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2006
Annual Report and Accounts
HSBC Holdings plc

Table of contents

  • Page 1
    2006 Annual Report and Accounts HSBC Holdings plc

  • Page 2
    ...the world. Its international network comprises over 10,000 properties in 82 countries and territories in Europe; Hong Kong; Rest of Asia-Pacific, including the Middle East and Africa; North America and Latin America. With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges...

  • Page 3
    ...,928 million (2005: US$98,226 million). Customer accounts and deposits by banks up 23.2 per cent to US$996,528 million (2005: US$809,146 million). Risk-weighted assets up 13.5 per cent to US$938,678 million (2005: US$827,164 million). Dividends and capital position • • Tier 1 capital ratio of...

  • Page 4
    ... (billion) ...Closing market price per ordinary share: - London ...- Hong Kong ...Closing market price per American Depositary Share4 ...Over 1 year HSBC total shareholder return to 31 December 2006 ...Benchmarks: - FTSE 1006 ...- MSCI World7 ...For footnotes, see page 4. 5 2005 11,334 US...

  • Page 5
    ... ...Loan impairment charges and other credit risk provisions ...Provisions for bad and doubtful debts ...Total operating expenses ...Profit before tax ...Profit attributable to shareholders of the parent company ...Dividends ...At the year-end Called up share capital ...Total shareholders' equity...

  • Page 6
    ...before loan impairment charges and other credit risk provisions. 4 Each American Depositary Share ('ADS') represents five ordinary shares. 5 Total shareholder return ('TSR') is defined on page 281. 6 The Financial Times-Stock Exchange 100 Index. 7 The Morgan Stanley Capital International World Index...

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

  • Page 8
    ... cent of the Group's total. There were a number of outstanding achievements, for example, exceeding US$1 billion pre-tax profits for the first time in both Mexico and the Middle East, and in each of our Private Banking and Commercial Banking businesses in Asia outside Hong Kong. We added around an...

  • Page 9
    ... Financing Review. Our Global Markets business was named Best at Treasury and Risk Management in Asia by Euromoney for the ninth consecutive year. increased and the alternative fund management sector expanded. The customer base of International Premier, the Group's personal banking service targeted...

  • Page 10
    ... minutes. In Hong Kong in the past four years, processing has been moved from the branches in favour of sales-related activities, with the result that less than 5 per cent of transactions are now being handled physically in the branches. In the UK retail network, product simplification has reduced...

  • Page 11
    ... international bank, we opened 13 new offices, taking the total to 45. We made significant progress in developing our personal and commercial distribution platforms throughout Asia, the Middle East and Latin America. We added 25 consumer finance offices in India and 28 in Indonesia. We established...

  • Page 12
    ...by facilitating trade flows. Additionally, financial markets are providing more sophisticated tools to help personal customers plan their long-term financial affairs, corporates to hedge their business risks and investors to manage their portfolio risks. The demand for financial services, therefore...

  • Page 13
    ... services. Headquartered in London, HSBC operates through long-established businesses and has an international network of over 10,000 properties in 82 countries and territories in five geographical regions: Europe; Hong Kong; Rest of Asia-Pacific, including the Middle East and Africa; North America...

  • Page 14
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Customer groups > Summary / Business highlights Customer groups and global businesses Summary HSBC manages its business through two customer groups, Personal Financial Services and Commercial Banking, and two global businesses,...

  • Page 15
    ... designed modern customer-friendly branches in selected markets; facilitating direct multi-channel access to the Group's services, and building a high quality system to help manage banking relationships; enhancing HSBC Premier as a signature product for the Group, offering a premium banking service...

  • Page 16
    ... launch of seven-day opening in selected UK, US and Hong Kong branches. Investment in the retail network continued in Europe, North America and parts of Asia-Pacific. • In the latter, HSBC began to introduce its Group-wide credit card system, expanded consumer finance in India and Indonesia, and...

  • Page 17
    ... by the success of new products such as the High Rate Savings Account, deposit balances rose. Rest of Asia-Pacific • HSBC invested in selected markets within the region, notably in cards, consumer finance, insurance, direct banking and Islamic banking. New branches were opened in India, mainland...

  • Page 18
    ...Share of HSBC's profit before tax ...Cost efficiency ratio ...Selected balance sheet data5 Loans and advances to customers (net) ...Total assets ...Customer accounts ...For footnotes, see page 26. 2 Strategic direction HSBC's strategy is to be the leading international business bank for Commercial...

  • Page 19
    ...sales. • • Hong Kong • HSBC was named 'World's Best Trade Finance Bank in Hong Kong' by Global Finance magazine, recognising the bank's efforts developing a centre of excellence for international trade. A new micro-business lending programme was launched, with a streamlined loan application...

  • Page 20
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Business highlights Corporate, Investment Banking and Markets Profit before tax Year ended 31 December 2006 2005 2004 US$m US$m US$m Net interest income ...Net fee income ...Trading income excluding net interest income ...Net ...

  • Page 21
    ... services Balance sheet management ...Group Investment Businesses ...Private equity ...Other1 ...Total operating income ...Selected balance sheet data5 Loans and advances to: - customers (net) ...- banks (net) ...Total assets ...Customer accounts ...Trading assets, financial instruments designated...

  • Page 22
    ... data5 Loans and advances to customers (net) ...Total assets ...Customer accounts ...For footnotes, see page 26. 3 2 Strategic direction The strategy for Private Banking is to be one of the world's leading international private banks, by providing excellent client service. HSBC's global network and...

  • Page 23
    ... managed products, which reached a value of US$4.8 billion. Recognising the value to be derived from closer links with other customer groups, dedicated teams working with Commercial Banking, Personal Financial Services and Corporate, Investment Banking and Markets produced a significant increase...

  • Page 24
    ... region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America4 ...Latin America4 ...Profit/(loss) before tax ...Share of HSBC's profit before tax ...Cost efficiency ratio ...Selected balance sheet data5 Loans and advances to customers (net) ...Total assets ...Customer accounts ...(625...

  • Page 25
    ... and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial assets designated at fair value, and financial investments ...- deposits by banks ...For footnotes, see page 26. Personal Financial Commercial Services...

  • Page 26
    ... assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial assets designated at fair value, and financial investments ...- deposits by banks ...For footnotes, see page 26. 2 1 Personal Financial Services...

  • Page 27
    ... balance sheet data5 Loans and advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial assets designated at fair value...

  • Page 28
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Geographical regions > Summary / Competitive environment Basis of preparation The results are presented in accordance with the accounting policies used in the preparation of HSBC's consolidated financial statements. HSBC's ...

  • Page 29
    ... Hong Kong and mainland China, the HSBC Group conducts business in 21 countries in the Asia-Pacific region, primarily through branches and subsidiaries of The Hongkong and Shanghai Banking Corporation, with particularly strong coverage in India, Indonesia, South Korea, Singapore and Taiwan. HSBC...

  • Page 30
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Competitive environment and the investment banking operations of other commercial banks. Regulators routinely monitor and investigate the competitiveness of the financial services industry (of which HSBC is a part) in a number ...

  • Page 31
    ... market. Robust equity markets buoyed sales of investment products and also benefited investmentrelated loans. The sustained appreciation of the Chinese currency during 2006 had no marked effect on Hong Kong's renminbi deposit business. Instead, funds were attracted to Chinese stocks listed in Hong...

  • Page 32
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Competitive environment / Europe > 2006 consolidate. Within the banking sector, consolidation continued in 2006, with a greater focus on national networks and retail branch banking. The Group's principal US subsidiaries, HSBC ...

  • Page 33
    ... Profit/(loss) before tax by country within customer groups and global businesses 2006 US$m Personal Financial Services ...United Kingdom ...France1 ...Turkey...Other ...Commercial Banking ...United Kingdom ...France1 ...Turkey...Other ...Corporate, Investment Banking and Markets2 ...United Kingdom...

  • Page 34
    ... 6,974 % Share of HSBC's profit before tax ...Cost efficiency ratio ...Year-end staff numbers (full-time equivalent) ...31.5 60.1 78,311 US$m Selected balance sheet data1 Loans and advances to customers (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at...

  • Page 35
    ... and current accounts, with higher balances achieved through targeted sales and marketing efforts. Interest income from credit cards and mortgages also increased. A focus on liabilities helped boost new UK savings account volumes markedly in a buoyant yet highly competitive savings market. HSBC...

  • Page 36
    ... work and shopping patterns among its customers and the increasing acceptance of direct channels. HSBC appraised its UK property portfolio during the year, and higher other operating income reflected Personal Financial Services' share of revenue from branch sale and lease-back transactions. Personal...

  • Page 37
    ... support business expansion throughout the region. Credit quality was stable. In the UK, HSBC invested to expand sales capacity and improve service through recruitment and the opening of commercial centres. To support HSBC's strategic intention to lead the market in international commercial banking...

  • Page 38
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Europe > 2006 to raising deposits through transactional and savings accounts and, as a result, deposit balances rose by 37 per cent and current account balances by 8 per cent. The benefit of this volume growth was partly offset...

  • Page 39
    ... structured derivatives and Credit and Rates. In Group Investment Businesses, a robust performance resulted in higher staff and support costs. A rise in operational expenditure was driven by increased volumes as well as new business won in respect of payments and cash management funds administration...

  • Page 40
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Europe > 2006 / 2005 mix change towards higher fee-generating discretionary and advisory managed funds, including the continued success of the SIS and CIS products and the launch of the 'Actively Managed Portfolio' product. A ...

  • Page 41
    ... 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 42
    ... 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 43
    ...first UK high street clearing bank to share full customer credit performance data in 2005. Underwriting activity was also further centralised. Collections capabilities were enhanced, resulting in an increase in amounts collected, and resources were added to the Retail Credit Risk Management function...

  • Page 44
    ... sales staff to support business expansion, and success led to higher performance-related remuneration. Campaigns targeting top tier commercial customers and supporting product launches led to an increase in marketing expenditure, while rebranding and supporting activity to emphasise the 'HSBC...

  • Page 45
    ...short-term rates. Customer deposit balances increased by 23 per cent and spreads improved by 9 basis points. Net fees rose by 7 per cent, partly due to an increase in earnings from the equity capital markets business. Additionally, as equity markets became more buoyant, HSBC Securities Services fees...

  • Page 46
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Europe > 2005 / Profit/(loss) before tax with the wider Group contributed to nearly one quarter of the US$1.6 billion of new money. A US$20 million lower performance fee from a public equity fund dedicated to Russia was more ...

  • Page 47
    ... sheet data2 Loans and advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and...

  • Page 48
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Europe > Profit/(loss) before tax Profit/(loss) before tax by customer groups and global businesses (continued) Year ended 31 December 2005 Corporate, Investment Banking & Private Markets Banking Other US$m US$m US$m 827 1,339 ...

  • Page 49
    ... sheet data2 Loans and advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and...

  • Page 50
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Hong Kong > 2006 Hong Kong Profit/(loss) before tax by customer groups and global businesses 2006 US$m Personal Financial Services ...Commercial Banking ...Corporate, Investment Banking and Markets ...Private Banking ...Other ...

  • Page 51
    ... from savings and current accounts and increased fee income. Marketing activities were successful, helping HSBC enlarge its share of the credit card and mortgage markets and attract higher deposit balances. As a result, customer numbers increased by over 100,000. The cost efficiency ratio improved...

  • Page 52
    ...the small business banking market, including customer service enhancements, improvements to account opening procedures and targeted promotional activity. As a result, Commercial Banking customer numbers increased (by 13,000 to 377,000), as did the number of products sold per customer. Investments to...

  • Page 53
    ... promotional activity, including the launch of the global Commercial Banking campaign to build market share. Cost efficiency was improved by the continuing migration of sales and transaction activity to lower-cost direct channels. Corporate, Investment Banking and Markets reported a pre-tax profit...

  • Page 54
    ...as trading activity increased in response to volatility in the value of the US dollar and economic conditions in certain local markets. Investments in equity sales and trading operations in previous years led to higher revenues. HSBC also benefited from internal synergies linking product structuring...

  • Page 55
    ... 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 increased in a benign credit environment. The...

  • Page 56
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Hong Kong > 2005 Net fees fell by 6 per cent to US$740 million, driven mainly by lower sales of unit trusts and capital guaranteed funds, partly offset by higher sales of structured deposit products and open-ended funds. A 34 ...

  • Page 57
    ...Global Investment Banking advisory 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...

  • Page 58
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Hong Kong > 2005 / Profit/(loss) before tax extend coverage along industry sector lines. In total, over 90 people were recruited to support the expansion. Technology and infrastructure costs rose as support and control ...

  • Page 59
    ......Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits by banks ... 35...

  • Page 60
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Hong Kong > Profit/(loss) before tax Profit/(loss) before tax by customer groups and global businesses (continued) Year ended 31 December 2005 Corporate, Investment Private Banking & Other Banking Markets US$m US$m US$m 607 431...

  • Page 61
    ......Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits by banks ... 10...

  • Page 62
    ... HOLDINGS PLC Report of the Directors: Business Review (continued) Rest of Asia-Pacific > 2006 Rest of Asia-Pacific (including the Middle East) Profit/(loss) before tax by customer groups and global businesses and by country 2006 US$m Personal Financial Services ...Commercial Banking ...Corporate...

