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Strong, steadfast, sustainable
www.hsbc.com
HSBC Holdings plc
Annual Report and Accounts 2009

Table of contents

  • Page 1
    HSBC Holdings plc Annual Report and Accounts 2009 Strong, steadfast, sustainable www.hsbc.com

  • Page 2
    ... customer groups and global businesses: Personal Financial Services (including consumer finance); Commercial Banking; Global Banking and Markets; and Private Banking. Certain defined terms Unless the context requires otherwise, 'HSBC Holdings' means HSBC Holdings plc and 'HSBC' or the 'Group' means...

  • Page 3
    ... Corporate governance report ...Directors and senior management ...Board of Directors ...Employees ...294 294 302 318 Corporate sustainability ...Share capital ...Dividends, shareholders and meetings ...326 328 331 Directors' Remuneration Report1 ...334 Statement of Directors' Responsibilities...

  • Page 4
    ... per cent and tier 1 ratio of 10.8 per cent. • Rights issue • In April 2009, HSBC Holdings raised £12.5 billion (US$17.8 billion), net of expenses, by way of a fully underwritten rights issue, offering its shareholders 5 new ordinary shares for every 12 ordinary shares at a price of 254 pence...

  • Page 5
    ....6 4.87 Share information at the year-end 2009 US$0.50 ordinary shares in issue (million) ...Market capitalisation (billion) ...Closing market price per ordinary share:6 - London ...- Hong Kong ...Closing market price per American Depositary Share7 ...Over 1 year HSBC total shareholder return to 31...

  • Page 6
    ... assets ...Return on average total shareholders' equity ...Loans and advances to customers as a percentage of customer accounts ...Average total shareholders' equity to average total assets ...Capital ratios12 Tier 1 ratio ...Total capital ratio ...Foreign exchange translation rates to US$ Closing...

  • Page 7
    ... ordinary shares. 8 Total shareholder return is defined on page 19. 9 The Financial Times Stock Exchange 100 Index. 10 The Morgan Stanley Capital International World Index. 11 The Morgan Stanley Capital International World Bank Index 12 The calculation of capital resources, capital ratios and risk...

  • Page 8
    ... the monetary, interest rate and other policies of central banks and other regulatory authorities, including the UK Financial Services Authority, the Bank of England, the Hong Kong Monetary Authority, the US Federal Reserve, the US Securities and Exchange Commission, the US Office of the Comptroller...

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

  • Page 10
    ... rights issue and internal capital generation. The core tier 1 ratio was 9.4 per cent at the same date, increasing by some 240 basis points. Throughout the crisis, our strategy has remained clear: to build on our position as the leading 2009: a year of transition In a number of important respects...

  • Page 11
    ... rural presence during the year. In Indonesia, we nearly doubled our network to support the growing financial needs of personal and business banking customers, and we launched our SME fund in the United Arab Emirates in January 2010. These are just a few examples which illustrate our commitment...

  • Page 12
    ...'s Statement customer needs. The market for capital has also suffered from clear distortions in recent years. There has been too great an emphasis on short-term gains, often accompanied by shareholder pressure to increase leverage in order to boost returns, and a dangerous underpricing of risk...

  • Page 13
    ... to serve' those global customers who have increasingly diverse financial needs. In short, it is undesirable and impractical to prescribe some ideal model for a bank. The crisis clearly demonstrated that systemic importance is not a function of size or business focus. HSBC has always believed in...

  • Page 14
    ...markets banking business and a uniquely cosmopolitan customer base with an extensive international network and substantial financial strength. The Group's strategy is aligned with the key trends which are shaping the global economy. In particular, HSBC recognises that, over the long term, developing...

  • Page 15
    ... The process HSBC uses to estimate losses inherent in its credit exposure or assess the value of certain assets requires difficult, As a global financial institution, HSBC is exposed to these developments across all its businesses, both directly and through their impact on its customers and clients...

  • Page 16
    ...'s retail business model depends on banking fees and a consolidation of the recovery observed in the financial markets in 2009 will help sustain profitability. Credit quality is expected to remain stable for personal customers due to the quality of the client base, though the outlook for commercial...

  • Page 17
    ... pressure on spreads earned on HSBC's deposit base, however. As the disruption to financial markets eased, evidence emerged of contracting credit spreads and improved liquidity during 2009, beginning in the second quarter of the year, enabling many companies to issue debt and raise new capital. The...

  • Page 18
    ... unforeseen market dislocations or interruptions. Rating agencies which determine HSBC's credit ratings and thereby influence the Group's cost of funds, take into consideration the effectiveness of HSBC's liquidity risk management framework. The market conditions that the financial services industry...

  • Page 19
    ...with counterparties in financial services, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose HSBC to credit risk in the event of default by its counterparty or client. HSBC's ability to engage...

  • Page 20
    ...breach of data security, particularly involving confidential customer data, could cause serious damage to the Group's ability to service its clients, could breach regulations under which HSBC operates and could cause long-term damage to its business and brand. HSBC is subject to tax-related risks in...

  • Page 21
    .... Total shareholder return is used as a method of assessing the overall return to shareholders on their investment in HSBC, and is defined as the growth in share value and declared dividend income during the relevant period. TSR is a key performance measure in rewarding employees. In calculating TSR...

  • Page 22
    ... 14 aspects. Employees rated HSBC above the external global average across all aspects. Brand perception In order to manage the HSBC brand most effectively, the Group tracks brand health among Personal Financial Services and Business Banking customers in each of HSBC's major markets. The survey...

  • Page 23
    ... strengthening of the US dollar compared with its value in 2008, and were most significant in Europe due to the size of HSBC's operations in the UK. The following acquisitions and disposals affected both comparisons: • the gain on sale of HSBC's UK merchant acquiring business to a joint venture 49...

  • Page 24
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Reconciliation of profit / Financial summary > Income statement Reconciliation of reported and underlying profit before tax 2009 compared with 2008 2008 at 2009 2009 Underadjustexchange lying change ments10 ...

  • Page 25
    ... by an increase in loan impairment charges and other credit risk provisions elsewhere. Although HSBC's business in North America continued to record a loss, performance improved as write-downs in Global Banking and Markets reduced and loan impairment charges in Personal Financial Services decreased...

  • Page 26
    ...Net trading income ...Changes in fair value of long-term debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value .. Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments...

  • Page 27
    ...credit trading business. This was partly offset by a reduction in deposit spreads in Personal Financial Services and Commercial Banking as interest rates fell, and an increase in loan impairment charges in Global Banking, reflecting a deterioration in the credit position of a small number of clients...

  • Page 28
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review Financial summary > Group performance > Net interest income / Net fee income (continued) Asia, Global Banking and Markets' results were strongly ahead, driven by foreign exchange, Rates and securities services. Balance ...

  • Page 29
    ... the Group's customers, and impaired loans. 2009 US$m Cards ...Account services ...Funds under management ...Broking income ...Credit facilities ...Insurance ...Global custody ...Imports/exports ...Underwriting ...Remittances ...Corporate finance ...Unit trusts ...Trust income ...Mortgage servicing...

  • Page 30
    ... year as market values rose and investor appetite for equity products increased. Account services fees fell, predominantly in North America as the result of a decline in credit card volumes and changes in customer behaviour, and in Private Banking due to a decrease in fiduciary deposit commissions...

  • Page 31
    ... of trading assets. As noted in 'Net interest income', the cost of internally funding these assets declined significantly as a result of the low interest rate environment. The Credit business benefited from a general tightening of credit spreads following a return of liquidity to much of the market...

  • Page 32
    ... fair value 2009 US$m Net income/(expense) arising from: - financial assets held to meet liabilities under insurance and investment contracts ...- liabilities to customers under investment contracts ...- HSBC's long-term debt issued and related derivatives ...Change in own credit spread on long-term...

  • Page 33
    ... 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 34
    ...the launch of new products including a life insurance product designed for high net worth individuals and a guaranteed savings product. In Hong Kong, HSBC retained its position as the leading bancassurer and net earned insurance premiums increased as a result of higher sales of unit-linked and whole...

  • Page 35
    ... Service of Korea. In 2008, HSBC reported a gain of US$416 million in respect of the purchase of PMII. See Note 23 on the Financial Statements. An increase in insurance sales to new customers in Hong Kong resulted in positive movements in the present value of in-force ('PVIF') long-term insurance...

  • Page 36
    ...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 37
    ...businesses, notably Personal Financial Services in North America and Commercial Banking in Hong Kong, but this was more than offset by increases elsewhere, primarily on individually significant loans within Global Banking and Markets and more broadly on Commercial Banking exposures outside Hong Kong...

  • Page 38
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review Financial summary > Group performance > Loan impairment charges (continued) impairment charges in the real estate secured portfolio. Loan impairment charges in the Card and Retail Services portfolio decreased despite the ...

  • Page 39
    ...for customers. In HSBC USA, loan impairment charges rose as credit quality worsened across the real estate secured portfolio and private label cards. Delinquencies rose in the prime first lien residential mortgage portfolio, Home Equity Line of Credit and Home Equity Loan second lien portfolios. The...

  • Page 40
    ... network in the US were partly offset by savings resulting from the closure. General and administrative expenses fell as HSBC focused on managing costs tightly and increasing efficiency. Marketing and advertising costs fell across the group, most notably in Card and Retail Services in North America...

  • Page 41
    ... conditions. A review of actuarial assumptions on employees' defined benefit pensions resulted in lower service costs in the UK. The restructuring of the consumer finance business in North America led to reduced headcount and lower costs. This was partially offset by higher salaries and increased...

  • Page 42
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Group performance > Share of profit in associates and joint ventures // Economic profit Share of profit in associates and joint ventures 2009 US$m Associates Bank of Communications Co., Limited...

  • Page 43
    ... long-term sustainable risk-based performance, HSBC emphasises the trend in economic profit ahead of absolute amounts within business units. The Group's long-term cost of equity is reviewed annually and for 2009 remained at 10 per cent. The following commentary on economic profit is on a reported...

  • Page 44
    ... to customers ...Financial investments ...Other assets ...Total assets ...LIABILITIES AND EQUITY Liabilities Deposits by banks ...Customer accounts ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue ...Liabilities under insurance...

  • Page 45
    ..., and a decrease in structured deposit accounts in Hong Kong as existing deals matured and customers expressed a preference for vanilla cash instruments in the uncertain economic environment. Financial liabilities designated at fair value grew by 4 per cent due to new HSBC debt issuances in Europe...

  • Page 46
    ...to banks ...Loans and advances to customers ...Financial investments ...Other assets ...Total assets ...Deposits by banks ...Customer accounts ...Trading liabilities ...Financial liabilities designated at fair value ...Derivative liabilities ...Debt securities in issue ...Liabilities under insurance...

  • Page 47
    ... 09 as Reported exchange Underlying Currency rates change reported change translation31 US$m US$m % US$m US$m 31 Dec 08 as reported US$m Loans and advances to customers (net) Personal Financial Services ...Commercial Banking ...Global Banking and Markets ...Private Banking ...Other ... Underlying...

  • Page 48
    ... Trading assets32 ...357,504 Financial assets designated at fair value33 ...62,143 Impairment provisions ...(26,308) Non-interest-earning assets ...667,942 Total assets and interest income ...2,445,986 Short-term funds and loans and advances to banks Europe HSBC Bank ...HSBC Private Banking Holdings...

  • Page 49
    ... America Other operations ... Financial investments Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East HSBC Bank...

  • Page 50
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Average balance sheet Assets (continued) 2009 Average Interest balance income US$m US$m Other interest-earning assets Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse)...

  • Page 51
    ... ...Financial liabilities designated at fair value (excluding own debt issued) ...Non-interest bearing current accounts ...Total equity and other non-interest bearing liabilities ...Total equity and liabilities ...Deposits by banks35 Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC...

  • Page 52
    ... PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Average balance sheet Equity and liabilities (continued) Average balance US$m Customer accounts37 Europe HSBC Bank ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...Hong Kong...

  • Page 53
    ...HSBC Private Banking Holdings (Suisse) ...HSBC France ...HSBC Finance ...Hang Seng Bank ...The Hongkong and Shanghai Banking Corporation ...The Hongkong and Shanghai Banking Corporation ...HSBC Bank Malaysia ...HSBC Bank Middle East HSBC Bank USA ...HSBC Finance ...HSBC Bank Canada ...HSBC Markets...

  • Page 54
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Net interest margin / Average asset distribution / Changes in net interest income and expense Net interest margin39 2009 % Europe HSBC Bank ...HSBC Private Banking Holdings (...

  • Page 55
    ... 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 ...HSBC Bank...

  • Page 56
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Changes in net interest income / net interest expense Interest income (continued) Increase/(decrease) in 2009 compared with 2008 Volume Rate US$m US$m (182) 165 (510) 25 1,380 ...

  • Page 57
    ...HSBC Bank USA ...HSBC Bank Canada ...HSBC Mexico ...Brazilian operations34 ...HSBC Bank Panama ...HSBC Bank Argentina ...2,407 256 645 200 211 1,494 191 432 975 385 391 2,946 353 99 361 11,346 Financial liabilities designated at fair value - own debt issued Debt securities in issue Europe HSBC Bank...

  • Page 58
    ...the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Short-term borrowings / Contractual obligations / Ratios / Loan maturities Short-term borrowings HSBC includes short-term borrowings within customer accounts, deposits by banks and debt securities in issue...

  • Page 59
    ... 5 years Loans and advances to banks ...Commercial loans to customers Commercial, industrial and international trade ...Real estate and other property related ...Non-bank financial institutions ...Governments ...Other commercial ...Hong Kong Government Home Ownership Scheme ...Residential mortgages...

  • Page 60
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > Deposits Deposits The following tables summarise the average amount of bank deposits, customer deposits and certificates of deposit ('CD's) and other money market instruments (...

  • Page 61
    Customer accounts 2009 Average Average balance rate US$m % Europe ...Demand and other - non-interest bearing ...Demand - interest bearing ...Savings ...Time ...Other ...Hong Kong ...Demand and other - non-interest bearing ...Demand - interest bearing ...Savings ...Time ...Other ...Rest of Asia-...

  • Page 62
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Balance sheet > CDs // Critical accounting policies Certificates of deposit and other money market instruments 2009 Average Average balance rate US$m % Europe ...Hong Kong ...Rest of Asia-...

  • Page 63
    ...advances HSBC's accounting policy for losses arising from the impairment of customer loans and advances is described in Note 2g on the Financial Statements. Loan impairment allowances represent management's best estimate of losses incurred in the loan portfolios at the balance sheet date. Management...

  • Page 64
    ... carrying amount of loans and advances. Goodwill impairment HSBC's accounting policy for goodwill is described in Note 2p on the Financial Statements. Note 22 on the Financial Statements lists the Group's cash generating units ('CGU's) by geographical region and global business. Total goodwill for...

  • Page 65
    ... to changes in key assumptions. Valuation of financial instruments HSBC's accounting policy for determining the fair value of financial instruments is described in Note 2d on the Financial Statements. The best evidence of fair value is a quoted price in an actively traded market. In the event...

