2/4: HK&S Bk Corp FY03 PT 2

HSBC Holdings PLC 01 March 2004 11. Overdue advances to customers Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 31Dec03 Gross advances to customers which have been overdue with respect to either principal or interest or periods of^ - six months or less but over three months 2,334 866 - 3,200 - one year or less but over six months 1,428 867 - 2,295 - over one year 3,133 2,376 - 5,509 6,895 4,109 - 11,004 Overdue advances to customers as a percentage of gross advances to customers^^ - six months or less but over three months 0.4% 0.3% - 0.4% - one year or less but over six months 0.2% 0.3% - 0.3% - over one year 0.6% 0.9% - 0.6% 1.2% 1.5% - 1.3% Overdue advances to customers (as above) 6,895 4,109 - 11,004 Less: overdue advances on which interest is still being accrued (1,593) (247) - (1,840) Add: advances overdue for periods of three months or less, or which are not yet overdue, and on which interest has been placed in suspense: - included in rescheduled advances 4,043 692 5 4,740 - other 3,631 1,723 - 5,354 Gross non-performing advances (Note 10) 12,976 6,277 5 19,258 Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 31Dec02 Gross advances to customers which have been overdue with respect to either principal or interest for periods of^ - six months or less but over three months 1,896 680 - 2,576 - one year or less but over six months 1,847 1,018 - 2,865 - over one year 5,376 4,011 - 9,387 9,119 5,709 - 14,828 Overdue advances to customers as a percentage of gross advances to customers^^ - six months or less but over three months 0.4% 0.4% - 0.3% - one year or less but over six months 0.3% 0.5% - 0.4% - over one year 1.0% 2.0% - 1.3% 1.7% 2.9% - 2.0% Overdue advances to customers (as above) 9,119 5,709 - 14,828 Less: overdue advances on which interest is still being accrued (1,509) (220) - (1,729) Add: advances overdue for periods of three months or less, or which are not yet overdue, and on which interest has been placed in suspense: - included in rescheduled advances 4,533 1,121 4 5,658 - other 1,300 2,651 - 3,951 Gross non-performing advances (Note 10) 13,443 9,261 4 22,708 ^Gross overdue advances to customers are stated after deduction of interest in suspense. ^^Expressed as a percentage of gross advances to customers after deduction of interest in suspense. 12. Rescheduled advances to customers Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 31Dec03 Rescheduled advances to customers^ 7,520 829 5 8,354 Rescheduled advances to customers as a percentage of gross advances to customers^^ 1.3% 0.3% 41.7% 1.0% At 31Dec02 Rescheduled advances to customers^ 6,496 1,373 4 7,873 Rescheduled advances to customers as a percentage of gross advances to customers^^ 1.2% 0.7% 0.6% 1.1% Rescheduled advances are those advances which have been restructured or renegotiated because of a deterioration in the financial position of the borrower, or because of the inability of the borrower to meet the original repayment schedule. Rescheduled advances to customers are stated net of any advances which have subsequently become overdue for over three months and which are included in overdue advances to customers (Note 11). Rescheduled advances to customers increased in Hong Kong mainly due to the debt restructuring of certain corporate customers in Hang Seng Bank. ^Rescheduled advances are stated after deduction of interest in suspense. ^^Expressed as a percentage of gross advances to customers after deduction of interest in suspense. 13. Analysis of advances to customers based on categories used by the HSBC Group The following analysis of advances to customers is based on categories used by the HSBC Group, including The Hongkong and Shanghai Banking Corporation Limited and its subsidiary companies, to manage associated risks. Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 31Dec03 Residential mortgages 183,031 79,104 - 262,135 Hong Kong SAR Government's Home Ownership Scheme and Private Sector Participation Scheme and Tenants Purchase Scheme mortgages 48,830 - - 48,830 Other personal 40,679 29,490 7 70,176 Total personal 272,540 108,594 7 381,141 Commercial, industrial and international trade 85,132 79,927 - 165,059 Commercial real estate 66,362 21,899 5 88,266 Other property-related lending 39,401 11,849 - 51,250 Government 7,193 4,976 - 12,169 Other commercial 52,426 29,149 - 81,575 Total corporate and commercial 250,514 147,800 5 398,319 Non-bank financial institutions 38,206 7,818 - 46,024 Settlement accounts 3,564 367 - 3,931 Total financial 41,770 8,185 - 49,955 Gross advances to customers 564,824 264,579 12 829,415 Suspended interest (603) (538) - (1,141) Gross advances to customers net of suspended interest 564,221 264,041 12 828,274 Provisions for bad and doubtful debts (8,144) (5,121) (5) (13,270) Net advances to customers 556,077 258,920 7 815,004 Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 31Dec02 Residential mortgages 185,439 46,017 - 231,456 Hong Kong SAR Government's Home Ownership Scheme and Private Sector Participation Scheme and Tenants Purchase Scheme mortgages 56,576 - - 56,576 Other personal 41,448 21,643 11 63,102 Total personal 283,463 67,660 11 351,134 Commercial, industrial and international trade 79,330 64,504 664 144,498 Commercial real estate 65,009 18,290 4 83,303 Other property-related lending 37,468 6,074 - 43,542 Government 5,610 3,963 - 9,573 Other commercial 51,560 31,306 - 82,866 Total corporate and commercial 238,977 124,137 668 363,782 Non-bank financial institutions 16,027 5,626 - 21,653 Settlement accounts 1,838 581 - 2,419 Total financial 17,865 6,207 - 24,072 Gross advances to customers 540,305 198,004 679 738,988 Suspended interest (904) (571) - (1,475) Gross advances to customers net of suspended interest 539,401 197,433 679 737,513 Provisions for bad and doubtful debts (8,882) (6,852) (4) (15,738) Net advances to customers 530,519 190,581 675 721,775 Advances to customers increased by HK$93.2 billion, or 12.9 per cent, since December 2002. At constant exchange rates, advances to customers grew by HK$70.0 billion or 9.7 per cent. Advances in Hong Kong grew by HK$25.6 billion, or 4.8 per cent, since the end of 2002 against a background of continued subdued loan demand and fierce market competition. In the bank in Hong Kong, advances to customers grew by HK$20.5 billion, or 6.7 per cent during 2003, with increases in lending relating to stock borrowing, other property-related lending and trade finance. Advances in Hang Seng Bank grew by HK$4.9 billion, or 2.2 per cent, since December 2002 with an increase in corporate and commercial loans mainly in lending to financial concerns and public sector entities engaged in financing activities. There was a reduction in personal lending in both Hang Seng Bank and the bank in Hong Kong, principally due to the continued decline in lending under the GHOS, which remained suspended during 2003. In the rest of the Asia-Pacific region, net advances to customers increased by HK$68.3 billion, or 35.9 per cent, since the end of 2002. At constant exchange rates the increase was HK$45.1 billion or 23.7 per cent. Excluding the effect of the weaker Hong Kong dollar, there has been an increase of HK$30.3 billion, or 45.3 per cent, since December 2002 in personal lending as a result of the growth in the Personal Financial Services business in a number of countries. The mortgage portfolio, in particular, has grown by HK$23.1 billion, or 50.1 per cent, at constant exchange rates, with a marked increase in the bank in New Zealand reflecting the acquisition of a HK$8.4 billion mortgage portfolio from AMP Bank. Mortgage lending also increased in the bank in Korea, Singapore, India and HSBC Bank Australia. Card lending has increased by 22.7 per cent at constant exchange rates since the end of 2002 with increases in HSBC Bank Australia, and in the bank in Taiwan, Thailand and Indonesia. Lending to commercial banking customers rose 16.6 per cent, at constant exchange rates, compared with the end of 2002 with increases in the bank in China and HSBC Bank Australia. Lending relating to the Corporate, Investment Banking and Markets business rose by 9.7 per cent mainly due to increased corporate lending in the bank in China. 