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HSBC Holdings plc Annual Report
and Accounts

Table of contents

  • Page 1
    HSBC Holdings plc Annual Report and Accounts

  • Page 2
    ... 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 and preference shares. This document comprises the Annual Report and Accounts 2005 for HSBC Holdings...

  • Page 3
    ... 2005 US$m For the year Total operating income ...Profit before tax ...Profit attributable to shareholders of the parent company ...Dividends ...At the year-end Total equity ...Total shareholders' equity ...Capital resources ...Customer accounts and deposits by banks ...Total assets ...Risk-weighted...

  • Page 4
    ... the income statements for 2004 of non-US dollar branches, subsidiaries, joint ventures and associates at the average rates of exchange for 2005; and the balance sheets at 31 December 2004 for non-US dollar branches, subsidiaries, joint ventures and associates at the prevailing rates of exchange on...

  • Page 5
    ...attributable to shareholders of the parent company ...Dividends ...At the year-end Called up share capital ...Total shareholders' equity ...Shareholders' funds ...Capital resources10 ...Customer accounts ...Undated subordinated loan capital ...Dated subordinated loan capital ...Loans and advances to...

  • Page 6
    HSBC HOLDINGS PLC Financial Highlights (continued) Five-year comparison (continued) Amounts in accordance with US GAAP 2005 US$m Income statement for the year Net income available for ordinary shareholders ...Other comprehensive income ...Dividends ...Balance sheet at 31 December Total assets ......

  • Page 7
    ...) and government-established exchange rates (for example, between the Hong Kong dollar and the US dollar); volatility in interest rates; volatility in equity markets, including in the smaller and less liquid trading markets in Asia and South America; lack of liquidity in wholesale funding markets in...

  • Page 8
    ... 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...

  • Page 9
    ...: Europe; Hong Kong; Rest of Asia-Pacific, including the Middle East and Africa; North America and South America. Within these regions, a comprehensive range of financial services is offered to personal, commercial, corporate, institutional, investment and private banking clients. Services are...

  • Page 10
    ... customer deposits. Mainland China remains a key long-term growth area for the Group. In 2002, HSBC completed the acquisition of a 10 per cent equity stake in Ping An Insurance Company of China Limited ('Ping An Insurance'), reducing its holding to 9.99 per cent following an initial public offering...

  • Page 11
    .... HSBC believes that by organising its internal and external reporting around customer groups, it reinforces to all its employees the Group's customer focus. Within Personal Financial Services, the increasing integration, skills sharing and transfer of technology with the consumer finance business...

  • Page 12
    ... enhancing capital markets and advisory capabilities focused on client service in defined sectors where HSBC has critical relevance and strength; Private Banking: serve the Group's highest value personal clients around the world; People: attract, develop and motivate HSBC's people, rewarding success...

  • Page 13
    ... learned from other successful businesses, and will recruit from non-banking industries where appropriate. current and savings accounts, mortgages and personal loans, credit cards, and local and international payments services. Personal customers prefer to conduct their financial business at times...

  • Page 14
    ... of the year. HSBC Finance's business in the UK ('HFC Bank') provides mid-market consumers with mortgages, secured and unsecured loans, insurance products, credit cards and retail finance products. It concentrates on customer service through its 187 HFC Bank and Beneficial branches, and finances...

  • Page 15
    ... management services: These include advice and products related to savings and investments. They are provided to Commercial Banking customers and their employees through HSBC's worldwide network of branches and business banking centres. Insurance: HSBC offers insurance protection, employee benefits...

  • Page 16
    ..., sales and trading for institutional, corporate and private clients and asset management services, including global investment advisory and fund management services; and distribution of capital markets instruments, including debt, equity and structured products, utilising links with HSBC's global...

  • Page 17
    ... Hong Kong's three note-issuing banks, accounting for more than 65 per cent by value of banknotes in circulation in 2005. Rest of Asia-Pacific (including the Middle East) The Hongkong and Shanghai Banking Corporation offers personal, commercial, corporate and investment banking and markets services...

  • Page 18
    ...of services. Limited market growth The majority of HSBC's business is conducted in the US, the UK and Hong Kong. Penetration of standard banking services in these markets is nearing After several very positive years, UK growth slowed in 2005. Although corporate earnings rose and the UK stock market...

  • Page 19
    ... cost of funds in the second half of 2005 from increasing interbank rates made banks with smaller deposit bases more cautious in price competition. A decline in property loan demand also added pressure on banks to look for new outlets for lending. Personal loans, including credit card advances, 17

  • Page 20
    ... industry, institutions involved in a broad range of financial products and services continued to consolidate. Within the banking sector, consolidation continued into 2006, with a greater focus on national networks and retail branch banking. The Group's principal US subsidiaries, HSBC Bank USA...

  • Page 21
    ..., payroll and pension-linked advances emerged in 2005 as a significant source of lending. Banks also developed 'virtual' banking networks known as correspondentes bancários. These are typically small retail establishments offering basic payment and banking services on behalf of established banks on...

  • Page 22
    ... on The Stock Exchange of Hong Kong Limited; 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...

  • Page 23
    ..., risk control, loan portfolio composition and organisational changes, including succession planning. UK depositors and investors are covered by the Financial Services Compensation Scheme which deals with deposits with authorised institutions in the UK, investment business and contracts of insurance...

  • Page 24
    ... by the Federal Reserve Board because HSBC is a 'bank holding company' under the US Bank Holding Company Act of 1956 (the 'BHCA') as a result of its ownership of HSBC Bank USA. HSBC Bank USA is a nationally chartered commercial bank and a member of the Federal Reserve System. HSBC Bank USA is the...

  • Page 25
    ... holding companies to maintain a minimum amount of capital in relation to their balance sheet assets (measured on a non-risk-weighted basis). The Federal Deposit Insurance Corporation Improvement Act of 1991 provides for extensive regulation of insured depository institutions (such as HSBC Bank USA...

  • Page 26
    ... licensing of insurance companies; premiums and loss rates; dividend restrictions; types of insurance that may be sold; permissible investments; policy reserve requirements; and insurance marketing practices. Certain US source payments to foreign persons may be subject to US withholding tax unless...

  • Page 27
    ...were located in Europe, 600 in Hong Kong and the Rest of Asia-Pacific, 4,000 in North America (including 1,600 in Mexico) and 1,900 in South America. These properties had an area of approximately 63.8 million square feet (2004: 62.2 million square feet). In addition, properties with a net book value...

  • Page 28
    ...does it include dividend income on trading assets. HSBC made a profit before tax of US$20,966 million, a rise of US$2,023 million or 11 per cent compared with 2004. Of this increase, US$267 million was attributable to additional contributions of ten and two months from M&S Money and Bank of Bermuda...

  • Page 29
    ... growth. Productivity improvements achieved in the UK and Hong Kong allowed the Group to continue building its Personal Financial Services and Commercial Banking businesses in the Rest of AsiaPacific, and expanding its capabilities in Corporate, Investment Banking and Markets, without deterioration...

  • Page 30
    .... UK Personal Financial Services balances grew strongly in mortgages, unsecured lending and cards, mainly funded by a 12 per cent increase in deposit and savings balances. In Turkey, card balances grew from increased marketing and working with HSBC's retail partners. Spreads tightened on UK personal...

  • Page 31
    ... of new savings products, including an online savings product which attracted a significant number of new customers. Treasury income from balance sheet management within Corporate, Investment Banking and Markets diminished as the rise in short-term interest rates limited opportunities to profit from...

  • Page 32
    ... in account services fees; • in Private Banking, the introduction of a wider range of alternative investment products and services generated higher fee income; increased demand for credit among personal and commercial customers drove mortgage and lending fees up by 11 per cent; and rising equity...

  • Page 33
    .... Investment banking fees increased in response to HSBC's success in attracting customers with an expanded range of products. Net fee income in South America increased by 23 per cent, principally due to higher card, lending and current account servicing fees. Current account fees benefited from...

  • Page 34
    ... grew strongly as structured product capabilities were added in the credit, equity, and interest rate and foreign exchange areas. Further benefit was derived from the greater focus put on client-driven risk management and the investment made in sales and execution expertise in previous years. In...

  • Page 35
    ... under insurance and investment contracts ...Change in fair value of liabilities to customers under investment contracts ...Movement in fair value of HSBC's long-term debt issued and related derivatives ...- change in own credit spread on long-term debt ...- other changes in fair value ...Income...

  • Page 36
    ... policyholder liabilities was offset against the movement in policyholders' liabilities without distinction between insurance and investment contracts. Year ended 31 December 2005 US$m By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...South America ...Gains less...

  • Page 37
    ...liabilities under investment contracts. Investment income from these products is now reported as 'Net income from financial investments designated at fair value'. Income that was previously reported as 'Net earned insurance premiums' is now taken directly to the balance sheet as customer liabilities...

  • Page 38
    HSBC HOLDINGS PLC Financial Review (continued) Other operating income Year ended 31 December 2005 US$m By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...South America ...Intra-HSBC elimination ...Other operating income ...1,603 805 335 740 188 3,671 (938) 2,733...

  • Page 39
    ... incurred and movement in policyholders' liabilities Year ended 31 December 2005 US$m By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...South America ...Net insurance claims incurred and movement in policyholders' liabilities 818 2,059 166 333 691 4,067 % 20...

  • Page 40
    HSBC HOLDINGS PLC Financial Review (continued) Loan impairment charges and other credit risk provisions Year ended 31 December 2005 US$m By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...South America ...Total loan impairment charges and other credit risk ...

  • Page 41
    ... loans were 3 per cent lower than 2004 compared with underlying lending growth (excluding lending to the financial sector and settlement accounts) of 12 per cent. Year ended 31 December 2005 US$m By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...South America...

  • Page 42
    ...platform. HSBC's branch network was extended in mainland China, South Korea, and India and additional sales and support staff were recruited in Personal Financial Services and Commercial Banking. Staff numbers also increased in response to the migration of call centre activities to the Group Service...

  • Page 43
    ..., to which the largest single contributor was the grossing up of certain customer lending and current account relationships in the UK, mainly in Corporate, Investment Banking and Markets, which would previously have been offset in reported loans and advances and customer accounts. At 31 December...

  • Page 44
    ...particularly in alternative funds. HSBC continues to manage some of the world's largest active equity funds investing in India and China with US$4.7 billion and US$1.9 billion of assets, respectively, at the end of 2005. In Private Banking, increased recognition of HSBC in the private banking sector...

  • Page 45
    ...the current levels of world interest rates, and taking into account its geographical and customer group diversification, HSBC believes that its true cost of capital on a consolidated basis is 10 per cent. HSBC plans to continue using this rate until the end of the current five-year strategic plan in...

  • Page 46
    ... ventures ...Profit before tax ...Share of HSBC's profit before tax ...Cost efficiency ratio ...Selected balance sheet data3 Loans and advances to customers (net) ...Total assets4 ...Customer accounts ...Loans and advances to banks (net)5 ...Trading assets, financial assets designated at fair value...

  • Page 47
    ... and joint ventures ...Profit before tax ... Personal Financial Services US$m 21,422 6,406 320 635 79 16 3,652 360 32,890 (2,953) Commercial Banking US$m 4,875 2,645 234 324 6 37 1,072 513 9,706 (1,264) Year ended 31 December 2004 Corporate, Investment Banking & Private Markets Banking Other6 US...

  • Page 48
    ... sales growth in mortgages, current accounts and savings products. In Turkey, marketing helped increase customer numbers by 7 per cent to 2.2 million. HSBC's mortgage products in the UK were highly rated: HSBC was named 'Best Value National Bank' for mortgage borrowing over two, five and ten years...

  • Page 49
    ... Internet Bank' in Hong Kong in 2005. HSBC maintained its position as the largest credit card issuer in Hong Kong, increasing the number of cards in circulation by 15 per cent and its market share of spending from 50.5 per cent to 52.1 per cent. A new innovative retirement planning solution was...

  • Page 50
    ...to increase the sale of structured investment products, were also notable successes. Having enhanced its systems, HSBC retained its position as 'Best in Cash Management in Asia and the Middle East', its number two ranking in the world and its top five ranking for Europe, North America, Latin America...

  • Page 51
    ... Your Money', and in Taiwan HSBC launched a 'Cash Marketing Campaign'. • • • • North America • HSBC's market share of small business customers in New York City increased, supported by the success of the BusinessSmart Value package which added 41,000 new accounts in 2005. HSBC Bank USA...

  • Page 52
    .... Foreign exchange trading benefited from strong income streams from emerging markets. In Global Markets, client revenues and market share rose in response to new investment. Money market and balance sheet management income fell due to rising short-term US dollar and Hong Kong dollar interest rates...

  • Page 53
    ... review of HSBC's portfolio and a balance sheet securitisation programme to enhance return on capital employed. In Global Investment Banking, an increase in market share reflected HSBC's success in developing customer relationships. In debt capital markets, HSBC was ranked fifth in the international...

  • Page 54
    ... Private Bank was named the third largest global provider of hedge funds by capital invested by Institutional Investor magazine. Dedicated teams working with Commercial Banking, Personal Financial Services and Corporate, Investment Banking and Markets produced a significant increase in intra-Group...

  • Page 55
    ... and Succession Planning', '1st for Tax Guidance and Services' and '1st for Trust Services' in Asia. • • North America • HSBC extended its Private Banking capabilities through front office recruitment in New York, California and Florida, and expanded its Wealth and Tax advisory business in...

