HSBC 2010 Annual Report Download

Download and view the complete annual report

Please find the complete 2010 HSBC annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 396

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180
  • 181
  • 182
  • 183
  • 184
  • 185
  • 186
  • 187
  • 188
  • 189
  • 190
  • 191
  • 192
  • 193
  • 194
  • 195
  • 196
  • 197
  • 198
  • 199
  • 200
  • 201
  • 202
  • 203
  • 204
  • 205
  • 206
  • 207
  • 208
  • 209
  • 210
  • 211
  • 212
  • 213
  • 214
  • 215
  • 216
  • 217
  • 218
  • 219
  • 220
  • 221
  • 222
  • 223
  • 224
  • 225
  • 226
  • 227
  • 228
  • 229
  • 230
  • 231
  • 232
  • 233
  • 234
  • 235
  • 236
  • 237
  • 238
  • 239
  • 240
  • 241
  • 242
  • 243
  • 244
  • 245
  • 246
  • 247
  • 248
  • 249
  • 250
  • 251
  • 252
  • 253
  • 254
  • 255
  • 256
  • 257
  • 258
  • 259
  • 260
  • 261
  • 262
  • 263
  • 264
  • 265
  • 266
  • 267
  • 268
  • 269
  • 270
  • 271
  • 272
  • 273
  • 274
  • 275
  • 276
  • 277
  • 278
  • 279
  • 280
  • 281
  • 282
  • 283
  • 284
  • 285
  • 286
  • 287
  • 288
  • 289
  • 290
  • 291
  • 292
  • 293
  • 294
  • 295
  • 296
  • 297
  • 298
  • 299
  • 300
  • 301
  • 302
  • 303
  • 304
  • 305
  • 306
  • 307
  • 308
  • 309
  • 310
  • 311
  • 312
  • 313
  • 314
  • 315
  • 316
  • 317
  • 318
  • 319
  • 320
  • 321
  • 322
  • 323
  • 324
  • 325
  • 326
  • 327
  • 328
  • 329
  • 330
  • 331
  • 332
  • 333
  • 334
  • 335
  • 336
  • 337
  • 338
  • 339
  • 340
  • 341
  • 342
  • 343
  • 344
  • 345
  • 346
  • 347
  • 348
  • 349
  • 350
  • 351
  • 352
  • 353
  • 354
  • 355
  • 356
  • 357
  • 358
  • 359
  • 360
  • 361
  • 362
  • 363
  • 364
  • 365
  • 366
  • 367
  • 368
  • 369
  • 370
  • 371
  • 372
  • 373
  • 374
  • 375
  • 376
  • 377
  • 378
  • 379
  • 380
  • 381
  • 382
  • 383
  • 384
  • 385
  • 386
  • 387
  • 388
  • 389
  • 390
  • 391
  • 392
  • 393
  • 394
  • 395
  • 396

HSBC Holdings plc
Annual Report and Accounts 2010
Connecting people,
companies and
markets worldwide

Table of contents

  • Page 1
    Connecting people, companies and markets worldwide HSBC Holdings plc Annual Report and Accounts 2010

  • Page 2
    ... of the Directors for these reports is solely to HSBC Holdings plc. Additional information, including commentary on 2009 compared with 2008, may be found in the Form 20-F filed with the US Securities and Exchange Commission and available on www.hsbc.com and www.sec.gov. Certain defined terms Unless...

  • Page 3
    ...day, this walkway forms a vital artery through the heart of Asia's pre-eminent financial centre, which hosts over 190 banks and deposit-taking companies from all over the world. 1 Shareholder Information Financial Statements Governance Operating & Financial Review Headquartered in London, HSBC...

  • Page 4
    HSBC HOLDINGS PLC Report of the Directors: Overview Financial highlights Financial highlights For the year Profit before taxation Underlying profit before taxation Total operating income US$19,037m - up 169% 2009: US$7,079m 2008: US$9,307m Net operating income before loan impairment charges and ...

  • Page 5
    ...: 51.8% 2008: 48.1% 21.7% 2009: 22.5% 2008: 22.6% 9.0% Governance Financial Statements 2009: 12.5% 2008: 7.4% Share information at the year-end Closing market price US$0.50 ordinary shares in issue Market capitalisation London Hong Kong American Depositary Share5 17,686m 2009: 17,408m 2008: 12...

  • Page 6
    ...Group Chief Executive's Business Review sets out clearly how HSBC delivered a much improved balance of profits in 2010. It is reassuring to see our Personal Financial Services businesses returning to profitability in aggregate and Commercial Banking growing significantly, largely in emerging markets...

  • Page 7
    ... ourselves. Overview sustainable long-term value for shareholders consistently in a manner that maintains the confidence of all other key stakeholders in our businesses including depositors, counterparties, long-term creditors, customers, employees, regulators and governments. His review on pages...

  • Page 8
    ... capital and protecting value for those who make capital available. Payment mechanisms, the provision of long-term credit, trade finance, hedging and other risk management products, deposit, investment and retirement services are but a few of the activities through which banking groups contribute...

  • Page 9
    ...improve in 2010 and shareholders continued to benefit from HSBC's universal banking model. All regions and customer groups were profitable, as Personal Financial Services and North America returned to profit. Commercial Banking made an increased contribution to underlying earnings and Global Banking...

  • Page 10
    ...target a return on average shareholders' equity of 12-15% in the future. As Group Chief Executive, it is right that, in managing the business and developing Group strategy, my principal office should be in Hong Kong - a global financial hub of growing importance at the centre of HSBC's strategically...

  • Page 11
    ... to report that we have had a good start to the year, with continued momentum in lending, mainly in emerging markets and in respect of global trade. S T Gulliver, Group Chief Executive 28 February 2011 9 Shareholder Information Financial Statements Governance Operating & Financial Review The...

  • Page 12
    ... Kong, Rest of Asia-Pacific, the Middle East, North America and Latin America. Our products and services are delivered through two customer groups, Personal Financial Services ('PFS') and Commercial Banking ('CMB'), and two global businesses, Global Banking and Markets ('GB&M'), and Global Private...

  • Page 13
    ... replaced with risk-adjusted revenue growth; the GMB will prioritise return on average total shareholders' equity in place of return on average invested capital, which has therefore been excluded; and customer transactions processed and percentage of information technology ('IT') services meeting...

  • Page 14
    HSBC HOLDINGS PLC Report of the Directors: Overview (continued) Strategic objectives and KPIs Strategic objectives Deliver consistent earnings and superior risk-adjusted returns Risk-adjusted revenue growth (2010: underlying growth 15%) 37 1.2 10 13 0.7 Basic earnings per ordinary share 1.4 11.0...

  • Page 15
    ... issue of hybrid capital securities during the year and careful management of RWAs. Outcome: ratio within the limits set by the Risk Management Meeting for each site. Reach new customers and expand services to existing customers using the HSBC brand and global network Brand perception PFS Business...

  • Page 16
    ...of our investment in British Arab Commercial Bank plc in October 2010; the gain on sale of Eversholt Rail Group of US$255m in December 2010; and the gain of US$74m on the deconsolidation of private equity funds following the management buy-out of Headland Capital Partners Ltd (formally known as HSBC...

  • Page 17
    ... region Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East ...North America ...Latin America ...Profit before tax ...By customer group and global business Personal Financial Services ...Commercial Banking ...Global Banking and Markets ...Global Private Banking ...Other ...Profit before tax...

  • Page 18
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Income statement Consolidated income statement Five-year summary consolidated income statement 2010 US$m Net interest income ...Net fee income ...Net trading income ...Net income/(expense) ...

  • Page 19
    ...than in 2009. 17 Shareholder Information Financial Statements Governance Operating & Financial Review Latin America, primarily in Mexico and Brazil, reflecting a reduction in personal lending balances as selected portfolios were managed down, and an improvement in credit quality as origination...

  • Page 20
    ...rate environment and by the effect of repositioning our customer assets towards secured lending as we reduced our higher risk and higher yielding portfolios. Revenues in Balance Sheet Management decreased, as expected, from the strong levels of 2009 as higher yielding positions taken in prior years...

  • Page 21
    ... in debt securities in issue as HSBC Finance's funding requirements continued to decrease in line with the run-off of the residual Net fee income 2010 US$m Cards ...Account services ...Funds under management ...Broking income ...Credit facilities ...Insurance ...Imports/exports ...Global custody...

  • Page 22
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Group performance Net fee income from sales of investment products in Asia and Europe increased, driven by a stronger investment performance in funds and improved customer sentiment which led ...

  • Page 23
    ... of the credit spread-related movements in the fair value of our own long-term debt, on which we reported adverse fair value movements of US$63m in 2010 and US$6.5bn in 2009. In North America, a small favourable fair value movement was reported Financial Statements The accounting policies for the...

  • Page 24
    ...2009 as the improving economic situation resulted in a reduction in the level of write-downs required on private equity and other strategic equity investments. Net earned insurance premiums Higher net gains were reported in Balance Sheet Management on disposals of available-for-sale debt securities...

  • Page 25
    ... of HSBC Private Equity (Asia) Ltd, partly offset by a loss of US$42m on the disposal of our shareholding in British Arab Commercial Bank plc. Reported results in 2009 included a gain of US$280m from the sale of the remaining stake in the card merchant-acquiring business in the UK. Net investment...

  • Page 26
    ... in reserves in 2009 on the now closed UK motor insurance book, which reflected the rising incidence and severity of claims at that time, did not recur. The decision taken in 2010 not to renew certain contracts in our Irish business resulted in a further decrease in net insurance claims incurred and...

  • Page 27
    ... the UK secured lending book, credit quality continued to be high and loan impairment charges remained at low levels. In CMB, loan impairment charges declined by US$159m due to strengthened credit risk management and improved collections, notably in the UK property, retail and service sectors. Loan...

  • Page 28
    ... certain unsecured lending portfolios and the higher risk elements of the credit card portfolio were managed down, and economic conditions improved. Impairment charges also declined in CMB, due to the non-recurrence of charges against specific technology-related exposures in 2009. Partly offsetting...

  • Page 29
    ... % HSBC ...Personal Financial Services ...Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East ...North America ...Latin America ...Commercial Banking ...Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East ...North America ...Latin America ...Global Banking and Markets ...Global Private...

  • Page 30
    ... the hiring of front-line staff, investment in systems and higher compliance costs coupled with lower revenue in the low interest rate environment. Share of profit in associates and joint ventures 2010 US$m Associates Bank of Communications Co., Limited ...Ping An Insurance (Group) Company of China...

  • Page 31
    ... to banks ...Loans and advances to customers35 ...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...

  • Page 32
    ... higher mortgage lending in Hong Kong and the UK, strong demand for commercial loans and a rise in trading assets in North America and Asia as a result of customer demand, supported by improved liquidity generated by higher deposits and our debt issuance programme. The Group's reported tier 1 ratio...

  • Page 33
    ... sales Reconciliation of reported and underlying assets and liabilities in Hong Kong following the launch of several new products, and gains on unit-linked products as investment market values improved. Overview Shareholder Information Financial Statements Governance Operating & Financial Review...

  • Page 34
    ... amounts within business units. Our long-term cost of capital is reviewed annually and for 2010 it was revised to 11% from the 10% used in 2009. We use a Capital Asset Pricing Model to determine our cost of capital. The main drivers of the increase were an increase in the risk free rate and an...

  • Page 35
    ... and advances in North America would increase loan impairment allowances by US$0.9bn at 31 December 2010 (2009: US$1.3bn). It is possible that the outcomes within the next Overview Shareholder Information Financial Statements Governance Operating & Financial Review Introduction The results of HSBC...

  • Page 36
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Critical accounting policies financial year could differ from the assumptions built into the models, resulting in a material adjustment to the carrying amount of loans and advances. Goodwill ...

  • Page 37
    ... speeds, the extent and depth of market price declines and changes in credit ratings. The review of estimated future cash flows on underlying collateral is subject to uncertainties when the assessment is based on historical information on pools of assets, and judgement is required to determine...

  • Page 38
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Financial summary > Critical accounting policies // Customer groups and global businesses > Summary representative of current economic and credit conditions. Further details of the nature and extent of our ...

  • Page 39
    ... ...Personal Financial Services ...Commercial Banking ...Global Banking and Markets ...Global Private Banking ...Other ...Analysis by customer group and global business ...Page 37 38 40 42 44 46 47 48 Basis of preparation The results are presented in accordance with the accounting policies used in...

