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Strength, diversity and resilience
2008
HSBC Holdings plc Annual Report and Accounts

Table of contents

  • Page 1
    2008 HSBC Holdings plc Annual Report and Accounts Strength, diversity and resilience

  • Page 2
    ... 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 over 210,000 shareholders in 120 countries and territories. The shares are traded on the New York Stock Exchange in...

  • Page 3
    ... in the US ...Limitations affecting equity security holders ...Fourth interim dividend for 2008 ...Interim dividends for 2009 ...Dividends on ordinary shares of HSBC Holdings ...Nature of trading market ...Shareholder profile ...Memorandum and Articles of Association ...Annual General Meeting ...448...

  • Page 4
    ... million). Customer accounts and deposits by banks up by 1 per cent to US$1,245,411 million (2007: US$1,228,321 million). Risk-weighted assets up by 2 per cent to US$1,147,974 million (2007: US$1,123,782 million). Dividends and capital position1 • Total dividends declared in respect of 2008 of US...

  • Page 5
    ....5 5.69 Share information at the year-end 2008 US$0.50 ordinary shares in issue (million) ...Market capitalisation (billion) ...Closing market price per ordinary share: - London ...- Hong Kong ...Closing market price per American Depositary Share7 ...Over 1 year HSBC total shareholder return to 31...

  • Page 6
    ...other credit risk provisions ...Total operating expenses ...Profit before tax ...Profit attributable to shareholders of the parent company ...Dividends2 ...At the year-end Called up share capital ...Total shareholders' equity ...Capital resources1,13 ...Customer accounts ...Undated subordinated loan...

  • Page 7
    ... in North America, was reported in total operating expenses. This amount is excluded from total operating expenses to calculate the ratio. 7 Each American Depositary Share ('ADS') represents five ordinary shares. 8 Total shareholder return is defined on page 19. 9 The Financial Times Stock Exchange...

  • Page 8
    ... the funding of private and public sector defined benefit pensions; and consumer perception as to the continuing availability of credit, and price competition in the market segments served by HSBC. - - - - • changes in government policy and regulation, including: - the monetary, interest rate...

  • Page 9
    ... markets where HSBC operates including increased competition from non-bank financial services companies, including securities firms. • factors specific to HSBC: - the success of HSBC in adequately identifying the risks it faces, such as the incidence of loan losses or delinquency, and managing...

  • Page 10
    HSBC HOLDINGS PLC Group Chairman's Statement Group Chairman's Statement low. This cheap money fuelled a consumer boom and rising house prices. It encouraged increased borrowing by banks and by their customers, fuelling asset price bubbles particularly in housing markets. Loose monetary conditions ...

  • Page 11
    ... of credit cards, we will write no further consumer finance business through the HFC and Beneficial brands in the US and close the majority of the network. Thus, in terms of new business, we are drawing a line and we will run off our existing business, providing all necessary support to HSBC Finance...

  • Page 12
    ... ordinary share capital following the Rights Issue we are announcing today, prevailing business conditions and capital requirements. The dividend payments remain substantial and reflect management's long-term confidence in the business. HSBC will continue to aim to pay progressive dividends in line...

  • Page 13
    .... Our strategy has served HSBC well and positions it for long-term growth with attractive returns. HSBC continues to combine its position as the world's leading emerging markets bank with an extensive international network across both developed and faster growing markets. At the same time, as...

  • Page 14
    ... services. Headquartered in London, HSBC operates through long-established businesses and has an international network of some 10,000 properties in 86 countries and territories in five geographical regions: Europe; Hong Kong; Rest of Asia-Pacific, including the Middle East and Africa; North America...

  • Page 15
    ...the capital markets or deteriorating investor sentiment. Market developments may affect consumer confidence and may cause declines in credit card usage and adverse changes in payment patterns, leading to increases in delinquencies and default rates, write-offs and loan impairment charges beyond HSBC...

  • Page 16
    ...customers are likely to seek capital protection and become increasingly rate and risk sensitive, seeking out products which offer deposit insurance and government guarantees. Regulatory reforms in the areas of wealth management product complexity, sales requirements and liquidity and reserve ratios...

  • Page 17
    ... the risk of deposit migration. HSBC's Global Banking and Markets business operates in the markets affected by illiquidity and extreme price volatility, either directly or indirectly, through exposures to securities, loans, derivatives and other commitments, and HSBC has made substantial write-downs...

  • Page 18
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Challenges and uncertainties / KPIs transactions with counterparties in financial services, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients...

  • Page 19
    ... to increase their capital in response to deteriorating market conditions may have secondary effects on lending, which could exacerbate the current market downturn. These measures, alone or in combination, could have an adverse effect on HSBC's operations. In the UK for example, the Banking Act 2009...

  • Page 20
    ... paid in respect of the year to which the dividend relates. 8 Basic earnings per ordinary share is defined in Note 13 on the Financial Statements. 9 The return on average total shareholders' equity is defined as profit attributable to shareholders of the parent company divided by the average total...

  • Page 21
    .... In 2008, the ratio of 4.0 per cent was 11.3 percentage points lower than that reported in 2007. This decrease reflected the decline in profit driven by goodwill impairment, the significant increase in loan impairment charges, write-downs in credit trading, leveraged and acquisition finance, and...

  • Page 22
    ... increase. The following chart shows the 2005 to 2008 volumes per delivery channel: Number of customer transactions (millions) 2,500 2,000 1,500 1,000 500 0 Branch/Call Centre-Agent Credit card Internet Self-Service Terminal Other e-Channels Others (payment, clearing, etc) 2005 2006...

  • Page 23
    ... and Vietnam Technological and Commercial Joint Stock Bank ('Techcombank') following their share issues; the disposal of the Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited in the UK in October 2007; the sale of Wealth and Tax Advisory Services to its management in...

  • Page 24
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Reconciliation of reported and underlying profit before tax / Financial summary Reconciliation of reported and underlying profit before tax 2008 compared with 2007 2007 acquisitions, disposals & dilution Currency...

  • Page 25
    ......Net insurance claims incurred and movement in liabilities to policyholders . Loan impairment charges and other credit risk provisions ...Operating expenses ...Share of profit in associates and joint ventures ...Economic profit ...Balance sheet ...Movement from 31 December 2007 to 31 December 2008...

  • Page 26
    ... carried on the balance sheet in respect of the Group's investment in its North America Personal Financial Services business. This non-cash charge arose substantially in the second half of 2008 as heightened risk premia in the market increased discount rates and cash flows estimated from ongoing...

  • Page 27
    ... businesses within Global Banking and Markets, including foreign exchange, payments and cash management, equities, HSBC Global Asset Management and securities services. The deterioration in credit quality which began in 2006 in a particular portfolio of purchased mortgages in the US consumer finance...

  • Page 28
    ... balance growth in North America, Europe and Hong Kong. Balance Sheet Management revenues increased compared with 2006, particularly in Hong Kong and Rest of Asia-Pacific as deposits grew strongly. Lending spreads in 2007 reflected the continued benign corporate and commercial credit conditions...

  • Page 29
    ... enhancement services on cards also increased. In Mexico, the credit card business continued to grow, both in balances and in transaction volumes. Higher income from funds under management products, broking services, unit trusts and global custody was driven by buoyant stock markets in Hong Kong and...

  • Page 30
    ... short-term interest rates. Revenues were also boosted by an increased number of deals, widening spreads and increased customer demand for trading and hedging products. The decline in equities trading income reflected weaker equity markets, particularly in Hong Kong, where demand for structured...

  • Page 31
    ... investment losses driven by falling equity and bond markets, predominantly affecting the value of assets held in unit-linked and participating funds in Hong Kong, France and the UK. The negative movement in fair value is partially offset by a corresponding reduction in 'Net insurance claims...

  • Page 32
    ... investment 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. 2008 US$m Net gain from disposal of: - debt securities ...- equity securities ...- other financial investments...

  • Page 33
    ...death benefits to pension contracts. New product launches also aided growth in Hong Kong. In Latin America, higher premiums in Brazil were driven by increased sales of pension products with linked-life policies. In non-life insurance, the UK benefited from a decision to reduce the proportion of risk...

  • Page 34
    ... sale of property fund assets and a reduction in Group real estate disposals in 2008. Similarly, in Hong Kong revaluation gains on investment properties did not recur. Life assurance enhancements to pension products resulted in increased present value of inforce long-term insurance ('PVIF') business...

  • Page 35
    ... investment returns on unit-linked and participating policies. This was most notable in Hong Kong, the UK and Brazil. There was an offsetting increase in 'Net income from financial instruments designated at fair value' which reflected these investment returns. In addition, FSA rule changes in the UK...

  • Page 36
    ... house price depreciation restricted refinancing options for customers. In HSBC USA, loan impairment charges rose as credit quality worsened across the real estate secured portfolio and private label cards. Delinquencies rose in the prime first lien residential mortgage portfolio, Home Equity Line...

  • Page 37
    ... the commercial portfolio in the second half of 2008. In Global Banking and Markets, credit impairment charges within Balance Sheet Management principally reflected losses on debt securities and paper issued by financial institutions previously rated at investment grade which failed in the year. In...

  • Page 38
    ... awards under the HSBC Holdings Group Share Option Plan. 2008 compared with 2007 Reported operating expenses increased by US$10.1 billion to US$49.1 billion, due to an impairment charge of US$10.6 billion to fully write off goodwill in Personal Financial Services in North America. Excluding this...

  • Page 39
    ... costs. Staff numbers in North America fell as the consumer finance business was restructured, resulting in the discontinuation of certain business channels in mortgage services and the closing of branch offices in consumer lending. Premises and equipment costs increased on investments in technology...

  • Page 40
    ... market value. Profits from the Saudi British Bank were higher by 16 per cent due to strong balance sheet growth, particularly in the lending portfolio, augmented by higher fees from cards, account services and trade. Profits from Industrial Bank grew by 72 per cent, driven by increased investment...

  • Page 41
    ... The decline in profit was predominately driven by the US$10.6 billion goodwill impairment charge relating to the North American Personal Financial Services business, alongside a significant increase in loan impairment charges and write-downs in credit trading, leveraged and acquisition finance, and...

  • Page 42
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Movement in 2008 Balance sheet 2008 US$m ASSETS Cash and balances at central banks ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and ...

  • Page 43
    ... mainly in Hong Kong and the UK where Balance Sheet Management invested a greater proportion of its assets in government and government-guaranteed debt. HSBC also reduced counterparty credit risk in the UK by channelling an increasing proportion of lending to banks through the London Clearing House...

  • Page 44
    ... in holdings of asset-backed securities. Liabilities under insurance contracts increased by 10 per cent, largely due to new business sales in Hong Kong, France and the UK, partly offset by reduced liabilities on unit-linked policies. Other liabilities rose by 50 per cent due to the consolidation of...

  • Page 45
    ...loans and advances to banks Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East . HSBC Bank USA ...HSBC Bank Canada...

  • Page 46
    ... 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 47
    ... assets Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East . HSBC Bank USA ...HSBC Finance ...HSBC Bank Canada...

  • Page 48
    ...63 4.47 6.40 9.78 4.87 6.94 6.30 4.29 North America Latin America Other operations ... Financial liabilities designated at fair value - own debt issued11 Europe HSBC Holdings ...HSBC Bank ...HSBC France ...Hang Seng Bank ...HSBC Bank USA ...HSBC Finance ...18,675 8,805 1,515 127 1,504 32,126 1,083...

  • Page 49
    ...3.48 North America Latin America Other operations ... Debt securities in issue Europe HSBC Bank ...HSBC France ...HSBC Finance ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East HSBC Bank USA ...HSBC Finance ...HSBC Bank Canada ...HSBC...

  • Page 50
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Average balance sheet and NII Total equity and liabilities (continued) Average balance US$m Other interest-bearing liabilities Europe HSBC Bank ...HSBC Private Banking Holdings...

  • Page 51
    ... assets 2008 % 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...

  • Page 52
    ...838 2008 US$m Short-term funds and loans and advances to banks Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East...

  • Page 53
    ... 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 Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East ...HSBC Bank USA ...HSBC Bank Canada ...HSBC...

  • Page 54
    ... designated at fair value - own debt issued Debt securities in issue Europe HSBC Bank ...HSBC France ...HSBC Finance ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East ...HSBC Bank USA ...HSBC Finance ...HSBC Bank Canada ...HSBC Mexico...

  • Page 55
    ... shall on a poll have one vote for every share he or she holds. Where any shareholder is, under the rules governing the listing of securities on any stock exchange on which all or any shares of HSBC Holdings are for the time being listed or traded, required to abstain from voting on any particular...

  • Page 56
    ... issue at 2 March 2009 are paid quarterly at the sole and absolute discretion of the Board of Directors. The Board of Directors will not declare a dividend on the Dollar Preference Shares if payment of the dividend would cause HSBC Holdings not to meet the applicable capital adequacy requirements of...

  • Page 57
    ... for 2008. The market value per share used to calculate shareholders' entitlements to new shares was US$15.2466, being the US dollar equivalent of £8.266. 3. 4. All-Employee share plans 5. In connection with the exercise of options under the HSBC Holdings savings-related share option plans: 27...

  • Page 58
    ... Stock Rights under HSBC Finance share plans that have been converted into rights over HSBC Holdings ordinary shares. Authority to purchase ordinary shares 12. At the Annual General Meeting in 2008, shareholders renewed the authority for the Company to make market purchases of ordinary shares...

  • Page 59
    ... 5 years US$m 63,402 - 736 1,573 - 9,618 - 8,536 83,865 Total US$m Long-term debt obligations ...Term deposits and certificates of deposit ...Capital (finance) lease obligations ...Operating lease obligations ...Purchase obligations ...Short positions in debt securities and equity shares ...Current...

  • Page 60
    ... international trade...Real estate and other property related ...Non-bank financial institutions ...Governments ...Other commercial ...Hong Kong Government Home Ownership Scheme ...Residential mortgages and other personal loans ...Loans and advances to customers ...Interest rate sensitivity of loans...

  • Page 61
    ... of bank deposits, customer deposits and certificates of deposit ('CDs') and other money market instruments (which are included within 'Debt securities in issue' in the balance sheet), together with the average interest rates paid thereon for each of the past three years. The geographical analysis...