14. Analysis of advances to customers by geographical area according to the location of counterparties, after risk transfer Figures in Rest of Americas/ HK$m Hong Kong Asia-Pacific Europe Others Total At 31Dec03 Gross advances to customers, net of suspended interest 499,432 260,108 64,116 4,618 828,274 Overdue advances to customers 6,679 3,958 366 1 11,004 Non-performing advances to customers 11,527 6,267 1,462 2 19,258 At 31Dec02 Gross advances to customers, net of suspended interest 497,925 178,002 58,405 3,181 737,513 Overdue advances to customers 8,497 5,749 575 7 14,828 Non-performing advances to customers 11,777 8,961 1,952 18 22,708 15. Analysis of advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority ('HKMA') The following analysis of advances to customers is based on the categories contained in the 'Quarterly Analysis of Loans and Advances and Provisions' return required to be submitted to the HKMA by branches of the bank and by banking subsidiary companies in Hong Kong and is shown net of suspended interest. Figures in HK$m At 31Dec03 At 31Dec02 Gross advances to customers for use in Hong Kong Industrial, commercial and financial Property development 37,873 42,845 Property investment 74,938 69,499 Financial concerns 16,218 9,813 Stockbrokers 612 693 Wholesale and retail trade 26,689 25,602 Manufacturing 10,498 8,622 Transport and transport equipment 31,482 30,810 Others 39,641 43,042 237,951 230,926 Figures in HK$m At 31Dec03 At 31Dec02 Individuals Advances for the purchase of flats under the Hong Kong SAR Government's Home Ownership Scheme and Private Sector Participation and Tenants Purchase Scheme 48,830 56,576 Advances for the purchase of other residential properties 168,841 169,836 Credit card advances 20,747 19,696 Others 17,689 20,700 256,107 266,808 Gross advances to customers for use in Hong Kong 494,058 497,734 Trade finance 38,086 35,096 Gross advances to customers for use outside Hong Kong made by branches of the bank and subsidiary companies in Hong Kong 32,077 6,571 Gross advances to customers made by branches of the bank and subsidiary companies in Hong Kong 564,221 539,401 Gross advances to customers made by branches of the bank and subsidiary companies outside Hong Kong - rest of Asia-Pacific 264,041 197,433 - Americas/Europe 12 679 Gross advances to customers net of suspended interest 828,274 737,513 An explanation of the significant differences between the categories of advances and their definitions used by the HSBC Group and those used by the HKMA is given on pages 16-17 of the Annual Report and Accounts for 2002. 16. Cross-border exposure The country risk exposures shown below are prepared in accordance with the Bank of England Country Exposure Report (Form C1) and the HKMA Return of Cross-Border Claims (MA(BS)9) guidelines. Cross-border claims are on-balance sheet exposures to counterparties based on the location of the counterparties after taking into account the transfer of risk. The tables show claims on individual countries or areas, after risk transfer, amounting to 10 per cent or more of the aggregate cross-border claims. Cross-border risk is controlled centrally through a well-developed system of country limits and is frequently reviewed to avoid concentration of transfer, economic or political risk. Banks and other Public financial sector Figures in HK$m institutions entities Other Total At 31Dec03 Americas United States 21,464 58,929 23,304 103,697 Other 39,840 23,040 20,898 83,778 61,304 81,969 44,202 187,475 Europe United Kingdom 81,520 16 31,175 112,711 Other 253,748 1,567 30,124 285,439 335,268 1,583 61,299 398,150 Asia-Pacific excluding Hong Kong 110,348 37,847 79,558 227,753 At 31Dec02 Americas United States 19,273 47,023 27,185 93,481 Other 32,788 18,052 16,975 67,815 52,061 65,075 44,160 161,296 Europe United Kingdom 66,441 - 24,222 90,663 Other 205,331 6,182 25,357 236,870 271,772 6,182 49,579 327,533 Asia-Pacific excluding Hong Kong 106,014 44,570 52,811 203,395 17. Current, savings and other deposits Figures in HK$m At 31Dec03 At 31Dec02 Customer accounts - Current accounts 211,749 150,749 - Savings accounts 682,412 528,231 - Other deposit accounts 665,234 710,563 1,559,395 1,389,543 Certificates of deposit in issue 92,521 74,380 Other debt securities in issue 17,788 9,616 1,669,704 1,473,539 Current, savings and other deposits rose by HK$196.2 billion, or 13.3 per cent, since the end of 2002. At constant exchange rates, the