  • Page 40
    ...advisory: capital raising on debt and equity markets and advisory services are available as required. • Commercial cards: card issuing helps customers enhance cash management, credit control and purchasing. Card acquiring services enable merchants to accept credit and debit card payments in person...

  • Page 41
    ..., insurance, family office advisory and philanthropy. 39 Shareholder Information Financial Statements Governance • Private Banking services comprise multi-currency deposit accounts and fiduciary deposits, credit and specialist lending, treasury trading services, cash management, securities...

  • Page 42
    ...34 markets in its first year Significant increase in mortgage lending in Hong Kong and the UK • Strategic direction Our strategy for PFS is to use our global reach and scale to grow profitably in selected markets by providing relationship banking and wealth management services. PFS employs two...

  • Page 43
    ... opening in the UK, the launch of retail renminbi wealth management products, mobile banking and online real time bond trading in Hong Kong, and the upgrading of the US automatic teller machine ('ATM') network to accept deposits. • • • 41 Shareholder Information Financial Statements...

  • Page 44
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups and global businesses > CMB Commercial Banking CMB offers a full range of commercial financial services and tailored propositions to 3.6m customers ranging from sole proprietors to publicly quoted...

  • Page 45
    ... SMEs by 19% in 2010, opened accounts for over 125,000 customers starting new businesses and added over 170 extra local business managers. We continued to develop and improve our direct channels through enhanced telephone-based relationship management services in key markets, including the launch of...

  • Page 46
    ... net release of US$429m largely relating to legacy positions in Credit trading and monoline Credit exposures, compared with a reported write-down of US$331m in 2009, following a general improvement in ABS prices. Trading income also benefited from a small favourable fair value movement on structured...

  • Page 47
    ..., reflecting spread compression in the more competitive trading environment and a decline in market volatility. Investment in the Equities business, particularly the enhancement Financial Statements delivery of certain staff benefits in the main UK pension scheme in 2009, higher support costs and...

  • Page 48
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups and global businesses > GPB / Other Global Private Banking GPB works with our high net worth clients to offer both traditional and innovative ways to manage and preserve wealth while optimising ...

  • Page 49
    ...of Paris and New York headquarters buildings • US$6.5bn reduction in adverse fair value movements on own debt • For footnotes, see page 83. 47 Shareholder Information Investment in Group Service Centres as migrated activities increase Financial Statements Governance Operating & Financial...

  • Page 50
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Customer groups and global businesses > Analysis Analysis by customer group and global business HSBC profit/(loss) before tax and balance sheet data Personal Financial Commercial Services Banking US$m US$m Global...

  • Page 51
    Personal Financial Services US$m Commercial Banking US$m Global Banking & Markets US$m Other44 US$m Intersegment elimination56 US$m Total US$m Profit/(loss) before tax Net interest income/(expense) ...Net fee income ...Trading income excluding net interest income ...Net interest income on ...

  • Page 52
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Summary / Europe Geographical regions Page Summary ...Europe ...Hong Kong ...Rest of Asia-Pacific ...Middle East ...North America ...Latin America ...50 51 56 60 66 71 76 Summary ...

  • Page 53
    ... rate at 1.0% throughout the year. Review of performance Our European operations reported a pre-tax profit of US$4.3bn, compared with US$4.0bn in 2009, an increase of 7%. In 2010, this included adverse fair value movements of US$198m due to the change in credit spreads on the Group's own debt...

  • Page 54
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Services Banking US$m US$m 2010 UK ...France60 ...Germany ...Malta ......

  • Page 55
    ... the year on foreign currency debt designated at fair value, issued as part of our overall funding strategy with an offset from trading assets held as economic hedges reported in 'Net trading income'. Gains less losses from financial investments increased by US$455m as improved market conditions led...

  • Page 56
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Europe Profit/(loss) before tax and balance sheet data - Europe Personal Financial Commercial Services Banking US$m US$m Global Banking & Markets US$m 2010 Global Private Banking US$m ...

  • Page 57
    ...$m 439,481 1,268,600 495,019 (194,655) 55 Shareholder Information Financial Statements Governance Operating & Financial Review Overview Personal Financial Services US$m Commercial Banking US$m Global Banking & Markets US$m 2009 Global Private Banking US$m Intersegment elimination56 US$m

  • Page 58
    ... in 2009 across all customer groups, reflecting an improvement in credit conditions. Revenue growth was in part offset by an increase in staff and IT costs driven by business expansion to maintain our strong market position. We retained our market leadership in residential mortgages, credit cards...

  • Page 59
    ...by customer group and global business 2010 US$m Personal Financial Services ...Commercial Banking ...Global Banking and Markets ...Global Private Banking ...Other ...2,918 1,352 1,430 227 (235) 5,692 2009 US$m 2,728 956 1,507 197 (359) 5,029 2008 US$m 3,428 1,315 1,436 237 (955) 5,461 Asset spreads...

  • Page 60
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Hong Kong Profit/(loss) before tax and balance sheet data - Hong Kong Personal Financial Commercial Services Banking US$m US$m Global Banking & Markets US$m 2010 Global Private Banking US$m...

  • Page 61
    ... US$m (9,004) 59 Shareholder Information 99,381 399,243 275,441 Financial Statements 5,021 Governance Operating & Financial Review Overview Personal Financial Services US$m Commercial Banking US$m Global Banking & Markets US$m 2009 Global Private Banking US$m Intersegment elimination56...

  • Page 62
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific Rest of Asia-Pacific We offer a full suite of banking and financial services in mainland China, mainly through our local subsidiary, HSBC Bank (China) Company Limited. ...

  • Page 63
    Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Services Banking US$m US$m 2010 Australia ...India ...Indonesia ...Japan ...Mainland China ...Associates ...Other mainland China ...Malaysia ...Singapore ...South Korea ...Taiwan ...Vietnam...

  • Page 64
    ... from increased holdings of debt securities. Net income from financial instruments designated at fair value fell by US$95m. The movement was due to lower revaluation gains in 2010 than in 2009 on assets held to support insurance contracts. To the extent that these lower investment gains were...

  • Page 65
    ... credit risk provisions decreased by 55% to US$439m. As economic and credit conditions improved across the region, loan impairment charges fell in PFS, most notably in India as certain unsecured lending portfolios were managed down, and fewer specific impairments Share of profit from associates...

  • Page 66
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Rest of Asia-Pacific Profit before tax and balance sheet data - Rest of Asia-Pacific Personal Financial Commercial Services Banking US$m US$m Global Banking & Markets US$m 2010 Global Private...

  • Page 67
    ...,043 222,139 133,999 65 Shareholder Information (7,320) Financial Statements Governance Operating & Financial Review Overview Personal Financial Services US$m Commercial Banking US$m Global Banking & Markets US$m 2009 Global Private Banking US$m Other US$m Intersegment elimination56 US...

  • Page 68
    ...capital spending. The high and stable average oil prices also improved external account positions in the Gulf, leading to an increase in reserves and overall net foreign asset accumulation following the modest drawdowns in 2009. As well as receiving support from rising public spending, non-oil goods...

  • Page 69
    Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Services Banking US$m US$m 2010 Egypt ...Qatar ...United Arab Emirates ...Other ...Middle East (excluding Saudi Arabia) ...Saudi Arabia ...38 19 17 19 93 7 100 2009 Egypt ...Qatar ...United...

  • Page 70
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Middle East Net interest income decreased by 8% as average lending balances declined in both PFS and CMB, the proportion of higher yielding assets fell and the cost of liquidity remained ...

  • Page 71
    ... balance sheet data - Middle East Personal Financial Commercial Services Banking US$m US$m Global Banking & Markets US$m 2010 Global Private Banking US$m Intersegment elimination56 US$m Other US$m Total US$m Profit/(loss) before tax Net interest income ...Net fee income ...Trading income/(expense...

  • Page 72
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > Middle East / North America Profit/(loss) before tax and balance sheet data - Middle East (continued) Personal Financial Services US$m Global Banking & Markets US$m 2009 Global Private Banking...

  • Page 73
    North America Our North American businesses are located in the US, Canada and Bermuda. Operations in the US are primarily conducted through HSBC Bank USA, N.A., which is concentrated in New York State, and HSBC Finance, a national consumer finance company based near Chicago. HSBC Markets (USA) Inc. ...

  • Page 74
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America Profit/(loss) before tax by country within customer groups and global businesses Personal Financial Commercial Banking Services US$m US$m 2010 US ...Canada ...Bermuda ...Other...

  • Page 75
    ... and overlimit fees in our Card and Retail Services business. from the sale of residential mortgages and the refinement of the income recognition methodology of long-term insurance contracts did not recur. This was partly offset by a gain on the sale of our New York headquarters building in 2010.

  • Page 76
    ... HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Geographical regions > North America Profit/(loss) before tax and balance sheet data - North America Personal Financial Commercial Services Banking US$m US$m Global Banking & Markets US$m 2010 Global Private Banking...

  • Page 77
    ... US$m (11,589) 75 Shareholder Information 206,853 475,014 149,157 Financial Statements (7,750) Governance 16,546 Operating & Financial Review Overview Personal Financial Services US$m Commercial Banking US$m Global Banking & Markets US$m 2009 Global Private Banking US$m Intersegment...

  • Page 78
    ... in 2010, and robust labour market conditions, as the unemployment rate fell to an all-time low of 5.3% in December. The growth of domestic demand led to a rapid rise in import growth and a widening of Brazil's current account deficit and contributed, along with a rise in food prices during the year...

  • Page 79
    ... improving economic conditions. Average customer lending balances fell in PFS, as certain portfolios were managed down, notably in credit cards in Mexico and other higher-risk personal loan balances in Mexico and Brazil. However, year-end balances were higher than in 2009 as we reversed the decline...

  • Page 80
    ...in Foreign Exchange and Rates in 2009 were not repeated. Net income on financial instruments designated at fair value declined by 21% to US$425m, primarily due to lower investment returns experienced on assets held in support of the pensionlinked portfolio in Brazil and annuity products in Argentina...

  • Page 81
    ... sheet data - Latin America Personal Financial Commercial Services Banking US$m US$m Global Banking & Markets US$m 2010 Global Private Banking US$m Intersegment elimination56 US$m Other US$m Total US$m Profit/(loss) before tax Net interest income ...Net fee income/(expense) ...Trading income...

  • Page 82
    ...and Financial Review (continued) Geographical regions > Latin America // Other information > FUM and assets in custody / Property Profit/(loss) before tax and balance sheet data - Latin America (continued) Personal Financial Services US$m Global Banking & Markets US$m 2009 Global Private Banking US...

  • Page 83
    ... when compared with 2009. Both Global Asset Management and GPB fund holdings increased, reflecting an improvement in equity market performance and strong net inflows. Operating & Financial Review Overview We announced in November 2010 that, with effect from 1 March 2011, Retail Banking and Wealth...

  • Page 84
    ... parent of that company, HSBC North America, entered into a consent cease and desist order with the Federal Reserve Board in the first week of October 2010. These actions require improvements for an effective compliance risk management programme across the Group's US businesses, including US Bank...

  • Page 85
    ... 28 February 2011 the Directors declared a fourth interim dividend for 2010 of US$0.12 per ordinary share in lieu of a final dividend, which will be payable to ordinary shareholders on 5 May 2011 in cash in US dollars, or in pounds sterling or Hong Kong dollars at exchange rates to be determined on...

  • Page 86
    ...and associates for the previous year at the average rates of exchange applicable in the current year. 12 Excluding adjustments in 2009. 13 Positive numbers are favourable: negative numbers are unfavourable. 14 Changes in fair value due to movements in own credit spread on long-term debt issued. This...

  • Page 87
    ... preference 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. 43 Return on invested capital is profit attributable to ordinary shareholders of the parent company...

  • Page 88
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Risk profile / Managing risk / Risk governance Risk Page Risk profile1 ...Managing risk1 ...Capital and liquidity ...Risk governance1 ...Scenario stress testing ...Challenges and uncertainties1 ...Business...

  • Page 89
    ... as the low yields available on fixed-interest investments and continuing high unemployment rates, particularly in the US and Europe. Capital and liquidity Operating & Financial Review Shareholder Information Financial Statements Governance Overview The continued growth in our business in 2010 was...

  • Page 90
    ... laws; information security policies; sales and trading practices; and the conduct of companies with which we are associated. Failure to address these issues appropriately may give rise to additional legal and compliance risk to HSBC, with an increase in the number of litigation claims and the...

