Annual Reports

  • 20-F (Jul 6, 2010)
  • 10-K (Jun 3, 2010)
  • 10-K (Apr 9, 2010)
  • 10-K (Apr 8, 2010)
  • 10-K (Apr 7, 2010)
  • 10-K (Apr 6, 2010)

 
Quarterly Reports

 
8-K

 
Other

Volkswagen 20-F 2010
e20vf
Table of Contents

As filed with the Securities and Exchange Commission on March 15, 2010.
 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
 
     
o
  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
   
Or
 
   
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
   
 
  For the fiscal year ended December 31, 2009
 
   
Or
 
   
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
   
Or
 
   
o
  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
   
 
  Date of event requiring this shell company report                     
For the transition period from N/A to N/A
Commission file number: 1-14930
HSBC Holdings plc
(Exact name of Registrant as specified in its charter)
     
N/A   United Kingdom
(Translation of Registrant’s name into English)   (Jurisdiction of incorporation or organisation)
8 Canada Square
London E14 5HQ
United Kingdom
(Address of principal executive offices)
Russell C Picot
8 Canada Square
London E14 5HQ
United Kingdom
Tel +44 (0) 20 7991 8888
Fax +44 (0) 20 7992 4880
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
     
Title of each class   Name of each exchange on which registered
Ordinary Shares, nominal value US$0.50 each.
  London Stock Exchange
 
  Hong Kong Stock Exchange
 
  Euronext Paris
 
  Bermuda Stock Exchange
 
  New York Stock Exchange*
American Depository Shares, each representing 5
Ordinary Shares of nominal value US$0.50 each.
  New York Stock Exchange
6.20% Non-Cumulative Dollar Preference Shares, Series A
  New York Stock Exchange*
American Depositary Shares, each representing one-
fortieth of a Share of 6.20% Non-Cumulative Dollar
Preference Shares, Series A
  New York Stock Exchange
5.25% Subordinated Notes 2012
  New York Stock Exchange
6.5% Subordinated Notes 2036
  New York Stock Exchange
6.5% Subordinated Notes 2037
  New York Stock Exchange
6.8% Subordinated Notes Due 2038
  New York Stock Exchange
8.125% Perpetual Subordinated Capital Securities
Exchangeable at the Issuer’s Option into Non-
Cumulative Dollar Preference Shares
  New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act of 1934: None
 
     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the period covered by the annual report:
     Ordinary Shares, nominal value US$0.50 each                                         17,408,206,768
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes o No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes þ No.
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes o No
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ    Accelerated filer o    Non-accelerated filer   o
(Do not check if a smaller reporting company)
   
     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
         
U.S. GAAP o
  International Financial Reporting Standards as issued by the
International Accounting Standards Board þ
  Other o
     If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17  o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
 
* Not for trading, but only in connection with the registration of American Depositary Shares.
 
 

 


Table of Contents

HSBC HOLDINGS PLC
Annual Report and Accounts 2009
     
 
 
 
 
 
Headquartered in London, HSBC is one of the largest banking and financial services organisations in the world. Its international network comprises some 8,000 properties in 88 countries and territories in Europe; Hong Kong; Rest of Asia-Pacific; the Middle East; North America and Latin America.
     With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by over 220,000 shareholders in 121 countries and territories. The shares are traded on the New York Stock Exchange in the form of American Depositary Shares.
     HSBC provides a comprehensive range of financial services to more than 100 million customers through four customer groups and global businesses: Personal Financial Services (including consumer finance); Commercial Banking; Global Banking and Markets; and Private Banking.
 
Certain defined terms
Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’ or the ‘Group’ means HSBC Holdings together with its subsidiaries. Within this document the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’ equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary shares and those preference shares classified as equity.

 


 

HSBC HOLDINGS PLC
Contents
     
 
 
 
 
         
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Impact of Market Turmoil
       
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Risk1
       
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Governance1
       
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1   Detailed contents are provided on the referenced pages.

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Table of Contents

HSBC HOLDINGS PLC
Financial Highlights
     
 
 
 
Highlights / Ratios
 
For the year
  Total operating income down by 11 per cent to US$78,631 million (2008: US$88,571 million).
 
  Net operating income before loan impairment charges and other credit risk provisions down by 19 per cent to US$66,181 million (2008: US$81,682 million).
 
  Underlying group pre-tax profit up by US$15,308 million to US$13,286 million.
 
  Group pre-tax profit down by 24 per cent to US$7,079 million (2008: US$9,307 million).
 
  Profit attributable to shareholders of the parent company up by 2 per cent to US$5,834 million (2008: US$5,728).
 
  Return on average shareholders’ equity of 5.1 per cent (2008: 4.7 per cent).
 
  Earnings per ordinary share down by 17 per cent to US$0.34 (2008: US$0.41).
At the year-end
  Total equity up by 35 per cent to US$135,661 million (2008: US$100,229 million).
 
  Loans and advances to customers down by 4 per cent to US$896,231 million (2008: US$932,868 million).
 
  Customer accounts up by 4 per cent to US$1,159 billion (2008: US$1,115 billion).
 
  Ratio of customer advances to customer accounts 77.3 per cent (2008: 83.6 per cent).
 
  Risk-weighted assets down by 1 per cent to US$1,133 billion (2008: US$1,148 billion).
Dividends and capital position
  Total dividends declared in respect of 2009 of US$0.34 per ordinary share, a decrease of 47 per cent on dividends for 2008; fourth interim dividend for 2009 of US$0.10 per ordinary share, no change from 2008.
 
  Core tier 1 ratio of 9.4 per cent and tier 1 ratio of 10.8 per cent.
Rights issue
  In April 2009, HSBC Holdings raised £12.5 billion (US$17.8 billion), net of expenses, by way of a fully underwritten rights issue, offering its shareholders 5 new ordinary shares for every 12 ordinary shares at a price of 254 pence per new ordinary share.
     
Dividends per ordinary share1
(US dollars)
  Earnings per ordinary share
(US dollars)
     
(BAR GRAPH)
  (BAR GRAPH)
For footnotes, see page 5.

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Table of Contents

Capital and performance ratios
                 
    2009     2008  
    %     %  
 
               
Capital ratios
               
Core tier 1 ratio
    9.4       7.0  
Tier 1 ratio
    10.8       8.3  
Total capital ratio
    13.7       11.4  
 
               
Performance ratios
               
Return on average invested capital2
    4.1       4.0  
Return on average total shareholders’ equity3
    5.1       4.7  
Post-tax return on average total assets
    0.27       0.26  
Post-tax return on average risk-weighted assets
    0.58       0.55  
 
               
Credit coverage ratios
               
Loan impairment charges as a percentage of total operating income
    31.72       27.24  
Loan impairment charges as a percentage of average gross customer advances
    2.82       2.45  
Total impairment allowances outstanding as a percentage of impaired loans at the year-end
    83.2       94.3  
 
               
Efficiency and revenue mix ratios
               
Cost efficiency ratio4
    52.0       60.1  
As a percentage of total operating income:
               
– net interest income
    51.8       48.1  
– net fee income
    22.5       22.6  
– net trading income
    12.5       7.4  
 
               
Financial ratios
               
Loans and advances to customers as a percentage of customer accounts
    77.3       83.6  
Average total shareholders’ equity to average total assets
    4.72       4.87  
Share information at the year-end
                 
    2009     2008  
 
               
US$0.50 ordinary shares in issue (million)
    17,408       12,105  
Market capitalisation (billion)
    US$199       US$114  
Closing market price per ordinary share:6
               
– London
    £7.09       £5.77  
– Hong Kong
  HK$89.40     HK$67.81  
Closing market price per American Depositary Share7
    US$57.09       US$44.15  
                         
    Over 1 year     Over 3 years     Over 5 years  
 
                       
HSBC total shareholder return to 31 December 20098
    128.3       103.6       120.6  
Benchmarks:
                       
– FTSE 1009
    127.3       98.0       135.4  
– MSCI World10
    116.7       103.6       134.9  
– MSCI Banks11
    125.2       70.6       92.3  
     
Return on average invested capital
(per cent)
  Cost efficiency ratio
(per cent)
     
(BAR GRAPH)   (BAR GRAPH)
For footnotes, see page 5.

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Table of Contents

HSBC HOLDINGS PLC
Financial Highlights (continued)
     
 
 
 
5-year comparison / Footnotes
 
Five-year comparison
                                         
    2009     2008     2007     2006     2005  
    US$m     US$m     US$m     US$m     US$m  
 
                                       
For the year
                                       
Net interest income
    40,730       42,563       37,795       34,486       31,334  
Other operating income
    37,901       46,008       49,806       35,584       30,370  
Loan impairment charges and other credit risk provisions
    (26,488 )     (24,937 )     (17,242 )     (10,573 )     (7,801 )
Total operating expenses
    (34,395 )     (49,099 )     (39,042 )     (33,553 )     (29,514 )
Profit before tax
    7,079       9,307       24,212       22,086       20,966  
Profit attributable to shareholders of the parent company
    5,834       5,728       19,133       15,789       15,081  
Dividends1
    5,639       11,301       10,241       8,769       7,750  
 
                                       
At the year-end
                                       
Called up share capital
    8,705       6,053       5,915       5,786       5,667  
Total shareholders’ equity
    128,299       93,591       128,160       108,352       92,432  
Capital resources12,13
    155,729       131,460       152,640       127,074       105,449  
Customer accounts
    1,159,034       1,115,327       1,096,140       896,834       739,419  
Undated subordinated loan capital
    2,785       2,843       2,922       3,219       3,474  
Preferred securities and dated subordinated loan capital14
    52,126       50,307       49,472       42,642       35,856  
Loans and advances to customers15
    896,231       932,868       981,548       868,133       740,002  
Total assets
    2,364,452       2,527,465       2,354,266       1,860,758       1,501,970  
                                         
    US$     US$     US$     US$     US$  
 
                                       
Per ordinary share
                                       
Basic earnings16
    0.34       0.41       1.44       1.22       1.18  
Diluted earnings16
    0.34       0.41       1.42       1.21       1.17  
Dividends
    0.34       0.93       0.87       0.76       0.69  
Net asset value at year-end17
    7.17       7.44       10.72       9.24       8.03  
 
                                       
Share information
                                       
US$0.50 ordinary shares in issue (millions)
    17,408       12,105       11,829       11,572       11,334  
                                         
    %     %     %     %     %  
 
                                       
Financial ratios
                                       
Dividend payout ratio18
    100.0       226.8       60.4       62.3       58.5  
Post-tax return on average total assets
    0.27       0.26       0.97       1.00       1.06  
Return on average total shareholders’ equity
    5.1       4.7       15.9       15.7       16.8  
Loans and advances to customers as a percentage of customer accounts
    77.3       83.6       89.5       96.8       100.1  
Average total shareholders’ equity to average total assets
    4.72       4.87       5.69       5.97       5.96  
 
                                       
Capital ratios12
                                       
Tier 1 ratio
    10.8       8.3       9.3       9.4       9.0  
Total capital ratio
    13.7       11.4       13.6       13.5       12.8  
 
                                       
Foreign exchange translation rates to US$
                                       
Closing    – £:US$1
    0.616       0.686       0.498       0.509       0.581  
:US$1
    0.694       0.717       0.679       0.759       0.847  
Average  – £:US$1
    0.641       0.545       0.500       0.543       0.550  
:US$1
    0.719       0.684       0.731       0.797       0.805  
For footnotes, see page 5.

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Table of Contents

Consolidated Financial Statements
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’) and as endorsed by the European Union (‘EU’). EU-endorsed IFRSs may differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. At 31 December 2009, there were no unendorsed standards effective for the year ended 31 December 2009 affecting these consolidated and separate financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC’s financial statements for the year ended 31 December 2009 are prepared in accordance with IFRSs as issued by the IASB.
HSBC uses the US dollar as its presentation currency because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business. Unless otherwise stated, the information presented in this document has been prepared in accordance with IFRSs.
When reference to ‘underlying’ or ‘underlying basis’ is made in tables or commentaries, comparative information has been expressed at constant currency (see page 21), eliminating the impact of fair value movements in respect of credit spread changes on HSBC’s own debt and adjusting for the effects of acquisitions and disposals. A reconciliation of reported and underlying profit before tax is presented on page 22.
Footnotes to Financial Highlights
1   Dividends recorded in the financial statements are dividends per ordinary share declared in a year and are not dividends in respect of, or for, that year. The third interim dividend for 2008 of US$0.18 was paid on 14 January 2009. The fourth interim dividend for 2008 of US$0.10 was paid on 6 May 2009. First, second and third interim dividends for 2009, each of US$0.08 per ordinary share, were paid on 8 July 2009, 7 October 2009 and 13 January 2010, respectively. Note 12 on the Financial Statements provides more information on the dividends declared in 2009. On 1 March 2010 the Directors declared a fourth interim dividend for 2009 of US$0.10 per ordinary share in lieu of a final dividend, which will be payable to ordinary shareholders on 5 May 2010 in cash in US dollars, or in pounds sterling or Hong Kong dollars at exchange rates to be determined on 26 April 2010, with a scrip dividend alternative. The reserves available for distribution at 31 December 2009 were US$34,460 million.
 
    Quarterly dividends of US$15.50 per 6.20 per cent non-cumulative Series A US dollar preference share, equivalent to a dividend of US$0.3875 per Series A ADS, each of which represents one-fortieth of a Series A dollar preference share, were paid on 16 March 2009, 15 June 2009, 15 September 2009 and 15 December 2009.
 
    Quarterly coupons of 8.125 per cent capital securities of US$0.508 were paid on 15 January 2009, 15 April 2009, 15 July 2009 and 15 October 2009.
 
2   The definition of return on average invested capital and a reconciliation to the equivalent GAAP measures are set out on page 19.
 
3   The return on average total shareholders’ equity is defined as profit attributable to shareholders of the parent company divided by average total shareholders’ equity.
 
4   The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and other credit risk provisions.
 
5   This footnote is intentionally left blank.
 
6   The prices of HSBC Holdings ordinary shares and American Depositary Shares (‘ADS’) have been adjusted for the 5-for-12 rights issue completed in April 2009.
 
7   Each ADS represents five ordinary shares.
 
8   Total shareholder return is defined on page 19.
 
9   The Financial Times Stock Exchange 100 Index.
 
10   The Morgan Stanley Capital International World Index.
 
11   The Morgan Stanley Capital International World Bank Index
 
12   The calculation of capital resources, capital ratios and risk-weighted assets for 2009 and 2008 is on a Basel II basis. 2005 to 2007 comparatives are on a Basel I basis.
 
13   Capital resources are total regulatory capital, the calculation of which is set out on page 289.
 
14   Includes perpetual preferred securities, details of which can be found in Note 32 on the Financial Statements.
 
15   Net of impairment allowances.
 
16   The effect of the bonus element of the rights issue (Note 13 on the Financial Statements) has been included within the basic and diluted earnings per share.
 
17   The definition of net asset value per share is total shareholders’ equity, less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue.
 
18   Dividends per ordinary share expressed as a percentage of earnings per ordinary share.

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Table of Contents

HSBC HOLDINGS PLC
Cautionary Statement Regarding Forward-Looking Statements
     
 
 
 
Cautionary statement

The Annual Report and Accounts 2009 contains certain forward-looking statements with respect to the financial condition, results of operations and business of HSBC.
     Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and ‘reasonably possible’, variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made, and it should not be assumed that they have been revised or updated in the light of new information or future events.
     Written and/or oral forward-looking statements may also be made in the periodic reports to the United States Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts.
     Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These factors include, among others:
  changes in general economic conditions in the markets in which HSBC operates, such as:
    continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts;
 
    changes in foreign exchange rates, in both market exchange rates (for example, between the US dollar and pound sterling) and government-established exchange rates (for example, between the Hong Kong dollar and US dollar);
 
    the timing of interest rate rises in countries which have reduced policy rates to close to zero and more general volatility in interest rates;
 
    volatility in equity markets, including in the smaller and less liquid trading markets in Asia and Latin America;
    lack of liquidity in wholesale funding markets;
 
    illiquidity and downward price pressure in national real estate markets, particularly consumer-owned real estate markets;
 
    the ease with which central banks which have provided liquidity support to financial markets through quantitative easing and extended liquidity schemes are able to withdraw such support and the timing of any withdrawal;
 
    heightened market concerns over sovereign creditworthiness in over-indebted countries;
 
    the impact of lower than expected investment returns on the funding of private and public sector defined benefit pensions;
 
    the effect of unexpected changes in actuarial assumptions on longevity which would influence the funding of private and public sector defined benefit pensions; and
 
    consumer perception as to the continuing availability of credit, and price competition in the market segments served by HSBC.
  changes in government policy and regulation, including:
    the monetary, interest rate and other policies of central banks and other regulatory authorities, including the UK Financial Services Authority, the Bank of England, the Hong Kong Monetary Authority, the US Federal Reserve, the US Securities and Exchange Commission, the US Office of the Comptroller of the Currency, the European Central Bank, the People’s Bank of China and the central banks of other leading economies and markets where HSBC operates;
 
    initiatives to change the size, scope of activities and interconnectedness of financial institutions following consideration of the regulatory consultations currently under way;
 
    revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix;
 
    imposition of levies or taxes designed to change business mix and risk appetite;


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Table of Contents

    the practices, pricing or responsibilities of financial institutions serving their consumer markets;
 
    expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership;
 
    changes in bankruptcy legislation in the principal markets in which HSBC operates and the consequences thereof;
 
    general changes in government policy that may significantly influence investor decisions, in particular in markets in which HSBC operates, including financial institutions newly taken into state ownership on a full or partial basis;
 
    extraordinary government actions as a result of current market turmoil;
 
    other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for HSBC’s products and services;
    the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and
 
    the effects of competition in the markets where HSBC operates including increased competition from non-bank financial services companies, including securities firms.
  factors specific to HSBC:
    the success of HSBC in adequately identifying the risks it faces, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, HSBC’s ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; and
 
    the success of HSBC in addressing operational, legal and regulatory, and litigation challenges.