  • Page 66
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review Critical accounting policies (continued) Impairment of available-for-sale financial assets HSBC's accounting policy for impairment of available-for-sale financial assets is described in Note 2j on the Financial Statements. ...

  • Page 67
    ... losses in the next financial year. Deferred tax assets HSBC's accounting policy for the recognition of deferred tax assets is described in Note 2s on the Financial Statements. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against...

  • Page 68
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Summary / Personal Financial Services Customer groups and global businesses Page Summary ...Personal Financial Services ...Commercial Banking ...Global Banking and Markets ...Private Banking ......

  • Page 69
    ... .. Net insurance claims 43 42 Strategic direction HSBC's strategy for Personal Financial Services is to use its global reach and scale to grow profitably in selected markets by providing relationship banking and wealth management services. In markets where HSBC already has scale, such as Hong Kong...

  • Page 70
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Personal Financial Services in the US declined and consumer finance and unsecured lending activities in other countries were scaled back. These factors were partially mitigated by the benefit of...

  • Page 71
    .... In Hong Kong, HSBC maintained its market leading position with gross mortgage balance growth of 7 per cent during the year. • As part of its strategy to deliver a globally consistent customer experience, Personal Financial Services commenced a global retail store update and refresh programme...

  • Page 72
    ... income .. Net insurance claims 43 42 Strategic direction HSBC's Commercial Banking strategy is focused on two key initiatives: âˆ' to be the leading international business bank, using HSBC's extensive geographical network together with product expertise in payments, trade, receivables finance and...

  • Page 73
    ... the importance of this segment to the Commercial Banking business. Customer loans and advances in business banking were US$53 billion, and HSBC continued to support businesses in the global downturn. The US$5 billion International SME Fund was launched in December 2008 in five key markets. The fund...

  • Page 74
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Commercial Banking / Global Banking and Markets • Total revenue in the corporate segment was US$6.3 billion. Deposits from corporate customers were US$121 billion, while loans and advances ...

  • Page 75
    ... the Group's extensive distribution network; developing Global Banking and Markets' hub-and-spoke business model; and continuing to build capabilities in major hubs to support the delivery of an advanced suite of services to corporate, institutional and government clients across the HSBC network...

  • Page 76
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Global Banking and Markets Management view of total operating income 2009 US$m Global Markets44 ...Credit ...Rates ...Foreign exchange ...Equities ...Securities services45 ...Asset and structured...

  • Page 77
    ...at year end. In August 2009, Global Asset Management entered the European Exchange Traded Funds ('ETF') market, working closely with Global Markets and HSBC Securities Services, and launched three ETF funds. • In Principal Investments, opportunities for private equity realisations were limited and...

  • Page 78
    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 Markets Hong Kong US$m 25,742 16,937 21,991 27,789 92,181 217,146 5,824 26,650 10,720 16,619 ...

  • Page 79
    ... position, and extensive global network provides a foundation from which Private Banking continues to attract and retain clients. Product and service leadership in areas such as credit, estate planning, hedge funds, and investment advice helps Private Banking meet the complex international financial...

  • Page 80
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups > Private Banking • Trading income fell by 18 per cent, also reflecting lower client trading activity, mainly in foreign exchange and structured products. Gains less losses from financial ...

  • Page 81
    ...415) Private Banking Net interest income ...Net fee income ...Other income15 ...Net operating income16 .. Loan impairment charges and other credit risk provisions ...Net operating income ...Operating expenses ...Operating profit ...Income from associates ...Profit before tax ... 2008 as reported US...

  • Page 82
    ... accounting reasons were reflected through the income statement. Net expense from financial instruments designated at fair value declined by 90 per cent to US$90 million due to reduced income from non-qualifying interest and exchange rate hedges related to long-term debt issued by HSBC Holdings...

  • Page 83
    ... with the revenue reported in other operating income. Costs at HSBC's Group Service Centres rose by 10 per cent as the number of migrated activities increased in line with the Group's Global Resourcing model. Other Net interest expense ...Net fee income ...Changes in fair value ...Gains on disposal...

  • Page 84
    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 2009 Personal Financial Commercial Services Banking US$m US$m 25,107 8,238 637 65 702 7,883 3,702...

  • Page 85
    ... debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums...

  • Page 86
    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) 2007 Personal Financial Services US$m 29,069 11,742 38 140 178 Commercial Banking US$m 9,055 3,972...

  • Page 87
    ... Kong's three note-issuing banks, accounting for more than 67.2 per cent by value of banknotes in circulation in 2008. Rest of Asia-Pacific HSBC offers personal, commercial, global banking and markets services in mainland China, mainly through its local subsidiary, HSBC Bank (China) Company Limited...

  • Page 88
    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 2009 US$m Europe ...Hong Kong ...Rest of ...

  • Page 89
    ...customer groups and global businesses Personal Financial Commercial Services Banking US$m US$m 2009 UK ...France51 ...Germany ...Malta ...Switzerland ...Turkey ...Other ...364 54 - 33 - 43 (182) 312 2008 UK...507 8,595 Loans and advances to customers (net) by country 2009 US$m UK ...France51 ......

  • Page 90
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe > 2009 Profit before tax Europe Net interest income ...Net fee income ...Net trading income ...Changes in fair value of long-term debt issued and related derivatives ...Net income/(...

  • Page 91
    ... unemployment levels led to a rise in loan impairment charges in the Personal Financial Services and Commercial Banking businesses. HSBC Bank continued to provide lending services to its customers while maintaining effective credit control and strengthening collection practices and systems. 89

  • Page 92
    ... market share in equity capital markets issues as corporates and financial institutions restructured their balance sheets by raising share capital. As part of its wealth management strategy, HSBC continued to grow the Premier customer base and successfully launched the World Selection fund in the UK...

  • Page 93
    ... global asset management business in 2008. Offsetting this was the non-recurrence of a favourable embedded value adjustment following HSBC's introduction of enhanced benefits to existing pension products in the UK in 2008, and lower gains on the sale and leaseback of branches. Net insurance claims...

  • Page 94
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe > 2009 / 2008 Markets' exceptional revenue and profit growth in selective businesses. In Personal Financial Services and Commercial Banking businesses, operational cost savings ...

  • Page 95
    ... by narrowing deposit spreads, as base rates were cut in the UK, and increased funding costs, principally for trading activities, in France. Higher net interest income from the expansion of credit card lending and commercial loan portfolio growth in the small and mid-market customer segments in...

  • Page 96
    ... 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 97
    Analysis by customer group and global business Profit/(loss) before tax 2009 Personal Financial Commercial Services Banking US$m US$m 5,413 1,949 34 (1) 33 2,739 1,679 3 17 20 Global Banking & Markets US$m 4,367 1,670 2,267 1,869 4,136 Private Banking US$m 949 883 175 23 198 Intersegment ...

  • Page 98
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe > Profit/(loss) before tax by customer group Profit/(loss) before tax (continued) 2008 Personal Financial Services US$m 6,464 2,612 47 - 47 Commercial Banking US$m 3,435 2,025 71 12 ...

  • Page 99
    ... debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums...

  • Page 100
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Hong Kong > 2009 Hong Kong Profit/(loss) before tax by customer group and global business 2009 US$m Personal Financial Services ...Commercial Banking ...Global Banking and Markets ......

  • Page 101
    ... of deposit spreads. Average customer lending balances remained broadly in line with 2008, as lower Commercial Banking balances, which reflected the reduction in exports in the first half of 2009, were broadly offset by higher lending in Personal Financial Services and Global Banking and Markets. As...

  • Page 102
    ... spreads compressed in the near-zero interest rate environment. HSBC continued to increase market share in savings and deposit accounts, and balances grew following a series of deposit acquisition campaigns. In Personal Financial Services, customer account balances rose by 15 per cent and Premier...

  • Page 103
    ... led to increased impairment charges against unsecured lending in Personal Financial Services, though bankruptcy levels improved in the second half of the year. Property prices increased during 2009 and mortgage lending remained well secured with conservative loan-to-value ratios and origination...

  • Page 104
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Hong Kong > 2008 / Profit/(loss) before tax by customer group allocated to policyholders in full, the portion of decline in the value passed on to clients who have products with ...

  • Page 105
    ... and global business Profit/(loss) before tax 2009 Personal Financial Commercial Services Banking US$m US$m 2,577 1,410 186 3 189 938 530 92 - 92 Global Banking & Markets US$m 1,150 563 792 16 808 Private Banking US$m 212 125 91 - 91 Intersegment elimination50 US$m (124) - - 124 124 Hong Kong Net...

  • 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 Profit/(loss) before tax (continued) 2008 Personal Financial Services US$m 3,381 1,441 143 11 154 Commercial Banking US$m 1,498 548 79...

  • Page 107
    2007 Personal Financial Services US$m 3,342 1,973 188 5 193 Commercial Banking US$m 1,540 526 63 - 63 Global Banking & Markets US$m 986 682 553 241 794 Private Banking US$m 70 179 280 - 280 Intersegment elimination50 US$m 312 - - (312) (312) Hong Kong Net interest income/(expense) ...Net fee income...

  • Page 108
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific > 2009 Rest of Asia-Pacific27 Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Services Banking US$m US$m ...

  • Page 109
    ... retail sales rising by 17.5 per cent in the year. The annual CPI rate was negative throughout much of 2009, largely reflecting the earlier movements in food and energy prices, before accelerating to 1.9 per cent in December 2009. The renminbi exchange rate was little changed against the US dollar...

  • Page 110
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific > 2009 Profit before tax Rest of Asia-Pacific27 Net interest income ...Net fee income ...Net trading income ...Changes in fair value of long-term debt issued and ...

  • Page 111
    ... has strengthened HSBC's network in India, allowing it to offer wealth management products through over 200 additional outlets. Building the Group's mainland China business and renminbi capabilities continued to be a key focus, as demonstrated by the opening of onshore renminbi accounts in mainland...

  • Page 112
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific > 2009 / 2008 by asset repricing, particularly in Commercial Banking. Average lending balances fell in Global Banking and Markets and Commercial Banking as a result of ...

  • Page 113
    ... as the number of migrated activities and processes increased in accordance with the Group's global resourcing strategy to develop centres of excellence. All related costs are recharged to other Group entities and the income from these recharges is reported within other operating income. New outlets...

  • Page 114
    ... in Personal Financial 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...

  • Page 115
    ...mainly by increased customer activity and high levels of market volatility. A net expense from financial instruments designated at fair value of US$171 million was recorded compared with income of US$121 million in 2007. Declines in equity markets affected unitlinked insurance products, particularly...

  • Page 116
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific > Profit before tax by customer groups Analysis by customer group and global business Profit before tax 2009 Personal Financial Commercial Services Banking US$m US$m 1,...

  • Page 117
    ... debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums...

  • 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 // Middle East Profit before tax (continued) 2007 Personal Financial Services US$m 1,507 594 42 (2) 40 Commercial Banking US$m 750...

  • Page 119
    ...tax by country within customer groups and global businesses Personal Financial Commercial Services Banking US$m US$m 2009 Egypt ...United Arab Emirates ...Other ...Middle East (excluding Saudi Arabia) ...Saudi Arabia ...18 (177) 13 (146) 20 (126) 2008 Egypt ...United Arab Emirates ...Other ...Middle...

  • Page 120
    ... 41.1 8,050 Balance sheet data41 2009 US$m Loans and advances to customers (net) ...Loans and advances to banks (net) ...Trading assets, financial assets designated at fair value, and financial investments ...Total assets ...Deposits by banks ...Customer accounts ...For footnotes, see page 149. All...

  • Page 121
    ... in 2009. Net interest income declined by 4 per cent, driven by lower deposit and lending balances and deposit spread compression across all customer groups. Commercial Banking lending balances fell as trade levels declined. In Personal Financial Services, average mortgages and credit card balances...

  • Page 122
    ... expenditure in Global Banking and Markets was offset by lower staff costs in Personal Financial Services and Commercial Banking as headcount declined. Non-staff costs rose as new head office buildings in the UAE and Qatar caused higher rental costs, and IT investment increased from systems upgrades...

  • Page 123
    .... HSBC also successfully launched new banking products across the region, in addition to growing the Premier customer base. Business volume growth and wider asset spreads drove higher net interest income, and fee income rose as volumes of cards and trade products grew. As global financial conditions...

  • Page 124
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Middle East > Profit/(loss) before tax by customer group Analysis by customer group and global business Profit/(loss) before tax 2009 Personal Financial Commercial Services Banking US$m US...

  • Page 125
    ...% 0.8 29.6 - (60) 60 - - - (279) 2,389 (959) 1,430 316 1,746 % 18.8 35.9 Share of HSBC's profit before tax ...Cost efficiency ratio ... 3.1 53.2 Balance sheet data41 US$m Loans and advances to customers (net) ...Total assets ...Customer accounts ...7,226 8,168 13,753 US$m 13,221 14,672 10,978 US...

  • Page 126
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Middle East > Profit/(loss) before tax by customer group // North America > 2009 Profit/(loss) before tax (continued) 2007 Personal Financial Services US$m 458 172 30 - 30 2 - 22 684 - 684 ...

  • Page 127
    ... America Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Banking Services US$m US$m 2009 US ...Canada ...Bermuda ...Other ...(5,292) 17 49 - (5,226) 2008 US52 ...Canada ...Bermuda ...Other ...158 347 37 1 543 Global Banking & Markets...

  • Page 128
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America > 2009 Profit/(loss) before tax North America Net interest income ...Net fee income ...Net trading income/(expense) ...Changes in fair value of long-term debt issued and ...

  • Page 129
    ... in Personal Financial Services and lower operating expenses following the closure of the Consumer Lending branch network at the beginning of 2009, partly offset by higher loan impairment charges and other credit risk provisions in the corporate and commercial, and Private Banking, books. Net...

  • Page 130
    ...customer behaviour, aligning it with the policy used across the Group. As a consequence of this, real estate secured loan balances are now written down to net realisable value generally no later than the end of the month in which the account becomes 180 days delinquent, and personal lending products...

  • Page 131
    ... of the branch network amounted to US$150 million. Staff costs decreased as a result of lower staff numbers, offsetting higher performance-related costs in Global Banking and Markets. General and administrative costs declined with lower marketing costs in Card and Retail Services as a significant...

  • Page 132
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions >North America > 2008 activity was curtailed. Deposit insurance expenses increased by US$143 million following a Federal Deposit Insurance Corporation special assessment in response to the ...

  • Page 133
    ... designated at fair value rose by US$304 million to US$293 million due to income from ineffective hedges related to long-term debt issued by the Group's subsidiaries in North America. Gains less losses from financial investments declined, mainly due to losses on US government agency securities...

  • Page 134
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America > 2008 / Profit/(loss) before tax by customer group Other operating income declined due to losses on sale of the Canadian vehicle finance businesses and other loan portfolios ...