  • Page 62
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Deposits / CDs // Critical accounting policies 2008 Average Average balance rate US$m % Customer accounts Europe Demand and other - non-interest bearing ...Demand - interest ...

  • Page 63
    ...on the location of the office in which the deposits are recorded and excludes balances with HSBC companies. The majority of certificates of deposit and time deposits are in amounts of US$100,000 and over or the equivalent in other currencies. Critical accounting policies (Audited) Introduction The...

  • Page 64
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review Critical accounting policies (continued) Impairment of loans and advances HSBC's accounting policy for losses arising from the impairment of customer loans and advances is described in Note 2g on the Financial Statements. ...

  • Page 65
    ... carrying amount of loans and advances. Goodwill impairment HSBC's accounting policy for goodwill is described in Note 2(p) on the Financial Statements. Note 22 on the Financial Statements lists the Group's cash generating units ('CGUs') by geographical region and global business. Total goodwill for...

  • Page 66
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review Critical accounting policies (continued) The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. ...

  • Page 67
    ... by external investors, the availablefor-sale holdings in these categories within Global Banking and Markets amounted to US$5.2 billion at 31 December 2008 (2007: US$11.8 billion). The deficit in the available-for-sale fair value reserve as at 31 December 2008 in relation to these securities was US...

  • Page 68
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review Critical accounting policies / Customer groups > Summary (continued) impairment on available-for-sale debt securities, as a result of which, evidence of impairment may be identified in available-for-sale debt securities ...

  • Page 69
    ....0 Summary HSBC manages its business through two customer groups, Personal Financial Services and Commercial Banking, and two global businesses, Global Banking and Markets (previously Corporate, Investment Banking and Markets), and Private Banking. Personal Financial Services incorporates the Group...

  • Page 70
    ...fees from retail securities and investments, particularly in Hong Kong, and changes in fee billing practices in the credit card business to improve the customer proposition in North America. A net expense of US$2.9 billion was recorded on financial instruments designated at fair value, compared with...

  • Page 71
    ... in credit quality in the North American Personal Financial Services business. Delinquency rates increased across all portfolios in HSBC Finance, particularly consumer lending, and in the real estate secured portfolios in HSBC USA, following the sustained downturn in the housing market and...

  • Page 72
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Personal Financial Services Subsequent developments The branch-based US consumer lending business of HSBC Finance has historically focused on sub-prime customers who rely on drawing cash against...

  • Page 73
    ... income4 ...Net operating income5 ...Loan impairment charges and other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit ...Income from associates ...Profit before tax ...For footnotes, see page 143. 2006 2006 acquisitions and as disposals1 reported US$m US...

  • Page 74
    ...of the UK merchant acquiring division, recorded in 'Other operating income'. Profit growth was most significant in Australia, India, mainland China, United Arab Emirates ('UAE'), Turkey, Brazil and Argentina. HSBC remained committed to new lending, increasing lending balances by 10 per cent. Deposit...

  • Page 75
    ... in new assets under management, while referrals from Private Banking led to a three-fold increase in new relationships. Sales of Global Markets products were particularly strong in foreign exchange under Commercial Banking's strategy to be the leading bank for international business. Business...

  • Page 76
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Commercial Banking / Global Banking and Markets Reconciliation of reported and underlying profit before tax 2008 compared with 2007 2007 acquisitions, disposals & dilution Currency gains1 ...

  • Page 77
    ...decline over the last four half-years. Core businesses such as foreign exchange, Rates, Balance Sheet Management and financing and equity capital markets posted record revenues. In 2008, some US$5.4 billion of write-downs were absorbed on legacy positions in credit trading, leveraged and acquisition...

  • Page 78
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Global Banking and Markets Management view of total operating income 2008 US$m Global Markets18 ...Credit ...Rates ...Foreign exchange ...Equities ...Securities services ...Asset and structured ...

  • Page 79
    ... decrease in funds under management following recent equity market declines. Nevertheless, HSBC remained one of the leading emerging markets asset managers. Reconciliation of reported and underlying profit before tax 2008 compared with 2007 2007 acquisitions, disposals & dilution Currency gains1...

  • Page 80
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Global Banking and Markets / Private Banking Balance sheet data significant to Global Banking and Markets15 Hong Kong US$m 45,398 26,989 23,042 20,970 46,964 225,853 11,509 30,866 13,056 28,536 ...

  • Page 81
    ...a result of an increase in customer deposit balances in Switzerland, the UK and Hong Kong as customers reduced risk in response to market turbulence, choosing HSBC for its strength and switching from investment securities to cash deposits. Spreads improved as interest rates declined sharply. Net fee...

  • Page 82
    ...) Customer groups > Private Banking • Trading income fell by 21 per cent to US$422 million, driven by lower demand for structured products in Asia following the decline in the Hong Kong stock market which led to clients preferring more stable cash deposits. Partly offsetting this was an increase...

  • Page 83
    ... 2008 at 2008 acquisitions exchange and rates3 disposals1 US$m US$m 1,205 1,536 704 3,445 - - - - Private Banking Net interest income ...Net fee income ...Other income4 ...Net operating income5 ...Loan impairment charges and other credit risk provisions ...Net operating income ...Operating expenses...

  • Page 84
    ... declines in equity market prices. These investments were primarily in Asian financial services companies which are held for the long term. In 2007, the results included dilution gains of US$1.1 billion following share offerings made by HSBC's associates, Ping An Insurance, Bank of Communications...

  • Page 85
    Balance sheet data15 2008 US$m Loans and advances to customers (net) ...Total assets ...Customer accounts ...2,621 135,001 2,041 2007 US$m 2,678 155,685 2,006 2006 US$m 2,095 137,291 1,245 Reconciliation of reported and underlying profit/(loss) before tax 2008 compared with 2007 2007 acquisitions, ...

  • Page 86
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Profit/(loss) before tax Analysis by customer group and global business Profit/(loss) before tax 2008 Personal Financial Commercial Services Banking US$m US$m 29,419 10,107 175 79 254 9,494 4,...

  • Page 87
    ......Net operating income5 ...Loan impairment charges and other credit risk provisions ...Net operating income ...Total operating expenses ...Operating profit ...Share of profit in associates and joint ventures ...Profit before tax ...Share of HSBC's profit before tax...Cost efficiency ratio ... Total...

  • Page 88
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Profit/(loss) before tax // Geographical regions > Summary Profit/(loss) before tax (continued) 2006 Personal Financial Services US$m 26,076 8,762 391 220 611 Commercial Banking US$m 7,514 3,207...

  • Page 89
    ..., accounting for more than 65 per cent by value of banknotes 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...

  • Page 90
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Summary / Europe In the analysis of profit by geographical regions that follows, operating income and operating expenses Profit/(loss) before tax 2008 US$m Europe ...Hong Kong ...Rest of ...

  • Page 91
    ...customer groups and global businesses Personal Financial Commercial Banking Services US$m US$m 2008 United Kingdom ...France22 ...Germany ...Malta ...Switzerland ...Turkey ...Other ...1,546 139 - 59 - 3 (89) 1,658 2007 United... Loans and advances to customers (net) by country 2008 US$m United Kingdom...

  • Page 92
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe > 2008 Profit before tax Europe Net interest income ...Net fee income ...Net trading income ...Changes in fair value of long-term debt issued and related derivatives ...Net income/(...

  • Page 93
    ...sale of the card acquiring business in the UK to a joint venture with Global Payments, Inc. in June 2008. Excluding these disposals and, in 2007, the acquisition of HSBC Assurances and the disposal of Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited and substantial fair...

  • Page 94
    ... value adjustment following HSBC's introduction of enhanced benefits to existing commercial pension products in the first half of 2008. These benefits were partially offset by costs associated with the support of money market funds in the global asset management business. Net insurance claims...

  • Page 95
    ... European property company, and additional credit risk provisions on debt securities held within the Group's available-for-sale portfolio, mainly in Solitaire Funding Limited ('Solitaire'), a special purpose entity managed by HSBC. A modest improvement in the UK personal finance sector reflected...

  • Page 96
    ... the Private Banking business earned higher net interest income from lending to existing clients as they further leveraged their portfolios. Net fee income rose by 11 per cent. Account services increased on higher customer balances and volumes of transactions in the UK and France, supported by sales...

  • Page 97
    ...the part sale of HSBC's investment in it. Trading income rose by 41 per cent, driven by the equities business and foreign exchange trading, where income increased strongly, with volume and profitability reflecting market volatility. The increase was partly offset by write-downs in credit, structured...

  • Page 98
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe > Profit/(loss) before tax by customer group Analysis by customer group and global business Profit/(loss) before tax 2008 Personal Financial Commercial Services Banking US$m US$m 6,...

  • Page 99
    ...at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums . Other operating income/ (expense) ...Total operating income ...Net insurance claims17 ...Net operating income5 ...Loan impairment (charges)/ recoveries and other credit risk provisions...

  • Page 100
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe > Profit/(loss) before tax by customer group // Hong Kong Analysis by customer group and global business (continued) Profit/(loss) before tax 2006 Personal Financial Services US$m 5,...

  • Page 101
    Hong Kong Profit/(loss) before tax by customer group and global business 2008 US$m Personal Financial Services ...Commercial Banking ...Global Banking and Markets ...Private Banking ...Other ...3,428 1,315 1,436 237 (955) 5,461 2007 US$m 4,212 1,619 1,578 305 (375) 7,339 2006 US$m 2,880 1,321 955 ...

  • Page 102
    ... rates. Savings and deposit balances grew strongly, particularly in Personal Financial Services, as customers revealed a preference for security and liquidity following declines in equity markets. Deposit growth was augmented by the launch of campaigns offering both preferential time deposit rates...

  • Page 103
    ... and bankruptcy increased in Hong Kong. Although property market declines reduced equity levels for residential mortgage customers, the impact on loan impairment charges was limited as this lending was well-secured and regulatory restrictions constrained origination loanto-value ratios to below...

  • Page 104
    ... in balance sheet management and strong results from the trading businesses and securities services in the buoyant economic environment. Higher demand for structured products and mutual funds drove the increase in Private Banking profits. Cost efficiency ratios improved in all customer groups. Net...

  • Page 105
    ... of a new portfolio wealth management sales tool in the branch network. An increase in IPO activity in Hong Kong, mainly derived from mainland China, had a positive effect on underwriting fees. Life insurance commission income increased, boosted by new product offerings. Credit card fee income...

  • Page 106
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Hong Kong > Profit/(loss) before tax by customer group Analysis by customer group and global business Profit/(loss) before tax 2008 Personal Financial Commercial Services Banking US$m US$m ...

  • Page 107
    ... risk provisions ...Net operating income ...Total operating expenses ...Operating profit/(loss) ...Share of profit in associates and joint ventures ...Profit/(loss) before tax ... Share of HSBC's profit before tax ...Cost efficiency ratio ... 17.4 27.2 Balance sheet data15 US$m Loans and advances...

  • Page 108
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Hong Kong > Profit/(loss) before tax by customer group // Rest of Asia-Pacific Analysis by customer group and global business (continued) Profit/(loss) before tax 2006 Personal Financial ...

  • Page 109
    ... within customer groups and global businesses Personal Financial Commercial Banking Services US$m US$m 2008 Australia ...India ...Indonesia ...Japan ...Mainland China ...Associates ...Other mainland China ...Malaysia ...Middle East ...Egypt ...United Arab Emirates ...Other Middle East ...Middle East...

  • Page 110
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific > 2008 Profit/(loss) before tax by country within customer groups and global businesses (continued) Personal Financial Services US$m 2006 Australia ...India ......

  • Page 111
    ... levels and private and public investment expenditure. High oil revenues continued to boost fiscal and current account surpluses throughout the region during 2008, although the impact of the decline in oil prices during the final months of the year, together with the OPEC-mandated production cuts...

  • Page 112
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific > 2008 Profit before tax Rest of Asia-Pacific (including the Middle East) Net interest income ...Net fee income ...Net trading income ...Changes in fair value of long-...

  • Page 113
    ... Services and Commercial Banking rose due to customer acquisition, notably among small businesses following the launch of the HSBC Direct for Business product. These deposits were deployed in increasing lending, where spreads improved on the corporate lending and credit card portfolios and mortgage...

  • Page 114
    ... fees from investment products and broking across the region, driven by a decline in equity markets and weakened investor sentiment. Fee income from credit facilities rose, notably in the Middle East, India, Australia and Singapore, reflecting increases in the number of customers. Net trading income...

  • Page 115
    ... account surpluses throughout the Middle East, boosting reserves and holdings of overseas assets. Rapid economic growth, low interest rates and currency weakness increased inflation, however, fuelling demands in some quarters for adjustments to the long-standing dollar pegs. Regional equity markets...

  • Page 116
    ...and trade. In Global Banking and Markets, the rise in net interest income was driven by the recovery in Balance Sheet Management revenues and, as trade and investment flows increased, by higher transactional balances in the payments and cash management businesses. In Personal Financial Services, net...

  • Page 117
    ... where an additional 27 new branches or sub-branches were opened. In India, the branch network and the consumer finance and credit card businesses were all expanded. Marketing, technology and infrastructure costs were incurred in support of business expansion. Share of profit in associates and joint...

  • Page 118
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific > Profit before tax by customer group Analysis by customer group and global business Profit before tax 2008 Personal Financial Commercial Services Banking US$m US$m 2,...

  • Page 119
    ... other credit risk provisions ...Net operating income ...Total operating expenses ...Operating profit ...Share of profit in associates and joint ventures ...Profit before tax ... Share of HSBC's profit before tax ...Cost efficiency ratio ... 3.1 73.9 Balance sheet data15 US$m Loans and advances to...

  • Page 120
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific > Profit before tax by customer group // North America > 2008 Analysis by customer group and global business (continued) Profit before tax 2006 Personal Financial ...

  • Page 121
    North America Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Services Banking US$m US$m 2008 United States23 ...Canada ...Bermuda ...Other ...(17,364) 106 31 (1) (17,228) 2007 United States ...Canada ...Bermuda ...Other ...226 380 51 1 ...

  • Page 122
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America > 2008 Profit/(loss) before tax North America Net interest income ...Net fee income ...Net trading income/(expense) ...Changes in fair value of long-term debt issued and related...

  • Page 123
    ... for retail deposits in which HSBC refrained from passing on the full effects of interest rate cuts to customers. Asset spreads widened, particularly in vehicle finance and credit cards and, to a lesser extent, the real estate secured portfolios as yields declined by less than funding costs in...