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HSBC HOLDINGS PLC
Group Chairman’s Statement
     
 
 
 
Group Chairman’s Statement

(PHOTO)
2009: a year of transition
In a number of important respects, 2009 was a year of transition.
     It began with further turbulence in global financial markets but, during the year, the markets pulled back from uncertainty and progressively stabilised as a consequence of the continued, extraordinary and timely actions by governments and central banks.
     2009 also saw the deepest contraction in the real economy in any year since the Second World War. However, it was apparent by year end that the worst was over – even if confidence remained fragile and recovery would be uneven.
     The global macro-economic transition from West to East gathered pace during 2009. At HSBC we have long been convinced that the world’s economic centre of gravity is shifting, and the financial crisis has only accelerated this trend.
     Nevertheless, huge challenges and risks remain for all of us.
     While emerging markets are leading global recovery and seem certain to drive the majority of the world’s growth in the generation ahead, recovery in developed markets has been slow to start, and unemployment remains high.
     Furthermore, the global rebalancing of demand has barely begun. The financial crisis brought into stark relief the extent of the imbalances, especially between over-consuming Western economies and high-saving emerging markets. Rebalancing requires structural change and international co-operation, and it will take time.
     There are also important lessons to learn as we seek to reform
the financial system. Few of these lessons are quick or simple, but the need for urgent change is clearer than ever.
Supporting customers and delivering results throughout the cycle
Throughout the crisis, HSBC has remained profitable, financially strong and independently owned by our shareholders.
     It is testimony to the quality and strength of HSBC’s management team that, in 2009, our underlying performance was significantly ahead of 2008. On an underlying basis, and excluding the impact of the goodwill impairment recorded in 2008, pre-tax profit was US$13.3 billion, 56 per cent higher. On a reported basis, profit before tax was US$7.1 billion, down 24 per cent, in part due to the reversal of fair value accounting gains on our own debt.
     That HSBC has reported a pre-tax profit in all three years since the onset of the crisis should be a source of great confidence to our shareholders, our depositors and all of our customers. Our track record of delivering results through adversity, and at all stages of the economic cycle, remains intact.
     We continued to enhance our financial strength during 2009. We strengthened our capital base by US$10.2 billion through underlying profit generation. This comfortably covers our dividends declared, which total US$5.9 billion in respect of 2009. The directors have announced a fourth interim dividend of 10 cents per ordinary share, payable on 5 May 2010, and we remain one of the leading payers of dividends in financial services, declaring dividends in respect of the last three years of over US$24 billion in total.
     The successful completion of our rights issue in April added US$17.8 billion to shareholders’ equity and helped to set the tenor for market recovery. Its success demonstrated the strong confidence which you, our shareholders, have in our future and we are profoundly thankful for your support.
     We indicated at the time of the rights issue our expectation that, if successful, it would increase our tier 1 ratio by around 150 basis points. I am pleased to report that our tier 1 ratio increased by some 250 basis points to 10.8 per cent at 31 December 2009, largely as a result of the rights issue and internal capital generation. The core tier 1 ratio was 9.4 per cent at the same date, increasing by some 240 basis points.
     Throughout the crisis, our strategy has remained clear: to build on our position as the leading


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international and emerging markets bank. We have also never forgotten that it is our responsibility to make a real contribution to economic and social development, and that our ability to do so is fundamental to our success in delivering sustainable value to our shareholders.
     Meeting our commitments to the communities we serve around the world is not some optional extra or by-product of our business – it is part of our raison d’être. In Argentina, which was in the midst of the peso crisis ten years ago, we did not abandon our customers and have remained committed to the market ever since. In 2009, our operations there reported their best-ever underlying performance and resumed paying cash dividends to the Group in January 2010. In mainland China, we are proud of our position as the leading international bank, and we continued to build our strong rural presence during the year. In Indonesia, we nearly doubled our network to support the growing financial needs of personal and business banking customers, and we launched our SME fund in the United Arab Emirates in January 2010. These are just a few examples which illustrate our commitment to helping people prepare for the future, building prosperity and security for their families and communities.
Robust corporate governance and unrivalled management experience
In 2009 we announced that, as Group Chief Executive, Michael Geoghegan would take responsibility for developing strategy as part of his overall responsibilities for the performance of the Group’s business. We relocated the principal office of the Group Chief Executive to Hong Kong and, on 1 February 2010, he succeeded Vincent Cheng as Chairman of The Hongkong and Shanghai Banking Corporation Limited. This underscores our commitment to our emerging markets businesses and reflects the historic shift now taking place in the global economy.
     HSBC’s corporate headquarters remain in the UK, where we continue to benefit from being at the heart of one of the world’s pre-eminent financial centres. From this base, as Chairman, I spend an increasing amount of my time engaging with policymakers and regulators throughout the world on behalf of the Group, on the growing number of policy issues which are crucial for the banking industry in general and for HSBC in particular.
     At HSBC, we have an extremely strong, diverse and engaged Board and the international experience and expertise of our management team is something which sets us apart. We are committed to delivering
effective supervision and to compliance with the principles set out in the Walker Review in the UK. During 2009, we also took further steps to strengthen our top management team. Sandy Flockhart was appointed Chairman, Personal and Commercial Banking, with responsibility for Personal Financial Services, Commercial Banking and Insurance, HSBC’s Latin American and African businesses, and most Group functions. Stuart Gulliver was appointed Chairman, Europe, Middle East and Global Businesses and assumed responsibility for Private Banking, adding to his responsibilities for Global Banking and Markets. Douglas Flint assumed additional responsibilities for Regulation and Compliance in an expanded role as Chief Financial Officer, Executive Director, Risk and Regulation. Peter Wong was appointed Chief Executive of The Hongkong and Shanghai Banking Corporation Limited, succeeding Sandy Flockhart.
     I would like to thank Vincent Cheng for his tremendous contribution over the past five years as Chairman of The Hongkong and Shanghai Banking Corporation Limited, and look forward to continuing to work with him as a main Board member and Chairman of HSBC Bank (China) Company Limited.
     I would also like to say thank you on behalf of the Board to three of our directors, José Luis Durán, William Fung and Sir Mark Moody-Stuart, who will retire by rotation at the 2010 Annual General Meeting and will not seek re-election. It has been a privilege to work with each of them and all of us on the Board are extremely grateful for their counsel and support.
Learning the lessons from the crisis
In 2009, the G20 set out its clear belief that sustainable globalisation and rising prosperity will require an open world economy based on market principles, effective regulation, and strong global institutions. At HSBC, we agree that these principles are critical for the common good. It is vital that the industry should engage constructively in the debate about how this should work in practice and HSBC is participating fully in these discussions. In our view, the overall objective must be to deliver three effective market mechanisms.
     Competitive product provision is fundamental to economic and social development. In the recent past, attempts to drive ever greater profits from the same source resulted in distorted products, lack of transparency and over-complexity. The industry needs to learn the lessons from this and deliver a market which provides financial services that are competitive, transparent and responsive to genuine customer needs.


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HSBC HOLDINGS PLC
Group Chairman’s Statement (continued)
     
 
 
 
Group Chairman’s Statement

     The market for capital has also suffered from clear distortions in recent years. There has been too great an emphasis on short-term gains, often accompanied by shareholder pressure to increase leverage in order to boost returns, and a dangerous underpricing of risk. This resulted in unsustainable returns, which in some cases proved to be illusory. Banks must be appropriately capitalised, sufficiently liquid and not overstretched, and getting this right will be crucial in delivering the sustainable financial system we need for the future.
     Partly because of these problems in other areas of the marketplace, the third area requiring urgent reform is the market for talent. There is understandable public anger in some countries as a result of the practices at certain banks and, in particular, because of the egregious reward of management failure. We have witnessed unacceptable distortions – from rewards linked to unsustainable or illusory day-one revenues which encouraged excessive risk-taking; to multi-year guaranteed bonuses with no performance criteria. Over the last three years I have spoken publicly about my concerns regarding remuneration and I will set out our principles at HSBC.
Rewarding sustainable performance
First, for any bank to be sustainable it must strike the right balance in serving the long-term interests of its stakeholders. It must deliver sustainable returns to shareholders on their investment; it must maintain the capital strength needed to support the customers and economies it serves; and it must reward its employees appropriately. My own experience is that colleagues want to know that their job makes a difference and contributes to social and economic development; reward is simply not the only motivating factor. Nonetheless it is important, and companies have a clear responsibility to treat their employees appropriately.
     It therefore follows that remuneration must be firmly tied to sustainable performance and must not reward failure. It should be properly aligned with risk which remains on the balance sheet, and subject to deferral and to clawback in case performance later proves to be unsatisfactory.
     Second, in order to maintain long-term competitive advantage, remuneration must be market-based. Underpaying ultimately results in a company losing some of its best people. HSBC is domiciled in the UK but we have around 300,000 employees in 88 countries and territories. We have to think internationally, and remuneration policy is no
exception. Similarly, if pre-eminent financial centres like London are to remain home to firms like HSBC, those of us who care for its future must reflect the reality of the global marketplace in our thinking and approach.
     Third, an independent Remuneration Committee should conduct rigorous international benchmarking on compensation and consult appropriately on its conclusions. These are the principles we have followed in determining HSBC’s rewards this year.
     Our executive Directors have a combined 178 years of service – a track record almost without parallel in the industry. I believe there is no better management team in banking and it is no coincidence that HSBC has remained profitable throughout the financial crisis and paid dividends when few other banks did. Indeed, for 2009, our total dividends to shareholders once again comfortably exceed total bonus awards. We have not needed taxpayers’ money; on the contrary, HSBC has contributed nearly £5 billion in tax to the UK economy over the past five years.
     At HSBC, we firmly believe that bonuses are a legitimate and proper element of reward providing, of course, awards fully satisfy the principles set out above. The G20 has set out clear guidance which HSBC wholly supports, and we comply with the Financial Services Authority’s remuneration code of practice. Indeed, our decision to defer 100 per cent of executive Director bonuses in respect of 2009 over three years exceeds these guidelines.
     Proper pay for proper performance includes ensuring market-based pay for employees over time. The Board expects fixed pay in banking to increase as a proportion of total compensation, especially for important risk and supervisory functions. This is a process we intend to see through at HSBC, and our management team is no exception.
     The Board fully appreciates that, in these extraordinary times, remuneration is enormously sensitive – and particularly so when the absolute numbers involved are large by any standards, even if they are not in comparison with some other companies of HSBC’s standing. Our practice is clear and transparent and this year’s executive awards are set out in the Directors’ Remuneration Report published today. We absolutely believe that the decisions we have taken on this year’s remuneration awards are right – for all of our stakeholders.
Building a sustainable financial system for the future
As policymakers and industry participants take the


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necessary steps to improve the way our markets work, there are also some important over-arching challenges which we must address.
     It is imperative to strike the right balance between strengthening the financial system and supporting economic growth. ‘De-risking’ the banking system, if taken too far, will throttle recovery and drive risk into other, unregulated parts of the capital markets. It is in the collective public interest to get this balance right. We must not rush to implement hastily conceived responses and policy must be co-ordinated internationally if we are to manage risk better in a truly global industry.
     Policymakers also need to evolve new macroeconomic tools which will assist them to manage the supply of credit, as well as the cost of credit, in the economy. I believe a key element of this involves managing bank capital on a countercyclical basis which strikes the right balance between financial system stability and the prospects for economic growth. We cannot deliver a sustainable financial system without improving the wider framework for macroeconomic management too.
     Finally, in the context of a wide-ranging discussion on the appropriate size and shape of banks, we must recognise that corporate structure and liquidity management are at least as important as size per se. This debate has sometimes been given the unhelpful shorthand ‘too big to fail’, but the reality is more complex than the headlines suggest.
We believe that the financial system needs banks which are ‘big enough to cope’ by having a diversified business portfolio, helping to reduce risk and to generate consistent returns. There has likewise not been enough consideration given to the need for banks to be ‘broad enough to serve’ those global customers who have increasingly diverse financial needs. In short, it is undesirable and impractical to prescribe some ideal model for a bank. The crisis clearly demonstrated that systemic importance is not a function of size or business focus.
     HSBC has always believed in having a transparent structure based on separately capitalised subsidiaries, takes a conservative approach to liquidity management, and has built a business with the scale to provide broad, diversified services to its global customers. While the detail and timing of regulatory change remain uncertain, we are confident that our focus on these fundamentals positions us strongly and competitively to respond to the challenges ahead.
-s- S K Green
S K Green, Group Chairman
1 March 2010


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review
     
 
 
 
Principal activities / Strategic direction / Challenges and uncertainties

Principal activities
 
HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$199 billion at 31 December 2009.
     Through its subsidiaries and associates, HSBC provides a comprehensive range of banking and related financial services. Headquartered in London, HSBC operates through long-established businesses and has an international network of some 8,000 properties in 88 countries and territories in six geographical regions: Europe; Hong Kong; Rest of Asia-Pacific; the Middle East; North America and Latin America. Previously, the Middle East was reported as part of Rest of Asia-Pacific. Within these regions, a comprehensive range of financial services is offered to personal, commercial, corporate, institutional, investment and private banking clients. Services are delivered primarily by domestic banks, typically with large retail deposit bases, and by consumer finance operations.
     Taken together, the five largest customers of HSBC do not account for more than one per cent of HSBC’s income.
     The Group has contractual and other arrangements with numerous third parties in support of its business activities. None of the arrangements is individually considered to be essential to the business of the Group.
     There were no significant acquisitions during the year (for details of acquisitions see page 444).
Strategic direction
 
HSBC’s strategic direction reflects its position as ‘The world’s local bank’, combining the largest global emerging markets banking business and a uniquely cosmopolitan customer base with an extensive international network and substantial financial strength.
     The Group’s strategy is aligned with the key trends which are shaping the global economy. In particular, HSBC recognises that, over the long term, developing markets are growing faster than the mature economies, world trade is expanding at a greater rate than gross domestic product and life expectancy is lengthening virtually everywhere. HSBC’s strategy is focused on delivering superior growth and earnings over time by building on the Group’s heritage and skills. Its origins in trade in Asia have had a considerable influence over the development of the Group and, as a consequence, HSBC has an established and longstanding presence in many countries. The combination of local
knowledge and international breadth is supported by a substantial financial capability founded on balance sheet strength, largely attributable to the scale of the Group’s retail deposit bases.
     HSBC is, therefore, continuing to direct incremental investment primarily to the faster growing markets and, in the more developed markets, is focusing on businesses and customer segments which have international connectivity. A policy of maintaining HSBC’s capital strength and strong liquidity position remains complementary to these activities and is the foundation of decisions about the pace and direction of investment.
     The Group has identified three main business models for its customer groups and global businesses that embody HSBC’s areas of natural advantage:
  businesses with international customers for whom connections with developing markets are crucial – Global Banking and Markets, Private Banking, the large business segment of Commercial Banking and the mass affluent segment of Personal Financial Services;
 
  businesses with local customers where service efficiencies can be enhanced through global scale – the small business segment of Commercial Banking and the mass market segment of Personal Financial Services; and
 
  products where global scale is possible by applying the Group’s efficiency, expertise and brand – product platforms such as global transaction banking.
     The means of executing the strategy and making greater use of the linkages within the Group are clear:
  the HSBC brand and global networks will be leveraged to reach new customers and offer further services to existing clients;
 
  efficiency will be enhanced by taking full advantage of local, regional and global economies of scale, in particular by adopting a common systems architecture wherever possible; and
 
  objectives and incentives will be aligned to motivate and reward staff for being fully engaged in delivering the strategy.
Challenges and uncertainties
 
Current economic and market conditions may adversely affect HSBC’s results
HSBC’s earnings are affected by global and local economic and market conditions. The dislocation in


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financial markets which began in August 2007 put financial institutions under considerable pressure. Market turbulence was accompanied by recessionary conditions in developed economies and a slowdown in emerging countries, with serious adverse consequences for asset values, employment, consumer confidence and levels of economic activity. The global economy entered the most severe downturn for 80 years in 2008.
     Governments and central banks took concerted action to make substantial funds and deposit guarantees available to boost liquidity and confidence in their financial systems, stimulate lending and support institutions which were judged to be at risk of failing. In addition, governments extended fiscal stimulus programmes and central banks reduced interest rates. As a consequence, conditions eased in 2009 and most leading developed economies began to emerge from recession, although the pace and depth of recovery was uneven across economies and asset markets. The financial services industry continued to face an unusually high degree of uncertainty.
     Despite some evidence of stabilisation in housing market conditions during 2009, the dramatic declines of the previous two years, particularly in the US and the UK, continued to affect adversely the credit performance of real estate-related exposures. Higher unemployment undermined consumer confidence and this, coupled with the deterioration in house prices, led to lower spending which weakened economies. This resulted in significant write-downs of related asset values by financial institutions, including HSBC. These write-downs, both of direct lending exposures and of asset-backed securities, caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger competitors and, in some cases, to fail.
     Economic conditions remain fragile, and the risk exists that major economies may suffer a ‘double dip’ recession in which the improvements seen in a number of important markets reverse. This could have an adverse effect on HSBC’s operating results. In particular, the Group may face the following challenges in connection with these events:
  HSBC’s ability to assess the creditworthiness of its customers or to estimate the values of its assets may be impaired if the models and techniques it uses become less accurate in their predictions of future behaviour, valuations or estimates. The process HSBC uses to estimate losses inherent in its credit exposure or assess the value of certain assets requires difficult,
    subjective and complex judgements. These include forecasts of economic conditions and how predicted economic scenarios may impair the ability of HSBC’s borrowers to repay their loans or affect the value of assets. As a consequence, this process may be less capable of making accurate estimates which, in turn, may undermine the reliability of the process;
 
  the demand for borrowing from creditworthy customers may diminish should economic activity slow;
 
  a prolonged period of low interest rates will constrain net interest income earned by HSBC on its excess deposits;
 
  HSBC’s ability to borrow from other financial institutions or to engage in funding transactions on favourable terms, or at all, could be adversely affected by any renewed disruption in the capital markets or deteriorating investor sentiment;
 
  market developments may continue to depress consumer confidence and may cause further declines in credit card usage and adverse changes in payment patterns, leading to increases in delinquencies and default rates, write-offs and loan impairment charges beyond HSBC’s expectations;
 
  loan impairment allowances and write-offs would be likely to rise in the event of a ‘double dip’ recession as consumer confidence weakened and business failures increased;
 
  HSBC expects to face increased regulation and supervision of the financial services industry, following new proposed regulatory measures in countries in which it operates;
 
  trade and capital flows may contract as a result of protectionist measures being introduced in certain markets; and
 
  increased government ownership and control over financial institutions and further consolidation in the financial industry which could significantly alter the competitive landscape.
     As a global financial institution, HSBC is exposed to these developments across all its businesses, both directly and through their impact on its customers and clients. Local variations exist, however, reflecting regional circumstances and presenting challenges to HSBC which are specific to those areas. HSBC’s strong balance sheet and capital position, its roots in emerging markets and


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Challenges and uncertainties

its links with the developed world provide it with the platform to continue to grow, taking opportunities to expand its operations in existing markets and connect local customers internationally.
Europe
In the UK, the contraction in economic output appears to have ceased with the country emerging slowly from recession in the last quarter of 2009. However, economic indicators remain weak and the risk of the country slipping back into recession in 2010 remains, thus delaying the recovery. Government measures to tackle the record levels of national debt, including taxation increases and public spending cuts, are also likely to result in a slower recovery than from other recessions. Political involvement in the regulatory environment and the major financial institutions in which the state has a direct financial interest will continue. Government demands for increased credit to support the economic recovery coupled with regulatory actions to diminish the banking sector’s reliance on short-term wholesale funding will increase competition for deposits, narrowing margins. The combination of slow economic recovery, government intervention and increased competition for deposits will maintain pressure on profitability within HSBC’s retail business model. Credit quality is expected to improve in some sectors, however, as the economy returns to growth but could suffer a reversal should there be any further increase in unemployment in 2010.
     In France, following government stimulus measures, the economy has started recovering with gross domestic product (‘GDP’) growing slightly from the second quarter of 2009 and the number of companies in default stabilising. Although unemployment is rising and there are concerns about the public deficit, household consumption remains robust and continues to drive the economy. HSBC’s retail business model depends on banking fees and a consolidation of the recovery observed in the financial markets in 2009 will help sustain profitability. Credit quality is expected to remain stable for personal customers due to the quality of the client base, though the outlook for commercial credit remains less certain.
     Outside the UK and France, conditions are likely to remain difficult in some of the countries in which HSBC currently operates in Europe and volatility is expected to continue, in particular as markets focus on potential sovereign credit deterioration.
Hong Kong and Rest of Asia-Pacific
In Asia-Pacific, Hong Kong remains HSBC’s key market, and through the financial crisis has continued to generate relatively high returns on capital. HSBC will invest to maintain its competitive position in Hong Kong while continuing to support its growing franchises in other markets in the region. The slowdown in commercial activity, which precipitated the coordinated government stimulus packages, affected fee-based businesses, and continuing low interest rates have left deposit spreads compressed. However, HSBC is now seeing more lending demand as regional economies emerge from recession and equity markets and cross-border trade flows improve. HSBC attracted higher deposits in 2009 despite intensified competition for liquidity, and this added to the challenges of finding opportunities to deploy the deposits where credit demand remained muted. A recent increase in lending has started to ease some of these pressures. Emerging markets in Asia-Pacific currently offer the brightest prospects, with GDP growth in mainland China and India, in particular, expected to be strong in 2010.
     As the world’s fastest growing region, Asia is expected to drive incremental growth in the global recovery. Inflation triggered by rising output prices and increased demand remains a concern which has prompted regulatory interventions in the form of ‘cooling measures’ to manage asset growth and prevent, as far as possible, asset bubbles emerging. Mainland China has been prominent in taking a lead in this area. HSBC’s strong liquidity position in the region remains key to the Group’s ability to expand as well as increase margins when interest rates begin to rise again, the timing of which remains uncertain. Regional markets are likely to remain competitive due to the growing presence of large domestic and regional banks, for example, the mainland Chinese banks in Hong Kong.
Middle East
After a very difficult year, there are signs that the conditions for a recovery in Middle East economic activity have begun to emerge. Assuming an average oil price in excess of US$70 a barrel, public finances in the key oil producing states such as Saudi Arabia, Qatar and the United Arab Emirates (‘UAE’) should improve, allowing governments to maintain and even accelerate fiscal stimulus programmes.
     Investment spending is also likely to pick up after last year’s slowdown, although ongoing difficulty accessing funding will impede the pace of capital spending growth for the public and private