  • Page 135
    Analysis by customer group and global business Profit/(loss) before tax 2009 Personal Financial Commercial Services Banking US$m US$m 11,244 3,174 257 60 317 1,391 453 (10) 3 (7) Global Banking & Markets US$m 999 1,045 (179) 175 (4) Private Banking US$m 178 142 (3) (1) (4) Intersegment Other ...

  • Page 136
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America > Profit/(loss) before tax by customer group Profit/(loss) before tax (continued) 2008 Personal Financial Services US$m 12,632 3,896 (250) 66 (184) Commercial Banking US$m 1,...

  • Page 137
    ... Personal Financial Services US$m 13,175 4,571 (349) 134 (215) Commercial Banking US$m 1,558 338 (2) - (2) Global Banking & Markets US$m 378 701 (871) 137 (734) Private Banking US$m 273 279 11 - 11 Intersegment elimination50 US$m (520) - - 520 520 North America Net interest income/(expense) ...Net...

  • Page 138
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Latin America > 2009 Latin America Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Services Banking US$m US$m 2009 Argentina ...

  • Page 139
    ... US$m Loans and advances to customers (net) ...Loans and advances to banks (net) ...Trading assets, financial assets designated at fair value, and financial investments ...Total assets ...Deposits by banks ...Customer accounts ...For footnote, see page 149. All commentaries on Latin America are on...

  • Page 140
    ... and Commercial Banking and lower revenues in Personal Financial Services. Global Banking and Markets' performance improved driven by strong results in trading and Balance Sheet Management. 2009 was a year of consolidating risk policies and strongly emphasising cost control. Additional capital was...

  • Page 141
    ... resulted from increased foreign exchange and Rates trading income, which benefited from early positioning against interest rate movements in a volatile market. Net income from financial instruments designated at fair value rose by 36 per cent, primarily from higher insurance-related assets. This...

  • Page 142
    ...2008. Commercial loan volume growth was driven by increased lending for working capital and trade finance loans in Brazil, and medium-sized businesses and the real estate sector in Mexico. Increased income on customer liabilities, which was driven by volume growth, particularly in time deposits, was...

  • Page 143
    ... of new fees and volume growth, particularly in cards, personal loans, packaged deposit products and payments and cash management. Trading income rose by 22 per cent largely reflecting favourable positioning against foreign exchange movements and increased foreign exchange sales volumes. Trading...

  • Page 144
    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 Profit/(loss) before tax 2009 Personal Financial Commercial Services Banking US$m ...

  • Page 145
    ... in fair value of longterm debt issued and related derivatives ...Net income from other financial instruments designated at fair value ...Net income from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums...

  • Page 146
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Latin America > Profit/(loss) before tax by customer group // Products and services Profit/(loss) before tax (continued) 2007 Personal Financial Services US$m 3,983 1,372 67 10 77 Commercial...

  • Page 147
    ..., offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, and local and international payment services) and wealth management services (insurance and investment products and financial planning services). HSBC Premier ('Premier') provides...

  • Page 148
    ...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 149
    ... returns. Products and services offered include: Private Banking Services: These comprise multi-currency deposit accounts and fiduciary deposits, credit and specialist lending, treasury Other information Funds under management 2009 US$bn Funds under management At 1 January ...Net new money ...Value...

  • Page 150
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Other information > Assets held in custody / Property / Legal proceedings / Data security // Footnotes increased, primarily as a result of the improvement in global equity markets during the year. Global Asset ...

  • Page 151
    ... and rights of its clients and of the Group and to further enhance its security policies and data protection practices. Footnotes to the Operating and Financial Review Key performance indicators (page 18) 1 The percentage increase in net operating income before loan impairment and other credit risk...

  • Page 152
    ... shares and other equity instruments issued by HSBC Holdings; and - deducting average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities. Return on invested capital is based on the profit attributable to ordinary shareholders of the parent company...

  • Page 153
    ...; assess the applicability and relevance of good practice recommendations to their disclosures, acknowledging the importance of such guidance; seek to enhance the comparability of financial statement disclosures across the UK banking sector; and clearly differentiate in their annual reports between...

  • Page 154
    ... mortgage exposure. • The particular topics covered in respect of HSBC's securitisation activities and exposure to structured products are as follows: overview of exposure; business model; risk management; accounting policies; nature and extent of HSBC's exposures; fair values of financial...

  • Page 155
    ... US$m Financial assets reclassified to loans and receivables ABSs ...Trading loans - commercial mortgage loans ...Leveraged finance and syndicated loans ...Financial assets reclassified to available for sale Corporate debt and other securities ... Effect on income statement for 2008 Recorded in Net...

  • Page 156
    ... policy' on page 151, the dislocation of financial markets which developed in the second half of 2007 continued throughout 2008 and into 2009. For the last four half-year periods, the write-downs incurred by the Group on ABSs, trading loans held for securitisation, leveraged finance transactions...

  • Page 157
    ... holdings in which significant first loss protection is provided through capital notes issued by the securities investment conduits ('SIC's), excluding Solitaire. At each reporting date, an assessment is made of whether there is any objective evidence of impairment in the value of available-for-sale...

  • Page 158
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Overview of exposure > AFS ABSs impairment // Business model / Risk management / Accounting policies / Nature and extent of exposures Services downgraded the ratings on substantially all US Alt-A residential MBSs ...

  • Page 159
    ... lending held at fair value through profit or loss; ABSs including MBSs and CDOs; monolines; credit derivative product companies ('CDPC's); and leveraged finance transactions. MBSs are securities that represent interests in a group of mortgages. Investors in these securities have the right to cash...

  • Page 160
    ... risk characteristics to sub-prime, for example, UK non-conforming mortgages (see below); US Home Equity Lines of Credit: a form of revolving credit facility provided to customers, which is supported by a first or second lien charge over residential property. Global Banking and Markets' holdings...

  • Page 161
    ... holdings of ABSs, and direct lending held at fair value through profit or loss Designated at fair value through Held to maturity profit or loss US$m US$m Of which held through consolidated SPEs Total US$m US$m Trading US$m At 31 December 2009 Sub-prime residential mortgage-related assets ...Direct...

  • Page 162
    ... HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Overview of exposure > Nature and extent of exposures HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss 2009 At 31 December 2009 Gross fair value movements Realised Credit...

  • Page 163
    ... 1,029 74,007 Commercial property MBS and MBS CDOs8,9 ...- high grade10 ...- rated C to A ...- not publicly rated ...Leveraged finance-related assets ABSs and ABS CDOs8 ...- high grade10 ...- rated C to A ...Student loan-related assets ABSs and ABS CDOs8 ...- high grade10 ...- rated C to A ...Other...

  • Page 164
    ... directly by HSBC, Solitaire and the SICs were downgraded. In particular, Moody's Investor Services downgraded the ratings on substantially all the Group's holdings of US Alt-A residential MBSs issued in 2006 and 2007. The downgrade of assets is reflected in the disclosure of fair value movements...

  • Page 165
    ... insurers HSBC's principal exposure to monolines is through a number of over-the-counter ('OTC') derivative transactions, mainly credit default swaps ('CDS's). HSBC entered into these CDSs primarily to purchase credit protection against securities held at the time within the trading portfolio...

  • Page 166
    ... at 31 December 2009 (2008: US$2 million drawn). HSBC's exposure to debt securities which benefit from guarantees provided by monoline insurers Within both the trading and available-for-sale portfolios, HSBC holds bonds that are 'wrapped' with a credit enhancement from a monoline. As the bonds are...

  • Page 167
    ... year. HSBC's additional exposure to leveraged finance loans through holdings of ABSs from its trading and investment activities is shown in the table on page 159. HSBC's exposure to leveraged finance transactions Funded exposures21 US$m 2009 Europe ...Rest of Asia-Pacific ...North America ...3,790...

  • Page 168
    ...end, ultimate responsibility for the determination of fair values lies with Finance, which reports functionally to the Chief Financial Officer, Executive Director, Risk and Regulation. Finance establishes the accounting policies and procedures governing valuation and is responsible for ensuring that...

  • Page 169
    ... in other market factors such as benchmark interest rates or foreign exchange rates. Specifically, the change in fair value of issued debt securities attributable to the Group's own credit spread is computed as follows: for each security at each reporting date, an externally verifiable price is...

  • Page 170
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Fair values of financial instruments > Carried at fair value All net positions in non-derivative financial instruments, and all derivative portfolios, are valued at bid or offer prices as appropriate. Long positions ...

  • Page 171
    ... methodologies employed. Over time, as model development progresses, model limitations are addressed within the core revaluation models and a model limitation adjustment is no longer needed. Inception profit (Day 1 P&L reserves) Inception profit adjustments are adopted where the fair value estimated...

  • Page 172
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Fair values of financial instruments > Carried at fair value of the unobservable component. The 'observability boundary' is the point at which during the lifetime of the trade the previously unobservable significant ...

  • Page 173
    ... the calculation. uncertainties inherent in estimating fair value for private equity investments. Debt securities, treasury and other eligible bills, and equities The fair value of these instruments is based on quoted market prices from an exchange, dealer, broker, industry group or pricing service...

  • Page 174
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Fair values of financial instruments > Carried at fair value that are generally observable include foreign exchange spot and forward rates, benchmark interest rate curves and volatility surfaces for commonly traded ...

  • Page 175
    ... Other portfolios include holdings in various bonds, preference shares and debentures where the unobservability relates to the prices of the underlying securities. The decrease during the year was due to a reduction in the fair value of loans held for securitisation and disposals of positions within...

  • Page 176
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Fair values of financial instruments > Carried at fair value between interest rates and foreign exchange rates. The movement in Level 3 trading liabilities during the year was primarily due to the issue of new equity ...

  • Page 177
    ... net interest income'. Fair value changes on long term debt designated at fair value and related derivatives are presented in the income statement under 'Changes in fair value of long-term debt issued and related derivatives'. The income statement line item 'Net income/(expense) from other financial...

  • Page 178
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) Fair values of financial instruments > Carried at fair value Reflected in profit or loss Favourable Unfavourable changes changes US$m US$m At 31 December 2008 ...Private equity investments ...Asset-backed securities ......

  • Page 179
    ... at fair value in the financial statements: Bases of valuing HSBC Holdings' financial assets and liabilities measured at fair value Quoted market price Level 1 US$m At 31 December 2009 Assets Derivatives ...Financial investments: available for sale ...Liabilities Financial liabilities designated at...

  • Page 180
    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 Assessing available-for-sale assets for impairment HSBC's policy on impairment of available-for-sale assets is described on page ...

  • Page 181
    ... by capital note holders. Fair values of financial instruments not carried at fair value Financial instruments that are not carried at fair value on the balance sheet include loans and advances to banks and customers, deposits by banks, customer accounts, debt securities in issue and subordinated...

  • Page 182
    ... to customers ...Financial investments: debt securities ...Financial investments: treasury and other eligible bills ...Liabilities Deposits by banks ...Customer accounts ...Debt securities in issue ...Subordinated liabilities ...179,781 896,231 17,526 101 124,872 1,159,034 146,896 30,478 Fair value...

  • Page 183
    ...: Fair values of HSBC Holdings' financial instruments not carried at fair value on the balance sheet 2009 Carrying amount US$m Assets Loans and advances to HSBC undertakings ...Liabilities Amounts owed to HSBC undertakings ...Debt securities in issue ...Subordinated liabilities ...23,212 Fair value...

  • Page 184
    ... financed by issuing CP or drawing advances from HSBC. The cash flows received by the conduits from the third-party assets are used to service the funding and provide a commercial rate of return for HSBC for structuring, for various other administrative services, and for the liquidity and credit...

  • Page 185
    ... billion). Weighted average life of portfolios It should be noted that securities purchased by SICs typically benefit from substantial transactionspecific credit enhancements such as subordinated tranches and/or excess spread, which absorb any credit losses before they fall on the tranche held by...

  • Page 186
    ...mortgages ...US Alt-A ... 0.7 1.9 2.6 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...

  • Page 187
    ... designated at fair value ...Derivative assets ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other assets ... 0.1 - - - 11.1 0.9 12.1 - 0.2 0.1 - 19.9 - 20.2 0.1 0.2 0.1 - 31.0 0.9 32.3 - 0.1 - 13.4 - 0.4 13.9 - - 0.1 - 0.3 - 0.4 Funding structure...

  • Page 188
    HSBC HOLDINGS PLC Report of the Directors: Impact of Market Turmoil (continued) SPEs > SIVs and conduits / Money market funds / CNAV funds Weighted average life of the funding liabilities Other SICs Years 0.1 10.3 Total SICs Years 0.1 10.3 Total multi-seller conduits Years 0.1 - Total SIVs Years ...

  • Page 189
    ... money market funds invest in diverse portfolios of highly-rated debt instruments, and historically included limited holdings in instruments issued by SIVs. At 31 December 2009, these funds had no exposure to instruments issued by SIVs (2008: US$0.5 billion). Constant Net Asset Value funds During...

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

  • Page 191
    ... and for capital efficiency purposes. In such cases, the loans and advances are transferred by HSBC to the SPEs for cash, and the SPEs issue debt securities to investors to fund the cash purchases. Credit enhancements to the underlying assets may be used to obtain investment grade ratings on the...

  • Page 192
    ... to enable the notes issued to the investors to be rated. The SPEs are not consolidated by HSBC when the investors bear substantially all the risks and rewards of ownership through the notes. The total fair value of liabilities (notes issued and derivatives) in structured credit transaction SPEs was...

  • Page 193
    ... assets ...Direct lending31 ...ABSs31 ...ABCP ...Other ... Funding provided by HSBC ...CP ...MTNs ...Junior notes ...Term repos executed ...Investments in funds ...Drawn liquidity facility ...Capital notes32 ... 191 Total maximum exposure to consolidated SPEs ... Liquidity and credit enhancements...

  • Page 194
    ...CP ...MTNs ...Junior notes ...Term repos executed ...Investments in funds ...Drawn liquidity facility ...Capital notes32 ... Report of the Directors: Impact of Market Turmoil (continued) 192 Total maximum exposure to consolidated SPEs33 ... Liquidity and credit enhancements Deal-specific liquidity...

  • Page 195
    ....2 116.4 18.1 Money market funds35 Enhanced VNAV VNAV CNAV funds funds funds US$bn US$bn US$bn Non-money market funds35 MultiSpecialist Local manager funds funds funds37 US$bn US$bn US$bn At 31 December 2009 Total assets ... Funding provided by HSBC ...MTNs ...Investments in funds ... Total maximum...

  • Page 196
    ... disclosed in Note 39 on the Financial Statements. The majority by value of undrawn credit lines arise from 'open to buy' lines on personal credit cards, advised overdraft limits and other pre-approved loan products, and mortgage offers awaiting customer acceptance. HSBC generally has the right to...

  • Page 197
    ... committed loan facility amount not yet drawn down by the customer, less any fair value write-downs, net of fees held on deposit. 23 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial instruments are risk-managed. 24...

  • Page 198
    ... 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 199
    ...is the Financial Services and Markets Act 2000 ('FSMA'). Additionally, data privacy is regulated by the Data Protection Act 1998. Other UK financial services legislation is derived from EU directives relating to banking, securities, insurance, investments and sales of personal financial services. In...