increase was HK$166.8 billion or 11.3 per cent. Customer accounts at constant exchange rates increased by HK$146.0 billion, or 10.5 per cent, since the end of 2002. In Hong Kong, customer accounts increased by HK$106.8 billion, or 9.7 per cent, since the end of 2002. Personal account balances grew by HK$56.4 billion, or 7.0 per cent, compared with 31 December 2002 while there was a further movement of funds from time deposits to current and savings accounts in both the bank and Hang Seng Bank as customers preferred liquidity in an uncertain and low interest rate environment. Deposits from Commercial, and Corporate, Investment Banking and Markets businesses rose by HK$50.4 billion compared with the end of 2002 mainly in the bank in Hong Kong. In the rest of the Asia-Pacific region, customer accounts increased by HK$62.7 billion, or 22.3 per cent, since the end of 2002. At constant exchange rates the increase was HK$39.1 billion or 13.9 per cent. Deposits from personal customers grew by 9.8 per cent at constant exchange rates since the end of 2002 with strong growth in the bank in New Zealand following the acquisition of a deposit portfolio from AMP Bank. In addition, there were increases in the bank in China and India and in HSBC Bank Australia. Customer deposits from Commercial Banking business were in line with the end of 2002, while deposits from Corporate, Investment Banking and Markets businesses increased by 28.1 per cent at constant exchange rates, with increases in the bank in China, Taiwan, Korea and HSBC Bank Australia. The increase in certificates of deposit in issue compared with December 2002 was mainly in the bank in Hong Kong and related to wealth management products launched by the group. The group's advances-to-deposits ratio declined to 48.8 per cent at 31 December 2003 from 49.0 per cent at 31 December 2002. 18. Reserves At 31Dec03 At 31Dec02 Figures in HK$m restated Share premium account 3,878 3,895 Revaluation reserves - Premises revaluation reserve 5,439 6,613 - Investment properties revaluation reserve 1,696 1,973 - Long-term equity investments revaluation reserve 1,182 1,261 8,317 9,847 Retained profits 37,764 28,952 49,959 42,694 19. Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec03 Contingent liabilities - Acceptances and endorsements 19,355 4,033 3,803 - Guarantees 122,075 107,562 35,892 - Other 130 130 130 141,560 111,725 39,825 Commitments - Documentary credits and short-term trade-related transactions 45,038 12,890 8,767 - Forward asset purchases and forward forward deposits placed 7,696 7,696 2,665 - Undrawn note issuing and revolving underwriting facilities 4,187 2,094 1,686 - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 55,456 27,728 26,042 - under one year 554,808 - - 667,185 50,408 39,160 Exchange rate contracts - Spot and forward foreign exchange 2,043,936 40,361 9,882 - Other exchange rate contracts 563,533 30,485 8,613 2,607,469 70,846 18,495 Interest rate contracts - Interest rate swaps 2,715,154 48,890 12,719 - Other interest rate contracts 915,413 1,939 532 3,630,567 50,829 13,251 Other derivative contracts 27,375 5,697 3,777 Impact of counterparty netting agreements on derivatives' exposure - (46,347) (9,564) Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec02 Contingent liabilities - Acceptances and endorsements 16,829 3,773 3,522 - Guarantees 96,698 84,467 35,279 - Other 29 29 29 113,556 88,269 38,830 Commitments - Documentary credits and short-term trade-related transactions 40,214 10,515 7,837 - Forward asset purchases and forward forward deposits placed 9,683 9,683 1,939 - Undrawn note issuing and revolving underwriting facilities - - - - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 51,694 25,847 23,696 - under one year 500,801 - - 602,392 46,045 33,472 Exchange rate contracts - Spot and forward foreign exchange 1,840,129 36,126 8,634 - Other exchange rate contracts 435,160 19,512 5,534 2,275,289 55,638 14,168 Interest rate contracts - Interest rate swaps 1,951,825 46,198 11,489 - Other interest rate contracts 809,638 3,313 749 2,761,463 49,511 12,238 Other derivative contracts 8,231 2,893 1,690 Impact of counterparty netting agreements on derivatives' exposure - (45,483) (9,339) The tables above