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sector alike. Tight financing conditions as well as a sharp fall in asset prices in some parts of the region will also weigh on an expected increase in private consumption levels.
     Provided the external environment continues to strengthen, regional non-commodity exporters such as Egypt should see the recent downturn in demand for tourism and trade services slowly reverse, offering additional support for growth.
     With most regional economies basing their monetary regimes around a US dollar-peg, interest rates are expected to remain at historically low levels across much of the region in 2010. Coupled with growth in government spending and gains in global commodity prices, this may result in a rise in inflation. After the sharp economic downturn of 2009, however, the increase in price pressure is unlikely to be pronounced.
North America
In 2009, the economic backdrop in the US continued to be characterised by tight credit conditions, reduced economic growth and a weak housing market. Against this, market confidence began to increase, beginning in the second quarter of the year, stemming largely from government initiatives to restore faith in the capital markets, and the benefits to borrowers of the prolonged period of low Federal funds rates. The latter put pressure on spreads earned on HSBC’s deposit base, however. As the disruption to financial markets eased, evidence emerged of contracting credit spreads and improved liquidity during 2009, beginning in the second quarter of the year, enabling many companies to issue debt and raise new capital.
     The reduction in uncertainty helped capital markets to recover and stock markets to rise. Signs of stabilisation in house prices, most notably in the lower price ranges, began to emerge in the third quarter of the year. An improvement in unemployment and a sustained recovery in the housing market continue to remain critical to consumer confidence and a broader US economic recovery. Although consumer confidence has improved, it remains depressed on a historical basis, driven by declines in household income and wealth and the job market remaining difficult. It is likely that these conditions will continue to constrain the Group’s results into 2010, although the degree to which this happens remains uncertain.
     On 14 January 2010, the US Administration announced its intention to propose a Financial Crisis Responsibility Fee to be assessed against financial institutions with more than US$50 billion on
consolidated assets for at least 10 years. It is not possible to assess the financial impact of this proposal, however, until final legislation has been enacted.
Latin America
Economic activity in Latin America was affected by the global economic recession in 2009. The region’s weighted average GDP is expected to fall by 2.7 per cent in the year, though growth may resume in 2010 given the outlook for world trade and a rebound in economic activity. Unemployment rates in the region rose in 2009 and it is probable that this trend will continue, albeit at a slower pace as economies begin to recover. Inflation fell due to falling commodity prices and lower demand. These effects will begin to reverse in 2010 and consequently inflation may rise.
     HSBC is positioning itself to grow in select customer markets, though challenges remain to expanding business volumes. Margin pressures are expected to continue throughout the region due to fierce competition for prime customers and lower interest rates than the historical averages. Any further reduction in GDP and increase in unemployment will negatively affect business activity, compounded by uncertainty surrounding presidential elections in Costa Rica, Colombia and Brazil in 2010 and in Peru and Argentina in 2011.
Liquidity and funding risks are inherent in HSBC’s business
HSBC’s business model is founded upon having ready access to financial resources whenever required to meet its obligations and grow its business. To this end, HSBC entities seek to maintain a diversified and stable funding base comprising core retail and corporate customer deposits and institutional balances, and certain entities augment this with modest amounts of long-term wholesale funding. In addition, HSBC holds portfolios of highly liquid assets diversified by currency and maturity to enable it to respond to unusual liquidity requirements.
     Where markets become illiquid, the value at which financial instruments can be realised is highly uncertain, and although processes are available to estimate fair values, they require substantial elements of judgement, assumptions and estimates (which may change over time). The risk of illiquidity, therefore, may reduce capital resources as valuations decline. Actions or the threat of actions by third parties and independent market participants, such as rating agency downgrades of instruments to which HSBC has exposure, can result in reduced


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Challenges and uncertainties

liquidity and valuations of those instruments. The liquidity of those HSBC entities that utilise long-term wholesale markets could be constrained by an inability to access them due to a variety of unforeseen market dislocations or interruptions. Rating agencies which determine HSBC’s credit ratings and thereby influence the Group’s cost of funds, take into consideration the effectiveness of HSBC’s liquidity risk management framework.
     The market conditions that the financial services industry experienced during the height of the crisis were reflected in decreased liquidity, reduced availability of long-term wholesale market funding, pressure on capital and extreme price volatility across a wide range of asset classes. Illiquidity prevented the realisation of some asset positions and constrained risk distribution in ongoing banking activities. The market conditions also highlighted the significant benefits of a diversified core deposit base, leading to increased competition for such deposits and the greater risk of deposit migration between competitors.
     HSBC’s Global Banking and Markets business operates in many markets affected by illiquidity and is subject to the threat of extreme price volatility, either directly or indirectly, through exposures to securities, loans, derivatives and other commitments. At the height of the financial crisis, HSBC made substantial write-downs and recognised impairments on illiquid legacy credit and structured credit positions. Although during 2009 there was some moderation in market conditions, it is difficult to predict if this trend will continue and, if conditions worsen, which of HSBC’s markets, products and other businesses will be affected. Any repeat of these factors could have an adverse effect on the Group’s results.
Reform of the regulatory environment presents risks to HSBC
There are potential strategic and structural risks to the organisation, nature and scope of the Group’s business activities and opportunities posed by many of the proposals for regulatory reform being debated both internationally and domestically in response to the recent financial crisis. A consensus has emerged among the G-20 nations that institutions that would pose a systemic risk if they were to fail should be subject to enhanced regulation in markets in which they have a substantial presence. HSBC is likely to be considered a systemically significant institution in its key markets. The Basel Committee on Banking Supervision (‘The Committee’) has issued a comprehensive reform package to address the lessons of the crisis which includes proposals on
strengthening global capital and liquidity regulations and the resolution of systemically significant cross-border banks. The Committee’s paper entitled ‘Strengthening the Resilience of the Banking Sector’ proposes changes to both the composition of capital and the risk coverage of the capital framework, as well as the introduction of a leverage ratio and measures to promote the build up of capital buffers. The stated intention of these proposals is to promote a more resilient banking sector, to improve the banking sector’s ability to absorb shocks, to improve risk management and to strengthen bank transparency and disclosure. The proposals on liquidity aim to elevate the resilience of internationally active banks to liquidity stresses, as well as increasing international harmonisation of liquidity risk supervision. A study of the impact of all these proposals on individual banks, and the financial services industry as a whole, is taking place in the first half of 2010 in parallel with a consultation process. The Committee is then seeking to agree proposals by the end of 2010 for implementation by the end of 2012.
     At the same time, the European Commission, the UK Tripartite Authorities (HM Treasury, the Bank of England and the Financial Services Authority (‘FSA’)), the US Government and others have made a number of proposals for adjustments in their regulatory regimes which could affect entities in the HSBC Group. HSBC is engaged actively in discussions with its regulators, both directly and through industry bodies, on the appropriate regime to be applied to various activities and entities, taking into account the interaction of global and local regulations. The precise nature, extent, form and timing of any regulatory changes, as well as the degree to which there will be effective consultation among the various jurisdictions involved, are highly uncertain and thus it is not possible to determine or estimate the likely actual impact on the Group’s business and activities. Major areas where reform is being actively discussed, all of which could affect HSBC’s business and activities, are possible capital surcharges for systemically important banks, greater emphasis on standalone national subsidiaries, reduced interconnectedness within the system, changes to capital regulations affecting both capital and capital requirements, changes in compensation practices, restrictions on certain types of financial products, and greater separation of retail and wholesale activities.
     HSBC Bank, like all authorised institutions in the UK, is subject to a ‘Special Resolutions Regime’ under the Banking Act 2009 which gives wide powers in respect of UK banks and their parent


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companies to HM Treasury, the Bank of England and the FSA in circumstances where any such UK bank has encountered or is likely to encounter financial difficulties.
HSBC is subject to political and economic risks in the countries in which it operates
HSBC operates through an international network of subsidiaries and affiliates in 88 countries and territories around the world. Its results are, therefore, subject to the risk of loss from unfavourable political developments, currency fluctuations, social instability and changes in government policies on such matters as expropriation, authorisations, international ownership, interest-rate caps, limits on dividend flows and tax in the jurisdictions in which it operates. These factors may also negatively affect revenues from the trading of securities and investment in securities, and credit quality in lending portfolios. The ability of HSBC’s subsidiaries and affiliates to pay dividends could be restricted by changes in official banking measures, exchange controls and other requirements. HSBC prepares its accounts in US dollars, but because a substantial portion of its assets, liabilities, assets under management, revenues and expenses are denominated in other currencies, changes in foreign exchange rates have an effect on its reported income, cash flows and shareholders’ equity.
HSBC has significant exposure to counterparty risk both within the financial sector and to other risk concentrations
HSBC has exposure to virtually all major industries and counterparties, and it routinely executes transactions with counterparties in financial services, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose HSBC to credit risk in the event of default by its counterparty or client. HSBC’s ability to engage in routine transactions to fund its operations and manage its risks could be adversely affected by the actions and commercial soundness of other financial services institutions. Financial institutions are necessarily interdependent because of trading, clearing, counterparty or other relationships. As a consequence, a default by, or decline in market confidence in, individual institutions, or anxiety about the financial services industry generally, can lead to further individual and/or systemic difficulties, defaults and losses. Where counterparty risk has been mitigated by taking collateral, HSBC’s credit risk may remain high if the collateral it holds cannot be realised or has to be liquidated at prices
which are insufficient to recover the full amount of its loan or derivative exposure.
HSBC operates in a highly competitive environment, and competition could intensify as a result of current global market conditions and possible changes thereto
The financial crisis has begun to re-shape the banking landscape globally and those institutions which have emerged the strongest have reinforced both the importance of a core retail and commercial deposit funding base and strong capitalisation.
     At the height of the crisis, financial institutions requiring support from governments in a variety of ways were characterised broadly as being dependent on short-term wholesale funding which failed to roll over due to market concerns about the quality of the assets being funded. As a consequence, financial firms have sought to reduce the proportion of their balance sheets funded in the wholesale markets. As a result, competition for retail deposits and tighter balance sheet control have resulted in re-pricing of loans and advances. Although the financial industry’s renewed focus on building retail deposit bases has resulted in greater price competition in terms of interest rates offered, the strength of HSBC’s brand and its longstanding conservative balance sheet structure and its relationship-based approach have enabled the Group to increase deposits in the current environment.
     Further consolidation is expected to take place through portfolio disposals, the sale of banks and financial institutions weakened by the crisis, or the consolidation of smaller institutions which lack the scale to compete in a world of higher capital and liquidity requirements.
     In addition, the crisis has reinforced a global economic shift towards emerging markets. It is now expected that much of the growth in financial services will be in emerging markets as their economies continue to grow and the relative penetration of banking activities increases.
HSBC is subject to legal and compliance risks, which could have an adverse effect on the Group
Legal and compliance risks arise from a variety of sources with the potential to cause harm to HSBC and its ability to operate. These issues require the Group to deal appropriately with potential conflicts of interest; regulatory requirements; ethical issues; anti-money laundering laws and regulations; privacy laws; information security policies; sales and trading


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Challenges and uncertainties / KPIs

practices; and the conduct of companies with which it is 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 amount of damages asserted against HSBC, or subject HSBC to regulatory enforcement actions, fines or penalties or reputational damage.
Operational risks are inherent in HSBC’s business
HSBC is exposed to many types of operational risk, including fraudulent and other criminal activities (both internal and external), breakdowns in processes or procedures and systems failure or non availability. HSBC is also subject to the risk of disruption of its business arising from events that are wholly or partially beyond its control (for example natural disasters, acts of terrorism, epidemics and transport or utility failures) which may give rise to losses in service to customers and/or economic loss to HSBC. All of these risks are also applicable where HSBC relies on outside suppliers or vendors to provide services to it and its customers.
     The reliability and security of HSBC’s information and technology infrastructure and its customer databases are crucial to maintaining the service availability of banking applications and processes and to protecting the HSBC brand. Critical system failure, any prolonged loss of service availability or any material breach of data security, particularly involving confidential customer data, could cause serious damage to the Group’s ability to service its clients, could breach regulations under which HSBC operates and could cause long-term damage to its business and brand.
HSBC is subject to tax-related risks in the countries in which it operates, which could have an adverse effect on its operating results
HSBC is subject to the substance and interpretation of tax laws in all countries in which it operates. Tax risk is the risk associated with changes in tax law or the interpretation of tax law. It also includes the risk of changes in tax rates and the risk of consequences arising from failure to comply with procedures required by tax authorities. Failure to manage tax risks could lead to increased tax charges, including financial or operating penalties.
Key performance indicators
 
The Board of Directors and the Group Management Board monitor HSBC’s progress against its strategic objectives. Progress is assessed by comparison with the Group’s strategy, its operating plan targets and its historical performance using both financial and non-financial measures.
     As a prerequisite for the vesting of Performance Shares, the Remuneration Committee must satisfy itself that HSBC Holdings’ financial performance has shown a sustained improvement in the period since the award date. In determining this, the Remuneration Committee will take account of all relevant factors but, in particular, will compare HSBC’s financial key performance indicators (‘KPI’s) with the equivalent measures within the total shareholder return (‘TSR’) comparator group.
Financial KPIs
In assessing progress in delivering the Group’s strategy and monitoring HSBC’s performance, management reviews the financial KPIs described below. These KPIs are complemented by a range of secondary benchmarks which are relevant to reviewing performance against plan and at the business level.
     HSBC has published a number of key targets against which performance is measured. Financial targets have been set as follows: a return on average total shareholders’ equity over the medium term of between 15 per cent and 19 per cent; the cost efficiency ratio to be between 48 per cent and 52 per cent; and HSBC’s TSR to be in the top half of that achieved by the comparator group. The cost efficiency ratio has been set as a range within which the business is expected to remain in order to accommodate both returns to stakeholders and the need for continued investment in support of future business growth.
     In the light of market conditions and proposed changes to capital requirements currently being considered by various governmental and regulatory bodies, HSBC believes return on average total shareholders’ equity over the medium term is more likely to be around the lower end of the target range. Once regulatory proposals are in definitive form HSBC intends to publish a revised target range.


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Financial KPIs – trend analysis
                                                     
      2009       2008       2007       2006       2005    
      %       %       %       %       %    
 
                                                   
Revenue growth1
      (19.0 )       3.4         20.8         13.4         12.2    
Revenue mix2
                                                   
Net interest income
      61.5         52.1         47.8         52.8         54.4    
Net fee income
      26.7         24.5         27.9         26.3         25.1    
Other income3
      11.8         23.4         24.3         20.9         20.5    
 
                                                   
Cost efficiency4
      52.0         60.1         49.4         51.3         51.2    
Credit performance as measured by risk adjusted margin5
      3.5         4.8         6.0         6.3         6.3    
Return on average invested capital6
      4.1         4.0         15.3         14.9         15.9    
Return on average total shareholders’ equity7
      5.1         4.7         15.9         15.7         16.8    
Dividends per share growth8
      (46.9 )       (28.9 )       11.1         11.0         10.6    
 
                                                   
   
 
    US$       US$       US$       US$       US$    
   
Basic earnings per ordinary share9
      0.34         0.41         1.44         1.22         1.18    
For footnotes, see page 149.
                         
    Over     Over     Over  
    1 year     3 years     5 years  
 
                       
Total shareholder return
                       
HSBC TSR
    128.3       103.6       120.6  
Benchmarks:
                       
– FTSE 100
    127.3       98.0       135.4  
– MSCI World
    116.7       103.6       134.9  
– MSCI Banks
    125.2       70.6       92.3  
     Revenue growth provides an important guide to the Group’s success in generating business. In 2009, total revenue declined by 19 per cent to US$66.2 billion. On an underlying basis, revenue grew by 8 per cent, reflecting the resilience of HSBC’s income generating capabilities in these difficult economic circumstances.
     Revenue mix represents the relative distribution of revenue streams between net interest income, net fee income and other revenue. It is used to understand how changing economic factors affect the Group, to highlight dependence on balance sheet utilisation for income generation and to indicate success in cross-selling fee-based services to customers with deposit and loan facilities. This understanding assists management in making business investment decisions.
     Cost efficiency is a relative measure that indicates the consumption of resources in generating revenue. Management uses this to assess the success of technology utilisation and, more generally, the productivity of the Group’s distribution platforms and sales forces.
     Credit performance as measured by risk-adjusted margin is an important gauge for assessing whether credit is correctly priced so that the returns available after recognising impairment charges meet the Group’s required return parameters.
     Return on average invested capital measures the return on the capital investment made in the business, enabling management to benchmark HSBC against competitors.
     Return on average total shareholders’ equity measures the return on average shareholders’ investment in the business. This enables management to benchmark Group performance against competitors and its own targets. In 2009, the ratio was 5.1 per cent or 0.4 percentage points higher than in 2008.
     HSBC aims to deliver sustained dividend per share growth for its shareholders. The total dividend for 2009, based on the year to which the dividends relate (rather than when they were paid), amounts to US$0.34 per ordinary share, a reduction of 47 per cent on 2008.
     Basic earnings per share (‘EPS’) is a ratio that shows the level of earnings generated per ordinary share. EPS is one of two KPIs used in rewarding employees and is discussed in more detail in the Director’s Remuneration Report on page 334. EPS for 2009 was US$0.34, a decline of 17 per cent on 2008.
     Total shareholder return is used as a method of assessing the overall return to shareholders on their investment in HSBC, and is defined as the growth in share value and declared dividend income during the relevant period. TSR is a key performance measure in rewarding employees. In calculating TSR, dividend income is assumed to be invested in the underlying shares. The TSR benchmark is an index set at 100 and measured over one, three and five years for the purpose of comparison with the performance of a group of competitor banks which


