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Annual Report and Accounts

HSBC Holdings plc

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Annual Report and Accounts HSBC Holdings plc

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...000 properties in 83 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, shares in HSBC Holdings plc are held by about 200,000...

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... million). Return on average invested capital of 15.3 per cent (2006: 14.9 per cent). Earnings per ordinary share up 17.9 per cent to US$1.65 (2006: US$1.40). At the year-end Total equity up 17.8 per cent to US$135,416 million (2006: US$114,928 million). Customer accounts and deposits by banks up...

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......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 20075 ...Benchmarks: - FTSE 1006 ...- MSCI World7 ...For footnotes, see page 4. The consolidated financial statements...

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... of the parent company ...Dividends ...At the year-end Called up share capital ...Total shareholders' equity ...Shareholders' funds ...Capital resources10 ...Customer accounts ...Undated subordinated loan capital ...Preferred securities and dated subordinated loan capital11 ...Loans and advances to...

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...to shareholders of the parent company divided by average total shareholders' equity. 3 The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and other credit risk provisions. 4 Each American Depositary Share ('ADS') represents...

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..., the Bank of England, the Hong Kong Monetary Authority, the US Federal Reserve, the US Securities and Exchange Commission, the US Office of the Comptroller of the Currency, the European Central Bank, the People's Bank of China and the central banks of other leading economies and markets where HSBC...

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HSBC HOLDINGS PLC Report of the Directors: Business Review Group Chairman's statement Group Chairman's statement year. In addition, Personal Financial Services produced record profits in emerging markets. Within these customer groups, our insurance operations made further progress. Our North ...

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... increasingly employ technology to create better products which we can deliver globally at lower cost. As we grow our direct banking business, we will create opportunities to meet more of our customers' financial needs. Building on our position as the world's leading international emerging markets...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Group Chairman's statement Korea. We have entered a number of strategic alliances to ensure that we have the best products for our customers and the support to grow our activities. A fifth consecutive year of rising oil prices ...

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... better positioned to withstand market turbulence and grasp strategic opportunities. We will continue to focus HSBC on the parts of the global economy that promise the best prospects for higher growth over the long term. We will continue to invest for profitable growth in line with our strategy, and...

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... Financial Services ...Commercial Banking ...Global Banking and Markets ...Private Banking ...Other ...Analysis by customer group and global business ...Geographical regions ...Summary of geographical regions ...Competitive environment ...Europe ...Hong Kong ...Rest of Asia-Pacific ...North America...

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... loan impairment and other credit risk charges. 5 Net operating income divided by average risk-weighted assets. 6 Profit attributable to ordinary shareholders divided by average invested capital. 7 The percentage increase in dividends per share since the previous year, based on the dividends paid...

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.... Management uses this to assess the success of technology utilisation and, more generally, the productivity of the Group's distribution platforms and sales forces. The cost efficiency ratio for 2007 improved over the previous two years notwithstanding the continued investment in HSBC's businesses...

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... on the share price of the current weakness in the US sub-prime mortgage business and investor preference over this time for companies with smaller market values, particularly those for which there is the possibility of participating in domestic or regional consolidation. Management believes that...

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... HSBC's reported and underlying financial performances were: â€¢ Foreign currency translation differences, mainly due to the weakening of the US dollar, most significantly in Europe due to the size of HSBC's operations in the UK. The Group's profit before tax for 2007 compared with 2006 increased...

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HSBC Net interest income ...Net fee income ...Other income3 ...Net operating income4 ...Loan impairment charges and other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit ...Income from associates ...Profit before tax ... 2006 as reported US$m 34,486 17,182 13...

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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,...

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...Asia-Pacific, Latin America, Turkey and the Middle East; markets where HSBC has scale, such as the UK and Hong Kong; HSBC Premier customers, who appreciate the benefits of a bank with strong international connectivity; and consumer finance, cards, direct banking and other product families where HSBC...

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... consumer finance business in Asia. In India, the Group opened an additional 18 consumer finance branches and loan centres, more than doubling customer numbers. In Indonesia, HSBC opened 36 new consumer finance centres in 2007, taking the total to 64. â€¢ â€¢ Europe â€¢ In the UK, HSBC invested...

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...Islamic insurance business in the Middle East. HSBC launched an online savings product in the United Arab Emirates ('UAE') at the end of the first quarter of 2007. By the end of the year, almost 10,000 accounts had been opened and more than US$500 million of deposits placed. â€¢ â€¢ Latin America...

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..... Loan impairment charges and other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit ...Income from associates .. Profit before tax ...By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ... 2006 as reported US...

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...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ...6 Strategic direction HSBC's Commercial Banking strategy is focused on two key initiatives: - to be the leading international business bank, using HSBC's extensive geographical network together with product expertise in payments...

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... of new small business customers in key markets had existing Personal Financial Services relationships. Referrals of Commercial Banking customers to Private Banking resulted in US$1.8 billion of assets under management. Sales of Global Banking and Markets products increased strongly, particularly...

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..., HSBC's payments and cash management services won Euromoney's 'Best Cash Management in North America' award for the second year running. The appointment of dedicated resources underpinned strong growth in cross-sales of treasury and debt products to Commercial Banking customers. Increased customer...

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..... Loan impairment charges and other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit ...Income from associates .. Profit before tax ...By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ... 2006 as reported US...

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... to new business and was downsized. Strong results were reported across most other businesses with record revenues from foreign exchange, equities, securities services, payments and cash management, and HSBC Global Asset Management. Pre-tax profit in Hong Kong, Rest of Asia-Pacific and Latin America...

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...Foreign exchange ...Credit and Rates ...Structured derivatives ...Equities10...Securities services ...Global Banking ...Financing and capital markets ...Payments and cash management ...Other transaction services ...Balance sheet management ...HSBC Global Asset Management11 ...Principal Investments...

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... (charges)/recoveries and other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit ...Income from associates ...Profit before tax ...By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ... 2006 as reported US...

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... innovative ways of managing and preserving the wealth of high net worth individuals while optimising returns. Private Banking aims to grow annuity revenue streams through product leadership in areas such as credit, hedge funds, emerging markets, investment advice and estate planning. This will be...

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... be opened in Shanghai, Beijing and Guangzhou. A savings product with returns linked to the Hong Kong Stock Exchange (the Forward Accumulator) was introduced by HSBC in Asia. Client assets by investment class 2007 US$bn Equities ...Bonds ...Structured products ...Funds ...Cash, fiduciary deposits...

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..... Loan impairment charges and other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit ...Income from associates .. Profit before tax ...By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ... 2006 as reported US...

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... ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ...6 Notes â€¢ â€¢ For a description of the main items reported under 'Other', see footnote 8 on page 130. Dilution gains of US$1.1 billion were recorded in the first half of 2007 following share offerings made by three of HSBC...

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... ...Loan impairment charges and other credit risk provisions Net operating income ...Operating expenses ...Operating loss ...Income from associates .. Profit/(loss) before tax ...By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ... 2005 as reported...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... in circulation in 2007. Rest of Asia-Pacific (including the Middle East) HSBC offers personal, commercial, global banking and markets services in mainland China, mainly through its local subsidiary, HSBC Bank (China) Company Limited ('HSBC Bank China'), which was incorporated in March 2007...

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...a wide range of institutions including commercial banks, consumer finance companies, retail financial service companies, savings and loan associations, credit unions, general retailers, brokerage firms and investment companies. In investment banking, HSBC faces competition from specialist providers...

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... programme occurred in January 2008. UK Financial services, including retail banking, is a highly competitive sector in the UK, led by several national and international institutions which compete on both price and service quality. Domestic acquisitions or mergers are limited. The sector is closely...

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... on interest rates and an overall improvement in the property market led to increased demand for mortgages. Prices for high-end properties rose, though competition in traditional mortgage products remained fierce. Rising equity markets stimulated sales of investment products and related loans. After...

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... high as average lending rates continued to decline, despite no change to central bank policy. Banks in South Korea faced increased funding costs as they competed for deposits with securities firms who offered competitive rates on cash management accounts. Measures to cool the real estate sector...

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... on deposit account fees and ATM commissions. HSBC continued to increase its market share in core consumer, commercial and corporate banking products, and sought to differentiate itself through customer service. HSBC is well positioned to capitalise on economic growth with its extensive branch and...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Europe > Profit / (loss) before tax Europe Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Banking Services US$m US$m Year ended 31 December 2007 United Kingdom ......

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... (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at fair value and financial investments16 ...Total assets ...Deposits by banks ...Customer accounts ...For footnotes, see page 130. 452,275 104,527 445,258 1,184,315 87,491 504,954 At 31 December 2006 US...

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... 13 Review of business performance European operations reported a pre-tax profit of US$8.6 billion, compared with US$7.0 billion in 2006, an increase of 23 per cent. On an underlying basis, pre-tax profits improved by 13 per cent. In March 2007, HSBC acquired its partner's shares in life, property...

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... product offering real-time account opening, instantly ready for funding. Together with improved spreads, this contributed to a 29 per cent increase in net interest income on savings products. Average current account balances in the UK increased to US$31 billion. Sales of HSBC's premium service, fee...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Europe > 2007 interest rates started to decline during the second half of 2007 following rate rises earlier in the year. Average lending balances increased by 28 per cent. The income benefit from these increases was partly ...

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... in foreign exchange fees and card activity following the small-business credit card product successfully launched in May 2006. In Turkey, net fee income grew by 42 per cent, driven by investment banking, advisory and structured finance transactions, mainly due to a 15 per cent increase in corporate...

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... Strong foreign exchange and equities trading income drove revenue growth, enhanced by higher advisory fees and fair value gains in financing and capital markets. Securities services benefited from higher transaction volumes driven by increased market volatility. A rise in revenues from payments and...

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higher lending balances as existing clients increased their leverage. Net fee income increased by 15 per cent to US$1.0 billion, mainly due to a 10 per cent increase in funds under management in Switzerland with discretionary and advisory funds generating higher annual fees. Client investments in ...

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... profits in Private Banking were driven by strong client asset inflows, a more sophisticated product mix and lending growth. Global Banking and Markets made encouraging gains in trading activities, and operating expenses rose in line with net operating income. In Personal Financial Services, net...

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... mortgages also increased. A focus on liabilities helped boost new UK savings account volumes markedly in a buoyant yet highly competitive savings market. HSBC's competitive internet-based products were the key driver of growth. Cash invested in First Direct's 'e-savings' product trebled; balances...

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...Turkey, the opening of 37 new branches and associated growth in numbers of sales staff and infrastructure costs drove a 26 per cent rise in costs. Marketing expenditure also increased in support of the growing consumer lending, insurance and pensions businesses. Commercial Banking reported a pre-tax...

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... and increasing client contact by embedding business specialists in selected branches. These initiatives delivered increases in the number of start-up accounts and the number of customers who switched their business from other banks to HSBC. Higher-value international and foreign currency accounts...

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... funds under management and higher performance fees allied to revenues from disposals of property and structured finance fund investments. Trading income increased with positive revenue trends in the key product areas where HSBC has invested, notably Credit and Rates, foreign exchange and structured...

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... as ongoing investment in product development, particularly in structured derivatives and Credit and Rates. In HSBC Global Asset Management, 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...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... customers (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at fair value, and financial investments ...Total assets ...Deposits by banks ...Customer accounts ...For footnote, see page 130. 89,638 63,737 102,180 332,691 6,420 234,488 At 31 December 2006...

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... retail brokerage and investment products, as well as growth in net interest income following higher deposit balances and lending. In Commercial Banking, balance sheet growth was driven by customer acquisition, increased trade flows and supporting businesses expanding into mainland China. In Global...

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... the year. HSBC's credit card business maintained its leading position in terms of cards in circulation, spending and balances. HSBC's development of its investment and wealth management platforms benefited from the buoyant stock market in Hong Kong. This led to an increase in fees from the sale of...

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... sales of investment products. The cost efficiency ratio improved by 1.2 percentage points. While strong economic growth was a stimulus to revenue growth, HSBC also actively increased its customer base by opening business banking branches and adding frontline staff. Market share increased for key...

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...growth in new business. Trading income increased by 20 per cent, mainly from foreign exchange, structured derivatives, equities and rates. Global Markets benefited from interest rate volatility during the year and a buoyant equity market backed by mainland Chinese stocks listed in Hong Kong, as well...

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... 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 by 1.1 percentage points...

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... deposit spreads. HSBC increased its share of new mortgage business to 33 per cent, the highest of any lender, benefiting from the launch of a simplified, transparent pricing structure in the first half of 2006 which was supported by extensive media coverage. The relaunch of a number of key products...

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... referral programme. HSBC opened over 25,000 new BusinessVantage accounts in 2006, 21 per cent more than in 2005. Interest rate rises led to a 30 basis point widening of deposit and current account spreads and contributed to increased demand for savings products. Non-trade lending balances increased...