give the nominal contract amounts, credit equivalent amounts and risk-weighted amounts of off-balance sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted amounts. These are assessed in accordance with the Third Schedule of the Banking Ordinance on capital adequacy and depend on the status of the counterparty and the maturity characteristics. The risk weights used range from 0 per cent to 100 per cent for contingent liabilities and commitments, from 0 per cent to 50 per cent for exchange rate and interest rate contracts, and from 0 per cent to 100 per cent for other derivative contracts. The group has executed close-out netting agreements with certain counterparties, which allow for positive and negative mark-to-market values on different transactions to be offset and settled by a single payment in the event of default by either party. These have been taken into account in calculating total risk assets. Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The contract amounts represent the amounts at risk should the contract be fully drawn upon and the client default. Since a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements. Derivatives arise from futures, forward, swap and option transactions undertaken by the group in the foreign exchange, interest rate and equity markets. The contract amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date; they do not represent amounts at risk. Replacement cost of contracts Figures in HK$m At 31Dec03 At 31Dec02 Exchange rate contracts 42,119 27,319 Interest rate contracts 39,360 42,034 Other derivative contracts 601 236 82,080 69,589 Less: netting adjustments (31,259) (33,522) cash collateral received (2,889) (2,585) 47,932 33,482 The replacement cost of contracts represents the mark-to-market assets on all contracts with a positive value, i.e. an asset to the group. This comprises the mark-to-market assets on contracts with third parties and fellow subsidiary companies included in the balance sheet in 'Other assets', and on accrual accounted contracts which are not marked-to-market in the balance sheet. Replacement cost is a close approximation of the credit risk for these contracts as at the balance sheet date. The actual credit risk is measured internally as the sum of positive mark-to-market values and an estimate for the future fluctuation risk, using a future risk factor. The netting adjustments represent amounts where the group has in place legally enforceable rights of offset with individual counterparties to offset the gross amount of positive mark-to-market assets with any negative mark-to-market liabilities with the same customer. These offsets are recognised by the Hong Kong Monetary Authority in the calculation of risk assets for the capital adequacy ratio. Cash collateral received represents amounts specifically held against identifiable transactions which meet the offset criteria. 20. Foreign exchange exposure The group had the following structural foreign currency exposures which exceeded 10 per cent of the net structural foreign currency exposure in all currencies: Figures in HK$m Net structural position At 31Dec03 Australia dollar 2,510 India rupee 3,824 Singapore dollar 3,432 United States dollar (43,558) At 31Dec02 Singapore dollar 3,491 United States dollar (39,949) The group's US dollar non-structural foreign currency position exceeded 10 per cent of the group's net foreign currency non-structural positions in all currencies and was made up as follows: US$ non-structural position Figures in HK$m At 31Dec03 At 31Dec02 Spot assets 985,356 857,174 Spot liabilities (954,240) (798,744) Forward purchases 1,320,615 1,117,731 Forward sales (1,239,787) (1,071,448) Net options position (560) (35) 111,384 104,678 21. Reconciliation of operating profit to cash (used in)/generated from operations Figures in HK$m 2003 2002 Operating profit 33,879 33,570 Net interest income (38,738) (39,645) Dividend income (252) (214) Depreciation and amortisation 2,044 2,084 Provisions for bad and doubtful debts 3,386 2,251 Advances written off net of recoveries (6,183) (7,113) Other provisions for liabilities and charges 641 424 Provisions utilised (445) (348) Interest received 43,376 47,879 Interest paid (15,960) (19,311) Net