  • Page 200
    ...OCC') and the Federal Deposit Insurance Corporation (the 'FDIC') govern many aspects of HSBC's US business. HSBC and its US operations are subject to supervision, regulation and examination by the Federal Reserve Board because HSBC is a 'bank holding company' under the US Bank Holding Company Act of...

  • Page 201
    ...and bank holding companies to maintain a minimum amount of capital in relation to their balance sheet assets (measured on a non-risk weighted basis). HSBC Bank USA and HTCD are subject to risk-based assessments from the Federal Deposit Insurance Corporation ('FDIC'), which insures deposits generally...

  • Page 202
    ... Financial Officer, Executive Director, Risk and Regulation within the integrated Finance and Risk function, which the latter represents on the Board. Global Risk has functional responsibility for the principal financial risk types, namely retail and wholesale credit, market, operational, security...

  • Page 203
    ... costs and their mitigation. The credit risk governance structures and control frameworks implemented by the Group are designed for all stages of economic and financial cycles. During 2009, a number of processes, for example, crisis management and new product review, were enhanced in response to...

  • Page 204
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Management manuals their detailed credit policies and procedures, consistent with Group policy; • guiding HSBC's operating companies on the Group's appetite for credit risk exposure to specified market sectors, activities ...

  • Page 205
    ... by customer and retail product segments. A Credit Review and Risk Identification team reports directly to each regional Chief Risk Officer, and reviews the robustness and effectiveness of key risk measurement, monitoring and control activities. HSBC's credit risk rating systems and processes...

  • Page 206
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Management amount of the asset is reduced directly. For further details, see 'Accounting policies' on page 369. Impairment allowances may be assessed and created either for individually significant accounts or, on a ...

  • Page 207
    ... numbers of relatively lowvalue assets are managed using a portfolio approach, typically low-value, homogeneous small business accounts in certain countries or territories; residential mortgages that have not been individually assessed; credit cards and other unsecured consumer lending products...

  • Page 208
    ... advances to the commercial real estate sector, notably in parts of Europe, the Middle East and North America. Exposure to personal lending secured on residential property remained significant. HSBC suffered from continuing weakness in credit conditions in the US mortgage market. However, in the UK...

  • Page 209
    ... banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...Treasury and other eligible bills ...Debt securities ...Loans and advances to banks ...Loans and advances to customers ...Financial assets designated at fair value ...Treasury and other eligible bills ...Debt securities...

  • Page 210
    ...in the commercial real estate sector, charges over the properties being financed; and in the financial sector, charges over financial instruments such as cash, debt securities and equities in support of trading facilities. not impaired, or on individually assessed impaired loans and advances, as it...

  • Page 211
    ...bills. A more detailed analysis of financial investments is set out in Note 19 on the Financial Statements and an analysis by credit quality is provided on page 225. The insurance businesses held diversified portfolios of debt and equity securities designated at fair value (2009: US$25 billion; 2008...

  • Page 212
    ...international trade...Commercial real estate ...Other property-related ...Government ...Other commercial5 ...Financial ...Non-bank financial institutions ...Settlement accounts ...Asset-backed securities reclassified ...Total gross loans and advances to customers ...Gross loans and advances to banks...

  • Page 213
    ... and commercial ...Commercial, industrial and international trade ...Commercial real estate ...Other property-related ...Government ...Other commercial5 ...Financial ...Non-bank financial institutions ...Settlement accounts ...Asset-backed securities reclassified ...Total gross loans and advances to...

  • Page 214
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Credit exposure > Concentration of exposure Gross loans and advances to customers by country within Rest of Asia-Pacific, Middle East and Latin America (Audited) Commercial, international trade and other US$m Residential ...

  • Page 215
    ...accordance with the Bank of England Country Exposure Report (Form CE) guidelines, outstandings comprise loans and advances (excluding settlement accounts), amounts receivable under finance leases, acceptances, commercial bills, CDs and debt and equity securities (net of short positions), and exclude...

  • Page 216
    ... liquidity, and reduced demand for their products and services; this encouraged them to reduce indebtedness through portfolio disposals, extend the duration of short-term finance and focus increasingly on cost efficiency. HSBC has worked closely with its customers to identify problem areas early and...

  • Page 217
    ... offers loans secured on existing assets, such as first and second liens on residential property; unsecured lending products such as overdrafts, credit cards and payroll loans; and debt consolidation loans which may be secured or unsecured. In 2009, credit exposure in the personal lending portfolios...

  • Page 218
    ... PLC Report of the Directors: Risk (continued) Credit risk > Areas of special interest > Personal lending HSBC's US vehicle finance portfolio. The transaction is currently expected to close in the first quarter of 2010. The Consumer Lending business historically provided real estate secured...

  • Page 219
    ...Bank and First Direct as HSBC grew market share in UK mortgage lending (discussed in greater detail below). Other personal lending in the UK declined by 11 per cent to US$29 billion, primarily due to reduced customer demand for credit. In Latin America, gross loans and advances to personal customers...

  • Page 220
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Areas of special interest > Personal lending > Mortgage lending For an analysis of loan impairment allowances and impaired loans, see page 230. Mortgage lending The Group offers a wide range of mortgage products designed to ...

  • Page 221
    ... all new business originations are made through HSBC's own salesforce and mainly to existing customers holding a current or savings account relationship with the Group. HSBC does not accept self-certification of income and restricts lending to purchase residential property for rental. UK mortgage...

  • Page 222
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Areas of special interest > Personal lending > Mortgage lending // US personal lending - credit quality Mortgage lending products (Unaudited) Rest of Europe US$m 9,205 2 9,207 - (41) - (41) - 1,084 - 1,084 11.8% - - - - Rest...

  • Page 223
    ... market, though the first-time homebuyer tax credit and the low interest rates were the main forces driving up home sales and shrinking inventories of unsold properties. This resulted in some house price stabilisation in the latter half of 2009, particularly in the middle and lower price sector...

  • Page 224
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Areas of special interest > US personal lending - credit quality Mortgage lending In line with its exit strategy for non-prime real estate secured mortgage lending, HSBC continued to reduce mortgage lending exposure in the ...

  • Page 225
    ... in the US: Quarter ended As Ex. period reported change 31 Dec 31 Dec 2009 2009 US$m US$m In Personal Financial Services in the US Residential mortgages Second lien mortgage lending ...Vehicle finance ...Credit card ...Private label ...Personal non-credit card ...Total ... 30 Sep 2009 US$m 30...

  • Page 226
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Areas of special interest > Renegotiated loans // Credit quality Quarter ended As Ex. period change reported 31 Dec 31 Dec 2009 2009 US$m US$m In Mortgage Services and Consumer Lending Mortgage Services: ...3,477 4,456 - ...

  • Page 227
    ...and retail lending business, as well as the external ratings attributed by external agencies to debt securities. There is no direct correlation between the internal and external ratings at granular level, except to the extent each falls within a single quality classification. Credit quality of HSBC...

  • Page 228
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Credit quality > Risk ratings / Financial instruments by credit quality Quality classification definitions • 'Strong': exposures demonstrate a strong capacity to meet financial commitments, with negligible or low ...

  • Page 229
    ... of collection from other banks ...Hong Kong Government certificates of deposit ...Trading assets ...- treasury and other eligible bills ...- debt securities ...- loans and advances to banks - loans and advances to customers ...Financial assets designated at fair value24 ...- treasury and other...

  • Page 230
    ... of collection from other banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...- treasury and other eligible bills ...- debt securities ...- loans and advances to banks - loans and advances to customers ...Financial assets designated at fair value24 ...- treasury and other...

  • Page 231
    ... 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 232
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Credit quality > Past due but not impaired // Impaired loans and advances / Impairment allowances Up to 29 days US$m At 31 December 2008 Items in the course of collection from other banks ...Loans and advances held at ...

  • Page 233
    ... on loans and advances to customers by geographical region (Audited) Hong Kong US$m Rest of AsiaPacific7 US$m North Middle East7 America US$m US$m Latin America US$m Europe US$m At 31 December 2009 Gross loans and advances Individually assessed impaired loans27 ...Collectively assessed ...Impaired...

  • Page 234
    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 2009 Individually Collectively assessed assessed Total allowances allowances ...

  • Page 235
    ... to income statement ...Personal ...- residential mortgages ...- other personal ...Corporate and commercial ...- commercial, industrial and international trade ...- commercial real estate and other property-related ...- other commercial ...Financial33 ...Governments ...Exchange and other movements...

  • Page 236
    ... to income statement34 ...Personal ...- residential mortgages ...- other personal ...Corporate and commercial ...- commercial, industrial and international trade ...- commercial real estate and other propertyrelated ...- other commercial ...Financial33 ...Exchange and other movements ...Impairment...

  • Page 237
    ... ...Charge to income statement ...Personal ...- residential mortgages ...- other personal ...Corporate and commercial ...- commercial, industrial and international trade ...- commercial real estate and other propertyrelated ...- other commercial ...Financial33 ...Exchange and other movements...

  • Page 238
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Impairment allowances > Net loan impairment charge Individually and collectively assessed impairment charge to income statement by industry segment (Unaudited) 2009 Individually Collectively assessed assessed US$m US$m Banks...

  • Page 239
    Net loan impairment charge to the income statement by geographical region (Unaudited) Hong Kong US$m Rest of AsiaPacific7 US$m North Middle East7 America US$m US$m Latin America US$m Europe US$m 2009 Individually assessed impairment allowances New allowances ...Release of allowances no longer ...

  • Page 240
    ... small number of large individually assessed impairments against corporate and commercial exposures, together with the effects of credit quality deterioration in the personal lending portfolio. In the unsecured portfolios, credit quality declined in the cards and personal loans portfolios reflecting...

  • Page 241
    ... rates on losses has not been as severe as initially expected due, in part, to lower fuel prices and the boost to cash flow provided by government stimulus programmes that meaningfully benefit non-prime customers. In HSBC Bank USA personal lending portfolios, new loan impairment allowances increased...

  • Page 242
    ... as delinquency rates increased across credit cards, personal loans and corporate lending in light of the deteriorating economic environment. Elsewhere, impairment charges on the commercial portfolio rose in the UK, particularly in the final quarter of 2008 as the weakening property market led to...

  • Page 243
    ... HSBC Holdings from transactions with Group subsidiaries and from guarantees issued in support of obligations assumed by certain Group operations in the normal conduct of their business. These risks are reviewed and managed within regulatory and internal limits for exposures by the HSBC Global Risk...

  • Page 244
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Credit risk > Risk elements principal and/or interest are classified as unimpaired loans when the Group expects to recover the contractual cash flows in full. Troubled debt restructurings The SEC requires separate disclosure of any loans ...

  • Page 245
    ...,936 % 71.2 Trading loans classified as in default North America ...Risk elements on loans Europe ...Hong Kong ...Rest of Asia-Pacific7 ...Middle East7 ...North America ...Latin America ... 798 11,366 1,086 1,372 1,984 23,936 4,509 44,253 Assets held for resale Europe ...Hong Kong ...Rest of Asia...

  • Page 246
    ...as the Group assimilates knowledge from the recent market events, the effects of which are discussed more fully below. Policies and procedures (Audited) markets. These entities are funded from HSBC's largest banking operations and within clearly defined internal and regulatory guidelines and limits...

  • Page 247
    ...December 2009 Deposits by banks ...Customer accounts ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue ...Subordinated liabilities ...Other financial liabilities ...Loan and other credit-related commitments ...Financial guarantees and...

  • Page 248
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Liquidity and funding > Liquidity risk management / Contingent liquidity risk Advances to deposits ratio HSBC emphasises the importance of core current accounts and savings accounts as a source of funds to finance lending to customers, ...

  • Page 249
    ... credit card portfolios transferred to HSBC Bank USA from HSBC Finance in early 2009. Projected cash flow scenario analysis The Group uses a number of standard projected cash flow scenarios designed to model both Groupspecific and market-wide liquidity crises, in which the rate and timing of deposit...

  • Page 250
    ... Deposit Insurance Corporation Temporary Liquidity Guarantee Programme. This debt was issued in 2008. The deterioration of the US sub-prime credit market reduced the availability of term financing to entities with exposures to the US sub-prime market. However, HSBC Finance, by virtue of its position...

  • Page 251
    ... from other members of the HSBC Group, HSBC Finance eliminated the need to issue institutional term debt in 2008 and 2009. Funding plans are in place which would enable HSBC Finance to deal with a recurrence of stress in the credit markets. As part of liquidity management, asset portfolios totalling...

  • Page 252
    ... from market-making, position-taking and other marked-to-market positions so designated. Non-trading portfolios include positions that arise from the interest rate management of HSBC's retail and commercial banking assets and liabilities, financial investments designated as available for sale and...

  • Page 253
    ... policies defined by Group Risk, and monitoring and reporting these exposures against the prescribed limits on a daily basis. Each operating entity is required to assess the market risks which arise on each product in its business and to transfer these risks to either its local Global Markets unit...

  • Page 254
    ... within the stress loss scenarios reported to senior management. The following table provides an overview of the reporting of risks within this section: Portfolio Trading Non-trading Risk type Foreign exchange and commodity ...Interest rate ...Equity ...Credit spread ...For footnotes, see page 291...

  • Page 255
    ...HSBC's fair value and price verification controls, see page 166. Trading portfolios (Audited) HSBC's control of market risk is based on a policy of restricting individual operations to trading within a list of permissible instruments authorised for each site by Group Risk, of enforcing rigorous new...

  • Page 256
    .... Credit spread risk also arises on credit derivative transactions entered into by Global Banking in order to manage the risk concentrations within the corporate loan portfolio and so enhance capital efficiency. The mark-to-market of these transactions is reflected in the income statement...

  • Page 257
    ... on available-for-sale equity securities, see The principal objective of market risk management of non-trading portfolios is to optimise net interest income. Interest rate risk in non-trading portfolios arises principally from mismatches between the future yield on assets and their funding cost, as...

  • Page 258
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Market risk > Sensitivity of NII / Structural FX exposure 'Summary of significant accounting policies' on page 369. Sensitivity of net interest income (Unaudited) effect on HSBC's consolidated portfolio valuations and net interest income...

  • Page 259
    ...US dollar, Hong Kong dollar and sterling which have restricted the Group's ability to pass on to depositors further rate reductions, thereby increasing exposures to further rate falls; and Global Markets' decreased net trading asset positions, particularly in euros and US dollars. The funding of net...

  • Page 260
    ... in the Group's businesses; providing dividend payments to HSBC Holding's equity shareholders and interest payments to providers of debt capital; and maintaining a supply of short-term cash resources. It does not take proprietary trading positions. The main market risks to which HSBC Holdings is...

  • Page 261
    management of interest rate risk arising on certain long-term debt capital issues do not qualify for hedge accounting treatment. Changes in the market values of these swaps are recognised directly in the income statement. HSBC Holdings expects that these swaps will be held to final maturity with the...