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...-based investments. Fees from the asset and structured finance business also rose. Net trading income increased by 18 per cent. HSBC retained its leadership position in foreign exchange, with revenues strengthening as trading activity increased in response to volatility in the value of the US dollar...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Hong Kong >2006 / Profit/(loss) before tax by customer group Fee income growth also benefited from increased client holdings of funds and alternative investments. Trading and other revenues were 18 per cent higher at US$199 ...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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

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... 585 236 289 94 68 317 2,574 Loans and advances to customers (net) by country 2007 US$m Australia ...India ...Indonesia ...Japan ...Mainland China ...Malaysia ...Middle East (excluding Saudi Arabia) ...Egypt ...United Arab Emirates ...Other Middle East ...Singapore ...South Korea ...Taiwan ...Other...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Rest of Asia-Pacific > 2007 Customer accounts by country 2007 US$m Australia ...India ...Indonesia ...Japan ...Mainland China ...Malaysia ...Middle East (excluding Saudi Arabia) ...Egypt ...United Arab Emirates ...Other Middle ...

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... customers (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at fair value, and financial investments ...Total assets ...Deposits by banks ...Customer accounts ...For footnote, see page 130. 101,852 39,861 64,381 228,112 17,560 150,233 At 31 December 2006...

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... the cost efficiency ratio. Global and regional emphasis on distinctive product offerings, including HSBC Premier and HSBC Direct, as well as significant investment in branches and marketing, and growth of consumer assets in emerging markets, helped attract an additional 1.1 million active customers...

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... key products with 23 per cent growth in the number of active customers to over 2.4 million. HSBC is among the market leaders in India in new credit card issuance and retail mutual funds distribution. The wealth management business continued to perform strongly with a 91 per cent increase in funds...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Rest of Asia-Pacific > 2007 increased use of point-of-sale financing. By the end of 2007, nearly 2.7 million credit cards were in circulation in India and over 1.2 million cards in the Middle East. In Malaysia, the Group is the...

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... growing lending volumes to mid-market customers and improved spreads on lending products. Lending volume growth resulted in part from increased cross-border activity, new branches and additional front-line employees. In Singapore, profit before tax rose by 19 per cent, driven by higher net interest...

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... international and domestic investor confidence in local stock markets. In line with the strategy to build an emerging markets-led and financing-focused business, there were strong revenue performances in Global Banking and Markets in India, mainland China, the Middle East, Singapore and Malaysia...

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...a result of increased employee numbers, particularly in the front office, and alignment of salaries to market conditions to support future growth. Also contributing to the rise were operating expenses in India, which more than doubled as HSBC continued to build its Private Banking business there. In...

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...Insurance in August 2005 which made that company a 19.9 per cent owned associate of HSBC. Pre-tax profits in the region have nearly doubled in the past two years, justifying HSBC's strategy of investing in emerging markets. Momentum in 2006 was strong, with underlying net operating income increasing...

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... balance sheet growth, wider deposit spreads and increased fee income. Income growth was supported by business development activity which contributed to a 26 per cent increase in operating costs. The cost efficiency ratio improved by 1.3 percentage points. The development of HSBC's regional business...

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... PLC Report of the Directors: Business Review (continued) Rest of Asia-Pacific > 2006 The robust performance of regional stock markets during 2006 contributed to strong demand for investment products and led to the launch of new investment funds, which together generated a 27 per cent increase...

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... 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 region to deploy the additional deposit base being attracted. For example, in Malaysia...

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...economic development in the Middle East. Trade finance and payments and cash management fee income also benefited from higher customer volumes. HSBC Global Asset Management revenues more than doubled, reflecting higher funds under management and performance fees on emerging market funds. Net trading...

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... 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, client appetite for investment in newly launched funds and the successful growth of recently...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Rest of Asia-Pacific > Profit before tax by customer group / North America Profit before tax and balance sheet data by customer group and global business (continued) Personal Financial Commercial Services Banking US$m US$m 1,...

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North America Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Banking Services US$m US$m Year ended 31 December 2007 United States ...Canada ...Bermuda ...Other ...(1,824) 265 13 - (1,546) Year ended 31 December 2006 United States ......

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...HOLDINGS PLC Report of the Directors: Business Review (continued) North America > Profit before tax / 2007 Profit before tax 2007 US$m 14,847 5,810 (542) 1,750 245 105 449 360 23,024 (241) 22,783 (12,156) 10,627 (10,556) 71 20 91 % Share of HSBC's profit before tax ...Cost efficiency ratio ...Year...

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.... Personal Financial Services reported a pre-tax loss of US$1.5 billion, a decline of US$4.9 billion from 2006. Performance was significantly affected by rising loan impairment charges in the consumer finance business in mortgage lending, cards and branch personal lending. Actions taken to manage...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) North America > 2007 credit lines and reducing the volume of balance transfers in credit cards, and restructuring the consumer lending branch network by closing some 400 branches of HSBC Finance to reflect expected lower demand...

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... high-rate and direct savings products were offset by the benefits of an increased proportion of higher yielding deposits. Average lending balances in Canada rose by 9 per cent as the strength of the economy and buoyant housing market drove demand for loans. While asset spreads at both the retail...

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... HOLDINGS PLC Report of the Directors: Business Review (continued) North America > 2007 in servicing fees on mortgages, credit card fees and deposit service charges. Trading losses in 2007 were US$215 million compared with trading income of US$274 million in 2006. Conditions in the housing market...

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... compared with 2006. The growth in deposit accounts and a focus on business debit cards for small and micro businesses led to a rise in deposit service charges and card fees. This was, however, offset by lower fees on the syndication of commercial real estate loans as balance activity declined. In...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) North America > 2007 / 2006 fee income rose with the increase in activity volumes. Higher service charges and credit fees were the main fee generators. Loan impairment charges rose by 151 per cent to US$191 million, reflecting ...

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...weak. Having raised its overnight interest rate from 3.25 per cent at the start of 2006 to 4.25 per cent in May, the Bank of Canada kept rates on hold for the rest of the year. Review of business performance HSBC's operations in North America reported a pre-tax profit of US$4.7 billion compared with...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) North America > 2006 services business within HSBC Finance, as slowing house price appreciation and the projected effect of interest rate resets impacted loss estimates from rising credit delinquency. This is described more ...

Page 103
..., spreads narrowed due to higher funding costs as interest rates rose, and this reduced the positive income benefit of the higher lending balances. The following comments on mortgage lending relate to HSBC Finance as mortgage lending growth in 2006 was concentrated in this business. In the branch...

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... 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...

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... HSBC Bank USA, expense growth was primarily driven by branch staff costs from additional headcount recruited to support investment in business expansion and new branch openings. Greater emphasis placed on increasing the quality and number of branch staff dedicated to sales and customer relationship...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) North America > 2006 expansion and greater focus placed on generating balances from commercial real estate companies and middle market customers. In particular, there was an increased emphasis on attracting high margin balances...

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... reported a 31 per cent increase in fees, reflecting a growth in funds under management within HSBC Global Asset Management, coupled with higher fees from the lending business and securities services. Net trading income more than doubled to US$818 million. In Global Markets, a wider product offering...

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...HOLDINGS PLC Report of the Directors: Business Review (continued) North America > 2006 / Profit/(loss) before tax by customer group HSBC businesses also contributed to the increased level of fee income. A one-off gain of US$9 million arose from a partial disposal of a holding in the Hermitage Fund...

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... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments16 ...- deposits...

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... to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments16 ...- deposits by banks ...For footnotes, see page 130. Year ended 31 December 2006 Global Banking & Private Markets Banking Other...

Page 111
...$m Share of HSBC's profit before tax ...Cost efficiency ratio ... 19.9 40.8 US$m Balance sheet data7 Loans and advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net...

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HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Latin America > Profit/(loss) before tax Latin America Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Banking Services US$m US$m Year ended 31 December 2007 Mexico...

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... to customers (net) ...Loans and advances to banks (net) ...Trading assets, financial instruments designated at fair value, and financial investments ...Total assets ...Deposits by banks ...Customer accounts ...For footnote, see page 130. 47,923 12,675 24,715 99,056 4,092 61,292 At 31 December 2006...

Page 114
... (15) 14 (25) 14 Review of business performance HSBC's operations in Latin America reported a pre-tax profit of US$2.2 billion compared with US$1.7 billion in 2006, representing an increase of 26 per cent. HSBC's acquisitions of HSBC Bank Panama and Banca Nazionale in 2006 strengthened the existing...

Page 115
...and portfolio management programmes put in place to improve customer retention and card usage. Demand for housing remained strong and mortgage lending continued to grow. HSBC's mortgage positioning is based on speed of service and competitive rates supported by marketing campaigns. HSBC Premier was...

Page 116
... volumes of general insurance and life protection policies, supported by innovative marketing campaigns. Net gains from financial investments increased significantly, driven by a gain of US$97 million, following a sale of shares held in a credit bureau, a stock exchange and a derivatives exchange in...

Page 117
... commercial real estate lending, increased support for larger local and global commercial customers and strong volume growth in trade and factoring. Average lending balances rose by 37 per cent, primarily on large corporates, while spreads widened on small business loans. Spreads on deposit accounts...

Page 118
...boosted fees from financing and capital markets, both from advisory services and from underwriting new listings. Securities services also performed well in the region as new business volumes and strong local equity markets drove a 63 per cent increase in assets under custody. Net income from trading...

Page 119
... cent in 2005. Interest rates rose steadily in 2006 and the peso weakened slightly against the US dollar. Given Argentina's higher inflation rate, however, the exchange rate appreciated in real terms. Review of business performance HSBC's operations in Latin America reported a pre-tax profit of US...

Page 120
... 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 121
..., successful portfolio management strategies and promotions, development of new sales channels and 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 122
HSBC HOLDINGS PLC Report of the Directors: Business Review (continued) Latin America > 2006 in transactions from non-HSBC customers. Growth in mutual fund fees was mainly driven by higher sales volumes and expanded product offerings in the stronger economic environment. Fee income in Brazil rose ...

Page 123
... number of products held per customer. Current account fee income grew from higher levels of transactional activity and tariff increases implemented in 2005. Pricing changes introduced part-way through 2006 led to higher revenues from payment and cash management services. There was improved fee...

Page 124
.... Net fee income increased by 29 per cent to US$167 million, predominantly through increased performance-related fees on emerging markets funds managed by HSBC Global Asset Management. Income in securities services benefited from strong equity market indices and growth in new business as assets...

Page 125
... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

Page 126
... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

Page 127
... advances to customers (net) ...Total assets ...Customer accounts ...The following assets and liabilities were significant to Global Banking and Markets: - loans and advances to banks (net) ...- trading assets, financial instruments designated at fair value, and financial investments ...- deposits...

Page 128
... for the online market. Wealth management (insurance and investment products and financial planning services) plays an important part in meeting the needs of customers. Insurance products distributed by HSBC through its direct channels and branch networks include loan protection, life, property and...

Page 129
...-border payments, collections, liquidity management and account services worldwide. The Group's extensive network of offices and direct access to numerous local clearing systems enhances its customers' ability to manage their cash efficiently on a global basis. International trade: HSBC finances and...

Page 130
...private investors, financial institutions, and governments and their agencies. Products include: â€¢ financing and capital markets, which comprises capital raising, including debt and equity capital, corporate finance and advisory services, bilateral and syndicated lending, leveraged and acquisition...

Page 131
...administration, charitable trusts and foundations, insurance and offshore structures. Specialist advisory services: Private Banking offers expertise in several specialist areas of wealth management including tax advisory and financial planning, family office advisory, corporate finance, consolidated...

Page 132
... Montreal Exchange for 2007. 11 HSBC Global Asset Management was formerly known as Group Investment Businesses. 12 'Other' in Global Banking and Markets includes net interest earned on free capital held in the global business not assigned to products. 13 The results of Global Banking and Markets in...

Page 133
... investments and derivatives ...Funds under management ...Assets held in custody and under administration ...Economic profit ...Other financial information ...Average balance sheet and net interest income ...Analysis of changes in net interest income ...Share capital and reserves ...Short-term...

Page 134
...and advances HSBC's accounting policy for losses arising from the impairment of customer loans and advances is described in Note 2f on the Financial Statements. Loan impairment allowances represent management's best estimate of losses incurred in the loan portfolios at balance sheet date. Management...

Page 135
... such as national and local trends in housing markets, the level of interest rates, portfolio seasoning, account management policies and practices, changes in laws and regulations, and other factors that can affect customer payment patterns. Different factors are applied in different regions and...

Page 136
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Critical accounting policies > Financial summary / Income statement expected cash flows continued to exceed the carrying amount including goodwill in the CGU, and therefore no goodwill impairment has occurred. However, in the ...

Page 137
... unprecedented market conditions, the return on shareholders' equity exceeded 15 per cent, capital ratios remained strong, revenue growth was in double digits and the cost efficiency ratio improved. For the first time in recent years, pre-tax profits from the Group's emerging markets operations...