  • Page 124
    ... due to higher customer acceptance rates of Account Secure Plus and Identity Protection Plan, a rise in syndication, credit and service fees in Commercial Banking and increased fees from asset management. Trading losses were dominated by write-downs in Global Banking and Markets on legacy exposures...

  • Page 125
    ... 11 per cent lower. Staff costs declined, primarily in HSBC Finance, following decisions taken in 2007 to close the acquisition channels for new business in Mortgage Services and a number of consumer lending branches, and integrate the operations of the card businesses. HSBC USA made the decision to...

  • Page 126
    ... Banking and Markets arose from credit-related and liquidity event writedowns as asset-backed securities markets became illiquid and credit spreads widened markedly. Net interest income rose by 4 per cent, as higher revenues from payments and cash management, commercial lending and cards were offset...

  • Page 127
    ... lending businesses, communication expenses increased due to higher mailing volumes on cards and consumer lending as credit collection policies were tightened. In the third quarter, however, expenditure on card marketing declined in line with a decision to slow lending growth. Share of profit...

  • Page 128
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America > Profit/loss before tax by customer group Analysis by customer group and global business Profit/(loss) before tax 2008 Personal Financial Commercial Services Banking US$m US...

  • Page 129
    ...241) 22,783 (12,156) 10,627 (10,556) 71 20 91 % 0.4 46.3 Share of HSBC's profit before tax ...Cost efficiency ratio ... (6.4) 42.3 Balance sheet data15 US$m Loans and advances to customers (net) ...Total assets ...Customer accounts ...For footnotes, see page 143. 218,676 237,475 61,824 US$m 38,930...

  • Page 130
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America > Profit/loss before tax by customer group // Latin America Analysis by customer group and global business (continued) Profit/(loss) before tax 2006 Personal Financial ...

  • Page 131
    ... country within customer groups and global businesses Personal Financial Commercial Banking Services US$m US$m 2008 Argentina ...Brazil ...Mexico ...Panama ...Other ...- 250 360 51 7 668 2007 Argentina ...Brazil ...Mexico ...Panama ...Other ...111 348 157 37 53 706 Global Banking & Markets US$m 113...

  • Page 132
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Latin America > 2008 Profit before tax Latin America Net interest income ...Net fee income ...Net trading income ...Changes in fair value of long-term debt issued and related derivatives ...

  • Page 133
    ... in 2008. Commercial loan volume growth was driven by increased lending for working capital and trade finance loans in Brazil, and medium-sized businesses and the real estate sector in Mexico. Increased income on customer liabilities, which was driven by volume growth, particularly in time deposits...

  • Page 134
    ... of long-term insurance contracts in Brazil in 2008 was offset by a similar adjustment in Mexico in 2007. Loan impairment charges and other credit risk provisions rose by 42 per cent, mainly relating to credit cards, as organically grown portfolios in Mexico seasoned following market share growth...

  • Page 135
    ...offset by increased loan impairment charges in Mexico. Profit before tax in Global Banking and Markets increased as strong growth in net fee and net interest income was partly offset by a decrease in trading income and higher costs related to business expansion. Notwithstanding continuing investment...

  • Page 136
    ... assets and liabilities. In particular, credit card balances increased, driven by marketing and portfolio management initiatives designed to improve customer retention and card usage. Volume growth was achieved in mortgages, commercial real estate lending, trade and factoring. Customer relationship...

  • Page 137
    Analysis by customer group and global business Profit/(loss) before tax 2008 Personal Financial Commercial Services Banking US$m US$m 4,582 1,339 123 7 130 1,637 536 27 4 31 Global Banking & Markets US$m 579 248 200 8 208 Private Banking US$m 22 35 3 - 3 Intersegment elimination21 US$m (327) - - 327...

  • Page 138
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Latin America > Profit/(loss) before tax by customer group Analysis by customer group and global business (continued) Profit/(loss) before tax 2007 Personal Financial Services US$m 3,983 1,...

  • Page 139
    ...Net trading income ...Changes in fair value of long-term debt issued and related derivatives ...Net income from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend...

  • Page 140
    ... personal banking products (current and savings accounts, mortgages and personal loans, credit cards, and local and international payment services), together with consumer finance and wealth management services. In other markets, HSBC participates more selectively, targeting only those customer...

  • Page 141
    ...international trade, under both open account terms and traditional trade finance instruments. HSBC also provides international factoring, commodity and insured export finance, and forfaiting services. The Group utilises its extensive international network to build customer relationships at both ends...

  • Page 142
    ...exchange traded futures; equity services, including research, sales and trading for institutional, corporate and private clients and asset management services; distribution of capital markets instruments, including debt, equity and structured products, utilising HSBC's global network; and securities...

  • Page 143
    ... the year, Global Asset Management remained one of the world's largest emerging market asset managers, with US$52 billion of funds under management. Private Banking's funds under management decreased by 20 per cent to US$219 billion, driven by equity market performance. Net new money, while positive...

  • Page 144
    ... Securities. Various non-US HSBC group companies provide custodial, administration and similar services to a number of funds incorporated outside the United States of America whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008...

  • Page 145
    ... of shared services and Group Service Centres included within 'Other' which are recovered from customer groups, and (ii) the intra-segment funding costs of trading activities undertaken within Global Banking and Markets. HSBC's balance sheet management business, reported within Global Banking and...

  • Page 146
    ... to direct lending held at fair value through profit or loss and ABSs, including mortgage-backed securities ('MBS's) and collateralised debt obligations ('CDO's), and exposures to and contingent claims on monoline insurers in respect of structured credit activities and leveraged finance transactions...

  • Page 147
    ... longer marked-to-market through the income statement. Amounts reclassified as loans and receivables are accounted as such from the date of reclassification and tested thereafter for the write-downs of ABSs taken to the income statement - US$3.4 billion; the movement in fair values on available...

  • Page 148
    ... of future Effective Amount cash flows2 interest rate reclassified1 US$m US$m % Reclassification to loans and receivables ABSs ...Trading loans - commercial mortgage loans ...Leveraged finance loans ...Reclassification to available for sale Corporate debt and other securities ...8,194 650 6,458 15...

  • Page 149
    ... principal holdings of ABSs are in the Global Banking and Markets' business through special purpose entities ('SPE's) which have the benefit of external investor first loss protection support, positions held directly and by Solitaire Funding Limited ('Solitaire') where HSBC has first loss risk. The...

  • Page 150
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Overview > Global Banking and Markets ABSs / Stress analysis // Business model > ABSs / SPEs Global Banking and Markets available-for-sale ABSs exposure At 31 December 2008 Directly held1 SPEs US$m US$m Total carrying ...

  • Page 151
    ...-for-sale ABS positions, based on the fair value of the positions at that date. The outcome of the stress test was particularly sensitive to expected loss and prepayment rates for Alt-A securities and the loss of credit protection from certain monoline insurers on US Home Equity Lines of Credit...

  • Page 152
    ... fair value through profit or loss; ABSs including MBSs and CDOs; monoline insurers; credit derivative product companies ('CDPC's); and leveraged finance transactions. MBSs are securities that represent interests in a group of mortgages. Investors in these securities have the right to cash received...

  • Page 153
    ... relating to leveraged finance loans; student loan-related assets: securities with collateral relating to student loans; and other assets: securities with other receivablerelated collateral. • • • • Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair...

  • Page 154
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Nature and extent of exposures Carrying amount of HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss (continued) At 31 December 2007 Designated at fair value through Held...

  • Page 155
    ...284 262 22 284 691 755 697 58 1,446 677 614 574 40 1,291 Commercial property mortgage-related assets MBS and MBS CDOs1 ...- high grade2 ...- rated C to A ...- not publicly rated ...Balance carried forward ... (57) (57) - - (2,286) (19) (18) (1) - (8) (1,709) (1,696) (13) - (9,333) - - - - (560...

  • Page 156
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Nature and extent of exposures HSBC's consolidated holdings of US ABSs, and direct lending held at fair value through profit or loss (continued) 2008 Fair value Realised movements through gains and equity5 (losses)4 US...

  • Page 157
    ... 756 - 1,172 Commercial property mortgage-related assets MBS and MBS CDOs1 ...- high grade2 ...- not publicly rated ...Leveraged finance-related assets ABSs and ABS CDOs1 - high grade2 ...Student loan-related assets ABSs and ABS CDOs1 ...- high grade2 ...- rated C to A ...Other assets ABS and ABS...

  • Page 158
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Nature and extent of exposures HSBC's consolidated holdings of UK ABSs, and direct lending held at fair value through profit or loss (continued) 2008 Fair value Realised movements through gains and equity5 (losses)4 US...

  • Page 159
    ... non-US and non-UK residential mortgage-related assets MBSs1 ...- high grade2 ...- rated C to A ...- not publicly rated ...Commercial property mortgage-related assets MBS and MBS CDOs1 ...- high grade2 ...- rated C to A ...- not publicly rated ...Leveraged finance-related assets ABSs and ABS CDOs1...

  • Page 160
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Nature and extent of exposures > Monolines HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss, other than those supported by US and UK-originated assets (continued) 2007 ...

  • Page 161
    ... was drawn at 31 December 2008 (2007: US$158 million, none drawn). HSBC's exposure to debt securities which benefit from guarantees provided by monoline insurers Within both the trading and available-for-sale portfolios, HSBC holds bonds that are 'wrapped' with a credit enhancement from a monoline...

  • Page 162
    ... / Leveraged finance HSBC's exposure to Credit Derivative Product Companies CDPCs are independent companies that specialise in selling credit default protection on corporate exposures. As corporate credit spreads widened during the second half of 2008, increasing the potential value of claims...

  • Page 163
    ... financial markets developed in the second half of 2007 and continued throughout 2008. Consequently, income statement write-downs on leveraged finance transactions are presented for the three half-year periods affected to date. Half-year to 30 June 2008 US$m 278 - 31 December 2008 US$m Write-downs...

  • Page 164
    ... by a function independent of the risk-taker. To this end, ultimate responsibility for the determination of fair values lies with Finance, which reports functionally to the Group Finance Director. Finance establishes the accounting policies and procedures governing valuation, and is responsible for...

  • Page 165
    ... from several independent support functions (Product Control, Market Risk Management, Derivative Model Review Group and Finance) in addition to senior management. The members of each Valuation Committee consider the appropriateness and adequacy of the fair value adjustments and the effectiveness of...

  • Page 166
    ... Private equity HSBC's private equity positions are generally classified as available for sale and are not traded in active markets. In the absence of an active market, an investment's fair value is estimated on the basis of an analysis of the investee's financial position and results, risk profile...

  • Page 167
    ... fair value in the consolidated financial statements: Bases of valuing financial assets and liabilities measured at fair value Quoted market price US$m At 31 December 2008 Assets Trading assets ...Financial assets designated at fair value ...Derivatives ...Financial investments: available for sale...

  • Page 168
    ... at fair value through Held for trading profit or loss US$m US$m - - - - 5,294 - - 1,215 6,509 - - - - 5,396 - - 588 5,984 Available for sale US$m At 31 December 2008 Private equity investments ...Asset-backed securities ...Leveraged finance ...Loans held for securitisation ...Structured notes...

  • Page 169
    ..., and (ii) a general increase in the fair value of derivative assets during 2008. Trading liabilities valued using a valuation technique with significant unobservable inputs principally comprised equity-linked structured note transactions. These notes, which HSBC issues to investors, provide the...

  • Page 170
    ... including, for example, multiples for comparable listed companies and discounts for marketability. For ABSs whose prices are unobservable, models are used to generate the expected value of the asset, incorporating benchmark information on factors such as prepayment speeds, default rates, loss...

  • Page 171
    ... loans acquired for the purpose of securitisation and credit derivative transactions executed against monoline insurers. 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...

  • Page 172
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Fair values of financial instruments > Carried at fair value / Not carried at fair value Debt securities When assessing available-for-sale debt securities for objective evidence of impairment at the balance sheet date,...

  • Page 173
    ... coupon rates. In general, contractual cash flows are discounted using HSBC's estimate of the discount rate that a market participant would use in valuing instruments with similar maturity, repricing and credit risk characteristics. The fair value of a loan portfolio reflects both loan impairments...

  • Page 174
    .... No block discount or premium adjustments are made. The fair values of intangible assets related to the businesses which originate and hold the financial instruments subject to fair value measurement, such as values placed on portfolios of core deposits, credit card and customer relationships, are...

  • Page 175
    ... provides an analysis of the fair value of financial instruments not carried at fair value on the balance sheet: Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet 2008 Carrying amount US$m Assets Loans and advances to HSBC undertakings ...Liabilities...

  • Page 176
    ... operation of SIVs to changes in the market value of their underlying assets. In order to remove the risk of having to make forced asset sales, HSBC established three new securities investment conduits (defined below) to take on the assets held in Cullinan and Asscher. Mazarin Funding Limited...

  • Page 177
    ...US$bn Asset class at 31 December 2008 Structured finance Vehicle loans and equipment leases ...Consumer receivables ...Credit card receivables ...Residential MBSs ...Commercial MBSs ...Auto floor plan ...Trade receivables ...Student loan securities ...Vehicle finance loan securities ...Leverage loan...

  • Page 178
    ... Commercial bank securities and deposits ...Investment bank debt securities ...Investment bank securities ...Finance company debt securities ...Other assets ...- - - - 0.9 0.9 12.1 US sub-prime mortgages ...US Alt-A ...0.6 2.3 2.9 Asset class at 31 December 2007 Structured finance Vehicle loans...

  • Page 179
    ... the geographical origin of the mortgage loans held at fair value and ABSs, including those represented by MBSs and CDOs held in consolidated SIVs and securities investment conduits, see 'Nature and extent of HSBC's exposures' on page 150. Total assets by balance sheet classification Other SICs US...

  • Page 180
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) SPEs > SIVs and conduits The revolving credit facilities of multi-seller conduits will predominantly have expected average Funding structure Solitaire Provided Total by HSBC US$bn US$bn At 31 December 2008 Capital ...

  • Page 181
    ... only cash and equivalent assets held within the HSBC Group. Consequently, HSBC retains no exposure to the vehicle. Money market funds HSBC has established and manages a number of money market funds which provide customers with tailored investment opportunities with a set of narrow and well-defined...