  • Page 56
    ... in Hong Kong. The US Technology Centre incurred and recharged US$1,100 million of expense, 18 per cent higher than 2004 as a result of increased activity in support of both increased global IT requirements and the development of new capabilities in Corporate, Investment Banking and Markets. Costs...

  • Page 57
    ... of HSBC's consolidated financial statements. HSBC's operations are closely integrated and, accordingly, the presentation of customer group data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and head office...

  • Page 58
    ... Review (continued) Europe Profit/(loss) before tax by country within customer group Year ended 31 December 2005 2004 US$m US$m Personal Financial Services ...United Kingdom1 ...France2 ...Turkey ...Other ...Commercial Banking ...United Kingdom ...France2 ...Turkey ...Other ...Corporate, Investment...

  • Page 59
    ... 60.8 77,755 US$m Selected balance sheet data1 Loans and advances to customers (net) ...Loans and advances to banks (net) ...Financial investments, trading assets, and financial instruments designated at fair value ...Total assets ...Deposits by banks ...Customer accounts ...1 Third party only. 312...

  • Page 60
    ... rate calculation under IFRSs. New lending was strongest in the first time buyer market, where successful pricing and marketing strategies helped gain market share of new sales in a market which contracted overall. Net interest income from UK credit cards increased by 24 per cent, driven by balance...

  • Page 61
    ... unsecured lending in the UK increased by 4 per cent. The launch of differentiated pricing initiatives in April, notably through preferential personal lending rate offers to lower-risk customers, helped boost average loan balances by 9 per cent, and increase HSBC's market share of gross advances...

  • Page 62
    ... by 15 basis points, while term lending margins were in line with 2004. A campaign designed to secure a greater share of the commercial savings market, in part through more competitive pricing, contributed to an 11 per cent increase in UK deposit balances, with spreads falling by 16 basis points...

  • Page 63
    .... Corporate, Investment Banking and Markets reported a pre-tax profit of US$2,114 million, an increase of 27 per cent, compared with 2004. Revenues from all major client-related trading activities increased, particularly from the credit and rates, equities and structured derivatives businesses where...

  • Page 64
    ... new capabilities were added to the cash equities platform, the structured derivatives business in the UK and the credit and rates business. An increase in operational costs, particularly in Global Transaction Banking, was due to higher transaction volumes. Private Banking reported a pre-tax profit...

  • Page 65
    ... private banks. Within Other, net operating income benefited from the change to the presentation of inter-company preference share dividends received from Hong Kong under IFRSs from 1 January 2005. Head office operating expenses increased, reflecting higher brand advertising and marketing costs...

  • Page 66
    ....8 US$m Share of HSBC's profit before tax ...Cost efficiency ratio ... 9.2 58.2 US$m Selected balance sheet data2 Loans and advances to customers (net) ...Total assets ...Customer accounts ...Loans and advances to banks (net)3 ...Trading assets, financial instruments designated at fair value, and...

  • Page 67
    ... operating expenses .. Operating profit ...Share of profit in associates and joint ventures ...Profit before tax...1 Personal Financial Services US$m 4,644 2,110 - Commercial Banking US$m 2,305 1,593 116 Year ended 31 December 2004 Corporate, Investment Banking & Private Markets Banking Other...

  • Page 68
    HSBC HOLDINGS PLC Financial Review (continued) Hong Kong Profit before tax by customer group Year ended 31 December 2005 2004 US$m US$m Personal Financial Services ...Commercial Banking ...Corporate, Investment Banking and Markets ...Private Banking ...Other ...2,628 955 922 190 (178) 4,517 2,063 ...

  • Page 69
    ... and Markets reflected the first full-year effect of the investment made to support business expansion. Pretax profits of Personal Financial Services and Commercial Banking grew by 27 per cent and 6 per cent respectively, benefiting from a sharp rise in deposit spreads as short-term interest rates...

  • Page 70
    ... utilisation of the Group Service Centres. Pre-tax profits in Commercial Banking increased by 6 per cent to US$955 million. Increased deposit spreads and a rise in lending and deposit balances led to higher net interest income, though this was partly offset by larger loan impairment charges and...

  • Page 71
    ...platform for Asia in Hong Kong. A 19 per cent decline in total operating income was driven by a 74 per cent fall in balance sheet management and money market revenues due to rising short-term US and Hong Kong interest rates and flattening yield curves. In Corporate and Institutional Banking, deposit...

  • Page 72
    ...Financial Review (continued) resources and improved services to facilitate business expansion. Private Banking contributed a pre-tax profit of US$190 million, an increase of 45 per cent compared with 2004. The benefits of strong growth in client assets, and consequently higher brokerage and trading...

  • Page 73
    ... US$m Share of HSBC's profit before tax ...Cost efficiency ratio ... 12.5 33.3 US$m Selected balance sheet data2 Loans and advances to customers (net) ...Total assets3 ...Customer accounts ...Loans and advances to banks (net)4 ...Trading assets, financial instruments designated at fair value, and...

  • Page 74
    ... Review (continued) Profit/(loss) before tax by customer group (continued) Year ended 31 December 2004 Corporate, Investment Banking & Private Markets Banking Other US$m US$m US$m 998 529 476 - 2 2 19 101 2,127 (12) 85 75 101 - - - - (2) 259 - (144) (52) (4) - 175 22 (1) 561 557 - Hong Kong...

  • Page 75
    Rest of Asia-Pacific (including the Middle East) Profit/(loss) before tax by customer group and by country Year ended 31 December 2005 2004 US$m US$m Personal Financial Services ...Commercial Banking ...Corporate, Investment Banking and Markets ...Private Banking ...Other ...377 818 1,207 78 94 2,...

  • Page 76
    ....3 55.1 55,577 US$m Selected balance sheet data1 Loans and advances to customers (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at fair value, and financial investments ...Total assets ...Deposits by banks ...Customer accounts ...1 Third party only. 70...

  • Page 77
    ... deposit spreads and strong loan growth, partly offset by lower asset spreads as funding costs increased following interest rate rises. Average mortgage balances increased by 27 per cent to US$16.7 billion. This growth reflected marketing campaigns in India, Malaysia and Singapore alongside new...

  • Page 78
    ... business growth and to increase sales and wealth management activities. Performance-related remuneration costs were also higher as a result of the strong growth in profitability. Marketing costs rose as major campaigns were run to support product promotions in mortgages, credit cards, insurance...

  • Page 79
    ... gains on the sale of HSBC's stake in MISR International, an Egyptian Bank. Income from the bank's strategic investments in China, Bank of Communications and Industrial Bank, which were acquired in 2004, also increased. Corporate, Investment Banking and Markets reported a pre-tax profit of US$1,207...

  • Page 80
    ...Global Transaction Banking revenues increased, as payments and cash management benefited from an increase in regional mandates which added to average balances, together with a widening of deposit spreads, notably in Singapore, India and Thailand. In Global Markets, balance sheet management and money...

  • Page 81
    ... expenses rose to support business growth. In Other, the Group's Service Centres continued to expand to support HSBC's productivity improvements, incurring US$129 million of incremental costs, offset by higher recharges to other customer groups. Higher interest rates led to increased earnings on...

  • Page 82
    HSBC HOLDINGS PLC Financial Review (continued) Profit before tax by customer group Year ended 31 December 2005 Corporate, Investment Banking & Private Markets Banking Other US$m US$m US$m 614 498 30 43 54 73 Rest of Asia-Pacific (including the Middle East) Net interest income ...Net fee income ...

  • Page 83
    ... profit ...Share of profit in associates and joint ventures ...Profit before tax ... Personal Financial Services US$m 948 284 43 32 1 - 77 28 1,413 (72) Commercial Banking US$m 472 266 59 - - - 20 13 830 (10) Year ended 31 December 2004 Corporate, Investment Private Banking & Banking Other Markets...

  • Page 84
    ...Financial Review (continued) North America Profit/(loss) before tax by country within customer group Year ended 31 December 2005 2004 US$m US$m Personal Financial Services ...United States ...Canada ...Mexico ...Other ...Commercial Banking ...United States ...Canada ...Mexico ...Other ...Corporate...

  • Page 85
    ....3 75,926 US$m Selected balance sheet data1 Loans and advances to customers (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at fair value, and financial investments ...Total assets ...Deposits by banks ...Customer accounts ...1 Third party only 264,934...

  • Page 86
    ... rate environment. In Commercial Banking, growth in pre-tax profits was largely driven by lending and deposit balance growth and improved liability interest margins. In Corporate, Investment Banking and Markets, growth in revenues was offset by investment expenditure to build the required platform...

  • Page 87
    ... with competitive pricing pressures due to excess market capacity. Personal non-credit card average loan balances in the consumer finance business grew by 8 per cent to US$16.0 billion, reflecting the success of several large direct mail campaigns and increased availability of this product in the...

  • Page 88
    ... deposit-related services in the US Bank. Within the US taxpayer financial services business, fee income grew by 12 per cent, driven by higher average loan balances and the sale of previously written-off loan balances. HSBC is the sole provider of bank products to H&R Block, the largest retail tax...

  • Page 89
    ... to improve customer service levels within the branch network and bonus costs in line with increased sales. Marketing costs grew to support the credit cards business, evidenced by the 80 per cent increase in the number of cards in circulation. IT costs rose as new systems to meet Group standards...

  • Page 90
    ... million of deposits. 'Business Smart', a product offering free checking and other value offerings to commercial customers, performed strongly following its launch at the end of 2004, attracting 41,000 new customers and balances of over US$1.0 billion. In Canada, net interest income increased by 16...

  • Page 91
    ... year. The recruitment of front office staff in Private Banking, and new feegenerating staff in WTAS, added to the cost base. This was partly offset by headcount savings through restructuring and the sale of the trust account business referred to above. Increased activity at HSBC's North American...

  • Page 92
    ....3 US$m Share of HSBC's profit before tax ...Cost efficiency ratio ... 22.7 42.8 US$m Selected balance sheet data2 Loans and advances to customers (net) ...Total assets ...Customer accounts ...Loans and advances to banks (net)3 ...Trading assets, financial instruments designated at fair value, and...

  • Page 93
    ...) in associates and joint ventures ...Profit/(loss) before tax ...1 Personal Financial Services US$m 12,915 2,885 221 80 14 553 (7) 16,661 (312) Commercial Banking US$m 1,147 302 15 5 - - 154 1,623 - Year ended 31 December 2004 Corporate, Investment Banking & Private Markets Banking Other US$m US...

  • Page 94
    HSBC HOLDINGS PLC Financial Review (continued) South America Profit/(loss) before tax by country within customer group Year ended 31 December 2005 2004 US$m US$m Personal Financial Services ...Brazil ...Argentina ...Other ...Commercial Banking ...Brazil ...Argentina ...Other ...Corporate, ...

  • Page 95
    ...62.1 33,282 US$m Selected balance sheet data1 Loans and advances to customers (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at fair value, and financial investments ...Total assets ...Deposits by banks ...Customer accounts ...1 Third party only. 9,307...

  • Page 96
    ... offset by increased costs to support business expansion and develop alternative sales channels. The investment in alternative channels led to a 15 per cent increase in direct sales volumes to over 3.2 million, with particularly strong growth in personal lending, cards and insurance. Loan impairment...

  • Page 97
    ... management, current accounts, and lending in Brazil. Current account fees increased by 26 per cent, reflecting tariff increases, improved collection procedures and higher transaction volumes, while lending fees benefited from higher business volumes. In Argentina, the launch of a commercial banking...

  • Page 98
    ... in line with 2004. Private Banking reported a pre-tax profit of US$1 million, a modest increase on 2004. The business was reorganised in 2005, with the transfer of smaller accounts to Personal Financial Services in Brazil, following a resegmentation of the customer base. In Brazil, HSBC's insurance...

  • Page 99
    ....1 US$m Share of HSBC's profit before tax ...Cost efficiency ratio ... 1.0 66.6 US$m Selected balance sheet data2 Loans and advances to customers (net) ...Total assets ...Customer accounts ...Loans and advances to banks (net)3 ...Trading assets, financial instruments designated at fair value, and...

  • Page 100
    HSBC HOLDINGS PLC Financial Review (continued) Profit before tax by customer group (continued) Year ended 31 December 2004 Corporate, Investment Banking & Private Markets Banking Other US$m US$m US$m 127 62 41 9 (1) - 55 3 296 (47) 4 12 - - - - - 1 17 - 12 (75) (1) 45 35 2 359 12 389 (244) South ...

  • Page 101
    ... original effective interest rate, and comparing the resultant present value with the loan's current carrying amount. The carrying amount of impaired loans on the balance sheet is reduced through the use of an allowance account. HSBC's policy requires a review of the level of impairment allowances...

  • Page 102
    ...The portfolio approach is applied to accounts in the following portfolios low value, homogeneous small business accounts in certain jurisdictions; residential mortgages less than 90 days overdue; credit cards and other unsecured consumer lending products; and motor vehicle financing. • • The...

  • Page 103
    ... impairment HSBC's accounting policy for goodwill is described in Note 2(o) on the Financial Statements. Goodwill arises on business combinations, including the acquisition of subsidiaries, joint ventures or associates, when the cost of acquisition exceeds the fair value of HSBC's share of the...