cash inflow from trading activities 21,748 19,577 Change in treasury bills with original term to maturity of more than three months 4,879 (26,570) Change in placings with banks maturing after one month (22,436) 24,816 Change in certificates of deposit with original term to maturity of more than three months (286) (17,717) Change in securities held for dealing purposes 5,229 (13,084) Change in advances to customers (82,829) (42,428) Change in amounts due from fellow subsidiary companies (35,302) 8 Change in other assets (70,550) (15,145) Change in current, savings and other deposit accounts 196,165 95,420 Change in deposits by banks 22,566 (2,172) Change in amounts due to fellow subsidiary companies 276 (365) Change in amounts due to ultimate holding company (66) (39) Change in other liabilities 35,290 15,129 Exchange adjustments 1,695 825 Cash generated from operations 76,379 38,255 22. Analysis of cash and cash equivalents a. Changes in cash and cash equivalents during the year Figures in HK$m 2003 2002 Balance at 1 January 266,407 314,206 Net cash inflow/(outflow) before the effect of foreign exchange movements 33,892 (55,091) Effect of foreign exchange movements 11,136 7,292 Balance at 31 December 311,435 266,407 b. Analysis of balances of cash and cash equivalents as classified in the consolidated balance sheet Figures in HK$m 2003 2002 Cash in hand and current balances with banks 35,301 29,257 Placings with banks 227,100 202,452 Treasury bills 43,906 32,887 Certificates of deposit 5,128 1,811 311,435 266,407 c. Analysis of net outflow of cash and cash equivalents in respect of acquisition of and increased shareholding in subsidiary companies Figures in HK$m 2003 2002 Cash consideration (833) (183) Cash and cash equivalents acquired 38 7 (795) (176) d. Analysis of net outflow of cash and cash equivalents in respect of sale of subsidiary companies Figures in HK$m 2003 2002 Sale proceeds - 1 Cash and cash equivalents transferred - (1) - - 23. Segmental analysis The allocation of earnings reflects the benefits of shareholders' funds to the extent that these are actually allocated to businesses in the segment by way of intra-group capital and funding structures. Common costs are included in segments on the basis of the actual recharges made. Geographical information has been classified by the location of the principal operations of the subsidiary company or, in the case of the bank, by the location of the branch responsible for reporting the results or advancing the funds. Due to the nature of the group structure, the analysis of profits shown below includes intra-group items between geographical regions. Profit and loss account: Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total Year ended 31Dec03 Interest income 39,809 17,714 699 58,222 Interest expense (10,080) (8,808) (596) (19,484) Net interest income 29,729 8,906 103 38,738 Dividend income 239 9 4 252 Fees and commissions receivable 11,561 4,871 2 16,434 Fees and commissions payable (1,497) (1,249) (50) (2,796) Dealing profits 1,923 2,104 (3) 4,024 Rental income from investment properties 220 - - 220 Other 4,801 722 4 5,527 Operating income 46,976 15,363 60 62,399 Operating expenses (16,296) (8,728) (34) (25,058) Operating profit before provisions 30,680 6,635 26 37,341 Provisions for bad and doubtful debts (3,098) (321) 33 (3,386) Provisions for contingent liabilities and commitments (51) (25) - (76) Operating profit 27,531 6,289 59 33,879 Profit on tangible fixed assets and long-term investments 779 110 124 1,013 Surplus/(deficit) on property revaluation (262) 28 - (234) Share of profits less losses of associated companies 139 - - 139 Profit on ordinary activities before tax 28,187 6,427 183 34,797 Tax on profit on ordinary activities (3,612) (1,760) (15) (5,387) Profit on ordinary activities after tax 24,575 4,667 168 29,410 Minority interests (3,613) - - (3,613) Profit attributable to shareholders 20,962 4,667 168 25,797 Profit and loss account: Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total Year ended 31Dec02 Interest income 44,819 16,468 521 61,808 Interest expense (13,314) (8,399) (450) (22,163) Net interest income 31,505 8,069 71 39,645 Dividend income 198 13 3 214 Fees and