  • Page 182
    ...money market funds invest in diverse portfolios of highly-rated debt instruments, including limited holdings in instruments issued by SIVs. At 31 December 2008, the exposure of these funds to SIVs was US$0.5 billion (2007: US$3.9 billion). Constant Net Asset Value funds CNAV funds price their assets...

  • Page 183
    ...Non-money market investment funds HSBC, through its fund management business, has established a large number of non-money market funds to enable customers to invest in a range of assets, typically equities and debt securities. At the launch of a fund HSBC, as fund manager, usually provides a limited...

  • Page 184
    ... assets of HSBC's non-money market funds which are on-balance sheet by balance sheet classification At 31 December 2008 2007 US$bn US$bn Cash ...Trading assets ...Financial instruments designated at fair value ...Financial investments ...0.4 0.2 2.3 0.8 3.7 0.4 0.5 3.0 0.2 4.1 Total assets of HSBC...

  • Page 185
    ..., and in structured loans and deposits, where SPEs introduce cost efficiencies. HSBC consolidates these SPEs when the substance of the relationship indicates that HSBC controls the SPE. HSBC's risks and rewards of ownership in these SPEs are in respect of its on-balance sheet assets and liabilities...

  • Page 186
    ... 2008 Total assets ...Direct lending4 ...ABSs4 ...Other 0.4 - - 0.4 Funding provided by HSBC ...CP ...MTNs ...Junior notes ...Term repos executed ...Investments in funds ...Drawn liquidity facility ...Capital notes5 ... Total maximum exposure to consolidated SPEs ... Report of the Directors...

  • Page 187
    ...-wide limited credit enhancements ...Other liquidity and credit enhancements ... 1 2 3 4 The securities investment conduits include Mazarin, Barion, Malachite and Solitaire. Local investment management funds. Also includes consolidated SPEs that hold mortgage loans held at fair value. These assets...

  • Page 188
    ... market funds have been classified as available-for-sale securities, and measured at fair value. HSBC's financial investments in off-balance sheet securitisations have been classified as trading assets and available-for-sale securities, and measured at fair value. 2 In the US, HSBC has established...

  • Page 189
    ... 40 on the Financial Statements. The majority by value of undrawn credit lines arise from 'open to buy' lines on personal credit cards, advised overdraft limits and other pre-approved loan products, and mortgage offers awaiting customer acceptance. HSBC generally has the right to change or terminate...

  • Page 190
    ... these exchanges. In the UK, these are the Listing Rules of the Financial Services Authority ('FSA'); in Hong Kong, The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited ('HKSE'); in the US, where the shares are traded in the form of ADSs, HSBC Holdings' shares are...

  • Page 191
    .... These include deposit-taking, retail banking, life and general insurance, pensions, investments, mortgages, custody and share dealing businesses, and treasury and capital markets activity. HSBC Bank plc is HSBC's principal authorised institution in the UK. FSA rules establish the minimum criteria...

  • Page 192
    ..., the furnishing of accurate reports. The HKMA implemented Basel II with effect from 1 January 2007 for all Authorised Institutions incorporated in Hong Kong. The marketing of, dealing in and provision of advice and asset management services in relation to securities in Hong Kong are subject to the...

  • Page 193
    ... sustainability (environmental and social) risks. Market risk includes foreign exchange, interest rate and equity price risks. The management of these various risk categories is discussed below. Insurance risk is managed by the Group's insurance businesses together with their own credit, liquidity...

  • Page 194
    .... 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. HSBC has standards, policies and procedures 192

  • Page 195
    ... levels report to GMO Risk. GMO helps build the Group's credit risk management capacity through staff selection, training, development, performance assessment and remuneration - the GCRO is jointly responsible with business heads for setting the performance goals of senior Global Risk officers...

  • Page 196
    ... unit in the development of stress-testing scenarios, economic capital measurement and the refinement of key risk indicators and their reporting, the tools for this being increasingly embedded within the Group's business planning processes. Reporting on aspects of the HSBC credit risk portfolio...

  • Page 197
    ... adopted by the Group to support calculation of its minimum credit regulatory capital requirement. The integration of this methodology into HSBC's risk processes and structures is well advanced and supports reporting on the new basis to senior management in line with the Group's IRB obligations. For...

  • Page 198
    ...established in each reporting entity is documented and reviewed by senior Finance and Credit Risk management to ensure conformity with Group policy. Homogeneous groups of loans Two methodologies are used to calculate impairment allowances where large numbers of relatively lowvalue assets are managed...

  • Page 199
    ... other than credit cards. Cases of write-off periods exceeding 360 days past due are few but arise, for example, in a few countries where local regulation or legislation constrain earlier write-off, or where the realisation of collateral for secured real estate lending extends beyond this time. In...

  • Page 200
    .... HSBC reduced exposure to banks as it tightened lending limits in response to declining credit quality. Much of this lending was instead placed into government issued or guaranteed debt, which contributed to an increase in financial investments. Loans and advances to customers in the commercial...

  • Page 201
    ... credit risk (Audited) At 31 December 2008 Maximum exposure US$m Items in the course of collection from other banks Trading assets ...- treasury and other eligible bills ...- debt securities ...- loans and advances to banks ...- loans and advances to customers ...Financial assets designated at fair...

  • Page 202
    ...the Financial Statements and an analysis by credit quality is provided on page 218. The insurance businesses held diversified portfolios of debt and equity securities designated at fair value (2008: US$20 billion; 2007: US$34 billion) and debt securities classified as financial investments (2008: US...

  • Page 203
    ...single exposure type. Corporate, commercial and financial lending, including settlement accounts, amounted to 53 per cent of total loans and advances to customers at 31 December 2008. The largest industry concentrations were in non-bank financial institutions and commercial real estate lending at 10...

  • Page 204
    ... for new originations. In HSBC USA, balances declined by 32 per cent, primarily due to the sale of US$7.0 billion of mortgage portfolios during 2008 and the fact that the majority of loan originations continued to be sold in the secondary markets. In line with HSBC's reduced risk appetite...

  • Page 205
    ... large corporates. Balances declined in France due to the sale of the regional banks in July 2008. In Hong Kong, corporate and commercial lending rose by 19 per cent, driven by higher lending in commercial, industrial and international trade, commercial real estate and other property-related sectors...

  • Page 206
    ... in the trade loans portfolio and working capital products. Loans and advances to the financial sector rose by 15 per cent with strong growth in the UK and North America, largely in collateralised lending. Lending balance were 46 per cent higher in the UK due to the increased use of secured funding...

  • Page 207
    ... ...Corporate and commercial ...Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government ...Other commercial2 ...Financial ...Non-bank financial institutions Settlement accounts ...Asset-backed securities reclassified...Total gross loans and...

  • Page 208
    ... a credit card portfolio as impaired. There has been no effect on impairment allowances. Gross loans and advances to customers by principal country within Rest of Asia-Pacific and Latin America (Audited) Commercial, international trade and other US$m Residential mortgages US$m At 31 December 2008...

  • Page 209
    ...outstandings comprise loans and advances (excluding settlement accounts), amounts receivable under finance leases, acceptances, commercial bills, CDs and debt and equity securities (net of short positions), and exclude accrued interest and intra-HSBC exposures. In-country foreign currency and cross...

  • Page 210
    ...assets being acquired. HSBC also offers loans secured on existing assets, such as first and second liens on residential property; unsecured lending products such as overdrafts, credit cards and payroll loans; and debt consolidation loans which may be secured or unsecured. At the end of February 2009...

  • Page 211
    ... to end new correspondent channel originations in Mortgage Services and limit new originations in the consumer lending business through tighter underwriting standards. Portfolio run-off, charge-off of impaired loans and the sale of US$8.2 billion of loans during 2008 from the US real estate secured...

  • Page 212
    ... Finance in North America (see page 70). Mortgage lending in HSBC USA also declined, following a series of management actions to reduce risk in the portfolio. These included closing the prime wholesale and third-party correspondent mortgage business in November 2008, selling US$7.0 billion in loans...

  • Page 213
    ... of 2008 in generating new business, and an increase at First Direct due to growth in offset mortgage lending following a similarly successful campaign. The maintenance of good credit quality in difficult market conditions is attributable to the business model pursued by HSBC in the UK. HSBC Bank...

  • Page 214
    ...) Credit risk > Areas of special interest > Mortgage lending / US personal lending above. Additionally, HSBC Bank is now benefiting from having intentionally reduced its market share in 2006 and 2007 as property prices continued to rise. The portion of mortgages with a loan to value ratio greater...

  • Page 215
    ... sold during the year. Both dollar and percentage two months and over contractual delinquency in the real estate secured portfolios of HSBC Finance and HSBC USA increased following a voluntary one month suspension of final court proceedings in foreclosure cases relating to owner-occupied properties...

  • Page 216
    ... in 2007. At HSBC USA, delinquencies rose as credit quality deterioration was experienced across the real estate secured portfolio, driven by house price depreciation and the US economic weakness. Delinquency rates of prime first lien mortgages were also affected by the sale of US$7.0 billion...

  • Page 217
    ... earlier terminated a number of dealer relationships, particularly in the Northeast of the US. Other personal lending Higher delinquency rates were experienced in the HSBC Finance unsecured lending portfolio, excluding credit cards. The increase was driven by a deterioration in credit quality due to...

  • Page 218
    ... related to loans secured on real estate. US loan modifications (Unaudited) In 2008, HSBC Finance continued to refine and expand its customer account management policies and practices. Through its ARM Reset Modification Programme, established in October 2006, HSBC Finance proactively contacts...

  • Page 219
    ...Credit quality of HSBC's lending, debt securities and other bills under previous programmes. Innovations included lowering the interest rate for qualifying customers on fixed rate loans as well as ARMs, and implementing longer term modifications, providing assistance generally for two to five years...

  • Page 220
    ... with short-term issue ratings are reported against the long-term rating of the issuer of those securities. If major rating agencies have different ratings for the same debt securities, a prudent rating selection is made in line with regulatory requirements. Additional credit quality information in...

  • Page 221
    ...overdue loans fully secured by cash collateral; mortgages that are individually assessed for impairment, and that are in arrears more than 90 days, but where the value of collateral is sufficient to repay both the principal debt and all potential interest for at least one year; and short-term trade...

  • Page 222
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Credit quality > Past due but not impaired // Impaired loans and advances > 2008 Past due but not impaired loans and advances to customers and banks by industry sector At 31 December 2008 US$m Banks ...Customers ...Personal1...

  • Page 223
    ... the end of 2007. The increase was driven by the UK where credit quality in the UK commercial portfolio deteriorated sharply in the final quarter of the year. A small number of exposures in the commercial real estate sector were particularly affected by a sharp deterioration in market conditions in...

  • Page 224
    ... ...Number of properties added to foreclosed inventory in the year/quarter ...Average loss on sale of foreclosed properties1 ...Average total loss on foreclosed properties2 ...Average time to sell foreclosed properties (days) ...9,589 20,051 13% 42% 177 customer. HSBC does not generally occupy...

  • Page 225
    ... to EL8 but excluding retail loans 90 days past due. 4 The 2007 collectively assessed impaired loans and advances for North America have been increased from US$7,963 million to US$9,241 million as a result of the reclassification of an element of a credit card portfolio as impaired. There has been...

  • Page 226
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Impairment allowances > Movements Impairment allowances on loans and advances to customers and banks by industry sector (Audited) At 31 December 2008 Individually Collectively assessed assessed Total allowances allowances ...

  • Page 227
    ...mortgages ...- other personal ...Corporate and commercial ...- commercial, industrial and international trade ...- commercial real estate and other property-related ...- other commercial ...Financial4 ...Governments ...General provisions ...Exchange... customers as a percentage of loans and advances to...

  • Page 228
    ... and international trade ...- commercial real estate and other property-related - other commercial ...Financial4 ...Exchange and other movements ...Impairment allowances at 31 December ...Impairment allowances against banks: - individually assessed ...Impairment allowances against customers...

  • Page 229
    ... statement1 ...Personal ...- residential mortgages ...- other personal ...Corporate and commercial ...- commercial, industrial and international trade ...- commercial real estate and other property-related - other commercial ...Financial4 ...Governments ...Exchange and other movements ...Impairment...

  • Page 230
    ... (Unaudited) 2008 Individually Collectively assessed assessed US$m US$m Banks ...Personal ...Residential mortgages ...Other personal ...Corporate and commercial ...Commercial, industrial and international trade ...Commercial real estate and other property-related ...Other commercial ...Financial...

  • Page 231
    ... per cent compared with 2007. This primarily reflected higher impairment charges in Global Banking and Markets following a significant charge against a single European commercial real estate corporate customer. Loan impairment charges increased by 40 per cent to US$24.1 billion from US$17.2 billion...

  • Page 232
    ... uncovered in the UK residential property market. Credit quality in the unsecured portfolios of M&S Money, HSBC Bank and Partnership Cards deteriorated slightly in 2008, particularly in the second half of the year, due to the weakening UK economy. Releases and recoveries in Europe declined by 27 per...

  • Page 233
    ... of the portfolio seasoned. Releases and recoveries in North America decreased to US$116 million. In the US consumer finance business, collection staff increased in all lending portfolios as part of the response to the deteriorating credit environment. In Latin America, new loan impairment charges...

  • Page 234
    ... their business. These risks are reviewed and managed within regulatory and internal limits for exposures by the HSBC Global Risk function, which provides highHSBC Holdings - maximum exposure to credit risk Maximum exposure 2008 2007 US$m US$m Derivatives ...Loans and advances to HSBC undertakings...

  • Page 235
    ...100 per cent). The credit quality of loans and advances to HSBC undertakings is assessed as satisfactory risk, with 100 per cent of the exposure being neither past due nor impaired (2007: 100 per cent). The long-term debt ratings of HSBC Group issuers of financial investments are within the Standard...

  • Page 236
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Risk elements / Liquidity and funding > Policies / Primary sources of funding Analysis of risk elements (Unaudited) 2008 US$m Impaired loans Europe ...Hong Kong ...Rest of Asia-Pacific ...North America1 ...Latin America ...

  • Page 237
    ...operates. HSBC's liquidity and funding management process includes: • projecting cash flows by major currency under various stress scenarios and considering the level of liquid assets necessary in relation thereto; monitoring balance sheet liquidity and advances to deposits ratios against internal...