  • Page 104
    ... to take account of a number of factors such as bid-offer spread, credit profile, servicing costs of portfolios and model uncertainty. These adjustments are based on defined policies which are applied consistently across HSBC. Fair value based on: Quoted market prices ...Internal models with...

  • Page 105
    ... IAS 39 or as insurance contract liabilities under IFRS 4. HSBC is required to adopt this amendment for the year ending 31 December 2006 and is currently assessing the impact this will have both in the Group and the parent company. The Financial Accounting Standards Board ('FASB') has issued the...

  • Page 106
    .... Year ended 31 December Average balance US$m Short-term funds and loans and advances to banks Europe 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...

  • Page 107
    ...) Year ended 31 December Average Balance US$m Loans and advances to customers Europe 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...

  • Page 108
    ... Balance US$m Other interest-earning assets Europe 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 ...HSBC Bank Middle East ...HSBC Bank USA...

  • Page 109
    ... Bank Argentina ...30.1 2.2 9.9 0.7 4.8 12.7 6.5 0.6 1.1 10.7 9.3 2.6 1.6 1.4 0.1 5.7 100.0 For footnotes, see page 113. 28.3 2.2 9.8 0.9 5.2 14.2 6.6 0.7 0.9 8.8 10.8 2.4 1.8 0.9 0.1 6.4 100.0 Hong Kong Rest of Asia-Pacific North America South America Other operations (including consolidation...

  • Page 110
    HSBC HOLDINGS PLC Financial Review (continued) Total equity and liabilities Year ended 31 December Average balance US$m Deposits by banks4 Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong ...

  • Page 111
    Total equity and liabilities (continued) Year ended 31 December Average balance US$m Financial liabilities designated at fair value - own debt issued6 Europe North America HSBC Holdings ...HSBC Bank ...HSBC Bank USA ...HSBC Finance ...13,928 5,919 1,469 28,146 288 49,750 Debt securities in issue ...

  • Page 112
    ... balance US$m 2004 Interest expense US$m Cost % Cost % Hong Kong Rest of Asia-Pacific North America South America Other operations ... 56,043 314,140 1,249,341 19,371 1.55 Net interest margin Year ended 31 December 2004 2005 % % Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse...

  • Page 113
    ... rate. 2005 compared with 2004 Increase/(decrease) 2005 US$m Short-term funds and loans and advances to banks Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation...

  • Page 114
    ... (71) 63 25 67 (29) 8 308 1,309 824 303 240 507 779 537 40 27 884 166 65 395 128 12 564 5,471 Volume US$m Rate US$m 2004 US$m Hong Kong Rest of Asia-Pacific North America South America Other operations ... Hong Kong Rest of Asia-Pacific North America South America Other operations ... 112

  • Page 115
    ... Rate US$m 2004 US$m Hong Kong Rest of Asia-Pacific North America South America Other operations ... Hong Kong Rest of Asia-Pacific North America South America Other operations ... Footnotes to 'Average balance sheet and net interest income' 1 Brazilian operations comprise HSBC Bank Brasil...

  • Page 116
    ...in 'Loans and advances to banks' and 'Loans and advances to customers'. Interest income on such loans was included in the consolidated income statement to the extent to which it had been received. (iii) Balances and transactions with fellow subsidiaries are reported gross in the principal commercial...

  • Page 117
    ...risks and adherence to limits by means of reliable and up-todate administrative and information systems. HSBC regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. Individual responsibility and accountability, instilled through...

  • Page 118
    ... non-bank financial institutions. Each operating company is required to implement credit policies, procedures and lending guidelines which conform to HSBC Group standards, with credit approval authorities delegated from the Board of Directors of HSBC Holdings to the relevant Chief Executive Officer...

  • Page 119
    ...throughout the Group to enable operating companies to control and monitor exposures by customer and counterparty. Special attention is paid to problem loans. When appropriate, specialist units are established by HSBC's operating companies to provide customers with support in order to help them avoid...

  • Page 120
    ... total gross lending to customers, broadly in line with 2004. Commercial, industrial and international trade lending grew strongly in 2005, particularly in the retail and services industries. This, together with the IFRS grossing change mentioned above, increased commercial and financial lending by...

  • Page 121
    ... 2004 US$m Loans and advances to customers Personal: Residential mortgages ...Hong Kong Government Home Ownership Scheme ...Other personal ...Total personal ...Corporate and commercial: Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government...

  • Page 122
    ... helped by marketing campaigns. In the Rest of Asia-Pacific, continuing expansion of the credit card base and higher utilisation of cards by existing customers, together with successful marketing, contributed to a 25 per cent increase in lending. In South America, marketing and new product launches...

  • Page 123
    ... in personal lending in North America are the following balances relating to the US: 2005 US$m Residential mortgages - HSBC Bank USA ...Residential mortgages - HSBC Finance ...Motor vehicle finance ...MasterCard/Visa credit cards ...Private label cards ...Other unsecured personal lending ...36...

  • Page 124
    ... loans % 32.5 0.8 23.3 56.6 Europe US$m Personal Residential mortgages ...Hong Kong Government Home Ownership Scheme . Other personal ...70,546 - 57,920 128,466 Corporate and commercial Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government...

  • Page 125
    ... loans % 30.4 1.2 24.7 56.3 Europe US$m Personal Residential mortgages ...Hong Kong Government Home Ownership Scheme ...Other personal ...51,721 - 42,041 93,762 Corporate and commercial Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government...

  • Page 126
    ...Kong Government Home Ownership Scheme ...Other personal ...38,719 - Hong Kong US$m 23,839 7,255 7,066 38,160 Rest of AsiaPacific US$m 7,507 - 5,900 13,407 North America US$m 26,666 - 7,836 34,502 South America US$m 253 - 1,012 1,265 26,748 65,467 Corporate and commercial Commercial, industrial...

  • Page 127
    ... Government Home Ownership Scheme ...Other personal ...27,282 - Hong Kong US$m 23,125 8,123 6,227 37,475 Rest of AsiaPacific US$m 5,134 - North America US$m 22,126 - South America US$m 548 - 21,065 48,347 4,616 9,750 6,273 28,399 1,280 1,828 Corporate and commercial Commercial, industrial...

  • Page 128
    HSBC HOLDINGS PLC Financial Review (continued) Loans and advances to customers by principal area within Rest of Asia-Pacific and South America Loans and advances (gross) Commercial, international Other trade and Propertypersonal other related US$m US$m US$m 694 545 338 139 11 871 2,320 3,395 460 ...

  • Page 129
    ... Group's standard credit grading system. The following information is based on that system: Loans and advances to customers US$m Grades: 1 to 3 - satisfactory risk ...4 - watch list and special mention ...5 - sub-standard but not impaired ...705,036 19,950 6,130 731,116 Loans and advances to banks...

  • Page 130
    ... loans by industry sector as a % of total gross loan % 20.9 79.1 100.0 Europe US$m Personal ...Commercial and corporate ...Total impaired loans and advances to customers ...655 2,562 3,217 Hong Kong US$m 256 198 454 Rest of AsiaPacific US$m 119 629 748 North America US$m 5 338 343 South America...

  • Page 131
    ...to customers ...Loans and advances to banks ...751,359 125,974 877,333 1 Against financial liabilities with the same counterparty. 2 Excluding the value of any collateral or security held. Net total credit risk2 US$m 702,864 125,923 828,787 Debt securities Debt securities and other bills by rating...

  • Page 132
    ... assessment Loans and advances (Audited IFRS 7 information) It is HSBC's policy that each operating company makes allowance for impaired loans promptly when required and on a consistent basis in accordance with Group guidelines. HSBC's rating process for credit facilities extended by its operating...

  • Page 133
    ... accounts in the following portfolios: • • low value, homogeneous small business accounts in certain jurisdictions; residential mortgages that have not been individually assessed or are less than 90 days overdue (except in HSBC Finance); credit cards and other unsecured consumer lending products...

  • Page 134
    ...typically write off problem lending more quickly than is the practice in the UK. This means that HSBC's reported levels of credit risk elements and associated allowances are likely to be higher than those of comparable US banks. Impairment allowances (Audited IFRS 7 information) Management assesses...

  • Page 135
    ...allowance accounts for total loans and advances (Audited IFRS 7 information) Individually assessed US$m At 1 January ...IFRSs transition at 1 January ...At 1 January ...Amounts written off ...Recoveries of loans and advances written off in previous years ...Charge to income statement ...Exchange and...

  • Page 136
    ... in HSBC's impairment allowances by location of lending office for each of the past five years. A discussion of the material movements in the loan impairment charges by region follows these tables. 2005 (Audited IFRS 7 information) Rest of AsiaHong North South Kong Pacific America America US...

  • Page 137
    ... written off in previous years Commercial, industrial and international trade Real estate ...Non-bank financial institutions ...Other commercial ...Residential mortgages ...Other personal ... Hong Kong US$m 1,055 (34) (35) (55) (2) (33) (52) (125) (302) South America US$m 583 (1) (53) (1) - (10...

  • Page 138
    ... of amounts written off in previous years Commercial, industrial and international trade Real estate ...Non-bank financial institutions ...Other commercial ...Residential mortgages ...Other personal ... Hong Kong US$m 1,143 (71) (12) (13) (65) (121) (302) (584) South America US$m 477 (69) (5) - (30...

  • Page 139
    ... off Banks ...Commercial, industrial and international trade Real estate ...Non-bank financial institutions ...Governments ...Other commercial ...Residential mortgages ...Other personal ...3,067 - Hong Kong US$m 1,408 - 2002 Rest of AsiaNorth Pacific America US$m US$m 1,952 - South America US...

  • Page 140
    ... (442) Recoveries of amounts written off in previous years Commercial, industrial and international trade Real estate ...Non-bank financial institutions ...Other commercial ...Residential mortgages ...Other personal ... Hong Kong US$m 1,802 - South America US$m 540 - Total US$m 8,197 (5) (753) (88...

  • Page 141
    ... provisions Total bad and doubtful debt charge ...Bank ...Customer ...(162) 1,023 (7) 1,031 % Customer bad and doubtful debt charge as a percentage of closing gross loans and advances ...31 December 2004 Non-performing loans ...Provisions ... South America US$m 398 (49) (79) 270 (2) 268 (2) 270...

  • Page 142
    HSBC HOLDINGS PLC Financial Review (continued) Net charge to the income statement for bad and doubtful debts by geographical region (continued) Year ended 31 December 2003 Rest of North Hong Kong Asia-Pacific America US$m US$m US$m 655 (182) (42) 431 (31) 400 - 400 % 412 (269) (74) 69 16 85 3 82 %...

  • Page 143
    ... offset the nonrecurrence of the general provision release in Switzerland. New impairment allowances in Hong Kong were US$359 million, a rise of 51 per cent. This was partially attributable to a small number of individual allowances for corporate and commercial customers. However, overall credit...

  • Page 144
    ... only partially offset by increased requirements due to loan growth. HSBC has benefited from the shift in the balance of the consumer lending business towards higher credit quality customers. HSBC Finance monitors the two-month-and-over contractual delinquency ratio closely, as management views it...

  • Page 145
    ... policies are kept under continuous review and their application varies according to the nature of the market, the product, and the availability of empirically based data. When empirical evidence indicates an increased propensity to default on restructured accounts, the use of roll-rate methodology...

  • Page 146
    ... the Rest of Asia-Pacific was also strong, and mortgage lending increased by over 30 per cent in each of the Middle East, India, Taiwan, South Korea, mainland China and Singapore. Growth in the unsecured element of the portfolio, consisting of credit and charge card advances, personal loans, vehicle...

  • Page 147
    ..., card and mortgages. Net interest margin was partially offset by a lower interest rate environment during the year. In the UK, growth in personal lending was mainly in the mortgage market, where HSBC focused on retaining existing customers, and increasing market share through competitive pricing...

  • Page 148
    ... primarily due to the write-offs mentioned above. Excluding this, impaired loans rose, in part due to the strong growth in unsecured personal lending and credit cards. The UK has experienced weakening personal credit quality in recent years, driven by record levels of consumer debt, slower economic...

  • Page 149
    ...the loan book. Unimpaired loans past due 90 days or more The rise in Europe was due to the UK, where improved processes led to better credit data collection. In North America, HSBC Finance's business benefited from improvement in delinquency and default trends year on year. In common with other card...

  • Page 150
    HSBC HOLDINGS PLC Financial Review (continued) Risk elements The following table provides an analysis of risk elements in the loan portfolios at 31 December for the past five years: 2005 US$m Impaired loans Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...South America ...5,081 506 ...

  • Page 151
    ... the Bank of England Country Exposure Report (Form CE) guidelines, outstandings comprise loans and advances (excluding settlement accounts), amounts receivable under finance leases, acceptances, commercial bills, certificates of deposit, and debt and equity securities (net of short positions), and...

  • Page 152
    ... funding of certain short-term treasury requirements and start-up operations or branches which do not have access to local deposit markets, all of which are funded under strict internal and regulatory guidelines and limits from HSBC's largest banking operations. These internal and regulatory limits...

  • Page 153
    ... or asset-backed markets. A key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to customer liabilities. Generally, liquid assets comprise cash balances, short-term interbank deposits and highly-rated debt securities available for immediate sale and for which...

  • Page 154
    ... the Group Management Board. Limits are set for each portfolio, product and risk type, with market liquidity being a principal factor in determining the level of limits set. Traded Markets Development and Risk, an independent unit within Corporate, Investment Banking and Markets, develops the Group...