Page 138
... exchange, payments and cash management, equities, HSBC Global Asset Management and securities services businesses; these more than offset the significant write-downs inthe Credit and Rates businesses, largely the consequence of the market-related factors discussed above. Year ended 31 December 2006...

Page 139
...Personal Financial Services in North America, and in Global 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 140
... interest rates in many major currencies resulted in higher interest income from the investment of low-cost deposits and transactional balances in Personal Financial Services and the payments and cash management businesses within Commercial Banking and Global Banking and Markets; lending spreads in...

Page 141
... Internet Banking helped to drive an increase in customer numbers which, in turn, led to deposit and loan growth. Net interest income in North America rose by 4 per cent, as higher revenues from payments and cash management, commercial lending and cards were offset by lower mortgage balances, spread...

Page 142
...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 rates in most major currencies in recent years...

Page 143
... to expand and trade flows increased. In North America, net interest income increased by 3 per cent. In the US Personal Financial Services business, strong growth in mortgages, cards, and other personal unsecured non-credit card lending was funded by a 21 per cent rise in average deposits to US$32...

Page 144
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Net fee income 2007 US$m Cards1 ...Account services ...Funds under management ...Broking income ...Insurance1 ...Global custody ...Credit facilities ...Unit trusts ...Imports/exports ...Remittances ...Corporate finance ......

Page 145
... regional equity markets. As global customers continued to seek investment opportunities in emerging markets, funds under management increased. Growth in cards in issue led to higher card fees. In Rest of Asia-Pacific, higher trade and remittance flows led to increased payments and cash management...

Page 146
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Net trading income Increases in 2006 were partly offset by the effect of FFIEC guidance, which limits certain fee billings for non-prime credit card accounts. Following its launch in 2005, activity within HSBC's mortgage-...

Page 147
... Global Markets business, assisted by investments made in recent years to grow the product range and customer base. HSBC had only very limited exposure to asset-based securities and structured credit products in Hong Kong. Strong growth was delivered in Rest of AsiaPacific, led by foreign exchange...

Page 148
... the Directors: Financial Review (continued) Net income from financial instruments designated at fair value Net income from financial instruments designated at fair value Year ended 31 December 2007 Net income US$m By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America...

Page 149
... returns on the portfolios held by the insurance businesses in the UK and Hong Kong. The change in fair value of liabilities under investment contracts declined by 7 per cent. Year ended 31 December 2006 compared with year ended 31 December 2005 Net income from financial instruments designated...

Page 150
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Gains less losses from financial investments / Net earned insurance premiums Gains less losses from financial investments 2007 US$m By geographical region Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin ...

Page 151
... of Asia-Pacific region, net earned insurance premiums increased by 24 per cent to US$226 million. This growth was mainly generated in Malaysia by the HSBC Amanah Takaful business which was launched in late 2006, offering shariahcompliant insurance products. In North America, net earned insurance...

Page 152
...by increased marketing. Increased sales of individual life policies were the main driver of the growth. HSBC continued to expand its insurance business across Rest of Asia-Pacific with a number of initiatives including the establishment of HSBC's first Islamic insurance company in Malaysia. In North...

Page 153
...and income from UK branch sale and lease-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...

Page 154
... related to life policies. Policyholders participate in the investment performance of assets supporting these liabilities and the investment return on these assets is shown in 'Net income from financial instruments designated at fair value'. In the Rest of Asia-Pacific region, net insurance claims...

Page 155
... to policyholders in North America rose by 12 per cent to US$259 million, mainly reflecting an increase in reserves for new life insurance business underwritten in 2006. In Latin America, higher sales of life and pension fund products led to an increase in net insurance claims incurred and movement...

Page 156
... HOLDINGS PLC Report of the Directors: Financial Review (continued) Loan impairment charges constrained customers' ability to refinance their loans and led to deterioration in credit markets; â€¢ an underlying 7 per cent increase in lending to customers (excluding lending to the financial sector...

Page 157
... resulted in an increase in net loan impairment charges in 2006. Loan impairment charges in Hong Kong remained low at US$172 million, underpinned by robust personal and commercial credit quality in a strong economy with low unemployment. In Rest of Asia-Pacific, loan impairment charges rose sharply...

Page 158
... in 2006 arising from the waiver of the TSR-related performance condition in respect of the 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...

Page 159
.... â€¢ support business expansion, mainly in Commercial Banking and Global Banking and Markets. Performance-related bonuses increased in response to revenue growth. Increased marketing and IT costs reflected business growth and the launch of new initiatives. As commercial rents rose in Hong Kong...

Page 160
... 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 in Personal Financial...

Page 161
... in Global Banking and Markets in line with higher transactional volumes, increased headcount and union-agreed pay rises. 2007 % HSBC ...Personal Financial Services ...Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ...Commercial Banking ...Europe ...Hong Kong ...Rest...

Page 162
... of Asia-Pacific region increased by 51 per cent, mainly due to increased contributions from HSBC's strategic investments in mainland China. Profit from Bank of Communications, Ping An Insurance and Industrial Bank improved significantly, driven largely by a thriving local economy. â€¢ HSBC's share...

Page 163
...to slow lending in the US in the light of a deterioration in credit conditions in the personal sector. Trading assets, financial investments and derivatives Trading assets principally consist of debt and equity instruments acquired for the purpose of market making or to benefit from short-term price...

Page 164
... HSBC Global Asset Management as one of the world's largest emerging market asset managers. Private Banking's funds increased by 19 per cent to US$275 billion, driven by client acquisition, partly due to greater brand awareness and an enhanced product range, strong investment performance and foreign...

Page 165
... debt as a result of widening credit spreads and related derivatives. This resulted in a higher return on average invested capital and, in consequence, economic spread, which increased by 0.4 percentage points compared with 2006. Year ended 31 December 2007 US$m Average total shareholders' equity...

Page 166
...,973 Financial assets designated at fair value2 ...14,899 Impairment provisions ...(15,309) Non-interest-earning assets ...440,686 Total assets and interest income ...2,111,950 Short-term funds and loans and advances to banks Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France...

Page 167
... Loans and advances to customers Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...HSBC Finance ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East HSBC Bank USA...

Page 168
... assets Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...HSBC Finance ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East . HSBC Bank USA ...HSBC Finance ...HSBC...

Page 169
... 4.75 3.67 6.66 9.23 3.21 7.21 5.45 3.58 North America Latin America Other operations ... Financial liabilities designated at fair value - own debt issued6 Europe HSBC Holdings ...HSBC Bank ...HSBC France ...Hang Seng Bank ...HSBC Bank USA ...HSBC Finance ...15,142 9,907 143 126 1,620 31,889 - 58...

Page 170
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Average balance sheet Total equity and liabilities (continued) 2007 Interest expense US$m 10,576 1,485 1,226 1,900 Year ended 31 December 2006 Average Interest balance expense Cost US$m US$m % 221...

Page 171
... Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...HSBC Finance ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East HSBC Bank USA ...HSBC Finance ...HSBC Bank Canada ...HSBC...

Page 172
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Average balance sheet / Analysis of changes in net interest income Net interest margin 2007 % Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...HSBC Finance ...Hang Seng...

Page 173
... 838 Increase/(decrease) in 2006 compared with 2005 Volume Rate US$m US$m 424 42 77 82 54 52 20 35 204 31 31 141 3 (2) 52 1,162 338 35 226 113 533 117 18 62 110 45 (32) (134) 3 3 113 1,634 2007 US$m Short-term funds and loans and advances to banks Europe HSBC Bank ...HSBC Private Banking Holdings...

Page 174
... 324 5 23 876 7,210 Hong Kong Rest of Asia-Pacific North America Latin America Other operations ... Interest expense Deposits by banks Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and...

Page 175
... 7,775 Hong Kong Rest of Asia-Pacific North America Latin America Other operations ... Footnotes to 'Average balance sheet and net interest income' and 'Analysis of changes in net interest income'. 1 Interest income on trading assets is reported as 'Net trading income' in the consolidated income...

Page 176
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Share capital and reserves Share capital and reserves Authorised share capital The authorised share capital of HSBC Holdings at 31 December 2007 was US$7,500,100,000 divided into 15,000 million ...

Page 177
... discretion of the Board of Directors. The Board of Directors will not declare a dividend on the Dollar Preference Shares if payment of the dividend would cause HSBC Holdings not to meet the applicable capital adequacy requirements of the FSA or the profit of HSBC Holdings available for distribution...

Page 178
... interim dividend for 2007. The market value per share used to calculate shareholders' entitlements to new shares was US$17.5483, being the US dollar equivalent of Â£8.874. 3. 4. All-Employee share plans 5. In connection with the exercise of options under the HSBC Holdings savings-related share...

Page 179
... is to make market repurchases of up to 1,158,660,000 ordinary shares. The Directors have not exercised this authority. In accordance with the terms of a waiver granted by the Hong Kong Stock Exchange on 19 December 2005, HSBC Holdings will comply with the applicable law and regulation in the UK in...

Page 180
......Short positions in debt securities and equity shares ...Current tax liability ...Pension obligations ...318,653 278,693 703 4,559 942 108,246 2,559 9,055 723,410 Ratios of earnings to combined fixed charges (and preference share dividends) 2007 Ratios of earnings to combined fixed charges Ratios...

Page 181
... 5 years Loans and advances to banks ...Commercial loans to customers Commercial, industrial and international trade ...Real estate and other property related ...Non-bank financial institutions ...Governments ...Other commercial ...Hong Kong Government Home Ownership Scheme ...Residential mortgages...

Page 182
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 183
...,508 - 2.6 4.1 4.5 4.8 72,901 283,992 191,551 97,027 16,855 662,326 - 1.8 3.3 3.7 4.4 CDs and other money market instruments Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ...66,164 941 7,230 23,735 1,526 99,596 5.0 3.9 6.0 5.4 6.8 5.2 48,238 1,191 6,621 23,472 318...

Page 184
...,942 Hong Kong Certificates of deposit ...Time deposits: - banks ...- customers ...969 1,955 22,450 25,374 Rest of Asia-Pacific Certificates of deposit ...Time deposits: - banks ...- customers ...3,816 7,104 10,896 21,816 North America Certificates of deposit ...Time deposits: - banks ...- customers...

Page 185
...liquidity support to the senior debt investors through committed liquidity facilities. SIVs are structured to provide investors with the opportunity to invest in a range of assets depending on their risk preference. Senior debt issued by SIVs is structured to be highly rated and the SIVs are managed...

Page 186
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Off-balance sheet arrangements and SPEs debt and capital notes. These SIVs were not consolidated on inception because HSBC did not have the majority of risks and rewards of ownership and it was ...

Page 187
... loan securities ...Home equity lines of credit securities ...Vehicle finance loans securities ...Credit loan securities ...Other asset-backed securities ...Total structured finance assets ...Finance Commercial bank debt securities and deposits ...Investment bank debt securities ...Finance company...

Page 188
HSBC HOLDINGS PLC Report of the Directors: Financial Review (continued) Other financial information > Off-balance sheet arrangements and SPEs Asscher - Composition of asset portfolio 2007 US$bn Asset class Structured finance Residential mortgage-backed securities ...Commercial mortgage-backed ...

Page 189
...their assets on a fair value basis and consequently prices may change from one day to the next. These funds pursue an 'enhanced' investment strategy, as part of which investors accept greater credit and duration risk in the expectation of higher returns. Money market activities are highly developed...

Page 190
... market funds to enable customers to invest in a range of assets, typically equities and debt securities. At the launch of a fund HSBC, as fund manager, typically provides a limited amount of initial capital known as 'seed capital' to enable the fund to start purchasing assets. These holdings...

Page 191
... in HSBC consolidating the fund because its resultant holding of 83 per cent represents the majority of risks and rewards of ownership. Securities investment conduits purchase highly rated asset-backed securities and facilitate tailored investment opportunities for HSBC's investor clients. HSBC...

Page 192
... 20 on the Financial Statements. Other HSBC also establishes SPEs in the normal course of business for a number of purposes, for example, structured credit transactions for customers to provide finance to public and private sector infrastructure projects, and for asset and structured finance ('ASF...

Page 193
... in Note 41 on the Financial Statements. The majority by value of undrawn credit lines arise from 'open to buy' lines on personal credit cards, advised overdraft limits and other pre-approved loan products, and mortgage offers awaiting customer acceptance. HSBC generally has the right to change...

Page 194
...the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited is set out in the 'Report of the Directors: Governance' on page 289. HSBC's operations throughout the world are regulated and supervised by approximately 510 different central banks and regulatory authorities in...

Page 195
... FSMA. These include deposit taking, retail banking, life and general insurance, pensions, investments, mortgages, custody and branch share-dealing businesses, and treasury and capital markets activity. HSBC Bank is HSBC's principal authorised institution in the UK. FSA rules establish the minimum...

Page 196
...dollar or foreign currency deposits in Hong Kong are covered by the scheme and other deposit products like structured deposits, secured deposits, bearer instruments and offshore deposits are not protected. The marketing of, dealing in and provision of advice and asset management services in relation...