  • Page 63
    ... ...Year-end staff numbers (full-time equivalent) ...16.0 52.8 72,265 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...

  • Page 64
    ... credit card business, increased marketing activity and expansion of the sales force. 36 new branches and 28 consumer loan centres were opened in 13 countries, most notably Indonesia, mainland China and the Middle East, and at the end of 2006, HSBC had 396 branches in the Rest of AsiaPacific region...

  • Page 65
    ... were also factors in the rise in operating expenses. Marketing costs rose as HSBC increased advertising and promotional activity directed to attracting new customers, enlarging HSBC's share of the credit card, mortgage and unsecured personal lending markets and increasing deposit balances. In 63

  • Page 66
    ... In India, current account and deposit balances increased by 40 per cent, partly from liquidity chasing new IPOs, which surged in line with strong local equity markets. In 2006, HSBC successfully launched a number of initiatives designed to increase asset balances throughout the Rest of Asia-Pacific...

  • Page 67
    ... credit quality remained strong. Operating expenses increased by 21 per cent to US$554 million in support of business expansion. HSBC recruited additional sales and support staff, increased its Commercial Banking presence in the branch network and committed to higher marketing activity in a number...

  • Page 68
    ... CIS products, proved successful. Trading and other operating income was slightly lower than in 2005, due to sluggish stock market performance and correspondingly subdued client activity. Client assets increased by 12 per cent to US$16 billion, benefiting from the recruitment of front office staff...

  • Page 69
    ... by strong asset and deposit growth, increased fee income and higher income from investments in the Middle East and mainland China. Costs in support of business expansion rose and were broadly in line with revenue growth. Higher loan impairment charges reflected growth in credit card lending and the...

  • Page 70
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Rest of Asia-Pacific > 2005 43 per cent. The benefits of higher mortgage balances were partly offset by lower spreads as pricing stayed highly competitive. The credit card business continued to expand in a number of countries. ...

  • Page 71
    ... strategy, resulting in a 16 per cent increase in costs. In India, the recruitment of additional sales staff boosted customer facing staff by 85 per cent in 2005. In South Korea, staff recruitment and heightened marketing activity supported HSBC's four recently established commercial banking centres...

  • Page 72
    .... HSBC's operations in the Middle East reported a 63 per cent rise in customer advances, primarily due to strong demand for corporate credit, driven by government spending on regional infrastructure projects. Global Transaction Banking revenues increased, as payments and cash management benefited...

  • Page 73
    ...ratio. Front office recruitment in most countries contributed to a small increase in staff costs, and expenditure on marketing and administrative expenses rose to support business growth. In Other, the Group's Service Centres continued to expand to support HSBC's productivity improvements, incurring...

  • Page 74
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Rest of Asia-Pacific > Profit before tax Profit before tax by customer groups and global businesses Year ended 31 December 2006 Corporate, Investment Banking & Private Markets Banking Other US$m US$m US$m 802 688 717 - 717 4 38...

  • Page 75
    ... sheet data2 Loans and advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and...

  • Page 76
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Rest of Asia-Pacific > Profit before tax / North America > 2006 Profit before tax by customer groups and global businesses (continued) Rest of Asia-Pacific (including the Middle East) Net interest income ...Net fee income ......

  • Page 77
    North America Profit/(loss) before tax by country within customer groups and global businesses 2006 US$m Personal Financial Services ...United States ...Canada ...Bermuda ...Commercial Banking ...United States ...Canada ...Bermuda ...Corporate, Investment Banking and Markets ...United States ......

  • Page 78
    ... 4,668 % Share of HSBC's profit before tax ...Cost efficiency ratio ...Year-end staff numbers (full-time equivalent) ...21.1 47.1 55,642 US$m Selected balance sheet data2 Loans and advances to customers (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at...

  • Page 79
    ..., Investment Banking and Markets, strong trading results more than offset lower balance sheet management revenues, which were constrained by compressed spreads in a flat interest rate yield curve environment. Underlying operating expenses increased by 13 per cent to support investment in business...

  • Page 80
    ... in personal non-credit card lending balances. Asset spreads narrowed, largely from lower yields which reflected changes in product mix and competitive market conditions. Average deposit balances grew by 6 per cent compared with 2005, with the notable success of a new high rate savings account and...

  • Page 81
    ... wealth management business resulted in higher investment administration fees, and credit card fee income rose, driven by increased lending. Trading income fell by 17 per cent, due to lower income on HSBC Finance's Decision One mortgage balances held for resale to secondary market purchasers. This...

  • Page 82
    ... business expansion and new branch openings. Greater emphasis placed on increasing the quality and number of branch staff dedicated to sales and customer relationship activities, which changed the staff mix, also contributed to cost growth. The continued promotion of the on-line savings product, new...

  • Page 83
    ... increase in fees, reflecting a growth in funds under management within Group Investment Businesses, coupled with higher fees from the lending business and HSBC Securities Services. Net trading income more than doubled to US$818 million. In Global Markets, a wider product offering and improved sales...

  • Page 84
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) North America > 2006 / 2005 tailored solutions. Revenues in the foreign exchange business remained robust against the backdrop of a weakening US dollar. In Canada, trading income more than doubled, with higher gains from ...

  • Page 85
    ... personal non-credit card portfolios continued to grow. The benefits of strong asset growth were largely offset by lower spreads as interest rates rose. Additional resources were focused on the core retail banking business in the US as high priority was given to growing the deposit base. Investment...

  • Page 86
    ... benefit of higher balances was more than offset by higher funding costs. Yields, however, improved due to a combination of higheryielding sub-prime receivable balances, increased pricing on variable rate products and other re-pricing initiatives. In the retail services cards business, average loan...

  • Page 87
    ...Credit card balances also grew, following the successful launch of a MasterCard programme. Net fee income grew by 23 per cent to US$3,050 million, driven by the strong performance in the US, where the 23 per cent increase was mainly from retail and credit card services, the mortgage banking business...

  • Page 88
    ...from lower account origination fees. In HSBC's US bank, costs grew to support business expansion and new branch openings. Brand awareness programmes in the second and fourth quarters increased marketing costs, and expenditure was incurred on promoting the online savings product. The benefit of these...

  • Page 89
    ... Global Transaction Banking fees rose, reflecting higher customer volumes in payments and cash management. Income from trading activities increased, due in part to higher revenues in the US from credit trading following losses in 2004, and a tightening of credit spreads. Business lines in which HSBC...

  • Page 90
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) North America > Profit/(loss) before tax Profit/(loss) before tax by customer groups and global businesses Year ended 31 December 2006 Corporate, Investment Banking & Private Markets Banking Other US$m US$m US$m 266 656 746 72 ...

  • Page 91
    ... sheet data2 Loans and advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and...

  • Page 92
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) North America > Profit/(loss) before tax / Latin America > 2006 Profit/(loss) before tax by customer groups and global businesses (continued) Year ended 31 December 20044 Corporate, Investment Banking & Private Markets Banking ...

  • Page 93
    ... America Profit/(loss) before tax by country within customer groups and global businesses 2006 US$m Personal Financial Services ...Mexico ...Brazil ...Argentina ...Other ...Commercial Banking ...Mexico ...Brazil ...Argentina ...Other ...Corporate, Investment Banking and Markets ...Mexico ...Brazil...

  • Page 94
    ... ...Year-end staff numbers (full-time equivalent) ...7.9 61.0 67,116 US$m Selected balance sheet data2 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...

  • Page 95
    ... banks, improving its market share by 35 basis points. A strong increase in low-cost deposits was reflective of the continuing success of 'Tu Cuenta', the first integrated financial services product of its kind offered locally, with nearly 400,000 new accounts opened in 2006. HSBC Premier performed...

  • Page 96
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Latin America > 2006 improvements in card activation times. These initiatives helped HSBC become the market leader in credit card balance growth, improving market share by 2.3 per cent. The number of cards in circulation ...

  • Page 97
    ... brands and internal cross-selling initiatives led to a rise in motor, home and extended-warranty insurance premium income. Life and annuity premiums also increased in line with higher customer salaries. The 'Maxima' pension funds business delivered higher revenues helped by improvements in the...

  • Page 98
    ... signed, generating US$50 million of new loans. HSBC's share of the trade services market continued to grow, building on the Group's international network and product capabilities. Fees from international factoring and domestic invoicing payment products also rose, as new products were successfully...

  • Page 99
    ...$167 million, predominantly through increased performance-related fees on emerging markets funds managed by Group Investment Businesses. Income in HSBC Securities Services benefited from strong equity market indices and growth in new business as assets under custody increased significantly to US$89...

  • Page 100
    ... transfer of some customers to the Commercial Banking segment, pre-tax profits rose. This was driven by strong revenue growth from higher deposit balances and widening spreads, strong loan growth and higher fee income, partly offset by the non-recurrence in 2005 of loan impairment provision releases...

  • Page 101
    ...launch in February 2005, over 600,000 accounts were opened in the year, averaging some 2,300 new customers per day. The continued success of HSBC's competitive fixed rate mortgage product in Mexico, helped by strong demand from first time buyers, led to average mortgage balances increasing by 93 per...

  • Page 102
    ... incurred in improving customer service levels within the branch network, and a rise in 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 were...

  • Page 103
    .... Trade services fee income increased by 63 per cent as a result of customer acquisition and increased cross-sales to existing customers, nearly doubling the bank's market share in a growing market. In Brazil, the increase was due to higher fees from payments and cash management, current accounts...

  • Page 104
    ... in balances. Brazil reported a decrease in balance sheet management and money market revenues as a result of high short-term interest rates and an inverted yield curve. Net fee income rose by 12 per cent reflecting higher fees in Global Transaction Banking. The payments and cash management business...

  • Page 105
    ......Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits by banks ... 16...

  • Page 106
    HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Latin America > Profit/(loss) before tax Profit/(loss) before tax by customer groups and global businesses (continued) Year ended 31 December 20053 Corporate, Investment Banking & Private Markets Banking Other US$m US$m US$m ...

  • Page 107
    ...balance sheet data Loans and advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Corporate, Investment Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value...

  • Page 108
    ... and the positioning of HSBC's local businesses. Typically, products provided include current and savings accounts, mortgages and personal loans, credit cards, and local and international payment services. HSBC uses its global reach to offer tailored financial services to customers banking in more...

  • Page 109
    ...accept credit card payments either in store or on the internet. Insurance: HSBC offers insurance services in 25 sites, which cover a full range of commercial insurance products designed to meet the needs of businesses and their employees, including employee benefit, pension and healthcare programmes...

  • Page 110
    ... subsidiaries and offices of its clients on a global basis. Corporate, Investment Banking and Markets is managed as three principal business lines: Global Markets, Global Banking and Group Investment Businesses. This structure allows HSBC to focus on relationships and sectors that best fit the Group...

  • Page 111
    ..., equities, derivatives, options, futures, structured products, mutual funds and alternative products, such as hedge funds and fund of funds. By accessing regional expertise located within six major advisory centres in Hong Kong, Singapore, Geneva, New York, Paris and London, Private Banking seeks...

  • Page 112
    ... ...Net insurance claims incurred and movement in policyholders' liabilities ...Loan impairment charges and other credit risk provisions ...Operating expenses ...Share of profit in associates and joint ventures ...Asset deployment ...Trading assets and financial investments ...Funds under management...

  • Page 113
    ... made to the exchange rates used to translate assets and liabilities denominated in foreign currencies into the functional currencies of any HSBC branch, subsidiary, joint venture or associate. 2006 compared with 2005 As Constant reported currency on an underlying basis % % 2005 compared with 2004...

  • Page 114
    ...at the balance sheet date which will only be individually identified in the future. The collective impairment allowance is determined after taking into account: • historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product...

  • Page 115
    ...to ensure they remain appropriate. The portfolio approach is generally applied to the following types of portfolios low value, homogeneous small business accounts in certain jurisdictions; residential mortgages; credit cards and other unsecured consumer lending products; and motor vehicle financing...

  • Page 116
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Critical accounting policies / Key performance indicators acquired business is greater than the cost of acquisition, the excess is recognised immediately in the income statement. Goodwill is allocated to cash-generating units ...

  • Page 117
    ... continue up to 2008. The plan is aimed at guiding the Group to achieve management's vision for HSBC to be the world's leading financial services company. To support the Group's strategy and ensure that HSBC's performance can be monitored, management utilises a number of financial KPIs. The table...

  • Page 118
    ... significant credit losses in the mortgage services business in the US described on page 189. Management aims to improve risk-adjusted performance over time. Return on average invested capital measures the return on the capital investment made in the business, enabling management to benchmark HSBC...

  • Page 119
    ... its main markets over many years. Going forward, HSBC will use a consistent measure of recommendation to gauge customer satisfaction with the services provided by the Group's Personal Financial Services and Commercial Banking businesses, and benchmark the measures of reported customer satisfaction...

  • Page 120
    ... and the success of the Group's IT function in meeting straight-through delivery processing targets. Customer transactions processed HSBC's IT function establishes with its end users service level agreements for systems performance (e.g. systems up-time 99.9 per cent of the time and credit card...

  • Page 121
    ......Net insurance claims incurred and movement in policyholders' liabilities ...Net operating income before loan impairment charges and other credit risk provisions ...Loan impairment charges and other credit risk provisions ...Net operating income ...Employee compensation and benefits ...General and...