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
KPIs / Reconciliation of reported and underlying profit before tax

reflect HSBC’s range and breadth of activities. As the comparator group includes companies listed on overseas markets, a common currency is used to ensure that TSR is measured on a consistent basis. The TSR levels at the end of 2009 were 128.3, 103.6 and 120.6 over one, three and five years respectively. HSBC’s performance did not meet the target of being in the top half of the comparator group over any of the required time periods.
     Management believes that financial KPIs must remain relevant to the business so they may be changed over time to reflect changes in the Group’s composition and the strategies employed.
Non-financial KPIs
HSBC has chosen four non-financial KPIs which are important to the future success of the Group in delivering its strategic objectives. These non-financial KPIs are reported within HSBC on a local basis.
Employee engagement
Employee engagement is a measure of employees’ emotional and rational attachment to HSBC. It is critical to the long-term success of the Group and, as such, an employee engagement target was included in the 2009 objectives for Group executives (see Directors’ Remuneration Report, page 334).
     In 2009, HSBC conducted the third Global People Survey of its workforce worldwide. The 2009 participation rate of 91 per cent was one of the highest in the industry.
     The Group’s employee engagement score rose from 67 per cent in 2008 to 71 per cent in 2009. In achieving 71 per cent, HSBC exceeded its target for 2009 of 69 per cent and the external global and sector averages. HSBC aspires to progressively improve its engagement score to best in class levels by 2011.
     The 2009 survey covered 14 aspects. Employees rated HSBC above the external global average across all aspects.
Brand perception
In order to manage the HSBC brand most effectively, the Group tracks brand health among Personal Financial Services and Business Banking customers in each of HSBC’s major markets. The survey is conducted on a consistent basis by accredited independent third-party organisations. A weighted scorecard of brand measures produces
an overall score for each market on a 100-point scale, which is then benchmarked against HSBC’s main competitors. The scores from each market are then weighted according to the risk-adjusted revenues in that market to obtain the overall Group score.
     In 2009, Personal Financial Services’ customers judged HSBC’s brand to be 6 points stronger than its competitors, up from 4 points in 2008 and above the target. Business Banking customers also judged the brand to be 6 points higher than HSBC’s competitors, the same as in 2008.
Customer recommendation
Customer recommendation is an important driver of business growth for HSBC. HSBC uses a consistent measure of customer recommendation around the world to continue to improve the services provided by the Group to customers of Personal Financial Services and Business Banking. This measurement is carried out by accredited independent third-party organisations and the resulting recommendation scores are benchmarked against competitors. A 100 point scale is used to measure the score.
     The 2009 customer recommendation score for Personal Financial Services increased from +1 to +2 compared with a target of +3.
     Business Banking customer recommendation was also +2 points ahead of HSBC’s competitors but below the target of +4.
IT performance and systems reliability
HSBC tracks two key measures as indicators of IT performance; namely, the number of customer transactions processed and the reliability and resilience of systems measured in terms of service availability targets.
Number of customer transactions processed
The number of customer transactions processed reflects the dependency on IT of the delivery channels that customers use to interact with HSBC. Monitoring the volumes by channel enables the Group to allocate resources appropriately. Despite a fall in total volumes, the transition of customer transactions from labour intensive channels (branch/call centre) to automated channels (credit card, internet, self-service and other e-channels) continued in 2009. The following chart shows the 2005 to 2009 volumes per delivery channel:


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Number of customer transactions (millions)
(BAR CHART)
Percentage of IT services meeting or exceeding targets
HSBC’s IT function establishes with its end-users service levels for systems performance, such as systems running 99.9 per cent of the time or credit card authorisations within two seconds, and monitors the achievement of each of these commitments. The following chart shows the percentage of IT services meeting or exceeding the agreed service targets by region. All regions continue to show sustained improvement over the period.
Percentage of IT services meeting or exceeding targets
(BAR CHART)
Reconciliation of reported and underlying
profit before tax
 
HSBC measures its performance internally on a like-for-like basis by eliminating the effects of foreign currency translation differences; acquisitions and disposals of subsidiaries and businesses; fair value movements on own debt attributable to credit spread where the net result of such movements will be zero upon maturity of the debt; and, in 2007, gains from the dilution of the Group’s interests in associates, all of which distort year-on-year comparisons. HSBC refers to this as its underlying performance.
     Reported results include the effects of the above items. They are excluded when monitoring progress against operating plans and past results because
management believes that the underlying basis more accurately reflects operating performance.
Constant currency
Constant currency comparatives for 2008 and 2007 used in the 2009 and 2008 commentaries, respectively, are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:
  the income statements for 2008 and 2007 at the average rates of exchange for 2009 and 2008, respectively; and
 
  the balance sheets at 31 December 2008 and 2007 at the prevailing rates of exchange on 31 December 2009 and 2008, respectively.
     No adjustment has been made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates. When reference is made to ‘constant currency’ in tables or commentaries, comparative data reported in the functional currencies of HSBC’s operations have been translated at the appropriate exchange rates applied in the current period on the basis described above.
Underlying performance
The tables below compare HSBC’s underlying performance in 2009 with 2008, and 2008 with 2007. Equivalent tables are provided for each of HSBC’s customer groups and geographical segments in their respective sections below.
     The foreign currency translation differences were mainly due to the relative strengthening of the US dollar compared with its value in 2008, and were most significant in Europe due to the size of HSBC’s operations in the UK.
     The following acquisitions and disposals affected both comparisons:
  the gain on sale of HSBC’s UK merchant acquiring business to a joint venture 49 per cent owned by the Group in June 2008 and the gain on sale of the residual stake in June 2009;
 
  the disposal of seven French regional banking subsidiaries in July 2008;
 
  the disposal of the stake in Financiera Independencia S.A.B. de C.VB (‘Financiera Independencia’) in Mexico in November 2008; and
 
  the acquisition of PT Bank Ekonomi Raharja Tbk (‘Bank Ekonomi’) in May 2009.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Reconciliation of profit / Financial summary > Income statement
Reconciliation of reported and underlying profit before tax
                                                                         
    2009 compared with 2008  
                            2008                                
    2008     2008             at 2009     2009     Under-     2009     Re-     Under-  
    as     adjust-     Currency     exchange     adjust-     lying     as     ported     lying  
    reported     ments 10   translation 11   rates 12   ments 10   change     reported     change 13   change 13
HSBC   US$m     US$m     US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                                       
Net interest income
    42,563       (65 )     (2,062 )     40,436       53       241       40,730       (4 )     1  
Net fee income
    20,024       (58 )     (1,315 )     18,651       6       (993 )     17,664       (12 )     (5 )
Changes in fair value14
    6,570       (6,570 )                 (6,533 )           (6,533 )     (199 )        
Gains on disposal of
French regional banks
    2,445       (2,445 )                                   (100 )        
Other income15
    10,080       (680 )     (1,597 )     7,803       298       6,219       14,320       42       80  
 
                             
 
   
 
 
 
                                                                       
Net operating income16
    81,682       (9,818 )     (4,974 )     66,890       (6,176 )     5,467       66,181       (19 )     8  
 
                                                                       
Loan impairment charges and other credit risk provisions
    (24,937 )     6       709       (24,222 )           (2,266 )     (26,488 )     (6 )     (9 )
 
                             
 
   
 
 
 
                                                                       
Net operating income
    56,745       (9,812 )     (4,265 )     42,668       (6,176 )     3,201       39,693       (30 )     8  
 
                                                                       
Operating expenses (excluding goodwill impairment)
    (38,535 )     68       2,655       (35,812 )     (31 )     1,448       (34,395 )     11       4  
 
                                                                       
Goodwill impairment
    (10,564 )                 (10,564 )           10,564             100       100  
 
                             
 
   
 
 
 
                                                                       
Operating profit
    7,646       (9,744 )     (1,610 )     (3,708 )     (6,207 )     15,213       5,298       (31 )     410  
 
                                                                       
Income from associates
    1,661             25       1,686             95       1,781       7       6  
 
                             
 
   
 
 
 
                                                                       
Profit before tax
    9,307       (9,744 )     (1,585 )     (2,022 )     (6,207 )     15,308       7,079       (24 )     757  
 
                             
 
   
 
 
                                                                         
    2008 compared with 2007  
   
 
 
            2007             2007                                
    2007     adjustments             at 2008     2008     Under-     2008     Re-     Under-  
    as     & dilution     Currency     exchange     adjust-     lying     as     ported     lying  
    reported     gains 10   translation 11   rates 17   ments 10   change     reported     change 13   change 13
HSBC   US$m     US$m     US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                                       
Net interest income
    37,795       (389 )     (4 )     37,402       250       4,911       42,563       13       13  
Net fee income
    22,002       (239 )     (152 )     21,611       18       (1,605 )     20,024       (9 )     (7 )
Changes in fair value14
    3,055       (3,055 )                 6,570             6,570       115          
Gains on disposal of
French regional banks
                            2,445             2,445                  
Other income15
    16,141       (1,232 )     (269 )     14,640       703       (5,263 )     10,080       (38 )     (36 )
 
                             
 
   
 
 
 
                                                                       
Net operating income16
    78,993       (4,915 )     (425 )     73,653       9,986       (1,957 )     81,682       3       (3 )
 
                                                                       
Loan impairment charges and other credit risk provisions
    (17,242 )     31       113       (17,098 )     (6 )     (7,833 )     (24,937 )     (45 )     (46 )
 
                             
 
   
 
 
 
                                                                       
Net operating income
    61,751       (4,884 )     (312 )     56,555       9,980       (9,790 )     56,745       (8 )     (17 )
 
                                                                       
Operating expenses (excluding goodwill impairment)
    (39,042 )     514       301       (38,227 )     (198 )     (110 )     (38,535 )     1        
 
                                                                       
Goodwill impairment
                                  (10,564 )     (10,564 )                
 
                             
 
   
 
 
 
                                                                       
Operating profit
    22,709       (4,370 )     (11 )     18,328       9,782       (20,464 )     7,646       (66 )     (112 )
 
                                                                       
Income from associates
    1,503       (12 )     107       1,598             63       1,661       11       4  
 
                             
 
   
 
 
 
                                                                       
Profit before tax
    24,212       (4,382 )     96       19,926       9,782       (20,401 )     9,307       (62 )     (102 )
 
                             
 
   
 
 
For footnotes, see page 149.

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Financial summary
 
         
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Consolidated income statement
2009 compared with 2008
Reported pre-tax profits in 2009 fell by 24 per cent to US$7.1 billion and earnings per share declined to US$0.34. Return on average shareholders’ equity remained broadly at 2008 levels at 5.1 per cent (2008: 4.7 per cent).
     On an underlying basis, profit before tax increased by US$15.3 billion compared with 2008. The difference between reported and underlying results is explained on page 21. Except where otherwise stated, the commentaries in the Financial Summary are on an underlying basis.
Profit before tax on an underlying basis and excluding the goodwill impairment charge of US$10.6 billion in 2008, was 56 per cent or US$4.7 billion higher.
     The increase in profit before tax was driven by strong growth in net operating income in Global Banking and Markets, in part reflecting the absence of significant write-downs in securities and structured credit positions which had affected results in 2008. More significantly, the business benefited from market share gains in core activities and the effect of early positioning by Balance Sheet Management, in anticipation of the low interest rate environment. Results in 2009 also reflected lower loan impairment charges in North America, partly offset by an increase in loan impairment charges and other credit risk provisions elsewhere.
     Although HSBC’s business in North America continued to record a loss, performance improved as write-downs in Global Banking and Markets reduced and loan impairment charges in Personal Financial Services decreased. This resulted from steps taken to curtail origination in 2007 and 2008 which culminated in the closure of the Consumer Lending branch network in the second quarter of 2009, and from the decision to place all consumer finance portfolios other than credit cards into run-off. The closure of the branch network fed through to lower operating expenses during the remainder of the year.
     In Hong Kong, economic performance remained robust despite continuing challenges, with HSBC’s results underpinned by a market-leading share in deposits, residential mortgages, cards and insurance. Overall profitability declined, however, as revenue was driven lower by compressed deposit spreads in the low interest rate environment. Loan impairment charges improved on 2008, remaining low, and operating expenses reflected a disciplined approach to cost management.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Income statement
Consolidated income statement
                                 
      2009       2008       2007    
      US$m       US$m       US$m    
 
                               
Interest income
      62,096         91,301         92,359    
Interest expense
      (21,366 )       (48,738 )       (54,564 )  
 
Net interest income
      40,730         42,563         37,795    
 
Fee income
      21,403         24,764         26,337    
Fee expense
      (3,739 )       (4,740 )       (4,335 )  
 
Net fee income
      17,664         20,024         22,002    
 
Trading income excluding net interest income
      6,236         847         4,458    
Net interest income on trading activities
      3,627         5,713         5,376    
 
Net trading income
      9,863         6,560         9,834    
 
Changes in fair value of long-term debt issued and related derivatives18
      (6,247 )       6,679         2,812    
Net income/(expense) from other financial instruments designated at fair value
      2,716         (2,827 )       1,271    
 
Net income/(expense) from financial instruments designated at fair value
      (3,531 )       3,852         4,083    
 
Gains less losses from financial investments
      520         197         1,956    
Gains arising from dilution of interests in associates
                      1,092    
Dividend income
      126         272         324    
Net earned insurance premiums
      10,471         10,850         9,076    
Gains on disposal of French regional banks
              2,445            
Other operating income
      2,788         1,808         1,439    
 
                   
 
Total operating income
      78,631         88,571         87,601    
 
Net insurance claims incurred and movement in liabilities to policyholders
      (12,450 )       (6,889 )       (8,608 )  
 
                   
 
Net operating income before loan impairment charges and other credit risk provisions
      66,181         81,682         78,993    
 
Loan impairment charges and other credit risk provisions
      (26,488 )       (24,937 )       (17,242 )  
 
                   
 
Net operating income
      39,693         56,745         61,751    
 
                   
 
Employee compensation and benefits
      (18,468 )       (20,792 )       (21,334 )  
General and administrative expenses
      (13,392 )       (15,260 )       (15,294 )  
Depreciation and impairment of property, plant and equipment
      (1,725 )       (1,750 )       (1,714 )  
Goodwill impairment
              (10,564 )          
Amortisation and impairment of intangible assets
      (810 )       (733 )       (700 )  
 
                   
 
Total operating expenses
      (34,395 )       (49,099 )       (39,042 )  
 
                   
 
Operating profit
      5,298         7,646         22,709    
 
Share of profit in associates and joint ventures
      1,781         1,661         1,503    
 
                   
 
Profit before tax
      7,079         9,307         24,212    
 
Tax expense
      (385 )       (2,809 )       (3,757 )  
 
                   
 
Profit for the year
      6,694         6,498         20,455    
 
   
 
     
 
     
 
   
 
Profit attributable to shareholders of the parent company
      5,834         5,728         19,133    
Profit attributable to minority interests
      860         770         1,322    
For footnote, see page 149.

     In the Rest of Asia-Pacific region, the economic challenges faced were similar to those in Hong Kong and their impact was reflected in lower income and higher loan impairment charges. Income from associates, primarily in mainland China, made a significant positive contribution to the region’s performance. HSBC continued to expand its presence in Rest of Asia-Pacific through organic growth and strategic investment.
     HSBC’s Middle East operations suffered from a combination of factors: a severe contraction in the economy of Dubai, a fall in oil revenues for much of the year and investment losses incurred by many regional investors. This led to a decline in profit before tax of 74 per cent, primarily due to a significant increase in loan impairment charges. The regional economic downturn and continuing uncertainty affected both retail and corporate customers, particularly in the United Arab Emirates (‘UAE’) where the downturn was most pronounced.


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     In Europe, HSBC reported an increase in profit before tax on an underlying basis, driven by Global Banking and Markets in London and Paris. This resulted from a strong performance in Rates and Balance Sheet Management, coupled with the benefit of stabilisation of asset prices and general tightening of credit spreads and lower write-downs in the credit trading business. This was partly offset by a reduction in deposit spreads in Personal Financial Services and Commercial Banking as interest rates fell, and an increase in loan impairment charges in Global Banking reflecting a deterioration in the credit position of a small number of clients.
The increase in profit before tax was driven by strong growth in Global Banking and Markets.
     In Latin America, the decline in pre-tax profits was driven by an increase in loan impairment charges in Personal Financial Services and Commercial Banking and lower revenues in Personal Financial Services, partly offset by a strong performance in trading and Balance Sheet Management in Global Banking and Markets. The lower revenues in Personal Financial Services were in part due to the continued curtailment of personal unsecured credit exposures, following the Group’s adverse experience in 2008, with net interest income also adversely affected by declining interest rates and narrowing spreads.
     With the exception of Personal Financial Services, which continued to be heavily affected by the consumer finance losses in North America, all customer groups remained profitable.
    The following items are significant to a comparison of reported results with 2008:
  the non-recurrence of the US$10.6 billion goodwill impairment charge in North America recorded in 2008;
 
  the non-recurrence of a US$2.4 billion gain on the sale of French regional banks in 2008;
 
  fair value losses relating to own credit spreads of US$6.5 billion in 2009 compared with gains of US$6.6 billion in 2008;
 
  a US$72 million fraud loss relating to Bernard L Madoff Investment Securities LLC (‘Madoff Securities’) in 2009, which was in addition to the US$984 million charge reported in 2008;
 
  loss from write-downs in legacy securities and structured credit positions amounting to US$0.3 billion in 2009 compared with US$5.4 billion in 2008;
  the acquisition in 2008 of the subsidiary, Project Maple II B.V., which owned the Group’s headquarters at 8 Canada Square, and the subsequent sale of the company and leaseback of the property in 2009, resulting in gains of US$0.6 billion in 2009 and US$0.4 billion in 2008;
 
  the sale of the card merchant-acquiring business in the UK, resulting in gains of US$0.3 billion in 2009 and US$0.4 billion in 2008;
 
  the change in the basis of delivering long-term employee benefits in the UK, which generated a one-off accounting gain of US$0.5 billion in 2009; and
 
  the tax expense of US$0.3 billion in 2009, which was lower than in previous years as a result of the geographic distribution of income. The Group generated profits in low tax rate jurisdictions, principally Asia, and incurred losses in high tax rate jurisdictions, principally the US, which when mixed produced a low overall rate.
2008 compared with 2007
Reported pre-tax profits in 2008 fell by 62 per cent to US$9.3 billion and earnings per share declined to US$0.47. In a year characterised by a significant deterioration in the credit markets and by unprecedented illiquidity in most asset classes, return on average total shareholders’ equity fell to 4.7 per cent.
     The fall in profit before tax was exacerbated by recognition of a US$10.6 billion impairment charge which wrote off in full the goodwill carried on the balance sheet in respect of the Group’s investment in its North America Personal Financial Services business. This non-cash charge arose substantially in the second half of 2008 as heightened risk premia in the market increased discount rates and cash flows estimated from ongoing activities fell as the US economy continued to decline and the outlook for the business deteriorated.
     On an underlying basis, profit before tax declined by 102 per cent compared with 2007. The difference between the reported and underlying results is explained on page 21. Except where stated otherwise, the commentaries in the Financial Summary are on an underlying basis.
     Performance in Asia was strong, generating profit before tax of US$11.9 billion, broadly in line with results excluding the dilution gains which arose


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Group performance > Net interest income / Net fee income

in 2007 when HSBC did not participate in share offerings by its mainland China associates. Within Asia, Global Banking and Markets’ results were strongly ahead, driven by foreign exchange, Rates and securities services. Balance Sheet Management revenues rose significantly from positioning ahead of interest rate cuts, and were especially strong in Europe despite losses from the defaults of certain financial sector companies. With the exception of Personal Financial Services, which incurred significant losses in North America, all customer groups remained profitable. Commercial Banking and Private Banking delivered results broadly in line with 2007, while Global Banking and Markets’ profits declined.
     Performance was overshadowed by a US$7.8 billion rise in loan impairment charges and other credit risk provisions, largely from the US consumer finance business, and a further US$5.4 billion in trading write-downs on illiquid legacy positions in credit trading, leveraged and acquisition finance and monoline credit exposure in Global Banking and Markets. Increases in loan impairment charges and other credit risk provisions in Personal Financial Services and Commercial Banking, the latter rising rapidly in the second half of 2008 from a low base, occurred as the global economy
slowed. Global Banking and Markets also experienced a rise in loan impairment charges and other credit risk provisions as refinancing options dried up for a number of companies as the market for long-term asset financing became increasingly illiquid. The market turmoil also led to impairments on equity securities in the available-for-sale portfolio.
    The following items were significant:
 
  the non-recurrence of US$1.1 billion of gains which arose in 2007 on the dilution of the Group’s stakes in various associates;
 
  a US$3.6 billion increase (from US$3.0 billion in 2007 to US$6.6 billion) in fair value gains from wider credit spreads recorded predominantly on HSBC’s own long-term debt designated at fair value. These gains reported in the ‘Other’ segment, are not allocated to customer groups and are not included within regulatory capital calculations;
 
  the gain of US$2.4 billion on the sale of the French regional banks; and
 
  a charge against trading income of US$984 million following the fraud in December 2008 relating to Madoff Securities.