Page 197
...Company (Delaware), N.A. ('HSBC Bank Delaware'). These three banks are nationally chartered FDIC-insured, full-service commercial banks and members of the Federal Reserve System. HSBC also owns HSBC Bank Nevada, N.A. ('HSBC Bank Nevada'), a nationally chartered bank limited to credit card activities...

Page 198
... holding companies to maintain a minimum amount of capital in relation to their balance sheet assets (measured on a non-risk-weighted basis). The Federal Deposit Insurance Corporation Improvement Act of 1991 provides for extensive regulation of insured depository institutions (such as HSBC Bank USA...

Page 199
... A well-established risk governance and ownership structure ensures oversight of, and accountability for, the effective management of risk at Group, regional, customer group and operating entity levels. The Board of Directors of HSBC Holdings approves plans and performance targets for the Group and...

Page 200
... to meet an obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from certain off-balance sheet products such as guarantees and credit derivatives, and from the Group's holdings of assets in the form of debt securities. â€¢ â€¢ 198

Page 201
... system covers almost all Group corporate business by value. Providing advice and guidance to HSBC's operating companies, to promote best practice throughout the Group on credit-related matters such as sustainability risk, new products and training. Acting on behalf of HSBC Holdings as the primary...

Page 202
... financial sector, charges over financial instruments such as debt securities and equities in support of trading facilities. In addition, credit derivatives, including credit default swaps and structured credit notes, as well as securitisation structures, are used to manage credit risk in the Group...

Page 203
... and advances and held-tomaturity financial investments through the use of an allowance account. When impairment of availablefor-sale financial assets occurs, the carrying amount of the asset is reduced directly. Two types of impairment allowance are in place: individually assessed and collectively...

Page 204
... assets are managed using a portfolio approach, typically low-value, homogeneous small business accounts in certain countries or territories; residential mortgages that have not been individually assessed; credit cards and other unsecured consumer lending products; and motor vehicle financing...

Page 205
... trading assets, loans to customers, loans to banks and financial investments. Recently, loss experience has mainly affected personal lending portfolios. Thus, in 2007, 94 per cent of loan impairment charges arose in Personal Financial Services, broadly in line with 2006. The deterioration of credit...

Page 206
...2007 2006 US$m US$m Items in course of collection from other banks ...Trading assets ...Treasury and other eligible bills ...Debt securities ...Loans and advances ...Financial assets designated at fair value ...Treasury and other eligible bills ...Debt securities ...Loans and advances ...Derivatives...

Page 207
... businesses held diversified portfolios of debt and equity securities designated at fair value (2007: US$34 billion; 2006: US$18 billion) and debt securities classified as financial investments (2007: US$23 billion; 2006: US$10 billion). The increase was due to the acquisition of HSBC's partner...

Page 208
...,373 1,238,126 1 Including Hong Kong Government Home Ownership Scheme loans of US$3,942 million at 31 December 2007. 2 Other personal loans and advances include second lien mortgages and other property-related lending. 3 Other commercial loans and advances include advances in respect of agriculture...

Page 209
...2007. In Hong Kong, other personal lending rose by 29 per cent to US$13 billion as HSBC launched a series of credit card campaigns that consolidated the Group's position as market leader. Other unsecured lending rose by 46 per cent. In Rest of Asia-Pacific, other personal lending increased by 19 per...

Page 210
... In Mexico, volumes grew in commercial real estate lending, trade and factoring. The loan portfolio in Brazil grew strongly, led by increases in volumes in the giro facil product, guaranteed account, rural loans and working capital financing. Loans and advances to the financial sector rose by 53 per...

Page 211
...72,884 168,549 Corporate and commercial Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government ...Other commercial2 ... Hong Kong US$m 29,689 13,344 43,033 Rest of AsiaPacific US$m 20,397 16,513 36,910 North America US$m 118,993 111,569 230...

Page 212
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) (Audited) At 31 December 2006 Gross loans and advances to customers US$m 265,337 210,...

Page 213
... 55,672 129,595 Corporate and commercial Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government ...Other commercial2 ... Hong Kong US$m 28,492 9,978 38,470 Rest of AsiaPacific US$m 17,641 11,178 28,819 North America US$m 116,448 97,663 214...

Page 214
...Includes Hong Kong Government Home Ownership Scheme loans of US$5,383 million. Other commercial loans and advances include advances in respect of agriculture, transport, energy and utilities. Includes credit card lending of US$56,222 million. Net of suspended interest. Included in North America are...

Page 215
...,721 42,041 93,762 Corporate and commercial Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government ...Other commercial3 ... Hong Kong US$m 29,954 7,420 37,374 Rest of AsiaPacific US$m 12,101 7,135 19,236 North America US$m 76,485 73,717 150...

Page 216
... the Directors: The Management of Risk (continued) Credit risk > Exposure > Rest of Asia-Pacific and Latin America / Debt securities Gross loans and advances to customers by principal country within Rest of Asia-Pacific and Latin America (Audited) At 31 December 2007 Commercial, international trade...

Page 217
... assets ...- financial instruments designated at fair value ...- available-for-sale securities ...- held-to-maturity investments ...21,751 133 24,451 45 46,380 or their equivalent. Debt securities with short-term ratings are reported against the long-term rating of the issuer of the short-term debt...

Page 218
... Financial Services in North America (69 per cent), the UK (11 per cent) and Latin America (9 per cent). HSBC recorded strong growth in Latin America, with gross loans and advances to personal customers rising by 31 per cent to US$22 billion. Residential mortgage lending in the region increased...

Page 219
... products sold in the US consumer lending branch network are for refinancing and debt consolidation, rather than for house purchase. Interest-only mortgages are those where customers make regular payments of interest during the life of the loan and repay the principal from the sale of their home...

Page 220
... Loan to value ratios are generally based on values at origination date. HSBC Finance mortgage lending (Unaudited) HSBC Finance held approximately US$91 billion of residential mortgage loans and advances to personal customers at 31 December 2007, 18 per cent of the Group's gross loans and advances...

Page 221
... house prices, reduced availability of mortgage finance and growing customer delinquency and default caused a deterioration in credit quality of increasing intensity. Housing markets in a large part of the US have been affected by a broad-based slowdown in the rate of appreciation in property values...

Page 222
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Areas of special interest > US personal lending / Loan delinquency in US HSBC Finance: geographical concentration of US lending1 (Unaudited) Mortgage lending as a percentage of: total mortgage total lending...

Page 223
... vehicle finance business tightened underwriting criteria in both the dealer and direct-to-consumer channels, to convert the mix of new loans to a higher credit quality. HSBC has been proactive in reaching out to customers to provide financial counselling and assist them in restructuring their debts...

Page 224
... head office when the borrower is a branch. In accordance with the Bank of England Country Exposure Report (Form CE) guidelines, outstandings comprise loans and advances (excluding settlement accounts), amounts receivable under finance leases, acceptances, commercial bills, CDs and debt and equity...

Page 225
...US personal lending was reflected in an increase in the proportion of loans and advances to customers which were past due, though not impaired, to 5.1 per cent (2006: 4.6 per cent, following restatement). The great majority of such loans were in the band of past due up to 90 days. The credit quality...

Page 226
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Credit quality > Loans and advances Loans and advances Distribution of loans and advances by credit quality (Audited) At 31 December 2007 Loans and Loans and advances to advances to banks customers US$m US...

Page 227
... payment date but on which there is no evidence of impairment; loans fully secured by cash collateral; residential mortgages in arrears more than 90 days, but where the value of collateral is sufficient to repay both the principal debt and all potential interest for at least one year; and short-term...

Page 228
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Credit quality > Loans and advances > 2007 / Renegotiated loans Individually assessed loans and Collectively assessed loans and advances to customers advances to customers1 Total Gross Collective Gross ...

Page 229
... impaired loans and advances to customers (Audited) bulk of the change. HSBC Finance experienced a deterioration in credit quality in most of its lending book, in particular for first and second lien mortgages originated in 2005 and 2006. In the final quarter of the year, in line with the market...

Page 230
...returned to the customer. HSBC does not generally occupy repossessed properties for its business use. The majority of repossessed properties arose in the US in HSBC Finance, which experienced higher levels of foreclosure and higher losses on sale due to declining house prices. The average time taken...

Page 231
...Real estate owned'. Impairment allowances and charges Movement in allowance accounts for total loans and advances (Audited) Individually assessed US$m At 1 January 2007 ...Amounts written off ...Recoveries of loans and advances written off in previous years ...Charge to income statement ...Exchange...

Page 232
......Other commercial ...Residential mortgages ...Other personal ...Charge to income statement1 ...Banks ...Commercial, industrial and international trade ...Real estate ...Non-bank financial institutions ...Governments ...Other commercial ...Residential mortgages ...Other personal ...Foreign exchange...

Page 233
......Other commercial ...Residential mortgages ...Other personal ...Charge to income statement1 ...Banks ...Commercial, industrial and international trade ...Real estate ...Non-bank financial institutions ...Governments ...Other commercial ...Residential mortgages ...Other personal ...Foreign exchange...

Page 234
... ...Residential mortgages ...Other personal ...Net charge/(release) to income statement1 ...Banks ...Commercial, industrial and international trade ...Real estate ...Non-bank financial institutions ...Governments ...Other commercial ...Residential mortgages ...Other personal ...Foreign exchange and...

Page 235
... mortgages ...Other personal ...Net charge to profit and loss account3 ...Banks ...Commercial, industrial and international trade ...Real estate ...Non-bank financial institutions ...Governments ...Other commercial ...Residential mortgages ...Other personal ...General provisions ...Foreign exchange...

Page 236
... Asia-Pacific, as well as those booked in Hong Kong. 3 See table below 'Net charge to the income statement for bad and doubtful debts by geographical region'. 4 Other movements include amounts of US$129 million in Europe and US$4,524 million in North America transferred in on the acquisition of HSBC...

Page 237
Net loan impairment charge to the income statement by geographical region (Unaudited) Year ended 31 December 2007 Rest of North AsiaHong America Pacific Kong US$m US$m US$m 103 (32) (14) 57 184 (29) 155 212 - 212 % 0.14 US$m 433 376 211 (96) (32) 83 623 (92) 531 614 - 614 % 0....

Page 238
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Loan impairment charge > 2007 Net loan impairment charge to the income statement by geographical region (continued) (Unaudited) Year ended 31 December 2005 Rest of North AsiaHong America Pacific Kong US$m ...

Page 239
... increase of 19 per cent, due to the growth in credit card balances and new corporate loan charges. Releases and recoveries in Hong Kong decreased to US$75 million, primarily in the corporate sector. This reflected the low level of allowances added in recent years. In Rest of Asia-Pacific, new loan...

Page 240
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Loan impairment charge > 2007 / 2006 regular levels after an upsurge in 2006 due to regulatory changes which affected collection activity and minimum payments. With corporate and commercial loan impairment ...

Page 241
... in commercial releases and recoveries in the Middle East. In North America, new loan impairment charges rose by 36 per cent. Excluding Metris, new charges increased by 30 per cent. Credit deterioration, mainly in second lien, some portions of first lien and adjustable-rate mortgages acquired from...

Page 242
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Loan impairment charge / HSBC Holdings / Risk elements Canada, as the strong economy continued to underpin good credit quality. Releases and recoveries in North America decreased by 23 per cent to US$146 ...

Page 243
HSBC Holdings' maximum exposure to credit risk at 31 December 2007 is shown below. HSBC Holdings' financial assets represent claims on Group subsidiaries, principally located in Europe and North America. 2006 (restated)1 Off-balance sheet Carrying exposure value US$m US$m 1,599 14,456 3,614 - 19,...

Page 244
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Credit risk > Risk elements / Liquidity and funding > Policies / Primary sources of funding 2007 US$m Impaired loans Europe ...Hong Kong ...Rest of Asia-Pacific ...North America ...Latin America ...6,266 433 1,088 8,384 ...

Page 245
... the efficient funding of certain short-term treasury requirements and start-up operations or branches which do not have access to local deposit markets, all of which are funded under clearly defined internal and regulatory guidelines and limits from HSBC's largest banking operations. These internal...

Page 246
... match. Advances to deposits ratio (Audited) HSBC emphasises the importance of current accounts and savings accounts as a source of funds to finance lending to customers, and discourages reliance on short-term professional funding. To achieve this goal, limits are placed on Group banking entities...

Page 247
...funds maturing in the next 30 days from wholesale market sources and from customers who are deemed to be professional. The Group defines liquid assets for the purposes of the liquidity ratio as cash balances, short-term interbank deposits and highly rated debt securities available for immediate sale...

Page 248
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Liquidity and funding > Primary sources of funding / HSBC Holdings Ratio of net liquid assets to customer liabilities and net liquid assets (Audited) Year ended 31 December 2007 Net liquid Ratio assets % US$bn HSBC Bank ...