  • Page 155
    ... of daily revenue arising from all Global Markets' business and other trading activities. In 2005, HSBC implemented a change in the transfer pricing of funds between the Personal Financial Services and the Corporate, Investment Banking and Markets segments in North America, following a transfer of...

  • Page 156
    ... related to securities sold short, all derivative financial instruments and available-for-sale securities. The determination of fair values is therefore a significant element in the reporting of the Group's Global Markets activities. Responsibility for determining accounting policies and procedures...

  • Page 157
    ... 39.2 25.7 30.1 46.7 53.1 Positions taken without trading intent - VAR by risk type (Audited IFRS 7 information) Foreign exchange and commodity prices US$m At 31 December 2005 ...At 31 December 2004 ...Average 2005 ...2004 ...Minimum 2005 ...2004 ...Maximum 2005 ...2004 Interest rate trading US...

  • Page 158
    ... interest rate risk limits established by the Group Management Board. As noted above, in certain cases, the non-linear characteristics of products cannot be adequately captured by the risk transfer process. For example, both the flow from customer deposit accounts to alternative investment products...

  • Page 159
    ...-rate risk and equity risk, which primarily arise when guaranteed investment return policies have been issued. The insurance businesses have a dedicated head office market risk function which oversees management of this risk. A similar market risk also arises within HSBC's defined benefit pension...

  • Page 160
    ..., lending portfolio funded to an extent with interest rate sensitive short-term liabilities. • Global Markets: the residual interest rate risk is managed within Global Markets. This reflects the Group's policy of transferring all interest rate risk, other than structural risk, to Global Markets...

  • Page 161
    ... dividend and interest income on its investments in the Group's businesses; providing dividend payments to HSBC Holdings' 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...

  • Page 162
    ... short-term cash balances and funding positions; to minimise the market risk arising from long-term investments and long-term liabilities; and to protect distributable reserves from the adverse impact of market risk variables. Market risk for HSBC Holdings is monitored by its ALCO. The main market...

  • Page 163
    ... review of identified risks to monitor significant changes; operational risk loss data is collected and reported to senior management at the business unit level. Aggregate operational risk losses are recorded and details of incidents above a materiality threshold are reported to Group Head Office...

  • Page 164
    ... are taken. The Group Internal Audit function monitors compliance with policies and standards. Risk management of insurance operations (Forms part of the audited financial statements) Insurance risk Within its service proposition, HSBC offers its personal and commercial customers a wide range of...

  • Page 165
    ... unit linked and non-linked. There are a number of major sub-categories of non-linked life assurance. Insurance contracts with discretionary participation features include with-profits business. The largest portfolio is in Hong Kong. This is a book of endowment life policies, with annual bonuses...

  • Page 166
    ... experience is worse than expected. HSBC manages these risks through prudent pricing (for example, imposing restrictions and deductibles in the policy terms and conditions), product design, risk selection, claims handling, investment strategy and reinsurance policy. All non-life insurance contracts...

  • Page 167
    ... related risks. The present value of the shareholders' interest in the profits expected to emerge from the book of in-force policies at 31 December 2005 can be stress-tested to assess the ability of the book of life business to withstand adverse developments. A key feature of life insurance business...

  • Page 168
    HSBC HOLDINGS PLC Financial Review (continued) A key aspect of the risk management for insurance business, and life insurance in particular, is the need actively to manage the assets in relation to the liabilities. Of particular importance for a number of lines of business is the need to match the...

  • Page 169
    ... assets, liabilities and shareholders' funds of associate insurance companies Erisa S.A. and Ping An Insurance. Financial risks HSBC's insurance businesses are exposed to a range of financial risks, including market risk, credit risk and liquidity risk. The nature and management of these risks is...

  • Page 170
    ... on the assets supporting guaranteed investment returns payable to policyholders; and higher market interest rates result in a reduction of the value of the fixed income securities portfolio which may result in losses if, as a result of an increase of the level of surrenders, the corresponding...

  • Page 171
    ... companies Erisa, S.A. and Ping An Insurance. 2 There is no specific investment return implied by market performance guarantees because the guarantees are expressed as lying within prescribed ranges of average market returns. The Group manages the annuities, annual return and capital guarantees...

  • Page 172
    ... the framework of the Group guidelines and review investment performance and compliance with the guidelines. Assessment of the creditworthiness of issuers and counterparties is based primarily upon internationally recognised credit ratings and other publicly available information. In addition, to...

  • Page 173
    ... HSBC's insurance business by rating agency designation at 31 December 2005 based on Standard and Poor's ratings or equivalent: Treasury bills US$m Supporting liabilities under non-linked insurance contracts AAA ...AA- to AA+ ...A- to A+ ...Lower than A- ...Unrated ...Supporting shareholder's funds...

  • Page 174
    ... and the timing of settlement of claims liabilities that may arise, and this leads to liquidity risk. As part of the management of this exposure, estimates are prepared for most lines of insurance business of cash flows expected to arise from insurance funds at the balance sheet date. The estimates...

  • Page 175
    ...balance sheet transactions. Under the EU's Amending Directive to the Capital Adequacy Directive, the FSA allows banks to calculate capital requirements for market risk in the trading book using VAR techniques. HSBC's capital is divided into two tiers: • Tier 1 capital comprises shareholders' funds...

  • Page 176
    ... increase in shareholders' funds at the balance sheet date compared with the previous accounting, which is reversed when the relevant dividend is subsequently declared. Banks reflect the benefit of this increase in their regulatory capital until the dividend declaration, in line with the accounting...

  • Page 177
    ...market and investor concentration, cost, market conditions, timing and the effect on the composition and maturity profile of HSBC's capital. The subordinated debt requirements of other HSBC companies are met internally. HSBC recognises the impact on shareholder returns of the level of equity capital...

  • Page 178
    HSBC HOLDINGS PLC Financial Review (continued) Capital structure (Unaudited information) 2005 US$m Composition of regulatory capital Tier 1 capital Shareholders' funds ...Minority interests and preference shares ...Innovative tier 1 securities ...Less : Goodwill capitalised and intangible assets ...

  • Page 179
    ... Banking Corporation ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...HSBC Bank and other subsidiaries ...HSBC Bank ...HSBC Finance ...HSBC Bank Canada ...HSBC Bank USA and other subsidiaries ...HSBC North America ...HSBC Mexico ...HSBC Bank Middle East ...HSBC Bank Malaysia ...HSBC South...

  • Page 180
    ...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...

  • Page 181
    ...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. Year ended 31 December 2005 Average Average balance rate US$m % Deposits by banks Europe Demand and other...

  • Page 182
    HSBC HOLDINGS PLC Other Information (continued) Year ended 31 December 2005 Average Average balance rate US$m % Customer accounts Europe Demand and other - non-interest bearing ...Demand - interest bearing ...Savings ...Time ...Other ...28,501 146,484 46,248 48,201 10,967 280,401 Hong Kong Demand ...

  • Page 183
    ... 64,705 Hong Kong Certificates of deposit ...Time deposits: - banks ...- customers ...340 889 13,438 14,667 Rest of Asia-Pacific Certificates of deposit ...Time deposits: - banks ...- customers ...4,251 2,923 9,408 16,582 North America Certificates of deposit ...Time deposits: - banks ...- customers...

  • Page 184
    ... 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 Federal funds...

  • Page 185
    ... entities, together with secondary credit enhancement. HSBC also has relationships with SPEs which offer management of investment funds, provide finance to public and private sector infrastructure projects, and facilitate capital funding through the issue of preference shares via partnerships. All...

  • Page 186
    ... and Head of the Home Civil Service in the United Kingdom from 1988 to 1998. †R K F Ch'ien, CBE Age 54. Chairman of CDC Corporation and of its subsidiary, China.com Inc. A non-executive Director since 1998. A member of the Group Audit Committee. Non-executive Chairman of HSBC Private Equity (Asia...

  • Page 187
    ... Accounting Standards Board from 2001 to 2004. A non-executive Director of BP p.l.c. since 1 January 2005. A former partner in KPMG. †W K L Fung, OBE Age 57. Group Managing Director of Li & Fung Limited. A non-executive Director since 1998. A member of the Corporate Social Responsibility...

  • Page 188
    ... Banking from 2001 to 2004. S T Gulliver Age 46. Co-Head Corporate, Investment Banking and Markets. A Group Managing Director since 2004. Joined HSBC in 1980. Appointed a Group General Manager in 2000. Head of Treasury and Capital Markets in Asia-Pacific from 1996 to 2002 and Head of Global Markets...

  • Page 189
    ... Officer of HSBC Bank Canada from 1997 to 1999. President and Chief Executive Officer of HSBC USA Inc. and HSBC Bank USA from 1999 to 2003. J J Studzinski Age 49. Co-Head Corporate, Investment Banking and Markets. A Group Managing Director since 2004. Joined HSBC in 2003 as a Group General Manager...

  • Page 190
    ... Thurston Age 52. Group General Manager, Personal Financial Services, Asia-Pacific. Joined HSBC in 1975. Appointed a Group General Manager in 2003. P T S Wong Age 54. Executive Director, Hong Kong and Mainland China of The Hongkong and Shanghai Banking Corporation Limited. Joined HSBC on 28 February...

  • Page 191
    ...dividend. The market value per share used to calculate shareholders' entitlements to new shares was US$16.2305, being the US dollar equivalent of £9.032. 2. Principal activities and business review Through its subsidiaries and associates, HSBC provides a comprehensive range of banking and related...

  • Page 192
    ...Company to make market repurchases of up to 1,119,000,000 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...

  • Page 193
    ... Directors' Remuneration Report. All-employee share 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...

  • Page 194
    ...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...

  • Page 195
    ...the Remuneration Committee does not intend seven times salary to be the normal level of award. Under the HSBC Holdings Group Share Option Plan the maximum value of options which could have been granted to an employee in any one year (together with any Performance Share awards under the HSBC Holdings...

  • Page 196
    ... average closing price of the shares immediately before the dates on which options were exercised was £9.19. The HSBC Holdings Group Share Option Scheme expired on 26 May 2005. No options have been granted under the Scheme since that date. The HSBC Share Plan HSBC Holdings ordinary shares of...

  • Page 197
    ...HSBC France share). At 31 December 2005, The HSBC Holdings Employee Benefit Trust 2001 (No. 1) held 21,102,823 HSBC Holdings ordinary shares which may be exchanged for HSBC France shares arising from the exercise of these options. Banque Chaix shares of â,¬16 Date of award 7 Jun 2000 Exercise price...

  • Page 198
    .... Options and equity-based awards granted on or after 14 November 2002 will be exercisable on their original terms, save that they have been adjusted to reflect the exchange ratio. At 31 December 2005, the HSBC (Household) Employee Benefit Trust 2003 held 3,006,623 HSBC Holdings ordinary shares and...

  • Page 199
    ...,131 Options lapsed during year - - Options at 31 December 2005 - - 1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £8.91. HSBC Finance 1996 Long-Term Executive Incentive Compensation Plan HSBC Holdings ordinary shares of US$0.50...

  • Page 200
    ... Options lapsed during year - Options at 31 December 2005 - 1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £9.00. Beneficial Corporation 1990 Non-Qualified Stock Option Plan HSBC Holdings ordinary shares of US$0.50 Date of award...

  • Page 201
    ...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 further options will be granted...

  • Page 202
    ... Corporate Governance Report of HSBC Holdings. Board of Directors 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...

  • Page 203
    ... was Group Treasurer from 1992 to 1998, and Executive Director, Corporate, Investment Banking and Markets from 1998 to 2003, when he was appointed to his current position. He has worked in Hong Kong, New York, the Middle East and London, and has immense international experience and knowledge of HSBC...

  • Page 204
    ... advance of all Board and Committee meetings to allow time for appropriate review and to facilitate full discussion at the meetings. 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...

  • Page 205
    ...change in balance sheet management policy. The Group Management Board sub-delegates credit, investment and capital expenditure authorities to its members. Group Audit Committee The Group Audit Committee meets regularly with HSBC's senior financial, internal audit, legal and compliance management and...

  • Page 206
    ... Credit and Risk, the Head of Group Compliance, the Group General Manager, Legal and Compliance, the Group General Manager Internal Audit and the Head of Group Security and receives periodic presentations from other functional heads and line management. Regular comprehensive reports on the work...

  • Page 207
    ...the Group's financial statements. Examples of such services are due diligence services provided in connection with potential acquisitions, audits or reviews of employee benefit plans, ad hoc attestation or agreed-upon procedures reports (including reports requested by regulators), and accounting and...

  • Page 208
    ... Listing of Securities on The Stock Exchange of Hong Kong Limited, save that The Stock Exchange of Hong Kong has granted certain waivers from strict compliance with the Hong Kong Model Code, primarily to take into account accepted practices in the UK, particularly in respect of employee share plans...

  • Page 209
    ...the Group Business Principles and Values, which apply to the employees of all HSBC companies, pursuant to the requirements of the Sarbanes-Oxley Act the Board of HSBC Holdings has adopted a Code of Ethics applicable to the Group Chairman, the Group Finance Director and Group Chief Accounting Officer...

  • Page 210
    ...the business. The appointment of executives to the most senior positions within HSBC requires the approval of the Board of Directors of HSBC Holdings. Functional, operating, financial reporting and certain management reporting standards are established by Group Head Office management for application...