Group performance by income and expense item
Net interest income
                         
    2009     2008     2007  
 
                       
Net interest income19 (US$m)
    40,730       42,563       37,795  
Average interest-earning assets (US$m)
    1,384,705       1,466,622       1,296,701  
Gross interest yield20 (per cent)
    4.48       6.23       7.12  
Net interest spread21 (per cent)
    2.90       2.87       2.86  
Net interest margin22 (per cent)
    2.94       2.90       2.91  
For footnotes, see page 149.

2009 compared with 2008
Reported net interest income of US$40.7 billion fell by 4 per cent compared with 2008, but was marginally higher on an underlying basis.
     Reported net interest income includes the expense of the internal funding of trading assets, while related revenue is reported in trading income. The cost of internally funding these assets declined significantly as a result of the low interest rate environment. In HSBC’s customer group reporting, this cost is included within trading income.
     Deposit spreads were squeezed by the exceptionally low interest rates, although this was partly offset by the reduced cost of funding trading activities. Strong revenues in Balance Sheet Management reflected positions taken in 2008 ahead
of the reduction in major currency interest rates. As these positions began to mature, the revenue from Balance Sheet Management’s activities reduced but remained strong in the second half of 2009.
     Average interest-earning assets fell slightly due to a decline in term lending, mainly from the run-off portfolios in North America and the decline in consumer credit appetite globally.
     Average interest-bearing liabilities also decreased, due to a decline in debt securities in issue as funding requirements for HSBC Finance Corporation (‘HSBC Finance’) fell as certain portfolios were managed down. This was largely offset by a rise in current account balances, driven by growth in customer demand for more liquid assets. The very low interest rates led to clients


26


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holding an increasing proportion of funds in liquid current accounts rather than in savings and deposit accounts as they positioned for rising interest rates or prospective investment opportunities.
Competition for deposits and exceptionally low interest rates squeezed deposit margins.
     The net interest spread rose slightly. As a result of continuing deposit inflows, the Group sourced an increasing proportion of its funding from customer accounts, and consequently reduced its reliance on relatively more expensive debt securities. The benefit of this was largely offset, however, by a decline in customer lending, particularly higher yielding personal lending, which reduced the average yield on assets.
2008 compared with 2007
Reported net interest income of US$42.6 billion rose by 13 per cent compared with 2007, 13 per cent on an underlying basis.
     Growth in net interest income was driven by significantly higher revenues in Balance Sheet Management, in part reflecting favourable positioning to take advantage of falling interest rates. Lending and deposit balances also grew strongly, while progressive reductions in central bank reference rates led to a decline in both asset yields
and the cost of funds. Overall, spreads narrowed on an underlying basis.
     Average interest-earning assets increased to US$1,467 billion, led by growth in average loans and advances to customers. This was mainly due to an increase in average term lending balances in Europe and Asia.
     An increase in average interest-bearing liabilities was driven by growth in average customer accounts, notably in Europe. HSBC attracted substantial deposits from customers who valued HSBC’s perceived strength at a time of global financial market turmoil and customers also expressed a preference for security and liquidity following declines in equity markets.
     Interest rates were cut aggressively in many countries during 2008, as central banks reduced their reference rates as part of stimulus programmes introduced in response to deteriorating economic conditions. This contributed to a decline in asset yields. The cost of funds also fell, but this was less significant than the decline in yields as spreads narrowed overall on an underlying basis.
     In North America, net interest income was also adversely affected by rises in loan modifications designed to reduce the payment burden on the Group’s customers, and impaired loans.


Net fee income
                         
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
Cards
    4,625       5,844       6,496  
Account services
    3,592       4,353       4,359  
Funds under management
    2,172       2,757       2,975  
Broking income
    1,617       1,738       2,012  
Credit facilities
    1,479       1,313       1,138  
Insurance
    1,421       1,771       1,836  
Global custody
    988       1,311       1,404  
Imports/exports
    897       1,014       866  
Underwriting
    746       325       367  
Remittances
    613       610       556  
Corporate finance
    396       381       409  
Unit trusts
    363       502       875  
Trust income
    278       325       299  
Mortgage servicing
    124       120       109  
Maintenance income on operating leases
    111       130       139  
Taxpayer financial services
    87       168       252  
Other
    1,894       2,102       2,245  
 
           
 
Total fee income
    21,403       24,764       26,337  
 
Less: fee expense
    (3,739 )     (4,740 )     (4,335 )
 
           
 
Net fee income
    17,664       20,024       22,002  
 
           

27


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Group performance > Net fee income / Net trading income

2009 compared with 2008
Reported net fee income decreased by 12 per cent to US$17.7 billion, 5 per cent lower on an underlying basis.
Lower credit card fees and weaker equity markets led to a decline in net fee income.
     Credit card fees fell significantly, mainly in North America, reflecting lower transaction volumes, a reduction in cards in issue and changes in customer behaviour which led to lower cash advance, interchange, late and overlimit fees. In the UK, the decrease primarily arose from the disposal of the card-acquiring business to a joint venture in June 2008.
     Weaker equity markets and subdued investor sentiment for higher risk products led to a reduction in both the volume and the value of equity-related products. This resulted in a decrease in fees generated from funds under management, global custody and unit trusts, though fees grew from equity capital markets products in Global Banking and Markets. The impact was particularly marked in the first half of 2009, though market-related fees recovered somewhat in the second half of the year as market values rose and investor appetite for equity products increased.
     Account services fees fell, predominantly in North America as the result of a decline in credit card volumes and changes in customer behaviour, and in Private Banking due to a decrease in fiduciary deposit commissions as lower interest rates drove down balances.
     Insurance broking fees also fell, mainly due to lower origination volumes of credit-related products,
principally in the US consumer finance business, and reduced payment protection business in the UK.
     Corporate credit facility and underwriting fees increased strongly on the back of higher debt originations in Europe and North America which accompanied the considerable reconstruction and refinancing of corporate balance sheets in 2009.
2008 compared with 2007
Reported net fee income declined by 9 per cent to US$20 billion, 7 per cent lower on an underlying basis.
     Lower equity market-related revenues, notably in Hong Kong, were driven by weakened investor sentiment, and reflected in the fall in the aggregate of broking income, global custody and unit trust income. Similarly, fund management fees declined as equity markets retreated and lower performance fees were earned.
     HSBC announced revisions to its credit card fee charging policies in the US in 2007, and this fed through as expected in the form of a substantial decline in overlimit fees, further compounded by lower cash advance and interchange fee income as a result of reduced volumes. In the UK, the divestment in 2008 of the card acquiring business resulted in reduced card acquiring fees. Offsetting these factors were rises in card fees in Hong Kong, the Middle East, India and Turkey.
     Fee income from credit facilities rose, notably in the Middle East, in line with customer volumes. Growth in fee income from trade and supply chain products reflected higher volumes and customer acquisition in India and, to a greater extent in the Middle East, increased activity driven by commodity price inflation.


Net trading income
                         
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
Trading activities
    5,240       2,988       4,521  
Net interest income on trading activities
    3,627       5,713       5,376  
Other trading income – hedge ineffectiveness:
                       
– on cash flow hedges
    90       (40 )     (77 )
– on fair value hedges
    (45 )     5       19  
Non-qualifying hedges
    951       (1,122 )     (5 )
Losses on Madoff Securities fraud
          (984 )      
 
           
 
Net trading income23,24
    9,863       6,560       9,834  
 
           
For footnotes, see page 149.

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2009 compared with 2008
Reported net trading income increased by 50 per cent to US$9.9 billion, 83 per cent higher on an underlying basis.
     Reported trading income excludes the interest expense of the internal funding of trading assets. As noted in ‘Net interest income’, the cost of internally funding these assets declined significantly as a result of the low interest rate environment.
     The Credit business benefited from a general tightening of credit spreads following a return of liquidity to much of the market, and the write-downs on legacy positions in Credit trading declined significantly following the stabilisation of asset prices.
Net trading income rose by 83 per cent on an underlying basis.
     An increase in Rates revenues, particularly in the first half of the year, reflected increased market share and client trading volumes, wider bid-offer spreads and early positioning for interest rate movements. Partly offsetting these gains, fair value losses were recorded on HSBC structured liabilities as a result of credit spreads tightening, compared with gains in this area in 2008.
     Equities benefited from the non-recurrence of the US$984 million charge reported in 2008 in respect of Madoff Securities. The core Equities business also took advantage of a changed competitive landscape to capture a greater share of business in strategic markets from key institutional clients.
     Foreign exchange trading revenues were well ahead of 2007, but fell short of the record year in 2008. This reflected a combination of reduced customer volumes from lower trade flows and investment activity, and relatively lower market volatility.
     Tightening credit spreads led to losses of US$429 million on credit default swap transactions in parts of the Global Banking portfolio. In 2008, gains of US$912 million were reported on these credit default swaps as a result of widening credit spreads.
     A reduction in net interest income on trading activities reflected the sharp fall in interest rates at the end of 2008 but was partly compensated for by a reduction in the internal funding cost of trading activities, which is reported in ‘Net interest income’.
     Income from non-qualifying hedges related to mark-to-market gains on cross-currency swaps as the
US dollar depreciated against sterling, and on interest rate swaps as US dollar long and medium term interest rates increased over the year. In 2008, appreciation of the US dollar and a fall in interest rates led to mark-to-market losses on these instruments.
     During the second half of 2008, HSBC reclassified US$17.9 billion of assets from ‘held for trading’ to ‘loans and receivables’ and ‘available for sale’ following the IASB’s amendment to International Accounting Standard (‘IAS’) 39. Had these reclassifications not taken place and the assets had continued to be accounted for on a fair value basis, additional gains of US$1.5 billion would have been recorded in 2009 (2008: losses of US$3.5 billion). See ‘Impact of Market Turmoil’, pages 151 to 195.
2008 compared with 2007
Reported net trading income fell by 33 per cent to US$6.6 billion, 32 per cent lower on an underlying basis.
     Net income from trading activities declined by 81 per cent, driven by the continuing effect of the market turmoil which led to US$5.4 billion of write-downs on legacy monoline credit exposures, credit trading and leveraged and acquisition finance loans. More information about the losses, the associated assets and residual exposure is provided in ‘Impact of Market Turmoil’ on pages 151 to 195.
     Record foreign exchange trading income was due to increased customer volumes and market volatility across all regions, as investors sought to reduce risk in the second half of 2008, driving growth in global foreign exchange trading as demand for assets denominated in US dollars and Japanese Yen increased.
     Rates trading income rose substantially, with record revenues in the first half of 2008 due to favourable positioning against movements in interest rate yield curves as central banks responded to the market turmoil by lowering short-term interest rates. Revenues were also boosted by an increased number of deals, widening spreads and increased customer demand for trading and hedging products.
     The decline in equities trading income reflected weaker equity markets, particularly in Hong Kong, where demand for structured equity products fell. In addition, following the alleged fraud at Madoff Securities, HSBC wrote off the value of units it held in funds that had invested with the company and took a US$984 million charge. The units had been acquired in connection with various financing


29


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Group performance > Net income from financial instruments at FV / Gains less losses from financial instruments

transactions HSBC had entered into with institutional clients.
     The decline in non-qualifying hedges related to mark-to-market losses on cross-currency swaps as
the US dollar appreciated and on interest rate swaps as interest rates fell in late 2008.
     Widening credit spreads led to further gains on credit default swap transactions in parts of the Global Banking portfolio.


Net income from financial instruments designated at fair value
                                 
      2009       2008       2007    
      US$m       US$m       US$m    
 
                               
Net income/(expense) arising from:
                               
– financial assets held to meet liabilities under insurance and investment contracts
      3,793         (5,064 )       2,056    
– liabilities to customers under investment contracts
      (1,329 )       1,751         (940 )  
– HSBC’s long-term debt issued and related derivatives
      (6,247 )       6,679         2,812    
Change in own credit spread on long-term debt
      (6,533 )       6,570         3,055    
Other changes in fair value25
      286         109         (243 )  
 
– other instruments designated at fair value and related derivatives
      252         486         155    
 
                   
 
Net income/(expense) from financial instruments designated at fair value
      (3,531 )       3,852         4,083    
 
   
 
   
 
   
 
 
 
Financial assets designated at fair value at 31 December
      37,181         28,533         41,564    
Financial liabilities designated at fair value at 31 December
      80,092         74,587         89,939    
For footnote, see page 149.

HSBC designates certain financial instruments at fair value to remove or reduce accounting mismatches in measurement or recognition, or where financial instruments are managed and their performance is evaluated together on a fair value basis. All income and expense from financial instruments designated at fair value are included in this line except for interest arising from HSBC’s issued debt securities and related derivatives managed in conjunction with those debt securities, which is recognised in ‘Interest expense’.
     HSBC principally uses the fair value designation in the following instances (for which all numbers are ‘reported’):
  for certain fixed-rate long-term debt issues whose rate profile has been changed to floating through interest rate swaps as part of a documented interest rate management strategy. Approximately US$63 billion (2008: US$59 billion) of the Group’s debt issues have been accounted for using the fair value option.
 
    The movement in fair value of these debt issues includes the effect of own credit spread changes and any ineffectiveness in the economic relationship between the related swaps and own debt. As credit spreads widen or narrow, accounting profits or losses, respectively, are booked. The size and direction of the accounting consequences of changes in own credit spread and ineffectiveness can be volatile from year to year, but do not alter the cash flows envisaged
    as part of the documented interest rate management strategy. As a consequence, gains and losses arising from changes in own credit spread on long-term debt are not regarded internally as part of managed performance and are excluded from underlying results. Similarly, such gains and losses are ignored in the calculation of regulatory capital;
 
  for US$15 billion (2008: US$11 billion) of financial assets held to meet liabilities under insurance contracts, and certain liabilities under investment contracts with discretionary participation features; and
 
  for US$8 billion (2008: US$7 billion) of financial assets held to meet liabilities under unit-linked and other investment contracts, as well as the associated liabilities.
2009 compared with 2008
A net expense from financial instruments designated at fair value of US$3.5 billion was reported compared with income of US$3.9 billion in 2008.
A significant change in credit spread on HSBC’s own debt in 2009 reversed the movement in 2008.
     On an underlying basis, HSBC reported income of US$3.0 billion in 2009 compared with an expense of US$2.6 billion in 2008. The large difference between the reported and underlying results is due to the exclusion of the effect of credit spread-related


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movements in the fair value of HSBC’s own long-term debt from underlying performance.
     Income of US$3.8 billion was recorded due to a fair value movement on assets held to back insurance and investment contracts, compared with an expense of US$4.8 billion in 2008. This reflected investment gains in the current year driven by improved market performance, predominantly affecting the value of assets held in unit-linked and participating funds in Hong Kong, the UK and France.
  To the extent that the investment gains related to assets held to back investment contracts, the expense associated with the corresponding increase in liabilities to customers was also recorded under net income from financial instruments designated at fair value. This expense amounted to US$1.3 billion in 2009 compared with an income of US$1.5 billion in 2008 when liabilities fell in line with declining asset markets.
 
  To the extent that the investment gains related to assets held to back insurance contracts, they were offset by a corresponding increase in ‘Net insurance claims and movement in liabilities to policyholders’ to reflect the extent to which unit-linked policyholders, in particular, participate in the investment performance experienced in the associated asset portfolios.
2008 compared with 2007
Reported net income from financial instruments designated at fair value decreased by US$231 million to US$3.9 billion in 2008.
     On an underlying basis, in particular excluding a large income from movements in the fair value of the Group’s own long-term debt, a net expense of US$2.7 billion was recorded, compared with income of US$1.1 billion in 2007.
     A negative movement of US$5.1 billion was recorded in the fair value of assets held to back insurance and investment contracts, compared with a positive reported movement of US$2.1 billion in 2007. This reflected investment losses driven by falling equity and bond markets, predominantly affecting the value of assets held in unit-linked and participating funds in Hong Kong, France and the UK. The negative movement in fair value is partially offset by a corresponding reduction in ‘Net insurance claims and movement in liabilities to policyholders’, where unit-linked policyholders in particular participate in the investment performance experienced on the investment portfolios held to support the liabilities.
     For assets held to meet liabilities under investment contracts the corresponding reduction in the liability to customers is also reported within net income from financial instruments designated at fair value. A reduction of US$1.8 billion in the fair value of liabilities held under investment contracts compared with a reported increase in the fair value of liabilities of US$940 million in 2007.


Gains less losses from financial investments
                         
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
Net gain from disposal of:
                       
– debt securities
    463       19       120  
– equity securities
    407       1,216       1,864  
– other financial investments
    8       4       14  
 
           
 
 
    878       1,239       1,998  
Impairment of available-for-sale equity securities
    (358 )     (1,042 )     (42 )
 
           
 
Gains less losses from financial investments
    520       197       1,956  
 
           

2009 compared with 2008
Reported gains less losses from financial investments increased by US$323 million to US$520 million. On an underlying basis, they increased by US$546 million.
     Net gains on the disposal of debt securities increased significantly, due to gains recorded on the sale of mortgage-backed securities in North America. They were supplemented by smaller gains,
principally on the disposal of available-for-sale bonds in Latin America and the UK.
     Sales of Visa shares contributed significant gains during 2008, with additional gains from further sales in 2009. Other gains recognised during 2008, including those recorded on the sale of MasterCard shares, were not repeated in 2009.
     A significantly lower level of impairments on equity investments was recognised in 2009 than in


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Group performance > Gains less losses from financial investments / Net earned insurance premiums / OOI

2008 in Asia, Europe and North America, reflecting the improvement in the economic situation and equity markets. Of the investments on which material impairments were recognised in 2008, a significant amount reversed during 2009 due to share price appreciation, notably in India and, to a lesser extent, Vietnam; however, under IFRSs all subsequent increases in the fair value are treated as a revaluation and are recognised in other comprehensive income rather than the income statement.
2008 compared with 2007
Reported gains less losses of US$197 million from financial investments during 2008 were 90 per cent lower than in 2007, 93 per cent lower on an underlying basis. A reduction in net gains from disposals was compounded by significant impairments recognised on equity securities held in
the available-for-sale portfolio as certain investments were marked down to reflect the prevailing market conditions.
     The redemption of Visa shares following its initial public offering (‘IPO’) resulted in significant gains, and there were further gains from the sale of MasterCard shares. These were more than offset by losses in Principal Investments and the non-recurrence of various significant gains in 2007, mostly in respect of Euronext, the European stock exchange, and a credit bureau in Brazil.
     Declining equity markets caused impairments to be recognised against a number of strategic investments in Asia, held in the available-for-sale portfolio and on private equity investments, mainly in Europe. The market turmoil in the US also led to impairments against investments in various US financial institutions.


