
H S B C H O L D I N G S P L C
Glossary (continued)
Term
Definition
Credit risk mitigation
A technique to reduce the credit risk associated with an exposure by application of
Credit risk spread
credit risk mitigants such as collateral, guarantee and credit protection.
The premium over the benchmark or risk-free rate required by the market to accept
a lower credit quality. The yield spread between securities with the same coupon
rate and maturity structure but with different associated credit risks. The yield
spread rises as the credit rating worsens.
Customer deposits
Money deposited by account holders. Such funds are recorded as liabilities.
Customer risk rating (‘CRR’)
A scale of 22 grades measuring internal obligor probability of default.
Debt restructuring
A restructuring by which the terms and provisions of outstanding debt agreements
are changed. This is often done in order to improve cash flow and the ability of
the borrower to repay the debt. It can involve altering the repayment schedule as
well as debt or interest charge reduction.
Debt securities
Assets on the Group’s balance sheet representing certificates of indebtedness of
credit institutions, public bodies or other undertakings, excluding those issued by
Central Banks.
Debt securities in issue
Transferable certificates of indebtedness of the Group to the bearer of the
certificates. These are liabilities of the Group and include certificates of deposits.
Delinquency
Economic capital
See ‘Arrears’.
The internally calculated capital requirement which is deemed necessary by HSBC
to support the risks to which it is exposed at a confidence level consistent with a
target credit rating of AA.
Economic profit
The difference between the return on financial capital invested by shareholders
(‘return on invested capital’) and the cost of that capital. Economic profit may be
expressed as a whole number or as a percentage.
Enhanced variable net asset
Funds that price their assets on a fair value basis. Consequently, prices may change
value funds
Equity risk
from one day to the next.
The risk arising from positions, either long or short, in equities or equity-based
instruments, which create exposure to a change in the market price of the equities
or equity instruments.
Expected loss (‘EL’)
A regulatory calculation of the amount expected to be lost on an exposure using a
12 month time horizon and downturn loss estimates. EL is calculated by
multiplying the Probability of Default (a percentage) by the Exposure at Default
(an amount) and Loss Given Default (a percentage).
Exposure
A claim, contingent claim or position which carries a risk of financial loss.
Exposure at default (‘EAD’)
Fair value adjustment
First lien
The amount expected to be outstanding after any credit risk mitigation, if and when
the counterparty defaults. EAD reflects drawn balances as well as allowance for
undrawn amounts of commitments and contingent exposures.
An adjustment to the fair value of a financial instrument which is determined using
a valuation technique (level 2 and level 3) to include additional factors that would
be considered by a market participant that are not incorporated within the
valuation model.
A security interest granted over an item of property to secure the repayment of a
debt that places its holder first in line to collect repayment from the sale of the
underlying collateral in the event of a default on the debt.
Funded exposures
A funded exposure is one where the notional amount of a contract is or has been
exchanged.
Funding risk
A form of liquidity risk arising when the liquidity needed to fund illiquid asset
positions cannot be obtained at the expected terms and when required.
490
Term
Definition
Historic rating transition
matrices (‘HRTM’)
HRTMs show the probability of a counterparty with a particular rating moving to a
different rating over a defined time horizon.
Impaired loans
Loans where the Group does not expect to collect all the contractual cash flows or
expects to collect them later than they are contractually due.
Impairment allowances
Management’s best estimate of losses incurred in the loan portfolios at the balance
sheet date.
Individually assessed
Exposure to loss is assessed on all individually significant accounts and all other
impairment
Insurance risk
Internal Capital Adequacy
accounts that do not qualify for collective assessment.
A risk, other than a financial risk, transferred from the holder of a contract to the
insurance provider. The principal insurance risk is that, over time, the combined
cost of claims, administration and acquisition of the contract may exceed the
aggregate amount of premiums received and investment income.
Assessment Process (‘ICAAP’)
The Group’s own assessment of the levels of capital that it needs to hold through an
examination of its risk profile from regulatory and economic capital viewpoints.
Internal Model Method (‘IMM’) One of three approaches defined by Basel II to determine exposure values for
counterparty credit risk.
Internal ratings-based approach
A method of calculating credit risk capital requirements using internal, rather than
(‘IRB’)
supervisory, estimates of risk parameters.
Invested capital
Equity capital invested in HSBC by its shareholders.