  • Page 211
    ... the Board of Directors. The key processes used by the Committee in carrying out its reviews include: regular reports from the heads of key risk functions; the production annually of reviews of the internal control framework applied at Group Head Office and major operating subsidiary level measured...

  • Page 212
    ... measures and employee relations. The policy manuals address risk issues in detail and co-operation between head office departments and businesses is required to ensure a strong adherence to HSBC's risk management system and its corporate social responsibility practices. Internal controls are an...

  • Page 213
    ... business of HSBC are welcomed and are dealt with in an informative and timely manner. All HSBC Holdings ordinary shares of US$0.50 shareholders are encouraged to attend the Annual General Meeting or the informal meeting of shareholders held in Hong Kong to discuss the progress of HSBC. Directors...

  • Page 214
    ...any short positions as defined in the Securities and Futures Ordinance of Hong Kong. Save as stated above and in the Directors' Remuneration Report, none of the Directors had an interest in any shares or debentures of any HSBC or associated corporation at the beginning or at the end of the year, and...

  • Page 215
    ... 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 2005 and up to the date of this Report. Supplier payment policy HSBC Holdings subscribes to...

  • Page 216
    HSBC HOLDINGS PLC Report of the Directors (continued) US$28.9 million was given for charitable purposes in the United Kingdom. No political donations were made during the year. At the Annual General Meeting in 2003 shareholders gave authority for HSBC Holdings and HSBC Bank to make EU political ...

  • Page 217
    ... terms and conditions of employment, remuneration, retirement benefits, development of high potential employees and key succession planning. The Remuneration Committee seeks to respond to the variety of environments and circumstances which are faced by different businesses in different markets...

  • Page 218
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) account in determining individual bonus levels include customer relationships; full utilisation of professional skills; and adherence to HSBC's ethical standards, internal controls and procedures. Bonus ranges are reviewed in the context...

  • Page 219
    ... greater participation in the HSBC Holdings Savings-Related Share Option Plan: International, two amendments were approved at the 2005 Annual General Meeting. The first was the introduction of the facility to save and have option prices expressed in US dollars, Hong Kong dollars and euros as well...

  • Page 220
    ... banking sector. Market information is monitored for major US institutions of a comparable size and complexity to HSBC Holdings, including: Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co. The level of awards available to the executive Directors under the annual cash bonus scheme...

  • Page 221
    ... is responsible; and Group performance, measured by comparing operating profit before tax with plan. The Remuneration Committee has discretion to eliminate extraordinary items when assessing bonuses, if the main cause did not arise during the current bonus year. Measurement against these key...

  • Page 222
    ... of The HSBC Share Plan where maximum value will only be released to the individual if Group performance is at a very high level. The Trustee to the Plan will be provided with funds to acquire HSBC Holdings ordinary shares at an appropriate time after the announcement of the annual results. Sir...

  • Page 223
    ... shareholder return. Following the three-year performance period, the conditions applying to awards of Performance Shares under The HSBC Share Plan will be tested and vesting will take place shortly afterwards. Shares released will include additional shares equivalent to the value of the dividends...

  • Page 224
    ...' TSR measured against the TSR benchmark. For each award the opening calculation of the share price component within HSBC Holdings' TSR was the average market price over the 20 trading days commencing on the day when the annual results were announced. TSR for the benchmark constituents was based on...

  • Page 225
    .... Total Shareholder Return The graphs below show HSBC Holdings' TSR performance against the benchmark TSR for Performance Shares awarded in March 2002 (graph 1), the Financial Times-Stock Exchange ('FTSE') 100 Index (graph 2), the Morgan Stanley Capital International ('MSCI') World Index...

  • Page 226
    ...the three-year period ended 2001, pro rated for any partial year (US$4 million). Within 30 days of the effective date of the acquisition, Mr Aldinger received a one-time special retention grant of HSBC Holdings ordinary shares under the HSBC Holdings Restricted Share Plan 2000 with a value equal to...

  • Page 227
    ... take into account the expected time commitment of such appointment. The time commitment for executive Directors' external appointments will be reviewed as part of the annual Board review. Any remuneration receivable in respect of an external appointment is normally paid to the HSBC company by which...

  • Page 228
    ... or bonuses related to the revenue or profits generated by employees individually or collectively with others engaged in similar activities) were the highest in HSBC for the year ended 31 December 2005. £000 Basic salaries, allowances and benefits in kind ...Pension contributions ...Bonuses paid or...

  • Page 229
    ... of 2005 when added to the bonus waived in respect of 2004 (£1,200,000) equals 250 per cent of salary earned during 2004 and 2005. 10 Includes fees as non-executive Chairman of HSBC Private Equity (Asia) Limited and as a non-executive Director of The Hongkong and Shanghai Banking Corporation. 11...

  • Page 230
    ... allowance will increase to 55 per cent of annual basic salary. The pension arrangements for D G Eldon are provided under the HSBC International Staff Retirement Benefits Scheme with a normal accrual rate of one twenty-seventh of pensionable salary per year of pensionable service. These arrangements...

  • Page 231
    ...682 225 1 The transfer value represents a liability of HSBC's pension funds and not a sum paid or due to the individual; it cannot therefore meaningfully be added to annual remuneration. 2 On attaining age 60, Sir John Bond has been able, under the terms of the scheme, to retire at any time with an...

  • Page 232
    ... the terms of the HSBC Finance Corporation stock option plan, to an earlier date in certain circumstances, for example retirement. 1,070,000 options remaining unvested therefore vested on Mr Aldinger's retirement as a Director on 29 April 2005. Based on the market price of HSBC Holdings shares on...

  • Page 233
    ... vested on Mr Aldinger's retirement as a Director on 29 April 2005 when the market price was £8.355. At the date of the award, 10 May 2004, the market value per share was £7.94. The performance tests described in the 'Report of the Directors' in the Annual Report and Accounts 2000 and set out in...

  • Page 234
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Audited Information 5 Retired as a Director on 27 May 2005. At the date of vesting, 31 May 2005 the market value per share was £8.68. The market values per share at the dates of the awards, 12 March 2001, 8 March 2002, 5 March 2003 and 4...

  • Page 235
    ... in relation to the financial statements. The Directors are responsible for preparing the Annual Report and Accounts 2005, the consolidated financial statements of HSBC Holdings and its subsidiaries (the 'Group') and holding company financial statements for HSBC Holdings (the 'parent company') in...

  • Page 236
    ...'s Report to the Members of HSBC Holdings plc We have audited the Group and parent company financial statements (the 'financial statements') of HSBC Holdings plc for the year ended 31 December 2005 which comprise the Group Income Statement, the Group and parent Company Balance Sheets, the Group and...

  • Page 237
    ...true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company's affairs as at 31 December 2005; and the financial statements and the part of the Directors' Remuneration Report to be audited...

  • Page 238
    HSBC HOLDINGS PLC Financial Statements Consolidated income statement for the year ended 31 December 2005 Notes 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...

  • Page 239
    ... 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 ...Retirement benefit...

  • Page 240
    HSBC HOLDINGS PLC Financial Statements (continued) Consolidated statement of recognised income and expense for the year ended 31 December 2005 2005 US$m Available-for-sale investments: - fair value changes taken to equity ...- fair value changes transferred to income statement on disposal or ...

  • Page 241
    ...option awards ...Own shares released on vesting of share awards and exercise of options ...Increase in non-equity minority interests ...Subordinated loan capital issued ...Subordinated loan capital repaid ...Dividends paid to shareholders of the parent company ...Dividends paid to minority interests...

  • Page 242
    ... owed to HSBC undertakings ...Financial liabilities designated at fair value ...Derivatives ...Other liabilities ...Accruals and deferred income ...Deferred tax ...Subordinated liabilities ...Total liabilities ...Equity Called up share capital ...Share premium account ...Merger reserve and other...

  • Page 243
    ...share capital At 1 January ...Shares issued in connection with the early conversion of HSBC Finance Corporation 8.875 per cent Adjustable Conversion-Rate Equity Security Units ...Shares issued under employee share plans ...Shares issued in lieu of dividends ...At 31 December ...Share premium account...

  • Page 244
    ...continued) HSBC Holdings cash flow statement for the year ended 31 December 2005 Notes Cash flows from operating activities Profit before tax ...Adjustments for: - non-cash items included in net profit ...- change in operating assets ...- change in operating liabilities ...- elimination of exchange...

  • Page 245
    HSBC HOLDINGS PLC Notes on the Financial Statements 1 Basis of preparation (a) For all reporting periods up to and including the year ended 31 December 2004, HSBC prepared its consolidated financial statements in accordance with UK Generally Accepted Accounting Principles ('UK GAAP'). From 1 ...

  • Page 246
    ... financial statements, drawn up to 31 December annually. Entities that are controlled by HSBC are consolidated until the date that control ceases. Newly acquired subsidiaries are consolidated from the date that control is transferred to HSBC. The purchase method of accounting is used to account for...

  • Page 247
    ...geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, North America and South America, and manages its business through four customer groups: Personal Financial Services; Commercial Banking; Corporate Investment Banking and Markets; and Private Banking. The main items reported in the 'Other...

  • Page 248
    ...supported by prices from current market transactions or observable market data. A number of factors such as bid-offer spread, credit profile, servicing costs of portfolios and model uncertainty are taken into account, as appropriate, when values are calculated using valuation techniques. If the fair...

  • Page 249
    .... Other historical data and current economic conditions are also evaluated when calculating the appropriate level of allowance required to cover inherent loss. In certain highly developed markets, sophisticated models also take into account behavioural and account management trends as revealed in...

  • Page 250
    ... under investment contracts - These are managed on a fair value basis and management information is also prepared on this basis. Liabilities to customers under linked contracts are determined based on the fair value of the assets held in the linked funds, with changes shown in the income statement...

  • Page 251
    ... rates. Dividends are recognised in the income statement when the right to receive payment has been established. Financial investments are recognised using trade date accounting. At each balance sheet date an assessment is made of whether there is any objective evidence of impairment in the value...

  • Page 252
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) (j) 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 ...

  • Page 253
    ... of the hedge is assessed. The method an HSBC entity adopts for assessing hedge effectiveness will depend on its risk management strategy. For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows...

  • Page 254
    ... 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 annually by comparing the present value of the expected future cash flows from a business with the...

  • Page 255
    ... include the value of in-force long-term assurance 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...

  • Page 256
    ...' equity. Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantially 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...

  • Page 257
    ...fair value of the options on grant date, and the effect of any non-market vesting conditions such as option lapses. An option may lapse if, for example, an employee ceases to be employed by HSBC before the end of the vesting period. Estimates of future such employee departures are taken into account...

  • Page 258
    ... as recent experience and general economic conditions. Movements in the present value of in-force long-term insurance business are included in 'Other operating income' on a gross of tax basis. (x) Investment contracts Customer liabilities under non-linked and unit-linked investment contracts and the...

  • Page 259
    ..., and include cash and balances at central banks, treasury bills and other eligible bills, loans and advances to banks, and certificates of deposit. 3 Net income from financial instruments designated at fair value Net income from financial instruments designated at fair value includes all gains and...

  • Page 260
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 2005 US$m 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 ...

  • Page 261
    ... 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 investments1...

  • Page 262
    ...The largest plan exists in the United Kingdom, where the HSBC Bank (UK) Pension Scheme covers employees of HSBC Bank plc and certain other employees of HSBC. This plan comprises a funded defined benefit plan ('the principal plan') which is closed and a defined contribution plan which was established...

  • Page 263
    ...(UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and the HSBC North America (U.S.) Retirement Income Plan cover 38 per cent of HSBC's employees. HSBC healthcare benefits plans HSBC also provides post-employment healthcare benefits under plans in the United Kingdom...

  • Page 264
    ... defined benefit pension and post-employment healthcare plans at 31 December 2004, which formed the basis for measuring the 2005 periodic costs, were as follows: Rate of increase for pensions in payment and deferred pension % 2.7 n/a n/a 2.7 5.0 5.0 2.0 n/a n/a 1.5 Discount rate % UK ...Hong Kong...

  • Page 265
    ... the Group's obligations under its defined benefit pension and post-employment healthcare plans, particularly given the maturity of the plans. HSBC calculates that each additional year of longevity assumed in calculating its defined benefit obligation for the HSBC Bank (UK) Pension Scheme increases...

  • Page 266
    ... benefit pension costs in each subsequent year: At 31 December 2005 HSBC Bank (UK) Pension Scheme Other plans Expected Expected rates of rates of return Value return % US$m % Equities ...Bonds ...Property ...Other ...Fair value of plan assets ...Present value of funded obligations ...Present value...

  • Page 267
    ...in the fair value of plan assets 2005 HSBC Bank (UK) Pension Scheme US$m At 1 January ...Expected return on plan assets...Contributions by HSBC ...- normal ...- special ...Contributions by employees ...Experience gains ...Benefits paid ...Acquisitions ...Assets distributed on settlements ...Exchange...

  • Page 268
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Total expense recognised in the income statement in 'Employee compensation and benefits' 2005 HSBC Bank (UK) Pension Scheme US$m Current service cost ...Interest cost ...Expected return on plan assets ...Past service cost ...(Gains)/...