  • Page 122
    ... Services in North America, and in Corporate, Investment Banking and Markets, where the cost efficiency ratio improved slightly as strong revenue growth offset the first full year effect of investment expenditure in previous years. HSBC's share of profit in associates and joint ventures increased...

  • Page 123
    ... East and Latin America contributed to cost 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...

  • Page 124
    ...the Personal Financial Services and Commercial Banking businesses in Asia and the UK, and also improved the value of cash balances within the Group's custody and payments and cash management businesses and increased the resultant investment income; the cumulative effect of higher short-term interest...

  • Page 125
    ... business through network expansion, customer recruitment and targeted marketing and promotions. In Personal Financial Services, the emphasis on the recruitment of HSBC Premier customers generated strong deposit growth throughout the region, which funded increased mortgage and credit card borrowing...

  • Page 126
    ... in mortgage, card and unsecured personal lending balances was strong, offsetting spread contraction as the cost of funds rose with progressive interest rate rises. Core deposit growth benefited from expansion of the branch network and the launch of new savings products, including an online savings...

  • Page 127
    ...$m Cards ...Account services ...Funds under management ...Broking income ...Insurance ...Credit facilities2 ...Global custody ...Imports/exports ...Unit trusts ...Remittances ...Underwriting ...Corporate finance ...Trust income ...Maintenance income on operating leases ...Mortgage servicing ...Other...

  • Page 128
    ... unit trust, broking and custody fees. • There was an increase in cards in issue, which drove higher transaction volumes and balances and led to a 16 per cent rise in card fee income, principally in the US; Strong equity market performance also benefited HSBC's asset management activities. Funds...

  • Page 129
    ... customer numbers and greater card utilisation. Account service fees increased by 9 per cent, reflecting increased customer numbers, the launch of a new packaged product in the UK and the introduction of a Small Business Tariff in Commercial Banking. Buoyant equity markets benefited custody fees...

  • Page 130
    ... products. Overall, customer volumes rose, as increased hedging activity and a change in risk appetite among investors drove a general improvement in market sentiment towards developing economies. On an underlying basis trading income in the Rest of Asia-Pacific grew by 35 per cent, driven by HSBC...

  • Page 131
    ...income on trading activities'. The offset to the net internal funding is reported as 'Net interest income' within the lending customer group. The resulting 'Net trading income' line comprises all gains and losses from changes in the fair value of financial assets and financial liabilities classified...

  • Page 132
    ... held to meet liabilities 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...

  • Page 133
    ..., like the related assets, were included within the heading 'Net income from financial instruments designated at fair value'. The element of the increase in liabilities under insurance contracts that reflected investment performance was reported separately within 'Net insurance claims incurred and...

  • Page 134
    ... decrease. In Hong Kong, net earned premium income increased by 13 per cent, driven by the life insurance business. New products, many designed to meet financial needs identified in HSBC's global study on the future of retirement, were supported by increased promotional and marketing activity, and...

  • Page 135
    ... number of personal insurance policies, resulting from an expansion of HSBC's insurance operations in the region. In North America, increased cross-sales of insurance products through the branch network, combined with strong sales of other personal insurance-related products, resulted in an increase...

  • Page 136
    ...back transactions. In Hong Kong, the modest increase in other operating income reflected profits earned from the sale of the former head office building of Hang Seng Bank and income received from the transfer of the credit card acquiring business into a joint venture between HSBC and Global Payments...

  • Page 137
    ...movement in the liability that arises, primarily from the attribution of investment performance to savings-related policies. Consequently, claims rise in line with increases in sales of savings-related business and with investment market growth. In Europe, net insurance claims incurred and movement...

  • Page 138
    ...system in 2005 reduced the amount of reserves held for liabilities in respect of income protection products, bringing additional benefits in terms of capital efficiency of the UK life operation. Loan impairment charges and other credit risk provisions 2006 US$m By geographical region Europe ...Hong...

  • Page 139
    ...lien and adjustable rate mortgages acquired from correspondent brokers and banks in 2005 and in the first half of 2006; 10 per cent underlying lending growth (excluding lending to the financial sector and settlement accounts), notably in the UK, the US, Mexico, Brazil and Asia; the continuing effect...

  • Page 140
    ... cent of this increase, principally in mortgages, credit cards and other personal lending products. At 31 December 2005, personal lending accounted for 56 per cent of the customer loan portfolio, in line with 2004. The proportion of the portfolio attributable to corporate and commercial lending was...

  • Page 141
    ... 2003 awards under the HSBC Holdings Group Share Option Plan ('the Plan'). As explained in the Annual Report and Accounts 2005, in light of the impressive and sustained performance and shareholder returns over the three years covered by the 2003 awards, the Group Remuneration Committee exercised its...

  • Page 142
    ... opening hours in the branch network and the expansion of Commercial Banking, and an increase in revenue-driven performance-related awards drove staff costs higher. Marketing expenditure incurred on advertising and promotional activities rose in support of credit card and investment fund products...

  • Page 143
    ... 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 Centres...

  • Page 144
    ...geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America1 ...Latin America1 ...Share of profit in associates and joint ventures ...(72) 19 865 30 4 846 business expansion exceeded revenue growth. The cost efficiency ratio in Corporate, Investment Banking and Markets improved...

  • Page 145
    ...-office operation in Shanghai became fully functional and the centralisation of the life insurance underwriting and claims business was completed. • HSBC's share of income from Bank of Communications rose by 44 per cent, driven by wider spreads and an improved product mix, with increased corporate...

  • Page 146
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Asset deployment / Funds under management / Assets held in custody driven by strong investment banking performance, a buoyant stock market and rapid growth in ShariahAsset deployment compliant products and services. At 31 ...

  • Page 147
    ... Group Investment Businesses and Private Banking delivered good investment performance and strong net new money. HSBC is among the world's largest emerging market asset managers with US$62 billion of funds under management invested in emerging market assets. Group Investment Businesses managed US...

  • Page 148
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Economic profit / Other financial information Economic profit HSBC's internal performance measures include economic profit, a calculation which compares the return on financial capital invested in HSBC by its shareholders with...

  • Page 149
    ... North America Latin America Other operations ... Trading assets2 Europe Hong Kong HSBC Bank ...HSBC France ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank USA ...HSBC Bank Canada ...HSBC Markets...

  • Page 150
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Average balance sheet Assets (continued) 2006 Average Interest balance income US$m US$m Loans and advances to customers Europe HSBC Bank ...226,528 HSBC Private Banking Holdings (Suisse) ...7,134 ...

  • Page 151
    ...-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 ...HSBC Finance ...HSBC Bank...

  • Page 152
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Average balance sheet Assets (continued) 2006 % Distribution of average total assets Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...HSBC Finance ...Hang Seng Bank ......

  • Page 153
    ...25 6.24 5.71 1.84 2.01 North America Latin America Other operations ... Customer accounts5 Europe HSBC Bank ...221,369 HSBC Private Banking Holdings (Suisse) ...25,346 HSBC France ...23,579 Hang Seng Bank ...54,267 The Hongkong and Shanghai Banking Corporation ...104,441 The Hongkong and Shanghai...

  • Page 154
    ... Review (continued) Other financial information > Average balance sheet Total equity and liabilities (continued) 2006 Average Interest balance expense US$m US$m Financial liabilities designated at fair value - own debt issued6 Europe North America HSBC Holdings ...HSBC Bank ...HSBC Bank USA ...HSBC...

  • Page 155
    ... America Other operations ... 3.88 907,995 3.17 879,158 2.20 Summary Total interest-margin liabilities ...1,067,646 Trading liabilities...224,050 Financial liabilities designated at fair value (excluding own debt issued) ...12,537 Non-interest-bearing current accounts ...71,744 Total equity...

  • Page 156
    ...with 2005 Increase/(decrease) 2006 Volume Rate US$m US$m 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 157
    ... Rate US$m US$m US$m Financial investments 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 158
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Changes in net interest income / Share capital and reserves Interest expense 2006 compared with 2005 Increase/(decrease) 2006 Volume Rate US$m US$m US$m Customer accounts Europe HSBC Bank ...HSBC ...

  • Page 159
    ... within shareholders' equity and other non interest-bearing liabilities and the related coupon payments were included within 'Profit attributable to minority interests'. Share capital and reserves The following events in relation to the share capital of HSBC Holdings occurred during the year...

  • Page 160
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Share capital and reserves / Short term borrowings / Contractual obligations / Loan maturity Authority to repurchase ordinary shares 12. At the Annual General Meeting in 2006, shareholders renewed...

  • Page 161
    ...Commercial, industrial and international trade Real estate and other property related ...Non-bank financial institutions ...Governments ...Other commercial ...Hong Kong Government Home Ownership Scheme ...Residential mortgages and other personal loans Loans and advances to customers ...Interest rate...

  • Page 162
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Deposits Deposits The following tables analyse the average amount of bank deposits, customer deposits and certificates of deposit ('CDs') and other money market instruments (which are included ...

  • Page 163
    Year ended 31 December 2006 Average Average balance rate US$m % Customer accounts Europe Demand and other - non-interest bearing ...Demand - interest bearing ...Savings ...Time ...Other ...Hong Kong Demand and other - non-interest bearing ...Demand - interest bearing ...Savings ...Time ...Other ......

  • Page 164
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Certificates of deposit and other time deposits / Off-balance sheet arrangements Certificates of deposit and other time deposits At 31 December 2006, the maturity analysis of certificates of ...

  • Page 165
    ... loan, advised overdraft limits, and mortgage offers awaiting customer acceptance. HSBC generally has the right to change or terminate any conditions of a personal customer's overdraft, credit card or other credit line upon notification to the customer. In respect of corporate commitments to lend...

  • Page 166
    HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Off balance sheet arrangements / Regulation and supervision party. The cash flows received by SPEs on pools of receivables are used to service the finance provided by investors. HSBC administers ...

  • Page 167
    ...on The Stock Exchange of Hong Kong Limited is set out in the 'Report of the Directors: Governance' on page 248. HSBC's operations throughout the world are regulated and supervised by approximately 510 different central banks and regulatory authorities in those jurisdictions in which HSBC has offices...

  • Page 168
    ... the FSMA. These include retail banking, life and general insurance, pensions, mortgages, custody and branch sharedealing businesses, and treasury and capital markets activity. HSBC Bank is HSBC's principal authorised institution in the UK. FSA rules establish the minimum criteria for authorisation...

  • Page 169
    ... the HKMA certain returns and other information and establishes certain minimum standards and ratios relating to capital adequacy (see below), liquidity, capitalisation, limitations on shareholdings, exposure to any one customer, unsecured advances to persons affiliated with the bank and holdings of...

  • Page 170
    ... Office of the Comptroller of the Currency ('OCC') and the Federal Deposit Insurance Corporation ('FDIC') govern many aspects of HSBC's US business. HSBC and its US operations are subject to supervision, regulation and examination by the Federal Reserve Board because HSBC is a 'bank holding company...

  • Page 171
    ... have adopted 'leverage' capital requirements that generally require US banks and bank holding companies to maintain a minimum amount of capital in relation to their balance sheet assets (measured on a non-risk-weighted basis). The Federal Deposit Insurance Corporation Improvement Act of 1991...

  • Page 172
    ... risk, operational risk, pension risk, insurance risk and sustainability (environmental or social) risks. Market risk includes foreign exchange, interest rate and equity price risk. HSBC's risk management policies are designed to identify and analyse these risks, to set appropriate risk limits...

  • Page 173
    ... their detailed credit policies and procedures. Issuing policy guidelines to HSBC's operating companies on the Group's attitude toward, and appetite for, credit risk exposure to specified market sectors, activities and banking products. Each HSBC operating company and major business unit is required...

  • Page 174
    ... operating company is required to implement credit policies, procedures and lending guidelines which conform to HSBC Group standards, with credit approval authorities delegated from the Board of Directors of HSBC Holdings to the relevant Chief Executive Officer. In each major subsidiary, management...

  • Page 175
    ... of similar assets to assess the quality of the loan book and other exposures; a consideration of any oversight or review work performed by Credit and Risk functions; review of model validation procedures; review of management objectives and a check that Group and local standards and policies are...

  • Page 176
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Credit risk management are reviewed regularly and amendments, where necessary, are implemented promptly. The credit quality of unimpaired loans is assessed by reference to the Group's standard credit rating...

  • Page 177
    ... numbers of relatively lowvalue assets are managed using a portfolio approach, typically low-value, homogeneous small business accounts in certain countries or territories; residential mortgages that have not been individually assessed; credit cards and other unsecured consumer lending products...

  • Page 178
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Credit risk management / Exposure Collectively assessed allowances are generally calculated monthly and charges for new allowances, or reversals of existing allowances, are determined for each separately ...

  • Page 179
    ...total gross lending to customers, broadly in line with 2005. Commercial, industrial and international trade lending grew strongly in 2006, notably to the service industry. This increased this class of lending by a percentage point to 18 per cent of total gross loans and advances to customers. Within...

  • Page 180
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk Credit risk > Exposure > 2006 Financial investments (Unaudited) At US$205 billion, total financial investments were 12 per cent higher than at the end of 2005. Investments of US$93 billion in corporate debt and other securities ...