IRB advanced approach
A method of calculating credit risk capital requirements using internal PD, LGD
and EAD models.
IRB foundation approach
A method of calculating credit risk capital requirements using internal PD models
but with supervisory estimates of LGD and conversion factors for the calculation
of EAD.
ISDA
International Swaps and Derivatives Association.
ISDA Master agreement
Standardised contract developed by ISDA used as an umbrella under which bilateral
derivatives contracts are entered into.
Key management personnel
Directors and Group Managing Directors of HSBC Holdings.
Level 1 – quoted market price
Financial instruments with quoted prices for identical instruments in active markets.
Level 2 – valuation technique
using observable inputs
Financial instruments with quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in inactive markets and
financial instruments valued using models where all significant inputs are
observable.
Level 3 – valuation technique
Financial instruments valued using valuation techniques where one or more
with significant unobservable
inputs
Leveraged finance
significant inputs are unobservable.
Funding provided for entities with higher than average indebtedness, which
typically arises from sub-investment grade acquisitions or event-driven
financing.
Liquidity enhancement
Liquidity enhancement makes funds available if required, for reasons other than
asset default, e.g. to ensure timely repayment of maturing commercial paper.
Liquidity risk
The risk that HSBC does not have sufficient financial resources to meet its
obligations as they fall due, or will have to do so at an excessive cost. This risk
arises from mismatches in the timing of cash flows.
Loan modification
A process by which the terms of a loan are modified either temporarily or
permanently, including changes to the rate and/or the payment. Modification may
also lead to a re-ageing of the account.
491
H S B C H O L D I N G S P L C
Glossary (continued)
Term
Definition
Loan-to-value ratio (‘LTV’)
A mathematical calculation that expresses the amount of the loan as a percentage of
the value of security. A high LTV indicates that there is less cushion to protect the
lender against house price falls or increases in the loan if repayments are not made
and interest is added to the outstanding loan balance.
Loans past due
Loans on which repayments are overdue.
Loss given default (‘LGD’)
The estimated ratio (percentage) of the loss on an exposure to the amount
Market risk
Monoline insurers
(‘monolines’)
outstanding at default (EAD) upon default of a counterparty.
The risk that movements in market risk factors, including foreign exchange rates and
commodity prices, interest rates, credit spreads and equity prices will reduce
income or portfolio values.
Entities which specialise in providing credit protection to the holders of debt
instruments in the event of default by the debt security counterparty. This
protection is typically held in the form of derivatives such as CDSs referencing
the underlying exposures held.
Mortgage-backed securities
Securities that represent interests in groups of mortgages, which may be on
(‘MBS’s)
residential or commercial properties. Investors in these securities have the right to
cash received from future mortgage payments (interest and/or principal). When
the MBS references mortgages with different risk profiles, the MBS is classified
according to the highest risk class.
Mortgage-related assets
Assets which are referenced to underlying mortgages.
Mortgage vintage
Medium term notes
(‘MTN’s)
The year a mortgage was originated.
Notes issued by corporates across a range of maturities. MTNs are frequently issued
by corporates under MTN Programmes whereby notes are offered on a regular and
continuous basis to investors.
Net asset value per share
Total shareholders’ equity, less non-cumulative preference shares and capital
Negative equity mortgages
securities, divided by the number of ordinary shares in issue.
Negative equity is the value of the asset less the outstanding balance on the loan. It
arises when the value of the property purchased is below the balance outstanding
on the loan.
Net interest income
The amount of interest received or receivable on assets net of interest paid or
Net principal exposure
Non-conforming mortgages
payable on liabilities.
The gross principal amount of assets that are not protected by CDSs. It includes
assets that benefit from monoline protection, except where this protection is
purchased with a CDS.
Mortgages that do not meet normal lending criteria, e.g. where the normal level of
documentation has not been provided or where increased risk factors are present,
such as poor credit history, result in lending at a rate that is higher than the normal
lending rate.
Operational risk
The risk of loss resulting from inadequate or failed internal processes, people and
Over-the-counter
(‘OTC’)
systems, or from external events, including legal risk.
A bilateral transaction (e.g. derivatives) that is not exchange traded and valued using
valuation models.
Performance Shares
Awards of HSBC Holdings ordinary shares under employee share plans that are
subject to the achievement of corporate performance conditions.
Prime
A US description for mortgages granted to the most creditworthy category of
borrowers.