  • Page 269
    ... the fair value of plan assets 2005 US$m At 1 January ...Expected return on plan assets ...Contributions by HSBC ...Experience gains ...Benefits paid ...Exchange differences ...At 31 December ...79 10 19 1 (7) 5 107 2004 US$m 62 8 14 - (5) - 79 The actual return on plan assets for the year ended 31...

  • Page 270
    ...The average number of persons employed by HSBC Holdings during 2005 was 433 (2004: 421). 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 Benefit Scheme. There is...

  • Page 271
    ... accounting matters, reporting on internal controls not connected with the financial statements, due diligence work and environmental audits. Tax services include tax compliance services and tax advice. Other services include other assurance and advisory services such as translation services, review...

  • Page 272
    ...3 20 5-year SavingsRelated Share Option Plans 4.3 5 20 The HSBC Share Plan 4.3 5 20 1 The risk-free rate was determined from the UK gilts yield curve for the HSBC Holdings Group Share Option Plan awards and UK Savings-Related Share Option Plans. A similar yield curve was used for the International...

  • Page 273
    ... date is 4 years. None of these options are exercisable at the balance sheet date. Savings-related share option plans The savings-related share option plans invite eligible employees to enter into savings contracts to save up to £250 per month, with the option to use the savings to acquire shares...

  • Page 274
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) The weighted average fair value of options granted in the year as at the date of grant was US$3.76 (2004: US$3.75). The exercise price range and weighted average remaining contractual life for options outstanding at the balance sheet ...

  • Page 275
    ... 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 to the creation of shareholder value...

  • Page 276
    ...-term incentive scheme 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 to the creation of shareholder value. This...

  • Page 277
    ...685 HSBC Holdings and its subsidiary undertakings in the United Kingdom provided for UK corporation tax at 30 per cent (2004: 30 per cent). Overseas tax included Hong Kong profits tax of US$639 million (2004: US$539 million). Subsidiaries in Hong Kong provided for Hong Kong profits tax at the rate...

  • Page 278
    ..., relating to items that are taken directly to equity, was US$437 million (2004: US$319 million). 11 Dividends Dividends to shareholders of the parent company amounted to US$7,750 million in 2005 (2004: US$6,932 million). Of this, US$7,729 million was dividends paid on ordinary share capital (2004...

  • Page 279
    ...and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East, HSBC Finance and HSBC Bank USA, by the location of the branch responsible for reporting the results or advancing the funds. Due to the nature of HSBC's structure, the analysis of profits shown below includes intra-HSBC items between...

  • Page 280
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Profit before tax Year ended 31 December 2005 Rest of AsiaNorth South Pacific America America US$m US$m US$m 5,673 (3,261) 2,412 1,619 (279) 1,340 753 107 860 58 18 5 155 335 5,183 24,374 (9,487) 14,887 5,346 (740) 4,606 ...

  • Page 281
    ... profit ...Share of profit in associates and joint ventures ...Profit before tax ...Other disclosures: Capital expenditure incurred2 ...Investment in associates and joint ventures ...1 Hong Kong US$m 5,133 (1,495) 3,638 1,964 (261) 1,703 659 314 175 27 2,247 536 9,299 Year ended 31 December 2004...

  • Page 282
    ... other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit/(loss) ...Share of profit in associates and joint ventures ...Profit before tax ...Capital expenditure incurred2 ...1 Year ended 31 December 2005 Corporate, Investment Banking Private & Markets Banking...

  • Page 283
    ...Operating profit ...Share of profit in associates and joint ventures ...Profit before tax ...Capital expenditure incurred2 ...1 Net operating income: External ...Inter-segment ...1 Commercial Banking US$m 4,875 2,645 234 Year ended 31 December 2004 Corporate, Investment Banking Private & Markets...

  • Page 284
    ... other banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...Trading assets which may be repledged or resold by counterparties Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers ...Financial investments...

  • Page 285
    HSBC Holdings At 31 December 2005 Held for Designated trading at fair value US$m US$m - 968 - - - 968 - 14,092 3,517 14,092 - - - - - 3,517 - 756 - - - 25 781 Loans and receivables US$m Availablefor-sale securities US$m Total US$m 756 968 14,092 3,517 25 19,358 58,204 77,562 Financial assets ...

  • Page 286
    ... listed investments are US$2,049 million (2004: US$2,861 million) of investments listed in Hong Kong. 16 Financial assets designated at fair value 2005 US$m Treasury and other eligible bills ...Debt securities ...Equity securities ...Loans and advances to banks ...Loans and advances to customers...

  • Page 287
    ... are debt securities issued by banks and other financial institutions of US$1,703 million. 17 Derivatives Fair values of derivatives by product contract type held by HSBC At 31 December 2005 Trading US$m Foreign exchange ...Interest rate ...Equities ...Credit derivatives ...Commodity and other...

  • Page 288
    ...Notes on the Financial Statements (continued) Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries Year ended 31 December 2005 2004 Trading Assets Liabilities Assets US$m US$m US$m Foreign exchange ...Interest rate ...Gross total fair values ...896 72 968 144...

  • Page 289
    ... HSBC Holdings' derivatives entered into with HSBC undertakings are managed in conjunction with financial liabilities designated at fair value. Contract amounts of derivatives held for trading purposes by product type HSBC 2005 US$m Foreign exchange ...Interest rate ...Equities ...Credit derivatives...

  • Page 290
    ...the balance sheet date; they do not represent amounts at risk. 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...

  • Page 291
    ...any fair value adjustments to account for market features not included within the valuation model (for example, bid-mid spreads, counterparty credit spreads and/or market data uncertainty); and inception profit, or an unamortised element thereof, not recognised immediately in the income statement in...

  • Page 292
    ... 2004 US Treasury...US Government agencies ...US Government sponsored entities...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities ...Corporate debt and other securities ...Equities ...7,998 9,657 10,093 11,510 5,274 36,393 13,367 84,477 6,563 185,332 Fair value...

  • Page 293
    ...million. Included within listed investments are US$1,246 million (2004: US$3,120 million) of investments listed in Hong Kong. HSBC Holdings 2005 Carrying amount US$m Available-for-sale debt securities issued by HSBC undertakings ...Available-for-sale equities ...3,256 261 3,517 Fair value US$m 3,256...

  • Page 294
    ... equity capital Country of incorporation Listed People's Republic of China People's Republic of China Saudi Arabia Carrying amount US$m Fair value US$m Bank of Communications Co., Limited ...Ping An Insurance (Group) Company of China Limited...The Saudi British Bank ...Unlisted AEA Investors...

  • Page 295
    ... of HSBC Holdings. During the year, HSBC's shareholding of 21.16 per cent in the Cyprus Popular Bank Limited (trading as Laiki Group) was reclassified as a held for sale asset. See Note 25. HSBC has US$4,318 million (2004: US$nil) of investments in associates and joint ventures listed in Hong Kong...

  • Page 296
    ... operation is the United Kingdom. During 2005 HCM Holdings disposed of its trading subsidiary. The remaining investment represents an interest in a holding company. Although HSBC owns more than 50 per cent of the equity capital of HCM Holdings Limited, the agreement with the other shareholder means...

  • Page 297
    ... PVIF for HSBC's main insurance subsidiaries are: UK Risk free rate ...Risk discount rate ...Expenses inflation ...3.90% 8.00% 3.20% Hong Kong 4.19% 11.00% 3.00% The PVIF represents the value of the shareholder's interest in the in-force business of the life insurance operations. The calculation of...

  • Page 298
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Other intangible assets The analysis of the movement of intangible assets, excluding the present value of in-force long-term insurance business, for the year ended 31 December 2005 is as follows: Mortgage servicing rights US$m 791 136...

  • Page 299
    ...Commercial Banking - Europe ...Private Banking - Europe ...Corporate, Investment Banking and Markets - Europe ...Personal Financial Services - North America (other than Mexico) ...Total goodwill in the CGUs listed above ... Goodwill at 1 July 2005 US$m 3,515 2,913 3,701 3,694 10,451 24,274 Discount...

  • Page 300
    ...Financial Statements (continued) 23 Property, plant and equipment HSBC Property, plant and equipment Freehold land and buildings US$m Cost or fair value At 1 January 2005 ...Additions at cost2 ...Acquisition of subsidiaries ...Fair value adjustments ...Disposals ...Transfers ...Exchange differences...

  • Page 301
    ... a member of the Hong Kong Institute of Surveyors. As a result of the revaluation, the net book value of investment properties increased by US$201 million (2004: surplus of US$99 million). A surplus of US$201 million (2004: surplus of US$99 million), was credited to the income statement for the year...

  • Page 302
    ... Statements (continued) HSBC properties leased to customers HSBC properties leased to customers included US$646 million at 31 December 2005 (2004: US$552 million) let under operating leases, net of accumulated depreciation of US$42 million (2004: US$53 million). None was held by HSBC Holdings. HSBC...

  • Page 303
    ... preference share capital of US$17 million. 2 Issued equity capital is less than US$1 million. All of the above subsidiaries are included in the consolidation. Details of all HSBC companies will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies. All...

  • Page 304
    ... Alpha Fund 48.7 2004 Beijing HSBC Insurance Brokers Limited HSBC Insurance Brokers (India) Private Limited HSBC Private Equity Fund 3 HSBC Continental European Alpha Fund 24.9 25.9 47.3 19.9 HSBC has the right to appoint the majority of the board, therefore has management control. HSBC has...

  • Page 305
    ... contingent liabilities of the companies acquired during the year, which relate principally to Metris, were as follows: Fair value US$m At date of acquisition Cash and balances at central banks ...Loans and advances to banks ...Loans and advances to customers ...Debt securities ...Intangible assets...

  • Page 306
    ... these assets as held for sale. They are presented within the geographical segment South America. 26 Financial liabilities designated at fair value HSBC 2005 US$m Deposits by banks and customer accounts ...Liabilities to customers under investment contracts ...Debt securities in issue (Note...

  • Page 307
    ... 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...

  • Page 308
    ... Notes on the Financial Statements (continued) 28 Other liabilities HSBC 2005 US$m Amounts due to investors in funds consolidated by HSBC ...Current taxation ...Obligations under finance leases ...Dividend declared and payable by HSBC Holdings ...Endorsements and acceptances ...Other liabilities...

  • Page 309
    ... development of prior year claims. For this reason, no detailed table of claims development has been provided. This is because a significant majority of the non-life insurance business claims are settled within a short period of time. Life insurance policyholders' liabilities 2005 Reinsurers' share...

  • Page 310
    ...US$569 million) has no expiry date and US$377 million (2004: US$404 million) is scheduled to expire within 10 years. HSBC Holdings Deferred tax liability 2005 2004 US$m US$m Temporary differences: - short-term timing differences ...Provision for tax on profit remitted from overseas ...5 65 70 (1) 65...

  • Page 311
    ...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$235 million (2004: US$231 million). These relate to labour and overtime litigation claims brought by employees after leaving the bank...

  • Page 312
    ... 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. 1 2 3 4 See Step-up Perpetual Preferred Securities, note (a) Guaranteed by HSBC Holdings. Classified as...

  • Page 313
    ... 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...

  • Page 314
    ... and the guarantee taken together. HSBC Holdings Carrying amount 2005 US$m Subordinated liabilities: - at amortised cost ...- designated at fair value ...5,236 13,370 18,606 2005 US$m HSBC Holdings' dated subordinated loan capital is repayable: - between 2 and 5 years ...- over 5 years ...2,723 15...

  • Page 315
    ...analysis of the fair value of financial instruments not measured at fair value in the balance sheet: 2005 Carrying amount US$m Assets Loans and advances to banks ...Loans and advances to customers ...Financial investments: Debt securities ...Liabilities Deposits by banks ...Customer accounts ...Debt...

  • Page 316
    ... approximation of fair value, for example, because they are either short term in nature or reprice to current market rates frequently: Assets Cash and balances at central banks Items in the course of collection Hong Kong Government certificates of indebtedness (representative of Hong Kong banknotes...

  • Page 317
    ... than one year one year US$m US$m Assets Financial assets designated at fair value ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other financial assets ...1,537 121,387 301,181 79,239 12,589 515,933 Liabilities Deposits by banks ...Customer accounts...

  • Page 318
    ... branches, joint ventures and associates. Gains or losses on structural foreign exchange exposures are taken to reserves. HSBC's management of its structural foreign exchange exposures is discussed in the 'Market risk' section on page 168. HSBC Holdings retains foreign exchange exposure to dividends...

  • Page 319
    ...net structural foreign exchange exposure to Hong Kong dollars relates principally to the reclassification of preference share capital from equity to financial liability with effect from 1 January 2005, on application of IAS32. 2 After deducting sales of Saudi riyals amounting to US$480 million (2004...

  • Page 320
    ... HSBC USA Inc., in whole or part, on any dividend payment date at par. All redemptions are subject to the prior consent of the Financial Services Authority and, where relevant, the local banking regulator. 37 Called up share capital Authorised The authorised ordinary share capital of HSBC Holdings...

  • Page 321
    ... discretion of the Board of Directors. The Board of Directors will not declare a dividend if payment of the dividend would cause HSBC not to meet the applicable capital adequacy requirements of the FSA. HSBC Holdings may not declare or pay dividends on any class of its shares ranking lower in the...

  • Page 322
    ...83 HSBC Holdings shares for each HSBC Private Bank France share. During 2005, 473,400 HSBC Private Bank France shares were issued following the exercise of employee share options and exchanged for 841,291 HSBC Holdings ordinary shares, such shares being delivered from The CCF Employee Benefit Trust...