Page 249
... and capital receipts from its subsidiaries, which it deploys in short-term bank deposits or liquidity funds. HSBC Holdings' primary uses of cash are investments in subsidiaries, interest payments to debt holders and dividend payments to shareholders. On an ongoing basis, HSBC Holdings replenishes...

Page 250
... as one of the world's largest banking and financial services organisations. Market risk is the risk that movements in market risk factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices will reduce HSBC's income or the value of its portfolios...

Page 251
... from the interest rate management of HSBC's retail and commercial banking assets and liabilities, financial investments designated as available for sale and held to maturity, and exposures arising from HSBC's insurance operations. Market risk arising in HSBC's insurance businesses is discussed in...

Page 252
..., compared with two days in 2006. Daily distribution of Global Markets' trading, balance sheet management and other trading revenues (Unaudited) â€¢ â€¢ HSBC recognises these limitations by augmenting its VAR limits with other position and sensitivity limit structures. HSBC also applies a wide...

Page 253
... within the corporate loan portfolio and so enhance capital efficiency. The mark-tomarket of these transactions is taken through the profit and loss account. At 31 December 2007, the credit spread VAR on the credit derivatives transactions entered into by Global Banking was US$19.7 million (2006: US...

Page 254
... with interest rate risk limits established by the Group Management Board. In certain cases, the non-linear characteristics of products cannot be adequately captured by the risk transfer process. For example, both the flow from customer deposit accounts to alternative investment products and the...

Page 255
...are performed to substantiate the valuation of the investments within the portfolio and Group Finance is responsible for reviewing the carrying value of the investments. Funds typically invested for short-term cash management 253 Market risk also arises within HSBC's defined benefit pension schemes...

Page 256
... in an increase of 40 basis points in the real discount rate (net of the increase in expected inflation) used to value the net present value of the benefits payable of the HSBC Bank (UK) Pension Scheme, the Group's largest plan. In addition, the plan assets of the scheme have increased due to...

Page 257
..., increasing the benefit from reducing US dollar rates. Global Markets increased euro-denominated net trading asset positions leading to increased sensitivity in this currency to both rising and falling rates. The funding of net trading assets is generally sourced from floating rate retail deposits...

Page 258
...and foreign currency risk. Exposure to these risks arises from short-term cash balances, funding positions held, loans to subsidiaries, investments in longterm financial assets and financial liabilities including debt capital issued. The objective of HSBC Holding's market risk management strategy is...

Page 259
... rate risk, however. The projected increase in HSBC Holdings' sensitivity to moves in interest rates is mainly due to new interest-bearing capital issues, the funds from which have been largely invested in non-interest bearing equity investments in subsidiaries. Areas of special interest - market...

Page 260
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Market risk > Areas of special interest / Monoline insurers deterioration occurred in US mortgage-related financial instruments generally, with financial instruments issued by non-US government sponsored entities more ...

Page 261
... the year in the income statement. 3 Fair value gains and losses recognised during the year in equity. 4 HSBC has primarily utilised loan counterparty credit scores as the basis for determining whether an asset is classified as sub-prime. 5 Mortgage-backed securities ('MBSs') and collateralised debt...

Page 262
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Residual value risk management / Operational risk management > Legal risk HSBC's exposure to derivative transactions entered into directly with monoline insurers (Audited) Net exposure before credit risk adjustment1 US$m...

Page 263
... inherent in its processes, activities and products. Risk assessments incorporate an evaluation of the effectiveness of controls and are regularly reviewed to identify significant changes; operational risk loss data is collected and reported to senior management at the business unit level. Aggregate...

Page 264
... where the Head Office legal department has requested returns be completed for a particular claim. These returns are used for reporting to the Group Audit Committee and the Board of HSBC Holdings, and disclosure in the Interim Report and Annual Report and Accounts if appropriate. Global security and...

Page 265
... application of policies, reduce the costs of sustainability risk reviews and capture management information to measure and report on the effect of HSBC's lending and investment activities on sustainable development; and providing training and capacity building within HSBC's operating companies to...

Page 266
...in Hong Kong, is a book of endowment and whole-life policies, with annual bonuses awarded to policyholders. In addition, certain minimum return levels are guaranteed. Credit life insurance business is written to underpin banking and finance products. The policy pays a claim if the holder of the loan...

Page 267
...the Group relate, in the main, to core underlying banking activities such as savings or investment products and The following tables provide an analysis of the insurance risk exposures by geography and by type of business. By definition, HSBC is not exposed to insurance risk on investment contracts...

Page 268
... summary of HSBC's life insurance activity. In particular, the table highlights that the most significant products are investment contracts with DPF issued in France, insurance contracts with DPF issued in Hong Kong, annuities issued in North America and Latin America and unit-linked contracts...

Page 269
.... HSBC manages these risks through pricing (for example, imposing restrictions and deductibles in the policy terms and conditions), product design, risk selection, claims handling, investment strategy and reinsurance policy. The majority of non-life insurance contracts are renewable annually and...

Page 270
...linked US$m US$m HSBC HOLDINGS PLC Contracts with DPF1 US$m Insurance operations > Insurance risk At 31 December 2007 Financial assets: - trading assets ...- financial assets designated at fair value ...- derivatives ...- financial investments ...- other financial assets ...- 3,424 2 4,518 1,896...

Page 271
... companies, HSBC Assurances and Ping An Insurance. A principal tool used to manage the Group's exposure to insurance risk, in particular for life insurance contracts, is asset and liability matching. Models are used to assess the effect of a range of future scenarios on the values of financial...

Page 272
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Insurance operations > Financial risks Balance sheet of insurance manufacturing subsidiaries by geographical region (Audited) Hong Kong US$m Rest of AsiaPacific US$m North America US$m Latin America US$m Europe US$m At ...

Page 273
... risks (Audited) HSBC's insurance businesses are exposed to a range of financial risks, including market risk, credit risk and liquidity risk. Market risk includes interest rate risk, equity risk and foreign exchange risk. The nature and management of these risks is described below. Manufacturing...

Page 274
... cent (2006: 31.8 per cent) invested in equity securities. In life linked insurance, premium income less charges levied is invested in a portfolio of assets. HSBC manages the financial risk of this product on behalf of the policyholders by holding appropriate assets in segregated funds or portfolios...

Page 275
... customers with potentially enhanced returns. Subsidiaries with portfolios of such products are exposed to falls in the market price of equity securities when the risk cannot be managed through the discretionary bonus policy. A subsidiary holding a portfolio of long-term insurance and investment...

Page 276
... value of equity holdings and the market value of equity holdings by region and country; and for foreign exchange rate risk, the total net short foreign exchange position and the net foreign exchange positions by currency. HSBC's insurance manufacturing subsidiaries manage market risk by using...

Page 277
...reinsurance transactions and any credit protection products they write. HSBC sells certain unit-linked life insurance contracts via a co-insurance agreement with a third party. The insurance contracts issued under the co-insurance agreement include market return guarantees, which are underwritten by...

Page 278
... upon internationally recognised credit ratings and other publicly available information. Investment credit exposures are monitored against limits by the local insurance manufacturing subsidiaries, and are aggregated and reported to HSBC's Group Credit Risk function, the Group Insurance Credit Risk...

Page 279
... - trading assets ...- financial instruments designated at fair value ...- available-for-sale securities ...- held-to-maturity investments ... - 79 257 44 380 1 Shareholders' funds comprise solvency and unencumbered assets. 2 Does not include treasury bills, other eligible bills and debt securities...

Page 280
... from new business, policy renewals and recurring premium products; cash inflows arising from interest and dividends on investments and principal repayments of maturing debt investments; cash resources; and cash inflows from the sale of investments. investing in good credit-quality investments with...

Page 281
...) ...Life insurance (linked) ...2,3 The profile of the expected maturity of the insurance contracts as at 31 December 2007 has remained stable compared with 2006. The increase in the undated investment contract liabilities arises principally from the incorporation of HSBC Assurances' balance sheet...

Page 282
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Insurance operations > PVIF Present value of in-force long-term insurance business (Audited) Sensitivity of PVIF to changes in economic assumptions (Audited) PVIF at 31 December 2007 2006 US$m US$m + 100 basis point ...

Page 283
.... For insurance contracts, the cost of claims is funded by premiums received and income earned on the investment portfolio supporting the liabilities. For a portfolio of term assurance, an increase in lapses typically leads to a negative impact on profit due to the loss of future premium income...

Page 284
...the Group's guidelines on market and investor concentration, cost, market conditions, timing, effect on composition and maturity profile. The subordinated debt requirements of other HSBC companies are met internally. Each subsidiary manages its own capital required to support planned business growth...

Page 285
... book off-balance sheet items giving rise to credit, foreign exchange or interest rate risk are assigned weights appropriate to the category of the counterparty, taking into account any eligible collateral or guarantees. Trading book risk-weighted assets are determined by taking into account market...

Page 286
HSBC HOLDINGS PLC Report of the Directors: The Management of Risk (continued) Capital management and allocation > Basel II related risks such as foreign exchange, interest rate and equity position risks, and counterparty risk. Basel II (Audited) The Basel Committee on Banking Supervision ('the ...

Page 287
... in tier 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 ...Ordinary shares issued ...Other (including exchange differences) ...At 31...

Page 288
...net of deferred tax, arising from the credit spreads on debt issued by HSBC Holdings and its subsidiaries and designated at fair value. 2 Mainly comprises investments in insurance entities. HSBC complied with the FSA's capital adequacy requirements throughout 2007 and 2006. Tier 1 capital increased...

Page 289
...Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...HSBC Bank and other subsidiaries ...HSBC North America ...HSBC Finance ...HSBC Bank Canada ...HSBC Bank USA and other subsidiaries ...HSBC Mexico ...HSBC Bank Middle East ...HSBC Bank Malaysia ...HSBC Brazil ...HSBC Bank Panama ...Bank...

Page 290
...value gains and losses, net of deferred tax, arising from the credit spreads on debt issued by HSBC Holdings and its subsidiaries and designated at fair value. 3 Includes a tax credit adjustment in respect of the excess of expected losses over impairment allowances. 4 Under Basel II, only collective...

Page 291
... ...Employee share plans ...Subsidiary company share plans ...Employee compensation and benefits ...Corporate sustainability ...Investing in sustainability ...Community involvement ...Health and safety ...Supplier payment policy ...Donations ...Sustainability reporting ...Dividends, shareholders and...

Page 292
... (China) Company Limited and HSBC Investments (Hong Kong) Limited and a Director of HSBC Bank Australia Limited. Joined HSBC in 1978. Appointed a Group General Manager in 1995 and a Group Managing Director in 2005. A Director of Great Eagle Holdings Limited and a Member of the Exchange Fund Advisory...

Page 293
... of the Hong Kong General Chamber of Commerce, the Hong Kong Exporters' Association and the Hong Kong Committee for the Pacific Economic Cooperation Council. S T Gulliver (Appointed 1 May 2008) Age 48. Head of Global Banking and Markets and HSBC Global Asset Management. An executive Director with...

Page 294
... Group General Manager in October 2006. Joined HSBC in 1980. Company Secretary of HSBC Holdings plc since 1990. Chairman of the Disclosure Committee. A member of the Listing Authority Advisory Committee of the Financial Services Authority and of the Primary Markets Group of the London Stock Exchange...

Page 295
... Operating Officer, HSBC North America Holdings Inc. from 2007 to 21 February 2008. Chief Operating Officer, HSBC Bank USA from 2004 to 2006. Y A Nasr Age 53. Deputy Chairman and Chief Executive of HSBC Bank Middle East Limited since 22 May 2007. A Group Managing Director since 2004. Joined HSBC in...

Page 296
... and Group Chief Information Officer. Joined HSBC Finance Corporation in 1989. Appointed a Group General Manager in 2004. A M Keir Age 49. Global Co-Head Commercial Banking. Joined HSBC in 1981. Appointed a Group General Manager in October 2006. N L Kidwai Age 50. Chief Executive Officer, HSBC India...

Page 297
...structures within HSBC, headed by the Board of Directors of HSBC Holdings and led by the Group Chairman, is to deliver sustainable value to shareholders. Implementation of the strategy set by the Board is delegated to the Group Management Board under the leadership of the Group Chief Executive. HSBC...

Page 298
... full-time Directors. There is a clear division of responsibilities at the head of the Company between the running of the Board and the executive responsibility for running HSBC's business. The Group Chairman's responsibilities include the long-term strategic development of HSBC, the development of...

Page 299
... Listing of Securities on The Stock Exchange of Hong Kong Limited, each non-executive Director determined by the Board to be independent has provided an annual confirmation of his or her independence to HSBC Holdings. Information, induction and ongoing development The Board regularly reviews reports...

Page 300
... senior executives hold regular meetings with institutional investors and report to the Board on those meetings. As described in the Directors' Remuneration Report, a consultation with institutional shareholders on the framework of Directors' remuneration and proposed changes to The HSBC Share Plan...