  • Page 181
    ... of gross loans and advances to customers. In North America, growth in other personal lending was largely driven by credit card activity and increased second lien mortgage balances. In the US, increased uptake of both prime and non-prime credit cards was driven by targeted marketing campaigns and...

  • Page 182
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Exposure > 2006 / By industry sector launches in the Middle East, Sri Lanka and Singapore and marketing and incentive campaigns across the region. Other unsecured lending balances rose during 2006, partly ...

  • Page 183
    ... collectively assessed loans and advances. Included in personal lending in North America are the following balances relating to the US: (Unaudited) Residential mortgages - HSBC Bank USA ...Residential mortgages - HSBC Finance ...Motor vehicle finance ...MasterCard/Visa credit cards ...Private label...

  • Page 184
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Exposure > By industry sector Loans and advances to customers by industry sector and by geographical region (Audited) At 31 December 2005 (restated5) Gross loans and Latin advances to America customers US$m...

  • Page 185
    ...Other personal ...70,546 57,920 128,466 Corporate and commercial Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government ...Other commercial2 ... Hong Kong US$m 29,373 9,105 38,478 Rest of AsiaPacific US$m 14,860 9,079 23,939 North America...

  • Page 186
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Exposure > By industry sector Loans and advances to customers by industry sector and by geographical region (continued) (Unaudited) At 31 December 20032 (restated7) Gross loans and advances to customers US...

  • Page 187
    ...Other personal ...38,719 26,748 65,467 Corporate and commercial Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government ...Other commercial3 ... Hong Kong US$m 31,094 7,066 38,160 Rest of AsiaPacific US$m 7,507 5,900 13,407 North America US...

  • Page 188
    ...) Credit risk > Exposure > Rest of Asia-Pacific and Latin America / Banks / Financial assets Loans and advances to customers by principal area within Rest of Asia-Pacific and Latin America (Audited) Loans and advances (gross) Commercial, international trade and PropertyOther other related personal...

  • Page 189
    ... liabilities for financial reporting purposes. However, the exposure to credit risk relating to the respective financial assets is mitigated as follows. At 31 December 2006 Carrying amount US$m Loans and advances held at amortised cost Loans and advances to customers ...Loans and advances to banks...

  • Page 190
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Exposure > Debt securities / Areas of special interest Debt securities and other bills by rating agency designation (Audited) The following table presents an analysis by rating agency designation of debt ...

  • Page 191
    ...Other personal lending' in the market sector analysis. In addition to capital or principal repayment mortgages that may be subject to either fixed or variable interest rates, HSBC responds to customer needs by periodically testing and underwriting an increasing range of mortgage products designed to...

  • Page 192
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Exposure > Areas of special interest / Cross-border distribution 1 HSBC Finance includes lending in Canada and the UK and excludes loans transferred to HSBC USA Inc. 2 Total mortgage lending includes ...

  • Page 193
    ...mortgage lending which is reported within 'Other personal lending' in the market sector analysis. At 31 December 2006, the outstanding balance of interest-only loans in the US mortgage services business was US$6.3 billion, or 1.3 per cent of the Group's gross loans and advances to personal customers...

  • Page 194
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Exposure / Credit quality > Loans and advances outstandings comprise loans and advances (excluding settlement accounts), amounts receivable under finance leases, acceptances, commercial bills, In-country ...

  • Page 195
    ...The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the Group's standard credit grading system, as described on page 173. The following information is based on that system: At 31 December 2005 Loans and Loans and advances...

  • Page 196
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Credit quality > Loans and advances > 2006 Impaired loans and advances (Audited) At 31 December 2006 US$m Total impaired loans and advances to: - banks ...- customers ...15 13,785 13,800 Total allowances ...

  • Page 197
    ... mortgage balances originated through the branch-based consumer lending business, rose modestly, driven by growing portfolio maturity and a higher mix of credit card receivables following the Metris acquisition. In Canada, impaired loans increased as a small number of commercial customers in...

  • Page 198
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Credit quality / Impairment allowances and charges Interest forgone on impaired loans (Audited) Interest income that would have been recognised under the original terms of impaired and restructured loans ...

  • Page 199
    ...of loans and advances to customers (Unaudited) At 31 December 2006 % Total impairment allowances to gross lending1 Individually assessed impairment allowances ...Collectively assessed impairment allowances ...0.30 1.28 1.58 1 Net of reverse repo transactions, settlement accounts and stock borrowings...

  • Page 200
    ...HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Impairment allowances > 2006 / 2005 Movement in impairment allowances by industry segment and by geographical region The following tables show details of the movements in HSBC's impairment allowances by location...

  • Page 201
    ... booked in Hong Kong may cover assets booked in branches located outside Hong Kong, principally in the Rest of Asia-Pacific, as well as those booked in Hong Kong. 3 In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has...

  • Page 202
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Provisions for bad and doubtful debts > 2004 / 2003 Movement in provisions by industry segment and by geographical region (Unaudited) 2004 (restated3) Rest of AsiaNorth Pacific America US$m US$m 1,181 (21) ...

  • Page 203
    ...North America transferred in on the acquisition of HSBC Finance Corporation, and of US$116 million in Latin America transferred in on the acquisition of Lloyds TSB Group's Brazilian businesses and assets. 3 General provisions are allocated to geographical segments based on the location of the office...

  • Page 204
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Provisions for bad and doubtful debts > 2002 / Impairment charges > 2006 / 2005 Movement in provisions by industry segment and by geographical region (continued) (Unaudited 2002 (restated4) Rest of ...

  • Page 205
    ... losses ...Banks ...Customers ...1,984 (5) 1,989 % Charge for impairment losses as a percentage of closing gross loans and advances ...31 December 2005 Impaired loans ...Impairment allowances ... Year ended 31 December 2005 (restated1) Rest of Latin North AsiaHong America America Pacific Kong US...

  • Page 206
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Charge to P&L Account > 2004 to 2002 / Impairment charges > 2006 Net charge to the profit and loss account for bad and doubtful debts by geographical region (continued) (Unaudited) Year ended 31 December ...

  • Page 207
    .... In response, HSBC tightened underwriting controls in the second half of 2005, reduced its market share of unsecured personal lending and changed the product mix of new business towards lower-risk customers. In 2006 there were early signs of improvement in more recent unsecured lending. New loan...

  • Page 208
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Impairment charges > 2006 / 2005 of several significant recoveries in 2005 led to a large fall in France. In Hong Kong, new loan impairment charges declined by 22 per cent to US$243 million, reflecting the ...

  • Page 209
    ...to a small number of individual allowances for corporate and commercial customers. However, overall credit quality improved, evidenced by a decline in impaired loans as a proportion of gross advances, reflecting a strong economy with low unemployment. Releases and recoveries in Hong Kong declined by...

  • Page 210
    ...-off policies relating to retail and credit card balances. Excluding these factors, credit quality improved year on year, reflecting an improving economic environment. This contributed to the fall in new impairment allowances, which was only partially offset by increased requirements due to loan...

  • Page 211
    ...contractual delinquency (as a percentage of loans and advances) within Personal Financial Services in the US: (Unaudited) 31 December 2006 % Residential mortgages ...Second lien mortgage lending ...Vehicle finance1 ...Credit card2 ...Private label ...Personal non-credit card Total2 ...2.59 4.02 3.16...

  • Page 212
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Impairment losses / HSBC Holdings / Risk elements Charge for impairment losses as a percentage of average gross loans and advances to customers (Unaudited) Europe % Year ended 31 December 2006 New ...

  • Page 213
    ... year if the debt performs in accordance with the new terms. Troubled debt restructurings were broadly in line with 2005. Unimpaired loans past due 90 days or more (Unaudited) Credit risk elements also cover potential problem loans. These are loans where information about borrowers' possible credit...

  • Page 214
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Risk elements / Liquidity and funding > Policies / Primary sources of funding Risk elements (Unaudited) The following table provides an analysis of risk elements in the loan portfolios at 31 December for ...

  • Page 215
    ... in the operating companies of HSBC in accordance with practices and limits set by the Group Management Board. These limits vary by local financial unit to take account of the depth and liquidity of the market in which the entity operates. It is HSBC's general policy that each banking entity should...

  • Page 216
    ... and accessing additional funding sources such as interbank 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...

  • Page 217
    ... liquidity position of the Group's banking entities. Year ended 31 December 2006 2005 % % Year-end ...Maximum ...Minimum ...Average ...20.6 22.1 17.1 19.3 17.1 17.5 14.4 16.3 deploys in short-term bank deposits or liquidity funds. HSBC Holdings' primary uses of cash are investments in subsidiaries...

  • Page 218
    ...so designated but not held with trading intent is disclosed separately. Non-trading portfolios primarily arise from the interest rate management of HSBC's retail and commercial banking assets and liabilities. The management of market risk is principally undertaken in Global Markets using risk limits...

  • Page 219
    ... Group's balance sheet management activities. The daily VAR, for both trading and non-trading portfolios, for HSBC Global Markets was as follows: Daily total VAR for Global Markets (US$m) (Unaudited) Revenues (US$m)  Profit and loss frequency Year ended 31 December 2005 Number of days Revenues...

  • Page 220
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Market risk > Value at risk / Trading portfolios / Non-trading portfolios Fair value and price verification control (Audited) Where certain financial instruments are carried on the Group's balance sheet at fair values, ...

  • Page 221
    ... captured by the risk transfer process. For example, both the flow from customer deposit accounts to alternative investment products and the precise prepayment speeds of mortgages will vary at different interest rate levels. In such circumstances, simulation modelling is used to identify the...

  • Page 222
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Market risk > Non-trading portfolios / Sensitivity of NII Once market risk has been consolidated in Global Markets or ALCO-managed books, the net exposure is typically managed through the use of interest rate swaps ...

  • Page 223
    ... its management of market risk in non-trading portfolios, to mitigate the impact of prospective interest rate movements which could reduce future net interest income, while balancing the cost of such hedging activities on the current net revenue stream. For simulation modelling, businesses use...

  • Page 224
    ... that HSBC Finance has a substantial fixed rate, real estate secured, lending portfolio which is primarily funded with interest rate sensitive short-term liabilities. Residual interest rate risk is managed within Global Markets. This reflects the Group's policy of transferring all interest rate risk...

  • Page 225
    ...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. The objectives of HSBC Holdings' market risk management...

  • Page 226
    ...funds received have generally been used to increase long-term investments in subsidiaries. Residual value risk management (Unaudited) A significant part of a lessor's return from operating leases is dependent upon its management of residual value risk. This arises from operating lease transactions...

  • Page 227
    ... unable to successfully defend a claim brought against any HSBC company; or HSBC being unable to take action to enforce its rights through the courts. • operational risk management responsibility is assigned to senior management within each business operation; information systems are used to...

  • Page 228
    ... asset and liability management strategy and related monitoring mechanisms to the market risks inherent in the scheme. These techniques include: • • regular assessments of funding positions; regular reviews of investment performance against market benchmarks; half-yearly reviews of the pension...

  • Page 229
    ...be high, and supporting HSBC's operating companies to assess similar risks of a lower magnitude; building and implementing systems-based processes to ensure consistent application of policies, reduce the costs of sustainability risk reviews and capture management information to measure and report on...

  • Page 230
    ... assigned assets falling below that required to support benefit payments. HSBC manages this risk by conducting regular actuarial investigations on the sustainability of the bonus rates. Credit life insurance provides protection in the event of death or unemployment. Credit life insurance business is...

  • Page 231
    ...life business uses written premiums as representing the best available measure of risk exposure. Both life and non-life business insurance risks are controlled through high level procedures set centrally, and can be supplemented with procedures set locally which take account of specific local market...

  • Page 232
    ...provided and claims experience risk is the risk that portfolio experience is worse than expected. HSBC manages these risks through pricing (for example, imposing restrictions and deductibles in the policy terms and conditions), product design, risk selection, claims handling, investment strategy and...

  • Page 233
    ...at the time. A key aspect of risk management in the insurance business, in particular the life insurance business, is the need to match assets and liabilities. Models are used to assess the impact of a range of future scenarios on the value of financial assets and associated liabilities. The results...

  • Page 234
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Insurance operations > Insurance risk / Financial risks Insurance contracts Contracts with DPF1 US$m At 31 December 2005 Financial assets: - trading assets ...- financial assets designated at fair value - derivatives ...

  • Page 235
    ... financial risk, for example, when the proceeds from financial assets are not sufficient to fund the obligations arising from non-linked insurance and investment contracts. Certain insurance-related activities undertaken by HSBC subsidiaries such as insurance broking, insurance management (including...

  • Page 236
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Insurance operations > Financial risks / Market risk Financial assets held by insurance underwriting operations (Audited) At 31 December 2006 Life linked Life non-linked Non-life insurance1 insurance2 insurance3 US$m US...

  • Page 237
    ...6 Comprises mainly loans and advances to banks and cash. In life linked insurance, premium income less charges levied is invested in unit-linked funds. HSBC manages the financial risk of this product by holding appropriate assets in segregated funds or portfolios to which the liabilities are linked...

  • Page 238
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Insurance operations > Market risk / Credit risk • annual return: the annual return is guaranteed to be no lower that a specified rate. This can be the investment return credited to the policyholder every year (...