  • Page 91
    ... foreign exchange rates have an effect on our reported income, cash flows and shareholders' equity. 89 Shareholder Information Financial Statements Governance We are subject to political and economic risks in the countries in which we operate Operating & Financial Review The market conditions...

  • Page 92
    ... for failed banks; measures on financial sector compensation arrangements to prevent excessive short-term risk taking and mitigate systemic risk on a globally consistent basis; and a fair and substantial contribution by the financial sector towards paying for any burden associated with government...

  • Page 93
    ..., the UK levy that would be payable based on the closing 2010 balance sheet, after taking into account announced changes to deposit protection schemes in 2011, is estimated at US$0.6bn. Financial Statements Governance Remuneration: the FSB has issued principles on remuneration designed to guide...

  • Page 94
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Challenges and uncertainties > Macro-prudential and regulatory // Credit risk > Credit risk management Transaction Tax ('FTT') applied to a specified range of financial transactions. An IMF report for the ...

  • Page 95
    ... of funds for lending to support economic recovery. Overview Shareholder Information Financial Statements Governance Operating & Financial Review Credit risk Credit risk management (Audited) • Credit risk is the risk of financial loss if a customer or counterparty fails to meet a payment...

  • Page 96
    .... The Group Chief Risk Officer chairs the Credit Risk Analytics Oversight Committee, which reports to the Risk Management Meeting and oversees risk rating model governance for both wholesale and retail business; • to report on retail portfolio performance, high risk portfolios, risk concentrations...

  • Page 97
    ... prices in most of our key markets. Despite 95 Shareholder Information Financial Statements Our credit exposure is spread across a broad range of asset classes, including derivatives, trading assets, loans and advances to customers, loans and advances to banks and financial investments. In 2010...

  • Page 98
    ... sector, charges over business assets such as premises, stock and debtors; In addition, credit derivatives and securitisation structures are used to hedge or transfer credit risk within our loan portfolio. The loans and advances offset adjustment in the table above primarily relates to customer...

  • Page 99
    ...an analysis by credit quality is provided on page 114. At 31 December 2010, our insurance businesses held diversified portfolios of debt and equity securities designated at fair value (2010: US$28bn; 2009: US$25bn) and debt securities classified as financial investments (2010: US$38bn; 2009: US$35bn...

  • Page 100
    ... strong growth in new mortgage sales in Hong Kong and the UK. This was partly offset by a 12% decline in the US, mainly due to the continued run-off of our Consumer Lending and Mortgage Services portfolios. Corporate and commercial lending was 46% of gross lending to customers at 31 December 2010...

  • Page 101
    ... 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 ('TGLAC')6 ...Gross loans and advances to banks...

  • Page 102
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Credit exposure Gross loans and advances to customers by industry sector and by geographical region (Audited) Gross loans and advances to customers Rest of AsiaMiddle North Latin Pacific East...

  • Page 103
    ... ...Singapore ...South Korea ...Taiwan ...Vietnam ...Other ...Middle East (excluding Saudi Arabia)...Egypt ...Qatar ...United Arab Emirates ...Other ...North America ...US ...Canada ...Bermuda ...Latin America ...Argentina ...Brazil ...Mexico ...Panama ...Other ...Total ...111,618 103,037 3,749...

  • Page 104
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Credit exposure / Areas of special interest > Wholesale lending Gross loans and advances to customers by country (continued) Residential mortgages US$m At 31 December 2009 Europe ...UK ......

  • Page 105
    ... Overall credit quality improved during 2010, as economies generally demonstrated signs of recovery. sovereign credit risk premia in private securities prices triggered portfolio reallocation to safer assets and a tightening of market liquidity. Initial concerns over liquidity and funding spread to...

  • Page 106
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Areas of special interest > Wholesale lending Exposures to selected eurozone countries10 (Unaudited) At 31 December 2010 Not held for trading Held for trading Cash and Net debt lending to ...

  • Page 107
    ... real estate and other property-related lending of US$107bn at 31 December 2010 was 7% higher than at 31 December 2009 and represented 11% of total loans and advances to customers. The increase in exposure was largely in Hong Kong, offset by a reduction in North America. In 2010, credit quality...

  • Page 108
    ... property; unsecured lending products such as overdrafts, credit cards and payroll loans; and debt consolidation loans which may be secured or unsecured. In 2010, credit quality in our personal lending portfolios improved, reflecting a recovery of economic conditions in most markets. Delinquency...

  • Page 109
    ...include all products where the customers' monthly payments are set at 107 Shareholder Information Interest-only mortgages are those for which customers make regular payments of interest during the life of the loan and repay the principal from the sale of their home or alternative sources of funds...

  • Page 110
    ...customers holding current or savings accounts with HSBC; this facilitated and strengthened the underwriting process. Loan impairment charges and delinquency levels in our UK mortgage book declined despite unemployment remaining high, mainly due to improving economic conditions and low interest rates...

  • Page 111
    ... 109 Shareholder Information HSBC Finance held approximately US$51bn of residential mortgage and second lien loans and advances to personal customers secured on real estate at 31 December 2010, 12% of the Group's gross loans and advances to personal customers. Financial Statements Governance...

  • Page 112
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Areas of special interest > US personal lending HSBC Finance US mortgage lending17 (Unaudited) At 31 December 2010 Other Consumer mortgage Lending lending US$m US$m 31,759 1,517 1,517 87 2 2 ...

  • Page 113
    ... at 31 December 2009 to 16.2%, while in our Mortgage Services portfolio, two months or more delinquency rates increased from 16.5% to 18.0%. At HSBC Bank USA, we continued to sell the majority of new mortgage loan originations to the secondary markets. These decreases were partly offset by increases...

  • Page 114
    .... 10,940 20,489 9% 51% 161 2009 6,188 14,845 12% 51% 193 Credit cards In our credit card and private label portfolios two months or more delinquency balances declined markedly, reflecting actions taken to improve credit quality, and our customer payment rates benefited from an increased focus by...

  • Page 115
    ... to real estate loans within consumer finance portfolios in the US. Our credit risk management policy sets out restrictions on the number and frequency of restructures, the minimum period an account must have been opened before any restructure can be considered, and the number of qualifying payments...

  • Page 116
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Areas of special interest > Forbearance strategies / Collateral // Credit quality > Financial instruments Renegotiated loans totalled US$35bn at 31 December 2010 (2009: US$39bn). The largest ...

  • Page 117
    ... with short-term issue ratings are reported against the long-term rating of the issuer of those securities. If major rating agencies have different ratings for the same debt securities, a prudent rating selection is made in line with regulatory requirements. Additional credit quality information in...

  • Page 118
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Credit quality > Financial instruments / Past due but not impaired Trading assets on which credit quality has been assessed decreased by 11%, with the decline being in assets rated as 'strong...

  • Page 119
    ...December 2009 Cash and balances at central banks ...Items in the course 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...

  • Page 120
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Credit quality > Past due but not impaired / Impaired loans / Impairment allowances Past due but not impaired loans and advances to customers and banks by industry sector (Audited) At 31 ...

  • Page 121
    ... to customers and banks (Audited) Impairment allowances on loans and advances to customers by geographical region (Audited) Hong Kong US$m Rest of AsiaPacific US$m Middle East US$m North America US$m Latin America US$m Europe US$m At 31 December 2010 Gross loans and advances Individually assessed...

  • Page 122
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Credit quality > Impairment allowances Movement in impairment allowances on loans and advances to customers and banks (Audited) Banks Individually assessed8 US$m 2010 At 1 January ...Amounts ...

  • Page 123
    ... 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 ...Financial35 ...Governments ...Exchange and other movements...

  • Page 124
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Credit quality > Impairment allowances Movement in impairment allowances by industry sector and by geographical region (Audited) 2010 Hong Kong US$m 804 (265) (150) (1) (149) (109) (90) (18) ...

  • Page 125
    ...31 0.80 0.63 0.60 1.23 2.84 2.85 5.69 0.29 5.91 6.20 0.83 4.26 5.09 0.70 2.07 2.77 123 Shareholder Information Financial Statements Governance Operating & Financial Review (1,984) Overview Hong Kong US$m Rest of AsiaPacific US$m Middle East US$m North America US$m Latin America US$m

  • Page 126
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Impairment charge Impairment charge to the income statement Individually and collectively assessed impairment charge to income statement by industry segment (Unaudited) 2010 Individually ...

  • Page 127
    ...2.08 2.92 (0.10) 2.82 2.71 2.54 (0.09) 2.45 1.75 2.09 (0.12) 1.97 1.36 1.49 (0.10) 1.39 1.15 125 Shareholder Information 2010 % 2009 % 2008 % 2007 % 2006 % Financial Statements Governance 2,248 2,573 (255) (70) 242 315 (64) (9) 244 341 (82) (15) 580 598 (16) (2) 916 1,052 (112) (24...

  • Page 128
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Impairment charge / HSBC Holdings Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region (Unaudited) Hong Kong % 0.15 (0.03) 0.12...

  • Page 129
    ...process. In our corporate and commercial portfolios in North America, new loan impairment allowances declined, reflecting lower balances due to customer deleveraging and improved credit quality which, along with the improved economy, resulted in credit upgrades on certain accounts and fewer customer...

  • Page 130
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Securitisation exposures and other structured products All of the derivative transactions are with HSBC undertakings which are banking counterparties (2009: 100%). The credit quality of the ...

  • Page 131
    ..., including securities investment conduits ('SIC's) and money market funds, as described in Note 43 on the Financial Statements, with the intention of earning net interest income and management fees; holding MBSs or other ABSs in the trading portfolio hedged through credit derivative protection...

  • Page 132
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Securitisation exposures and other structured products Categories of ABSs and CDOs Sub-prime Definition Loans to customers who have limited credit histories, modest incomes or high debt-to-...

  • Page 133
    ... Other holdings in these higher risk categories classified as available-for-sale are held in vehicles where third party first loss protection exists, as described in the section on securities investment conduits, above. During 2010, the credit ratings on certain ABSs held directly by HSBC, Solitaire...

  • Page 134
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Securitisation exposures and other structured products pools and models their projected future cash flows. The estimated future cash flows of the securities are assessed at the specific ...

  • Page 135
    ...consolidated holdings of ABSs, and direct lending held at fair value through profit or loss (Audited) Designated at fair value through profit US$m Of which held through consolidated Total SPEs US$m US$m Trading US$m At 31 December 2010 Mortgage-related assets Sub-prime residential ...Direct lending...

  • Page 136
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Securitisation exposures and other structured products HSBC's consolidated holdings of ABSs, and direct lending held at fair value through profit or loss (Audited) 2010 Gross fair value ...

  • Page 137
    2009 Gross fair value movements Realised Other gains/ compre- (losses) in Income hensive the income Reclassistatement43 income44 statement45 fied46 US$m US$m US$m US$m Mortgage-related assets Sub-prime residential Direct lending ...MBSs41 ...- high grade42 ...- rated C to A ...- not publicly rated ...

  • Page 138
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Credit risk > Securitisation exposures and other structured products Analysis of exposures and significant movements (Audited) US Alt-A residential mortgage-related assets During 2010, spreads on Alt-A ...

  • Page 139
    ... into directly with monolines Our principal exposure to monolines is through a number of OTC derivative transactions, mainly credit default swaps ('CDS's). We entered into these CDSs primarily to purchase credit protection against securities held at the time within the trading portfolio. During 2010...

  • Page 140
    ...Statements. HSBC's exposure to Credit Derivative Product Companies (Audited) As described above, HSBC's monoline credit risk adjustment calculation utilises a range of approaches dependent upon the credit quality of the monoline. The net impact of utilising the methodology adopted for 'highly-rated...

  • Page 141
    ... sectors: US$2.8bn to data processing (2009: US$3.8bn) and US$1.8bn to communications and infrastructure (2009: US$1.9bn). During 2010, 99% of the total fair value movement not recognised was against exposures in these two sectors (2009: 99%). Representations and warranties related to mortgage sales...

  • Page 142
    ... the Group consolidated level have not changed materially, there have been some revisions to individual entities. We employ a number of measures to monitor liquidity risk. The emphasis on the 'ratio of net liquid assets to customer deposits', as reported in the Annual Report and Accounts 2009, has...

  • Page 143
    ...,299 At 31 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 commitments54 ...Financial...