Page 301
... the Financial Reporting Council and the Code on Corporate Governance Practices in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. The Board of HSBC Holdings has adopted a code of conduct for transactions in HSBC Group securities by Directors...

Page 302
...disclose any waivers of the code for directors or executive officers. In addition to the Group Business Principles and Values, which apply to the employees of all HSBC companies, pursuant to the requirements of the Sarbanes-Oxley Act the Board of HSBC Holdings has adopted a Code of Ethics applicable...

Page 303
... day-to-day running 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 295. Following each meeting the Group Chief Executive reports to the Board on the Group Management Board...

Page 304
... rate risk. During 2007 the Committee also received frequent reports on the US mortgage services business, credit performance in the US and the impact of the tightening of liquidity in the money markets. Comprehensive reports are received at each meeting from the Group Chief Risk Officer, the Head...

Page 305
... terms of office of non-executive Directors; membership of Board Committees, in consultation with the Group Chairman and the chairman of such committees as appropriate; any matters relating to the continuation in office of any Director at any time; Directors' fees and committee fees for the Company...

Page 306
... March 2008, the date of approval of the Annual Report and Accounts 2007. 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 307
...internet banking; counterparty risk management policy following the publication of the Corrigan report in July 2005; best practice guidance emerging on liquidity management from the Institute of International Finance; the implications of a slowing housing market in the US coupled with rising payment...

Page 308
...dividends on these shares and have undertaken to transfer these shares to HSBC on ceasing to be Directors of HSBC France. No Directors held any short positions as defined in the Securities and Futures Ordinance of Hong Kong in the shares and loan capital of HSBC and its associated corporations. Save...

Page 309
...the HSBC Holdings UK Share Ownership Plan through regular monthly contributions (33 shares), the automatic reinvestment of dividend income on shares held in the plan (14 shares) and by the automatic reinvestment of dividend income by an Individual Savings Account and Personal Equity Plan manager (56...

Page 310
... sustainability and the quality of its direct managers. HSBC has communicated the results and key action plans are being developed to improve engagement. Following the success of the first survey, plans are underway for the second survey in 2008. Employee involvement HSBC values open communication...

Page 311
.... 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 312
... 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 as in pounds sterling...

Page 313
... 4,481,255 1,332,074 1 The weighted average closing price of the shares immediately before the dates on which options were exercised was Â£9.13. 2 Exercisable at a 15 per cent discount to the average market value of the ordinary shares on the five business days immediately preceding the invitation...

Page 314
... Performance Share awards under the HSBC Holdings Restricted Share Plan 2000) was 150 per cent (or in exceptional circumstances 225 per cent) of the employee's annual salary at the date of grant plus any bonus paid in the previous year. Under the HSBC Executive Share Option scheme the maximum value...

Page 315
... HSBC Holdings Group Share Option Plan expired on 26 May 2005. No options have been granted under the Plan since that date. 2 The weighted average closing price of the shares immediately before the dates on which options were exercised was Â£9.23. The HSBC Share Plan HSBC Holdings ordinary shares...

Page 316
... CCF Employee Benefit Trust 2001 held 955,952 HSBC Holdings ordinary shares which may be exchanged for HSBC Private Bank France shares arising from the exercise of these options. HSBC Finance and its subsidiaries Following the acquisition of HSBC Finance in 2003, all outstanding options and equity...

Page 317
... 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 Â£8.47. Beneficial Corporation: 1990 Non-Qualified Stock Option Plan HSBC Holdings ordinary shares of US$0.50 Date of...

Page 318
...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 319
... and benefits Note 9 on the Financial Statements gives details about employee compensation and benefits including pension plans. Set out below is information in respect of the five individuals (including a Director of HSBC Holdings) whose emoluments were the highest in HSBC for the year ended...

Page 320
... The Group Corporate Sustainability unit allows HSBC to join up its business development, risk management, business operations, community investment and reporting activities. The unit also works closely with Group Marketing to further embed sustainability into the brand; with Group Communications to...

Page 321
... of the Group who seek to develop sustainable business strategies or other programmes relating to climate change and to economic development issues. HSBC participated in the Prince of Wales' Accounting for Sustainability Project, which seeks to develop systems to help public and private sector...

Page 322
... Series A dollar preference share) was declared on 13 February 2008 for payment on 17 March 2008. Communication with shareholders Communication with shareholders is given high priority. Extensive information about HSBC's activities is provided in the Annual Report and Accounts, Annual Review and the...

Page 323
... Exchange of Hong Kong Limited at least 25 per cent of the total issued share capital of HSBC Holdings has been held by the public at all times during 2007 and up to the date of this Report. Dealings in HSBC Holdings shares Except for dealings as intermediaries by HSBC Bank, HSBC Financial Products...

Page 324
...Current arrangements ...Performance conditions ...Funding ...Total Shareholder Return ...Pensions ...Share ownership guidelines ...Service contracts ...Other directorships ...Non-executive Directors ...Fees ...Remuneration review (audited) Directors' emoluments ...Pensions ...Share plans ...322 322...

Page 325
... annual bonus opportunity will be increased from 250 to 400 per cent of salary for the Group Chief Executive and Group Finance Director, with the criteria for bonus awards being made more specific and 40 per cent of any award being deferred into HSBC Restricted Shares; The performance measures...

Page 326
... People â€¢ Employee engagement â€¢ Leadership Annual cash bonus The annual cash bonus for executive Directors is based upon individual performance as well as performance measured against a number of key financial targets for the Group, including financial (e.g. revenue growth, economic profit...

Page 327
... face value. 2 M F Geoghegan's 2006 award relates to his position as Chief Executive of HSBC Bank plc, prior to his current role as Group Chief Executive of HSBC Holdings. 3 S K Green's 2006 award relates to his position as Group Chief Executive. Vesting of the awards is subject to the performance...

Page 328
...HSBC Holdings has achieved a sustained improvement in performance the Remuneration Committee will take account of all relevant factors but in particular comparisons against the comparator group in areas such as revenue growth and mix, cost efficiency, credit performance, cash return on cash invested...

Page 329
... conditions. Funding The Company's policy is to fund long-term incentive awards of Performance Shares and Restricted Shares under The HSBC Share Plan through employee benefit trusts which undertake market purchases of HSBC Holdings' shares. The dilution limits set out in the HSBC share plans comply...

Page 330
... of the annual bonus that is deferred into shares. Increases in the expected level of share ownership will be introduced as part of the refinements to reward strategy and structure from 2008 discussed above. Service contracts HSBC's policy is to employ executive Directors on one-year rolling...

Page 331
... paid to fund personal pension arrangements. 2 Benefits in kind for executive Directors include provision of company car, medical insurance, other insurance cover, accountancy advice and travel assistance. 3 These discretionary bonuses are in respect of 2007. See page 324 for comparison with 2006...

Page 332
... year were Â£9.64 and Â£8.03. 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 Plan and the HSBC Holdings Restricted Share Plan...

Page 333
... At the date of the award, 5 March 2007, the market value (closing price) per share was Â£8.96. The Trustee of the Plan purchased the shares at a price of Â£8.936358. 2 Includes additional shares arising from scrip dividends. HSBC Holdings Restricted Share Plan 2000 HSBC Holdings ordinary shares of...

Page 334
HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Share plans / Statement of Directors' Responsibilities Oversea-Chinese Banking Corporation Ltd., Mitsubishi Tokyo Financial Group Inc. and The Bank of East Asia, Limited with Bank of America Corporation, The Royal Bank of Scotland Group ...

Page 335
... 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 financial statements for HSBC Holdings (the 'parent company') in accordance...

Page 336
...'s Report to the Members of HSBC Holdings plc We have audited the Group and parent company financial statements (the 'financial statements') of HSBC Holdings plc for the year ended 31 December 2007 which comprise the Group Income Statement, the Group and parent Company Balance Sheets, the Group and...

Page 337
... prepared 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. â€¢ â€¢ Separate opinion in relation to IFRSs As explained in...

Page 338
... ...7 Net operating income ...8 Employee compensation and benefits ...9 Auditors' remuneration ...10 Share-based payments ...11 Tax expense ...12 Dividends ...13 Earnings per share ...14 Segmental analysis ...By geographical region ...By customer group ...15 Analysis of financial assets and...

Page 339
... income ...Net interest income on trading activities ...Net trading income ...Net income from financial instruments designated at fair value ...Gains less losses from financial investments ...Gains arising from dilution of interests in associates ...Dividend income ...Net earned insurance premiums...

Page 340
... in the course of collection from other banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Interests in associates and...

Page 341
...46 on the Financial Statements in the Annual Report and Accounts 2005. The accompanying notes on pages 344 to 452, the audited sections of the 'Report of the Directors: The Management of Risk' on pages 192 to 288, 'Critical accounting policies' on pages 132 to 134 and 'Off-balance sheet arrangements...

Page 342
... ...Subordinated loan capital repaid ...Dividends paid to shareholders of the parent company ...Dividends paid to minority interests ...Net cash used in financing activities ...Net increase/(decrease) in cash and cash equivalents ...Cash and cash equivalents at 1 January ...Exchange differences in...

Page 343
... of the 'Report of the Directors: The Management of Risk' on pages 192 to 288, 'Critical accounting policies' on pages 132 to 134 and 'Off-balance sheet arrangements and special purpose entities' on pages 183 to 191 form an integral part of these financial statements. S K Green, Group Chairman 341

Page 344
... up share capital At 1 January ...Shares issued in connection with the early settlement of HSBC Finance 8.875 per cent Adjustable Conversion-Rate Equity Security Units ...Shares issued under employee share plans ...Shares issued in lieu of dividends ...At 31 December ...Share premium account At...

Page 345
... acquisition of and increase in stake of subsidiaries ...Net cash used in investing activities ...Cash flows from financing activities Issue of ordinary share capital ...Purchases of own shares to meet share awards and share option awards ...On exercise of share options ...Subordinated loan capital...

Page 346
... effect on the consolidated financial statements of HSBC. However, in the separate financial statements of HSBC Holdings, the effect was to increase both 'Investments in subsidiaries' and 'Share-based payment reserve' by US$909 million in 2006. This change in accounting policy was made in accordance...

Page 347
...Bank of Communications, Ping An Insurance and Industrial Bank which are included on the basis of financial statements made up for the twelve months to 30 September. These are equity accounted three months in arrears in order to meet the requirements of the Group's reporting timetable. HSBC has taken...

Page 348
...or services. HSBC is currently assessing the effect of this interpretation on the consolidated financial statements. IFRIC 14 'IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction' ('IFRIC 14') was issued on 5 July 2007 and is effective for annual periods...

Page 349
... financial statements. 2 Summary of significant accounting policies (a) Interest income and expense Interest income and expense for all financial instruments except for those classified as held for trading or designated at fair value (other than debt securities issued by HSBC and derivatives managed...

Page 350
...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; Global Banking and Markets; and Private Banking. The main items reported...

Page 351
.... Where loans and advances are hedged by derivatives designated and qualifying as fair value hedges, the carrying value of the loans and advances so hedged includes a fair value adjustment for the hedged risk only. For certain leveraged finance and syndicated lending activities, HSBC may commit...

Page 352
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 2 Collectively assessed loans and advances Impairment is assessed on a collective basis in two circumstances: - - to cover losses which have been incurred but have not yet been identified on loans subject to individual assessment...

Page 353
... as assets held for sale and reported in 'Other assets'. The asset acquired is recorded at the lower of its fair value (less costs to sell) and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Any...

Page 354
...income statement. If no designation was made for the assets relating to the customer liabilities they would be classified as available-for-sale and the changes in fair value would be recorded directly in equity. These financial instruments are managed on a fair value basis and management information...

Page 355
... effective interest rates. Dividends are recognised in the income statement when the right to receive payment has been established. At each balance sheet date an assessment is made of whether there is any objective evidence of impairment in the value of a financial asset or group of assets. This...

Page 356
... transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Net investment hedge Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the...

Page 357
... in the income statement. These gains and losses are reported in 'Net trading income', except where derivatives are managed in conjunction with financial instruments designated at fair value (other than derivatives managed in conjunction with debt securities issued by the Group), in which case...

Page 358
... 'Net fee income'. - For the accounting policy governing the value of in-force long-term insurance business (see Note 2x). (iii) Intangible assets are amortised over their finite useful lives, generally on a straight line basis, as follows: Trade names ...Mortgage servicing rights ...Internally...

Page 359
... banks' or 'Loans and advances to customers' as appropriate. The finance income receivable is recognised in 'Net interest income' over the periods of the leases so as to give a constant rate of return on the net investment in the leases. When HSBC is a lessee under finance leases, the leased assets...

Page 360
...fall due. The defined benefit pension costs and the present value of defined benefit obligations are calculated at the reporting date by the schemes' actuaries using the Projected Unit Credit Method. The net charge to the income statement mainly comprises the current service cost, plus the unwinding...