  • Page 239
    ...by establishing limits on the net positions by currency and the total net short position that each insurance subsidiary may hold. The risk is also monitored by tracking the effect of predetermined exchange differences on the total profit and net assets of the insurance underwriting subsidiaries. The...

  • Page 240
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Insurance operations > Credit risk (Audited) At 31 December 2006 Supporting liabilities under non-linked insurance contracts AAA ...AA- to AA+ ...A- to A+ ...Lower than A- ...Unrated ...Supporting shareholders' funds1 ...

  • Page 241
    ... ...Of which issued by: - government ...- local authorities ...- corporates ...- other ...Of which classified as: - trading assets ...- financial instruments designated at fair value ...- available-for-sale securities ...- held-to-maturity investments ... Treasury bills US$m Other eligible bills US...

  • Page 242
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Insurance operations > Credit risk / Liquidity risk / PVIF (Audited) Reinsurers' share of liabilities under insurance contracts Linked Non-linked insurance insurance contracts contracts US$m US$m 10 33 - 15 - 58 106 812...

  • Page 243
    ... framework for the evaluation of insurance and related risks. The value of the PVIF asset at 31 December 2006 was US$1,549 million (2005: US$1,400 million). The present value of the shareholders' interest in the profits expected to emerge from the book of in-force policies at 31 December can be...

  • Page 244
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Insurance operations > PVIF / Capital management and allocation The following table shows the movements recorded during the year in respect of PVIF and the Movements in PVIF and net assets of insurance operations (...

  • Page 245
    ... annual Group capital plan, which determines levels of risk-weighted asset growth and the optimal amount and mix of capital required to support planned business growth. As part of HSBC's capital management policy, capital generated in excess of planned requirements is returned to HSBC Holdings...

  • Page 246
    ... or guarantees. Trading book risk-weighted assets are determined by taking into account marketrelated risks such as foreign exchange, interest rate and equity position risks, and counterparty risk. Future developments Basel II (Audited) regulatory capital requirement on the basis of their internal...

  • Page 247
    ... 1 capital At 1 January ...Consolidated profits attributable to shareholders of the parent company ...Dividends ...Add back: shares issued in lieu of dividends ...Increase in goodwill and intangible assets deducted ...Preference shares issued ...Ordinary shares issued ...Other (including exchange...

  • Page 248
    HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Capital management and allocation > Capital measurement Capital structure (Unaudited) 2006 US$m Composition of regulatory capital Tier 1 capital Shareholders' funds ...Minority interests and preference shares ......

  • Page 249
    ... 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 Latin American operations ...Grupo Banistmo ...Bank of Bermuda ...HSBC Holdings sub-group...

  • Page 250
    ......Group General Managers ...Board of Directors ...The Board ...Corporate governance codes ...Board committees ...Internal control ...Directors' interests ...Employees ...Employee involvement ...Employment of disabled persons ...Remuneration policy ...Employee share plans ...Subsidiary company share...

  • Page 251
    ... May 2005, Deputy Chairman of The Hongkong and Shanghai Banking Corporation Limited. A non-executive Director of CLP Holdings Limited, Integrated Distribution Services Group Limited, Convenience Retail Asia Limited, Shui On Land Limited and VTech Holdings Limited. A member of the Hong Kong Trade...

  • Page 252
    ... 2005 to 24 October 2006. †S W Newton Age 65. Chairman of The Real Return Group Company Limited. A non-executive Director since 2002 and, from the conclusion of the Annual General Meeting in 2007, a member of the Group Audit Committee. A Member of the Advisory Board of the East Asia Institute...

  • Page 253
    ... Banking and Markets and Group Investment Businesses. A Group Managing Director since 2004. Director of HSBC Bank plc, HSBC USA Inc. and The Hongkong and Shanghai Banking Corporation Limited. Joined HSBC in 1980. Appointed a Group General Manager in 2000. Head of Treasury and Capital Markets in Asia...

  • Page 254
    ... a Group General Manager in 2002. P J Lawrence Age 45. Head of Corporate, Investment Banking and Markets, USA. President and Chief Executive Officer, HSBC Bank USA, N.A. and HSBC USA Inc. Joined HSBC in 1982. Appointed a Group General Manager in August 2005. M Leung Age 54. Global Co-Head Commercial...

  • Page 255
    ... Age 44. Group General Manager and Head of Network, HSBC Bank plc. Joined HSBC in 1983. Appointed a Group General Manager on 24 November 2006. B P McDonagh Age 48. Chief Executive Officer, HSBC Finance Corporation and Chief Operating Officer, HSBC North America Holdings Inc. Joined HSBC in 1979...

  • Page 256
    ... that nonexecutive Directors spend 24 days per annum on HSBC business after an induction phase, with Committee members devoting significant additional time. The Board sets the strategy for HSBC through the five-year strategic plan and approves the annual operating plans presented by management for...

  • Page 257
    ...too is highly qualified for his position as Group Chief Executive and his appointment also had the unanimous support of the Board. Mr Geoghegan has over 33 years' experience with HSBC and has worked in 10 countries in North and South America, Asia, the Middle East and Europe. The Directors believed...

  • Page 258
    ...HSBC's business, the experience of previous service on a subsidiary company board can be a considerable benefit to HSBC and does not detract from a Director's independence. In accordance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, each non-executive...

  • Page 259
    ... of Securities on The Stock Exchange of Hong Kong Limited throughout the year. The Board of HSBC Holdings has adopted a code of conduct for transactions in HSBC Group securities by Directors that complies with The Model Code in the Listing Rules of the Financial Services Authority and with The...

  • Page 260
    ... code for directors or executive officers. In addition to the Group Business Principles and Values, which apply to the employees of all HSBC companies, pursuant to the requirements of the Sarbanes-Oxley Act the Board of HSBC Holdings has adopted a Code of Ethics applicable to the Group Chairman and...

  • Page 261
    ...of HSBC Holdings in accordance with such policies and directions as the Board may from time to time determine. Matters reserved for approval by the Board are described on page 254. Following each meeting the Group Chief Executive reports to the Board on the Group Management Board's activities. Group...

  • Page 262
    ... bi-annual confirmations from subsidiary company audit committees relating to the financial statements and internal control procedures of those subsidiaries. The Group Audit Committee is accountable to the Board and assists it in meeting its responsibilities for maintaining an effective system of...

  • Page 263
    ... of Finance and Public Credit in Mexico, and G Morgan, a director of HSBC Bank Canada for nine years, were identified by the Nomination Committee and so neither an external consultancy nor open advertising was used in connection with their appointments. The terms and conditions of appointments...

  • Page 264
    ...5 March 2007, the date of approval of the Annual Report and Accounts 2006. In the case of companies acquired during the year, the internal controls in place are being reviewed against HSBC's benchmarks and integrated into HSBC's processes. HSBC's key internal control procedures include the following...

  • Page 265
    ... limits to line management in the subsidiaries. In addition, functional management in Group Head Office is responsible for setting policies, procedures and standards in the following areas of risk: credit risk; market risk; liquidity risk; operational risk; IT risk; insurance risk; accounting risk...

  • Page 266
    ... business and operational risk assessments; regular reports from the heads of key risk functions including Internal Audit and Compliance; the production annually of reviews of the internal control framework applied at Group Head Office and major operating subsidiary level measured against HSBC...

  • Page 267
    ... Directors and Senior Management held, in aggregate, options to subscribe for 4,585,589 HSBC Holdings ordinary shares under the HSBC Holdings Executive Share Option Scheme, HSBC Holdings Group Share Option Plan, HSBC Holdings savings-related share option plans and HSBC Finance 1996 Long-Term...

  • Page 268
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Employees > Remuneration policy / Share plans of union membership are in Brazil, France, India, Malaysia, Malta, Mexico, the Philippines, Singapore and the UK. It is the policy to maintain welldeveloped communications and ...

  • Page 269
    .... All-employee share option plans The HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International are all-employee share plans under which eligible HSBC employees (those employed within the Group on the first working day of the year of grant...

  • Page 270
    ... 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 271
    ... Plan was approved at the 2005 Annual General Meeting. Awards of Performance Shares are made under this Plan to executive Directors and other senior executives. The performance conditions for awards of Performance Shares are described under 'Long-term incentive plan' on page 281. The Remuneration...

  • Page 272
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Employees > Share plans / Subsidiary company share plans Awards of Restricted Shares are made to other employees below the level of the Group Management Board based on performance, potential and retention requirements or as part of ...

  • Page 273
    ... price (£) 8.794 9.170 Exercisable from 21 Jun 2008 30 Sep 2008 Exercisable until 21 Jun 2009 30 Sep 2015 Subsidiary company share plans HSBC France and its subsidiaries When it was acquired in 2000, HSBC France and its subsidiary company, HSBC Private Bank France, operated employee share...

  • Page 274
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Employees > Subsidiary company share plans HSBC France shares of â,¬5 Date of award 9 May 1996 7 May 1997 29 Apr 1998 7 Apr 1999 12 Apr 2000 Exercise price (â,¬) 35.52 37.05 73.50 81.71 142.50 Exercisable from 9 May 1998 7 Jun 2000 ...

  • Page 275
    ... be advanced to an earlier date in certain circumstances, e.g. retirement. 3 The weighted average closing price of the shares immediately before the dates on which rights vested was £9.83. Beneficial Corporation: 1990 Non-Qualified Stock Option Plan HSBC Holdings ordinary shares of US$0.50 Date of...

  • Page 276
    ...each Bank of Bermuda share and the average closing price of HSBC Holdings ordinary shares, derived from the London Stock Exchange Daily Official List, for the five business days preceding the closing date of the acquisition. No Bank of Bermuda: Executive Share Option Plan 1997 HSBC Holdings ordinary...

  • Page 277
    ...details about employee compensation and benefits including pension plans. Set out below is information in respect of the five individuals who are not Directors of HSBC Holdings whose emoluments (excluding commissions or bonuses related to the revenue or profits generated by employees individually or...

  • Page 278
    ... from HSBC's lending and investment businesses; and advice - providing policy and guidance for management on sustainability issues as they affect HSBC's corporate real estate portfolio and supply chain. Corporate Responsibility Corporate Responsibility is the term used at HSBC to describe the Group...

  • Page 279
    ..., HSBC highlighted 'Investing in Nature', its US$50 million, five-year eco-partnership with Earthwatch Institute, WWF and Botanic Gardens Conservation International. Also in 2006, HSBC's Group Head Office building in London achieved an overall rating of 'Excellent' for site management and operation...

  • Page 280
    ...informal meeting of shareholders held in Hong Kong to discuss the progress of HSBC. Notifiable interests in share capital According to the register maintained by HSBC Holdings up to 20 January 2007 pursuant to section 211 of the Companies Act 1985: • Legal and General Investment Management Limited...

  • Page 281
    ... year ended 31 December 2006. Annual General Meeting The Annual General Meeting of HSBC Holdings will be held at the Barbican Hall, Barbican Centre, London EC2 on Friday 25 May 2007 at 11.00am. Resolutions to receive the Annual Report and Accounts and to approve the Directors' Remuneration Report...

  • Page 282
    ... ...Executive Directors ...Salary ...Annual cash bonus ...Long-term incentive plan ...2007 awards ...Performance conditions ...Arrangements from 2001-2004 ...Total Shareholder Return ...Pensions ...Service contracts ...Other directorships ...Non-executive Directors ...Fees ...Remuneration review...

  • Page 283
    .... As far as the executive Directors are concerned, these are FTSE30 companies with significant international operations and other major European and where appropriate US parented banks. Remuneration policy for executive Directors is intended to provide competitive rates of base salary but with the...

  • Page 284
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Executive Directors underlying shares. As the comparator group includes companies listed on overseas markets, a common currency is used to ensure that TSR is measured on a consistent basis; and • the earnings per ordinary share award ...

  • Page 285
    ... performance, cash return on cash invested, dividend performance and total 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...

  • Page 286
    ...Remuneration Report Regulations 2002, graph 5 below shows HSBC Holdings' TSR performance against the FTSE 100 Index, for the five-year period ended 31 December 2006. The FTSE 100 has been chosen as this is a recognised broad equity market index of which HSBC Holdings is a member. Executive Directors...

  • Page 287
    ...-executive Directors are appointed for fixed terms not exceeding three years, subject to their re-election by shareholders at subsequent Annual General Meetings. Non-executive Directors have no service contract and are not eligible to participate in HSBC's share plans. Non-executive Directors' terms...

  • Page 288
    ...of company car, medical insurance, other insurance cover, accountancy advice and travel assistance. 3 These discretionary bonuses are in respect of 2006. 4 Each of the executive Directors waived their right to receive a fee from HSBC Holdings (2006: £27,083; 2005: £55,000). 5 Retired as a Director...

  • Page 289
    ...the HSBC Asia Holdings Pension Plan on a defined contribution basis. There were no pension liabilities under the HSBC International Staff Retirement Benefits Scheme for M F Geoghegan at 31 December 2006. 5 Increase in transfer value reflects increase in base salary in 2006, following S K Green's new...

  • Page 290
    ... 2005 1 Aug 2008 lowest market values during the year were £10.28 and £9.14. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the relevant date. Under the Securities and Futures Ordinance of Hong Kong, Performance Share awards under The HSBC Share...