Private equity investments
Equity securities in operating companies not quoted on a public exchange, often
involving the investment of capital in private companies or the acquisition of a
public company that results in the delisting of public equity.
492
Term
Definition
Probability of default (‘PD’)
The probability that an obligor will default within a one-year time horizon.
Regulatory capital
The capital which HSBC holds, determined in accordance with rules established by
the FSA for the consolidated Group and by local regulators for individual Group
companies.
Renegotiated loans
Loans whose terms have been renegotiated and are treated as up to date loans for
measurement purposes once the minimum number of payments required under the
new arrangements have been received.
Restricted Shares
Awards of HSBC Holdings ordinary shares to which employees will normally
become entitled, generally between one and three years, subject to remaining an
employee.
Retail loans
Money loaned to individuals rather than institutions. This includes both secured and
Return on equity
Risk appetite
Risk-weighted assets
(‘RWA’s)
Seasoning
Second lien
Securitisation
unsecured loans such as mortgages and credit card balances.
Profit attributable to ordinary shareholders divided by average invested capital.
An assessment of the types and quantum of risks to which HSBC wishes to be
exposed.
Calculated by assigning a degree of risk expressed as a percentage (risk weight) to
an exposure in accordance with the applicable Standardised or IRB approach
rules.
The emergence of credit loss patterns in portfolios over time.
A security interest granted over an item of property to secure the repayment of a debt
that is issued against the same collateral as a first lien but that is subordinate to it.
In the case of default, repayment for this debt will only be received after the first
lien has been repaid.
A transaction or scheme whereby the credit risk associated with an exposure, or pool
of exposures, is tranched and where payments to investors in the transaction or
scheme are dependent upon the performance of the exposure or pool of exposures.
A traditional securitisation involves the transfer of the exposures being securitised
to an SPE which issues securities. In a synthetic securitisation, the tranching is
achieved by the use of credit derivatives and the exposures are not removed from
the balance sheet of the originator.
Single-issuer liquidity facility
A liquidity or stand-by line provided to a corporate customer which is different from
a similar line provided to a conduit funding vehicle.
Structured Investment Vehicles
Special purpose entities which invest in diversified portfolios of interest-earning
(‘SIV’s)
Special purpose entities
(‘SPE’s)
Standardised approach
Structured finance / notes
assets, generally funded through issues of commercial paper, medium-term notes
and other senior debt to take advantage of the spread differentials between the
assets in the SIV and the funding cost.
A corporation, trust or other non-bank entity, established for a narrowly defined
purpose, including for carrying on securitisation activities. The structure of the
entity and activities are intended to isolate the obligations of the SPE from those of
the originator and the holders of the beneficial interests in the securitisation.
In relation to credit risk, a method for calculating credit risk capital requirements
using External Credit Assessment Institutions (‘ECAI’) ratings and supervisory
risk weights. In relation to operational risk, a method of calculating the
operational capital requirement by the application of a supervisory defined
percentage charge to the gross income of eight specified business lines.
An instrument whose return is linked to the level of a specified index or the level of
a specified asset. The return on a structured note can be linked to equities, interest
rates, foreign exchange, commodities or credit. Structured notes may or may not
offer full or partial capital protection in the event of a decline in the underlying
index or asset.
493
H S B C H O L D I N G S P L C
Glossary (continued)
Term
Definition
Student loan related assets
Securities with collateral relating to student loans.
Subordinated liabilities
Liabilities which rank after the claims of other creditors of the issuer in the event of
insolvency or liquidation.
Sub-prime
A US description for customers with high credit risk, for example those 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 problems.
Tier 1 capital
A component of regulatory capital, comprising core tier 1 and other tier 1 capital.
Other tier 1 capital includes qualifying hybrid capital instruments such as
non-cumulative perpetual preference shares and innovative tier 1 securities.
Tier 2 capital
A component of regulatory capital, comprising qualifying subordinated loan capital,
Troubled debt restructuring
related minority interests, allowable collective impairment allowances and
unrealised gains arising on the fair valuation of equity instruments held as
available-for-sale. Tier 2 capital also includes reserves arising from the
revaluation of properties.
A US description for restructuring a debt whereby the creditor for economic or legal
reasons related to a debtor’s financial difficulties grants a concession to the debtor
that it would not otherwise consider.