Page 361
... a net investment in a foreign operation are recognised in the income statement of the separate financial statements. In consolidated financial statements these exchange differences are recognised in the 'Foreign exchange reserve' in shareholders' equity. On disposal of a foreign operation, exchange...

Page 362
.... When a shortfall is identified it is charged immediately to the income statement. Present value of in-force long-term insurance business The value placed on insurance contracts that are classified as long-term insurance business and are in force at the balance sheet date is recognised as an...

Page 363
...the value of the relevant underlying funds or indices. Investment management fees receivable are recognised in the income statement over the period of the provision of the investment management services, in 'Net fee income'. The incremental costs directly related to the acquisition of new investment...

Page 364
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 3, 4 and 5 3 Net income from financial instruments designated at fair value Net income from financial instruments designated at fair value includes all gains and losses from changes in the fair value of financial assets and ...

Page 365
... classification of the Group's investments as 'Investments in associates' as the Group continues to retain significant influence (see Note 21). 5 Net earned insurance premiums Investment contracts with discretionary participation features US$m 1,890 - 1,890 - - - 1,890 Non-life insurance US$m 2007...

Page 366
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 6, 7 and 8 6 Net insurance claims incurred and movement in liabilities to policyholders Investment contracts with discretionary participation features US$m 1,080 1,108 2,188 - - - Non-life insurance US$m 2007 Claims, benefits ...

Page 367
...of assets and liabilities ...Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ...Gains/(losses) Gain/(loss) on disposal or settlement of loans and advances ...Net impairment loss on loans and advances ...Net (charge)/reversal...

Page 368
... UK, where the HSBC Bank (UK) Pension Scheme covers employees of HSBC Bank plc and certain other employees of HSBC. This plan comprises a funded defined benefit plan ('the principal plan') which is closed to new entrants, and a defined contribution plan which was established on 1 July 1996 for new...

Page 369
... Watson Wyatt Limited. At that date, the market value of the HSBC Bank (UK) Pension Scheme's assets was US$18,072 million (including assets relating to the defined benefit plan, the defined contribution plan, and additional voluntary contributions). The market value of the plan assets represented 89...

Page 370
...used were a discount rate of 8 per cent per annum and average salary increases of 3.75 per cent per annum. The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and the HSBC North America (U.S.) Retirement Income Plan cover 33 per cent of HSBC's employees...

Page 371
... 2014 n/a n/a 2017 n/a 2012 n/a n/a 1 Rate of increase for pensions in payment and deferred pension. The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2006, were as follows...

Page 372
... used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2005, were as follows. These assumptions also formed the basis for measuring periodic costs under the plans in 2006: Healthcare cost trend Discount rate % UK ...Hong Kong...

Page 373
... 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 2007 2006 US$m US$m Discount rate Change in pension obligation at year end from a 25bps increase...

Page 374
... the Group's defined benefit pension plans is set out below together with the expected rates of return and plan assets used to measure the net defined benefit pension costs in each subsequent year. HSBC Bank (UK) Pension Scheme 2007 Expected rates of return % Fair value of plan assets ...Equities...

Page 375
... fair value of plan assets HSBC Bank (UK) Pension Scheme 2007 2006 US$m US$m At 1 January ...Expected return on plan assets ...Contributions by HSBC ...- normal ...- special ...Contributions by employees ...Experience gains ...Benefits paid ...Assets distributed on curtailments ...Assets distributed...

Page 376
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 8 Summary 2007 US$m Defined benefit obligation ...Fair value of plan assets ...Net deficit ...Experience gains/(losses) on plan liabilities ...Experience gains on plan assets ...Gains/(losses) from changes in actuarial ...

Page 377
...133 The actual return on plan assets for the year ended 31 December 2007 was US$7 million (2006: US$10 million). HSBC expects to make US$18 million (2006: US$19 million) of contributions to post-employment healthcare benefit plans during 2008. Benefits expected to be paid from the plans to retirees...

Page 378
... number of persons employed by HSBC Holdings during 2007 was 595 (2006: 505). Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings...

Page 379
... and business continuity and performing agreed-upon IT testing procedures. 6 Including fees payable to KPMG for transaction-related work, including US debt issuances. 7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of financial...

Page 380
... used to estimate the fair value of the options granted were as follows: HSBC Holdings Group Share Option Plan 2007 Risk-free interest rate1 (%) ...Expected life2 (years) ...Expected volatility3 (%) ...Share price at grant date (Â£) ...2006 Risk-free interest rate1 (%) ...Expected life2 (years...

Page 381
... and subject to the Remuneration Committee being satisfied that HSBC's financial performance has shown a sustained improvement in the period since the award date. The shares vest after three years to the extent that the vesting conditions are satisfied. 2007 Number (000's) Outstanding at 1 January...

Page 382
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 10 Savings-related share option plans Savings-related share option plans invite eligible employees to enter into savings contracts to save up to Â£250 per month (or its equivalent in US dollars, Hong Kong dollars or euros), with ...

Page 383
... 0.3 years (2006: 0.8 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 384
...-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 incentive plan under...

Page 385
... to its completion on 28 March 2003 generally vest equally over four years and expire ten years from the date of grant. Information with respect to share options granted under HSBC Finance's pre-acquisition scheme is as follows: 2007 Number (000's) HSBC Finance share options outstanding at 1 January...

Page 386
... statement credit/(charge) ...Equity: - available-for-sale investments ...- cash flow hedges ...- share-based payments ...- actuarial gains and losses ...Foreign exchange and other adjustments ...At 31 December ...Asset ...Liability ...2,145 1,448 (8) 470 (65) (642) 77 3,425 5,284 (1,859) 3,425 2006...

Page 387
... 2007 US$m Deferred tax assets Retirement benefits ...Loan impairment allowances ...Unused tax losses ...Accelerated capital allowances ...Available-for-sale investments ...Cash flow hedges ...Share-based payments ...Other short term timing differences ...Other timing differences ...822 4,484 272 97...

Page 388
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 12, 13 and 14 12 Dividends Dividends to shareholders of the parent company were as follows: 2007 Per share US$ Dividends declared on ordinary shares In respect of previous year: - fourth interim dividend ...In respect of current...

Page 389
...) 2007 2006 Average number of shares in issue ...Dilutive share options and share awards ...- Savings-related Share Option Plan ...- Executive Share Option Scheme ...- Group Share Option Plan ...- Restricted and performance share awards ...- HSBC France share options ...- HSBC Finance share options...

Page 390
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 14 Profit before tax Year ended 31 December 2007 Rest of AsiaNorth Latin Pacific America America US$m US$m US$m 10,158 (6,015) 4,143 2,709 (463) 2,246 1,202 441 1,643 111 38 1,081 8 226 798 10,294 30,183 (15,336) 14,...

Page 391
...) on trading activities ...Net trading income ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums .. Other operating income ...Total operating income ...Net insurance claims...

Page 392
...) on trading activities ...Net trading income ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums . Other operating income ...Total operating income ...Net insurance claims...

Page 393
... charges and other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit ...Share of profit in associates and joint ventures ...Profit before tax ...Capital expenditure incurred3 ...2 1 Year ended 31 December 2007 Global Private Banking Banking Other & Markets...

Page 394
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 14 and 15 Personal Financial Services US$m Net interest income/(expense) ...Net fee income ...Trading income/(expense) excluding net interest income . Net interest income/(expense) on trading activities ...Net trading income/(...

Page 395
... activities ...Net trading income/(expense) ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums .. Other operating income ...Total operating income ...Net insurance claims...

Page 396
... banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other assets ...Accrued income ... Notes on the Financial Statements...

Page 397
... banks ...Items in the course of collection from other banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other assets...

Page 398
...the Financial Statements (continued) Notes 15 and 16 HSBC Holdings At 31 December 2007 Financial assets and liabilities at amortised cost US$m 360 - - - 21 381 Held for Designated trading at fair value US$m US$m Financial assets Cash at bank and in hand ...Derivatives ...Loans and advances to HSBC...

Page 399
...,113 65,242 204,355 1 Included within listed investments are US$6,977 million (2006: US$4,309 million) of investments listed in Hong Kong. Loans and advances to banks held for trading consist of: 2007 US$m Reverse repos ...Settlement accounts ...Stock borrowing ...Other ...80,476 8,227 8,259 3,478...

Page 400
... banks ...Loans and advances to customers ...181 21,150 20,047 41,378 178 8 41,564 2006 US$m 133 9,449 10,602 20,184 236 153 20,573 Securities designated at fair value Market value 2007 US$m US Treasury and US Government agencies ...UK Government ...Hong Kong Government ...Other government ...Asset...

Page 401
... rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives enable users to increase, reduce or alter exposure to credit or market risks. HSBC makes markets in derivatives for its customers and uses derivatives to manage its exposure to credit and market risks...

Page 402
...changes in exchange rates, interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage activities. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume...

Page 403
... the open risk position. The credit derivative business operates within the market risk management framework described from page 248. Derivatives valued using models with unobservable inputs The amount that has yet to be recognised in the consolidated income statement relating to the difference...

Page 404
...the balance sheet date; they do not represent amounts at risk. Fair value hedges HSBC's fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates. For...

Page 405
... (2006: US$122 million) was recognised due to hedge ineffectiveness. Hedges of net investments in foreign operations HSBC's consolidated balance sheet is affected by exchange differences between the US dollar and all the non-US dollar functional currencies of subsidiaries. HSBC hedges structural...

Page 406
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 19 Amortised cost US$m At 31 December 2007 US Treasury ...US Government agencies ...US Government sponsored entities ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities ...Corporate debt and ...

Page 407
... average yields of investment debt securities as at 31 December 2007: Within one year Amount Yield US$m % Available-for-sale US Treasury ...US Government agencies ...US Government-sponsored agencies ...UK Government ...Hong Kong Government ...Other governments ...Asset-backed securities ...Corporate...

Page 408
...,415 Carrying amount of transferred assets US$m 67,558 12,908 80,466 2006 Carrying amount of associated liabilities US$m 66,127 12,469 78,596 A small proportion of financial assets that do not qualify for derecognition relate to loans, credit cards, debt securities and trade receivables that have...

Page 409
... equity capital is less than US$1 million. All the above investments in associates are owned by subsidiaries of HSBC Holdings. HSBC had US$7,747 million (2006: US$4,747 million) of investments in associates and joint ventures listed in Hong Kong. For the year ended 31 December 2007, HSBC's share...

Page 410
... 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 411
...CGU operates. Cash flows are extrapolated in perpetuity due to the long-term perspective within the Group of the business units making up the CGUs. The pre-tax 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...

Page 412
... investment assumptions) ...Exchange differences and other movements ...At 31 December ...1,549 380 390 (204) (150) 1,965 2006 US$m 1,400 254 - (203) 98 1,549 PVIF-specific assumptions The key assumptions used in the computation of PVIF for HSBC's main life insurance operations were: UK % Risk free...

Page 413
...contractual commitments to acquire intangible assets. 2 The amortisation charge for the year is recognised within the income statement under 'Amortisation and impairment of intangible assets', with the exception of the amortisation of mortgage servicing rights that is charged to net fee income. 411

Page 414
...Depreciation charge for the year ...Disposals ...Transfers ...Exchange differences ...Other changes ...At 31 December 2006 ...Net carrying amount at 31 December 2006 ...5,331 684 93 25 (256) (446) - 237 (967) 4,701 Long leasehold land and buildings US$m 1,936 78 - 21 (37) (596) (5) 1 40 1,438 Short...

Page 415
... 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 of HSBC...

Page 416
...HSBC Bank plc ...HSBC France ...HSBC Bank International Limited ...HSBC Life (UK) Limited ...HSBC Private Banking Holdings (Suisse) S.A...HSBC Trinkaus & Burkhardt AG ...Marks and Spencer Retail Financial Services Holdings Limited ...Hong Kong Hang Seng Bank Limited ...HSBC Insurance (Asia) Limited...

Page 417
... mainly in the Middle East and HSBC Life (International) Limited which operates mainly in Hong Kong. Subsidiaries which experience significant restrictions on their ability to transfer funds to HSBC in the form of cash dividends or to repay loans and advances During 2007 and 2006, none of the Group...

Page 418
... holding in each entity to 100 per cent. HSBC Assurances is a group of companies offering life, property and casualty insurance products through HSBC France's networks. HSBC paid a cash consideration of US$304 million in respect of this acquisition. The fair value of the assets acquired exceeded...

Page 419
...liabilities - net short positions ...58,940 102,710 44,684 108,246 314,580 2006 US$m 32,040 89,166 34,115 71,287 226,608 27 Financial liabilities designated at fair value HSBC 2007 US$m Deposits by banks and customer accounts ...Liabilities to customers under investment contracts ...Debt securities...

Page 420
...33,167) 230,325 Certain debt securities in issue are managed on a fair value basis as part of HSBC's interest rate risk management policies. The hedged portion of these debt securities is presented within the balance sheet caption 'Financial liabilities designated at fair value', with the remaining...