  • Page 323
    ... shares were held in a Plan d'Epargne Entreprise on behalf of Banque Hervet employees to vest and be released to employees over a 5 year period. It was agreed to exchange these Banque Hervet shares, on vesting, for HSBC Holdings ordinary shares in the ratio of 3.46 HSBC Holdings ordinary shares...

  • Page 324
    ... from the London Stock Exchange Daily Official List, for the five business days preceding the closing date of the acquisition. During 2005, options over 459,091 HSBC Holdings ordinary shares were exercised (2004: 744,727) and delivered from the HSBC (Bank of Bermuda) Employee Benefit Trust 2004 to...

  • Page 325
    ...the year attributable to shareholders ...Dividends to shareholders of the parent company ...Own shares adjustment ...Share of changes recognised directly in equity in the equity of associates or joint ventures ...Actuarial losses on defined benefit plans4 ...Exchange differences ...Fair value losses...

  • Page 326
    ...) of own shares held within HSBC's insurance business, its 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...

  • Page 327
    ... HSBC's insurance business; its 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. 2 Net exchange differences...

  • Page 328
    ... 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 ...- 7,121 4,940 307 (71,107) (15,048) (8,923) (82,710) 2004 US$m - (5,329) 2,695 10,825 (130,228) - (2,262) (124,299) HSBC Holdings 2005 2004...

  • Page 329
    ... credits and short-term trade-related transactions ...Forward asset purchases and forward forward deposits placed ...Undrawn note issuing and revolving underwriting facilities ...Undrawn formal standby facilities, credit lines and other commitments to lend: - 1 year and under ...- over 1 year...

  • Page 330
    ... 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. When HSBC gives a guarantee on behalf of a customer, it...

  • Page 331
    ... subleases at the balance sheet date. In 2005, US$1,901 million (2004: US$951 million) was charged to 'General and administrative expenses' in respect of lease and sublease agreements, of which US$1,880 million (2004: US$930 million) related to minimum lease payments, US$21 million (2004: US$21...

  • Page 332
    ...Related party transactions Compensation to the Board of Directors and other key management personnel1 HSBC 2005 US$m Short-term employee benefits ...Post-employment benefits ...Share-based payment ...71 2 21 94 1 Key management personnel of HSBC are Board Directors and Group Managing Directors. 2004...

  • Page 333
    .... HSBC International Staff Retirements Benefits Scheme entered into swap transactions with HSBC to match the return on the plan assets to the benefit payments of the obligations. At 31 December 2005, the fair value of the swap is an asset of US$53 million to the pension scheme (2004: US...

  • Page 334
    ... per share) (2004: US$3,007 million, US$0.27 per share) was declared after 31 December 2005 and is subject to approval by the shareholders at the Annual General Meeting. On 6 March 2006, the Board of Directors authorised the financial statements for issue. 45 UK and Hong Kong accounting requirements...

  • Page 335
    ... Reconciliation of consolidated balance sheets at 31 December 2004 and 1 January 2005. (g) Principal accounting policies applicable to the 2004 comparative information which differ from those applied in 2005. (h) Effect of the transition to IFRSs on the financial position of HSBC Holdings. This note...

  • Page 336
    ... previously reported shareholders' funds under UK GAAP to total shareholders' equity under IFRSs at 31 December 2004 and 1 January 2004 At 31 December 2004 US$m Shareholders' funds as previously reported under UK GAAP ...Goodwill ...Retirement benefits ...Dividends ...Leases ...Share-based payments...

  • Page 337
    ... previously reported profit attributable to shareholders under UK GAAP to profit attributable to shareholders under IFRSs for the year ended 31 December 2004 Year ended 31 December 2004 US$m Profit before tax under UK GAAP ...Goodwill amortisation ...Other goodwill adjustments ...Retirement benefits...

  • Page 338
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) IAS 19 'Employee Benefits' ('IAS 19') IAS 19 requires pension fund assets to be assessed at fair value and liabilities on the basis of current actuarial assumptions using the projected unit credit method. As permitted by an amendment ...

  • Page 339
    ... of consolidating funds under management and SPEs under IAS 27 and SIC-12 was to gross up the 31 December 2004 balance sheet by US$4,796 million (1 January 2004: US$5,075 million) with a minor impact on total shareholders' equity. Attributable profit for the year ended 31 December 2004 increased by...

  • Page 340
    ... at the same time every year. An intangible asset recognised during the current period is tested before the end of the current annual period. Presentationally, intangible assets recognised under UK GAAP, including mortgage servicing rights and the value of in-force long-term assurance business, were...

  • Page 341
    ... exchange and share-based payment reserves have been grouped with 'Other reserves' rather than retained earnings. This resulted in an increase in other reserves of US$3,955 million and a corresponding reduction in reported retained earnings as at 1 January 2004 compared to the balances reported...

  • Page 342
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Consolidated income statement for the year ended 31 December 2004 UK GAAP IFRSs format US$m Interest income ...Interest expense ...Net interest income ...Fee income ...Fee expense ...Net fee income ...Trading income ...Net investment ...

  • Page 343
    Consolidated balance sheet at 31 December 2004 UK GAAP IFRSs format 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 securities ...Derivatives ...Loans and advances to banks ...Loans ...

  • Page 344
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Consolidated balance sheet at 1 January 2004 UK GAAP IFRSs format 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 ...

  • Page 345
    ... year ended 31 December 2004 and financial position at 31 December 2004 and 1 January 2004 reported under UK GAAP and IFRSs Consolidated income statement for the year ended 31 December 2004 Adjustments to conform HSBC's UK GAAP income statement for the year ended 31 December 2004 to its accounting...

  • Page 346
    Consolidated income statement for the year ended 31 December 2004 (continued) HSBC HOLDINGS PLC UK GAAP US$m (170) - - (170) 39 (131) (3) (134) 1,818 (45) 4 (164) (63 1,818 (45) 4 (164) (63) - - 57 (21) (12) 27 (1) (6) 31 (19) 12 1,818 (102) 25 (...

  • Page 347
    ... to conform HSBC's UK GAAP balance sheet at 31 December 2004 to its accounting policies under IFRSs are set out below: UK GAAP US$m Dividends US$m Retirement benefits US$m Software Goodwill capitalisation US$m US$m Leases US$m Property US$m Insurance US$m Sharebased payments US$m Consolidation US...

  • Page 348
    ...) LIABILITIES Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks . Debt securities in issue ...Other liabilities ...Liabilities to policyholders under long-term assurance business ...Retirement benefit liabilities...

  • Page 349
    ... to conform HSBC's UK GAAP balance sheet at 1 January 2004 to its accounting policies under IFRSs are set out below: UK GAAP US$m Retirement benefits US$m Dividends US$m Leases US$m Insurance US$m Property US$m Software Goodwill capitalisation US$m US$m Consolidation US$m Sharebased payments US...

  • Page 350
    ...) LIABILITIES Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks . Debt securities in issue ...Other liabilities ...Liabilities to policyholders under long-term assurance business ...Retirement benefit liabilities...

  • Page 351
    ... numbers in UK GAAP format Interest receivable ...Interest payable ... Net interest income ... Fees and commissions receivable ...Fees and commissions payable ... Dealing profits ...Net investment income on assets backing policyholder liabilities ... Dividend income ...Net earned insurance premiums...

  • Page 352
    ...the year (1,340) Profit attributable to minority interests - 12,918 Profit attributable to shareholders of the parent company US$m 17,871 316 804 18,991 (4,733) 14,258 (1,340) 12,918 48 (48) (48) (804) 804 Reclassification US$m IFRSs numbers in UK GAAP format Operating profit ... HSBC HOLDINGS PLC...

  • Page 353
    ...891 Hong Kong Government certificates of indebtedness Trading assets Derivatives Loans and advances to banks Loans and advances to customers 9,944 6,338 30,481 11,878 Cash and balances at central banks Items in the course of collection from other banks US$m Reclassification US$m IFRSs numbers in UK...

  • Page 354
    ... IFRSs numbers in UK GAAP format HSBC HOLDINGS PLC LIABILITIES Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ... Notes on the Financial Statements Debt securities in issue ...Retirement benefit liabilities...

  • Page 355
    ...850 Hong Kong Government certificates of indebtedness Trading assets Derivatives Loans and advances to banks Loans and advances to customers 7,733 6,628 20,475 10,987 Cash and balances at central banks Items in the course of collection from other banks US$m Reclassification US$m IFRSs numbers in UK...

  • Page 356
    ... IFRSs numbers in UK GAAP format HSBC HOLDINGS PLC LIABILITIES Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ... Notes on the Financial Statements Debt securities in issue ...Retirement benefit liabilities...

  • Page 357
    ... for trading purposes were included in the balance sheet at market value. Under IAS 39, all investment securities (debt securities and equity shares) are classified and disclosed within one of the following three categories: 'held-to-maturity'; 'available-for-sale'; or 'at fair value through profit...

  • Page 358
    .... Under IAS 32, preference shares are generally classified in the balance sheet as liabilities. This had the impact of increasing liabilities by US$10,218 million at 1 January 2005. Loan impairment Under HSBC's UK GAAP accounting policies, loans in the consumer finance business were written off to...

  • Page 359
    ... periods, as investment management fees and incremental directly attributable costs are spread over the period in which the services are provided. Offsetting of financial assets and financial liabilities Under UK GAAP the netting of asset and liability balances in the balance sheet is only allowed...

  • Page 360
    ... 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 ...Interests in associates and joint ventures Goodwill and...

  • Page 361
    ... 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 ...Retirement benefit...

  • Page 362
    ...IFRS 4 Fee and Non-equity Fair value commission reclassiLoan Insurance Offsetting option income fication impairment US$m US$m US$m US$m US$m US$m HSBC HOLDINGS PLC Total liabilities ... 1,180,777 1,044 Equity Called up share capital ...Share premium account ...Other reserves ...Retained earnings...

  • Page 363
    ...' and 'Dividend income' respectively. Loans and advances to banks and customers Loans and advances to banks and customers included loans and advances originated by HSBC which were not intended to be sold in the short term and had not been classified as held for trading. Loans and advances were...

  • Page 364
    ...end of each time period for which payments were overdue), other historical data and an evaluation of current economic conditions to calculate an appropriate level of specific provision based on inherent loss. Additionally, in certain highly developed markets, sophisticated models taking into account...

  • Page 365
    ... UK and Hong Kong, interest on non-performing loans was charged to the customer's account provided that there was a realistic prospect of interest being paid at some future date. However, the interest was not credited to the income statement but to an interest suspense account in the balance sheet...

  • Page 366
    ... by HSBC in the foreign exchange, interest rate, equity, credit derivative, and commodity markets that were held offbalance sheet. Netting was applied where a legal right of offset existed. Accounting for these instruments was dependent upon whether the transactions were undertaken for trading or...

  • Page 367
    ... statement. Insurance contracts The value of in-force long-term assurance business was determined by discounting future earnings expected to emerge from business then in force, using appropriate assumptions in assessing factors such as recent experience and general economic conditions. Movements...

  • Page 368
    ... of the main differences between UK GAAP and IFRSs applicable to HSBC Holdings, see Note (b). HSBC Holdings balance sheet at 31 December 2004 UK GAAP IFRSs format US$m ASSETS Cash at bank and in hand - balances with HSBC undertakings ...Derivatives ...Loans and advances to HSBC undertakings...

  • Page 369
    HSBC Holdings balance sheet at 1 January 2004 UK GAAP IFRSs format US$m ASSETS Cash at bank and in hand - balances with HSBC undertakings ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Investments in subsidiaries ...Property, plant and equipment ...Other assets...

  • Page 370
    ... other investments other than loans ...Current assets Debtors: - money market deposits with HSBC undertakings ...- other amounts owed by HSBC undertakings ...- amounts owed by HSBC undertakings (falling due after more than 1 year) ...- other debtors ...Cash at bank and in hand: - balances with HSBC...

  • Page 371
    ... other investments other than loans ...Current assets Debtors: - money market deposits with HSBC undertakings ...- other amounts owed by HSBC undertakings ...- amounts owed by HSBC undertakings (falling due after more than 1 year) ...- other debtors ...Cash at bank and in hand: - balances with HSBC...

  • Page 372
    ...16,636 1,885 55,668 Derivatives Loans and advances to HSBC undertakings Financial investments Investments in subsidiaries Cash at bank and in hand - balances with HSBC undertakings US$m Reclassification US$m IFRSs numbers in UK GAAP format ASSETS HSBC HOLDINGS PLC Fixed assets 2 Tangible assets...

  • Page 373
    HSBC Holdings balance sheet at 31 December 2004 under IFRSs (except IAS 32 and IAS 39) (continued) IFRSs numbers in IFRSs format US$m LIABILITIES AND EQUITY 858 191 1,189 10 1,198 172 64 Derivatives Other liabilities Accruals and deferred income Deferred taxation 7,352 Liabilities Amounts owed to ...

  • Page 374
    ...14,781 1,175 51,914 Derivatives Loans and advances to HSBC undertakings Financial investments Investments in subsidiaries Cash at bank and in hand - balances with HSBC undertakings US$m Reclassification US$m IFRSs numbers in UK GAAP format ASSETS HSBC HOLDINGS PLC Fixed assets 2 Tangible assets...