Net earned insurance premiums
                         
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
Gross insurance premium income
    10,991       12,547       11,001  
Reinsurance premiums
    (520 )     (1,697 )     (1,925 )
 
           
 
Net earned insurance premiums
    10,471       10,850       9,076  
 
           

2009 compared with 2008
Reported net earned insurance premiums amounted to US$10.5 billion, a decrease of 3 per cent compared with 2008. On an underlying basis, net earned insurance premiums increased by 3 per cent. Growth was recorded in Asia, Brazil and France, but this was largely offset by significant declines in the UK and the US.
     Net earned insurance premiums continued to grow in Asia, mainly from the launch of new products including a life insurance product designed for high net worth individuals and a guaranteed savings product. In Hong Kong, HSBC retained its position as the leading bancassurer and net earned insurance premiums increased as a result of higher sales of unit-linked and whole life products.
Growth in insurance premiums in Asia, Brazil and France was largely offset by declines in the UK and US.
     In Latin America, premium growth was driven by higher sales of pension and life products in Brazil, partly due to a number of customers switching their personal pension annuities to HSBC.
     In France, growth was significantly influenced by a large one-off reinsurance transaction in June 2008, which passed insurance premiums to a third party reinsurance provider. Adjusting for this, net earned insurance premiums were ahead of 2008 despite a significant reduction in the distribution network following the disposal of the French regional banks in July 2008.
     In the UK, demand for the Guaranteed Income Bond savings product declined as HSBC offered more favourable rates on an alternative deposit product. As the deposit product was a savings bond rather than an insurance contract, its income was recorded under net interest income, while the associated fall in sales of insurance products led to a US$1.1 billion reduction in insurance premium income with an equivalent decrease in ‘Net insurance claims incurred and movement in liabilities to policyholders’, as described below.
     The reduction in origination volumes in the consumer finance business in North America also led to correspondingly lower sales of credit protection insurance as the consumer finance business was closed.


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2008 compared with 2007
Reported net earned insurance premiums amounted to US$10.9 billion, 20 per cent higher than in 2007. HSBC acquired the remaining interest in HSBC Assurances in France in March 2007 and, in October 2007, sold the Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited in the UK. On an underlying basis, net earned insurance premiums increased by 14 per cent.
     Growth in net earned insurance premiums was driven by a continued strong performance from the UK life assurance business, mainly as a result of higher sales of the Guaranteed Income Bond, a non-linked product that was launched in June 2007. The introduction of enhanced life assurance benefits to
certain pension products, which led to these products being reclassified as insurance contracts, also resulted in higher premiums.
     The Hong Kong insurance business also performed well with respect to premium growth, due to stronger sales of products with DPF and an increase in regular premiums partly offset by a reduction in unit-linked premiums.
     In France, HSBC Assurances performed well in a declining market, as three promotional campaigns during the year contributed to growth in sales of policies with DPF. However, a significant one-off reinsurance transaction undertaken during 2008 caused net earned insurance premiums to decrease compared with 2007.


Other operating income
                         
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
Rent received
    547       606       630  
Gains/(losses) recognised on assets held for sale
    (115 )     (130 )     5  
Valuation gains/(losses) on investment properties
    (24 )     (92 )     152  
Gain on disposal of property, plant and equipment, intangible assets and non-financial investments
    1,033       881       213  
Change in present value of in-force long-term insurance business
    605       286       (145 )
Other
    742       257       584  
 
           
 
Other operating income
    2,788       1,808       1,439  
 
           

2009 compared with 2008
Reported other operating income of US$2.8 billion was 54 per cent higher than in 2008. This included a US$280 million gain related to the sale of the remaining stake in the card merchant-acquiring business in the UK, compared with a US$425 million gain in 2008 from the sale of the first tranche. In 2008 results also included gains of US$71 million related to the sale of HSBC’s stake in Financiera Independencia. On an underlying basis, other operating income rose by 163 per cent, driven mainly by an increase in insurance-related income in Hong Kong, a rise in gains on property disposals and lower losses on foreclosed properties.
Increased insurance income in Hong Kong, higher gains on property disposals and lower losses on foreclosed properties in the US helped drive an underlying US$1.5 billion rise in other operating income.
     Losses recognised on assets held for sale declined as losses on foreclosed properties in HSBC Finance decreased, partly due to lower inventory levels following delays in the foreclosure process
and partly due to some stabilisation in real estate prices.
     Property gains of US$576 million were recognised in respect of the sale and leaseback of 8 Canada Square, London which was effected through the disposal of HSBC’s entire shareholding in Project Maple II B.V. (‘PMII’) to the National Pension Service of Korea. In 2008, HSBC reported a gain of US$416 million in respect of the purchase of PMII. See Note 23 on the Financial Statements.
     An increase in insurance sales to new customers in Hong Kong resulted in positive movements in the present value of in-force (‘PVIF’) long-term insurance business. Further positive movements arose from refining the income recognition methodology used in respect of long-term insurance contracts in HSBC Finance. In 2008, a similar refinement in Brazil and HSBC’s introduction of enhanced benefits to existing pension products in the UK, resulted in favourable movements in PVIF.
     In Hong Kong, a gain of US$110 million was recognised in respect of a property disposal, and in Argentina a gain was realised on the sale of the head office building.
     Other operating income includes higher gains on the sale of prime residential mortgage portfolios in


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Group performance > Net insurance claims / Loan impairment charges

the US, gains from the extinguishment of certain debt issued by HSBC’s mortgage securitisation vehicles in the UK and lower costs associated with the provision of support to certain money market funds.
2008 compared with 2007
Reported other operating income of US$1.8 billion was 26 per cent higher than in 2007. This included gains of US$425 million on the sale of the card merchant acquiring business in the UK and US$71 million on the sale of HSBC’s entire stake in Financiera Independencia, a Mexican consumer lending company. On an underlying basis, other operating income fell by 23 per cent.
     The difficult property market conditions in the UK led to a loss in value of a property fund, lower income from the sale of property fund assets and a reduction in Group real estate disposals in 2008.
Similarly, in Hong Kong revaluation gains on investment properties did not recur.
     Life assurance enhancements to pension products resulted in increased present value of inforce long-term insurance (‘PVIF’) business, which also benefited from the non-recurrence of regulatory changes in 2007 in the UK.
     During 2008, HSBC recognised a gain of US$416 million in respect of the purchase of the subsidiary of Metrovacesa which owned the property and long leasehold comprising 8 Canada Square, London.
     Other operating income declined, driven by losses on sale of the Canadian vehicle finance business and other loan portfolios in 2008, in addition to the non-recurrence of gains on disposal of fixed assets and private equity investments in 2007.


Net insurance claims incurred and movement in liabilities to policyholders
                         
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
Insurance claims incurred and movement in liabilities to policyholders:
                       
– gross
    12,560       9,206       9,550  
– reinsurers’ share
    (110 )     (2,317 )     (942 )
 
           
 
– net26
    12,450       6,889       8,608  
 
           
For footnote, see page 149.

2009 compared with 2008
Reported net insurance claims incurred and movement in liabilities to policyholders increased by 81 per cent to US$12.5 billion. On an underlying basis, they increased by 94 per cent.
     The increase in net insurance claims incurred and movement in liabilities to policyholders mainly reflected the improvement in investment market performance compared with 2008 described above under ‘Financial instruments designated at fair value’. Higher investment gains were broadly matched by movement in liabilities to policyholders on unit-linked and, to a certain extent, participating policies whose policyholders share in the investment performance of the supporting assets. The gains generated on the assets held to support insurance contract liabilities are reported in ‘Net income from financial instruments designated at fair value’.
     New business growth in a number of regions during 2009, particularly Hong Kong and Singapore, also contributed to an increase in the movement in liabilities to policyholders, as did the non-recurrence of a large one-off reinsurance transaction in France in 2008. The decline in sales of a Guaranteed Income
Bond noted above had a corresponding effect on movement in liabilities to policyholders in the UK.
     As a consequence of a rising incidence and severity of claims, aggregate charges of US$310 million were made to strengthen reserves in the UK motor book and the Irish reinsurance business during 2009. The UK motor insurance business was placed into run-off in September 2009.
2008 compared with 2007
Reported net insurance claims incurred and movement in liabilities to policyholders decreased by 20 per cent to US$6.9 billion. HSBC acquired the remaining interest in HSBC Assurances in France in March 2007 and, in October 2007, sold Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited in the UK. On an underlying basis, net insurance claims incurred and movement in liabilities to policyholders fell by 22 per cent.
     The reduction in net insurance claims incurred and movement in liabilities to policyholders primarily reflected the impact of markedly weaker investment markets worldwide. This led to a


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reduction in liabilities to policyholders on unit-linked and, to a certain extent, participating policies.
     The decline arising from market value movements was partially offset by an increase in claims incurred and movement in liabilities to policyholders driven by new business growth, most significantly in France, the UK and Hong Kong. In addition, 2007 was affected by the implementation of an FSA regulatory change, which led to lower
gross liability valuations in that year, along with a reduction in the corresponding reinsurers’ share.
     A significant increase in the reinsurers’ share of claims incurred and movement in liabilities to policyholders was primarily driven by the above regulatory change plus an increase in a reserve provision on a unit-linked product in Hong Kong, which was fully reinsured. In addition, a significant one-off reinsurance transaction was undertaken in France during 2008.


Loan impairment charges and other credit risk provisions
                                 
      2009       2008       2007    
      US$m       US$m       US$m    
 
                               
Loan impairment charges
                               
New allowances net of allowance releases
      25,832         24,965         18,182    
Recoveries of amounts previously written off
      (890 )       (834 )       (1,005 )  
 
                   
 
      24,942         24,131         17,177    
Individually assessed allowances
      4,458         2,064         796    
Collectively assessed allowances
      20,484         22,067         16,381    
 
Impairment of available-for-sale debt securities
      1,474         737         44    
Other credit risk provisions
      72         69         21    
 
                   
 
Loan impairment charges and other credit risk provisions
      26,488         24,937         17,242    
 
                   
                         
    %     %     %  
 
                       
As a percentage of net operating income excluding the effect of fair value movements in respect of credit spread on own debt and before loan impairment charges and other credit risk provisions
    36.4       33.2       22.7  
Impairment charges on loans and advances to customers as a percentage of gross average loans and advances to customers
    2.8       2.5       2.0  
                         
    US$m     US$m     US$m  
 
                       
Customer impaired loans
    30,606       25,352       19,582  
Customer loan impairment allowances
    25,542       23,909       19,205  

2009 compared with 2008
Reported loan impairment charges and other credit risk provisions were US$26.5 billion in 2009, an increase of 6 per cent over 2008, 9 per cent on an underlying basis. Within this, collectively assessed allowances declined while individually assessed impairment allowances continued to increase.
     HSBC’s aggregate outstanding customer loan impairment allowances at 31 December 2009 of US$25.5 billion represented 3 per cent of gross customer advances (net of reverse repos and settlement accounts), compared with 2.6 per cent at the end of 2008.
     Loan impairment charges declined in certain businesses, notably Personal Financial Services in North America and Commercial Banking in Hong Kong, but this was more than offset by increases elsewhere, primarily on individually significant loans within Global Banking and Markets and more broadly on Commercial Banking exposures outside Hong Kong as the global economic downturn
adversely affected the ability of many customers to service their loan commitments. As a consequence, loan impairment charges rose despite an underlying 9 per cent decline in gross loans and advances to customers which was driven mainly by the run-off of the US consumer finance portfolios.
     In the US Personal Financial Services business, loan impairment charges declined by 11 per cent to US$14.2 billion, as additional delinquencies due to the continued deterioration in the US economy were more than offset by the effect of lower balances in the run-off portfolios in HSBC Finance.
     In HSBC Finance, loan impairment charges decreased by 12 per cent. The reduction arose in most portfolios, but mainly in Mortgage Services as the portfolio continued to run off. In Consumer Lending, loan impairment charges increased, particularly in the unsecured personal lending portfolio, due to a deterioration in the 2006 and 2007 vintages and, to a lesser extent, first lien real estate secured loans, which was partly offset by lower loan


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Group performance > Loan impairment charges

impairment charges in the real estate secured portfolio. Loan impairment charges in the Card and Retail Services portfolio decreased despite the state of the US economy and higher levels of unemployment and personal bankruptcy. The main reason was the decline in card balances following actions taken to manage risk beginning in the fourth quarter of 2007 and continuing through 2009, and stable credit conditions.
     In HSBC Bank USA, increased loan impairment charges in the personal lending portfolios were due to additional delinquencies which resulted in increased write-offs in the prime first lien mortgage loan portfolios as house prices continued to deteriorate in certain markets.
     Loan impairment charges and other credit risk provisions increased significantly in Global Banking and Markets. Loan impairment charges increased, reflecting the impairment of a small number of exposures in the financial and property sectors in Europe and the Middle East. Further impairments were also recognised in respect of certain asset-backed securities held in the available-for-sale portfolio, reflecting mark-to-market losses which HSBC judged to be significantly in excess of the likely ultimate cash losses.
Loan impairment charges declined in Personal Financial Services in the US but rose in Commercial Banking outside Hong Kong and in Global Banking and Markets.
     In the UK, loan impairment charges rose in both the Commercial Banking and Personal Financial Services portfolios. However, despite the contraction in the economy, charges remained a low proportion of the portfolio. In Commercial Banking, loan impairment charges largely reflected economic weakness in a broad range of sectors.
     In UK Personal Financial Services, loan impairment charges also increased as unemployment rose. This was seen primarily in the credit card and unsecured personal loan portfolios. In the residential mortgage portfolios, delinquency rates decreased as HSBC continued to benefit from very limited exposure to buy-to-let and self-certified mortgages. HSBC’s mortgage exposure continued to be well secured, with an average loan-to-value ratio for new UK business in HSBC Bank’s mortgage portfolio, excluding First Direct, of under 55 per cent in 2009, compared with 59 per cent in 2008.
     In the Middle East, loan impairment charges increased markedly from US$280 million to US$1.3 billion as the region experienced a significant economic contraction in activity,
predominantly in real estate and construction, which particularly affected the UAE. Commercial Banking recorded a number of specific loan impairment charges and a significant increase in collective loan impairment charges. Lower employment in the region, largely driven by the decline in construction activity, led to a rise in loan impairment charges in Personal Financial Services, particularly in the credit card and personal lending portfolios.
     In Latin America, portfolios were affected by the weaker economic environment for much of the year. In Personal Financial Services, loan impairment charges rose by 12 per cent to US$2.0 billion, with increased delinquencies in credit cards, mortgages, vehicle finance and payroll loans due to higher unemployment. In the Brazilian Commercial Banking portfolios, higher delinquencies were experienced primarily in the business banking and mid-market segments. In Mexico, action taken in 2008 to curtail originations and increase collection resources held loan impairment charges broadly unchanged notwithstanding the deterioration in the economy and the impact of the H1N1 virus.
     In India, as in Mexico, curtailment of origination activity in unsecured personal lending slowed the increase in loan impairment charges in the unsecured credit card and personal lending portfolios in Personal Financial Services. In Commercial Banking, a higher number of corporate failures including a number of fraud-related losses, led to increased loan impairment charges.
     Loan impairment charges and other credit risk provisions in Hong Kong decreased by 35 per cent to US$500 million as the economic environment improved in 2009, credit conditions recovered and international trade volumes improved.
     In Private Banking, loan impairment charges increased from a very low level, largely attributable to a specific charge relating to a single client relationship in the US.
2008 compared with 2007
Reported loan impairment charges and other credit risk provisions were US$24.9 billion in 2008, an increase of 45 per cent over 2007, 46 per cent on an underlying basis.
     A deterioration in credit quality was experienced across all customer groups and geographical regions as the global economy slowed. The rise in Group loan impairment charges and other credit risk provisions also reflected an underlying


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8 per cent increase in lending to customers (excluding the financial sector and settlement accounts).
     Loan impairment charges rose significantly in the US by 38 per cent to US$16.3 billion, due to credit quality deterioration across all US portfolios in Personal Financial Services.
     In the US consumer lending portfolio, loan impairment charges rose as delinquency rates deteriorated sharply and the economy declined markedly in the second half of 2008, most notably in the first lien portfolio. This was particularly apparent in the geographical regions most affected by house price depreciation and rising unemployment rates. In mortgage services, loan impairment charges rose as 2005 and 2006 vintages matured and moved into the later stages of delinquency. This was partly offset by the benefit of lower balances as run-off continued, albeit at a slowing pace as house price depreciation restricted refinancing options for customers. In HSBC USA, loan impairment charges rose as credit quality worsened across the real estate secured portfolio and private label cards. Delinquencies rose in the prime first lien residential mortgage portfolio, Home Equity Line of Credit and Home Equity Loan second lien portfolios. The higher delinquency rate for prime first lien mortgages was in part due to lower balances following US$7.0 billion of portfolio sales during the year.
     Loan impairment charges in the US card and retail services portfolios rose, again driven by increasing unemployment, portfolio seasoning, higher levels of personal bankruptcy filings and continued weakness in the US economy which was most apparent in regions with the most significant declines in house prices and rising unemployment.
     Loan impairment charges in Commercial Banking in North America more than doubled from a low base in 2007, due to deterioration across the commercial real estate, middle market and corporate banking portfolios in the US and, to a lesser extent, higher loan impairment charges against firms in the manufacturing, export and commercial real estate sectors in Canada.
     In the UK, a modest decline in loan impairment charges in Personal Financial Services reflected the non-recurrence of a methodology change at HFC in 2007 which resulted in higher impairment charges. Credit quality in the Personal Financial Services portfolio remained broadly stable, reflecting early risk mitigation through the tightening of lending controls and the sale of non-core credit card portfolios during the year. Credit quality in the
unsecured portfolios deteriorated slightly in 2008, particularly in the second half of the year, due to the weakening UK economy. Loan impairment charges in the commercial portfolio rose in 2008 as the weakening property market led to higher impairment charges against construction companies and businesses dependent upon the real estate sector, particularly in the final quarter of the year. Impairment charges against banks rose due to some exposure to the Icelandic banks in 2008. In addition, rising levels of personal indebtedness resulted in lower releases and recoveries of charges than in 2007.
     Higher loan impairment and other credit risk provisions within Global Banking and Markets in Europe reflected increased charges against certain corporate accounts and impairment recorded on available-for-sale debt securities.
     In Mexico, loan impairment charges rose by US$513 million or 69 per cent, primarily in the credit card portfolio. This was due to a combination of higher lending volumes from organic expansion and higher delinquency rates which were driven by a deterioration in credit quality as the portfolio continued to season and move into the later stages of delinquency. Management took action to enhance collection activity and improve the quality of new business. Impairment charges in the commercial portfolio also rose due to credit quality deterioration among small and medium-sized enterprises as the economy weakened.
     In Hong Kong, the rise in loan impairment charges was driven by weakness in parts of the export sector within the commercial portfolio in the second half of 2008. In Global Banking and Markets, credit impairment charges within Balance Sheet Management principally reflected losses on debt securities and paper issued by financial institutions previously rated at investment grade which failed in the year.
     In Rest of Asia-Pacific, the growth in loan impairment charges reflected a combination of the expansion of consumer lending and credit quality deterioration in India and the Middle East. In addition, higher impairment charges in Commercial Banking were driven by a deterioration in credit quality in the second half of the year.
     For the Group as a whole, the aggregate outstanding customer loan impairment allowances at 31 December 2008 of US$23.9 billion represented 2.6 per cent of gross customer advances (net of reverse repos and settlement accounts), compared with 2 per cent at 31 December 2007.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Group performance > Operating expenses
Operating expenses
                         
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
By expense category
                       
Employee compensation and benefits
    18,468       20,792       21,334  
Premises and equipment (excluding depreciation and impairment)
    4,099       4,305       3,966  
General and administrative expenses
    9,293       10,955       11,328  
 
           
 
Administrative expenses
    31,860       36,052       36,628  
Depreciation and impairment of property, plant and equipment
    1,725       1,750       1,714  
Amortisation and impairment of intangible assets
    810       733       700  
Goodwill impairment
          10,564        
 
           
 
Total operating expenses
    34,395       49,099       39,042  
 
           
                         
    At 31 December  
    2009     2008     2007  
 
                       
Staff numbers (full-time equivalent)
                       
Europe
    76,703       82,093       82,166  
Hong Kong
    27,614       29,330       27,655  
Rest of Asia-Pacific27
    87,141       89,706       80,523  
Middle East27
    8,281       8,453       8,050  
North America
    35,458       44,725       52,722  
Latin America
    54,288       58,559       64,404  
 
           
 
Total staff numbers
    289,485       312,866       315,520  
 
           
For footnote, see page 149.