  • Page 238
    ... upon. Advances to deposits ratio (Audited) HSBC emphasises the importance of core current accounts and savings accounts as a source of funds to finance lending to customers, and discourages reliance on short-term professional funding. This is achieved by placing limits on Group banking entities...

  • Page 239
    ..., HSBC defines liquid assets as cash balances, short-term interbank deposits and highly-rated debt securities available for immediate sale and for which a deep and liquid market exists. Contingent liquidity risk associated with committed loan facilities is not reflected in the ratios. The Group...

  • Page 240
    ...under the contingent liquidity risk limit structure (Audited) HSBC Bank 2008 2007 US$bn US$bn Conduits Client-originated assets1 ...- total lines ...- largest individual lines ...HSBC-managed assets2 ...Other conduits3 ...Single-issuer liquidity facilities - five largest4 ...- largest market sector5...

  • Page 241
    ... credit markets. As part of these plans, asset portfolios totalling US$15.3 billion were transferred from HSBC Finance to HSBC Bank USA in January 2009, resulting in US$8.0 billion of net funding benefit to HSBC Finance. HSBC Finance is eligible to participate in the US Federal Reserve's Commercial...

  • Page 242
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Liquidity and funding > HSBC Holdings // Market risk > Sensitivity / VAR HSBC Holdings (Audited) HSBC Holdings' primary sources of cash are interest and capital receipts from its subsidiaries, which it deploys in short-term bank deposits...

  • Page 243
    ...-trading portfolios include positions that arise from the interest rate management of HSBC's retail and commercial banking assets and liabilities, financial investments designated as available for sale and held to maturity, and exposures arising from HSBC's insurance operations. Market risk arising...

  • Page 244
    ...structural foreign exchange risk is monitored using sensitivity analysis. See page 429. 2 The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group VAR. The management of this risk is described on page 249. 3 Credit spread VAR is reported for the credit...

  • Page 245
    ... impact was limited as a result of managing down the market risk exposures during this period (see 'Value at risk of the trading and non-trading portfolios' below). Although the overall VAR limit for the Group was increased towards the end of 2008, as a result of the increased market volatility, the...

  • Page 246
    ... primarily managed through sensitivity limits, stress testing, and VAR for those portfolios where VAR is calculated. The Group is introducing credit spread as a separate risk type within the VAR models. At 31 December 2008, credit spread VAR was calculated for the London trading and New York credit...

  • Page 247
    ... rate risk positions to ensure they comply with interest rate risk limits established by GMB. In certain cases, the non-linear characteristics of products cannot be adequately captured by the risk transfer process. For example, both the flow from customer deposit accounts to alternative investment...

  • Page 248
    ... relates to funds that were consolidated within the Group's balance sheet as at 31 December 2008. Defined benefit pension schemes (Audited) interest rates, inflation, salary increases and the longevity of scheme members. Pension scheme assets will include equities and debt securities, the cash...

  • Page 249
    ... yield curve scenarios and the Group's current interest rate risk profile. This effect, however, does not incorporate actions that would be taken by Global Markets or in the business units to mitigate the impact of this interest rate risk. In reality, Global Markets seeks proactively to change the...

  • Page 250
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Market risk > Sensitivity of NII / Structural FX exposures / HSBC Holdings to lower deposit pricing in the event of interest rate reductions. • Residual interest rate risk is managed within Global Markets, under the Group's policy of ...

  • Page 251
    ... by its Structural Positions Review Group. A number of cross currency interest rate swaps entered into as part of HSBC Holdings' management of interest rate risk arising on certain long-term debt capital issues do not qualify for hedge accounting treatment. Changes in the market values of these...

  • Page 252
    ...69) (12) (83) (78) 23 28 53 HSBC Holdings' principal exposure to changes in its net interest income from movements in interest rates arises on short-term cash balances, floating rate loans advanced to subsidiaries and fixed rate debt capital securities in issue which have been swapped to floating...

  • Page 253
    ...Annual Report and Accounts 2007 as the principal measures used to monitor interest rate risk for HSBC Holdings. These enhanced reports are considered to be more suitable risk management measures for the longer term profile of a bank holding company balance sheet. Value at risk Total foreign exchange...

  • Page 254
    ... defined by the Group Management Board. A formal governance structure provides oversight over the management of operational risk. A Global Operational Risk and Control Committee, which reports to the Risk Management Meeting, meets quarterly to discuss key risk issues and review • • • HSBC...

  • Page 255
    ... in a defined benefit plan may arise from a number of factors, including: • investments delivering a return below that required to provide the projected plan benefits. This could arise, for example, when there is a fall in the market value of equities, or when increases in long-term interest rates...

  • Page 256
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Pension risk / Reputational risk / Sustainability risk / Insurance operations > Life business Ultimate responsibility for investment strategy rests with either the Trustees or, in certain circumstances, a Management Committee. The degree ...

  • Page 257
    ... the form of annual bonuses and a final bonus, in addition to providing cover on death. Certain minimum return levels are also guaranteed. The largest portfolio is in Hong Kong. Credit life insurance business is written to underpin banking and finance products. The policy pays a claim if the holder...

  • Page 258
    ...by the financial services industry. The report was issued in early 2009. The business is in the process of assessing the impact of the reported findings on credit protection products in the UK. Given the nature of the contracts written by the Group, the risks to which HSBC's insurance operations are...

  • Page 259
    ... December 2008 Life (non-linked) Insurance contracts with DPF1 ...Credit life ...Annuities ...Term assurance and other long-term contracts ...Total life (non-linked) ...Life (linked) ...Investment contracts with DPF 1,2 Hong Kong US$m Rest of AsiaPacific US$m North America US$m Latin America US...

  • Page 260
    ... of bonus payments to policyholders, may be taken. Expense risk is generally managed through pricing. The level of expenses in the contract will be one of the factors considered when setting premiums rates. Analysis of non-life insurance risk - net written insurance premiums1 (Audited) Hong Kong US...

  • Page 261
    ...), product design, risk selection, claims handling, investment strategy and reinsurance policy. The majority of non-life insurance contracts are renewable annually and the underwriters have the right to refuse renewal or to change the terms and conditions of the contract at that time. Balance sheet...

  • Page 262
    ...long-term insurance contracts and investment contracts with DPF. 5 Does not include assets, liabilities and shareholders' funds of associated insurance company, Ping An Insurance, or joint venture insurance companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited...

  • Page 263
    ...long-term insurance contracts and investment contracts with DPF. 2 Does not include assets, liabilities and shareholders' funds of associated insurance company, Ping An Insurance, or joint venture insurance companies, Hana Life and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited...

  • Page 264
    ... risks > Market risk Financial risks (Audited) HSBC's insurance businesses are exposed to a range of financial risks, including market risk, credit risk and liquidity risk. Market risk includes interest rate risk, equity risk and foreign exchange risk. The nature and management of these risks...

  • Page 265
    ....3 per cent) invested in equity securities. In life linked insurance, premium income less charges levied is invested in a portfolio of assets. HSBC manages the financial risks of this product on behalf of the policyholders by holding appropriate assets in segregated funds or portfolios to which the...

  • Page 266
    ... to the risk of falls in the market price of equity securities when they cannot be fully reflected in the discretionary bonuses. An increase in market volatility could also result in an increase in the value of the guarantee to the policyholder. Long-term insurance and investment products typically...

  • Page 267
    ... policyholders. Bonus rates are managed by regularly evaluating their sustainability. The effect is that a portion of the market risk is borne by the policyholder; as far as possible, matching assets to liabilities. For example, for products with annual return or capital guarantees, HSBC invests in...

  • Page 268
    ... to Group Insurance Head Office, where the reports are consolidated and reviewed by the Group Insurance Market and Liquidity Risk Meeting and the Group Stress Test Review Group. HSBC's insurance manufacturing subsidiaries identify the assets and liabilities in their financial statements whose values...

  • Page 269
    ... for sale, and consequently any changes in the fair value of these financial investments, absent impairment, would have no impact on the profit after tax. HSBC sells certain unit-linked life insurance contracts which are reinsured with a third-party. These insurance contracts include market return...

  • Page 270
    ... HOLDINGS PLC Report of the Directors: Risk (continued) Insurance operations > Financial risks > Credit risk Credit quality (Audited) The following table presents an analysis of treasury bills, other eligible bills and debt securities within HSBC's insurance business by measures of credit quality...

  • Page 271
    ...directly through the income statement. Consequently, all such balances are reported under 'neither past due nor impaired'. 2 Shareholders' funds comprise solvency and unencumbered assets. 3 Does not include treasury bills, other eligible bills and debt securities held by associated insurance company...

  • Page 272
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Insurance operations > Credit risk / Liquidity risk Issuers of treasury bills, other eligible bills and debt securities in HSBC's insurance subsidiaries (Audited) Treasury bills US$m At 31 December 2008 Governments ...Local authorities ...

  • Page 273
    ... maturing debt investments; cash resources; and cash inflows from the sale of investments. • Every quarter, HSBC's insurance manufacturing subsidiaries are required to complete and submit liquidity risk reports to Group Insurance Head Office for collation and review by the Group Insurance Market...

  • Page 274
    ... in the profits expected to emerge from the book of in-force policies at 31 December can be stress-tested to assess the ability of the life business book to withstand adverse developments. A key feature of the life insurance business is the importance of managing the assets, liabilities and risks in...

  • Page 275
    ... this scenario are in the UK, Hong Kong and Latin America. Mortality and morbidity risk is typically associated with life insurance contracts. The effect of an increase in mortality or morbidity on profit depends on the type of business being written. For a portfolio of term assurance contracts, an...

  • Page 276
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Insurance operations > PVIF // Capital management and allocation Sensitivity analysis (Audited) Effect on profit for the year to 31 December Life Non-life Total US$m US$m US$m 2008 20% increase in claims costs ...20% decrease in claims ...

  • Page 277
    ... target credit rating of AA. Regulatory capital is the capital which HSBC is required to hold as determined by the rules established by the FSA for the consolidated Group and by HSBC's local regulators for individual Group companies. An annual Group capital plan is prepared and approved by the Board...

  • Page 278
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Capital management and allocation There are also limitations on the amount of collective impairment allowances which may be included as part of tier 2 capital. For regulatory purposes, banking associates are proportionally consolidated, ...

  • Page 279
    ... to each of eight defined business lines. Both these approaches use an average of the last three financial years' revenues. Finally, the advanced measurement approach uses banks' own statistical analysis and modelling of operational risk data to determine capital requirements. HSBC has adopted the...

  • Page 280
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Capital management and allocation > Capital structure / Movement in tier 1 / RWAs Capital structure at 31 December 2008 Basel II Actual US$m (Audited) Composition of regulatory capital Tier 1 capital Shareholders' equity2 ...Minority ...

  • Page 281
    ......Opening pro-forma tier 1 capital under Basel II rules2 ...Consolidated profits attributable to shareholders of the parent company ...Dividends to shareholders ...Add back: shares issued in lieu of dividends ...Decrease/(increase) in goodwill and intangible assets deducted ...Removal of own credit...

  • Page 282
    ...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 283
    ... Corporation Limited in 1982 with responsibility for corporate planning activities. In 1992 he became Group Treasurer of HSBC Holdings plc, with responsibility for the HSBC Group's treasury and capital markets businesses globally. He has worked in Hong Kong, New York, the Middle East and London...

  • Page 284
    ... and Shanghai Banking Corporation Limited. An executive Director since 1 February 2008. Joined HSBC in 1978. Appointed a Group General Manager in 1995 and a Group Managing Director in 2005. Chairman of HSBC Bank (China) Company Limited and HSBC Global Asset Management (Hong Kong) Limited and a non...

  • Page 285
    ... business of Li & Fung has become one of the largest trading companies in Hong Kong with over 80 offices worldwide. S T Gulliver Age 49. Chief Executive of Global Banking and Markets and HSBC Global Asset Management. An executive Director since 1 May 2008. Joined HSBC in 1980. Appointed a Group...

  • Page 286
    ... Capital Markets in Asia-Pacific from 1996 to 2002. Mr Gulliver is a career banker with over 28 years' international experience with HSBC. He has held a number of key roles in the Group's operations worldwide, including in London, Hong Kong, Tokyo, Kuala Lumpur and the United Arab Emirates. Global...

  • Page 287
    ... and acquisitions, merchant banking, investment banking and financial markets. During his career he has worked in France, Germany, the UK and the USA. †J L Thornton Age 55. A non-executive Director since 1 December 2008. Non-executive Chairman and Director of HSBC North America Holdings Inc...

  • Page 288
    ... Holdings (UK) Limited and HSBC North America Holdings Inc. Chief Executive Officer, HSBC Finance Corporation and Chief Operating Officer of HSBC North America Holdings Inc. from February 2007 to 21 February 2008. Chief Operating Officer, HSBC Bank USA, N.A. from 2004 to 2006. Adviser to the Board...

  • Page 289
    ... Appointed a Group General Manager in 2003. Group General Manager, Group Credit and Risk from 2005 to September 2007. Head of Global Banking and Markets for North America from 2003 to 2005. P A Thurston Age 55. Managing Director, UK Banking. A Group Managing Director since 1 May 2008. Joined HSBC in...

  • Page 290
    ... Age 52. Group General Manager, Internal Audit. Joined HSBC in 1986. Appointed a Group General Manager in 2002. P J Lawrence Age 47. Head of Global Banking and Markets, HSBC USA. President and Chief Executive Officer, HSBC Bank USA, N.A. and HSBC USA Inc. Director of HSBC North America Holdings Inc...

  • Page 291
    ...Group Cards. Joined HSBC Finance Corporation in 1996. Appointed a Group General Manager in 2006. M S McCombe Age 42. Global Chief Executive Officer, HSBC Global Asset Management. Joined HSBC in 1987. Appointed a Group General Manager on 29 May 2008. K Newman Age 51. Director of One HSBC. Joined HSBC...

  • Page 292
    ...day running of HSBC to the Group Management Board but retains to itself approval of certain matters including operating plans and performance targets, procedures for monitoring and control of operations, the authority or the delegation of authority to approve credit, market risk limits, acquisitions...

  • Page 293
    ... 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 294
    ... 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 295
    ... hold regular meetings with institutional investors and report to the Board on those meetings. Institutional shareholders were consulted on the framework of Directors' remuneration and the proposed changes to the HSBC Share Plan which were approved at the 2008 Annual General Meeting. During 2008...