  • Page 375
    HSBC Holdings balance sheet at 1 January 2004 under IFRSs (except IAS 32 and IAS 39) (continued) IFRSs numbers in IFRSs format US$m LIABILITIES AND EQUITY 700 261 1,309 38 1,309 223 82 Derivatives Other liabilities Accruals and deferred income Deferred taxation 6,179 Liabilities Amounts owed to HSBC...

  • Page 376
    ... PLC Notes on the Financial Statements (continued) Key impact analysis of adopting IAS 32 and IAS 39 on HSBC Holdings' opening balance sheet as at 1 January 2005 Reconciliation of previously reported shareholders' funds under UK GAAP to total shareholders' equity under IFRSs at 1 January 2005...

  • Page 377
    ... 'Accounting and Reporting by Insurance Enterprises for Certain Long-duration Contracts and for Realised Gains and Losses from the Sale of Investments'. Impact • • Under US GAAP, shareholders' equity is lower than under IFRSs because the present value of in-force long-term assurance business is...

  • Page 378
    ..., 'Employers' Accounting for Pensions', prescribes a similar method of actuarial valuation for pension liabilities and requires the measurement of plan assets at fair value. When the value of benefits accrued based on employee service up to the balance sheet date (the accumulated benefit obligation...

  • Page 379
    ... for impairment at least annually at the reporting unit level by applying a test based on recoverable amounts. Quoted securities issued as part of the purchase consideration are valued for the purpose of determining the cost of the acquisition at their market price on the date the transaction is...

  • Page 380
    ... not clearly and closely related to those of the host contract, its terms are the same as those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in...

  • Page 381
    ... of the hedge is assessed. The method HSBC entities adopt for assessing hedge effectiveness will depend on their risk management strategies. For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows...

  • Page 382
    ... by HSBC in the foreign exchange, interest rate, equity, credit derivative, and commodity markets that were held off balance sheet. Netting was applied where a legal right of set-off existed. Accounting for these instruments was dependent upon whether the transactions were undertaken for trading or...

  • Page 383
    ... and its performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and where information about that group of financial instruments is provided internally on that basis to management; or relates to financial instruments containing one or...

  • Page 384
    ... insurance/investment contracts are reported as available-for-sale, with gains and losses taken directly to 'Other comprehensive income'. When the corresponding liability is reported at fair value, with movements reported immediately in net income, this also results in asymmetrical accounting being...

  • Page 385
    ...' if quotations are currently available on a recognised exchange. • • Impact • In 2004, available-for-sale securities, excluding equity shares that do not have a readily determinable fair value, were recorded at fair value in the US GAAP balance sheet. This value was higher than cost...

  • Page 386
    ... as 'separate accounts' are met. Impact • Certain HSBC insurance operations hold shares in HSBC as part of policyholder funds that qualify for classification as 'separate accounts'. These shares represent an addition to shareholders' equity for US GAAP purposes and are reported within 'Other...

  • Page 387
    ... If these conditions are not met the securitised assets continue to be consolidated. When HSBC retains an interest in securitised assets, such as a servicing right or the right to residual cash flows from the special purpose entity, HSBC recognises this interest at fair value on sale of the assets...

  • Page 388
    ... written off in full, or to recoverable value where collateral exists. Delinquency depends on the number of days payments is overdue. The delinquency status is applied consistently across similar loan products in accordance with HSBC's credit guidelines. When local regulators mandate the delinquency...

  • Page 389
    ... the parent company of HSBC (IFRSs) ...Shareholders' interest in long-term assurance fund ...Pension costs ...Stock-based compensation ...Intangible assets ...Purchase accounting adjustments1 ...Derivatives and hedge accounting ...Foreign exchange differences on available-for-sale securities ...Loan...

  • Page 390
    ...December 2005 US$m Shareholders' equity Total shareholders' equity (IFRSs) ...Shareholders' interest in long-term assurance fund ...Pension costs ...Fair value adjustment for available-for-sale securities ...Goodwill ...Revaluation of property ...Purchase accounting adjustments1 ...Intangible assets...

  • Page 391
    ...) ...Total assets ...Liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Derivatives ...Debt securities in issue ...Retirement benefit liabilities...Other liabilities (including...

  • Page 392
    ...the standard. When a pension plan's accumulated benefit obligation (the value of the benefits accrued based on employee service up to the balance sheet date) exceeds the fair value of its assets, an additional minimum pension liability equal to this excess is recognised by the employer to the extent...

  • Page 393
    ...2004 for HSBC's main pension plans have been calculated using the same financial assumptions as detailed in Note 7. The accumulated benefit obligation in respect of the above schemes was: 2005 US$m HSBC Bank (UK) Pension Scheme ...Other schemes ...19,709 5,241 2004 US$m 19,063 4,829 Post-retirement...

  • Page 394
    ... assets subject to annual amortisation Purchased credit card relationships and related programmes ...Retail services merchant relationship ...Other loan related relationships ...Mortgage servicing rights ...Technology, customer lists and other contracts ...Core deposit relationships ...Other...

  • Page 395
    ... number of fair value hedges of fixed rate liabilities. Ineffectiveness of such fair value hedges recognised in 2004 in net income under US GAAP (but not under IFRS) was a gain of US$1 million. HSBC's US mortgage bank has historically hedged fixed rate closed residential mortgage loans held for sale...

  • Page 396
    ... time value component of the derivative contracts is excluded from the assessment of hedge effectiveness. 2004 Ineffectiveness of cash flow hedging activities resulted in a loss of US$1 million being recognised in net income reported under US GAAP for 2004. Shareholders' equity at 31 December 2004...

  • Page 397
    ...exchange gains on available-for-sale securities HSBC holds, in a number of different currencies, securities which are classified as available-for-sale within individual legal entities. For example, in the private bank in Switzerland, for which the US dollar is the reporting currency, the Group holds...

  • Page 398
    ... in value. The increase in the US GAAP balance sheet of US$1,969 million represents the excess of fair value over cost (less provisions for permanent diminution in value) for debt securities and equity shares with a readily determinable fair value. The amortised cost of available-for-sale investment...

  • Page 399
    ... (2004: US$108 million) expire in 5 years or more. (h) Loans and advances Loans assessed under SFAS 114 'Accounting by creditors for impairment of a loan' SFAS 114 was amended by SFAS 118 'Accounting by creditors for impairment of a loan - income recognition and disclosures'. SFAS 114 addresses...

  • Page 400
    ... and a reduction in the carrying value of loans and advances to customers and shareholders' equity at 31 December 2005 of US$327 million. There was no difference in reported net income or shareholders' equity for 2004. (i) Earnings per share Basic earnings per share under US GAAP, SFAS 128 'Earnings...

  • Page 401
    ... in differences in accounting and disclosure treatment under US GAAP. The following table analyses HSBC's total consolidated VIE assets in a US GAAP balance sheet: At 31 December 2005 US$m Classification Loans and advances to customers ...Debt securities and equity shares ...Tangible fixed assets...

  • Page 402
    ... - Private label - Personal non-credit card - 2005 Net initial gains (US$ millions) ...2004 Net initial gains (US$ millions) ...Key economic assumptions2 Weighted average life (in years) ...Payment speed ...Expected credit losses (annual rate) ...Discount rate for future cash flows ...Cost of funds...

  • Page 403
    ... example, increases in market interest rates may result in lower prepayments) which might magnify or counteract the sensitivities. Furthermore, the estimated fair values as disclosed should not be considered indicative of future earnings on these assets. Static pool credit losses are calculated by...

  • Page 404
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) private label loan balances, the weighted average percentage of static pool credit losses is not considered to be materially different from the weighted average charge-off assumptions used in determining the fair value of interest-...

  • Page 405
    ... of shares in HSBC Holdings by shareholders subject to UK capital gains tax can be complex, partly depending on whether, for example, the shares were purchased since April 1991, acquired in 1991 in exchange for shares in The Hongkong and Shanghai Banking Corporation Limited, or acquired subsequent...

  • Page 406
    HSBC HOLDINGS PLC Taxation of Shares and Dividends (continued) a credit against US Federal tax liability for the amount of any tax paid in the United Kingdom in a case where the shares or ADSs are subject to both UK inheritance tax and to US Federal estate or gift tax. Stamp duty and stamp duty ...

  • Page 407
    ... foreign investment company, foreign personal holding company, or foreign investment company for US federal income tax purposes with respect to its 2004 or 2005 taxable year. In addition, based on the company's audited financial statements and current expectations regarding the value and nature...

  • Page 408
    ... Shares quoted ex-dividend in London, Hong Kong and Bermuda; ADSs quoted ex-dividend in New York ...Record date and closure of Hong Kong Overseas Branch Register of shareholders for one day ...Shares quoted ex-dividend in Paris ...Mailing of Annual Report and Accounts 2005 and/or Annual Review 2005...

  • Page 409
    ... are: First Announcement ...ADSs quoted ex-dividend in New York ...Shares quoted ex-dividend in London, Hong Kong and Bermuda ...Record date and closure of Hong Kong Overseas Branch Register of shareholders for one day ...Shares quoted ex-dividend in Paris ...Payment date ...2 May 2006 17 May 2006...

  • Page 410
    ... and Africa: Group Corporate Affairs HSBC Holdings plc 8 Canada Square London E14 5HQ UK For those in Asia-Pacific: Group Public Affairs The Hongkong and Shanghai Banking Corporation Limited 1 Queen's Road Central Hong Kong For those in the Americas: Employee Communications HSBC-North America 2700...

  • Page 411
    ...of these documents upon payment of a duplicating fee, by writing to the Commission at 450 Fifth Street, N.W., Washington, DC 20549. Investors may also obtain the reports and other information HSBC Holdings files at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, NY 10005...

  • Page 412
    ... of, US dollars, sterling and Hong Kong dollars, or satisfied in whole or in part by the issue of new shares in lieu of a cash dividend. Nature of trading market HSBC Holdings ordinary shares are listed or admitted to trading on the London Stock Exchange, the Hong Kong Stock Exchange ('HKSE...

  • Page 413
    ...In New York each ADS represents 5 underlying ordinary shares. 2 Shares were not listed on the Bermuda Stock Exchange prior to 18 February 2004. Stock Symbols HSBC Holdings ordinary shares trade under the following stock symbols: London Stock Exchange Hong Kong Stock Exchange New York Stock Exchange...

  • Page 414
    ... HSBC Group Structure of Principal Operating Companies at January 2006 HSBC Holdings plc HSBC HOLDINGS PLC Organisational Structure HSBC Bank plc HSBC North America Holdings Inc. HSBC Insurance Holdings Limited HSBC Latin America Holdings (UK) Limited HSBC Finance (Netherlands) HSBC Investment...

  • Page 415
    ...investments accounted for by 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 Allowances Ordinary shares...

  • Page 416
    ... (UK) Full-time equivalent staff numbers Financial Times - Stock Exchange index Generally Accepted Accounting Principles Gross domestic product Hong Kong Government Home Ownership Scheme HSBC's treasury and capital markets services in Corporate, Investment Banking and Markets HSBC Holdings together...

  • Page 417
    ... Holdings Limited, acquired by HSBC in November 2004 Middle market enterprises Morgan Stanley Capital International index Mortgage servicing rights HSBC Bank USA HSBC Finance HSBC France HSBC Holdings HSBC Mexico HSBC Private Bank (Suisse) IAS IFRSs IFRIC IGU Industrial Bank IPO Key Management...

  • Page 418
    ... Shanghai Banking Corporation Limited, the founding member of the HSBC Group Total shareholder return TSR measure applied to half of the award of performance shares under the HSBC Share Plan United Kingdom UK Generally Accepted Accounting Principles 8.875 per cent adjustable convertible rate equity...

  • Page 419
    ... in South America 96 product offering 13 Corporate social responsibility (CSR) committee 206 Cost efficiency ratio 41 Credit risk management 115 Credit quality 127 Critical accounting policies 99 Cross-border exposures 132, 149 Customer groups 11, 44 - 98 Dealings in HSBC Holdings plc shares 213...

  • Page 420
    .../New York Stock Exchange corporate governance differences 206 Group Managing Directors 186 Health and safety 210 Hong Kong competitive environment 17 economic background 67 profit/(loss) 66, 71 regulation and supervision 21 HSBC Holdings plc balance sheet 240 cash flow 242 credit risk 143 employee...

  • Page 421
    ... management biographies 186 remuneration 217 Share-based payments 269 Share capital 318 and reserves 189 notifiable interests 213 Share option plans Bank of Bermuda plans 199 HSBC France and subsidiary plans 195 discretionary plans 193 for directors 229 for employees 191 HSBC Finance Corporation...

  • Page 422
    ...BS99 3FA United Kingdom Telephone: 44 (0) 870 702 0137 Hong Kong Overseas Branch Register Computershare Hong Kong Investor Services Limited 46th floor, Hopewell Centre 183 Queen's Road East Hong Kong Telephone: 852 2862 8628 Bermuda Overseas Branch Register Corporate Shareholder Services The Bank of...

  • Page 423
    ...by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Holdings plc. Published by Group Finances, HSBC Holdings plc, London Designed by Group Public Affairs, The Hongkong and Shanghai Banking Corporation Limited, Hong Kong Printed by...

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    HSBC Holdings plc 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 020 7991 8888 Facsimile: 44 020 7992 4880 Web: www.hsbc.com