2009 compared with 2008
Reported operating expenses fell by US$14.7 billion to US$34.4 billion, with the most significant feature being the non-recurrence of the goodwill impairment charge of US$10.6 billion in 2008 to fully write off goodwill in Personal Financial Services in North America. Excluding this and on an underlying basis, operating expenses fell by 4 per cent.
Underlying operating expenses excluding goodwill impairment fell by 4 per cent.
     Employee compensation and benefits fell by 4 per cent as costs in the US declined following the closure of the branch-based consumer finance business in the first quarter of 2009. Average headcount in most regions was lower and this was reflected in lower costs. In the UK, a change in the basis of delivering death-in-service, ill health and early retirement benefits for some UK employees generated a one-off accounting gain of US$499 million which was partly offset by increased regular pension costs. There were higher performance-related costs in Global Banking and Markets reflecting its results. The UK and French governments announced one-off taxes in late 2009 in respect of certain bonuses payable by banks and banking groups. In both countries there is uncertainty over the interpretation of the draft proposals, and detailed analysis of individual awards
in the context of the final legislation will be required to determine the precise effect of the taxes. The estimated tax payable under the proposals as currently drafted is US$355 million in the UK and US$45 million in France. The taxes will be payable and accounted for in 2010 once the legislation is enacted. For further details, see page 326.
     Premises and equipment costs increased marginally with higher rental costs reflecting the sale and leaseback of a number of properties in 2008. One-off costs incurred due to the closure of the Consumer Lending branch network in the US were partly offset by savings resulting from the closure.
     General and administrative expenses fell as HSBC focused on managing costs tightly and increasing efficiency. Marketing and advertising costs fell across the group, most notably in Card and Retail Services in North America, and in the UK. Travel and entertainment costs, and expenditure related to services contracted to third parties, fell, primarily in Europe and North America. Better use of direct channels, increased automation of manual processes, enhanced utilisation of global service centres and elimination of redundant systems continued to be driven through the One HSBC programme. In North America, cost savings also resulted in the Consumer Lending Business from the discontinuation of loan originations and the closure of branches.


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2008 compared with 2007
Reported operating expenses increased by US$10.1 billion to US$49.1 billion, due to an impairment charge of US$10.6 billion to fully write off goodwill in Personal Financial Services in North America. Excluding this, operating expenses remained broadly in line on both reported and underlying bases.
     Employee compensation and benefits fell marginally. Lower discretionary bonuses reflected weaker performance in the current economic conditions. A review of actuarial assumptions on employees’ defined benefit pensions resulted in lower service costs in the UK. The restructuring of the consumer finance business in North America led to reduced headcount and lower costs. This was partially offset by higher salaries and increased headcount to support business expansion, mainly in Asia. Restructuring costs were incurred primarily in Latin America and Europe.
     Premises and equipment costs increased primarily in the UK and the Rest of Asia-Pacific region, driven by investment in technology and extensions and improvements to the branch and
ATM networks. As a consequence, repairs and maintenance costs rose. Commercial property rental costs also increased as a result of higher prices, new rentals and sale and leaseback deals.
     General and administrative expenses decreased, primarily due to a one-off recovery of US$110 million of previous years’ transactional taxes in Brazil and the non-recurrence of a number of one-off items in 2007, most notably (i) ex-gratia payments made in the UK in respect of overdraft fees, (ii) the provision for reimbursement of certain charges on historic will trusts and other related services in the UK, (iii) the indemnification agreement with Visa ahead of Visa’s IPO, and (iv) restructuring charges in the US consumer finance business incurred in 2007. These were partly offset by an increase in the Financial Services compensation scheme levy in the UK and an increase in a litigation provision in Asia.
     Goodwill impairment amounting to US$10.6 billion was booked following the continued deterioration in economic and credit conditions in North America. For further information see Note 22 on the Financial Statements.


Cost efficiency ratios
                                 
      2009       2008       2007    
      %       %       %    
 
                               
HSBC
      52.0         60.1         49.4    
 
                               
Personal Financial Services
      51.7         76.4         50.3    
Europe
      68.7         62.7         64.8    
Hong Kong
      34.9         32.2         27.2    
Rest of Asia-Pacific27
      81.2         81.5         77.9    
Middle East27
      53.5         53.2         61.1    
North America
      38.1         106.8         42.3    
Latin America
      66.7         59.7         61.3    
 
                               
Commercial Banking
      46.4         43.0         44.8    
Europe
      47.4         44.2         49.3    
Hong Kong
      33.7         26.2         24.9    
Rest of Asia-Pacific27
      47.0         45.9         47.5    
Middle East27
      33.8         32.0         34.5    
North America
      47.7         46.1         45.1    
Latin America
      57.0         55.0         54.3    
For footnote, see page 149.

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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Group performance > Share of profit in associates and joint ventures / Economic profit
Share of profit in associates and joint ventures
                         
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
Associates
                       
Bank of Communications Co., Limited
    754       741       445  
Ping An Insurance (Group) Company of China, Limited
    551       324       518  
Industrial Bank Co., Limited
    216       221       128  
The Saudi British Bank
    172       251       216  
Other
    42       63       159  
 
           
 
Share of profit in associates
    1,735       1,600       1,466  
Share of profit in joint ventures
    46       61       37  
 
           
 
Share of profit in associates and joint ventures
    1,781       1,661       1,503  
 
           

2009 compared with 2008
The share of profit in associates and joint ventures was US$1.8 billion, an increase of 7 per cent on 2008, and 6 per cent on an underlying basis.
     HSBC’s share of profits from Ping An Insurance (Group) Company of China, Limited (‘Ping An Insurance’) increased by 62 per cent as a result of the non-recurrence of Ping An Insurance’s impairment of its investment in Fortis SA/NV and Fortis N.V. (‘Fortis’) in 2008 and an increase in new business sales and investment returns which were boosted by a recovery in equity markets during 2009. This was partly offset by the non-recurrence of favourable changes to investment assumptions in the first half of 2008.
6 per cent underlying increase in share of profit in associates and joint ventures.
     HSBC’s share of profits from the Bank of Communications Co., Limited (‘Bank of Communications’) remained in line with 2008 as higher fee and trading income and a lower tax charge were broadly offset by a decline in net interest income and higher loan impairment charges.
     Profits from The Saudi British Bank were lower than in 2008 as an increase in loan impairment charges was only partly offset by increased operating income.
     The share of profits from joint ventures fell due to a decline in the profitability of HSBC Saudi Arabia Ltd as a result of a slowdown in initial public offerings (‘IPO’s) and a decline in assets under management. This was partly offset by an increase in profits from HSBC Merchant Services UK Ltd in the first half of 2009 compared with the second half of 2008. HSBC Merchant Services UK Ltd was created in June 2008 and sold in June 2009.
2008 compared with 2007
Share of profit in associates and joint ventures was US$1.7 billion, an increase of 11 per cent compared with 2007, and 4 per cent on an underlying basis.
     This increase was driven by higher contributions from Bank of Communications, Industrial Bank, and The Saudi British Bank, partly offset by lower profits from Ping An Insurance.
     HSBC’s share of profits from Bank of Communications rose by 52 per cent to US$741 million, primarily driven by increased margins, as yields rose following higher base rates in mainland China through most of 2008, and balance sheet growth. Growth in revenues from the asset custody business, financial advisory services and bank card transactions also drove higher profits.
     HSBC’s share of profits from Ping An Insurance decreased by 43 per cent, primarily due to the impairment of its investment in Fortis, following significant declines in its market value.
     Profits from The Saudi British Bank were higher by 16 per cent due to strong balance sheet growth, particularly in the lending portfolio, augmented by higher fees from cards, account services and trade.
     Profits from Industrial Bank grew by 72 per cent, driven by increased investment income and balance sheet growth.
     The share of profits from joint ventures rose due to growth in HSBC Saudi Arabia Ltd and the recognition of profits in HSBC Merchant Services UK Ltd, the new merchant acquiring venture with Global Payments Inc.
     An adjustment to the embedded value of HSBC Assurances in 2007 did not recur.


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Gains arising from dilution of interests in associates
In 2007, HSBC’s associates, Industrial Bank, Ping An Insurance and Bank of Communications in mainland China, Financiera Independencia in Mexico and Techcombank in Vietnam issued new shares for which HSBC did not subscribe. As a consequence of the new monies raised by the associates, HSBC’s share of their underlying assets increased by US$1.1 billion, notwithstanding the reduction in the Group’s interests. These gains were presented in the income statement as ‘Gains arising from dilution of interests in associates’, and should be regarded as exceptional.
Economic profit
HSBC’s internal performance measures include economic profit, a calculation which compares the return on financial capital invested in HSBC by its shareholders with the cost of that capital. HSBC prices its cost of capital internally and the difference between that cost and the post-tax profit attributable to ordinary shareholders represents the amount of economic profit generated. Economic profit generated is used by management as one input in deciding where to allocate capital and other resources.
     In seeking to drive long-term sustainable risk-based performance, HSBC emphasises the trend in economic profit ahead of absolute amounts within business units. The Group’s long-term cost of equity is reviewed annually and for 2009 remained at 10 per cent. The following commentary on economic profit is on a reported basis.
     The economic loss decreased by US$0.2 billion. Profit attributable to shareholders reflected a significant negative fair value movement in own debt of US$6.5 billion as credit spreads tightened, compared with an equivalent gain of US$6.6 billion in 2008, and the non-recurrence of a goodwill impairment charge of US$10.6 billion in 2008.
     Average invested capital decreased by 1 per cent. The additional equity raised through the rights issue was offset by the effect of the goodwill impairment charge at the end of 2008 and losses on structural foreign exchange exposures, the result of a stronger US dollar.
     Economic spread increased by 0.1 percentage points, the result of an increase in return on invested capital of 2 per cent and a decrease in the cost of capital in dollar terms of 1 per cent compared with 2008.


                                 
    2009     2008  
    US$m     %28     US$m     %28  
 
                               
Average total shareholders’ equity
    115,431               122,292          
Adjusted by:
                               
Goodwill previously amortised or written off
    8,123               8,152          
Property revaluation reserves
    (799 )             (828 )        
Reserves representing unrealised losses on effective cash flow hedges
    385               997          
Reserves representing unrealised losses on available-for-sale securities
    16,189               9,163          
Preference shares and other equity instruments
    (3,538 )             (2,685 )        
 
 
 
           
 
         
 
Average invested capital29
    135,791               137,091          
 
 
 
           
 
         
 
Return on invested capital30
    5,565       4.1       5,497       4.0  
 
Benchmark cost of capital
    (13,579 )     (10.0 )     (13,709 )     (10.0 )
 
               
 
Economic loss and spread
    (8,014 )     (5.9 )     (8,212 )     (6.0 )
 
               
For footnotes, see page 149.

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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Balance sheet > Movement in 2009
Consolidated balance sheet
Consolidated balance sheet as at 31 December 2009
                         
    At 31 December  
    2009     2008     2007  
    US$m     US$m     US$m  
 
                       
ASSETS
                       
Cash and balances at central banks
    60,655       52,396       21,765  
Trading assets
    421,381       427,329       445,968  
Financial assets designated at fair value
    37,181       28,533       41,564  
Derivatives
    250,886       494,876       187,854  
Loans and advances to banks
    179,781       153,766       237,366  
Loans and advances to customers
    896,231       932,868       981,548  
Financial investments
    369,158       300,235       283,000  
Other assets
    149,179       137,462       155,201  
 
           
 
Total assets
    2,364,452       2,527,465       2,354,266  
 
 
 
 
 
 
 
 
                       
LIABILITIES AND EQUITY
                       
Liabilities
                       
Deposits by banks
    124,872       130,084       132,181  
Customer accounts
    1,159,034       1,115,327       1,096,140  
Trading liabilities
    268,130       247,652       314,580  
Financial liabilities designated at fair value
    80,092       74,587       89,939  
Derivatives
    247,646       487,060       183,393  
Debt securities in issue
    146,896       179,693       246,579  
Liabilities under insurance contracts
    53,707       43,683       42,606  
Other liabilities
    148,414       149,150       113,432  
 
           
 
Total liabilities
    2,228,791       2,427,236       2,218,850  
 
           
 
                       
Equity
                       
Total shareholders’ equity
    128,299       93,591       128,160  
Minority interests
    7,362       6,638       7,256  
 
           
 
Total equity
    135,661       100,229       135,416  
 
           
 
Total equity and liabilities
    2,364,452       2,527,465       2,354,266  
 
           
A more detailed consolidated balance sheet is contained in the Financial Statements on page 355.

Movement from 31 December 2008 to 31 December 2009
Total assets amounted to US$2.4 trillion, 6 per cent lower than at 31 December 2008. After excluding the effect of currency movements, underlying total assets declined by 11 per cent, driven by a reduction in the fair value of derivative assets as market conditions stabilised.
     The Group’s reported tier 1 ratio increased from 8.3 per cent to 10.8 per cent, mainly due to additional equity of US$17.8 billion raised through the rights issue in April 2009, the contribution from profits for the year and a reduction in the underlying level of risk-weighted assets. For more details of capital and risk weighted assets, see pages 285 to 291. The following commentary is on an underlying basis.
Assets
Cash and balances at central banks increased by 12 per cent, consistent with the global liquidity
creation by central banks, particularly in Europe and North America.
     Trading assets fell by 6 per cent, primarily due to a decrease in the level of reverse repos, particularly in Europe and North America, and a reduction in holdings of short-dated government securities in Hong Kong. There was also a reduction in the collateral required by counterparties to support derivative liabilities as these balances declined. Equity shares held-for-trading grew as activity recovered against a low in the fourth quarter of 2008.
A reduction in the fair values of derivative assets drove an 11 per cent decline in underlying total assets.
     Financial assets designated at fair value grew by 19 per cent due to an increase in UK government debt securities in Balance Sheet Management, and an increase in the fair value of equity securities held within the insurance business, particularly in Europe and Hong Kong, as market values recovered.


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     Derivative assets declined by 52 per cent with reductions across all classes of asset, notably foreign exchange, interest rate and credit derivatives. Lower volatility within the financial markets, steepening yield curves in major currencies and narrowing credit spreads led to a fall in the fair value of outstanding derivative contracts.
     Loans and advances to banks increased by 12 per cent, mainly in Hong Kong and Rest of Asia-Pacific, where surplus funds were placed on a short-term basis with financial institutions and central banks as part of Balance Sheet Management activities.
     Loans and advances to customers fell by 9 per cent, driven by a reduction in balances in North America due to the run-off of the consumer finance businesses, the sale of selected portfolios, and a reduction in Treasury reverse repo balances and cash collateral as excess liquidity was placed in other investments. These factors were compounded by declines in balances in other regions, particularly in the first half of the year, due to customer deleveraging and lower credit origination in certain segments as risk appetite reduced and customer demand declined. In the UK, there was also a reduction in customer overdraft balances that are managed on a net basis but reported gross under IFRSs. Mortgage balances increased strongly in the UK and Hong Kong as HSBC targeted growth in these markets, although this was largely offset by the run-off of balances in the US, as noted above.
     Financial investments rose by 17 per cent, mainly in Hong Kong driven by purchases of Hong Kong government and other highly-rated securities in the year. This increase was partly offset by a fall in financial investments in Europe, as a result of debt securities that matured and were not replaced.
     Other assets grew by 7 per cent compared with 31 December 2008.
Liabilities
Deposits by banks decreased by 10 per cent, largely reflecting a decline in central bank and other interbank deposits in Hong Kong, Rest of Asia-Pacific and North America.
     Customer account balances decreased by 2 per cent, despite growth in the Personal Financial Services and Commercial Banking segments. This
was mainly due to an outflow of deposits in Europe as the economic situation improved and investor risk appetite increased. There was also a fall in deposits from customers whose accounts are managed net but reported gross under IFRSs, (see ‘Loans and advances to customers’). These factors were partly offset by an increase in deposits in Hong Kong due to an excess of liquidity in the market.
     Trading liabilities were 3 per cent higher, driven by increases in hedged net short positions on equity securities in line with a rise in market activity, and in government debt securities as a result of more active market making activities and an expectation of interest rate rises on certain trading desks. Offsetting this was a reduction in repo contracts, and a decrease in structured deposit accounts in Hong Kong as existing deals matured and customers expressed a preference for vanilla cash instruments in the uncertain economic environment.
     Financial liabilities designated at fair value grew by 4 per cent due to new HSBC debt issuances in Europe during the year.
     Derivative businesses are managed within market risk limits and, as a consequence, the reduction in the value of derivative liabilities broadly matched that of derivative assets.
     Debt securities in issue fell by 22 per cent, primarily in North America as the funding requirements reduced in line with the run-off of the consumer finance business.
     Liabilities under insurance contracts grew by 18 per cent due to gains recorded on unit-linked products as a result of an improvement in investment market values, and higher insurance sales in Hong Kong following the launch of several new products.
     Other liabilities were 4 per cent lower than at 31 December 2008.
Equity
Total shareholders’ equity increased by 31 per cent, mainly due to the US$17.8 billion of funds raised through the rights issue in April 2009. In addition, the negative balance on the available-for-sale reserve also declined from US$20.6 billion at 31 December 2008 to US$10.0 billion at 31 December 2009, largely reflecting increases in the market value of assets.


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HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Balance sheet > Reconciliation of assets and liabilities / Loans and advances and customer accounts
Reconciliation of reported and underlying assets and liabilities
                                                         
    31 December 2009 compared with 31 December 2008  
   
 
 
                    31 Dec 08                              
    31 Dec 08             at 31 Dec 09             31 Dec 09             Under-  
    as     Currency     exchange     Underlying     as     Reported     lying  
    reported     translation 31   rates     change     reported     change     change  
HSBC   US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                       
Cash and balances at central banks
    52,396       1,550       53,946       6,709       60,655       16       12  
Trading assets
    427,329       21,612       448,941       (27,560 )     421,381       (1 )     (6 )
Financial assets designated at fair value
    28,533       2,636       31,169       6,012       37,181       30       19  
Derivative assets
    494,876       32,379       527,255       (276,369 )     250,886       (49 )     (52 )
Loans and advances to banks
    153,766       7,406       161,172       18,609       179,781       17       12  
Loans and advances to customers
    932,868       57,163       990,031       (93,800 )     896,231       (4 )     (9 )
Financial investments
    300,235       14,748       314,983       54,175       369,158       23       17  
Other assets
    137,462       1,807       139,269       9,910       149,179       9       7  
 
 
 
   
 
   
 
   
 
   
 
                 
Total assets
    2,527,465       139,301       2,666,766       (302,314 )     2,364,452       (6 )     (11 )
 
 
 
   
 
   
 
   
 
   
 
                 
Deposits by banks
    130,084       8,426       138,510       (13,638 )     124,872       (4 )     (10 )
Customer accounts
    1,115,327       64,478       1,179,805       (20,771 )     1,159,034       4       (2 )
Trading liabilities
    247,652       12,714       260,366       7,764       268,130       8       3  
Financial liabilities designated at fair value
    74,587       2,709       77,296       2,796       80,092       7       4  
Derivative liabilities
    487,060       31,722       518,782       (271,136 )     247,646       (49 )     (52 )
Debt securities in issue
    179,693       8,005       187,698       (40,802 )     146,896       (18 )     (22 )
Liabilities under insurance contracts
    43,683       1,763       45,446       8,261       53,707       23       18  
Other liabilities
    149,150       5,144       154,294       (5,880 )     148,414             (4 )
 
 
 
   
 
   
 
   
 
   
 
                 
Total liabilities
    2,427,236       134,961       2,562,197       (333,406 )     2,228,791       (8 )     (13 )
 
 
 
   
 
   
 
   
 
   
 
                 
Total shareholders’ equity
    93,591       4,114       97,705       30,594       128,299       37       31  
Minority interests
    6,638       226       6,864       498       7,362       11       7  
 
 
 
   
 
   
 
   
 
   
 
                 
Total equity
    100,229       4,340       104,569       31,092       135,661       35       30  
 
 
 
   
 
   
 
   
 
   
 
                 
Total equity and liabilities
    2,527,465       139,301       2,666,766       (302,314 )     2,364,452       (6 )     (11 )
 
 
 
   
 
   
 
   
 
   
 
                 
For footnote, see page 149.
     In 2009, the effect of acquisitions was not material.