commissions receivable 10,680 4,313 7 15,000 Fees and commissions payable (1,433) (1,082) (15) (2,530) Dealing profits 675 1,807 (1) 2,481 Rental income from investment properties 238 1 - 239 Other 3,633 393 - 4,026 Operating income 45,496 13,514 65 59,075 Operating expenses (15,830) (7,393) (31) (23,254) Operating profit before provisions 29,666 6,121 34 35,821 Provisions for bad and doubtful debts (1,921) (330) - (2,251) Provisions for contingent liabilities and commitments (106) 106 - - Operating profit 27,639 5,897 34 33,570 Profit on tangible fixed assets and long-term investments 375 2 - 377 Surplus/(deficit) on property revaluation (385) 14 - (371) Share of profits less losses of associated companies 85 - - 85 Profit on ordinary activities before tax 27,714 5,913 34 33,661 Tax on profit on ordinary activities (3,216) (1,510) (8) (4,734) Profit on ordinary activities after tax 24,498 4,403 26 28,927 Minority interests (3,757) (3) - (3,760) Profit attributable to shareholders 20,741 4,400 26 25,167 Interest income and interest expense include intra-group interest of HK$2,452 million (2002: HK$2,614 million). Fees and commissions receivable and fees and commissions payable include intra-group fees of HK$179 million (2002: HK$128 million). Other operating income and operating expenses include intra-group items of HK$1,034 million (2002: HK$759 million). 24. Capital adequacy The table below sets out an analysis of regulatory capital and capital adequacy ratios for the group. Figures in HK$m At 31Dec03 At 31Dec02^ Composition of capital Tier 1: Shareholders' funds 110,012 92,444 Less: proposed dividends (8,450) (3,500) property revaluation reserves (7,135) (10,240) long-term equity investments revaluation reserve (1,182) (1,290) term preference shares (3,882) (3,899) goodwill (961) (633) Minority interests^^ 15,470 14,423 Total qualifying tier 1 capital 103,872 87,305 Tier 2: Property revaluation reserves (@70%)^^^ 4,994 7,168 Long-term equity investments revaluation reserve (@70%) 827 904 General provisions 4,138 4,238 Perpetual subordinated debt 9,316 12,282 Term subordinated debt 2,099 2,632 Term preference shares 3,882 3,899 Total qualifying tier 2 capital 25,256 31,123 Investments in associated companies (1,443) (1,499) Investments in unconsolidated subsidiary companies (4,812) (2,766) Investments in other banks (501) (559) Total capital 122,372 113,604 Risk-weighted assets 1,008,824 895,496 ^Prior year comparatives have not been restated on adoption of SSAP 12. ^^After deduction of minority interests in unconsolidated subsidiary companies. ^^^Balance at 31 December 2002 was capped at 31 December 1998 amount. The group's capital adequacy ratios adjusted for market risks calculated in accordance with the Hong Kong Monetary Authority Guideline on 'Maintenance of Adequate Capital Against Market Risks' are as follows: At 31Dec03 At 31Dec02 Total capital 12.1% 12.7% Tier 1 capital 10.3% 9.8% The group's capital adequacy ratios calculated in accordance with the provisions of the Third Schedule of the Banking Ordinance which does not take into account market risks are as follows: Total capital 11.9% 12.4% Tier 1 capital 10.1% 9.5% 25. Liquidity ratio The Banking Ordinance requires banks operating in Hong Kong to maintain a minimum liquidity ratio, calculated in accordance with the provisions of the Fourth Schedule of the Banking Ordinance, of 25 per cent. This requirement applies separately to the Hong Kong branches of the bank and to those subsidiary companies which are Authorised Institutions under the Banking Ordinance in Hong Kong. 2003 2002 The average liquidity ratio for the year was as follows: Hong Kong branches of the bank 49.0% 51.1% 26. Property revaluation The group's premises and investment properties were revalued as at 30 September 2003 and updated for any material changes at 31 December 2003. The basis of the valuation for premises was open market value for existing use or, in the case of one specialised building, depreciated replacement cost. The basis of the valuation for investment properties was open market value. The bases of valuation are unchanged from those used at 31 December 2002. Premises and investment properties in the Hong Kong SAR, the Macau SAR