  • Page 144
    ... cash outflows by selling securities and accessing additional funding sources such as interbank or collateralised lending markets. We use a number of principal measures to manage liquidity risk, as described below. Advances to core funding ratio We emphasise the importance of core customer deposits...

  • Page 145
    ... to model combinations of both Group-specific and market-wide liquidity crises, in which the rate and timing of deposit withdrawals and drawdowns on committed lending facilities are varied, and the ability to access interbank funding and term debt markets and to generate funds from asset portfolios...

  • Page 146
    ...means that HSBC Holdings is not dependent on a single source of profits to fund its dividend payments to shareholders. During 2010, HSBC Holdings continued to have full access to debt capital markets at market rates and issued US$5.0bn of capital instruments (2009: US$5.3bn). HSBC Holdings' primary...

  • Page 147
    ... 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 arising on each product in its business and to transfer them to either its local Global Markets unit for management...

  • Page 148
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Market risk > Sensitivity analysis / Trading and non-trading portfolios We routinely validate the accuracy of our VAR models by back-testing the actual daily profit and loss results, adjusted to remove non...

  • Page 149
    ... site by Group Risk, of enforcing rigorous new product approval procedures, and of VAR by risk type for trading intent activities68 (Audited) Foreign exchange and commodity US$m At 31 December 2010 ...At 31 December 2009 ...Average 2010 ...2009 ...Minimum 2010 ...2009 ...Maximum 2010 ...2009 ...For...

  • Page 150
    ... demand such as current accounts. Our control of market risk in the non-trading portfolios is based on transferring the risks to the books managed by Global Markets or the local ALCO. The net exposure is typically managed through the use of interest rate swaps within agreed limits. The VAR for these...

  • Page 151
    ... ...Funds invested for short-term cash management ...Investment to facilitate ongoing business72 ...Other strategic investments ... 2.8 0.5 1.0 3.7 8.0 4.0 0.8 1.2 3.1 9.1 For footnotes, see page 174. Market risk arises on equity securities classified as available for sale. The fair value of...

  • Page 152
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Market risk > Sensitivity of NII / Defined benefit pension schemes Assuming no management actions, a sequence of such rises would increase planned net interest income for 2011 by US$882m (2010: US$695m), ...

  • Page 153
    ...an increase in government bonds held in Balance Sheet Management, which are accounted for on an available-for-sale basis. Defined benefit pension schemes (Audited) HSBC's defined benefit pension schemes (Audited) 2010 US$bn Liabilities (present value) ...Assets: Equities ...Debt securities ...Other...

  • Page 154
    ...its investments in our businesses; providing dividend payments to HSBC Holdings' equity shareholders and interest payments to providers of debt capital; and maintaining a supply of short-term cash resources. It does not take proprietary trading positions. The main market risks to which HSBC Holdings...

  • Page 155
    ...interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VAR but is managed on a repricing gap basis. The interest rate repricing gap table below analyses the full term structure of interest rate mismatches within HSBC Holdings' balance sheet. The year...

  • Page 156
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Operational risk > Legal risk / Compliance risk / Security risk // Risk management of insurance operations Value at risk Total foreign exchange VAR arising within HSBC Holdings in 2010 and 2009 was as ...

  • Page 157
    ... The insurance contracts we sell primarily relate to core underlying banking activities, such as savings and investment products, and credit life products. 155 Shareholder Information The Group Compliance function supports line management in ensuring that there are adequate policies and...

  • Page 158
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Risk management of insurance operations > Overview of products / Nature and extent of risks / Insurance risk Our manufacturing business concentrates on personal lines, e.g. contracts written for ...

  • Page 159
    ... surrender rates and, if the policy has a savings element, the performance of the assets held to support the liabilities. Life and non-life business insurance risks are controlled by high-level policies and procedures set centrally, taking into account where appropriate local market conditions and...

  • Page 160
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Risk management of insurance operations > Insurance risk and income protection contracts and annuities. The risks are monitored on a regular basis, and are primarily mitigated by underwriting controls and ...

  • Page 161
    ...& Financial Review A principal tool we use to manage our exposure to insurance risk, in particular for life insurance contracts, is asset and liability matching. Overview policy terms and conditions), product design, risk selection, claims handling, investment strategy and reinsurance policy. The...

  • Page 162
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Risk management of insurance operations > Insurance risk / Financial risks Balance sheet of insurance manufacturing subsidiaries by type of contract (continued) Insurance contracts Term assurAnnuUnitance78...

  • Page 163
    ... 76,729 Financial risks (Audited) Our insurance businesses are exposed to a range of financial risks, including market risk, credit risk and liquidity risk. Market risk includes interest rate risk, equity risk and foreign exchange risk. The nature and management of these risks is described below...

  • Page 164
    ... of financial assets were invested in debt securities at 31 December 2010 (2009: 64.4%) with 22.9% (2009: 22.2%) invested in equity securities. In life linked insurance, premium income less charges levied is invested in a portfolio of assets. We manage the financial risks of this product on behalf...

  • Page 165
    .... Long-term insurance and investment products typically permit the policyholder to surrender the policy or let it lapse at any time. When the surrender value is not linked to the value realised from the sale of the associated supporting assets, the subsidiary is exposed to market risk. In...

  • Page 166
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Risk management of insurance operations > Financial risks > Market risk / Credit risk We use models to assess the effect of a range of future scenarios on the values of financial assets and associated ...

  • Page 167
    ... to manage and monitor credit risk. These include an Early Warning Report and a watch list of investments with current credit concerns which are circulated fortnightly to 165 Shareholder Information Financial Statements Governance We used to sell certain unit-linked life insurance contracts...

  • Page 168
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Risk management of insurance operations > Financial risks > Credit risk senior management in Group Insurance Head Office and the Regional Chief Risk Officers to identify investments which may be at risk of...

  • Page 169
    ... US$m At 31 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...

  • Page 170
    ... the capacity to meet payment terms in abnormal conditions. How liquidity risk is managed Our insurance manufacturing subsidiaries primarily fund cash outflows arising from claim liabilities from the following sources of cash inflows: • • premiums from new business, policy renewals and recurring...

  • Page 171
    ... Governance Operating & Financial Review (Audited) Overview period of risk. There is a greater spread of expected maturities for the life business where, in a large proportion of cases, the liquidity risk is borne in conjunction with policyholders (wholly in the case of unit-linked business).

  • Page 172
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Risk management of insurance operations > PVIF insurance business / Economic assumptions / Non-economic assumptions Present value of in-force long-term insurance business (Audited) Our life insurance ...

  • Page 173
    ... morbidity risk exist in France, Hong Kong, the UK and the US. Sensitivity to lapse rates depends on the type of contracts being written. For insurance contracts, claims are funded by premiums received and income earned on the investment portfolio supporting the liabilities. For a portfolio of term...

  • Page 174
    ... a number of pension plans throughout the world, as described in Note 7 on the Financial Statements. Some of them are defined benefit plans, of which the largest is the HSBC Bank (UK) Pension Scheme ('the principal plan'). In order to fund the benefits associated with these plans, sponsoring Group...

  • Page 175
    ...to be high, and supporting our operating companies to assess similar risks of a lower magnitude; building and implementing systems-based processes to ensure consistent application of policies, reduce the costs of sustainability risk reviews and capture management information to measure and report on...

  • Page 176
    ... fair value movement is taken directly to the income statement. Consequently, we report all such balances under 'Neither past due nor impaired'. 29 Loans and advances to customers includes asset-backed securities that have been externally rated as strong (2010: US$4.1bn; 2009: US$5.7bn), good (2010...

  • Page 177
    ... of commodity risk is consolidated with foreign exchange risk and is not applicable to non-trading portfolios. 64 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 148. 65 Credit spread...

  • Page 178
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Risk > Footnotes to Risk // Capital > Capital management 71 Investments in private equity are primarily made through managed funds that are subject to limits on the amount of investment. Potential new commitments...

  • Page 179
    ...FSA for the consolidated Group and by our local regulators for individual Group companies. The following risks managed through the capital management framework have been identified as material: credit, market, operational, interest rate risk in the banking book, pension fund, insurance and residual...

  • Page 180
    HSBC HOLDINGS PLC Report of the Directors: Operating and Financial Review (continued) Capital > Capital measurement and allocation Capital measurement and allocation (Unaudited) Regulatory and accounting consolidations The basis of consolidation for financial accounting purposes is described on ...

  • Page 181
    ... details of their risks, capital and risk management under the Basel II framework. Our pillar 3 disclosures for the year ended 31 December 2010 are published as a separate document on the Group Investor Relations website. 179 Operating & Financial Review For consolidated group reporting, the FSA...

  • Page 182
    ... ...Non-controlling interest transferred to tier 2 capital ...Non-controlling interest in deconsolidated subsidiaries ...Regulatory adjustments to the accounting basis ...Unrealised losses on available-for-sale debt securities3 ...Own credit spread ...Defined benefit pension fund adjustment4...

  • Page 183
    ... throughout 2010 and 2009. Profits attributable to shareholders of the parent company increased capital by US$13.2bn, offset by net dividends of US$3.8bn after taking account of shares issued in lieu of dividends. Hybrid capital securities issued, net of redemptions, increased tier 1 capital by...

  • Page 184
    ... on debt securities net of tax must be excluded from capital resources. 4 Under FSA rules, the defined benefit liability may be substituted with the additional funding that will be paid into the relevant schemes over the following five year period. 5 Mainly comprise investments in insurance entities...

  • Page 185
    ... benefits ...Bank payroll tax ...Corporate sustainability ...Sustainability governance ...Sustainability risk ...Health and safety ...Supplier payment policy ...Share capital ...Issued share capital ...Rights and obligations attaching to shares ...Share capital during 2010 ...Dividends, shareholders...

  • Page 186
    ... HOLDINGS PLC Report of the Directors: Governance (continued) Directors Mr Gulliver is a career banker with over 30 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...

  • Page 187
    ... trading in the Far East, UK, US and Australia. He is a Fellow of the Institute of Chartered Accountants in England and Wales. 185 Shareholder Information Financial Statements Governance Operating & Financial Review Overview 1996 to 2003. A Council Member of the Open University of Hong Kong...

  • Page 188
    ... at the UK Government Departments for Transport and Work and Pensions and at the Welsh Office from 1996 to 2003; and Vice President and Chief of Staff to the President of the World Bank from 1995 to 1996. Ms Lomax brings to the Board business experience in both the public and private sectors and...

  • Page 189
    ... Exchange plc; and a non-executive director of Resolution plc, the Financial Services Authority and the Court of The Bank of Ireland. 187 Overview Sir Brian brings to the Board extensive experience in money and bond markets, insurance, private equity, futures, options and commodities trading...

  • Page 190
    ... a Group General Manager in 2003. Chairman of HSBC Life (UK) Limited and a director of HSBC Bank plc since 3 December 2010. Group Chief Risk Officer from 2007 to 2 December 2010. Group General Manager, Group Credit and Risk from 2005 to 2007 and Head of Global Banking and Markets for North America...

  • Page 191
    ..., market risk limits, acquisitions, disposals, investments, capital expenditure or realisation or creation of a new venture, specified senior appointments and any substantial change in balance sheet management policy. Governance The Board is responsible for managing the business of HSBC Holdings...

  • Page 192
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Board of Directors > The Board Nine Board meetings and a two-day strategy meeting were held in 2010. At least one Board meeting each year is held in a key strategic location outside the UK. During 2010, a Board meeting was held in ...

  • Page 193
    ... the non-executive Directors, particularly those who serve as members of Board committees. The Nomination Committee regularly reviews the structure, size and composition necessary (including the skills, knowledge and experience required of Directors) to address and challenge adequately key risks and...

  • Page 194
    ... of Securities on the Stock Exchange of Hong Kong Limited, each non-executive Director determined by the Board to be independent has provided an annual confirmation of his or her independence to HSBC Holdings. Information, induction and ongoing development The Board regularly reviews reports on...

  • Page 195
    ... bi-annual presentations to the Board on market views and investor relations. The Board receives a regular Investor Relations activity report which provides feedback from institutional shareholders and brokers, analysts' forecasts, information from research reports and share price performance data...

  • Page 196
    ... in HSBC Group securities throughout the year. Board committees The Board has appointed a number of committees consisting of certain Directors, Group Managing Directors and, in the case of the Corporate Sustainability Committee, certain co-opted nondirector members. Information in relation to...