Unfunded exposures
An exposure where the notional amount of a contract has not been exchanged.
Value-at-risk
(‘VAR’)
A technique that measures the loss that could occur on risk positions as a result of
adverse movements in market risk factors (e.g. rates, prices, volatilities) over a
specified time horizon and to a given level of confidence.
Wholesale loans
Money loaned to sovereign borrowers, banks, non-bank financial institutions and
corporate entities.
Write-down
Reduction in the carrying value of an asset due to impairment or fair value
movements.
Wrong-way risk
An adverse correlation between the counterparty’s probability of default and the
mark-to-market value of the underlying transaction.
494
H S B C H O L D I N G S P L C
lndex
Accounting 365
developments (future) 367
policies (critical) 61
policies (significant) 157, 369
Accounts
approval 471
basis of preparation 66, 365
Acquisitions and disposals 444
Actuarial assumptions 394
American Depositary Shares 474
Annual General Meeting 333, 477
Areas of special interest 214
Asset-backed securities 154, 156
Assets
average balance sheet 46
by customer group 66
by geographical region 86, 417
charged as security 456
held in custody and under administration 148
intangible 438
other 444
trading 422
underlying/reported reconciliation 44
Associates and joint ventures
dilution gains 41, 386
interests in 432
share of profit in 40
Audit committee (Group) 310
Auditors’ remuneration 400
Auditors’ Report 350
Balance sheet
average 46
consolidated 42, 354
data 4, 67, 70, 76, 77, 80, 82, 88, 95, 98, 103,
108, 114, 118, 122, 126, 133, 137, 142,
417
HSBC Holdings 360
insurance manufacturing subsidiaries 270
underlying/reported reconciliation 44
Bank payroll tax 326
Borrowings (short-term) 56
Brand perception 20
Business highlights 68, 71, 74, 78
Business model 156
Business performance review
Europe 89, 93
Hong Kong 99, 101
Latin America 138, 140
Middle East 119, 121
North America 127, 131
Rest of Asia-Pacific 109, 112
Calendar (dividends) 473
Capital
management and allocation 285
return on invested capital 2
structure 289
Capital and performance ratios 3, 4
Cash flow
accounting policy 384
consolidated statement 356
HSBC Holdings 361
notes 461
495
payable under financial liabilities 249
projected scenario analysis 247
Cautionary statement regarding forward-looking
statements 6
Certificates of deposit and other time deposits
(maturity analysis) 60
Challenges and uncertainties 12
Client assets 78
Collateral and credit enhancements 207
Commercial Banking
business highlights 71
financial performance 70
products and services 145
strategic direction 70
underlying/reported profit 72
Committees (board) 310, 334
Communication with shareholders 332, 478
Concentration of exposure 208
Conduits 182
Constant currency 21
Constant Net Asset Value funds 187
Contents 1, 66, 85, 196, 294, 334, 472
Contingent liabilities and contractual
commitments 463
Contractual obligations 56
Corporate governance
codes 308
report 294
Corporate sustainability 326
committee 313
governance 328
risk 264
Cost efficiency ratio 3, 39
Credit coverage ratios 3
Credit exposure 206
Credit quality 203
classifications 226
Credit risk
challenges and uncertainties 17
management thereof 201
insurance 277
Critical accounting policies 61
Cross-border exposures 206, 213
Customer accounts 87, 98, 107, 117, 125, 136
recommendation 20
underlying/reported reconciliation 45
Customer groups and global businesses 66
Daily distribution of revenues 253
Data security 149
Dealings in HSBC Holdings plc shares 332
Debt securities in issue 209, 446
accounting policy 384
Defined terms inside front cover, 489
Deposits
average balances and average rates 58
time 60
Derivatives 208, 209, 424
accounting policy 376
Dilution gains 41, 386
Directors 294
appointments and re-election 307
biographies 294
H S B C H O L D I N G S P L C
lndex (continued)
board of directors 302
bonus 338
emoluments 400
fees 344
interests 316
non-executive 343
other directorships 343
pensions 342, 346
remuneration (executive) 337, 345
remuneration (principles) 334
responsibilities (statement of) 349
service contracts 343
share plans 347
Disclosure policy (market turmoil) 151
Dividends 2, 331, 332, 410, 472, 473
Donations 327
Earnings per share 2, 19, 340, 341, 411
Economic briefing
Europe 88, 92
Hong Kong 99, 101
Latin America 137, 140
Middle East 118, 121
