2/4: HK&S BK CORP FY04 PT 2

HSBC Holdings PLC
28 February 2005




2. Other operating income

Figures in HK$m                                       2004        2003

Dividend income
- Listed investments                                    87         152
- Unlisted investments                                  99         100
                                                       186         252
Fees and commissions
- Account services                                   1,207       1,162
- Credit facilities                                  1,447       1,295
- Import/export                                      2,676       2,373
- Remittances                                        1,103         957
- Securities/stockbroking                            2,841       2,086
- Cards                                              3,606       3,090
- Insurance                                            217         172
- Unit trusts/funds under management                 3,922       2,814
- Other                                              2,855       2,306
Fees and commissions receivable                     19,874      16,255
Fees and commissions payable                        (3,184)     (2,617)
                                                    16,690      13,638

Dealing profits
- Foreign exchange                                   4,580       3,096
- Interest rate derivatives                          2,380       1,248
- Debt securities                                     (423)       (404)
- Equities and other trading                            78          84
                                                     6,615       4,024

Rental income from investment properties               211         220
Other insurance income                               4,293       3,275
Other                                                1,426       1,218
                                                    29,421      22,627

Analysis of income from dealing in financial instruments

                                      2004                              2003

                              Dividend and                      Dividend and  
                   Dealing    net interest            Dealing   net interest  
Figures in HK$m    profits          income    Total   profits         income  Total
      
Foreign exchange     4,580             254    4,834     3,096            174  3,270
Interest rate
 derivatives         2,380            (760)   1,620     1,248           (282)   966
Debt securities       (423)          1,352      929      (404)         1,526  1,122
Equities and other       
 trading                78              21       99        84             (2)    82
                     6,615             867    7,482     4,024          1,416  5,440
                                                                              

Other operating income was HK$6,794 million, or 30.0 per cent, higher than 2003.
Customers' continued preference for alternative investment products and record
stock market volumes pushed wealth management and insurance income in the
Personal Financial Services business up by HK$2,219 million, or 40.7 per cent.
This was evidenced by strong growth in sales of unit trusts and capital
guaranteed funds in Hong Kong, fee income from securities, stockbroking and
custody, and new individual life insurance premium income. Fee income from cards
rose, reflecting the increase in the number of cards in issue and higher
cardholder spending. Revenues from trade finance also grew, notably in the bank
in Hong Kong and mainland China, attributable to the strong regional trade
flows. The substantial increase in dealing profits reflected successful trading
in derivatives products, growth in demand for structured interest rate products
and capital flows as customers sought to lock in funding requirements at
historically low rates. In addition, foreign exchange profits benefited from an
increase in corporate volumes and higher exchange rate volatility against a
backdrop of a long-term decline in spreads.

3. Operating expenses

Figures in HK$m                             2004              2003

Staff costs
- Salaries and other costs                13,911            12,605
- Retirement benefit costs                   832               979
                                          14,743            13,584

Premises and equipment
- Depreciation                             2,096             2,032
- Rental expenses                          1,143             1,129
- Other premises and equipment expenses    1,763             1,616
                                           5,002             4,777

Other                                      7,247             5,663
                                          26,992            24,024

Staff numbers by region^
                                      At 31Dec04        At 31Dec03

Hong Kong                                 23,947            22,720
Rest of Asia-Pacific                      21,009            18,679
Americas/Europe                               16                16
Total                                     44,972            41,415

^ Full-time equivalent

Operating expenses increased by HK$2,968 million, or 12.4 per cent, compared
with 2003. Staff costs rose by HK$1,159 million, or 8.5 per cent, attributable
to higher performance-related costs in line with the strong performance across
the region, the build-up of the investment banking division in Hong Kong, and
headcount growth. Staff numbers have increased by 3,557 to support business
expansion, including a number of staff who have transferred from Bank of
Bermuda. Retirement benefit costs were lower due to the recognition of a gain
arising from the curtailment of the local pension scheme in India. During 2004,
the group continued to migrate certain support-related functions to its service
centres in mainland China in order to reduce costs. Other operating expenses
were higher than 2003 due to increased advertising and marketing expenditure in
Hong Kong, India, Taiwan and Australia, in line with the growth in the Personal
Financial Services and Commercial Banking businesses in these countries.
Technology costs were higher as a result of investment in channel capabilities,
customer relationship systems and more efficient processing systems. Other
general expenses, including professional fees and communications costs,
increased reflecting business expansion and increased sophistication of the
product range.