  • Page 296
    ... the UK, particularly in respect of employee share plans. Following a specific enquiry, each Director has confirmed he or she has complied with the code of conduct for transactions in HSBC Group securities throughout the year. Differences in HSBC Holdings/New York Stock Exchange corporate governance...

  • Page 297
    ..., as the principal executive officers, and to the Group Finance Director and Group Chief Accounting Officer. HSBC Holdings' Code of Ethics is available on www.hsbc.com/codeofethics or from the Group Company Secretary at 8 Canada Square, London E14 5HQ. If the Board amends or waives the provisions...

  • Page 298
    ... of internal control, compliance and risk management. The members of the Group Audit Committee throughout 2008 were, R A Fairhead (Chairman), J D Coombe and J W J Hughes-Hallett. J R Lomax was appointed a member of the Committee on 1 March 2009. S W Newton retired as a Director of HSBC Holdings and...

  • Page 299
    ... on the US mortgage services business, credit performance in the US and the impact of the tightening of liquidity in the money markets. Comprehensive reports are received at each regular meeting from the Group Chief Risk Officer, the Head of Group Compliance, the Group General Manager, Legal and...

  • Page 300
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Board of Directors > Board committees / Internal control service and has selected or influenced the choice of KPMG. All services entered into with KPMG during 2008 were pre-approved by the Committee or were entered into under pre-...

  • Page 301
    ... Annual Report and Accounts 2008. 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: established by Group Management Office...

  • Page 302
    ...Board of Directors. The key processes used by the Committee in carrying out its reviews include: regular business and operational risk assessments; regular reports from the heads of key risk functions including Internal Audit and Compliance; the production annually of reviews of the internal control...

  • Page 303
    ... Holdings ordinary shares of US$0.50 arising from the HSBC Holdings savings-related share option plans, and the HSBC Share Plan are set out in the Directors' Remuneration Report on pages 314 to 328. At 31 December 2008, the aggregate interests under the Securities and Futures Ordinance of Hong Kong...

  • Page 304
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Board of Directors > Directors' interests // Employees > Involvement / Disabled / Remuneration policy No Directors held any short position as defined in the Securities and Futures Ordinance of Hong Kong in the shares and loan ...

  • Page 305
    ...challenging career development; it is also this type of people that HSBC seeks to attract. In line with the overall principles applied to executive Directors by the Remuneration Committee as described on page 315 in the Directors' Remuneration Report: • employees' salaries are reviewed annually in...

  • Page 306
    ... HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International are all-employee share plans under which eligible HSBC employees (those employed within the Group on the first working day of the year of grant) may be granted options to acquire...

  • Page 307
    .... The closing price per HSBC Holdings ordinary share on 29 April 2008, the day before options were awarded in 2008 under the HSBC Holdings Savings-Related Share Option Plan and the HSBC Holdings Savings-Related Share Option Plan: International, was £8.71. The all-employee share option plans will...

  • Page 308
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Employees > Share plans HSBC Holdings Savings-Related Share Option Plan: International HSBC Holdings ordinary shares of US$0.50 Date of award 2 May 2002 23 Apr 2003 8 May 2003 21 Apr 2004 21 Apr 2004 10 May 2004 10 May 2004 24 May ...

  • Page 309
    ... cent of the employee's annual salary at the date of grant. The exercise price of options granted under the HSBC Share Plan, and previously under the HSBC Holdings Group Share Option Plan, is the higher of the average market value of the ordinary shares on the five business days prior to the grant...

  • Page 310
    ... price (£) 8.794 9.170 Exercisable from 21 Jun 2008 30 Sep 2008 Exercisable until 21 Jun 2009 30 Sep 2015 Subsidiary company share plans HSBC France and subsidiary company When it was acquired in 2000, HSBC France and one of its subsidiary companies, HSBC Private Bank France, operated employee...

  • Page 311
    ... HSBC Private Bank France shares will be exchanged for HSBC Holdings ordinary shares in the ratio of 1.83 HSBC Holdings ordinary shares for each HSBC Private Bank France share. At 31 December 2008, The CCF Employee Benefit Trust 2001 held 943,142 HSBC Holdings ordinary shares which may be exchanged...

  • Page 312
    ...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 313
    .... The aggregate amount set aside or accrued to provide pension, retirement or similar benefits for Directors and Senior Management for the year ended 31 December 2008 was US$1,916,120. Executive Directors and members of Senior Management are generally subject to notice periods of up to 12 months and...

  • Page 314
    ...and foremost, this is about achieving sustainable profit growth so that HSBC can continue to reward shareholders and employees, build longlasting relationships with customers and suppliers, and invest in the business and in the communities where the Group operates, for future growth. This is central...

  • Page 315
    ... security reviews to ensure measures to protect HSBC staff, buildings, assets and information are appropriate for the level of threat. Supplier payment policy The Company does not currently subscribe to any code or standard on payment practice. It is the Company's policy, however, to settle terms...

  • Page 316
    ...of Securities on The Stock Exchange of Hong Kong Limited at least 25 per cent of the total issued share capital of HSBC Holdings has been held by the public at all times during 2008 and up to the date of this Report. Dealings in HSBC Holdings shares Except for dealings as intermediaries by HSBC Bank...

  • Page 317
    ... policy (unaudited) Remuneration Committee ...Overall principles ...Application to executive Directors ...HSBC performance and market context ...Executive Director remuneration ...Salary ...Annual bonus ...Long-term incentive plan ...Funding ...Total shareholder return ...Pensions ...Share...

  • Page 318
    ...and communicated to shareholders in the 2008 Directors' Remuneration Report. These changes, which are described in this report, were made to ensure closer alignment with HSBC's business strategy. They take into account competitive market practice and follow through the Group's global reward strategy...

  • Page 319
    .... In line with this, no bonus award is being made to him in respect of 2008. In view of general conditions in the financial markets, the Group Chief Executive, M F Geoghegan, the Group Finance Director, D J Flint, and the Chief Executive of Global Banking and Markets and HSBC Global Asset Management...

  • Page 320
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Executive Directors' remuneration > Annual bonus / Long-term incentive plan overall performance of the Group, as set out above, as well as their own part of the business. For executive Directors with responsibility for Asia, performance ...

  • Page 321
    ... the average annual difference between return on invested capital and the Group's benchmark cost of capital and is expressed as a percentage. EP is a key measure of shareholder value creation as it rewards management progressively to the extent that the return on the capital invested in HSBC by its...

  • Page 322
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Executive Directors' remuneration > Long-term incentive plan / Funding Earnings per share award Growth in Earnings per Share (EPS) is measured on a point to point basis, by comparing EPS in the third financial year of the performance ...

  • Page 323
    ...the HSBC share plans comply with the Association of British Insurers' guidelines. The Company's policy to date 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...

  • Page 324
    ... three years from the date of approval of amendments to the HSBC Share Plan on 30 May 2008, whichever is the later. The executive Directors and Group Managing Directors are now required to build and retain the following shareholdings. The Remuneration Committee will monitor compliance annually. The...

  • Page 325
    ...re-election by shareholders at the Annual General Meeting in 2009, their terms of appointment will expire in 2012. Fees Non-executive Directors' fees are regularly reviewed and compared with other large international companies. The current fee, which was approved by shareholders in 2006, is £65,000...

  • Page 326
    ... and accrual of benefits under, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme - Defined Benefit Section on 31 July 2008. The rules of the Scheme provide for a lump sum payment of benefit (rather than an annual pension) and Mr Cheng received a cash retirement benefit payment of HK$46...

  • Page 327
    ...1 The transfer value represents a liability of HSBC's pension funds and not a sum paid or due to the individual; it cannot therefore meaningfully be added to annual remuneration. 2 A A Flockhart left the International Staff Retirement Benefits Scheme ('ISRBS') on 30 November 2008. The ISRBS retains...

  • Page 328
    ... shares at 31 December 2008 was £6.62. The highest and lowest market values during the year were £9.2775 and £6.1225. 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...

  • Page 329
    ... The market value per share on the date of the award, 27 May 2005, was £8.68. 3 Includes additional shares arising from scrip dividends. 4 Appointed a Director on 1 February 2008. 5 The Total Shareholder Return element of the performance conditions was not met and, under the terms of the Plan, that...

  • Page 330
    ... PLC Directors' Remuneration Report (continued) Share plans // Statement of Directors' Responsibilities Awards of Restricted Shares HSBC Share Plan (Audited) HSBC Holdings ordinary shares of US$0.50 Year in which awards may vest 2011 2010 2011 20095 2009-20105 2009-20115 Awards held on date...

  • Page 331
    ... Auditor in relation to the financial statements. The Directors are responsible for preparing the Annual Report, the consolidated financial statements of HSBC Holdings and its subsidiaries (the 'Group') and holding company financial statements for HSBC Holdings (the 'parent company') in accordance...

  • Page 332
    ...the company's compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board's statements on internal control cover all risks and controls...

  • Page 333
    ...' Remuneration Report to be audited. Opinion In our opinion: • • the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group's affairs as at 31 December 2008 and of its profit for the year then ended; the parent company...

  • Page 334
    ... ...HSBC Holdings balance sheet ...HSBC Holdings statement of changes in total equity ...HSBC Holdings cash flow statement ...Notes on the Financial Statements 1 Basis of preparation ...2 Summary of significant accounting policies ...3 Net income from financial instruments designated at fair value...

  • Page 335
    ... ...Loan impairment charges and other credit risk provisions ...Net operating income ...Employee compensation and benefits ...General and administrative expenses ...Depreciation and impairment of property, plant and equipment ...Goodwill impairment ...Amortisation and impairment of intangible assets...

  • Page 336
    ... AND EQUITY Liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue ...Retirement benefit...

  • Page 337
    ... fair value (gains)/losses transferred to income statement ...Share of changes in equity of associates and joint ventures ...Exchange differences ...Actuarial gains/(losses) on defined benefit plans ...(23,722) (1,316) 1,779 (1,720) 1,754 (559) (12,205) (1,609) (37,598) Tax on items taken directly...

  • Page 338
    ... HOLDINGS PLC Financial Statements (continued) Consolidated cash flow statement / HSBC Holdings balance sheet Consolidated cash flow statement for the year ended 31 December 2008 Notes Cash flows from operating activities Profit before tax ...Adjustments for: - non-cash items included in profit...

  • Page 339
    HSBC Holdings balance sheet at 31 December 2008 Notes ASSETS Cash at bank and in hand: - balances with HSBC undertakings ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Investments in subsidiaries ...Property, plant and equipment ...Other assets ...Deferred tax ...

  • Page 340
    ... in equity / Cash flow statement HSBC Holdings statement of changes in total equity for the year ended 31 December 2008 2008 US$m Called up share capital At 1 January ...Shares issued under employee share plans ...Shares issued in lieu of dividends ...At 31 December ...Share premium account At...

  • Page 341
    HSBC Holdings cash flow statement for the year ended 31 December 2008 Notes Cash flows from operating activities Profit before tax ...Adjustments for: - non-cash items included in profit before tax ...- change in operating assets ...- change in operating liabilities ...- elimination of exchange ...

  • Page 342
    ... IFRS 7 relating to the fair value of financial instruments have been included in the audited section of 'Report of the Directors: Impact of market turmoil' on pages 144 to 187. In publishing the parent company financial statements here together with the Group financial statements, HSBC Holdings has...

  • Page 343
    ... of acquisition is less than the fair value of HSBC's share of the identifiable assets, liabilities and contingent liabilities of the business acquired, the difference is recognised immediately in the income statement. Entities that are controlled by HSBC are consolidated until the date that control...

  • Page 344
    ... statements of HSBC Holdings. IFRIC 13 'Customer Loyalty Programmes' ('IFRIC 13') was issued on 28 June 2007 and is effective for annual periods beginning on or after 1 July 2008. IFRIC 13 addresses how companies that grant their customers loyalty award credits (often called 'points') when buying...

  • Page 345
    ...the non-controlling interests' proportionate share of the net identifiable assets of the entity acquired. The effect that the changes will have on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings will depend on the incidence and timing of business...

  • Page 346
    ... fair value', except for interest arising from debt securities issued, and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'. Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for equity...

  • Page 347
    ... four customer groups: Personal Financial Services; Commercial Banking; Global Banking and Markets; and Private Banking. The main items reported in the 'Other' segment are certain property activities, unallocated investment activities, centrally held investment companies and HSBC's holding company...

  • Page 348
    ...a fair value adjustment for the hedged risk only. For certain leveraged finance and syndicated lending activities, HSBC may commit to underwrite loans on fixed contractual terms for specified periods of time, where the drawdown of the loan is contingent upon certain future events outside the control...

  • Page 349
    ..., and make payments in, the currency of the loan if not denominated in local currency; and when available, the secondary market price of the debt. Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the...

  • Page 350
    ... in housing markets and interest rates, portfolio seasoning, account management policies and practices, current levels of write-offs, changes in laws and regulations and other items which can affect customer payment patterns on outstanding loans, such as natural disasters. These risk factors, where...

  • Page 351
    ... rate risk management strategy. An accounting mismatch would arise if the debt securities issued were accounted for at amortised cost, because the related derivatives are measured at fair value with changes in the fair value recognised in the income statement. By designating the long-term debt...

  • Page 352
    ... life. Premiums and/or discounts arising on the purchase of dated investment securities are included in the calculation of their effective interest rates. Dividends are recognised in the income statement when the right to receive payment has been established. At each balance sheet date an assessment...

  • Page 353
    ..., the decline in the fair value of the financial asset is recognised directly in equity. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the...

  • Page 354
    ... in a fair value, cash flow or net investment hedge provided certain criteria are met. Hedge accounting At the inception of a hedging relationship, HSBC documents the relationship between the hedging instruments and the hedged items, its risk management objective and its strategy for undertaking...

  • Page 355
    ... 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 356
    ... the present value of in-force long-term insurance business, computer software, trade names, mortgage servicing rights, customer lists, core deposit relationships, credit card customer relationships and merchant or other loan relationships. Intangible assets are subject to impairment review if there...

  • Page 357
    ...when HSBC has a legal right to offset. Deferred tax relating to actuarial gains and losses on post-employment benefits is recognised directly in equity. Deferred tax relating to fair value remeasurement of available-for-sale investments and cash flow hedging instruments which are charged or credited...