North America 125, 130
Rest of Asia-Pacific 107, 111
Economic profit 41, 340
Efficiency and revenue mix ratios 3
Employees 318
compensation and benefits 326, 388
disabled 318
engagement 20, 327
involvement 318
remuneration policy 318
Enforceability of judgements made in the US 472
Enhanced Variable Net Asset Value funds 188
Enquiries (from shareholders) 478
Equity 43
Equity securities 178, 255
Europe
balance sheet data 88, 95, 417
business performance 89, 93
challenges and uncertainties 14
customer accounts by country 87
economic briefing 88, 92
lending 211
loan impairment charges/allowances 231, 234,
237, 238
loans and advances to customers 87
principal operations 85
profit/(loss) 87, 88, 95, 413
regulation and supervision (UK) 197
underlying/reported profit 89, 92
Events after the balance sheet date 471
Exchange controls and other limitations affecting
equity security holders 472
Exposures 152, 157, 162, 186, 188, 189, 206
Fee income (net) 27
Fair value
accounting policy 370
Financial assets
critical accounting policy (valuation) 64
designated at fair value 423
not qualifying for de-recognition 431
496
reclassification 153
Financial assets and liabilities
accounting policy 370, 378
by measurement basis 418
critical accounting policy (valuation) 63
Financial guarantee contracts
accounting policy 382
Financial highlights 2
Financial instruments
accounting policy (fair value) 374
credit quality 225
fair values, 166
net income from 30, 385
not at fair value 179
critical accounting policy (valuation) 63
Financial investments 428
accounting policy 375
gains less losses from 31
Financial liabilities designated at fair value 445
Financial risks (insurance) 272
Financial statements 5, 352
Five-year comparison 4
Footnotes 5, 149, 195, 291, 364
Foreign exchange
accounting policy 381
exposures 257, 455
rates 4
Funds under management 147
Geographical regions 85
Global Banking and Markets
asset-backed securities 154
balance sheet data 76
business highlights 74
financial performance 73
products and services 146
strategic direction 73
underlying/reported profit 75
Glossary 485
Going concern 316
Goodwill
accounting policy 378
and intangible assets 434
critical accounting policy 62
Governance codes 294
HSBC Holdings/New York Stock Exchange
corporate governance differences 308
Group Chairman’s Statement 8
Group Management Board 310
Health and safety 328
History and development of HSBC 482
Hong Kong
balance sheet data 98, 103, 417
business performance 99, 101
challenges and uncertainties 14
economic briefing 99, 101
lending 211
loan impairment charges/allowances 231, 234,
237, 238
principal operations 85
profit/(loss) 98, 103, 413
regulation and supervision 197
underlying/reported profit 99, 102
HSBC Holdings plc
balance sheet 360
cash flow 361
credit risk 241
deferred tax 410
dividends 473
employee emoluments 399
financial assets and liabilities 177, 421
liquidity and funding management 249
market risk 258
maturity analysis of assets and liabilities 455
net income from financial instruments 385
related party transactions 471
share plans 405, 347
statement of changes in equity 362
structural foreign exchange exposures 258
subordinated liabilities 453
Impairment
accounting policy 371
allowances and charges 35, 230
assessment 203
available-for-sale assets 178
critical accounting policy 61
impaired loans and advances 230
losses as percentage of loans and advances 232
movement by industry and geographical
region 232, 233, 234
Income statement (consolidated) 23, 353
Information on HSBC (availability thereof) 480
Insurance
accounting policy 382
claims incurred (net) and movements in
liabilities to policyholders 34, 387
liabilities under contracts issued 447
net earned premiums 32, 386
PVIF business 283
risk management 265
Interest income/expense (net) 26
accounting policy 369
analysis of changes in 53
average balance sheet 46
sensitivity 57, 256
Interim management statements 478
Internal control 313
IFRSs and Hong Kong Financial Reporting
Standards comparison 366
Investor relations 479
IT performance 20
Key performance indicators
financial 18
non-financial 20
Latin America
balance sheet data 137, 142
business performance 138, 140
challenges and uncertainties 15
customer accounts by country 136
economic briefing 137, 140
lending 211
loan impairment charges/allowances 231, 234,
237, 238
loans and advances to customers 136, 212