and mainland China, which represent 90.3 per cent by value of the group's properties subject to valuation, were valued by Chesterton Petty Limited. The valuations were carried out by independent qualified valuers who are members of the Hong Kong Institute of Surveyors. Properties in six other countries, which represent 6.3 per cent by value of the group's properties, were valued by different independent professionally qualified valuers. The valuations of the remaining properties have been reviewed by local management. The September property revaluation, together with the revaluation of Hong Kong properties undertaken in June 2003, have resulted in a decrease in the group's revaluation reserves of HK$1,397 million (of which a decrease of HK$1,335 million was taken to reserves in June 2003), net of deferred tax, and a charge to the profit and loss account before taxation of HK$234 million (of which a charge of HK$322 million was included in the profit and loss account in June 2003). 27. Accounting policies The accounting policies adopted are consistent with those described in the Annual Report and Accounts for 2002 except for the accounting and disclosure for deferred taxes which have been amended in accordance with Hong Kong Statement of Standard Accounting Practice 12 (SSAP 12) (Revised) on 'Income taxes'. In the current year, the group has adopted SSAP 12 (Revised). The principal effect of the implementation of SSAP 12 (Revised) is in relation to deferred tax. In previous years, partial provision was made for deferred tax using the income statement liability method, that is, a liability was recognised in respect of timing differences arising, except where those timing differences were not expected to reverse in the foreseeable future. SSAP 12 (Revised) requires the adoption of a balance sheet liability method, whereby deferred tax is recognised in respect of all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with limited exceptions. In the absence of any specific transitional requirements in SSAP 12 (Revised), the new accounting policy has been applied retrospectively. Comparative amounts for 2002 have been restated as follows: Profit and loss account Tax on profit on ordinary Minority Figures in HK$m activities interests Year ended 31Dec02 Under previous policy 4,024 3,782 Adoption of SSAP 12 710 (22) Under new policy 4,734 3,760 Consolidated balance sheet Investment in Figures in HK$m Other Other Minority Revaluation Retained associated assets liabilities interests reserves profits companies At 31Dec02 Under previous policy 106,606 135,516 17,241 11,530 28,579 1,499 Adoption of SSAP 12 976 2,467 (181) (1,683) 373 - Under new policy 107,582 137,983 17,060 9,847 28,952 1,499 Figures in HK$m Deferred tax assets Deferred tax liabilities At 31Dec03 1,668 3,101 At 31Dec02 1,305 3,191 28. Comparative figures Certain comparative figures have been reclassified to conform with the current year's presentation. 29. Constant exchange rates When reference to constant exchange rates is made, prior and current year data, as expressed in the functional currencies of the group's operations, have been translated into Hong Kong dollars using the same exchange rates for both years. 30. Statutory accounts The information in this news release is not audited and does not constitute statutory accounts. Certain financial information in this news release is extracted from the statutory accounts for the year ended 31 December 2003 which were approved by the Board of Directors on 1 March 2004 and will be delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The Auditors expressed an unqualified opinion on those statutory accounts in their report dated 1 March 2004. The Annual Report and Accounts for the year ended 31 December 2003, which include the statutory accounts, can be obtained on request from Group Public Affairs, The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong, and may be viewed on our website: www.hsbc.com, on or after 31 March 2004. 31. Ultimate holding company The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc. This information is provided by RNS The company news service from the London Stock Exchange

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