  • Page 358
    ... pension costs and the present value of defined benefit obligations are calculated at the reporting date by the schemes' actuaries using the Projected Unit Credit Method. The net charge to the income statement mainly comprises the current service cost, plus the unwinding of the discount rate on plan...

  • Page 359
    ... statements, the assets, including related goodwill where applicable, and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated into the Group's presentation currency at the rate of exchange ruling at the balance sheet date...

  • Page 360
    ... liability adequacy test, all contractual cash flows are discounted and compared with the carrying value of the liability. When a shortfall is identified it is charged immediately to the income statement. Present value of in-force long-term insurance business The value placed on insurance contracts...

  • Page 361
    ... investment management services are provided. (z) Debt securities issued and deposits by customers and banks Financial liabilities are recognised when HSBC enters into the contractual provisions of the arrangements with counterparties, which is generally on trade date, and initially measured at fair...

  • Page 362
    ... under investment contracts ...- HSBC's long-term debt issued and related derivatives ...- changes in own credit spread on long-term debt ...- derivatives managed in conjunction with HSBC's issued debt securities - other changes in fair value ...- other financial liabilities designated at fair value...

  • Page 363
    ... premiums ...Reinsurers' share of gross earned premiums ...Net earned insurance premiums ...1,776 58 1,834 (260) (3) (263) 1,571 Life insurance (non-linked) US$m 6,257 (171) 6,086 (878) 27 (851) 5,235 Life insurance (linked) US$m 1,825 - 1,825 (564) (19) (583) 1,242 Investment contracts with DPF1...

  • Page 364
    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 Non-life insurance US$m 2008 Claims, benefits and surrenders paid ...Movement in liabilities ...Gross claims incurred and movement in ...

  • Page 365
    ...not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ...Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ...Gains/(losses...

  • Page 366
    ... used to calculate the defined benefit obligations and related current service costs vary according to the economic conditions of the countries in which they are situated. The largest plan exists in the UK, where the HSBC Bank (UK) Pension Scheme covers employees of HSBC Bank plc and certain...

  • Page 367
    ... benefit payments from the principal plan. The asset allocation for this strategy is: % Equities ...Bonds ...Alternative assets1 ...Property ...Cash ...15.0 50.0 10.0 10.0 15.0 100.0 1 Alternative assets include emerging market bonds, loans, and infrastructure assets. At 31 December 2008, this...

  • Page 368
    ...In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The Hongkong and Shanghai Banking Corporation and certain other employees of HSBC Group. The scheme comprises a funded defined benefit scheme (which provides a lump sum on retirement but is now closed to...

  • Page 369
    ... to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2008, were as follows. These assumptions will also form the basis for measuring periodic costs under the plans in 2009: Healthcare cost trend Discount rate % UK2 ...Hong Kong...

  • Page 370
    ... of long-term future asset returns, which takes into account historical market returns plus additional factors such as the current rate of inflation and interest rates. Mortality assumptions are increasingly significant in measuring the Group's obligations under its defined benefit pension and...

  • Page 371
    ... principal plan: HSBC Bank (UK) Pension Scheme 2008 2007 US$m US$m Discount rate Change in pension obligation at year end from a 25bps increase ...Change in pension obligation at year end from a 25bps decrease ...Change in 2009 pension cost from a 25bps increase ...Change in 2009 pension cost from...

  • Page 372
    ... rates of return and plan assets used to measure the net defined benefit pension costs in each subsequent year. HSBC Bank (UK) Pension Scheme 2008 Expected rates of return % Fair value of plan assets ...Equities ...Bonds ...Property ...Other ...Defined benefit obligation ...Present value of funded...

  • Page 373
    ...5,149 3,093 Total expense recognised in the income statement in 'Employee compensation and benefits' HSBC Bank (UK) Pension Scheme 2008 2007 2006 US$m US$m US$m Current service cost ...Interest cost ...Expected return on plan assets ...Past service cost ...Gains on curtailments ...(Gains)/losses on...

  • Page 374
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 8 Summary 2008 US$m Defined benefit obligation ...Fair value of plan assets ...Net deficit ...Experience gains/(losses) on plan liabilities ...Experience gains/(losses) on plan assets ...Gains/(losses) from changes in actuarial ...

  • Page 375
    ... - 146 The actual return on plan assets for the year ended 31 December 2008 was a negative return of US$2 million (2007: positive US$7 million). HSBC expects to make US$4 million (2007: US$18 million) of contributions to post-employment healthcare benefit plans during 2009. Benefits expected to be...

  • Page 376
    ... number of persons employed by HSBC Holdings during 2008 was 730 (2007: 595). 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 377
    ... on IT security and business continuity and performing agreed-upon IT testing procedures. 6 Including fees payable to KPMG for transaction-related work, including US debt issuances. 7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of...

  • Page 378
    ...consolidated basis for HSBC Group. 10 Share-based payments During 2008, US$819 million was charged to the income statement in respect of share-based payment transactions settled in equity (2007: US$870 million; 2006: US$854 million). This expense, which was computed from the fair values of the share...

  • Page 379
    ... or as a part-deferral of annual bonuses. Shares are awarded without corporate performance conditions and generally vest between one and three years from the date of award, providing the employees have remained continually employed by HSBC for this period. 2008 Number (000s) Outstanding at 1 January...

  • Page 380
    ...Hong Kong dollars or euros), with the option to use the savings to acquire shares. The aim of the plans is to align the interests of all employees with the creation of shareholder value. The options are exercisable within three months following the first anniversary of the commencement of a one-year...

  • Page 381
    ... as part-deferral of annual bonuses or for recruitment purposes. Shares were awarded without corporate performance conditions and generally vest between one and three years from the date of award, providing the employees have remained continuously employed by HSBC for the period. 2008 Number (000s...

  • Page 382
    ... a long-term incentive plan under which certain senior HSBC employees were awarded share options before the adoption of the HSBC Holdings Group Share Option Plan in 2000. The aim of the plan was to align the interests of those higher performing senior employees with the creation of shareholder value...

  • Page 383
    ...2007: US$18.08). The remaining contractual life for options outstanding at the balance sheet date was 1.3 years (2007: 2.3 years). At the date of its acquisition in 2000, certain of HSBC France's subsidiary companies also operated employee share option plans under which options could be granted over...

  • Page 384
    ... deferred tax assets and liabilities at 31 December 2007. It gave rise to a credit to the Group's tax charge of US$28 million in 2007. Deferred taxation HSBC 2008 US$m At 1 January ...Income statement credit ...Equity: - available-for-sale investments ...- cash flow hedges ...- share-based payments...

  • Page 385
    ... deferred tax assets and liabilities: 2008 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 temporary differences...

  • Page 386
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 11, 12, 13 and 14 HSBC Holdings Deferred tax asset/(liability) 2008 2007 US$m US$m Temporary differences: - short-term timing differences ...- fair valued assets and liabilities ...- share-based payments ...1 30 11 42 1 (14) 20 ...

  • Page 387
    ... of intra-HSBC capital and funding structures. By geographical region Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East, HSBC Finance and HSBC Bank USA, by the...

  • Page 388
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 14 By geographical region Profit before tax Year ended 31 December 2008 Rest of AsiaNorth Latin Pacific America America US$m US$m US$m 11,517 (6,024) 5,493 3,154 (596) 2,558 1,823 621 2,444 25,897 (10,679) 15,218 6,292 (1,065) 5,...

  • Page 389
    ... of intangible assets ...Total operating expenses ...Operating profit ...Share of profit in associates and joint ventures ...Profit before tax ...1 Hong Kong US$m 12,580 (7,097) 5,483 3,860 (498) 3,362 1,270 (28) 1,242 Year ended 31 December 2007 Rest of AsiaNorth Latin Pacific America America US...

  • Page 390
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 14 By geographical region (continued) Profit before tax Year ended 31 December 2006 Rest of AsiaNorth Latin Pacific America America US$m US$m US$m 7,693 (4,646) 3,047 1,912 (290) 1,622 935 246 1,181 27,959 (13,691) 14,268 5,611 (...

  • Page 391
    ...incurred on property, plant and equipment and intangible assets By customer groups and global businesses Total assets At 31 December 2008 US$m % Personal Financial Services ...Commercial Banking ...Global Banking and Markets ...Private Banking ...Other ...Intra-HSBC items ...Total assets ...514,419...

  • Page 392
    ... (excluding goodwill impairment) ...Goodwill impairment ...Operating profit/(loss) ...Share of profit in associates and joint ventures ...Profit/(loss) before tax ...Capital expenditure incurred3 ...2 Year ended 31 December 2008 Global Banking Private & Markets Banking Other US$m US$m US$m 8,541...

  • Page 393
    ... ...Loan impairment charges and other credit risk provisions ...Net operating income2 ...Operating expenses ...Operating profit ...Share of profit in associates and joint ventures ...Profit before tax ...Capital expenditure incurred ...3 1 Commercial Banking US$m 9,055 3,972 265 31 296 Year ended...

  • Page 394
    ... credit risk provisions ...Net operating income ...Operating expenses ...Operating profit/(loss) ...Share of profit in associates and joint ventures ...Profit/(loss) before tax ...Capital expenditure incurred3 ...2 1 Commercial Banking US$m 7,514 3,207 204 20 224 Year ended 31 December 2006 Global...

  • Page 395
    ...Total financial assets ... Financial liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue...

  • Page 396
    ...89,939 13,893 Financial liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue ...Other...

  • Page 397
    HSBC Holdings At 31 December 2008 Financial assets and liabilities at amortised cost US$m 443 - - - 25 468 Held for Designated trading at fair value US$m US$m Financial assets Cash at bank and in hand ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Other assets...

  • Page 398
    ... The following table provides an analysis of trading securities: Fair value 2008 US$m US Treasury and US Government agencies1 ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities2 ...Corporate debt and other securities ...Equity securities ...26,621 10,586 6,648...

  • Page 399
    ... 20,047 41,378 178 8 41,564 Securities designated at fair value Fair value 2008 US$m US Treasury and US Government agencies1 ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities2 ...Corporate debt and other securities ...Equities ...93 992 284 3,624 6,492 5,099 10...

  • Page 400
    ...million of investments listed in Hong Kong (2007: US$1,502 million). 18 Derivatives Fair values of derivatives by product contract type held by HSBC Trading US$m At 31 December 2008 Foreign exchange ...Interest rate ...Equities ...Credit derivatives ...Commodity and other ...Total fair values ...At...

  • Page 401
    ... of generating profits from short-term fluctuations in price or margin. Positions may be traded actively or be held over a period of time to benefit from expected changes in exchange rates, interest rates, equity prices or other market parameters. Trading includes market-making, positioning and...

  • Page 402
    ... bought and sold this should not be interpreted as representing the open risk position. The credit derivative business operates within the market risk management framework described on pages 241 to 251. Derivatives valued using models with unobservable inputs The difference between the fair value...

  • Page 403
    ...-rate long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are recognised in the income statement. If the hedge relationship...

  • Page 404
    ...in limited circumstances. Hedging is undertaken using forward foreign exchange contracts which are accounted for as hedges of a net investment in a foreign operation, or by financing with borrowings in the same currencies as the functional currencies involved. At 31 December 2008, the fair values of...

  • Page 405
    ...,186 114,955 8,405 279,593 At 31 December 2006 US Treasury ...US Government agencies1 ...US Government sponsored entities1 ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities2 ...Corporate debt and other securities ...Equities ...10,219 6,004 14,010 7,515 1,085 37...

  • Page 406
    ... The fair value of the debt securities issued by banks and other financial institutions was US$141,526 million (2007: US$143,023 million; 2006: US$86,596 million). Treasury and other eligible bills availablefor-sale US$m Carrying amount at 31 December 2008 Listed on a recognised exchange ...Unlisted...

  • Page 407
    ...yields of investment debt securities as at 31 December 2008: 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 debt and...

  • Page 408
    ... relate to loans, credit cards, debt securities and trade receivables that have been securitised under arrangements by which HSBC retains a continuing involvement in such transferred assets. Continuing involvement may entail retaining the rights to future cash flows arising from the assets...

  • Page 409
    ...HSBC is assisting in the development of financial and operating policies and a number of staff have been seconded to assist in this process. The statutory accounting reference date of Bank of Communications Co., Limited, Ping An Insurance (Group) Company of China, Limited and Industrial Bank Company...

  • Page 410
    ... Board of Directors. HSBC disposed of its equity interest in Financiera Independencia on 25 November 2008. HSBC acquired 15 per cent of Vietnam Technological & Commercial Joint Stock Bank in October 2007. This investment was equity accounted from that date due to HSBC's representation on the Board...

  • Page 411
    ... rate used increased as observed market discount rates increased for US consumer finance and banking businesses. Impairment testing Timing of impairment testing HSBC's impairment test in respect of goodwill allocated to each CGU is performed as at 1 July each year. In line with the accounting policy...

  • Page 412
    ... because of the long-term perspective within the Group of the business units making up the CGUs. However, due to the economic downturn in Personal Financial Services - North America, a 10 year cash flow projection was used. Key assumptions in VIU calculation and management's approach to determining...

  • Page 413
    ... Financial Services - Latin America. The present value of in-force long-term insurance business Movement on the PVIF 2008 US$m At 1 January ...Value of new business written during the year ...Acquisition of subsidiaries or portfolios ...Movement from in-force business (including investment return...

  • Page 414
    ...of risk discount rates applied. Other intangible assets The analysis of the movement of intangible assets, excluding the PVIF, was as follows: Mortgage servicing rights US$m 1,202 158 - - - - 1,360 Internally generated software US$m 3,473 764 - (43) (561) (204) 3,429 Customer/ merchant relationships...

  • Page 415
    23 Property, plant and equipment HSBC Property, plant and equipment Freehold land and buildings US$m Cost or fair value At 1 January 2008 ...Additions at cost4 ...Acquisition of subsidiaries ...Fair value adjustments ...Disposals ...Reclassified from/(to) held for sale ...Transfers ...Exchange ...

  • Page 416
    ...). In the normal course of business, HSBC provided finance to Metrovacesa in respect of the debt element of this transaction at arm's length market rates in the form of a bridging loan of £810 million (US$1,601 million) secured by a charge on the property. The equity portion of £280 million (US...