  • Page 262
    ...) Market risk > HSBC Holdings // Residual value risk HSBC Holdings' principal exposure to changes in its net interest income from movements in interest rates arises on short-term cash balances, floating rate loans advanced to subsidiaries and fixed rate debt capital securities in issue which...

  • Page 263
    ... as financial assets. Changes in the carrying amount of these loans due to foreign exchange rate differences are taken directly to the income statement. These loans, and the associated foreign exchange exposures, are eliminated on a Group consolidated basis. The increased maximum VAR in 2009 related...

  • Page 264
    ... the Group's risk appetite, as defined by GMB. A formal governance structure provides oversight over the management of operational risk. A Global Operational Risk and Control Committee, which reports to the Risk Management Meeting, meets at least quarterly to discuss key risk issues and review the...

  • Page 265
    ... the market risks inherent in the scheme. Pension risk (Unaudited) HSBC operates a number of pension plans throughout the world, as described in Note 8 on the Financial Statements. Some of them are defined benefit plans, of which the largest is the HSBC Bank (UK) Pension Scheme. In order to fund...

  • Page 266
    ... operating companies to assess similar risks of a lower magnitude; building and implementing systems-based processes to ensure consistent application of policies, reduce the costs of sustainability risk reviews and capture management information to measure and report on the effect of HSBC's lending...

  • Page 267
    ... annual bonuses and a final bonus, in addition to providing cover on death. Certain minimum return levels are also guaranteed. The largest portfolio is in Hong Kong. Credit life insurance business is written to underpin banking and finance products. The policy pays a claim if the holder of the loan...

  • Page 268
    ... the underlying assets is affected by changes in both interest rates and equity prices (see page 274). During 2009, Group Insurance agreed to a global risk appetite statement in relation to insurance risks, encompassing limits on the largest exposures the business will write in normal circumstances...

  • Page 269
    ..., HSBC is not exposed to insurance risk on investment contracts, so they are not included in the insurance risk management analysis. Insurance contracts sold by HSBC primarily relate to core underlying banking activities, such as savings and investment products, and credit life products. The Group...

  • Page 270
    ... policyholders highlights that the most significant products are investment contracts with DPF issued in France, insurance contracts with DPF issued in Hong Kong and unit-linked contracts issued in Hong Kong, Latin America and Europe. The liabilities for long-term contracts are set by reference to...

  • Page 271
    .... HSBC manages these risks through pricing (for example, imposing restrictions and deductibles in the policy terms and conditions), product design, risk selection, claims handling, investment strategy and reinsurance policy. The majority of non-life insurance contracts are renewable annually and...

  • Page 272
    ... insurance risk such as mortality and lapse rates. In addition to assessing the actual cash inflow required to meet cash outflows, of particular importance is the need to match the expected pattern of cash inflows with the benefits payable on the underlying contracts, which can extend for many years...

  • Page 273
    ... a time when yields were higher than those observed in the current market. As a result, the current yield of the debt securities exceeds that which may be obtained on current issues. Management action was taken in relation to certain participating contracts to reduce short-term bonus rates paid to...

  • Page 274
    ...7,577 64,093 Financial risks (Audited) HSBC's insurance businesses are exposed to a range of financial risks, including market risk, credit risk and liquidity risk. Market risk includes interest rate risk, equity risk and foreign exchange risk. The nature and management of these risks is described...

  • Page 275
    ... HSBC's insurance manufacturing subsidiaries at 31 December 2009 by type of contract, and provides a view of the exposure to financial risk: Life linked Life non-linked contracts57 contracts58 US$m US$m At 31 December 2009 Trading assets Debt securities ...Financial assets designated at fair value...

  • Page 276
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Insurance operations > Financial risks > Market risk The table demonstrates that for linked contracts, HSBC typically designates assets at fair value. For non-linked contracts, the classification of the assets is driven by the nature of ...

  • Page 277
    ... asset reallocation strategies in order to manage risk exposures. • • • • • • The product approval process includes the identification and assessment of the risk embedded in new products. Group Insurance Head Office includes a Chief Market and Liquidity Risk Officer reporting...

  • Page 278
    ... 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 279
    ... the business. Group Insurance Head Office includes a Chief Credit Risk Officer reporting to the Chief Risk Officer. Each regional insurance unit includes an individual responsible for credit risk. The exposure to credit risk products and the management of the risks associated with credit protection...

  • Page 280
    ... internationally recognised credit ratings and other publicly available information. Investment credit exposures are monitored against limits by the local insurance manufacturing subsidiaries, and are aggregated and reported to Group Credit Risk, the Group Insurance Credit Risk Meeting and the Group...

  • Page 281
    ...December 2009 Supporting liabilities under non-linked insurance and investment contracts Trading assets - debt securities ...Financial assets designated at fair value ...- treasury and other eligible bills ...- debt securities ...Financial investments ...- treasury and other similar bills ...- other...

  • Page 282
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Insurance operations > Financial risks > Credit risk / Liquidity risk Treasury bills, other eligible bills and debt securities in HSBC's insurance manufacturing subsidiaries (continued) Neither past due nor impaired MediumMediumSubgood ...

  • Page 283
    ... holding may be sufficiently large that a sale cannot be completed around the market price. Finally, there is standby liquidity risk, which refers to the capacity to meet payment terms in abnormal conditions. HSBC's insurance manufacturing subsidiaries primarily fund cash outflows arising from claim...

  • Page 284
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Insurance operations > Financial risks > Liquidity risk // PVIF for collation and review by the Group Insurance Market and Liquidity Risk Meeting. Liquidity risk is assessed in these reports by measuring changes in expected cumulative net...

  • Page 285
    ... to emerge from the book of in-force policies at 31 December can be stress-tested to assess the ability of the life business book to withstand adverse developments. A key feature of the life insurance business is the importance of managing the assets, liabilities and risks in a coordinated fashion...

  • Page 286
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Insurance operations > PVIF > Non-economic assumptions // Capital management and allocation Movements in total equity and PVIF of insurance operations (Audited) 2009 Total equity US$m At 1 January ...Value of new business written during ...

  • Page 287
    ...HSBC's local regulators for individual Group companies. • The Group has identified the following as being the material risks faced and managed through the Capital Management Framework: credit, market, operational, interest rate risk in the banking book, pension fund, residual and insurance risks...

  • Page 288
    HSBC HOLDINGS PLC Report of the Directors: Risk (continued) Capital management and allocation > Capital measurement and allocation financial system during the past two years have been used to inform the capital planning process and further develop the stress scenarios employed by the Group. The ...

  • Page 289
    ... capital requirements under one of the credit risk approaches; standardised, IRB foundation and IRB advanced. HSBC uses the mark-to-market and internal model method approaches for counterparty credit risk. Its longer-term aim is to migrate more positions from the mark-to-market to the internal model...

  • Page 290
    ... HOLDINGS PLC Report of the Directors: Risk (continued) Capital management and allocation > Capital measurement and allocation > Capital structure Market risk Market risk is the risk that movements in market risk factors, including foreign exchange, commodity prices, interest rates, credit spread...

  • Page 291
    ... available-for-sale debt securities75 ...Own credit spread ...Defined benefit pension fund adjustment76 ...Reserves arising from revaluation of property and unrealised gains on available-for-sale equities ...Cash flow hedging reserve ...Deductions ...Goodwill capitalised and intangible assets ...50...

  • Page 292
    ... capital (Audited) Opening tier 1 capital79 ...Contribution to tier 1 capital from profit for the year ...Consolidated profits attributable to shareholders of the parent company ...Removal of own credit spread net of tax ...Goodwill write-offs ...Net dividends ...Dividends ...Add back: shares issued...

  • Page 293
    ...4 Other personal loans and advances include second lien mortgages and other property-related lending. 5 Other commercial loans and advances include advances in respect of agriculture, transport, energy and utilities. 6 Included within 'Gross loans and advances to customers' is credit card lending of...

  • Page 294
    ... exchange risk and is not applicable to non-trading portfolios. 45 The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included in the Group VAR. The management of this risk is described on page 258. 46 Credit spread sensitivity is reported separately for insurance...

  • Page 295
    ...Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited. 64 Impairment is not measured for debt securities held in trading portfolios or designated at fair value, as assets in such portfolios are managed according to movements in fair value, and the fair value movement is taken directly...

  • Page 296
    ... responsibility for HSBC's treasury and capital markets businesses globally from 1992 to 1998, and executive Director, Corporate, Investment Banking and Markets, from 1998 to 2003, when he was appointed Group Chief Executive. He has worked in Hong Kong, New York, the Middle East and London and has...

  • Page 297
    ... Corporation Limited until 1 February 2010 and of HSBC Global Asset Management (Hong Kong) Limited until 4 February 2010. A director of HSBC Bank Australia Limited and a member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority until 1 February 2010. A non-executive director...

  • Page 298
    ... of HSBC Finance Corporation and a director of HSBC North America Holdings Inc. until 7 May 2009. Co-chairman of the Counterparty Risk Management Policy Group III in 2008. Chaired the Financial Reporting Council's review of the Turnbull Guidance on Internal Control in 2004. Served on the Accounting...

  • Page 299
    ...Gulliver is a career banker with over 28 years' international experience with HSBC. He has held a number of key roles in the Group's operations worldwide, including in London, Hong Kong, Tokyo, Kuala Lumpur and the United Arab Emirates. Global Banking and Markets is the wholesale banking division of...

  • Page 300
    ... of the United Nations Foundation. A non-executive director of New Delhi Television Limited until 22 July 2009. A former non-executive director of DBS Group Holdings Limited and DBS Bank Limited. Mr Murthy brings to the Board experience in information technology, corporate governance and education...

  • Page 301
    ... The Bank of Ireland. Sir Brian brings to the Board extensive experience in money and bond markets, private equity, futures, options and commodities trading internationally. He established the London International Financial Futures and Options Exchange in the 1980s and led the Exchange's development...

  • Page 302
    ...2010. A director of Hang Seng Bank Limited, Bank of Communications Co., Ltd. and Ping An Insurance (Group) Company of China, Ltd. Group General Managers P Y Antika Age 49. Chief Executive Officer, Turkey. Joined HSBC in 1990. Appointed a Group General Manager in 2005. S Assaf Age 49. Head of Global...

  • Page 303
    ... North America Holdings Inc. Joined HSBC in 1981. Appointed a Group General Manager in 2004. P W Boyles Age 54. Chief Executive Officer Continental Europe and deputy chairman, HSBC France. Joined HSBC in 1975. Appointed a Group General Manager in 2006. D C Budd Age 56. Chairman of HFC Bank Limited...

  • Page 304
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Biographies > Senior management // Board of Directors > The Board A P Long Age 54. Group General Manager, Head of Global Transaction Banking. Joined HSBC in 1977. Appointed a Group General Manager in May 2008. A M Losada Age 55. ...

  • Page 305
    ... for such time and on such terms as it thinks fit. HSBC Holdings was registered in Hong Kong under part IX of the Companies Ordinance on 17 January 1991. The Board sets the strategy for the Group and approves the risk appetite, capital and operating plans presented by management for the achievement...

  • Page 306
    ... Annual General Meeting and were both re-elected ahead of taking up their new roles from the conclusion of that Meeting. 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...

  • Page 307
    ... work to develop the Group's business in China while continuing as chairman of HSBC Bank (China) Company Limited and HSBC Bank (Taiwan) Limited. A A Flockhart has been appointed Chairman, Personal and Commercial Banking and Insurance reporting to the Group Chief Executive and is based in Hong Kong...

  • Page 308
    ... against financial objectives, on business developments and on investor and external relations and receives reports from the chairmen of Board committees and from the Group Chief Executive. The Board receives regular reports and presentations on strategy and developments in the customer groups and...

  • Page 309
    ... shareholders each year to discuss corporate governance matters. All executive Directors and other senior executives hold regular meetings with institutional investors and report to the Board on those meetings. HSBC Holdings' brokers, Goldman Sachs, give biannual presentations to the Board on market...

  • Page 310
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Board of Directors > The Board / Corporate governance codes Financial Officer, Executive Director, Risk and Regulation or other executives has failed to resolve or for which such contact would be inappropriate. Invitations to meet S...

  • Page 311
    ...and to the Chief Financial Officer, Executive Director, Risk and Regulation and Group Chief Accounting Officer. HSBC Holdings' Code of Ethics is available on www.hsbc.com/codeofethics or from the Group Company Secretary at 8 Canada Square, London E14 5HQ. If the Board amends or waives the provisions...

  • Page 312
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Board of Directors > Board committees Lastly, a chief executive officer of a US company listed on the NYSE must annually certify that he or she is not aware of any violation by the company of NYSE corporate governance standards. In ...

  • Page 313
    ... presentations on global market risk and liquidity and reports on the US Mortgage Services business, credit performance in the US and the impact of the tightening of liquidity in the money markets. Comprehensive reports are received at each regular meeting from the Group Chief Risk Officer, the Head...

  • Page 314
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Board of Directors > Board committees / Internal control including the Credit Risk Management Policy Group III report and the report of the Institute of International Finance committee on Market Best Practices. The Committee has ...

  • Page 315
    ...and up to 1 March 2010, the date of approval of the Annual Report and Accounts 2009. In the case of companies acquired during the year, the internal controls in place are being reviewed against HSBC's benchmarks and integrated into HSBC's processes. HSBC's key internal control procedures include the...

  • Page 316
    ... Officer, Executive Director, Risk and Regulation, is held monthly to address asset, liability and risk management issues. The minutes of this meeting are submitted to the Group Audit Committee and to the Board of Directors. The Global Operational Risk and Control Committee ('GORCC'), which reports...

  • Page 317
    ... business and operational risk assessments; regular reports from the heads of key risk functions including Internal Audit and Compliance; the production annually of reviews of the internal control framework applied at Group Management Office and major operating subsidiary level measured against HSBC...

  • Page 318
    ... income statement and consolidated balance sheet, is provided in the 'Operating and Financial Review'; HSBC's objectives, Directors' interests HSBC Holdings ordinary shares of US$0.50 policies and processes for managing credit, liquidity and market risk, and its approach to capital management and...

  • Page 319
    ... shares). At 31 December 2009, executive Directors and Senior Management held, in aggregate, options to subscribe for 1,032,688 HSBC Holdings ordinary shares under the HSBC Holdings savings-related share option plans, HSBC Holdings Group Share Option Plan and HSBC Finance: 1996 Long-Term Executive...

  • Page 320
    ... offers challenging career development. In line with the overall principles applied to executive Directors by the Remuneration Committee described on page 334 in the Directors' Remuneration Report: • employees' salaries are reviewed annually in the context of business performance, market practice...

  • Page 321
    ...of the rights issue. The adjustments were to the ratios at which the subsidiary company shares are exchangeable for HSBC Holdings ordinary shares of US$0.50 following the exercise of options. Employee share plans are subject to the following limits on the number of HSBC Holdings ordinary shares that...

  • Page 322
    ... applicable, the US dollars, Hong Kong dollars and euro exercise prices are converted from the sterling exercise price at the applicable exchange rate on the working day preceding the relevant invitation date. The exercise period of the options awarded under all-employee share plans may be advanced...