4. Provisions for bad and doubtful debts

Figures in HK$m                                       2004       2003

Net (release)/charge for bad and doubtful debts

Advances to customers
- Specific provisions
    New provisions                                   4,079      7,001
    Releases                                        (2,550)    (2,771)
    Recoveries                                        (617)      (684)
                                                       912      3,546
- General provisions                                (1,723)      (160)
                                                      (811)     3,386
Placings with banks maturing after one month
- Net release of specific provisions                    (1)         -
Net (release)/charge to profit and loss account       (812)     3,386

There was a net release of provisions for bad and doubtful debts of HK$812
million, compared with a net charge of HK$3,386 million in 2003. The charge for
new specific provisions fell, with lower provisions against mortgages and credit
card advances in Hong Kong, in line with the improving economy, with lower
bankruptcies, falling unemployment, and a rise in property prices. Provisions
against lending to corporates were also lower, reflecting the benign credit
environment across the region. Releases and recoveries were lower, mainly from
commercial banking customers in Hong Kong, Indonesia and Bahrain. The release in
the general provision for 2004 was made following an improvement in historical
loss experience.

5. Profit on tangible fixed assets and long-term investments

Figures in HK$m                                                   2004    2003

Profit/(loss) on disposal of tangible fixed assets                 190     (84)

Profit on disposal of long-term investments                      1,705     860

Reversal of impairment of long-term investments                    203     237
                                                                 2,098   1,013

The profit on disposal of tangible fixed assets in 2004 was attributable to
gains made on the sale of residential properties in Hong Kong.

The profit on disposal of long-term investments and associated companies in 2004
comprised profits realised from the exchange of the group's interest in World
Finance International Limited, an associated company, for an interest in
Bergesen Worldwide, together with the sale of equity investments.

The reversal of impairment of long-term investments in 2004 reflected a partial
write-back of a provision against an equity investment.

6. Share of profits less losses of associated companies

In May 2004, Hang Seng Bank Limited acquired a 15.98 per cent stake in
Industrial Bank Co. Ltd., and in August 2004, The Hongkong and Shanghai Banking
Corporation Limited acquired a 19.9 per cent interest in Bank of Communications
Limited. These companies are accounted for as associated companies, as the group
has representation on the Board of Directors of each bank, and in accordance
with the Technical Support and Assistance Agreements, is assisting in the
development of financial and operating policies. In respect of Bank of
Communications Limited, a number of staff have been seconded to assist in this
process.

In respect of Industrial Bank Co. Ltd., Hang Seng Bank Limited also has
representation on the executive committee, whilst for Bank of Communications
Limited, The Hongkong and Shanghai Banking Corporation Limited has
representation on the senior executive remuneration committee and on the audit
committee.

Share of profits less losses of associated companies in 2004 included the
group's share of profits and amortisation of goodwill from Bank of
Communications and Industrial Bank from the date of investment to 30 September
2004. The group has taken advantage of the provision contained in Hong Kong
Statement of Standard Accounting Practice 10 whereby it is permitted to include
the attributable share of associates' results based on accounts drawn up to a
non-coterminous period end where it is more practicable to do so.