Page 421
...,262 28,019 HSBC Holdings 2007 US$m - - 1,393 - 12 1,405 2006 US$m - - 1,507 - 10 1,517 30 Liabilities under insurance contracts Gross US$m 2007 Non-life insurance liabilities Unearned premium provision ...Notified claims ...Claims incurred but not reported ...Other ...Reinsurers' share US$m Net US...

Page 422
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 30 The movement of liabilities under insurance contracts during the year was as follows: Non-life insurance liabilities 2007 Reinsurers' share US$m (176) 22 (385) 407 (27) (181) (413) (355) (58) 207 (189) 18 (52) (429) (380) (49)...

Page 423
...120) - 1,166 (57) (662) Gross US$m Life (non-linked) At 1 January ...Benefits paid ...Increase in liabilities to policyholders ...Acquisitions of subsidiaries ...Exchange differences and other movements ...At 31 December ...Investment contracts with discretionary participation features At 1 January...

Page 424
...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$391 million (2006: US$282 million). These relate to labour and overtime litigation claims brought by employees after leaving the bank...

Page 425
... the borrower, generally with the non objection of the Financial Services Authority, and, where relevant, the consent of the local banking regulator, and in certain cases at a premium over par. Interest rates on the floating rate loan capital are related to interbank offered rates. On the remaining...

Page 426
.... There are limitations on the payment of distributions if prohibited under UK banking regulations or other requirements, if a payment would cause a breach of HSBC's capital adequacy requirements, or if HSBC Holdings has insufficient distributable reserves (as defined). HSBC Holdings has covenanted...

Page 427
... shares of HSBC Bank having economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together. HSBC Holdings 2007 US$m Subordinated liabilities: - At amortised cost ...- Designated at fair value (Note 27)...8,544 18,683 27,227 2006...

Page 428
...an ongoing basis include trading assets and liabilities, instruments designated at fair value, derivatives, and financial investments classified as available-for-sale (including treasury and other eligible bills, debt securities, and equity securities). Fair value of financial instruments carried at...

Page 429
...which HSBC issues structured notes. These market spreads are significantly smaller than credit spreads observed for plain vanilla debt or in the credit default swap markets. All net positions in non-derivative financial instruments, and all derivative portfolios, are valued at bid or offer prices as...

Page 430
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 33 â€¢ Private equity HSBC's private equity positions are generally classified as available-for-sale and are not traded in an active market. In the absence of an active market for the investment, fair value is estimated based ...

Page 431
... degree, the increase also reflects increased uncertainty in determining the fair value of credit derivative transactions executed against certain monoline insurers, and a general increase in structured derivative business. Changes in fair value recorded in the income statement The following table...

Page 432
... HSBC Holdings The following table provides an analysis of the basis for valuing financial assets and financial liabilities measured at fair value in the financial statements: Quoted market price US$m At 31 December 2007 Assets Derivatives ...Financial investments: available-for-sale ...Liabilities...

Page 433
...of credit losses over the life of the loans. For impaired loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered. (ii) Financial investments The fair values of listed financial investments are determined using bid market prices. The...

Page 434
... lists financial instruments whose carrying amount is a reasonable approximation of fair value because, for example, they are short-term in nature or reprice to current market rates frequently: Assets Cash and balances at central banks Items in the course of collection from other banks Hong Kong...

Page 435
...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 ...5,752 222,674 438,246 103,492 24,087 794,251 Liabilities Deposits by banks ...Customer accounts...

Page 436
HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 34 and 35 Due within one year 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 ...

Page 437
...by the net asset value of its foreign exchange equity and subordinated debt investments in subsidiaries, branches, joint ventures and associates. Gains or losses on structural foreign exchange exposures are recognised directly in equity. HSBC's management of its structural foreign exchange exposures...

Page 438
... liabilities were as follows: Assets pledged at 31 December 2007 US$m Treasury bills and other eligible securities ...Loans and advances to banks ...Loans and advances to customers ...Debt securities ...Equity shares ...Other ...7,200 7,389 78,755 219,956 19,257 3,933 336,490 2006 US$m 6,480 934 63...

Page 439
... in connection with the maturity of HSBC Finance 8.875 per cent Adjustable Conversion-Rate Equity Security Units ...Shares issued under HSBC Finance share plans ...Shares issued under HSBC employee share plans ...Shares issued in lieu of dividends ...At 31 December 2006 ...11,572,207,735 685,005...

Page 440
... option Details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings Group Share Option Plan, HSBC Holdings Executive Share Option Scheme, the HSBC Share Plan and HSBC Holdings savings-related share option plans are given in Note 10. In aggregate, options...

Page 441
...- - 2006 HSBC Finance and subsidiary company plans Following the acquisition of HSBC Finance in 2003, all outstanding options and equity-based awards over HSBC Finance common shares were converted into rights to receive HSBC Holdings ordinary shares in the same ratio as the share exchange offer for...

Page 442
... shares, derived from the London Stock Exchange Daily Official List, for the five business days preceding the closing date of the acquisition. During 2007, options over 377,046 HSBC Holdings ordinary shares were exercised (2006: 529,233) and delivered from the HSBC (Bank of Bermuda) Employee Benefit...

Page 443
... within HSBC's insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets. 3 Amounts transferred to...

Page 444
... shares held within HSBC's insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets. 2006 numbers...

Page 445
... shares held within HSBC's insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets. 2005 numbers...

Page 446
...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 ...- (5,069) (4,972) (8,922) (131,886) (13,360) (12,329) (176,538) HSBC 2006 US...

Page 447
...Commitments Documentary credits and short-term trade-related transactions ...Forward asset purchases and forward forward deposits placed ...Undrawn note issuing and revolving underwriting facilities ...Undrawn formal standby facilities, credit lines and other commitments to lend: - 1 year and under1...

Page 448
... 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. Commitments At 31 December 2007, HSBC had US$942 million (2006...

Page 449
...agreement relating to this acquisition will result in HSBC assuming The Chinese Bank's assets, liabilities and operations with a payment by the Taiwan Government's Central Deposit Insurance Corporation to deliver an agreed net asset position. In addition, HSBC will provide certain additional capital...

Page 450
... years ...Equipment US$m Land and buildings US$m 2006 Equipment US$m 50 14 10 74 838 1,363 400 2,601 47 17 12 76 808 1,561 573 2,942 43 Litigation HSBC is party to legal actions in a number of jurisdictions including the UK, Hong Kong and the US, arising out of its normal business operations...

Page 451
...Credit cards ...Guarantees ...Balance at 31 December US$000 Number of persons 2006 Balance at 31 December US$000 94 534,227 300 27,044 12 19,041 206 25 85 407,176 317 21,751 12 16,706 687 23 1 Officers comprised 10 Group Managing Directors, the Group Chief Accounting Officer and the Group Company...

Page 452
... PLC Notes on the Financial Statements (continued) Note 44 2007 Highest amounts outstanding during year US$000 804,845 1,077 30,317 2006 Highest amounts outstanding during year US$000 582,606 1,637 24,952 Balance at 31 December US$000 Key Management Personnel Loans ...Credit cards ...Guarantees...

Page 453
... billion) of HSBC pension fund assets were under management by HSBC companies. Fees of US$42 million (2006: US$49 million) were earned by HSBC companies for these management services. HSBC's pension funds had placed deposits of US$506 million (2006: US$348 million) with its banking subsidiaries, on...

Page 454
... Bank (UK) Pension Scheme, which is sponsored by a separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure in relation to the scheme is made in Note 8 to the accounts. 45 Events after the balance sheet date...

Page 455
... Kong and Bermuda ...ADSs quoted ex-dividend in New York ...Record date and closure of Hong Kong and Bermuda Overseas Branch Registers of shareholders for one day ...Shares quoted ex-dividend in Paris ...Mailing of Annual Report and Accounts 2007 and/or Annual Review 2007, Notice of Annual General...

Page 456
... and Hong Kong dollars, or, subject to the Board's determination, may be 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...

Page 457
... 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 Exchange (ADS) Euronext Paris Bermuda Stock Exchange...

Page 458
...the Directors to offer a scrip dividend alternative ...9 To authorise the Company to make political donations and incur political expenditure ...10 To authorise HSBC Bank plc to make political donations and incur political expenditure ...11 To authorise electronic communications with shareholders in...

Page 459
... Africa: Group Communications HSBC Holdings plc 8 Canada Square London E14 5HQ UK For those in Asia-Pacific: Group Communications (Asia) The Hongkong and Shanghai Banking Corporation Limited 1 Queen's Road Central Hong Kong For those in the Americas: Internal Communications HSBC-North America 26525...

Page 460
... Relations Officer HSBC North America Holdings Inc. 26525 N Riverwoods Boulevard Mettawa, Illinois 60045 USA 1 224 544 4400 1 224 552 4400 [email protected] Senior Manager External Relations The Hongkong and Shanghai Banking Corporation Limited 1 Queen's Road Central Hong Kong...

Page 461
... of shares in HSBC Holdings by shareholders subject to UK capital gains tax can be complex, partly depending on whether, for example, the shares were purchased since April 1991, acquired in 1991 in exchange for shares in The Hongkong and Shanghai Banking Corporation Limited, or acquired subsequent...

Page 462
HSBC HOLDINGS PLC Shareholder Information (continued) Taxation of shares and dividends / History and development Stamp duty and stamp duty reserve tax Transfers of shares by a written instrument of transfer generally will be subject to UK stamp duty at the rate of 0.5 per cent of the consideration...

Page 463
...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 464
...associates' underlying net assets. Subsequently, in September and October, HSBC increases its holding in Bank of Communications from 18.60 per cent to 19.01 per cent for US$308 million. 2007 In September, HSBC agrees to acquire 51.02 per cent of the issued share capital of Korea Exchange Bank for US...

Page 465
Organisational Structure 463

Page 466
... Bank of Bermuda Bank of Communications Basel Committee Basel I Basel II BHCA BIB US equivalent or brief description Financial Statements Bylaws Long-term equity investments accounted for using the equity method Net income Statement of financial position Notes Ordinary shares, issued and fully paid...

Page 467
... Financial Times - Stock Exchange index Generally Accepted Accounting Principles Group Chief Risk Officer Gross domestic product The global business of the Group (previously known as Corporate, Investment Banking and Markets) comprising Global Markets, Global Banking and Global Asset Management HSBC...

Page 468
... Retail Financial Services Holdings Limited, acquired by HSBC in November 2004 Morgan Stanley Capital International index Mortgage servicing rights Nationally Chartered, a designation for certain categories of banks in the US Hedge of a net investment in a foreign operation New York Stock Exchange...

Page 469
... Group Total shareholder return TSR measure applied to half of the award of Performance Shares under The HSBC Share Plan United Arab Emirates United Kingdom UK Generally Accepted Accounting Principles United States of America Value at risk Variable Net Asset Value Worldwide Household International...

Page 470
HSBC HOLDINGS PLC Index Accounting developments (future) 345 policies (critical) 132 policies (significant) 347 requirements in UK and Hong Kong 452 Accounts approval 452 basis of preparation 16, 344 Annual General Meeting 321, 456 Areas of special interest 216, 257 Assets by customer group 16, ...

Page 471
... liabilities designated at fair value 417 Financial risks (insurance) 271 Financial statements 336 Five-year comparison 3 Foreign exchange accounting policy 359 exposures 256, 435 rates 3 Funds under management 162 Geographical regions 36 Global Banking and Markets business highlights 25 performance...

Page 472
... risk management 260 Organisational structure chart 463 Other (notes) 31 in Europe 49, 55 in Hong Kong 63, 68 in Latin America 117, 122 in North America 99, 106 in Rest of Asia-Pacific 81, 87 Pensions accounting policy 358 for directors 330 risk 253, 262 Personal Financial Services business...

Page 473
..., 412 accounting policy 356 valuation of land and buildings 129 Provisions 422 accounting policy 359 PVIF 280, 410 Ratios advances to deposits 244 capital and performance 2 credit coverage 2 cost efficiency 2, 159 earnings to combined fixed charges 178 net liquid assets to customer liabilities 245...

Page 474
... under the UK Companies Act Registered in England: number 617987 REGISTERED OFFICE AND GROUP HEAD OFFICE 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 (0) 20 7991 8888 Facsimile: 44 (0) 20 7992 4880 Web: www.hsbc.com REGISTRARS Principal Register Computershare Investor Services PLC PO...

Page 475
... Finance, HSBC Holdings plc, London Cover designed by Addison Corporate Marketing Limited, London; text pages designed by Group Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, Hong Kong Printed by St Ives Direct Limited, Crayford, UK, on Revive 50:50 Silk paper using...

Page 476
HSBC Holdings plc 8 Canada Square, London E14 5HQ, United Kingdom Telephone: 44 020 7991 8888 Facsimile: 44 020 7992 4880 www.hsbc.com

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