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Reconciliation of reported and underlying loans and advances to customers and customer accounts by geographical region
                                                         
    31 December 2009 compared with 31 December 2008  
   
 
 
                    31 Dec 08 at                              
    31 Dec 08             31 Dec 09             31 Dec 09             Under-  
    as     Currency     exchange     Underlying     as     Reported     lying  
    reported     translation 31   rates     change     reported     change     change  
    US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                       
Loans and advances to customers (net)
                                                       
Europe
    426,191       37,773       463,964       (24,483 )     439,481       3       (5 )
Hong Kong
    100,220       (54 )     100,166       (785 )     99,381       (1 )     (1 )
Rest of Asia-Pacific
    80,661       5,320       85,981       (5,938 )     80,043       (1 )     (7 )
Middle East
    27,295       (69 )     27,226       (4,382 )     22,844       (16 )     (16 )
North America
    256,214       7,379       263,593       (56,740 )     206,853       (19 )     (22 )
Latin America
    42,287       6,814       49,101       (1,472 )     47,629       13       (3 )
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
    932,868       57,163       990,031       (93,800 )     896,231       (4 )     (9 )
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Customer accounts
                                                       
Europe
    502,476       42,883       545,359       (50,340 )     495,019       (1 )     (9 )
Hong Kong
    250,517       (119 )     250,398       25,043       275,441       10       10  
Rest of Asia-Pacific
    124,194       5,736       129,930       4,069       133,999       8       3  
Middle East
    35,165       (76 )     35,089       (2,560 )     32,529       (7 )     (7 )
North America
    143,532       5,577       149,109       48       149,157       4        
Latin America
    59,443       10,477       69,920       2,969       72,889       23       4  
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
    1,115,327       64,478       1,179,805       (20,771 )     1,159,034       4       (2 )
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Reconciliation of reported and underlying loans and advances to customers and customer accounts by customer groups and global businesses
                                                         
    31 December 2009 compared with 31 December 2008  
   
 
 
                    31 Dec 08 at                              
    31 Dec 08             31 Dec 09             31 Dec 09             Under-  
    as     Currency     exchange     Underlying     as     Reported     lying  
    reported     translation 31   rates     change     reported     change     change  
    US$m     US$m     US$m     US$m     US$m     %     %  
 
                                                       
Loans and advances to customers (net)
                                                       
Personal Financial Services
    401,402       21,119       422,521       (23,061 )     399,460             (5 )
Commercial Banking
    203,949       14,614       218,563       (18,889 )     199,674       (2 )     (9 )
Global Banking and Markets
    287,306       19,989       307,295       (50,339 )     256,956       (11 )     (16 )
Private Banking
    37,590       1,416       39,006       (1,975 )     37,031       (1 )     (5 )
Other
    2,621       25       2,646       464       3,110       19       18  
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
    932,868       57,163       990,031       (93,800 )     896,231       (4 )     (9 )
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Customer accounts
                                                       
Personal Financial Services
    440,338       24,029       464,367       34,742       499,109       13       7  
Commercial Banking
    235,879       13,901       249,780       17,608       267,388       13       7  
Global Banking and Markets
    320,386       24,243       344,629       (59,902 )     284,727       (11 )     (17 )
Private Banking
    116,683       2,291       118,974       (12,441 )     106,533       (9 )     (10 )
Other
    2,041       14       2,055       (778 )     1,277       (37 )     (38 )
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
 
    1,115,327       64,478       1,179,805       (20,771 )     1,159,034       4       (2 )
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
For footnote, see page 149.
     In 2009, the effect of acquisitions was not material.

45


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Balance sheet / Average balance sheet

Average balance sheet and net interest income
Average balances and related interest are shown for the domestic operations of HSBC’s principal commercial banks by geographical region. ‘Other operations’ comprise the operations of the principal Commercial Banking and consumer finance entities outside their domestic markets and all other banking operations, including investment banking balances and transactions.
     Average balances are based on daily averages for the principal areas of HSBC’s banking activities with monthly or less frequent averages used elsewhere.
     Balances and transactions with fellow subsidiaries are reported gross in the principal Commercial Banking and consumer finance entities within ‘Other interest-earning assets’ and ‘Other interest-bearing liabilities’ as appropriate and the elimination entries are included within ‘Other operations’ in those two categories.
     Net interest margin numbers are calculated by dividing net interest income as reported in the income statement by the average interest-earning assets from which interest income is reported within the ‘Net interest income’ line of the income statement. Interest income and interest expense arising from trading assets and liabilities and the funding thereof is included within ‘Net trading income’ in the income statement.


Assets
                                                                             
        2009     2008     2007  
       
 
   
 
   
 
 
        Average     Interest             Average     Interest             Average     Interest        
        balance     income     Yield     balance     income     Yield     balance     income     Yield  
        US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
   
 
                                                                       
Summary  
 
                                                                       
Total interest-earning assets (itemised below)     1,384,705       62,096       4.48       1,466,622       91,301       6.23       1,296,701       92,359       7.12  
Trading assets32     357,504       7,614       2.13       428,539       16,742       3.91       374,973       17,562       4.68  
Financial assets designated at fair value33     62,143       1,032       1.66       37,303       1,108       2.97       14,899       813       5.46  
Impairment provisions     (26,308 )                     (20,360 )                     (15,309 )                
Non-interest-earning assets     667,942                       596,885                       440,686                  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
Total assets and interest income     2,445,986       70,742       2.89       2,508,989       109,151       4.35       2,111,950       110,734       5.24  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
Short-term funds and loans and advances to banks                                                                        
Europe  
HSBC Bank
    38,455       1,379       3.59       46,703       2,187       4.68       49,910       2,592       5.19  
   
HSBC Private Banking Holdings (Suisse)
    4,451       43       0.97       8,040       333       4.14       5,295       229       4.32  
   
HSBC France
    37,239       440       1.18       35,801       1,495       4.18       31,591       1,294       4.10  
Hong Kong  
Hang Seng Bank
    16,626       202       1.21       17,402       587       3.37       13,054       609       4.67  
   
The Hongkong and Shanghai Banking Corporation
    27,903       182       0.65       47,244       1,344       2.84       50,210       2,352       4.68  
Rest of Asia-Pacific27  
The Hongkong and Shanghai Banking Corporation
    23,107       326       1.41       27,907       881       3.16       19,286       810       4.20  
   
HSBC Bank Malaysia
    3,776       81       2.15       4,659       165       3.54       2,861       103       3.60  
Middle East27  
HSBC Bank Middle East
    4,312       52       1.21       6,028       188       3.12       6,328       324       5.12  
North America  
HSBC Bank USA
    2,338       94       4.02       9,595       328       3.42       9,393       477       5.08  
   
HSBC Bank Canada
    2,934       10       0.34       3,354       107       3.19       3,810       174       4.57  
Latin America  
HSBC Mexico
    3,722       149       4.00       3,682       247       6.71       3,555       239       6.72  
   
Brazilian operations34
    10,490       1,003       9.56       7,959       951       11.95       5,790       645       11.14  
   
HSBC Bank Panama
    1,187       10       0.84       1,133       30       2.65       897       33       3.68  
   
HSBC Bank Argentina
    256       29       11.33       612       43       7.03       304       16       5.26  
Other operations     15,782       199       1.26       19,992       760       3.80       19,087       898       4.70  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
   
 
    192,578       4,199       2.18       240,111       9,646       4.02       221,371       10,795       4.88  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
For footnotes, see page 149.

46


Table of Contents

Assets (continued)
                                                                             
        2009     2008     2007  
       
 
   
 
   
 
 
        Average     Interest             Average     Interest             Average     Interest        
        balance     income     Yield     balance     income     Yield     balance     income     Yield  
        US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
   
 
                                                                       
Loans and advances to customers                                                                        
Europe  
HSBC Bank
    276,602       10,898       3.94       288,214       18,587       6.45       237,231       18,078       7.62  
   
HSBC Private Banking Holdings (Suisse)
    9,993       176       1.76       12,355       494       4.00       9,805       507       5.17  
   
HSBC France
    71,048       1,932       2.72       73,455       3,604       4.91       68,027       3,219       4.73  
   
HSBC Finance
    3,094       319       10.31       4,808       505       10.50       5,492       611       11.13  
Hong Kong  
Hang Seng Bank
    42,619       1,194       2.80       42,304       1,589       3.76       37,827       2,120       5.60  
   
The Hongkong and Shanghai Banking Corporation
    55,287       1,757       3.18       54,628       2,291       4.19       48,134       2,901       6.03  
Rest of Asia-Pacific27  
The Hongkong and Shanghai Banking Corporation
    66,262       3,668       5.54       77,741       5,163       6.64       59,286       4,321       7.29  
   
HSBC Bank Malaysia
    8,113       455       5.61       8,407       553       6.58       7,467       507       6.79  
Middle East27  
HSBC Bank Middle East
    22,612       1,593       7.04       23,697       1,549       6.54       15,125       1,200       7.93  
North America  
HSBC Bank USA
    98,422       5,541       5.63       93,088       5,758       6.19       90,091       6,585       7.31  
   
HSBC Finance
    101,132       9,941       9.83       140,957       15,835       11.23       153,658       18,086       11.77  
   
HSBC Bank Canada
    43,072       1,499       3.48       48,331       2,455       5.08       43,570       2,598       5.96  
Latin America  
HSBC Mexico
    12,185       1,708       14.02       17,252       2,565       14.87       16,469       2,187       13.28  
   
Brazilian operations34
    18,704       4,494       24.03       19,642       4,879       24.84       13,569       3,895       28.71  
   
HSBC Bank Panama
    9,302       864       9.29       8,620       810       9.40       8,113       778       9.59  
   
HSBC Bank Argentina
    1,940       357       18.40       2,136       378       17.70       1,667       241       14.46  
Other operations     29,670       1,905       6.42       28,027       1,707       6.09       21,318       1,790       8.40  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
   
 
    870,057       48,301       5.55       943,662       68,722       7.28       836,849       69,624       8.32  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
Financial investments                                                                        
Europe  
HSBC Bank
    79,763       2,321       2.91       83,725       3,840       4.59       45,885       2,431       5.30  
   
HSBC Private Banking Holdings (Suisse)
    15,602       363       2.33       12,018       553       4.60       10,372       511       4.93  
   
HSBC France
    5,327       141       2.65       14,862       795       5.35       10,357       511       4.93  
Hong Kong  
Hang Seng Bank
    24,594       630       2.56       24,031       1,063       4.42       30,791       1,550       5.03  
   
The Hongkong and Shanghai Banking Corporation
    52,965       644       1.22       15,361       563       3.67       20,717       1,017       4.91  
Rest of Asia-Pacific27  
The Hongkong and Shanghai Banking Corporation
    34,056       1,039       3.05       31,992       1,507       4.71       23,739       1,065       4.49  
   
HSBC Bank Malaysia
    1,218       37       3.04       937       36       3.84       1,515       56       3.70  
Middle East27  
HSBC Bank Middle East
    6,996       118       1.69       5,671       144       2.54       3,654       174       4.76  
North America  
HSBC Bank USA
    27,253       969       3.56       25,089       1,232       4.91       23,373       1,189       5.09  
   
HSBC Finance
    2,426       120       4.95       2,908       143       4.92       4,072       229       5.62  
   
HSBC Bank Canada
    10,282       205       1.99       7,037       197       2.80       6,068       258       4.25  
Latin America  
HSBC Mexico
    3,916       227       5.80       3,470       244       7.03       3,327       319       9.59  
   
Brazilian operations34
    6,930       820       11.83       6,758       853       12.62       5,596       672       12.01  
   
HSBC Bank Panama
    604       39       6.46       618       47       7.61       709       58       8.18  
   
HSBC Bank Argentina
    181       35       19.34       287       47       16.38       563       68       12.08  
Other operations     50,767       1,717       3.38       29,632       1,354       4.57       27,252       1,407       5.16  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
   
 
    322,880       9,425       2.92       264,396       12,618       4.77       217,990       11,515       5.28  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
For footnotes, see page 149.

47


Table of Contents

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
     
 
 
 
Financial summary > Balance sheet > Average balance sheet
Assets (continued)
                                                                             
        2009     2008     2007  
       
 
   
 
   
 
 
        Average     Interest             Average     Interest             Average     Interest        
        balance     income     Yield     balance     income     Yield     balance     income     Yield  
        US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
   
 
                                                                       
Other interest-earning assets                                                                        
Europe  
HSBC Bank
    17,406       188       1.08       25,885       630       2.43       11,170       652       5.84  
   
HSBC Private Banking Holdings (Suisse)
    21,450       360       1.68       21,189       875       4.13       16,360       882       5.39  
   
HSBC France
    11,867       172       1.45       23,414       630       2.69       12,158       419       3.45  
Hong Kong  
Hang Seng Bank
    2,618       32       1.22       1,629       48       2.95       832       42       5.05  
   
The Hongkong and Shanghai Banking Corporation
    26,657       214       0.80       33,571       949       2.83       27,057       1,237       4.57  
Rest of Asia-Pacific27  
The Hongkong and Shanghai Banking Corporation
    19,917       106       0.53       24,492       352       1.44       11,137       588       5.28  
   
HSBC Bank Malaysia
    407       6       1.47       212       7       3.30       231       12       5.19  
Middle East27  
HSBC Bank Middle East
    541       46       8.50       843       63       7.47       758       52       6.86  
North America  
HSBC Bank USA
    3,327       71       2.13       3,091       188       6.08       3,731       231       6.19  
   
HSBC Finance
    2,995       6       0.20       2,638       63       2.39       1,724       89       5.16  
   
HSBC Bank Canada
    773       9       1.16       1,025       25       2.44       960       31       3.23  
Latin America  
HSBC Mexico
    138                   193       2       1.04                    
   
Brazilian operations34
    1,074       46       4.28       1,438       147       10.22       840       75       8.93  
   
HSBC Bank Panama
    1,372       9       0.66       1,807       23       1.27       1,351       40       2.96  
   
HSBC Bank Argentina
    51                   58       1       1.72       39       1       2.56  
Other operations     (111,403 )     (1,094 )             (123,032 )     (3,688 )             (67,857 )     (3,926 )        
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
   
 
    (810 )     171       (21.11 )     18,453       315       1.71       20,491       425       2.07  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
Total interest-earning assets                                                                        
Europe  
HSBC Bank
    412,226       14,786       3.59       444,527       25,244       5.68       344,196       23,753       6.90  
   
HSBC Private Banking Holdings (Suisse)
    51,496       942       1.83       53,602       2,255       4.21       41,832       2,129       5.09  
   
HSBC France
    125,481       2,685       2.14       147,532       6,524       4.42       122,133       5,443       4.46  
   
HSBC Finance
    3,094       319       10.31       4,808       505       10.50       5,492       611       11.13  
Hong Kong  
Hang Seng Bank
    86,457       2,058       2.38       85,366       3,287       3.85       82,504       4,321       5.24  
   
The Hongkong and Shanghai Banking Corporation
    162,812       2,797       1.72       150,804       5,147       3.41       146,118       7,507       5.14  
Rest of Asia-Pacific27  
The Hongkong and Shanghai Banking Corporation
    143,342       5,139       3.59       162,132       7,903       4.87       113,448       6,784       5.98  
   
HSBC Bank Malaysia
    13,514       579       4.28       14,215       761       5.35       12,074       678       5.62  
Middle East27  
HSBC Bank Middle East
    34,461       1,809       5.25       36,239       1,944       5.36       25,865       1,750       6.77  
North America  
HSBC Bank USA
    131,340       6,675       5.08       130,863       7,506       5.74       126,588       8,482       6.70  
   
HSBC Finance
    106,553       10,067       9.45       146,503       16,041       10.95       159,454       18,404       11.54  
   
HSBC Bank Canada
    57,061       1,723       3.02       59,747       2,784       4.66       54,408       3,061       5.63  
Latin America  
HSBC Mexico
    19,961       2,084       10.44       24,597       3,058       12.43       23,351       2,745       11.76  
   
Brazilian operations34
    37,198       6,363       17.11       35,797       6,830       19.08       25,795       5,287       20.50  
   
HSBC Bank Panama
    12,465       922       7.40       12,178       910       7.47       11,070       909       8.21  
   
HSBC Bank Argentina
    2,428       421       17.34       3,093       469       15.16       2,573       326       12.67  
Other operations     (15,184 )     2,727               (45,381 )     133               (200 )     169          
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
   
 
    1,384,705       62,096       4.48       1,466,622       91,301       6.23       1,296,701       92,359       7.12  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
For footnotes, see page 149.

48


Table of Contents

Equity and liabilities
                                                                             
        2009     2008     2007  
       
 
   
 
   
 
 
        Average     Interest             Average     Interest             Average     Interest        
        balance     expense     Cost     balance     expense     Cost     balance     expense     Cost  
        US$m     US$m     %     US$m     US$m     %     US$m     US$m     %  
   
 
                                                                       
Summary                                                                        
Total interest-bearing liabilities (itemised below)     1,353,283       21,366       1.58       1,451,842       48,738       3.36       1,279,460       54,564       4.26  
Trading liabilities     205,670       3,987       1.94       277,940       11,029       3.97       250,572       12,186       4.86  
Financial liabilities designated at fair value (excluding own debt issued)     15,688       293       1.87       21,266       345       1.62       20,827       224       1.07  
Non-interest bearing current accounts     123,271                       98,193                       83,958                  
Total equity and other non-interest bearing liabilities     748,074                       659,747                       477,133                  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
Total equity and liabilities     2,445,986       25,646       1.05       2,508,988       60,112       2.40       2,111,950       66,974       3.17  
   
 
 
 
   
 
           
 
   
 
           
 
   
 
         
Deposits by banks35                                                                        
Europe  
HSBC Bank
    35,207       553       1.57       48,167       1,875       3.89       44,787       2,148       4.80  
   
HSBC Private Banking Holdings (Suisse)
    1,063       1       0.09       4,493       105       2.34       690       22       3.19  
   
HSBC France
    43,682       536       1.23       37,851       1,672       4.42       30,816       1,358       4.41  
Hong Kong  
Hang Seng Bank
    1,051       5       0.48       1,696       55       3.24       2,993       123       4.11  
   
The Hongkong and Shanghai Banking Corporation
    6,892       9       0.13       3,665       70       1.91       3,634       150       4.13  
Rest of Asia-Pacific27  
The Hongkong and Shanghai Banking Corporation
    10,710       165       1.54       16,232       450       2.77       10,247       445       4.34  
   
HSBC Bank Malaysia
    110       2       1.82       338       10       2.96       375       12       3.20  
Middle East27  
HSBC Bank Middle East
    773       9       1.16       1,680       29       1.73       672