7. Taxation

The charge for taxation in the consolidated profit and loss account comprises:

Figures in HK$m                                        2004       2003

Hong Kong profits tax                                 3,982      3,603
Overseas taxation                                     2,476      1,802
Deferred taxation                                       484        (30)
                                                      6,942      5,375

Share of associated companies' taxation                 144         12
                                                      7,086      5,387

The effective rate of tax for 2004 was 15.8 per cent compared with 15.5 per cent
in 2003.

8. Dividends
                                    2004                      2003
                       HK$ per share      HK$m   HK$ per share     HK$m

Equity
 Ordinary dividends
 - Paid                          2.18   15,500            1.33    8,650
 - Proposed                      0.53    4,800            1.30    8,450
                                 2.71   20,300            2.63   17,100

Non-equity
 Preference dividends payable
 - Cumulative redeemable          
   preference shares              192       96             198       99
 - Non-cumulative irredeemable         
   preference shares             0.26    1,444            0.24    1,075
                                        21,840                   18,274

9. Advances to customers

Figures in HK$m                          At 31Dec04        At 31Dec03

Gross advances to customers                 928,178           829,415
Suspended interest                             (869)           (1,141)
                                            927,309           828,274

Specific provisions                          (5,609)           (9,132)
General provisions                           (2,447)           (4,138)
Total provisions                             (8,056)          (13,270)
Net advances to customers                   919,253           815,004

Provisions as a percentage of gross advances
 to customers^
Specific provisions                            0.61%             1.10%
General provisions                             0.26%             0.50%
Total provisions                               0.87%             1.60%

^ Gross advances to customers are stated after deduction of interest in suspense.

10. Provisions for bad and doubtful debts against advances to customers

                                                             Suspended
Figures in HK$m                 Specific   General    Total   interest

At 01Jan04                         9,132     4,138   13,270      2,007
Amounts written off               (5,033)        -   (5,033)    (1,145)
Recoveries of advances written
 off in previous years               617         -      617          -
Net charge/(release) to profit
 and loss account (Note 4)           912    (1,723)    (811)         -
Interest suspended during the year     -         -        -        744
Suspended interest recovered           -         -        -       (561)
Exchange and other adjustments       (19)       32       13          7

At 31Dec04                         5,609     2,447    8,056      1,052

Suspended interest above comprises both suspended interest netted against
'Advances to customers' and suspended interest netted against accrued interest
receivable in 'Other assets'.

11. Non-performing advances to customers and provisions

The geographical information shown below, and in notes 12, 13, 14 and
16, has been classified by location of the principal operations of the
subsidiary company or, in the case of the bank, by location of the
branch responsible for advancing the funds.

                                           Rest of  Americas/   
Figures in HK$m           Hong Kong   Asia-Pacific     Europe   Total

Year ended 31Dec04

Bad and doubtful debt 
 charge/(release)            (1,701)           896         (6)   (811)

At 31Dec04

Advances to customers on which interest is being placed in suspense or on which 
interest accrual has ceased as follows:

Gross advances on which interest
- has been placed in 
  suspense                    4,510          3,655          -    8,165
- accrual has ceased          1,492            713          5    2,210
Gross non-performing
 advances^                    6,002          4,368          5   10,375

Specific provisions          (2,569)        (3,035)        (5)  (5,609)                 
                              3,433          1,333          -    4,766

Specific provisions as a
 percentage of gross non-
 performing advances           42.8%          69.5%     100.0%    54.1%

Gross non-performing advances 
 as a percentage of gross
 advances to customers^^        1.0%           1.3%      35.7%     1.1%


                                           Rest of   Americas/   
Figures in HK$m             Hong Kong Asia-Pacific     Europe    Total

Year ended 31Dec03

Bad and doubtful debt
 charge/(release)               3,098          321        (33)   3,386


At 31Dec03

Advances to customers on which interest is being placed in suspense
or on which interest accrual has ceased are as follows:

Gross advances on which interest
- has been placed in suspense  11,675        5,306          -   16,981
- accrual has ceased            1,301          971          5    2,277
Gross non-performing advances^ 12,976        6,277          5   19,258