  • Page 291
    ...and transfer of the shares will not generally occur until the fifth anniversary of the date of award. A benchmark for HSBC Holdings' TSR, weighted by market capitalisation, was established which takes account of the TSR performance of: (1) a peer group of nine banks weighted by market capitalisation...

  • Page 292
    ... for shareholders the respective responsibilities of the Directors and of the Auditors in relation to the financial statements. The Directors are responsible for preparing the Annual Report, the consolidated financial statements of HSBC Holdings and its subsidiaries (the 'Group') and holding company...

  • Page 293
    ..., the Group Statement of Recognised Income and Expense, the Company Statement of Changes in Equity and the related notes. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors' Remuneration Report that is...

  • Page 294
    ... in accordance with the Companies Act 1985 and, as regards the group financial statements, Article 4 of the IAS Regulation; and the information given in the Directors' Report is consistent with the financial statements. • • KPMG Audit Plc Chartered Accountants Registered Auditor 5 March 2007...

  • Page 295
    ... geographical region ...By customer group ...14 Analysis of financial assets and financial liabilities by measurement value ...15 Trading assets ...16 Financial assets designated at fair value ...17 Derivatives ...18 Financial investments ...19 Securitisations and other structured transactions ...20...

  • Page 296
    ......Net insurance claims incurred and movement in policyholders' liabilities ...Net operating income before loan impairment charges and other credit risk provisions ...Loan impairment charges and other credit risk provisions ...Net operating income ...Employee compensation and benefits ...General and...

  • Page 297
    ... 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 liabilities...

  • Page 298
    ...Share of changes in equity of associates and joint ventures ...Exchange differences ...Actuarial losses on defined benefit plans ...1,582 (644) 1,554 (2,198) 20 4,675 (78) 4,911 Tax on items taken directly to equity ...Total income and expense taken to equity during the year ...Profit for the year...

  • Page 299
    ... of share 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: - equity ...- non-equity ...Net cash used in financing activities...

  • Page 300
    HSBC HOLDINGS PLC Financial Statements (continued) HSBC Holdings balance sheet at 31 December 2006 Notes ASSETS Cash at bank and in hand: - balances with HSBC undertakings ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Investments in subsidiaries ...Property,...

  • Page 301
    ...$544 million) of own shares held to fund employee share plans (2005: 49,217,589, US$701 million). The accompanying notes on pages 301 to 434, the audited sections of the 'Report of the Directors: The Management of Risk' on pages 165 to 247, and the 'Critical accounting policies' on pages 111 to 115...

  • Page 302
    ...) HSBC Holdings cash flow statement for the year ended 31 December 2006 Notes Cash flows from operating activities Profit before tax ...Adjustments for: - non-cash items included in profit before tax ...- change in operating assets ...- change in operating liabilities ...- elimination of exchange...

  • Page 303
    ...Statements in the Annual Report and Accounts 2005; HSBC has adopted 'Amendment to IAS 39: The Fair Value Option', 'Amendment to IAS 19 Employee Benefits: Actuarial Gains and Losses, Group Plans and Disclosures', 'Amendment to IAS 1 Presentation of Financial Statements: Capital Disclosures' and IFRIC...

  • Page 304
    .... Use of available information and application of judgement are inherent in the formation of estimates. Actual results in the future may differ from those reported. In this regard, management believes that the critical accounting policies where judgement is necessarily applied are those which relate...

  • Page 305
    ... or ownership risks related to the SPE or its assets in order to obtain benefits from its activities. • All intra-HSBC transactions are eliminated on consolidation. The consolidated financial statements of HSBC also include the attributable share of the results and reserves of joint ventures and...

  • Page 306
    ... interest rate (for example, certain loan commitment fees) and recorded in 'Interest income' (Note 2a). âˆ' âˆ' Net trading income Net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with related...

  • Page 307
    ...reporting HSBC is organised into five geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, North America and Latin America, and manages its business through four customer groups: Personal Financial Services; Commercial Banking, Corporate, Investment Banking and Markets; and Private Banking...

  • Page 308
    ... the balance sheet date which will only be individually identified in the future. The collective impairment allowance is determined after taking into account: - - - historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, loan grade or product...

  • Page 309
    ... due. (g) Trading assets and trading liabilities Treasury bills, debt securities, equity shares and short positions in securities are classified as held for trading if they have been acquired principally for the purpose of selling or repurchasing in the near term, or they form part of a portfolio of...

  • Page 310
    ... insurance contracts are the main class of financial instrument so designated. HSBC has documented risk management and investment strategies designed to manage such assets at fair value, taking into consideration the relationship of assets to liabilities in a way that mitigates market risks. Reports...

  • Page 311
    ... paid is recorded in 'Loans and advances to banks' or 'Loans and advances to customers' as appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the life of the agreement. Securities lending and borrowing transactions are generally secured, with...

  • Page 312
    ... the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction ('cash flow hedges'); or (iii) hedges of net investments in a foreign operation ('net investment hedges'). Hedge accounting is applied to derivatives designated as hedging...

  • Page 313
    ...amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (n) Subsidiaries, associates and joint ventures HSBC Holdings' investments...

  • Page 314
    ... assets include the value of in-force long-term insurance business, computer software, trade names, mortgage servicing rights, customer lists, core deposit relationships, credit card customer relationships and merchant or other loan relationships. Intangible assets are subject to impairment review...

  • Page 315
    ... that it relates to items recognised directly in shareholders' equity, in which case it is recognised in shareholders' equity. Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantively enacted by the balance sheet date, and...

  • Page 316
    ... an expense as they fall due. The costs recognised for funding defined benefit plans are determined using the Projected Unit Credit Method, with annual actuarial valuations performed on each plan. Actuarial differences that arise are recognised in shareholders' equity and presented in the Statement...

  • Page 317
    ..., the assets, including related goodwill where applicable, and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated into the Group's presentation currency at the rate of exchange ruling at the balance sheet date. The...

  • Page 318
    ...the balance sheet date is recognised as an asset. The present value of in-force long-term insurance business is determined by discounting future cash flows expected to emerge from business currently in force using appropriate assumptions in assessing factors such as future mortality, lapse rates and...

  • Page 319
    ... and deposits by customers and banks Financial liabilities are recognised when HSBC enters into the contractual provisions of the arrangements with counterparties, which is generally on trade date, and initially measured at fair value, which is normally the consideration received net of directly...

  • Page 320
    ... policyholders' liabilities Investment contracts with discretionary participation features US$m - 6 6 - - - Non-life insurance US$m 2006 Claims, benefits and surrenders paid ...Movement in liabilities ...Gross claims incurred and movement in liabilities ...Reinsurers' share of claims, benefits and...

  • Page 321
    ...not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ...Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ...Gains/(losses...

  • Page 322
    ... salaries ...Social security costs ...Post-employment benefits ...16,186 1,194 1,120 18,500 2005 US$m 14,008 1,072 1,065 16,145 2004 US$m 12,374 973 1,176 14,523 The average number of persons employed by HSBC during the year was as follows: 2006 Europe ...Hong Kong ...Rest of Asia-Pacific ...North...

  • Page 323
    ... the new strategy and swap arrangements were in place. The latest actuarial investigation of the principal plan was made at 31 December 2005, by C G Singer, Fellow of the Institute of Actuaries, of Watson Wyatt Limited. At that date, the market value of the HSBC Bank (UK) Pension Scheme's assets was...

  • Page 324
    ...increases of 3.75 per cent per annum. The Internal Revenue Service granted formal approval for changes in funding method due to the merger of pension plans on 23 August 2006. The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and the HSBC North America...

  • Page 325
    ... rate of return on plan assets is based on historical market returns adjusted for additional factors such as the current rate of inflation and interest rates. The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment...

  • Page 326
    ... an agerelated promotional salary scale that was included in the obligation calculation but not in the disclosed assumption. Mortality assumptions are increasingly significant in measuring the Group's obligations under its defined benefit pension and post-employment healthcare plans, particularly...

  • Page 327
    ... to changes in market conditions arising during the reporting period. The mortality rates used are sensitive to experience from the plan member profile. The following table shows the effect of changes in these and the other key assumptions on the principal plan: HSBC Bank (UK) Pension Scheme US...

  • Page 328
    ...assets include derivatives entered into with the HSBC Bank (UK) Pension Scheme with a negative fair value of US$273 million at 31 December 2006 (2005: nil). The principal plan holds a diversified portfolio of investments to meet future cash flow liabilities arising from accrued benefits as they fall...

  • Page 329
    ... 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 curtailments ...Assets distributed on settlements ...Exchange...

  • Page 330
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 7 Total expense recognised in the income statement in 'Employee compensation and benefits' 2006 HSBC Bank (UK) Pension Scheme US$m Current service cost ...Interest cost ...Expected return on plan assets ...Past service cost ...(...

  • Page 331
    ... return on plan assets ...Contributions by HSBC ...Experience gains/(losses) ...Benefits paid ...Assets distributed on curtailments ...Exchange differences ...At 31 December ...107 11 39 (1) (20) (1) (2) 133 2005 US$m 79 10 19 1 (7) - 5 107 The actual return on plan assets for the year ended...

  • Page 332
    ...). The average number of persons employed by HSBC Holdings during 2006 was 505 (2005: 433). 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...

  • Page 333
    ... IT testing procedures. 'Services related to corporate finance transactions' include fees payable to KPMG for transaction-related work, including US debt issuances. 'All other services' include other assurance and advisory services such as translation services, ad-hoc accounting advice and review of...

  • Page 334
    ... mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC. Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for HSBC Group. 9 Share-based payments...

  • Page 335
    ...and three years from date of award. 2006 Number (000's) Outstanding at 1 January ...Additions during the year1 ...Released in the year ...Forfeited in the year ...Outstanding at 31 December ...1 Additions during the year include 324,884 shares awarded to employees of HSBC Holdings (2005: 823). 5,106...

  • Page 336
    ...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 (or equivalent in US dollars, Hong Kong dollars or euros), with the option to use the savings to acquire shares...

  • Page 337
    ...0.84 years (2005: 1.09 years). HSBC Holdings Group Share Option Plan The HSBC Holdings Group Share Option Plan was a long-term incentive plan under which certain HSBC employees between 2000 and 2005 were awarded share options. The aim of the plan was to align the interests of those higher performing...

  • Page 338
    ...of fair values'. A risk-free interest rate of 4.3 per cent was used, with all other inputs to the model consistent with those used to value the other share options and awards made during 2006. HSBC Holdings Executive Share Option Scheme The HSBC Holdings Executive Share Option Scheme was a long-term...

  • Page 339
    ... the balance sheet date was 3.3 years (2005: 4.3 years). The weighted average share price at the date the share options were exercised was US$17.64 (2005: US$16.18). At the date of its acquisition in 2000, certain of HSBC France's subsidiary companies also operated employee share option plans under...

  • Page 340
    ... (754) - 6,358 5,520 The weighted average share price at the date the share options were exercised was US$17.65 (2005: US$16.18). 10 Tax expense 2006 US$m Current tax United Kingdom corporation tax charge - on current year profit ...United Kingdom corporation tax charge - adjustments in respect of...

  • Page 341
    ... average number of ordinary shares, excluding own shares held, outstanding in 2006 of 11,210 million (2005: 11,038 million; 2004: 10,907 million). 2006 US$m Profit attributable to shareholders of the parent company ...Dividend payable on preference shares classified as equity ...Profit attributable...

  • Page 342
    ... intra-HSBC capital and funding structures. By geographical region Geographical information is classified by the location of the principal operations of the subsidiary undertaking, or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East, HSBC Finance and HSBC Bank USA...

  • Page 343
    ... financial investments ...Dividend income ...Net earned insurance premiums .. Other operating income ...Total operating income ...Net insurance claims incurred and movement in policyholders' liabilities ...Net operating income before loan impairment charges and other credit risk provisions ...Loan...

  • Page 344
    ... financial investments ...Dividend income ...Net earned insurance premiums . Other operating income ...Total operating income ...Net insurance claims incurred and movement in policyholders' liabilities ...Net operating income before loan impairment charges and other credit risk provisions ...Loan...

  • Page 345
    ... investments ...Dividend income ...Net earned insurance premiums Other operating income ...Total operating income ...Net insurance claims incurred and movement in policyholders' liabilities ...Net operating income before loan impairment charges and other credit risk provisions ...Loan impairment...

  • Page 346
    ... HSBC Group. The following analysis includes inter-segment amounts within each customer group with the elimination shown in a separate column. Total assets At 31 December 2006 US$m % Personal Financial Services ...Commercial Banking ...Corporate, Investment Banking and Markets ...Private Banking...

  • Page 347
    ... ...Operating profit/(loss) ...Share of profit in associates and joint ventures ...Profit before tax ...Capital expenditure incurred3 ...1 Commercial Banking US$m 6,310 2,876 150 (3) 147 (12) 9 9 236 327 9,902 Year ended 31 December 2005 Corporate, Investment Banking Private & Markets Banking...

  • Page 348
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 13 and 14 Year ended 31 December 2004 Corporate, Investment Private Banking Banking Other & Markets US$m US$m US$m 3,994 2,764 1,935 718 962 257 90 171 40 Personal Financial Services US$m Net interest income ...Net fee income ...

  • Page 349
    ... Assets Cash and balances at central banks ...Items in the course of collection from other banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers...