principal operations 85
497
profit/(loss) 137, 142, 413
underlying/reported profit 138, 140
Lease commitments 465
accounting policy 380
Legal
challenges and uncertainties 17
proceedings 148
litigation 467
Leveraged finance transactions 165, 194
Liabilities
average balance sheet 49
other 447
subordinated 450
trading 445
underlying/reported reconciliation 44
Life insurance business 265
Liquidity and funding 244
challenges and uncertainties 15
management of risk 245
impact of market turmoil 248
insurance 281
policies and procedures 244
primary sources of funding 244
Loans and advances
accounting policy 371
collateral 207
concentration of exposure 209
credit quality of 203
delinquency in the US 224
impairment 230, 238, 241
maturity and interest sensitivity 57
modifications and re-aging 224
past due 229
renegotiated 224
to banks by geographical region 213
to customers by industry sector and
geographical region 45, 181, 211
underlying/reported reconciliation 45
Market risk 250
impact of market turmoil 252
insurance 274
sensitivity analysis 251
Market turmoil 151, 248, 252
Maturity analysis of assets and liabilities 454
Maximum exposure to credit risk 206
Memorandum and Articles of Association 476
Middle East
balance sheet data 118, 122, 417
business performance 119, 121
challenges and uncertainties 14
customer accounts by country 117
economic briefing 118, 121
lending 211
loan impairment charges/allowances 231, 234,
237, 238
loans and advances to customers 117, 212
principal operations 85
profit/(loss) 117, 122, 413
underlying/reported profit 119, 120
wholesale lending 214
Minority interests 457
Money market funds 187
H S B C H O L D I N G S P L C
lndex (continued)
Monoline insurers 163
Mortgage lending 218, 222
Nomination committee 312
Non-interest income
accounting policy 369
Non-life insurance business 266
Non-money market investment funds 188
Non-trading portfolios 255
North America
balance sheet data 126, 133
business performance 127, 131
challenges and uncertainties 15
customer accounts by country 125
economic briefing 125, 130
lending 211
loan delinquency in the US 223
loan impairment charges/allowances 231, 234,
237, 238
loans and advances to customers 125
mortgage lending 218
principal operations 85
profit/(loss) 126, 133, 413
regulation and supervision (US) 198
underlying/reported profit 127, 130
Off-balance sheet arrangements 194
Operating expenses 38
Operating income 33, 388
Operational risk
challenges and uncertainties 18
Organisational structure chart 484
Other (notes) 80
Pensions
accounting policy 380
defined benefit plans 258, 395, 398
for directors 346
risk 263
Performance and context 335
Personal Financial Services
business highlights 68
financial performance 67
products and services 145
strategic direction 67
underlying/reported profit 69
Personal lending 215
Pillar 2 and 3 288
Principal activities 12
Private Banking
business highlights 78
financial performance 78
products and services 147
strategic direction 77
underlying/reported profit 79
Products and services 145
Profit before tax
by country 87, 106, 117, 125
by customer group 66, 67, 70 73, 77 80, 82
by geographical region 86, 88, 95, 98, 103,
108, 114, 118, 122, 126, 133, 137, 142,
413
consolidated 353
data 4
underlying/reported reconciliations 22, 69, 72,
498
75, 79, 81, 89, 92, 99, 102, 109, 112, 127,
130
Property, plant and equipment 148, 439
accounting policy 379
Provisions 450
accounting policy 382
PVIF 283
Ratios
advances to deposits 246
capital and performance 3
credit coverage 3
cost efficiency 3, 39
earnings to combined fixed charges 56
financial 4
key performance indicators 19
net liquid assets to customer liabilities 246
Regulation and supervision 196
challenges and uncertainties 16
Related party transactions 468
Remuneration committee 312, 334
Renegotiated loans 224
Repricing gap 254
Reputational risk 263
Residual value risk management 261
Rest of Asia-Pacific
balance sheet data 108, 114
business performance 109, 112
challenges and uncertainties 14
customer accounts by country 107
economic briefing 107, 111
lending 211
loan impairment charges/allowances 231, 234,
237, 238
loans and advances to customers 107, 212
principal operations 85
profit/(loss) 106, 114, 413
underlying/reported profit 109, 112
Rights issue 2, 466
accounting policy 385
Risk elements in loan portfolio 241
Risk management 157, 199, 336
appetite 200