  • Page 323
    ... 2009 adjusted for rights issue. 2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.52. 3 Exercisable at a 15 per cent discount to the average market value of the ordinary shares on the five business days immediately preceding the...

  • Page 324
    ... Share awards under the HSBC Holdings Restricted Share Plan 2000) was 150 per cent (or in exceptional circumstances 225 per cent) of the employee's annual salary at the date of grant plus any bonus paid in the previous year. Under the HSBC Holdings Executive Share Option Scheme the maximum value...

  • Page 325
    ...until 21 Jun 2009 30 Sep 2015 1 Adjusted for rights issue. Subsidiary company share plans HSBC France and subsidiary company When it was acquired in 2000, HSBC France and one of its subsidiary companies, HSBC Private Bank France, operated employee share option plans under which options could be...

  • Page 326
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Employees > Subsidiary company share plans HSBC France Shares of â,¬5 Date of award 7 Apr 1999 12 Apr 2000 Exercise price (â,¬) 81.71 142.50 Exercisable from 7 Jun 2000 1 Jan 2002 Options at 1 January 2009 183,627 604,250 Options ...

  • Page 327
    ...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 328
    ... similar benefits for Directors and Senior Management for the year ended 31 December 2009 was US$1,790,072. Corporate sustainability HSBC's values promote ethical and sustainable business practices, making sustainability central to the Group's strategy and culture. It is about the Group's long-term...

  • Page 329
    ... risk issues into the Group's risk management processes covering corporate clients. Business sustainability HSBC aims to build long-term customer relationships around the world through the provision of a consistent and high-quality service and customer experience. The Group uses the benefits...

  • Page 330
    ... the world it operates. Group Security provides regular risk assessments in areas of increased risk to assist management in judging the level of terrorist threat. In addition, regional security functions conduct regular security reviews to ensure measures to protect HSBC staff, buildings, assets and...

  • Page 331
    ... of an ordinary resolution of HSBC Holdings and subject to such terms and conditions as the Board may determine, offer to any holders of ordinary shares the right to elect to receive ordinary shares of the same or a different currency, credited as fully paid, instead of cash in any currency in...

  • Page 332
    ... during the year in relation to the ordinary share capital of HSBC Holdings: Scrip dividends 1. 38,963,783 ordinary shares were issued at par in January 2009 to shareholders who elected to receive new shares in lieu of the third interim dividend for 2008. The market value per share used to calculate...

  • Page 333
    ... who elected to receive new shares in lieu of the second interim dividend for 2009. The market value per share used to calculate shareholders' entitlements to new shares was US$10.7597, being the US dollar equivalent of £6.566. the HSBC Holdings Group Share Option Plan. Options over 5,466,759...

  • Page 334
    ...Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited at least 25 per cent of the total issued share capital of HSBC Holdings has been held by the public at all times during 2009 and up to the date of this Report. Dealings in HSBC Holdings shares Except for dealings as...

  • Page 335
    ..., Barbican Centre, London EC2 on 28 May 2010 at 11.00am. An informal meeting of shareholders will be held at 1 Queen's Road Central, Hong Kong on Monday 24 May 2010 at 4.30pm. Resolutions to receive the Annual Report and Accounts, approve the Directors' Remuneration Report, re-elect Directors and...

  • Page 336
    ... ...Application to executive Directors ...HSBC performance and market context ...Key achievements ...Management of risk ...Executive Director remuneration ...Salary ...Annual bonus ...Performance Shares ...Funding ...Total shareholder return ...Pensions ...Share ownership guidelines ...Service...

  • Page 337
    ... and variable elements. Annual bonus payments and Performance Share awards are not pensionable. HSBC performance and market context 2009 was a year of unprecedented initiatives by governments and central banks designed to provide timely support for global financial markets and reduce the volatility...

  • Page 338
    ... of asset-backed and structured credit exposures in the Global Banking and Markets business; recovery in shareholders' equity in line with expectations, as the available-for-sale portfolio in the Global Banking and Markets business recovered value; the resilient performance of HSBC in Hong Kong...

  • Page 339
    ...and Commercial Banking and Insurance. His remit includes overseeing HSBC's Global Personal Financial Services, Commercial Banking and Insurance businesses, HSBC's Latin American and African businesses, and most Group functions including Corporate Sustainability. He continues to be based in Hong Kong...

  • Page 340
    ...from compressed deposit spreads, partly offset by a reduced level of loan impairment charges and credit risk provisions. Overall, customer lending balances were flat, as higher lending in Personal Financial Services and Global Banking and Markets was broadly offset by a decline in Commercial Banking...

  • Page 341
    ... terms. The 2008 figure is on a gross equivalent basis. Performance Shares Under the HSBC Share Plan, executive Directors, as with other participants in the Plan, are eligible to receive awards of Performance Shares with a face value at grant of up to a maximum of seven times salary. The Group...

  • Page 342
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Executive Director remuneration > Performance Shares measures and their percentage weighting referred to above. TSR award TSR is measured against a comparator group comprising the largest global banks in the world as well as other banks ...

  • Page 343
    ... market capitalisation, their geographic spread and the nature of their activities: ABN AMRO1 Banco Santander Bank of America Bank of New York Barclays BBVA BNP Paribas Citigroup Crédit Agricole Credit Suisse Group Deutsche Bank HBOS1 JP Morgan Chase Lloyds Banking Group Mitsubishi UFJ Financial...

  • Page 344
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Executive Directors > Funding / TSR / Pensions / Share ownership / Service contracts / Other directorships // Non-executive Directors three years would equate to a compound annual growth rate of 8 per cent. Illustration of incremental ...

  • Page 345
    ... future awards of long-term incentives and/or an increase in the proportion of the annual bonus that is deferred into shares. Service contracts HSBC's policy is to employ executive Directors on one-year rolling contracts although longer initial terms may be approved by the Remuneration Committee if...

  • Page 346
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Non-executive Directors > Fees // Directors' 2009 remuneration re-election by shareholders at Annual General Meetings. Non-executive directors have no service contract and are not eligible to participate in HSBC's share plans. Current ...

  • Page 347
    ... to the UK Listing Rules, includes deferred bonuses. 6 Total emoluments, pursuant to the UK Companies Act 2006, exclude the annual bonus that has been deferred and is not receivable for at least a further 12 months. The total of fees paid to each of the non-executive Directors of HSBC Holdings for...

  • Page 348
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Pensions / Share plans Pensions (Audited) V H C Cheng is a member of the Hong Kong Special Administrative Region Mandatory Provident Fund ('MPF') and received an executive allowance of 25 per cent of annual basic salary during 2009, ...

  • Page 349
    ... be advanced to an earlier date in certain circumstances, e.g. retirement. 2 Adjusted for rights issue. 3 Options lapsed on 29 April 2009 following closure of the associated savings-related account by the Director. Awards of Performance Shares HSBC Share Plan (Audited) HSBC Holdings ordinary shares...

  • Page 350
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Share plans // Statement of Directors' Responsibilities Vesting of these awards of Performance Shares is subject to the achievement of the corporate performance conditions set out on pages 339 to 342. Interests in awards of Performance ...

  • Page 351
    ... 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 352
    ... the Members of HSBC Holdings plc We have audited the Group and parent company financial statements of HSBC Holdings plc for the year ended 31 December 2009 set out on pages 353 to 471. The financial reporting framework that has been applied in their preparation is applicable law and International...

  • Page 353
    ... all the information and explanations we require for our audit. Under the Listing Rules of the Financial Services Authority, we are required to review: • • the directors' statement, set out on page 316, in relation to going concern; and the part of the Corporate Governance Statement relating to...

  • Page 354
    ... as security for assets ...36 Minority interests ...37 Called up share capital and other equity instruments ...38 Notes on the statement of cash flows ...39 Contingent liabilities, contractual commitments and guarantees ...40 Lease commitments ...41 Rights issue ...42 Litigation ...43 Related party...

  • Page 355
    ... ...Net trading income ...Changes in fair value of long-term debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value Gains less losses from financial investments...

  • Page 356
    HSBC HOLDINGS PLC Financial Statements (continued) Consolidated statement of comprehensive income / Consolidated balance sheet Consolidated statement of comprehensive income for the year ended 31 December 2009 2009 US$m Profit for the year ...Other comprehensive income/(expense) Available-for-sale...

  • Page 357
    ... assets ...LIABILITIES AND EQUITY Liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue...

  • Page 358
    ... issued ...Subordinated loan capital repaid ...Dividends paid to shareholders of the parent company ...Dividends paid to minority interests ...Dividends paid to holders of other equity instruments ...Net cash generated from/(used in) financing activities ...Net increase/(decrease) in cash and cash...

  • Page 359
    ...471) 50 (227) 38 683 9 274 - 209 135,661 At 1 January ...Profit for the year ... Other comprehensive income (net of tax) ...Available-for-sale investments ...Cash flow hedges ...Actuarial gains/(losses) on defined benefit plans ...Share of other comprehensive income of associates and joint ventures...

  • Page 360
    ...) - 118 100,229 Financial Statements (continued) Consolidated statement of changes in equity At 1 January ...Profit for the year ... Other comprehensive income (net of tax) ...Available-for-sale investments ...Cash flow hedges ...Actuarial gains/(losses) on defined benefit plans ...Share of other...

  • Page 361
    ...,029) (510) 7 870 (65) (38) (109) 135,416 At 1 January ...Profit for the year ...Other comprehensive income (net of tax) ...Available-for-sale investments ...Cash flow hedges ...Actuarial gains/(losses) on defined benefit plans ...Share of other comprehensive income of associates and joint ventures...

  • Page 362
    ... income ...Investments in subsidiaries ...Property, plant and equipment ...Deferred tax assets ...Total assets ...LIABILITIES AND EQUITY Liabilities Amounts owed to HSBC undertakings ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue ...Other liabilities...

  • Page 363
    ... share options ...Subordinated loan capital issued ...Subordinated loan capital repaid ...Debt securities issued ...Dividends paid ...Dividends paid to holders of other equity instruments ...Net cash generated from financing activities ...Net increase/(decrease) in cash and cash equivalents ...Cash...

  • Page 364
    ...' equity US$m 62,587 (1,096) 63 103 (40) (1,033) 73 Called up share capital US$m At 1 January ...Profit for the year ...Other comprehensive income (net of tax) ...Available-for-sale investments ...Income tax ...Total comprehensive income for the year ...Shares issued under employee share plans...

  • Page 365
    ... Sharebased Other payment paid-in reserve capital US$m US$m 1,181 1,968 Total shareholders' equity US$m 60,831 7,644 (292) (356) 64 7,352 470 Called up share capital US$m At 1 January ...Profit for the year ...Other comprehensive income (net of tax) ...Available-for-sale investments ...Income tax...

  • Page 366
    ...US$344 million on a forward foreign exchange contract associated with hedging the proceeds of the rights issue. For further details see Note 41 on the Financial Statements. 8 In April 2008, HSBC Holdings issued US$2,200 million of Perpetual Subordinated Capital Securities, including US$67 million of...

  • Page 367
    ... Hong Kong, Rest of Asia-Pacific, Middle East, North America and Latin America. Due to the nature of the Group, HSBC's chief operating decision-maker regularly reviews operating activity on a number of bases, including by geographical region, customer group and global business, and retail businesses...

  • Page 368
    ...IFRS 7 relating to the fair value of financial instruments, have been included in the audited section of 'Report of the Directors: Impact of Market Turmoil' on pages 151 to 195. In publishing the parent company financial statements here together with the Group financial statements, HSBC Holdings has...

  • Page 369
    ... audited interim financial statements, drawn up to 31 December annually. Subsidiaries are consolidated from the date that HSBC gains control. The purchase method of accounting is used to account for the acquisition of subsidiaries by HSBC. The cost of an acquisition is measured at the fair value of...

  • Page 370
    ... entity acquired either at fair value, or at the non-controlling interests' proportionate share of the net identifiable assets of the entity acquired. The effect that the changes will have on HSBC's consolidated financial statements and the separate financial statements of HSBC Holdings will depend...

  • Page 371
    ... arising from debt securities issued, and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense' (Note 2a). Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and...

  • Page 372
    ... bid-offer spread, model uncertainty, credit risk and model limitation. Where a financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the portfolio is calculated as the product of the number of units and quoted price and no block discounts are...

  • Page 373
    ... interest method. However, where the initial fair value is lower than the cash amount advanced (for example, due to the rate of interest charged on the loan being below the market rate of interest), the write-down is charged to the income statement. The write-down will be recovered over the life...

  • Page 374
    ... market price of the debt. Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the resultant present value with the loan's current carrying amount. Collectively assessed loans and advances Impairment...

  • Page 375
    ... the loan (net of impairment allowance) at the date of exchange. No depreciation is charged in respect of assets held for sale. Any subsequent write-down of the acquired asset to fair value less costs to sell is recognised in the income statement, in 'Other operating income'. Any subsequent increase...

  • Page 376
    ... risk management strategy. An accounting mismatch would arise if the debt securities issued were accounted for at amortised cost, because the related derivatives are measured at fair value with changes in the fair value recognised in the income statement. By designating the long-term debt at fair...

  • Page 377
    ... and/or discounts arising on the purchase of dated investment securities are included in the calculation of their effective interest rates. Dividends are recognised in the income statement when the right to receive payment has been established. At each balance sheet date an assessment is made...

  • Page 378
    ... and risks are not clearly and closely related to those of the host contract; the terms of the embedded derivative would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated at fair value. These...

  • Page 379
    ... 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 380
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 2 recognised in 'Interest expense'. All other gains and losses on these derivatives are reported in 'Net income from financial instruments designated at fair value'. (m) Derecognition of financial assets and liabilities Financial...

  • Page 381
    ... 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...

  • Page 382
    ... deferred fair value gain or loss is recognised in the income statement. (t) Pension and other post-employment benefits HSBC operates a number of pension and other post-employment benefit plans throughout the world. These plans include both defined benefit and defined contribution plans and various...

  • Page 383
    ... 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 384
    ... the consolidated financial statements, the assets, including related goodwill where applicable, and liabilities of branches, subsidiaries, joint ventures and associates whose functional currency is not US dollars, are translated into the Group's presentation currency at the rate of exchange ruling...

  • Page 385
    ... is recognised as an asset. The asset represents the present value of the shareholders' interest in the profits expected to emerge from these contracts written at the balance sheet date. The present value of in-force long-term insurance business and long-term investment contracts with DPF, referred...

  • Page 386
    ... costs directly related to the acquisition of new investment contracts or renewing existing investment contracts are deferred and amortised over the period during which the investment management services are provided. (z) Debt securities issued and deposits by customers and banks Financial...

  • Page 387
    ...from financial instruments designated at fair value ... (3,531) HSBC Holdings 2009 US$m Net income/(expense) arising on: - HSBC's long-term debt issued and related derivatives - changes in own credit spread on long-term debt ...- derivatives managed in conjunction with HSBC's issued debt securities...