  • Page 350
    ... Assets Cash and balances at central banks ...Items in the course of collection from other banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers...

  • Page 351
    HSBC Holdings At 31 December 2006 Financial assets and liabilities at amortised cost US$m 729 - - - 25 754 Held for Designated trading at fair value US$m US$m Financial Assets Cash at bank and in hand ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Other assets...

  • Page 352
    ... are valued at market value and the net gains/ (losses) resulting from trading activities: 2006 Fair value US$m US Treasury and US Government agencies ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities ...Corporate debt and other securities ...Equity securities...

  • Page 353
    ...portfolios by valuation methodology: Assets Trading securities % At 31 December 2006 Fair value based on: Quoted market prices ...Internal models with significant observable market parameters ...Internal models with significant unobservable market parameters ...Liabilities Trading securities - short...

  • Page 354
    ...for its customers and uses derivatives to manage its exposure to credit and market risks. Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. Asset values represent the cost to HSBC of replacing all transactions with a fair value in HSBC...

  • Page 355
    ...are used for traditional lending. Trading derivatives Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks...

  • Page 356
    ... 2005 US$m 73 340 (56) (64) (25) (16) 252 Hedging instruments HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing...

  • Page 357
    ... investments in foreign operations HSBC's consolidated balance sheet is affected by exchange differences between the US dollar and all the non-US dollar functional currencies of subsidiaries. HSBC hedges structural foreign exchange exposures only in limited circumstances. Hedging is undertaken using...

  • Page 358
    ... that are not supported by prices from current market transactions or observable market data. In these instances, the net fair value recorded in the financial statements is the sum of three components: - the value given by application of a valuation model, based upon HSBC's best estimate of the...

  • Page 359
    ...,752 93,217 6,295 202,925 At 31 December 2005 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 ...9,015 4,173 16,099 7,658 4,429 34,623...

  • Page 360
    ... % Available-for-sale US Treasury agencies ...US Government agencies ...US Government-sponsored agencies ...UK Government ...Hong Kong Government ...Other governments ...Asset-backed securities ...Corporate debt and other securities ...Total amortised cost ...Total carrying value ...Held-to-maturity...

  • Page 361
    ... on the cash flows from the asset, and transfers substantially all the risks and rewards of ownership. The risks include credit, interest rate, currency, prepayment and other price risks. Partial derecognition occurs when HSBC sells or otherwise transfers financial assets in such a way that some but...

  • Page 362
    ... cent shareholding in the Cyprus Popular Bank Limited (trading as Laiki Group). HSBC had US$4,747 million (2005: US$4,317 million) of investments in associates and joint ventures listed in Hong Kong. For the year ended 31 December 2006, HSBC's share of associates and joint ventures tax on profit was...

  • Page 363
    ... Technical Support and Assistance Agreements, HSBC is assisting in the development of financial and operating policies and a number of staff have been seconded to assist in this process. The statutory accounting reference date of Bank of Communications Co., Limited, Ping An Insurance (Group) Company...

  • Page 364
    ... 2006. The present value of in-force long-term insurance business ('PVIF') Movement on the PVIF 2006 US$m At 1 January ...IFRSs transition adjustment at 1 January 20051 ...Addition from current year new business ...Movement from in-force business ...Exchange differences and other movements ...At...

  • Page 365
    ... of PVIF for HSBC's main life insurance operations were: 2006 UK % Risk free rate ...Risk discount rate ...Expenses inflation...4.30 8.00 3.40 Hong Kong % 3.73 11.00 3.00 UK % 3.90 8.00 3.20 2005 Hong Kong % 4.19 11.00 3.00 The PVIF represents the value of the shareholder's interest in the...

  • Page 366
    ... the long-term perspective within the Group of the business units making up the CGUs. The discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the CGU operates. The cost of capital assigned to an individual CGU and used to discount its future...

  • Page 367
    ... 1 July 2006 US$m Cash Generating Unit Personal Financial Services - Europe ...Commercial Banking - Europe ...Private Banking - Europe ...Corporate, Investment Banking and Markets - Europe ...Personal Financial Services - North America ...Total goodwill in the CGUs listed above ...4,149 2,948 4,417...

  • Page 368
    ...at cost4 ...Acquisition of subsidiaries ...Fair value adjustments ...Disposals ...Transfers ...Exchange differences ...Other changes ...At 31 December 2005 ...Accumulated depreciation At 1 January 2005 ...Depreciation charge for the year ...Disposals ...Exchange differences ...Other changes ...At 31...

  • Page 369
    ...valued on an open market value basis as at 31 December each year by independent professional valuers who have recent experience in the location and type of properties. Investment properties in Hong Kong, the Macau Special Administrative Region and mainland China, which represent 25 per cent by value...

  • Page 370
    ... Bank Limited ...HSBC Insurance (Asia) Limited ...HSBC Life (International) Limited ...The Hongkong and Shanghai Banking Corporation Limited ...Rest of Asia-Pacific HSBC Bank Australia Limited ...HSBC Bank Egypt S.A.E...HSBC Investments (Taiwan) Limited ...HSBC Bank Malaysia Berhad ...North America...

  • Page 371
    ...Middle East, and HSBC Life (International) Limited which operates mainly in Hong Kong. Subsidiaries which experience significant restrictions on their ability to transfer funds to HSBC in the form of cash dividends or to repay loans and advances During 2006 and 2005, none of the Group's subsidiaries...

  • Page 372
    ... significant subsidiaries or business operations in 2006, which were accounted for using the purchase method: (i) On 30 April 2006 HSBC acquired the entire share capital of BNL Inversiones Argentinas S.A., the holding company of the bank Banca Nazionale del Lavoro S.A., which had net liabilities of...

  • Page 373
    ... assets as held for sale. These assets are presented within the geographical segment Rest of Asia-Pacific. 26 Trading liabilities 2006 US$m Deposits by banks ...Customer accounts ...Other debt securities in issue ...Other liabilities - net short positions ...32,040 89,166 34,115 71,287 226,608 2005...

  • Page 374
    ... liabilities designated at fair value HSBC 2006 US$m Deposits by banks and customer accounts ...Liabilities to customers under investment contracts ...Debt securities in issue (Note 28) ...Subordinated liabilities (Note 32) ...Preference shares (Note 32) ...577 13,278 33,167 18,503 4,686 70,211 2005...

  • Page 375
    ... in funds consolidated by HSBC ...Current taxation ...Obligations under finance leases ...Dividend declared and payable by HSBC Holdings ...Endorsements and acceptances ...Other liabilities ...966 1,805 707 1,507 9,577 15,262 29,824 Obligations under finance leases falling due: - within 1 year...

  • Page 376
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 30 30 Liabilities under insurance contracts 2006 Reinsurers' share US$m (176) (355) (58) (76) (665) Gross US$m Non-life insurance liabilities Unearned premium provision ...Notified claims ...Claims incurred but not reported ......

  • Page 377
    ...not reported ...Claims paid in current year ...Claims incurred in respect of current year ...Claims incurred in respect of prior years ...Exchange differences and other movements ...At 31 December ...Notified claims ...Claims incurred but not reported ...Other ...Total non-life insurance liabilities...

  • Page 378
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 30 and 31 Life insurance policyholders' liabilities 2006 Reinsurers' share US$m (807) 154 (208) (185) (1,046) Gross US$m Life (non-linked) At 1 January ...Benefits paid ...Claims incurred ...Exchange differences and other ...

  • Page 379
    ... has no expiry date and US$191 million (2005: US$377 million) is scheduled to expire within 10 years. HSBC Holdings Deferred tax asset/(liability) 2006 2005 US$m US$m Temporary differences: - short-term timing differences ...- fair valued assets and liabilities ...- share-based payments ...Provision...

  • Page 380
    ...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$282 million (2005: US$235 million). These relate to labour and overtime litigation claims brought by employees after leaving the bank...

  • Page 381
    ... borrower, generally with the consent of the Financial Services Authority, and, where relevant, the local banking regulator, and in certain cases at a premium over par. Interest rates on the floating rate loan capital are related to interbank offered rates. On the remaining subordinated loan capital...

  • Page 382
    ...HSBC's total capital ratio falls below the regulatory minimum ratio required, or (ii) the Directors expect that, in view of the deteriorating financial condition of HSBC Holdings, (i) will occur in the near term, then the Preferred Securities will be substituted by Preference Shares of HSBC Holdings...

  • Page 383
    ... Securities and the guarantee taken together. HSBC Holdings 2006 US$m Subordinated liabilities: - at amortised cost ...- designated at fair value ...8,423 14,070 22,493 2005 US$m 5,236 13,370 18,606 HSBC Holdings subordinated borrowings Amounts falling due after more than 1 year 2006 2005 US$m US...

  • Page 384
    ...quoted securities. (iii) Deposits by banks and customer accounts Deposits by banks and customer accounts are grouped by residual maturity. Fair values are estimated using discounted cash flows, applying either market rates, where applicable, or current rates offered for deposits of similar remaining...

  • Page 385
    ... value because, for example, they are short term in nature or reprice to current market rates frequently: Assets Cash and balances at central banks Items in the course of collection from other banks Hong Kong Government certificates of indebtedness Endorsements and acceptances Short-term receivables...

  • Page 386
    ... within one year one year US$m US$m Assets Financial assets designated at fair value ...Loans and advances to banks1 ...Loans and advances to customers ...Financial investments ...Other financial assets ...3,735 179,240 360,191 87,848 20,833 651,847 Liabilities Deposits by banks ...Customer accounts...

  • Page 387
    ... debt investments in subsidiary undertakings, 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 'Report of the Directors: The Management of Risk...

  • Page 388
    ... ...Loans and advances to customers ...Debt securities ...Equity shares ...Other ...6,480 934 63,956 106,652 11,634 390 190,046 2005 US$m 7,607 1,310 36,590 89,973 5,137 537 141,154 These transactions are conducted under terms that are usual and customary to standard lending, and stock borrowing...

  • Page 389
    ... been sold or repledged was US$135,998 million (2005: US$97,113 million). HSBC is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard stock borrowing and lending activities. 37 Minority interests 2006 US$m Minority interests...

  • Page 390
    ... discretion of the Board of Directors. The Board of Directors will not declare a dividend on the preference shares if payment of the dividend would cause HSBC Holdings not to meet the applicable capital adequacy requirements of the FSA or the profit of HSBC Holdings available for distribution...

  • Page 391
    ... the fifth anniversary of the date of the awards of the options. There were 402,856 HSBC Private Bank France employee share options exchangeable for HSBC Holdings ordinary shares outstanding at 31 December 2006 (2005: 597,660). At 31 December 2006, The CCF Employee Benefit Trust 2001 held 1,085,323...

  • Page 392
    ... HSBC (Household) Employee Benefit Trust 2003 (No.2) held a total of 8,670,335 (2005: 9,173,100) HSBC Holdings ordinary shares and 198,665 (2005: 2,198,829) ADSs, each of which represents five HSBC Holdings ordinary shares, which may be used to satisfy the exercise of these options and equity-based...

  • Page 393
    ... shares, derived from the London Stock Exchange Daily Official List, for the five business days preceding the closing date of the acquisition. During 2006, options over 529,233 HSBC Holdings ordinary shares were exercised (2005: 459,091) and delivered from the HSBC (Bank of Bermuda) Employee Benefit...

  • Page 394
    ...) 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 395
    ... ...New share capital subscribed, net of costs2 ...Profit for the year ...Dividends to shareholders ...Own shares adjustment ...Share of changes recognised directly in equity in the equity of associates or joint ventures ...Actuarial gains/(losses) on defined benefit plans ...Exchange differences...

  • Page 396
    ... 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 397
    ...Change in net trading securities and net derivatives .. Change in loans and advances to banks ...Change in loans and advances to customers ...Change in financial assets designated at fair value ...Change in other assets ...- (2,478) (13,620) (11,505) (132,987) (4,883) (7,796) (173,269) HSBC 2005 US...

  • Page 398
    ... contingent liabilities ...HSBC Holdings 2006 US$m 2005 US$m 2005 US$m 42,427 34,983 330 77,740 28,152 29,323 152 57,627 - 17,605 - 17,605 - 36,877 - 36,877 Commitments Documentary credits and short-term trade-related transactions ...Forward asset purchases and forward forward deposits placed...

  • Page 399
    ... 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. Joint ventures HSBC and its operations are contingently...

  • Page 400
    ... at the balance sheet date. Operating lease commitments At 31 December 2006, HSBC was obligated under a number of non-cancellable operating leases for properties, plant and equipment on which the future minimum lease payments extend over a number of years. 2006 Land and buildings US$m Future minimum...

  • Page 401
    ... it is not practicable to do so. 44 Related party transactions The Group's related parties include associates, joint ventures, post-employment benefit plans for the benefit of HSBC employees, key management personnel, close family members of key management personnel and entities which are controlled...

  • Page 402
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 44 Compensation of Directors and other key management personnel HSBC 2006 US$m Short-term employee benefits ...Post-employment benefits ...Share-based payment ...76 3 61 140 2005 US$m 71 2 21 94 Transactions, arrangements and ...

  • Page 403
    ... assets were under management by HSBC companies. Fees of US$49 million (2005: US$50 million) were earned by HSBC companies for these management services. HSBC's pension funds had placed deposits of US$348 million (2005: US$252 million) with its banking subsidiaries. The above outstanding balances...