  • Page 197
    ... with the Hong Kong and UK Corporate Governance Codes. There is therefore currently a degree of overlap between the responsibilities of the GAC and the GRC in relation to risk matters. For example, a review of the effectiveness of our systems of risk management and internal controls was undertaken...

  • Page 198
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Board committees > Group Audit Committee / Group Risk Committee Authority The Board Membership • Executive and nonexecutive Directors Responsibilities • Approves financial statements • Appoints senior financial officers • ...

  • Page 199
    ... services provided by KPMG Audit Plc and its affiliates ('KPMG') for each of the past three years is disclosed in Note 8 on the Financial Statements. The Board has approved, on the recommendation of the Committee, a policy for the employment by us of former employees of KPMG and an annual report...

  • Page 200
    ...risk governance structure and monitoring the effectiveness of the Group's risk management and internal control systems. The Committee monitors top and emerging risks and reviews the outcome of internal and external stress tests. In carrying out its responsibilities the Committee is closely supported...

  • Page 201
    ... sheet Strong brand Healthy capital position Conservative liquidity management Risk must be commensurate with returns Robust Group structure of separate legal entities The customer group and global product mix should produce sustainable long term earnings growth Risk diversification Strategic and...

  • Page 202
    HSBC HOLDINGS PLC Report of the Directors: Governance (continued) Board committees > Group Risk Committee / Remuneration Committee / Nomination Committee Stress testing HSBC's scenario analysis and stress testing programme is central to the identification and monitoring of top and emerging risks. ...

  • Page 203
    ...The terms of reference of the Committee, which are reviewed annually, are available at www.hsbc.com/boardcommittees. Overview the Group Head of Compliance as well as other members of senior management on developments in the Group's business; and received regular presentations on global market risk...

  • Page 204
    ... Board's performance evaluation. 28 February 2011, the date of approval of the Annual Report and Accounts 2010. 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. Key internal control...

  • Page 205
    ... for key customer groups, global product groups, support functions and certain geographies within the centralised functional control is exercised over all IT developments and operations. Common systems are employed for similar business processes wherever practicable. Credit and market risks are...

  • Page 206
    ... the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital...

  • Page 207
    ...in RMB1,960,000 of retail bonds issued by HSBC Bank (China), which he held throughout the year. No Directors held any short position as defined in the Securities and Futures Ordinance of Hong Increase in Directors' interests since 31 December 2010 HSBC Holdings ordinary shares of US$0.50 Beneficial...

  • Page 208
    ... of Annual General Meeting will be set out in the notes to that Notice. At 31 December 2010, Directors and Senior Management (being members of the Group Management Board) held, in aggregate, beneficial interests in 13,152,010 HSBC Holdings ordinary shares (0.07% of the issued ordinary shares). At...

  • Page 209
    ...take in executing our strategy. The risk appetite framework is approved by the Board of HSBC Holdings and helps to ensure effective risk management is emphasised to maintain a strong and secure operating platform, and that influences employee remuneration. Actual levels of variable pay depend on the...

  • Page 210
    ... the website of The Stock Exchange of Hong Kong Limited at www.hkex.com.hk or can be obtained upon request from the Group Company Secretary, 8 Canada HSBC Holdings Savings-Related Share Option Plan HSBC Holdings ordinary shares of US$0.50 Dates of award from to 21 Apr 2004 21 Apr 2010 Exercise price...

  • Page 211
    ... 2010, The CCF Employee Benefit Trust 2001 held 989,502 HSBC Holdings ordinary shares which may be exchanged for HSBC Private Bank France shares arising from the exercise of these options. 209 Shareholder Information Financial Statements Shares of â,¬5 Governance Operating & Financial Review...

  • Page 212
    ... each HSBC Bank 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 HSBC Bank Bermuda: Executive Share Option Plan 1997 HSBC Holdings ordinary shares of...

  • Page 213
    ...information in respect of the five highest paid senior executives (who are members of the GMB, but not Directors of HSBC Holdings plc) for the year ended 31 December 2010. Governance Employee compensation and benefits Their emoluments were within the following bands: Operating & Financial Review...

  • Page 214
    ... employee engagement, help manage the risks of lending, leverage savings through eco-efficiency and secure new revenue streams. They generally fall into one or more of the four broad areas discussed below. Business finance We aim to build long-term customer relationships around the world through...

  • Page 215
    ... Board, committees of the Board and executive management on corporate sustainability policies, including environmental, social and ethical issues. The terms of reference of the Corporate Sustainability Committee, which are reviewed annually, are available at www.hsbc.com/boardcommittees. The members...

  • Page 216
    ... HOLDINGS PLC Report of the Directors: Governance (continued) Corporate sustainability > Health and safety / Supplier payment // Share capital > Issued / Rights and obligations Health and safety The maintenance of appropriate health and safety standards remains a key responsibility of all managers...

  • Page 217
    ...relevant period determined by the Board is four consecutive dividend payment dates. Whenever holders of the Dollar Preference Shares are entitled 215 Shareholder Information The Dollar Preference Shares carry no rights to participate in the profits or assets of HSBC Holdings other than as set out...

  • Page 218
    ... during the year in relation to the ordinary share capital of HSBC Holdings: Scrip dividends 1. 13,135,446 ordinary shares were issued at par in January 2010 to shareholders who elected to receive new shares in lieu of the third interim dividend for 2009. The market value per share used to calculate...

  • Page 219
    ...500 ordinary shares wholly for cash to persons other than existing shareholders. Other than as described above, the Directors did not allot any shares during 2010. Treasury Shares In accordance with the terms of a waiver granted by the Hong Kong Stock Exchange on 19 December 2005, HSBC Holdings will...

  • Page 220
    ...of Securities on The Stock Exchange of Hong Kong Limited at least 25% of the total issued share capital has been held by the public at all times during 2010 and up to the date of this Report. Dealings in HSBC Holdings shares Except for dealings as intermediaries by HSBC Bank, HSBC Financial Products...

  • Page 221
    ... until 30 June 2011 a recording of the proceedings will be available on www.hsbc.com. On behalf of the Board D J Flint, Group Chairman HSBC Holdings plc Registered number 617987 28 February 2011 219 Shareholder Information Financial Statements Governance Operating & Financial Review Overview

  • Page 222
    ... capital securities issue in the first half of the year; we maintained a highly liquid balance sheet, with a ratio of customer advances to customer accounts of 78.1%; we increased dividends for our shareholders, reflecting the profit-generating capability of the Group; return on average shareholders...

  • Page 223
    ... executing our strategy. It shapes our integrated approach to business, risk and capital management and supports us in achieving our return on equity objectives. The risk appetite framework is agreed by the HSBC Holdings Board and cascaded across businesses and geographies. It provides an important...

  • Page 224
    ... and retirement benefits. Within the authority delegated by the Board, the Committee is responsible for approving remuneration policy and in doing so takes into account the pay and conditions across our Group. This includes the terms of bonus plans, share plans, other long-term incentive plans and...

  • Page 225
    ... out our policy relating to and the purpose of each element of the remuneration package for executive Directors. Element Fixed Base salary Delivery • Cash • Monthly • Pensionable Policy • Reviewed annually Purpose Timing • Reflects the market competitive • Paid during the rate for the...

  • Page 226
    HSBC HOLDINGS PLC Directors' Remuneration Report (continued) Executive Directors' remuneration > 2010 emoluments / Salary / Annual bonus In order to ensure that executive Directors' remuneration packages are competitive, having regard to the market in which we compete for executive talent, the ...

  • Page 227
    ... and Global Businesses. Profit before tax for the businesses within his remit decreased slightly, however this was against challenging market 225 Shareholder Information Financial Statements Governance Operating & Financial Review No other salary increases are proposed for executive Directors...

  • Page 228
    ... and absolute performance over the long-term taking into account an external measure of value creation, a measure of the extent to which the return on capital invested in HSBC is in excess of a benchmark return and a direct measure of the profits generated for shareholders. Awards will not vest...

  • Page 229
    ... as the average annual difference between return on invested capital and our benchmark cost of capital and is expressed as a percentage. EP is a key measure of shareholder value creation as it rewards management progressively to the extent that the return on the capital invested in HSBC by its...

  • Page 230
    ... equity market index of which HSBC Holdings is a member. HSBC TSR and FTSE 100 Index 130% Share ownership guidelines To ensure appropriate alignment with our shareholders, we operate a formal share ownership policy, expressed as a number of shares, for executive Directors and the Group Managing...

  • Page 231
    ... and a Director of HSBC Holdings on 31 December 2010. Retired as Group Chairman and a Director of HSBC Holdings on 3 December 2010. The other benefits as part of the payment in lieu of notice do not include the accommodation and car provided in Hong Kong. Appointed a Director of HSBC Holdings on...

  • Page 232
    ...-executive Director and member of the Audit Committee of Hang Seng Bank Limited. Retired as a Director on 28 May 2010. Includes fees as non-executive Deputy Chairman of The Hongkong and Shanghai Banking Corporation Limited. Includes fees as non-executive Chairman of HSBC North America Holdings Inc...

  • Page 233
    ... Review 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% of annual basic salary during 2010, less the mandatory contributions to the MPF by both the employer and employee, to fund personal pension...

  • Page 234
    ...to acquire the number of HSBC Holdings ordinary shares set against their respective names. HSBC Holdings savings-related share option plans (Audited) HSBC Holdings ordinary shares of US$0.50 Date of award D J Flint ...A A Flockhart ...I J Mackay ...25 Apr 2007 29 Apr 2009 30 Apr 2008 Exercise price...

  • Page 235
    ... interim dividend for 2009 did not accrue on the forfeited shares. 3 Includes additional shares arising from scrip dividends. 4 Interest at 3 December 2010 - date of retirement. (Audited) HSBC Holdings ordinary shares of US$0.50 Year in which awards may vest 20104 2012 2013 2011-20135 2010 2011...

  • Page 236
    ... with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and the management report represented by the Report of the Directors has...

  • Page 237
    ... to anyone other than the company and the company's members, as a body, for our audit work, for this report, or for the opinions we have formed. Overview We have audited the Group and parent company financial statements of HSBC Holdings plc for the year ended 31 December 2010 set out on pages 238...

  • Page 238
    ...; the part of the Corporate Governance Statement relating to the company's compliance with the nine provisions of the June 2008 Combined Code specified for our review; and certain elements of the report to shareholders by the Board on directors' remuneration. G Bainbridge, Senior Statutory Auditor...

  • Page 239
    ... accounting policies ...Net income/(expense) from financial instruments designated at fair value ...Net earned insurance premiums ...Net insurance claims incurred and movement in liabilities to policyholders ...Net operating income ...Employee compensation and benefits ...Auditors' remuneration...

  • Page 240
    ...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 241
    ... to income statement ...- income taxes ...Actuarial losses on defined benefit plans ...- before income taxes ...- income taxes ...Share of other comprehensive income/(expense) of associates and joint ventures ...Exchange differences ...Other comprehensive income/(expense) for the year, net of tax...

  • Page 242
    ... 10 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 ...Other...

  • Page 243
    ... of funds ...Proceeds from disposal of associates and joint ventures ...Net cash used in investing activities ...Cash flows from financing activities Issue of ordinary share capital ...- rights issue ...- other ...Issue of other equity instruments ...Net sales/(purchases) of own shares for market...

  • Page 244
    ...net of tax) ...Available-for-sale investments ...Cash flow hedges ...Actuarial losses on defined benefit plans ...Share of other comprehensive income of associates and joint ventures ...Exchange differences ... Total comprehensive income for the year ... 242 Shares issued under employee share plans...

  • Page 245
    ...fair value reserve US$m Sharebased payment reserve US$m Total Nonshareholders' controlling interests equity US$m US$m 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...

  • Page 246
    ... the year ... Financial Statements (continued) Consolidated statement of changes in equity / HSBC Holdings balance sheet 244 Shares issued under employee share plans ...Shares issued in lieu of dividends and amounts arising thereon2 ...Capital securities issued7 ...Dividends to shareholders ...Own...

  • Page 247
    HSBC Holdings balance sheet at 31 December 2010 Notes 2010 US$m 2009 US$m 10 Total assets ... 119,341 115,793 Liabilities and equity Liabilities Amounts owed to HSBC undertakings ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue ...Other liabilities ......

  • Page 248
    ... capital ...- rights issue ...- other ...Issue of other equity instruments ...On exercise of 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 (used...

  • Page 249
    ... (net of tax) ...Available-for-sale investments ...Income tax ...Total comprehensive income for the year ...Shares issued under employee share plans ...Shares issued in lieu of dividends and amounts arising thereon2 ...Capital securities issued7 .. Dividends to shareholders .. Own shares adjustment...