  • Page 388
    ...its interests in Bank of Communications, HSBC increased its holding from 18.60 per cent to 19.01 per cent at 31 December 2007 (Note 21). In 2007, certain HSBC associates issued new shares. HSBC did not subscribe and, as a result, its interests in the associates' equity decreased. The assets of each...

  • Page 389
    6 Net insurance claims incurred and movement in liabilities to policyholders Non-life insurance US$m 2009 Gross claims incurred and movement in liabilities ...- claims, benefits and surrenders paid ...- movement in liabilities ...Reinsurers' share of claims incurred and movement in liabilities ...-...

  • Page 390
    ...-for-sale equity securities ...Gains on disposal of property, plant and equipment, intangible assets and non-financial investments ...Gain on sale/repurchase of 8 Canada Square1 ...Loan impairment charges and other credit risk provisions ...Net impairment charge on loans and advances ...Impairment...

  • Page 391
    ...service, ill health and early retirement benefits for some UK employees. HSBC has been progressively offering all new employees membership of defined contribution plans. At 31 December 2009, 59 per cent of HSBC's staff were members of defined contribution plans. The related pension cost for the year...

  • Page 392
    ...Wyatt Limited, a Towers Watson company. At that date, the market value of the HSBC Bank (UK) Pension Scheme's assets was £10.6 billion (US$15.5 billion) (including assets relating to the defined benefit plan, the defined contribution plan and additional voluntary contributions). The market value of...

  • Page 393
    ..., the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The Hongkong and Shanghai Banking Corporation and certain other employees of HSBC Group. The scheme comprises a funded defined benefit scheme (which provides a lump sum on retirement but is now closed to new members...

  • Page 394
    ... 2010 of approximately US$13 million and a one-time curtailment gain of approximately US$144 million. The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and the HSBC North America (US) Retirement Income Plan cover 34 per cent of HSBC's employees. HSBC...

  • Page 395
    ... to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2007, were as follows. These assumptions also formed the basis for measuring periodic costs under the plans in 2008: Healthcare cost trend Discount rate % UK ...Hong Kong ...US...

  • Page 396
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 8 Mortality assumptions are significant in measuring the Group's obligations under its defined benefit pension and post-employment healthcare plans, particularly given the maturity of the plans. The mortality tables and average ...

  • Page 397
    ...measure the net defined benefit pension costs in each subsequent year. HSBC Bank (UK) Pension Scheme 2008 2009 Expected Expected rates of return rates of return Value % % US$m Fair value of plan assets ...Equities ...Bonds ...Property ...Other ...Defined benefit obligation ...Present value of funded...

  • Page 398
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 8 Other plans 2009 Expected rates of return1 % Fair value of plan assets ...Equities ...Bonds ...Property ...Other ...Defined benefit obligation ...Present value of funded obligations ...Present value of unfunded obligations ......

  • Page 399
    ... to the HSBC International Staff Retirement Benefits Scheme was made in the form of cash and US$69 million was contributed in the form of assetbacked securities previously held within the Group. The actual return on plan assets for the year ended 31 December 2009 was a positive return of US...

  • Page 400
    ... plans 2009 Expected rates of return1 % Fair value of plan assets ...Equities ...Bonds ...Other ...Defined benefit obligation ...Present value of funded obligations ...Present value of unfunded obligations ...Unrecognised negative past service cost ...Net liability ...1 The expected rates of return...

  • Page 401
    ... number of persons employed by HSBC Holdings during 2009 was 876 (2008: 730). Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings...

  • Page 402
    ... business continuity and performing agreed-upon IT testing procedures. 6 Including fees payable to KPMG for transaction-related work, including US debt issuances. 7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of financial models...

  • Page 403
    ... from the fair values of the share-based payment transactions when contracted, arose under employee share awards made in accordance with HSBC's reward structures. In April 2009, HSBC Holdings completed a rights issue, details of which are provided in Note 41. The terms of the share plans have been...

  • Page 404
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 10 1 The risk-free rate was determined from the UK gilts yield curve for the UK Savings-Related Share Option Plans. A similar yield curve was used for the International Savings-Related Share Option Plans. 2 Expected life is not a ...

  • Page 405
    ... 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. 2009 Number (000s) Outstanding at 1 January...

  • Page 406
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 10 2009 Weighted average exercise price £ 6.97 3.32 6.08 5.72 5.96 3.69 2008 Weighted average exercise price £ 6.83 6.82 - 6.10 7.04 6.97 Number (000s) Outstanding at 1 January ...Granted in the year ...Adjustment for rights ...

  • Page 407
    ...8.44 4.34 116,646 8.44 HSBC Holdings Executive Share Option Scheme The HSBC Holdings Executive Share Option Scheme was a long-term incentive plan under which certain senior HSBC employees were awarded share options before the adoption of the HSBC Holdings Group Share Option Plan in 2000. The aim of...

  • Page 408
    ...HSBC Holdings ordinary shares of US$0.50. As a consequence of the rights issue, the ratio of HSBC Holdings ordinary shares exchangeable for each HSBC France share was adjusted from 13 to 14.92. Options were granted at market value and are exercisable within 10 years of the date of grant. 2009 Number...

  • Page 409
    ...976 (97) 5,205 (1,247) (35) (166) (1,448) 3,757 The UK corporation tax rate applying to HSBC Holdings and its subsidiaries was 28 per cent (2008: 30 per cent to 31 March 2008 and 28 per cent thereafter; 2007: 30 per cent). Overseas tax included Hong Kong profits tax of US$783 million (2008: US$846...

  • Page 410
    ... reduction in other comprehensive income and equity). Deferred taxation HSBC 2009 US$m At 1 January ...Income statement credit ...Equity: - available-for-sale investments ...- cash flow hedges ...- actuarial losses ...- share-based payments ...Foreign exchange and other adjustments ...At 31 December...

  • Page 411
    2009 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 ...1,772 6,363 164 215 68 229 196 1,778 10,...

  • Page 412
    ...support this asset. HSBC Holdings Deferred tax asset/(liability) 2009 2008 US$m US$m Temporary differences: - short-term timing differences ...- fair valued assets and liabilities ...- share-based payments ...1 (23) 8 (14) 1 30 11 42 12 Dividends Dividends to shareholders of the parent company were...

  • Page 413
    ...the Hong Kong Overseas Branch Register and 19 March 2010 on the Principal Register in the UK or the Bermuda Overseas Branch Register. No liability is recorded in the financial statements in respect of the fourth interim dividend for 2009. On 15 January 2010, HSBC paid a further coupon on the capital...

  • Page 414
    ... markets business that provides services in credit, rates, foreign exchange, money markets and securities services; global asset management services and principal investment activities. Private Banking provides a range of services to meet the banking, investment and wealth advisory needs of high net...

  • Page 415
    ... in fair value of longterm debt issued and related derivatives ...Net income from other financial instruments designated at fair value ...Net income from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums...

  • Page 416
    ... debt issued and related derivatives ...Net income/(expense) from other financial instruments designated at fair value ...Net income/(expense) from financial instruments designated at fair value ...Gains less losses from financial investments ...Dividend income ...Net earned insurance premiums...

  • Page 417
    ... ...Net trading income/(expense) ...Changes in fair value of longterm debt issued and related derivatives ...Net income from other financial instruments designated at fair value ...Net income from financial instruments designated at fair value ...Gains less losses from financial investments...

  • Page 418
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 14 Other information about the profit/(loss) for the year Hong Kong US$m 8,967 8,352 615 Rest of AsiaPacific1 US$m 7,107 6,056 1,051 Middle East1 US$m 1,260 1,283 (23) North America US$m 641 767 (126) Latin America US$m 6,498 6,...

  • Page 419
    ...ratios Hong Kong US$m 71.0 41.7 Rest of AsiaPacific1 US$m 59.3 55.6 Middle East1 US$m 6.4 38.6 North America US$m (109.3) 51.5 Latin America US$m 15.9 59.6 Europe US$m Year ended 31 December 2009 Share of HSBC's profit before tax ...Cost efficiency ratio ...Year ended 31 December 2008 Share of HSBC...

  • Page 420
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 14 and 15 Other financial information Net operating income by customer group and global business Personal Financial Commercial Banking Services US$m US$m Year ended 31 December 2009 Net operating income ...External ...Inter-...

  • Page 421
    ...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 422
    ... banks ...Hong Kong Government certificates of indebtedness ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other assets ...Accrued income ... Notes on the Financial Statements...

  • Page 423
    ... at bank and in hand ...Derivatives ...Loans and advances to HSBC undertakings ...Financial investments ...Other assets ...Total financial assets ...Financial liabilities Amounts owed to HSBC undertakings ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue...

  • Page 424
    ... ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities3 ...Corporate debt and other securities ...Equity securities ...17,620 12,113 10,649 94,264 5,308 83,990 35,311 259,255 1 Included within these figures are debt securities issued by banks and other financial...

  • Page 425
    ... and advances to banks ...Loans and advances to customers ...223 20,718 14,983 35,924 354 903 37,181 2008 US$m 28,522 11 28,533 235 16,349 10,993 27,577 230 726 28,533 Securities designated at fair value Fair value1 2009 US$m US Treasury and US Government agencies2 ...UK Government ...Hong Kong...

  • Page 426
    ... HOLDINGS PLC Notes on the Financial Statements (continued) Note 18 18 Derivatives Fair values of derivatives by product contract type held by HSBC Trading US$m At 31 December 2009 Foreign exchange ...Interest rate ...Equity ...Credit ...Commodity and other ...Gross total fair values ...Netting...

  • Page 427
    ... credit risk management procedures to assess and approve potential credit exposures that are used for traditional lending. Trading derivatives Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products...

  • Page 428
    ...) (38) (5) 204 Hedging instruments HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt capital markets, and to...

  • Page 429
    ... in the cash flow hedging reserve, and are transferred to the income statement when the forecast cash flows affect the income statement. Fair value of derivatives designated as cash flow hedges At 31 December 2009 Fair value Assets Liabilities US$m US$m Foreign exchange ...Interest rate ...1,353...

  • Page 430
    ...foreign exchange contracts which are accounted for as hedges of a net investment in a foreign operation, or by financing with borrowings in the same currencies as the functional currencies involved. At 31 December 2009, the fair values of outstanding financial instruments designated as hedges of net...

  • Page 431
    ... guarantee issued by the US Government. 3 Excludes asset-backed securities included under US Government agencies and sponsored entities. Financial investments listed on a recognised exchange and unlisted Treasury Treasury and other and other eligible bills eligible bills available held to for sale...

  • Page 432
    ... yields of investment debt securities at 31 December 2009 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 433
    ... financial assets that do not qualify for derecognition relate to loans, credit cards, debt securities and trade receivables that have been securitised under arrangements by which HSBC retains a continuing involvement in such transferred assets. Continuing involvement may entail retaining the rights...

  • Page 434
    ...,3 ...British Arab Commercial Public Limited Company ...PRC1 PRC1 PRC1 Saudi Arabia Saudi Arabia 19.01% 12.78% 16.78% 32.50% 40.00% Issued equity capital RMB48,994m RMB5,000m RMB7,345m SR340m SR7,500m Hong Kong England 24.64% 48.92% Vietnam Technological and Commercial Joint Stock Bank ...Yantai...

  • Page 435
    ...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 436
    ...goodwill arising on business combinations, the present value of in-force long-term insurance business, and other intangible assets. Goodwill Reconciliation of goodwill Hong Kong US$m 122 - - 1 - 123 Rest of AsiaPacific1 US$m 364 570 - 119 - 1,053 Middle East1 US$m 69 - - - - 69 North America US$m 12...

  • Page 437
    ... operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective within the Group of the business units making up the CGUs. However, due to the current economic conditions in Personal Financial Services - Latin America, a 10 year cash flow...

  • Page 438
    ... 8.8 Cash-generating unit Personal Financial Services - Europe ...Commercial Banking - Europe ...Private Banking - Europe ...Global Banking and Markets - Europe ...Personal Financial Services - North America ...Personal Financial Services - Latin America ...Total goodwill in the CGUs listed above...

  • Page 439
    ... in respect of Personal Financial Services - Latin America. The present value of in-force long-term insurance business Movement on the PVIF 2009 US$m At 1 January ...Value of new business written during the year ...Movement from in-force business (including investment return variances and changes...

  • Page 440
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 22 and 23 Other intangible assets Movement of intangible assets excluding goodwill and the PVIF Mortgage servicing rights US$m 1,360 116 - (29) (757) - (1) 689 Internally generated software US$m 3,429 763 - (14) (45) 247 20 4,...

  • Page 441
    ... a net book value of US$513 million (2008: US$315 million). Including assets with a net book value of US$36 million (2008: US$28 million) pledged as security for liabilities. At 31 December 2009, HSBC had US$878 million (2008: US$1,498 million) of contractual commitments to acquire property, plant...

  • Page 442
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Note 23 In November 2009, HSBC entered into a contract for the sale and leaseback of 8 Canada Square in London for a consideration of £772.5 million (US$1,271 million). The transaction was effected through the sale of HSBC's 100 per ...

  • Page 443
    ... (206) (152) 971 Investment properties are valued on an open market value basis as at 31 December each year by independent professional valuers who have recent experience in the location and type of properties. Investment properties in Hong Kong, the Macau Special Administrative Region and mainland...

  • Page 444
    ... ...HSBC Private Banking Holdings (Suisse) S.A...HSBC Trinkaus & Burkhardt AG ...Marks and Spencer Retail Financial Services Holdings Limited ...Hong Kong Hang Seng Bank Limited7 ...HSBC Insurance (Asia) Limited ...HSBC Life (International) Limited ...The Hongkong and Shanghai Banking Corporation...

  • Page 445
    ... Investor Prime Money Market Fund ...HSBC Receivables Funding, Inc I ...HSBC Receivables Inc Funding II ...HSBC Sterling Liquidity Fund ...HSBC US Dollar Liquidity Fund ...Malachite Funding Limited ...Mazarin Funding Limited ...Metrix Funding Ltd ...Metrix Securities plc ...Regency Assets Limited...

  • Page 446
    ...Home Equity Loan Corporation I ...HSBC Investor Prime Money Market Fund ...HSBC Receivables Funding, Inc I ...HSBC Sterling Liquidity Fund ...HSBC US Dollar Liquidity Fund ...Malachite Funding Limited ...Mazarin Funding Limited ...Metris Receivables Inc ...Metrix Funding Ltd ...Metrix Securities plc...

  • Page 447
    ... value attributable to changes in credit risk was a gain of US$119 million (2008: gain of US$563 million). 27 Financial liabilities designated at fair value HSBC 2009 US$m Deposits by banks and customer accounts ...Liabilities to customers under investment contracts ...Debt securities in issue (Note...

  • Page 448
    ...34,969) 179,693 Certain debt securities in issue are managed on a fair value basis as part of HSBC's interest rate risk management policies. The hedged portion of these debt securities is presented within the balance sheet caption 'Financial liabilities designated at fair value', with the remaining...