capital management and allocation 285
contingent liquidity 247
control culture 201
credit 201
credit spread 255
gap risk 254, 260
governance and ownership 199
insurance operations 265
legal 262
liquidity and funding management 245
market 250
operational 262
pension 263
rating scales 226
reputational 263
residual value 261
scenario stress testing 200
security and fraud 263
sustainability 264
Risk-weighted assets 290
by principal subsidiary 291
Sale and repurchase agreements
accounting policy 376
Securities held for trading 208
Securitisations 189
Segmental analysis 412
accounting policy 369
Senior management
biographies 299
Share-based payments 401
accounting policy 381
Share capital 328, 457
accounting policy 384
notifiable interests in 332
ownership guidelines 342
rights and obligations 329
Share information 3
Share plans
Bank of Bermuda plans 325, 461
discretionary plans 322
for directors 347, 402
for employees 319, 402
HSBC Finance plans 324, 406, 460
HSBC France plans 323, 406, 459
Performance Shares and Restricted Share
awards 347, 402, 403
Shareholder (communications with) 332, 478
profile 476
Special purpose entities 181, 190, 194
Staff numbers 38, 388
Statement of changes in equity 357
Statement of comprehensive income 354
Stock symbols 476
Strategic direction 12
Structural foreign exchange exposure 257
Structured investment vehicles (‘SIV’s) 182
Subsidiaries 442
accounting policy 378
Supplier payment policy 328
Taxation
accounting policy 380
challenges and uncertainties 18
deferred tax – critical accounting policy 65
expense 407
UK residents 480
US residents 481
Tier 1 capital 289, 290
Total shareholder return 3, 19, 340, 341, 342
Trading assets 422
accounting policy 374
Trading income (net) 28
Trading liabilities
accounting policy 374
Trading market (nature of) 475
Trading portfolios 253
Troubled debt restructurings 242
Underlying performance 21
Value at risk 251
Wholesale lending 214
499
STOCKBROKERS
Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB
United Kingdom
HSBC Bank plc
8 Canada Square
London E14 5HQ
United Kingdom
HSBC HOLDINGS PLC
Incorporated in England on 1 January 1959 with
limited liability under the UK Companies Act
Registered in England: number 617987
REGISTERED OFFICE AND
GROUP MANAGEMENT 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
REGISTRARS
Principal Register
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Telephone: 44 (0) 870 702 0137
Hong Kong Overseas Branch Register
Computershare Hong Kong Investor Services
Limited
Hopewell Centre
Rooms 1712-1716, 17th floor
183 Queen’s Road East
Hong Kong
Telephone: 852 2862 8555
Bermuda Overseas Branch Register
Corporate Shareholder Services
The Bank of Bermuda Limited
6 Front Street
Hamilton HM11
Bermuda
Telephone: 1 441 299 6737
ADR Depositary
BNY Mellon Shareowner Services
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Pittsburgh
PA15252 - 8516
USA
Telephone: 1 877 283 5786
Email: shrrelations@bnymellon.com
Paying Agent (France)
HSBC France
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75419 Paris Cedex 08
France
Telephone: 33 1 40 70 22 56
500
© Copyright HSBC Holdings plc 2010
All rights reserved
No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording,
or otherwise, without the prior written permission of
HSBC Holdings plc.
Published by Group Finance, HSBC Holdings plc,
London
Cover designed by Black Sun Plc, London; text pages
designed by Group Communications (Asia), The
Hongkong and Shanghai Banking Corporation Limited,
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Printed by Park Communications Limited, London,
on Revive Pure White Offset paper using vegetable oil-
based inks. Made in Austria, the paper comprises 100%
de-inked post-consumer waste. Pulps used are totally
chlorine-free.
The FSC logo identifies products which contain wood
from well-managed forests certified in accordance with
the rules of the Forest Stewardship Council.
Cover
HSBC’s new China headquarters building (front cover, centre) on
the River Huangpu in Pudong, Shanghai, is due to open in mid-2010.
Photography: Mike Abrahams
Group Chairman
Photography: Eddie Chan Wai Hing
HSBC Holdings plc
HSBC Holdings plc
8 Canada Square
8 Canada Square
London E14 5HQ
London E14 5HQ
United Kingdom
United Kingdom
Telephone: 44 020 7991 8888
Telephone: 44 020 7991 8888
Facsimile: 44 020 7992 4880
Facsimile: 44 020 7992 4880