  • Page 250
    ...net of tax) ...Available-for-sale investments ...Income tax ...Total comprehensive income for the year ...Shares issued under employee share plans ...Shares issued in lieu of dividends and amounts arising thereon2 ...Shares issued in respect of rights issue ...Dividends to shareholders .. Own shares...

  • Page 251
    ...own shares held within HSBC's insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets (2009: 179...

  • Page 252
    ...' proportionate share of the net identifiable assets of the entity acquired; and changes in a parent's ownership interest in a subsidiary that do not result in a change of control are treated as transactions between equity holders and are reported in equity. - In terms of their application to HSBC...

  • Page 253
    ... relating to HSBC's securitisation activities and structured products have been included in the audited section of 'Report of the Directors: Risk' on pages 86 to 176. In accordance with HSBC's policy to provide meaningful disclosures that help investors and other stakeholders understand the Group...

  • Page 254
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 1 - Basis of preparation / 2 - Summary of significant accounting policies net assets. In a business combination achieved in stages, the previously held equity interest is remeasured at the acquisition-date fair value with the ...

  • Page 255
    ... those classified as held for trading or designated at fair value (other than debt securities issued by HSBC and derivatives managed in conjunction with such debt securities issued) are recognised in 'Interest income' and 'Interest expense' in the income statement using the effective interest method...

  • Page 256
    ..., Hong Kong, Rest of AsiaPacific, 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 257
    ... cost, as applicable. (f) Loans and advances to banks and customers Loans and advances to banks and customers include loans and advances originated by HSBC which are not classified either as held for trading or designated at fair value. Loans and advances are recognised when cash is advanced to...

  • Page 258
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 2 - Summary of significant accounting policies Individually assessed loans and advances For all loans that are considered individually significant, HSBC assesses on a case-by-case basis at each balance sheet date whether there is any ...

  • Page 259
    ... between the present value of expected future cash flows, discounted at the original effective interest rate of the portfolio, and the carrying amount of the portfolio. In certain highly developed markets, sophisticated models also take into account behavioural and account management trends as...

  • Page 260
    ... principally through sale, the assets are available for sale in their present condition and their sale is highly probable. The asset acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No...

  • Page 261
    ... rate risk management strategy. An accounting mismatch would arise if the debt securities issued were accounted for at amortised cost, because the related derivatives are measured at fair value with changes in the fair value recognised in the income statement. By designating the long-term debt...

  • Page 262
    ... assessing available-for-sale debt securities for objective evidence of impairment at the reporting date, HSBC considers all available evidence, including observable data or information about events specifically relating to the securities which may result in a shortfall in recovery of future cash...

  • Page 263
    ... ('cash flow hedges'); or (iii) a hedge of a net investment in a foreign operation ('net investment hedges'). Hedge accounting 261 Shareholder Information Financial Statements Governance Operating & Financial Review Overview objective evidence of impairment, the decline in the fair value of...

  • Page 264
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 2 - Summary of significant accounting policies is applied to derivatives designated as hedging instruments in a fair value, cash flow or net investment hedge provided certain criteria are met. Hedge accounting At the inception of a ...

  • Page 265
    ... 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 266
    ... in HSBC's share of net assets in the calculation of the gain or loss on disposal. (ii) Intangible assets include 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...

  • Page 267
    ...for the year, calculated using tax rates enacted or substantively enacted by the balance sheet date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when HSBC intends to settle on a net basis and the legal right to offset exists. Deferred...

  • Page 268
    ... 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 269
    ... currency'). HSBC's consolidated financial statements are presented in US dollars which is also HSBC Holdings' functional currency. Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the date of the transaction. Monetary assets and...

  • Page 270
    ...insurance business are reported as income over the term of the insurance contracts based on the proportion of risks borne during the accounting period. The unearned premium (the proportion of the business underwritten in the accounting year relating to the period of risk after the balance sheet date...

  • Page 271
    ...is recognised as an asset. The asset represents the present value of the equity holders' 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 272
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 2 - Summary of significant accounting policies / 3 - Net income from financial instruments at fair value (z) Debt securities issued and deposits by customers and banks Financial liabilities are recognised when HSBC enters into the ...

  • Page 273
    ... credit spread on long-term debt ...- derivatives managed in conjunction with HSBC Holdings issued debt securities ...- other changes in fair value ...2009 US$m 2008 US$m 248 (482) 373 139 (2,612) (352) 201 (2,763) 2,262 688 37 2,987 Financial Statements Governance Operating & Financial Review...

  • Page 274
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 4 - Net earned insurance premiums / 5 - Net insurance claims incurred / 6 - Net operating income 4 Net earned insurance premiums Non-life insurance US$m 2010 Gross earned premiums ...- gross written premiums ...- movement in unearned...

  • Page 275
    ... types of assets and liabilities ...Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ...Gains/(losses) Gain on disposal or settlement of loans and advances ...Impairment of available-for-sale equity securities ...Gains on...

  • Page 276
    ...defined benefit plans 2010 US$m Defined benefit pension plans ...HSBC Bank (UK) Pension Scheme ...- fair value of plan assets ...- present value of defined benefit obligations ...Other plans ...- fair value of plan assets ...- present value of defined benefit obligations ...- effect of limit on plan...

  • Page 277
    ... HSBC pension plans ...218 % 63 27 90 2009 211 % 59 29 88 2008 205 % 50 36 86 HSBC has been progressively offering all new employees membership of defined contribution plans. Governance Shareholder Information Financial Statements The majority of the Group's defined benefit plans are funded plans...

  • Page 278
    ...to be an appropriately matched portfolio of UK government bonds. An explicit allowance for expenses was also included. Information on the investment strategy of the principal plan can be found on page 172. In February 2010, HSBC Bank plc agreed with the Trustee of the Scheme to reduce the deficit of...

  • Page 279
    ...Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and the HSBC North America (US) Retirement Income Plan cover 34% of HSBC's employees and represent 82% of the Group's present value of defined benefit obligations. Overview Shareholder Information Financial Statements Governance...

  • Page 280
    ... with HSBC Bank plc by the HSBC Bank (UK) Pension Scheme with a positive fair value of US$2,173m at 31 December 2010 (2009: US$1,049m positive fair value) and US$77m positive fair value (2009: US$27m positive fair value) in respect of the HSBC International Staff Retirement Benefits Scheme. Further...

  • Page 281
    ... settlement gain in 2009 relates to an accounting benefit following a restructuring of the basis of delivery of death in service and ill health early retirement benefits to certain UK employees. Summary 2010 US$m Defined benefit obligation ...Fair value of plan assets ...Net deficit ...Experience...

  • Page 282
    ... plans Net liability under defined benefit healthcare plans 2010 US$m Fair value of plan assets At 1 January ...Expected return on plan assets ...Contributions by HSBC ...Experience gains ...Benefits paid ...Assets distributed on settlements ...Exchange differences ...At 31 December ...Present value...

  • Page 283
    ......Expected return on plan assets ...Past service cost ...Gains on curtailments ...Gains on settlements ...Total expense ...12 60 (13) (1) - - 58 2009 US$m 11 55 (11) (2) (22) - 31 2008 US$m 19 65 (12) (2) (31) (26) 13 2010 US$m Defined benefit obligation ...Fair value of plan assets ...Net deficit...

  • Page 284
    ... yields of high quality (AA rated or equivalent) debt instruments, with maturities consistent with those of the defined benefit obligations. In countries where there is not a deep market in corporate bonds, government bond yields have been used. The yield curve has been extrapolated where the term...

  • Page 285
    ... 2010 Expected rates of return1 % HSBC Bank (UK) Pension Scheme Fair value of plan assets ...Equities ...Bonds ...Property ...Other ...Other plans Fair value of plan assets ...Equities ...Bonds ...Property ...Other ...Healthcare plans Fair value of plan assets ...Equities ...Bonds ...Other ...2009...

  • Page 286
    ...average number of persons employed by HSBC Holdings during 2010 was 1,015 (2009: 876). 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. Directors...

  • Page 287
    ... on IT security and business continuity and performing agreed-upon IT testing procedures. 6 Including fees payable to KPMG for transaction-related work, including US debt issuances. 7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of...

  • Page 288
    ... average assumptions used to estimate the fair value of options granted Savings-related share option plans 1-year plan 3-year plans 5-year plans 2010 Risk-free interest rate1 (%) ...Expected life2 (years) ...Expected volatility3 (%) ...Share price at grant date (£) ...2009 Risk-free interest...

  • Page 289
    ... three years from the date of award, providing the employees have remained continually employed by HSBC for this period. Movement in Restricted Share awards under the HSBC Share Plan 2010 Number (000s) Outstanding at 1 January ...Additions during the year ...Adjustment for rights issue ...Released...

  • Page 290
    ... applied). Movement in savings-related share options 2010 Weighted average exercise price £ 3.69 5.39 - 4.18 4.44 3.87 2009 Weighted average exercise price £ 6.97 3.32 6.08 5.72 5.96 3.69 Number (000s) Outstanding at 1 January ...Granted in the year ...Adjustment for rights issue ...Exercised in...

  • Page 291
    ...the HSBC Holdings Group Share Option Plan awards 2010 Weighted average exercise price £ 7.12 - 6.08 7.36 7.12 2009 Weighted average exercise price £ 8.16 7.12 6.28 7.15 7.12 Number (000s) Outstanding and exercisable at 1 January ...Adjustment for rights issue ...Exercised in the year ...Forfeited...

  • Page 292
    ... HSBC Holdings Executive Share Option Scheme awards 2010 Weighted average exercise price £ 6.50 - 6.50 6.50 - 2009 Weighted average exercise price £ 6.92 6.04 6.39 5.61 6.50 Number (000s) Outstanding and exercisable at 1 January ...Adjustment for rights issue ...Exercised in the year ...Expired...

  • Page 293
    .... Movement on HSBC Finance share options 2010 Number (000s) Outstanding at 1 January ...Adjustment for rights issue ...Exercised in the year ...Expired in the year ...Outstanding and exercisable at 31 December ...2,736 - (307) - 2,429 Exercise price US$ 9.29 - 9.29 - 9.29 2009 Number (000s) 2,402...

  • Page 294
    ... relates to the transfer of HSBC Bank Canada, which was part of the sub-group headed by HSBC North America Holdings Inc, to HSBC Overseas Holdings (UK) Limited. A taxable gain arises on this disposal but the crystallisation of deferred tax assets and utilisation of current year foreign tax credits...

  • Page 295
    ...-for-sale investment ...- cash flow hedges ...- actuarial losses ...Equity: - share-based payments ...Foreign exchange and other adjustments .. - - 978 - 60 At 31 December 2009 ... 1,772 Assets ...Liabilities ... 1,772 - Shareholder Information Financial Statements Governance Operating...

  • Page 296
    ... strategies implemented in relation to such support. Further to the implementation of this strategy, the transfer of HSBC Bank Canada, which was part of the sub-group headed by HSBC North America Holdings Inc., to HSBC Overseas Holdings (UK) Limited in an internal reorganisation on 31 January 2010...

  • Page 297
    ...income generated by the businesses to support these assets. HSBC Holdings Deferred tax assets/(liabilities) 2010 2009 US$m US$m Temporary differences: - short-term timing differences ...- available-for-sale investments ...- fair valued assets and liabilities ...- share-based payments ...1 (21) 61 16...

  • Page 298
    ... payable on capital securities classified as equity ...Profit attributable to the ordinary shareholders of the parent company ...13,159 (90) (323) 12,746 2009 US$m 5,834 (90) (179) 5,565 2008 US$m 5,728 (90) (92) 5,546 Basic and diluted earnings per share 2010 Number Profit of shares US$m (millions...

  • Page 299
    ... business that provides services in credit, rates, foreign exchange, money markets and securities services; global asset management services and principal investment activities. Global Private Banking provides a range of services to meet the banking, investment and wealth advisory needs of high net...

  • Page 300
    ... other credit risk provisions ...Net operating income ...Employee compensation and benefits ...General and administrative expenses ...Depreciation and impairment of property, plant and equipment Amortisation and impairment of intangible assets ...Total operating expenses ...Operating profit ...Share...