  • Page 417
    ...HSBC does not have the majority of the risks and rewards of ownership. Investment properties are valued on an open market value basis as at 31 December each year by independent professional valuers who have recent experience in the location and type of properties. Investment properties in Hong Kong...

  • Page 418
    ... Holdings At 31 December 2008 HSBC's Issued interest in Country of equity incorporation equity capital capital % or registration Europe HFC Bank Limited ...HSBC Global Asset Management (UK) Limited (formerly HSBC Investments (UK) Limited) ...HSBC Asset Finance (UK) Limited ...HSBC Bank A.S...HSBC...

  • Page 419
    ... Bank Middle East Limited which operates mainly in the Middle East and HSBC Life (International) Limited which operates mainly in Hong Kong. Subsidiaries which experience significant restrictions on their ability to transfer funds to HSBC in the form of cash dividends or to repay loans and advances...

  • Page 420
    ... 2008. The Group's pre-tax profit on sale was US$2.4 billion. The following assets and liabilities were attributable to the disposal of the French regional banks: US$m Cash ...Loans and advances to banks and customers ...Other assets ...Total assets ...Deposits by banks ...Customer accounts ...Other...

  • Page 421
    ... in fair value attributable to changes in credit risk was a gain of US$563 million (2007: gain of US$34 million). 27 Financial liabilities designated at fair value HSBC 2008 US$m Deposits by banks and customer accounts ...Liabilities to customers under investment contracts ...Debt securities in...

  • Page 422
    ... are managed on a fair value basis as part of HSBC's interest rate risk management policies. The hedged portion of these debt securities is presented within the balance sheet caption 'Financial liabilities designated at fair value', with the remaining portion included within 'Trading liabilities...

  • Page 423
    ...,013 HSBC Holdings 2008 US$m - - 1,795 - 21 1,816 2007 US$m - - 1,393 - 12 1,405 30 Liabilities under insurance contracts Gross US$m At 31 December 2008 Non-life insurance liabilities Unearned premium provision ...Notified claims ...Claims incurred but not reported ...Other ...Reinsurers' share US...

  • Page 424
    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 Gross US$m 2008 Unearned premium reserve ('UPR') At 1 January ...Changes in UPR recognised as (income)/...

  • Page 425
    ... insurance liabilities to policyholders Gross US$m 2008 Life (non-linked) At 1 January ...Benefits paid ...Increase in liabilities to policyholders ...Exchange differences and other movements ...At 31 December ...Investment contracts with discretionary participation features At 1 January ...Benefits...

  • Page 426
    ...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$334 million (2007: US$391 million). These relate to labour and overtime litigation claims brought by employees after leaving the bank...

  • Page 427
    ...over par. Interest rates on the floating rate loan capital are related to interbank offered rates. On the remaining subordinated loan capital, interest is payable at fixed rates up to 10.176 per cent. 1 See 'Step-up perpetual preferred securities' below, note (a) 'Guaranteed by HSBC Holdings'. 2 See...

  • Page 428
    ...were onlent to HSBC Bank by the limited partnerships by issue of subordinated notes. The preferred securities qualify as innovative tier 1 capital for HSBC and for HSBC Bank on a solo and consolidated basis and, together with the guarantee, are intended to provide investors with rights to income and...

  • Page 429
    ...substituted by preference shares of HSBC Bank having economic terms which are in all material respects equivalent to those of the preferred securities and the guarantee taken together. HSBC Holdings 2008 US$m Subordinated liabilities: - At amortised cost ...- Designated at fair value (Note 27) ...14...

  • Page 430
    ... at fair value ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other financial assets ...4,735 146,268 407,582 111,027 27,642 697,254 Liabilities Deposits by banks ...Customer accounts ...Financial liabilities designated at fair value ...Debt securities...

  • Page 431
    ... 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 is discussed in the 'Report of the Directors: Risk' on...

  • Page 432
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 34, 35, 36 and 37 Net structural foreign exchange exposures 2008 US$m Currency of structural exposure Euro ...Pound sterling ...Chinese renminbi ...Mexican pesos ...Hong Kong dollars ...UAE dirhams ...Canadian dollars ......

  • Page 433
    ...2,481 1 The Series B preferred stock is redeemable at the option of HSBC Finance Corporation, in whole or in part, from 24 June 2010 at par. 2 The Series F preferred stock is redeemable at par at the option of HSBC USA Inc., in whole or in part, on any dividend payment date on or after 7 April 2010...

  • Page 434
    ... to ordinary shareholders of £10 million in respect of each ordinary share held by them. Other equity instruments On 9 April 2008, HSBC Holdings issued, in bearer form, 88 million 8.125 per cent Perpetual Subordinated Capital Securities ('Capital Securities'), each with a par value of US...

  • Page 435
    ... rank. At the Company's discretion, and subject to certain conditions being satisfied, the Capital Securities may be exchanged on any coupon payment date for non-cumulative preference shares to be issued by HSBC Holdings and which would rank pari passu with the dollar preference shares in issue at...

  • Page 436
    ... shares, derived from the London Stock Exchange Daily Official List, for the five business days preceding the closing date of the acquisition. During 2008, options over 12,847 HSBC Holdings ordinary shares were exercised (2007: 377,046) and delivered from the HSBC (Bank of Bermuda) Employee Benefit...

  • Page 437
    ... over HSBC Holdings ordinary shares under the Bank of Bermuda share plans were as follows: Number of HSBC Holdings ordinary shares 31 December 2008 ...31 December 2007 ...31 December 2006 ...2,205,321 2,314,083 2,710,368 Period of exercise 2009 to 2013 2008 to 2013 2007 to 2013 Exercise price US...

  • Page 438
    ... ...Capital securities issued5 ...Profit for the year ...Dividends to shareholders ...Own shares adjustment ...Share of changes recognised directly in the equity of associates or joint ventures ...Actuarial losses on defined benefit plans ...Exchange differences ...Fair value losses taken to equity...

  • Page 439
    ... ...Share of changes recognised directly in the equity of associates or joint ventures ...Actuarial gains/(losses) on defined benefit plans ...Exchange differences ...Fair value gains taken to equity ...Amounts transferred to the income statement3 ...Impairments taken to the income statement...

  • Page 440
    ... ...Share of changes recognised directly in the equity of associates or joint ventures ...Actuarial gains/(losses) on defined benefit plans ...Exchange differences ...Fair value gains taken to equity ...Amounts transferred to the income statement3 ...Impairments taken to the income statement...

  • Page 441
    ... in associates.. Revaluations on investment property ...Share-based payment expense ...Loan impairment losses gross of recoveries and other credit risk provisions ...Provisions ...Impairment of financial investments ...Charge for defined benefit plans ...Accretion of discounts and amortisation of...

  • Page 442
    ... security ...Other contingent liabilities ...HSBC Holdings 2008 US$m 2007 US$m 2007 US$m 72,895 259 73,154 77,885 334 78,219 47,341 - 47,341 38,457 - 38,457 Commitments Documentary credits and short-term trade-related transactions ...Forward asset purchases and forward forward deposits...

  • Page 443
    ... with HSBC's overall credit risk management policies and procedures. Approximately half of the above guarantees have a term of less than one year. Guarantees with terms of more than one year are subject to HSBC's annual credit review process. Financial Services Compensation Scheme The UK Financial...

  • Page 444
    ... at the balance sheet date. Operating lease commitments At 31 December 2008, HSBC was obligated under a number of non-cancellable operating leases for properties, plant and equipment on which the future minimum lease payments extend over a number of years. 2008 Land and buildings US$m Future...

  • Page 445
    ... income statement. Operating lease receivables HSBC leases a variety of different assets to third parties under operating lease arrangements, including transport assets (such as rolling stock), property and general plant and machinery. 2008 Land and buildings US$m Future minimum lease payments under...

  • Page 446
    ... Securities. Various non-US HSBC group companies provide custodial, administration and similar services to a number of funds incorporated outside the United States of America whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008...

  • Page 447
    ... of Directors and other Key Management Personnel 2008 US$m Short-term employee benefits ...Post-employment benefits ...Termination benefits ...Share-based payments ...31 5 - 16 52 HSBC 2007 US$m 62 4 9 40 115 2006 U$m 76 3 - 61 140 Transactions, arrangements and agreements involving related parties...

  • Page 448
    ...the same terms, including interest rates and security, as for comparable transactions with third-party counterparties. Post-employment benefit plans At 31 December 2008, US$3.5 billion (2007: US$4.1 billion) of HSBC post-employment benefit plan assets were under management by HSBC companies. Fees of...

  • Page 449
    ...by a separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure in relation to the scheme is made in Note 8 to the accounts. 44 Events after the balance sheet date A fourth interim dividend for 2008 of US$0.10...

  • Page 450
    ... equity security holders ...Fourth interim dividend for 2008 ...Interim dividends for 2009 ...Dividends on the ordinary shares of HSBC Holdings ...Nature of trading market ...Shareholder profile ...Memorandum and Articles of Association ...Annual General Meeting ...Interim Management Statements...

  • Page 451
    ... of new shares in lieu of a cash dividend. Nature of trading market HSBC Holdings ordinary shares are listed or admitted to trading on the London Stock Exchange, the Hong Kong Stock Exchange ('HKSE'), Euronext Paris, the New York Stock Exchange ('NYSE') and the Bermuda Stock Exchange. HSBC Holdings...

  • Page 452
    ...11.4 14.8 15.2 14.3 1 In New York each ADS represents 5 underlying ordinary shares. 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 HSBA 5 HBC HSB...

  • Page 453
    ...any company promoted by HSBC Holdings or in which HSBC Holdings is otherwise interested or as regards which HSBC Holdings has any powers of appointment; and shall not be liable to account to HSBC Holdings for any profit, remuneration or other benefit realised by any such office, employment, contract...

  • Page 454
    ...Watson Wyatt Limited; HSBC Group Hong Kong Local Staff Retirement Benefit Scheme: Estella Chiu, Fellow of the Society of Actuaries of the United States of America, of HSBC Insurance (Asia) Limited, a subsidiary of HSBC Holdings; and HSBC North America (US) Retirement Income Plan: Jennifer Jakubowski...

  • Page 455
    ...Middle East and 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...

  • Page 456
    ...relations Enquiries relating to HSBC's strategy or operations may be directed to: Manager Investor Relations HSBC Holdings plc 8 Canada Square London E14 5HQ UK Telephone: 44 (0)20 7991 8041 Facsimile: 44 (0)20 7991 4663 Email: [email protected] Investor Relations Officer HSBC North America...

  • Page 457
    ... 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 458
    ...special tax rules, such as banks, taxexempt entities, insurance companies, dealers in securities or currencies, persons that hold shares or ADSs as part of an integrated investment (including a 'straddle') comprised of a share or ADS and one or more other positions, and persons that own, directly or...

  • Page 459
    .... History and development of HSBC 1865 The founding member of the HSBC Group, The Hongkong and Shanghai Banking Corporation, is established in both Hong Kong and Shanghai. 1959 The Mercantile Bank of India Limited and The British Bank of the Middle East, now HSBC Bank Middle East Limited, are...

  • Page 460
    ...Shareholder Information (continued) History and development / Organisational chart 1987 A 14.9 per cent interest in Midland Bank plc, now HSBC Bank plc, one of the UK's principal clearing banks, is purchased. 1991 HSBC Holdings plc is established as the parent company of the HSBC Group. 1992 HSBC...

  • Page 461
    HSBC HOLDINGS PLC Organisational structure 459

  • Page 462
    ... Long-term equity investments accounted for using the equity method Lendings Long-term debt Par value Non-recurring Common stock A line of credit, contractually repayable on demand unless a fixed-term has been agreed, established through a customer's current account Preferred stock Real estate...

  • Page 463
    ... Cash-generating unit Constant Net Asset Value Combined Code on Corporate Governance issued by the Financial Reporting Council Commercial paper Consumer price index Customer risk rating Cullinan Finance Ltd, a structured investment vehicle managed by HSBC Decision One Mortgage Company, HSBC Finance...

  • Page 464
    ... Basel II Directors and Group Managing Directors of HSBC Holdings Key performance indicator KPMG Audit Plc and its affiliates London Interbank Offer Rate Losango Promoções e Vendas Ltda, the Brazilian consumer finance company acquired in December 2003 Bernard L Madoff Investment Securities LLC...

  • Page 465
    ...a foreign operation New York Stock Exchange Office of Fair Trading (UK) Over-the-counter Awards of HSBC Holdings ordinary shares under employee share plans that are subject to corporate performance conditions Ping An Insurance (Group) Company of China, Limited, the second-largest life insurer in the...

  • Page 466
    ... Customer groups and global businesses 67, 84 Daily distribution of revenues 243 Dealings in HSBC Holdings plc shares 314 Debt securities in issue 210, 420 accounting policy 359 rating agency designation 175 Deferred tax 66 Defined terms inside front cover Deposits average balances and average rates...

  • Page 467
    ... assets 409 critical accounting policy 63 Governance codes 294 HSBC Holdings/New York Stock Exchange corporate governance differences 294 Group Chairman's Statement 8 Group Management Board 296 Health and safety 313 History and development of HSBC 457 Hong Kong balance sheet data 99, 104 business...

  • Page 468
    ...to credit risk 197 Memorandum and Articles of Association 451 Minority interests 431 Money market funds 179 Monoline insurers 158 Mortgage lending 210, 211, 213 Nomination committee 298 Non-interest income accounting policy 344 Non-life insurance business 256 Non-trading portfolios 245 North America...

  • Page 469
    ...reported profit 111, 114 Risk elements in loan portfolio 233 Risk management 150, 191 capital management and allocation 274 contingent liquidity 238 credit 192 credit spread 244, 245 insurance operations 262 legal 252 liquidity and funding management 235 market 241 operational 252 pension 253 rating...

  • Page 470
    HSBC HOLDINGS PLC Incorporated in England on 1 January 1959 with limited liability under the UK Companies Act Registered in England: number 617987 REGISTERED OFFICE AND GROUP MANAGEMENT OFFICE 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 (0) 20 7991 8888 Facsimile: 44 (0) 20 7992 4880...

  • Page 471
    ... by Group 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 Crayford Limited, Kent, UK, on Revive 100 Offset...

  • Page 472
    HSBC Holdings plc 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 020 7991 8888 Facsimile: 44 020 7992 4880 www.hsbc.com