  • Page 404
    ... party counterparties. HSBC International Staff Retirements Benefits Scheme entered into swap transactions with HSBC to manage the inflation and interest rate sensitivity of the liabilities and selected assets. At 31 December 2006, the gross notional value of the swaps was US$1.2 billion (2005: US...

  • Page 405
    ...the balance sheet date is recognised as an asset. The present value of in-force long-term insurance business is determined by discounting future cash flows expected to emerge from business currently in force using appropriate assumptions in assessing factors such as future mortality, lapse rates and...

  • Page 406
    ... the funded status of HSBC's benefit plan (the difference between plan assets at fair value and the plan benefit obligations) to be recognised on the balance sheet. In 2005, when the value of benefits accrued based on employee service up to the balance sheet date (the accumulated benefit obligation...

  • Page 407
    ... of the acquisition at their market price on the date the transaction is completed. • • US GAAP • • Up to 30 June 2001, goodwill acquired was capitalised and amortised over its useful life, which could not exceed 25 years. The amortisation of previously acquired goodwill ceased with effect...

  • Page 408
    ...of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction ('cash flow hedge'); or (iii) hedges of net investments in a foreign operation ('net investment hedge'). Hedge accounting is applied to derivatives designated as hedging...

  • Page 409
    ... instruments comprised futures, forward, swap and option transactions undertaken 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...

  • Page 410
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 47 Non-trading transactions • Non-trading transactions, which were those undertaken for hedging purposes as part of HSBC's risk management strategy against cash flows, assets, liabilities or positions, were measured on an ...

  • Page 411
    ... of financial assets, financial liabilities or a combination of both that is managed 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...

  • Page 412
    ... rate management strategy. âˆ' âˆ' certain financial assets held by insurance operations and managed at fair value to meet liabilities under insurance contracts (in 2006, approximately US$6 billion; 2005: US$4 billion of assets); financial liabilities under investment contracts and the related...

  • Page 413
    ... of the investment. Foreign exchange differences on available-for-sale securities denominated in foreign currency are excluded from earnings and recorded as part of a separate component of shareholders' funds. • • Impact • In 2005, certain assets have been reported at fair value for IFRSs...

  • Page 414
    ... the security is classified as trading under IFRSs and affect shareholders' equity when the security is classified as available-for-sale under IFRSs. Loan origination IFRSs From 1 January 2005 • Certain loan fee income and incremental directly attributable loan origination costs are amortised to...

  • Page 415
    ... further details of transactions during the year where assets are derecognised under US GAAP. • • Loan impairment IFRSs • When statistical models, using historic loss rates adjusted for economic conditions, provide evidence of impairment in portfolios of loans, their values are written down...

  • Page 416
    ... securities used by one of HSBC's US subsidiaries to offset changes in the fair value of mortgage servicing rights from available-for-sale financial investments to trading assets. At 31 December 2005 those securities had a cost of US$115m and a fair value of US$111m. This resulted in a transfer out...

  • Page 417
    ... 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 assets' with gains and losses...

  • Page 418
    ... streamline operations is earlier under IFRSs than under US GAAP, for example, where there is a time lag between developing and communicating a formal plan, and putting it into practice. This resulted in marginally higher net income and shareholders' equity under US GAAP in 2005. Consolidation of...

  • Page 419
    ... on shareholders' equity or on net income for 2004 or 2005. • Long-term insurance assets and liabilities IFRSs • Long-term insurance fund assets, excluding own shares held, are classified in accordance with IAS 39, for example, available-for-sale securities, or financial instruments designated...

  • Page 420
    ... the parent company of HSBC (IFRSs) ...Shareholders' interest in long-term insurance fund ...Pension costs ...Stock-based compensation ...Intangible assets ...Purchase accounting adjustments ...Derivatives and hedge accounting ...Foreign exchange differences on available-for-sale securities ...Loan...

  • Page 421
    ... US$m Movement in shareholders' equity (US GAAP) Balance brought forward (as previously published) ...Adoption of SFAS 155 at 1 January 2006 ...Balance brought forward (restated) ...Net income ...Dividends ...Share options ...Shares issued in lieu of dividends ...New share capital subscribed net of...

  • Page 422
    ... 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 ...Financial liabilities designated at fair value ...Retirement benefit...

  • Page 423
    ... (2005: US$18 billion) of the consideration received has been sold or repledged in connection with stock borrowing transactions. (a) Pension and post-retirement costs On 31 December 2006, HSBC adopted the recognition and disclosure provisions of SFAS 158 'Employers' Accounting for Defined Benefit...

  • Page 424
    ... on the acquisition of subsidiaries, investments in associates and interests in joint ventures when the cost of acquisition exceeds the fair value of HSBC's share of the identifiable assets, liabilities and contingent liabilities acquired. Under IFRSs (and before them, UK GAAP), goodwill arising on...

  • Page 425
    ... Purchased credit card relationships and related programmes ...Retail services merchant relationship ...Other loan related relationships ...Technology, customer lists and other contracts .. Core deposit relationships ...Other ...Intangible assets not subject to annual amortisation Trade name...

  • Page 426
    ... US$bn Financial investments Available for sale debt securities Shortcut ...- Long-haul ...1.8 Customer deposits Shortcut ...Long-haul ...Debt securities in issue and subordinated liabilities Shortcut ...Long-haul ...Total ...- - Nominal values Cash flow Fair value hedges hedges 2006 2005 US$bn US...

  • Page 427
    ...operating subsidiaries designate under SFAS 133 certain derivative financial instruments, including interest rate swaps and cross-currency contracts, as qualifying cash flow hedges of the forecast repricing of certain deposit liabilities and issues of debt. A number of variable rate commercial loans...

  • Page 428
    ...value of the related funding. Under IFRSs both the assets and the liabilities are translated at closing exchange rates and the differences between historical book value and current value are reflected in foreign exchange trading income. This reflects the economic substance of holding currency assets...

  • Page 429
    ... year Less than one year Fair Unrealised Fair Unrealised value losses value losses US$m US$m US$m US$m At 31 December 2005 US Treasury ...US Government agencies ...US Government sponsored entities ...UK Government ...Hong Kong Government ...Other governments ...Asset-backed securities ...Corporate...

  • Page 430
    ...109 'Accounting for income taxes', were as follows: 2006 US$m Deferred tax liabilities Leasing transactions ...Capital allowances ...Provision for additional UK tax on overseas dividends ...Reconciling items ...Other ...Total deferred tax liabilities ...Deferred tax assets Loan impairment allowances...

  • Page 431
    ... acquire assets originated by HSBC itself and thereby provide HSBC with a cost-effective source of financing. Under both structures, commercial paper, notes, or equity interests are issued to investors to fund the purchase of receivables, and cash received from the receivables is used to service...

  • Page 432
    ... credit card receivables transferred to HSBC Bank USA. In other HSBC entities such activities do not represent a significant part of HSBC's business and retained interests in securitisations are not significant. In the third quarter of 2004, HSBC began to structure all new collateralised funding...

  • Page 433
    ... to current market rates to service the loans sold. Securitisation-related revenue includes income associated with the current and prior period securitisation of loans with limited recourse structured as sales under US GAAP. Such income includes gains on sales, net of the estimate of probable credit...

  • Page 434
    ... pool credit losses for vehicle finance loans securitised in 2003 were estimated to be 10 per cent. Activities of other North American subsidiaries Through its North American operating subsidiaries, HSBC began acquiring residential mortgage loans from unrelated third parties in the middle of 2005...

  • Page 435
    ... at 31 December 2005. Retained interests are recorded in trading assets and are measured at fair value. Investment grade certificates are valued using quoted market prices. Key assumptions used during 2006 and 2005 in measuring the fair value of residual interests at the date of securitisation are...

  • Page 436
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 47 / Shareholder information changes in fair value recognised in earnings as these changes occur. SFAS 159 is effective as of the beginning of the first fiscal year beginning after 15 November 2007. HSBC is currently studying the...

  • Page 437
    ... 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 2006 and/or Annual Review 2006, Notice of Annual General...

  • Page 438
    ...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'), Euronext Paris, the New York Stock...

  • Page 439
    ... 1 In New York each ADS represents 5 underlying ordinary shares. 2 HSBC 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...

  • Page 440
    ... Barbican Hall, Barbican Centre, London EC2 on 25 May 2007 at 11 am. All resolutions considered at the 2006 Annual General Meeting were passed on a poll as follows: Resolution 1 2 3 To receive the Report and Accounts for 2005 ...To approve the Directors' Remuneration Report for 2005 ...To re-elect...

  • Page 441
    ... East and Africa: Group Communications 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...

  • Page 442
    ... document and do not wish to receive such translations in future. Investor relations Enquiries relating to HSBC's strategy or operations may be directed to: Senior Manager Investor Relations HSBC Holdings plc 8 Canada Square London E14 5HQ UK Telephone: +44 (0)20 7991 8041 Facsimile: +44 (0)20 7991...

  • Page 443
    ...tax liability arising on disposals of shares in HSBC Holdings by shareholders subject to UK capital gains tax can be complex, partly depending on whether, for example, the shares were purchased since April 1991, acquired in 1991 in exchange for shares in The Hongkong and Shanghai Banking Corporation...

  • Page 444
    ... apply. The Treaty benefits discussed below generally are not available to US holders that hold shares or ADSs in connection with the conduct of a business through a permanent establishment, or the performance of personal services through a fixed base, in the UK. Taxation of dividends An eligible US...

  • Page 445
    ...the UK's principal clearing banks, is purchased. 1991 HSBC Holdings plc is established as the parent company of the HSBC Group. 1992 HSBC purchases the remaining interest in Midland Bank plc. 1993 As a consequence of the Midland acquisition, HSBC's head office is transferred from Hong Kong to London...

  • Page 446
    ... Retail Financial Services Holdings Limited, which trades as Marks and Spencer Money ('M&S Money') in the UK. 2004 HSBC acquires 19.9 per cent of Bank of Communications, mainland China's fifthlargest bank by total assets, and Hang Seng Bank acquires 15.98 per cent of Industrial Bank. 2005 HSBC...

  • Page 447
    Organisational Structure 445

  • Page 448
    ... Long-term equity investments accounted for using the equity method Lendings Long-term debt Par value Non-recurring Common stock A line of credit, contractually repayable on demand unless a fixed-term has been agreed, established through a customer's current account Preferred stock Real estate...

  • Page 449
    ...Markets Act 2000 (UK) 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 with its subsidiary...

  • Page 450
    ... Metris Companies Inc., US credit card issuer acquired in December 2005 Marks and Spencer Retail Financial Services Holdings Limited, acquired by HSBC in November 2004 Middle market enterprises Morgan Stanley Capital International index Mortgage servicing rights Nationally Chartered, a designation...

  • Page 451
    ...The HSBC Share Plan United Kingdom UK Generally Accepted Accounting Principles United States of America US Generally Accepted Accounting Principles Value at risk Variable interest entity Worldwide Household International Revolving Lending system Wealth and Tax Advisory Services, Inc. World Wide Fund...

  • Page 452
    ... ratio 1, 142 Credit exposure 176 Credit quality of loans and advances 192 Credit risk management thereof 171 insurance 237 Critical accounting policies 111 Cross-border exposures 176, 191 Customer groups and global businesses 12 profit before tax 23 Dealings in HSBC Holdings plc shares 279 Debt...

  • Page 453
    ... HSBC Holdings/New York Stock Exchange corporate governance differences 257 Group Chairman's Statement 6 Health and safety 277 History and development of HSBC 443 Hong Kong business performance 49, 53 competitive environment 29 economic briefing 49, 53 lending 179 loan impairment charges 206 profit...

  • Page 454
    ...38, 44 in Hong Kong 52,56 in Latin America 97, 102 in North America 82, 87 in Rest of Asia-Pacific 66, 71 Own shares held IFRSs/US GAAP differences 415 Pensions accounting policy 314 for directors 284, 286 IFRSs/US GAAP differences 403, 421 risk 226 Personal Financial Services business highlights 13...

  • Page 455
    ...and advances to customers 186 profit/(loss) 60, 72 Restructuring provisions IFRSs/US GAAP differences 416 Risk elements in loan portfolio 211 Risk management 170 capital management and allocation 243 credit 171 insurance operations 228 legal litigation 225 liquidity and funding management 213 market...

  • Page 456
    ...'s Road East Hong Kong Telephone: 852 2862 8628 Bermuda Overseas Branch Register Corporate Shareholder Services The Bank of Bermuda Limited 6 Front Street Hamilton HM11 Bermuda Telephone: 1 441 299 6737 ADR Depositary The Bank of New York 101 Barclay Street Floor 22W New York, NY 10286 USA Telephone...

  • Page 457
    ... HSBC Holdings plc, London Cover designed by Addison Corporate Marketing Limited, London; text pages designed by Group Public Affairs, The Hongkong and Shanghai Banking Corporation Limited, Hong Kong Printed by St Ives Direct Romford Limited, Romford, UK, on Revive Special Silk paper using vegetable...

  • Page 458
    HSBC Holdings plc 8 Canada Square, London E14 5HQ, United Kingdom Telephone: 44 020 7991 8888 Facsimile: 44 020 7992 4880 www.hsbc.com