  • Page 301
    ...693 (18,468) (13,392) (1,725) (810) (34,395) 5,298 1,781 7,079 (385) 6,694 299 Shareholder Information Financial Statements Governance Operating & Financial Review Overview Hong Kong US$m Rest of AsiaPacific US$m Middle East US$m North America US$m Latin America US$m IntraHSBC items US$m

  • Page 302
    ... 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 303
    Other information about the profit/(loss) for the year Hong Kong US$m 10,088 9,170 918 Rest of AsiaPacific US$m 8,793 7,728 1,065 Middle East US$m 1,783 1,774 9 North America US$m 8,752 8,504 248 Latin America US$m 8,187 8,151 36 IntraHSBC items US$m (3,125) - (3,125) 2010 Net operating income ......

  • Page 304
    ...Balance sheet information Hong Kong US$m Rest of AsiaPacific US$m Middle East US$m North America US$m Latin America US$m IntraHSBC items US$m Europe US$m At 31 December 2010 Loans and advances to customers (net) ...435,799 Interests in associates and joint ventures ...186 Total assets ...1,249,527...

  • Page 305
    ... movements in fair value of own debt and HSBC's holding company and financing operations. The 'Other' category also includes gains and losses on the disposal of certain significant subsidiaries or business units. Information by country 2010 External net operating income1 US$m UK ...Hong Kong ...USA...

  • Page 306
    ...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 307
    ... Financial liabilities Hong Kong currency notes in circulation ...Deposits by banks ...Customer accounts ...Items in the course of transmission to other banks ...Trading liabilities ...Financial liabilities designated at fair value ...Derivatives ...Debt securities in issue ...Other liabilities...

  • Page 308
    ... assets Cash 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...

  • Page 309
    ... 78,126 84,000 421,381 Trading securities valued at fair value Fair value1 2010 US$m US Treasury and US Government agencies2 ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities3 ...Corporate debt and other securities ...Equity securities ...20,239 17,036 11,053...

  • Page 310
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 16 - Fair values of financial instruments carried at fair value Loans and advances to customers held for trading 2010 US$m Reverse repos ...Settlement accounts ...Stock borrowing ...Other ...46,366 7,516 11,161 14,579 79,622 2009 US$m...

  • Page 311
    ... by the pricing provider to derive the data; the elapsed time between the date to which the market data relates and the balance sheet date; and the manner in which the data was sourced. For fair values determined using a valuation model, the control framework may include, as applicable, independent...

  • Page 312
    ... to HSBC's liabilities. 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 obtained or a price is derived using credit spreads for similar securities for...

  • Page 313
    Global Banking and Markets fair value adjustments At 31 December 2010 2009 US$m US$m Type of adjustment Risk-related ...Bid-offer ...Uncertainty ...Credit risk adjustment ...Other ...Model-related ...Model limitation ...Other ...Inception profit (Day 1 P&L reserves) (Note 20) ...2,171 620 136 1,355 ...

  • Page 314
    ... Designated at fair value Held for through trading profit or loss Derivatives US$m US$m US$m Available for sale US$m At 31 December 2010 Private equity including strategic investments ...Asset-backed securities ...Leveraged finance ...Loans held for securitisation ...Structured notes ...Derivatives...

  • Page 315
    ... as foreign exchange rates, interest rates and equity prices. The valuation of derivatives with monolines is discussed on page 137. Financial Statements Governance Operating & Financial Review At 31 December 2009 Private equity and strategic investments ...Asset-backed securities ...Leveraged...

  • Page 316
    ... net income/(expense) from other financial instruments designated at fair value ...- dividend income ...2009 At 1 January ...Total gains/(losses) recognised in profit or loss ...Total gains recognised in other comprehensive income1 ...Purchases ...New issuances ...Sales ...Settlements ...Transfers...

  • Page 317
    ... in the transfer of assets out of Level 3 during 2010. Transfers into Level 3 were primarily related to strategic investments in Asia. Trading assets: Greater pricing certainty of valuations in ABS markets (particularly MBS) and certain corporate bonds has resulted in the transfer of assets out of...

  • Page 318
    ... 2010 Private equity investments ...Asset-backed securities ...Loans held for securitisation ...Structured notes ...Derivatives with monolines ...Other derivatives ...Other portfolios ...112 8 8 18 94 256 135 631 At 31 December 2009 Private equity investments ...Asset-backed securities ...Leveraged...

  • Page 319
    ... HSBC Holdings' financial assets and liabilities measured at fair value Valuation techniques With Using significant observable unobservable inputs inputs Level 2 Level 3 US$m US$m Quoted market price Level 1 US$m At 31 December 2010 Assets Derivatives ...Financial investments: available for sale...

  • Page 320
    ... fair value on the balance sheet At 31 December 2010 Carrying amount US$m Assets Loans and advances to banks ...Loans and advances to customers ...Financial investments: debt securities ...Financial investments: treasury and other eligible bills ...Liabilities Deposits by banks ...Customer accounts...

  • Page 321
    ... sheet date. Debt securities in issue and subordinated liabilities Fair values are determined using quoted market prices at the balance sheet date where available, or by reference to quoted market prices for similar instruments. Financial Statements Shareholder Information 319 The fair values in...

  • Page 322
    ... of HSBC's financial assets At 31 December 2010 Carrying Fair amount value US$m US$m Reclassification to loans and receivables ABSs ...Trading loans - commercial mortgage loans ...Leveraged finance and syndicated loans ...Reclassification to available for sale Corporate debt and other securities...

  • Page 323
    ...,181 Securities designated at fair value Fair value1 2010 US$m US Treasury and US Government agencies2 ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities3 ...Corporate debt and other securities ...Equities ...78 1,304 151 4,130 6,128 6,616 17,418 35,825 2009 US...

  • Page 324
    ...756m of investments listed in Hong Kong (2009: US$506m). 20 Derivatives Fair values of derivatives by product contract type held by HSBC Trading US$m At 31 December 2010 Foreign exchange ...Interest rate ...Equity ...Credit ...Commodity and other ...Gross total fair values ...Netting ...Total ...At...

  • Page 325
    ..., HSBC employs the same 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...

  • Page 326
    ... products. Risk is typically controlled through entering into offsetting credit derivative contracts with other counterparties. HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure...

  • Page 327
    ...as fair value hedges At 31 December 2010 Assets Liabilities US$m US$m Foreign exchange ...Interest rate ...153 443 596 - 2,226 2,226 At 31 December 2009 Assets Liabilities US$m US$m 342 242 584 - 1,085 1,085 Gains or losses arising from fair value hedges Financial Statements Shareholder Information...

  • Page 328
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 20 - Derivatives / 21 - Financial investments Fair value of derivatives designated as cash flow hedges At 31 December 2010 Assets Liabilities US$m US$m Foreign exchange ...Interest rate ...1,151 2,321 3,472 340 1,683 2,023 At 31 ...

  • Page 329
    ...investments at amortised cost and fair value Amortised cost US$m At 31 December 2010 US Treasury ...US Government agencies2 ...US Government sponsored entities2 ...UK Government ...Hong Kong Government ...Other government ...Asset-backed securities3 ...Corporate debt and other securities ...Equities...

  • Page 330
    ...average yields of investment debt securities at 31 December 2010 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...

  • Page 331
    ... for the year ended 31 December 2010 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives. 22 Transfers of financial assets not qualifying for derecognition HSBC enters into transactions in the normal course of business by...

  • Page 332
    ..., will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies. HSBC had US$12,540m (2009: US$9,501m) of investments in associates and joint ventures listed in Hong Kong. For the year ended 31 December 2010, HSBC's share of associates and joint ventures' tax on...

  • Page 333
    ... Technological & Commercial Joint Stock Bank in October 2007. This investment was equity accounted from that date due to HSBC's representation on the Board of Directors and involvement in the Technical Support and Assistance Agreement. In December 2007, as a result of a rights issue in which HSBC...

  • Page 334
    ... and intangible assets 2010 US$m Goodwill ...Present value of in-force long-term insurance business ('PVIF')1 ...Other intangible assets ...22,406 3,440 4,076 29,922 1 Disclosures on PVIF are provided on page 170. 2009 US$m 23,241 2,780 3,973 29,994 Goodwill Reconciliation of goodwill Hong Kong US...

  • Page 335
    ... testing date for 2009 and 2010. For each significant CGU, the VIU is calculated by discounting management's cash flow projections for the CGU. The discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the CGU operates. The long-term growth...

  • Page 336
    .... Nominal long-term growth rate: external data that reflects the market's assessment of GDP and inflation for the countries within which the CGU operates. The rates used for 2009 and 2010 are taken as an average of the last 10 years. Discount rate: the discount rate used to discount the cash flows...

  • Page 337
    ..., HSBC had US$0.2m (2009: US$0.2m) of contractual commitments to acquire intangible assets. 2 The amortisation charge for the year is recognised within the income statement under 'Amortisation and impairment of intangible assets', with the exception of the amortisation of mortgage servicing rights...

  • Page 338
    ... assets with a net book value of US$31m (2009: US$36m) pledged as security for liabilities. At 31 December 2010, HSBC had US$593m (2009: US$878m) of contractual commitments to acquire property, plant and equipment. The disposals included under 'Equipment on operating leases' relate to the sale...

  • Page 339
    ... enhance investment properties (2009: nil). HSBC Holdings had no investment properties at 31 December 2010 or 2009. 337 Shareholder Information Financial Statements 566 36 (58) - 57 39 188 - 16 (25) 5 - 217 - 18 - - 2 971 36 (24) (25) 62 41 Governance Operating & Financial Review Overview...

  • Page 340
    ...Shares of no par value Ordinary MXN2.00 Ordinary PAB 1.00 HSBC France ...HSBC Bank International Limited ...HSBC Life (UK) Limited ...HSBC Private Banking Holdings (Suisse) S.A...HSBC Trinkaus & Burkhardt AG ...Marks and Spencer Retail Financial Services Holdings Limited ...Hong Kong Hang Seng Bank...

  • Page 341
    ...voting rights At 31 December 2009, HSBC consolidated HSBC Private Equity Fund 3 ('HPEF3') but only had a 38.8% interest in its equity capital. HSBC had control under IAS 27 because it was the investment adviser/manager of the fund and had a significant equity interest. On 30 November 2010, the Group...

  • Page 342
    ... recognised on reclassifying assets as held for sale during the year. 28 Trading liabilities 2010 US$m Deposits by banks ...Customer accounts ...Other debt securities in issue (Note 30) ...Other liabilities - net short positions in securities ...38,678 125,684 33,726 102,615 300,703 2009 US$m 41,165...

  • Page 343
    ... liabilities designated at fair value HSBC Overview Shareholder Information 341 2010 US$m Deposits by banks and customer accounts ...Liabilities to customers under investment contracts ...Debt securities in issue (Note 30) ...Subordinated liabilities (Note 34) ...Preferred securities (Note 34...

  • Page 344
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 30 - Debt securities in issue / 31 - Other liabilities / 32 - Liabilities under insurance contracts Bonds and medium-term notes HSBC 2010 US$m Fixed rate Secured financing: 0.01% to 3.99%: until 2068 ...4.00% to 4.99%: until 2013 ...

  • Page 345
    ... 2010 Non-life insurance liabilities Unearned premium provision ...Notified claims ...Claims incurred but not reported ...Other ...Reinsurers' share US$m Net US$m 727 879 745 105 2,456 (129) (230) (75) 2 (432) (673) - (760) (1,433) (1,865) 598 649 670 107 2,024 56,153 58,609 At 31 December 2009...

  • Page 346
    ... incurred in respect of current year ...Claims incurred in respect of prior years ...Exchange differences and other movements ...At 31 December ...Notified claims ...Claims incurred but not reported ...Other ...Total non-life insurance liabilities ...Reinsurers' share US$m Net US$m 833 (83) 1,192...

  • Page 347
    ... to policyholders include death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the declaration of bonuses and other amounts attributable to policyholders. 345 Shareholder Information Financial Statements Governance 17,370 (2,098) 4,669...

  • Page 348
    ... commitments; and US$118m (2009: US$158m) relating to provisions for onerous property contracts. 34 Subordinated liabilities HSBC 2010 US$m Subordinated liabilities At amortised cost ...- subordinated liabilities ...- preferred securities ...Designated at fair value (Note 29) ...- subordinated...

  • Page 349
    ... par. Interest rates on the floating rate loan capital are related to interbank offered rates. On the remaining subordinated loan capital, interest is payable at fixed rates of up to 10.176%. 347 Shareholder Information Financial Statements Governance Operating & Financial Review Overview 23...