  • Page 449
    ... to investors in funds consolidated by HSBC ...Obligations under finance leases (Note 40) ...Dividend declared and payable by HSBC Holdings ...Endorsements and acceptances ...Other liabilities ...48,193 644 1,231 9,313 9,259 68,640 2008 US$m 44,539 563 1,795 10,482 15,005 72,384 HSBC Holdings 2009...

  • Page 450
    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 2009 Unearned premium reserve ('UPR') At 1 January ...Changes in UPR recognised as (income)/...

  • Page 451
    ... other movements1 ...At 31 December ...Life (linked) At 1 January ...Benefits paid ...Increase in liabilities to policyholders ...Exchange differences and other movements2 ...At 31 December ...Total liabilities to policyholders ...Reinsurers' share US$m Net US$m 17,370 (2,098) 4,669 1,038 20,979 17...

  • Page 452
    ...in market rents, delays in finding new tenants and the timing of rental reviews. (ii) Labour, civil and fiscal litigation provisions in HSBC's Brazil operations of US$538 million (2008: US$334 million). These relate to labour and overtime litigation claims brought by employees after leaving the bank...

  • Page 453
    ... to the Financial Services Authority and, where relevant, the consent of the local banking regulator, and in certain cases at a premium over par. Interest rates on the floating rate loan capital are related to interbank offered rates. On the remaining subordinated loan capital, interest is...

  • Page 454
    ...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 455
    ...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 2009 US$m Subordinated liabilities: - at amortised cost ...- designated at fair value (Note 27) ...14...

  • Page 456
    ... value ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other financial assets ...3,786 172,916 381,967 134,824 26,189 719,682 Liabilities Deposits by banks ...Customer accounts ...Financial liabilities designated at fair value ...Debt securities in issue...

  • Page 457
    ... year one year US$m US$m Assets Loans and advances to HSBC undertakings ...Financial investments ...Other financial assets ...18,067 - 4 18,071 Liabilities Amounts owed to HSBC undertakings ...Financial liabilities designated at fair value ...Debt securities in issue ...Other financial liabilities...

  • Page 458
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 34, 35, 36 and 37 Net structural foreign exchange exposures 2009 US$m Currency of structural exposure Euro ...Pound sterling ...Chinese renminbi ...Mexican pesos ...Brazilian reais ...Hong Kong dollars ...Indian rupees ......

  • Page 459
    ... abolished under the UK Companies Act 2006 with effect from 1 October 2009 and consequential amendments to the Company's Articles of Association were approved by shareholders at the 2009 Annual General Meeting. At 31 December 2008, the authorised ordinary share capital of HSBC Holdings was US$7,500...

  • Page 460
    ...-cumulative dollar preference shares in issue are paid quarterly at the sole and absolute discretion of the Board of Directors. The Board of Directors will not declare a dividend on the preference shares in issue if payment of the dividend would cause HSBC Holdings not to meet the applicable capital...

  • Page 461
    ... At the Company's discretion, and subject to certain conditions being satisfied, the Capital Securities may be exchanged on any coupon payment date for non-cumulative preference shares to be issued by HSBC Holdings and which would rank pari passu with the dollar preference shares in issue at 2 March...

  • Page 462
    ...of the rights issue, the ratio of HSBC Holdings ordinary shares exchangeable for each HSBC Private Bank France share was adjusted from 1.83 to 2.099984. During 2009, 33,456 (2008: 7,000) HSBC Private Bank France shares were issued following the exercise of employee share options and exchanged for 70...

  • Page 463
    ... from the London Stock Exchange Daily Official List, for the five business days preceding the closing date of the acquisition. During 2009, options over 18,153 HSBC Holdings ordinary shares were exercised (2008: 12,847) and satisfied by delivery from the HSBC (Bank of Bermuda) Employee Benefit Trust...

  • Page 464
    ... operating liabilities 2009 US$m Change in accruals and deferred income ...Change in deposits by banks ...Change in customer accounts ...Change in debt securities in issue ...Change in financial liabilities designated at fair value Change in other liabilities ...(2,258) (5,216) 41,983 (32,797) 7,430...

  • Page 465
    ... letters of credit which are financial guarantee contracts are irrevocable obligations on the part of HSBC to pay third parties when customers fail to make payments when due. 3 Other direct credit substitutes include re-insurance letters of credit and trade-related letters of credit issued without...

  • Page 466
    ... credit risk management policies and procedures. Approximately half of the above guarantees have a term of less than one year. Guarantees with terms of more than one year are subject to HSBC's annual credit review process. Financial Services Compensation Scheme The UK Financial Services Compensation...

  • Page 467
    ... payments made to landlords for operating, tax and other escalation expenses. Finance lease receivables HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft), property and general plant and machinery. At the end of lease terms, assets...

  • Page 468
    ... for the rights issue, HSBC Holdings entered into a share-for-share exchange with Chinnery Limited, thereby availing itself of Statutory Share Premium Relief under Section 612 of the Companies Act 2006. The nominal value of the new shares issued was credited to share capital and the remaining...

  • Page 469
    ...plans and share schemes have been approved by the relevant tax authorities, where necessary. 42 Litigation Unauthorised overdraft charges in the UK On 27 July 2007, the UK Office of Fair Trading ('OFT') issued High Court legal proceedings against a number of UK financial institutions, including HSBC...

  • Page 470
    ...for planning, directing and controlling the activities of HSBC Holdings, being the Directors and Group Managing Directors of HSBC Holdings. Compensation of Key Management Personnel HSBC 2008 US$m 31 5 - 16 52 2009 US$m Short-term employee benefits ...Post-employment benefits ...Termination benefits...

  • Page 471
    ... significant voting power is held, by Key Management Personnel or their close family members. Some of the transactions were connected transactions, as defined by the Rules Governing The Listing of Securities on The Stock Exchange of Hong Kong Limited but were exempt from any disclosure requirements...

  • Page 472
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) Notes 43 and 44 Transactions with other related parties of HSBC Associates and joint ventures The Group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-...

  • Page 473
    ...of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure in relation to the scheme is made in Note 8 to the accounts...

  • Page 474
    ...ordinary shares of HSBC Holdings ...American Depositary Shares ...Nature of trading market ...Shareholder profile ...Memorandum and Articles of Association ...Annual General Meeting ...Interim Management Statements and Interim results ...Shareholder enquiries and communications ...Investor relations...

  • Page 475
    ... revocations of standing instructions for scrip dividends ...Exchange rate determined for payment of dividends in sterling and Hong Kong dollars ...Payment date: dividend warrants, new share certificates or transaction advices and notional tax vouchers mailed and shares credited to stock accounts in...

  • Page 476
    HSBC HOLDINGS PLC Shareholder Information (continued) American Depositary Shares / Nature of trading market Dividends are declared in US dollars and, at the election of the shareholder, paid in cash in one of, or in a combination of, US dollars, sterling and Hong Kong dollars, or, subject to the...

  • Page 477
    ... London Stock Exchange, HKSE, Euronext Paris, NYSE and the Bermuda Stock Exchange, as adjusted for the 5-for12 rights issue completed in April 2009. Past share price performance should not be regarded as a guide to future performance. High and low mid-market closing prices London US$0.50 shares High...

  • Page 478
    ... Shareholder Information (continued) Stock symbols // Shareholder profile / Memorandum and Articles of Association / Annual General Meeting Stock symbols HSBC Holdings ordinary shares trade under the following stock symbols: London Stock Exchange Hong Kong Stock Exchange New York Stock Exchange...

  • Page 479
    ...no mandatory retirement age for Directors of HSBC Holdings. Annual General Meeting The 2010 Annual General Meeting will be held at the Barbican Hall, Barbican Centre, London EC2 on Friday, 28 May 2010 at 11 am. An informal meeting of shareholders will be held at 1 Queen's Road Central, Hong Kong on...

  • Page 480
    ...Hong Kong Investor Services Limited Hopewell Centre Rooms 1712-1716, 17th Floor 183 Queen's Road East Hong Kong Telephone: 852 2862 8555 Email: [email protected] Investor Centre: www.computershare.com/hk/investors Bermuda Overseas Branch Register: Corporate Shareholder Services The Bank...

  • Page 481
    ... Enquiries relating to HSBC's strategy or operations may be directed to: Manager Investor Relations HSBC Holdings plc 8 Canada Square London E14 5HQ UK Telephone: 44 (0)20 7991 8041 Facsimile: 44 (0)845 587 0225 Email: [email protected] SVP Investor Relations HSBC North America Holdings Inc...

  • Page 482
    ... Banking Corporation Limited, or acquired subsequent to 1991 in exchange for shares in other companies. For capital gains tax purposes, the acquisition cost for ordinary shares is adjusted to take account of subsequent rights and capitalisation issues. Any capital gain arising on a disposal by a UK...

  • Page 483
    ..., the summary deals only with US holders that hold shares or ADSs as capital assets, and does not address the tax treatment of holders that are subject to special tax rules, such as banks, tax-exempt entities, insurance companies, dealers in securities or currencies, persons that hold shares or ADSs...

  • Page 484
    ... on the company's audited financial statements and relevant market and shareholder data, HSBC Holdings does not anticipate being classified as a passive foreign investment company. Accordingly, dividends paid on the shares generally should be treated as qualified dividends. Taxation of capital gains...

  • Page 485
    ... and Spencer Retail Financial Services Holdings Limited, which trades as Marks and Spencer Money ('M&S Money') in the UK. 2004 HSBC acquires 19.9 per cent of Bank of Communications, and Hang Seng Bank acquires 15.98 per cent of Industrial Bank. 2005 HSBC increases its holding in Ping An Insurance to...

  • Page 486
    ... Spencer Retail Financial Services Holdings Limited 99.84% HSBC Bank International Limited HSBC Middle East Holdings BV HSBC Private Banking Holdings (Suisse) S.A. HSBC Bank Middle East Ltd The Bank of Bermuda Ltd 62.14% HSBC Bank (China) Company Limited Hang Seng Bank Ltd HSBC Insurance...

  • Page 487
    ... Statements Bylaws Long-term equity investments accounted for using the equity method Net income Statement of financial position Notes Ordinary shares, issued and fully paid Tax depreciation allowances Payables Receivables Deferred income tax Amortisation Capital lease Ownership with absolute rights...

  • Page 488
    ...of deposit Credit default swap Collateralised debt obligation Cash-generating unit Constant Net Asset Value Combined Code on Corporate Governance issued by the Financial Reporting Council Commercial paper Consumer price index Customer risk rating Cullinan Finance Ltd, a structured investment vehicle...

  • Page 489
    ... Money MSCI MTN1 NA NYSE Brief description Home equity lines of credit HFC Bank Limited, the UK-based consumer finance business acquired through the acquisition by HSBC of HSBC Finance Hong Kong Interbank Offer Rate Hong Kong Monetary Authority The Stock Exchange of Hong Kong Limited The Hong Kong...

  • Page 490
    ... Management Meeting of the Group Management Board Retail price index (UK) Risk weighted asset Standard and Poor's rating agency Securities and Exchange Commission (US) Securities investment conduit Statement of investment principles produced by trustees of defined pension plans Structured investment...

  • Page 491
    ...profit, either from capital gain or rental income. A vehicle that holds asset-backed securities such as mortgages, vehicle finance loans and credit card loans which is financed by short-term debt normally issued in the form of commercial paper which is collateralised by the asset-backed debt. A fund...

  • Page 492
    ... terms and when required. Customer deposits Customer risk rating ('CRR') Debt restructuring Debt securities Debt securities in issue Delinquency Economic capital Economic profit Enhanced variable net asset value funds Equity risk Expected loss ('EL') Exposure Exposure at default ('EAD') Fair...

  • Page 493
    ... principal insurance risk is that, over time, the combined cost of claims, administration and acquisition of the contract may exceed the aggregate amount of premiums received and investment income. Internal Capital Adequacy The Group's own assessment of the levels of capital that it needs to hold...

  • Page 494
    ...capital in private companies or the acquisition of a public company that results in the delisting of public equity. Loans past due Loss given default ('LGD') Market risk Monoline insurers ('monolines') Mortgage-backed securities ('MBS's) Mortgage-related assets Mortgage vintage Medium term notes...

  • Page 495
    ...to equities, interest rates, foreign exchange, commodities or credit. Structured notes may or may not offer full or partial capital protection in the event of a decline in the underlying index or asset. Renegotiated loans Restricted Shares Retail loans Return on equity Risk appetite Risk-weighted...

  • Page 496
    ... or liquidation. A US description for customers with high credit risk, for example those who have limited credit histories, modest incomes, high debt-to-income ratios, high loan-to-value ratios (for real estate secured products) or have experienced credit problems caused by occasional delinquencies...

  • Page 497
    ... 119, 121 North America 127, 131 Rest of Asia-Pacific 109, 112 Calendar (dividends) 473 Capital management and allocation 285 return on invested capital 2 structure 289 Capital and performance ratios 3, 4 Cash flow accounting policy 384 consolidated statement 356 HSBC Holdings 361 notes 461 payable...

  • Page 498
    ... accounting policy 378 and intangible assets 434 critical accounting policy 62 Governance codes 294 HSBC Holdings/New York Stock Exchange corporate governance differences 308 Group Chairman's Statement 8 Group Management Board 310 Health and safety 328 History and development of HSBC 482 Hong Kong...

  • Page 499
    ... business 283 risk management 265 Interest income/expense (net) 26 accounting policy 369 analysis of changes in 53 average balance sheet 46 sensitivity 57, 256 Interim management statements 478 Internal control 313 IFRSs and Hong Kong Financial Reporting Standards comparison 366 Investor relations...

  • Page 500
    ...80 Pensions accounting policy 380 defined benefit plans 258, 395, 398 for directors 346 risk 263 Performance and context 335 Personal Financial Services business highlights 68 financial performance 67 products and services 145 strategic direction 67 underlying/reported profit 69 Personal lending 215...

  • Page 501
    ... payments 401 accounting policy 381 Share capital 328, 457 accounting policy 384 notifiable interests in 332 ownership guidelines 342 rights and obligations 329 Share information 3 Share plans Bank of Bermuda plans 325, 461 discretionary plans 322 for directors 347, 402 for employees 319, 402 HSBC...

  • Page 502
    ... the UK Companies Act Registered in England: number 617987 REGISTERED OFFICE AND GROUP MANAGEMENT OFFICE 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 (0) 20 7991 8888 Facsimile: 44 (0) 20 7992 4880 Web: www.hsbc.com REGISTRARS Principal Register Computershare Investor Services PLC The...

  • Page 503
    ... permission of HSBC Holdings plc. Published by Group Finance, HSBC Holdings plc, London Cover designed by Black Sun Plc, London; text pages designed by Group Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, Hong Kong Printed by Park Communications Limited, London, on...

  • Page 504
    HSBC Holdings plc 8 Canada Canada Square Square London E14 London E145HQ 5HQ United Kingdom United Kingdom Telephone: 44 Telephone: 44020 0207991 79918888 8888 Facsimile: 44 Facsimile: 44 020 020 7992 7992 4880 4880