  • Page 350
    ... or redemption of its ordinary shares, until after a distribution has been paid in full. If (i) HSBC's total capital ratio falls below the regulatory minimum ratio required, or (ii) the Directors expect that, in view of the deteriorating financial condition of HSBC Holdings, the former will occur...

  • Page 351
    ... of the preferred securities and the guarantee taken together. HSBC Holdings Operating & Financial Review Shareholder Information Financial Statements Governance 2010 US$m Subordinated liabilities: - at amortised cost ...- designated at fair value (Note 29) ...13,313 16,288 29,601 2009 US$m 14,406...

  • Page 352
    ... value ...Loans and advances to banks ...Loans and advances to customers ...Financial investments ...Other financial assets ...3,030 200,098 424,713 149,954 19,417 797,212 Liabilities Deposits by banks ...Customer accounts ...Financial liabilities designated at fair value ...Debt securities in issue...

  • Page 353
    ...the 'Report of the Directors: Risk' on page 149. In its separate financial statements, HSBC Holdings recognises its foreign exchange gains and losses on structural foreign exchange exposures in the income statement. Operating & Financial Review Shareholder Information Financial Statements Governance...

  • Page 354
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 37 - Assets charged as security / 38 - Non-controlling interests / 39 - Share capital and other equity instruments 37 Assets charged as security for liabilities and collateral accepted as security for assets Financial assets pledged ...

  • Page 355
    ... Services Authority and, where relevant, the local banking regulator. 39 Called up share capital and other equity instruments Issued and fully paid 2010 US$m HSBC Holdings ordinary shares1 ...8,843 Number HSBC Holdings ordinary shares of US$0.50 each At 1 January 2010 ...Shares issued under HSBC...

  • Page 356
    ...HOLDINGS PLC Notes on the Financial Statements (continued) 39 - Share capital and other equity instruments HSBC Holdings non-voting deferred shares 301,500 non-voting deferred shares of £1 each were in issue throughout 2009 and up to 29 December 2010 and were held by a subsidiary of HSBC Holdings...

  • Page 357
    ... each HSBC Private Bank France share. During 2010, 4,420 (2009: 33,456) HSBC Private Bank France shares were issued following the exercise of employee share options and exchanged for 9,281 (2009: 70,248) HSBC Holdings ordinary shares, such shares being delivered from The CCF Employee Benefit Trust...

  • Page 358
    ... from the London Stock Exchange Daily Official List, for the five business days preceding the closing date of the acquisition. During 2010, options over 4,781 HSBC Holdings ordinary shares were exercised (2009: 18,153) and satisfied by delivery from the HSBC (Bank of Bermuda) Employee Benefit Trust...

  • Page 359
    ...Shareholder Information The amount of cash and cash equivalents not available for use by HSBC at 31 December 2010 was US$37,413m (2009: US$19,119m), of which US$28,780m (2009: US$11,595m) related to mandatory deposits at central banks. Financial Statements Governance Operating & Financial Review...

  • Page 360
    ... US$m HSBC Holdings 2009 2010 US$m US$m 71,157 166 71,323 73,385 174 73,559 9,066 192 548,792 558,050 46,988 - 46,988 - - 2,720 2,720 35,073 - 35,073 - - 3,240 3,240 Commitments Documentary credits and short-term trade-related transactions ...Forward asset purchases and forward forward deposits...

  • Page 361
    ... 644 At 31 December 2010, future minimum sublease payments of US$436m (2009: US$512m) are expected to be received under non-cancellable subleases at the balance sheet date. Shareholder Information 359 Financial Statements Governance HSBC's share of associates' contingent liabilities amounted to...

  • Page 362
    HSBC HOLDINGS PLC Notes on the Financial Statements (continued) 42 - Lease commitments / 43 - Special purpose entities Operating lease commitments At 31 December 2010, HSBC was obligated under a number of non-cancellable operating leases for properties, plant and equipment on which the future ...

  • Page 363
    ... Money market funds US$bn - 0.4 0.4 Non-money market investment funds US$bn 0.3 0.5 6.4 - - - - 0.4 7.6 At 31 December 2010 Cash ...Trading assets ...Financial assets designated at fair value ...Derivatives ...Loans and advances to banks ...Loans and advances to customers ...Financial investments...

  • Page 364
    ... December 2010 Conduits ...Securities investment conduits Multi-seller conduits ...Securitisations...Money market funds ...Constant net asset value funds Other ...Non-money market investment funds ...41.7 32.2 9.5 25.7 0.4 - 0.4 7.6 75.4 At 31 December 2009 Conduits ...Securities investment conduits...

  • Page 365
    ... these money market funds are Constant Net Asset Value funds ('CNAV'), which invest in shorter-dated and highly-rated money market securities with the objective of providing investors with a highly liquid and secure investment. In September 2008 during the financial crisis, HSBC consolidated certain...

  • Page 366
    ...investment in the units of each fund, which at 31 December 2010 amounted to US$1.1bn (2009: US$1.8bn). Non-money market investment funds HSBC has established a large number of non-money market investment funds to enable customers to invest in a range of assets, typically equities and debt securities...

  • Page 367
    ... to HSBC to date, we estimate that the funds' actual transfers to Madoff Securities minus their actual withdrawals from Madoff Securities during the time that HSBC serviced the funds totalled approximately US$4.3bn. Operating & Financial Review Shareholder Information Financial Statements Governance...

  • Page 368
    ... Limited ('Fairfield'), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands and the US against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC's private banking...

  • Page 369
    ... parent of that company, HSBC North America, entered into a consent cease and desist order with the Federal Reserve Board in the first week of October 2010. These actions require improvements for an effective compliance risk management programme across the Group's US businesses, including US Bank...

  • Page 370
    ... of HSBC Holdings, being the Directors and Group Managing Directors of HSBC Holdings. Compensation of Key Management Personnel 2010 US$m Short-term employee benefits ...Post-employment benefits ...Other long-term benefits ...Termination benefits ...Share-based payments ...39 3 1 - 49 92 HSBC 2009 US...

  • Page 371
    .... HSBC Bank (UK) Pension Scheme entered into swap transactions with HSBC as part of the management of the inflation and interest rate sensitivity of its liabilities. At 31 December 2010, the gross notional value of the swaps was US$22.9bn (2009: US$23.7bn), the swaps had a positive fair value of...

  • Page 372
    ... Staff Retirements Benefits Scheme entered into swap transactions with HSBC to manage the inflation and interest rate sensitivity of the liabilities and selected assets. At 31 December 2010, the gross notional value of the swaps was US$1.8bn (2009: US$1.8bn) and the swaps had a net positive fair...

  • Page 373
    HSBC HOLDINGS PLC Shareholder Information Interim dividends Shareholder information Page Fourth interim dividend for 2010 ...Interim dividends for 2011 ...Stock symbols ...Shareholder profile ...Annual General Meeting ...Interim Management Statements and Interim Results ...371 371 372 372 372 373 ...

  • Page 374
    ... PLC Shareholder Information (continued) Stock symbols / Shareholder profile / Annual General Meeting / IMS and interim results / Shareholder enquiries Stock symbols HSBC Holdings ordinary shares trade under the following stock symbols: London Stock Exchange Hong Kong Stock Exchange New York...

  • Page 375
    [email protected] Website: www.hsbc.fr Further copies of this Annual Report and Accounts 2010 may be obtained by writing to the following departments: For those in Europe, the Middle East and Africa: Group Communications HSBC Holdings plc 8 Canada Square London E14 5HQ United Kingdom For those...

  • Page 376
    ... information about HSBC is available This Annual Report and Accounts 2010, and other information on HSBC, may be viewed on HSBC's website: www.hsbc.com. Reports, statements and information that HSBC Holdings files with the Securities and Exchange Commission are available at www.sec.gov. Investors...

  • Page 377
    375 Shareholder Information Financial Statements Governance Operating & Financial Review Overview

  • Page 378
    ... 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 379
    ...them, translating dividends paid in UK pounds sterling into US dollars using the exchange rate in effect on the date of receipt. A US holder that elects to receive shares in lieu of a cash dividend must include in ordinary income the fair market value of such shares on the dividend payment date, and...

  • Page 380
    HSBC HOLDINGS PLC Shareholder Information (continued) Taxation of shares and dividends > US residents // Cautionary statement paid, be subject to UK inheritance tax on the individual's death or on a lifetime transfer of shares or ADSs except in certain cases where the shares or ADSs (i) are ...

  • Page 381
    ... from non-bank financial services companies, including securities firms; and Governance Operating & Financial Review Overview of public or private defined benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we...

  • Page 382
    ... unit Commercial Banking, a customer group Constant Net Asset Value Combined Code on Corporate Governance issued by the Financial Reporting Council Commercial paper Consumer price index Customer risk rating Discretionary participation feature of insurance and investment contracts Earnings per share...

  • Page 383
    ... New York Stock Exchange Office of Foreign Asset Control Over-the-counter Probability of default Awards of HSBC Holdings ordinary shares under employee share plans that are subject to corporate performance conditions Personal Financial Services, a customer group Ping An Insurance (Group) Company...

  • Page 384
    ... Shares define the number of HSBC Holdings ordinary shares to which the employee will become entitled, generally between one and three years from the date of the award, and normally subject to the individual remaining in employment Security purchased under commitments to sell Retail price index (UK...

  • Page 385
    ... securities referencing such items as commercial and residential mortgages, vehicle loans and credit card receivables funded through the issuance of both long-term and short-term debt. A fund that prices its assets on an amortised cost basis, subject to the amortised book value of the portfolio...

  • Page 386
    ... with a target credit rating of AA. The difference between the return on financial capital invested by shareholders and the cost of that capital. Economic profit may be expressed as a whole number or as a percentage. The risk arising from positions, either long or short, in equities or equity-based...

  • Page 387
    ... residential property. H Overview Shareholder Information Financial Statements Governance Operating & Financial Review Historical rating transition matrices ('HRTM') Home Equity Lines of Credit ('HELoC's) I Loans where the Group does not expect to collect all the contractual cash flows or expects...

  • Page 388
    HSBC HOLDINGS PLC Shareholder Information (continued) Glossary Term Definition The risk that movements in market risk factors, including foreign exchange rates and commodity prices, interest rates, credit spreads and equity prices will reduce income or portfolio values. Notes issued by corporates...

  • Page 389
    ... a specified asset. The return on a structured note can be linked 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. Structured Investment Vehicles...

  • Page 390
    ... Credit risk 93 management thereof 93, 312 insurance 165 Critical accounting policies 33 Cross-border exposures 95, 102 Customer recommendation 13 Customer groups and global businesses 37 D Daily distribution of revenues 147 Data security 83 Dealings in HSBC Holdings plc shares 218 Debt securities...

  • Page 391
    ... (net) 18 accounting policy 253 average balance sheet 18 sensitivity 149 Interim management statements 373 Internal control 202 IFRS and Hong Kong Financial Reporting Standards comparison 250 Investor relations 374 G Geographical regions 50 Global Banking and Markets 44 underlying/reported profit...

  • Page 392
    ... 88 Organisational structure chart 375 Other 47, 303 P Payment protection insurance 366 Pensions 274 accounting policy 266 defined benefit plans 151, 274 for directors 231 risk 172 Performance and context 220 Personal Financial Services 40 underlying/reported profit 15 Personal lending 106 Pillar...

  • Page 393
    .../reported profit 15 Rights issue accounting policy 270 Risk appetite 87 committee 197 compliance 155 contingent liquidity 143 counterparty 90 credit 93, 165 credit spread 148 economic 89 gap risk 148 governance 87 insurance operations 155, 157, 159 legal 154 liquidity and funding management...

  • Page 394
    HSBC HOLDINGS PLC Incorporated in England on 1 January 1959 with limited liability under the UK Companies Act Registered in England: number 617987 REGISTERED OFFICE AND GROUP MANAGEMENT OFFICE 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 (0) 20 7991 8888 Facsimile: 44 (0) 20 7992 4880...

  • Page 395
    ... by Black Sun Plc, London; text pages designed by Group Finance, HSBC Holdings plc, London, and by Group Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, Hong Kong Printed by Park Communications Limited, London, on Revive 100 White Offset paper using vegetable oilbased...

  • Page 396
    HSBC Holdings plc 8 Canada Square London E14 5HQ United Kingdom Telephone: 44 020 7991 8888 Facsimile: 44 020 7992 4880 www.hsbc.com