Specific provisions            (4,885)      (4,242)        (5)  (9,132)
                                8,091        2,035          -   10,126

Specific provisions as a 
 percentage of gross non-
 performing advances             37.6%        67.6%     100.0%    47.4%

Gross non-performing advances 
 as a percentage of gross
 advances to customers^^          2.3%         2.4%      41.7%     2.3%

Non-performing advances fell by HK$8,883 million, or 46.1 per cent, to HK$10,375
million at 31 December 2004, reflecting the improved credit environment
throughout the region. In Hong Kong, non-performing advances fell by HK$6,974
million with reductions in both the bank and Hang Seng due to repayments and
write-offs. In the rest of the Asia-Pacific region, non-performing advances
decreased in most countries, notably in Thailand, Singapore and Indonesia due to
a combination of repayments, upgrades and write-offs relating to commercial and
corporate banking customers. However, non-performing advances increased in
mainland China.

^Gross non-performing 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. Overdue advances to customers

                                                Rest of   Americas/   
Figures in HK$m                 Hong Kong  Asia-Pacific      Europe   Total

At 31Dec04

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                      1,030           711           -   1,741

- one year or less but over
  six months                          784           296           -   1,080

- over one year                     1,847         1,534           -   3,381
                                    3,661         2,541           -   6,202

Overdue advances to customers
 as a percentage of gross 
 advances to customers^^

- six months or less but over
  three months                        0.2%          0.2%          -     0.2%

- one year or less but over
  six months                          0.1%          0.1%          -     0.1%

- over one year                       0.3%          0.5%          -     0.4%
                                      0.6%          0.8%          -     0.7%

Overdue advances to customers 
 (as above)                         3,661         2,541           -   6,202

Less: overdue advances on which
 interest is still being accrued     (519)         (357)          -    (876)

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    974           380           5   1,359
- other                             1,886         1,804           -   3,690

Gross non-performing advances 
 (Note 11)                          6,002         4,368           5  10,375


                                                Rest of    America/  
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 for 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 11)                      12,976            6,277          5   19,258


^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.

13. Rescheduled advances to customers


                                                Rest of    America/  
Figures in HK$m                Hong Kong   Asia-Pacific     Europe    Total

At 31Dec04

Rescheduled advances to
 customers^                        4,050            465          5    4,520

Rescheduled advances to 
 customers as a percentage 
 of gross advances to
 customers^^                         0.7%           0.1%      35.7%     0.5%

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%

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 12).

^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.

14. 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    America/  
Figures in HK$m                Hong Kong   Asia-Pacific     Europe    Total

At 31Dec04

Residential mortgages            185,047         98,080          2  283,129

Hong Kong SAR Government's 
 Home Ownership Scheme,
 Private Sector Participation
 Scheme and Tenants Purchase 
 Scheme mortgages                 41,991              -          -   41,991

Other personal                    50,765         37,963          7   88,735
Total personal                   277,803        136,043          9  413,855

Commercial, industrial and
 international trade             109,895        105,452          -  215,347

Commercial real estate            80,769         27,981          5  108,755

Other property-related
 lending                          46,324         14,066          -   60,390

Government                         4,781          5,151          -    9,932

Other commercial                  56,699         35,088          -   91,787
Total corporate and commercial   298,468        187,738          5  486,211

Non-bank financial institutions   15,021          9,150          -   24,171

Settlement accounts                3,470            471          -    3,941
Total financial                   18,491          9,621          -   28,112

Gross advances to customers      594,762        333,402         14  928,178

Suspended interest                  (392)          (477)         -     (869)

Gross advances to customers
 net of suspended interest       594,370        332,925         14  927,309

Provisions for bad and 
 doubtful debts                   (4,116)        (3,935)        (5)  (8,056)
 
Net advances to customers        590,254        328,990          9  919,253

                                                Rest of    America/  
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,
 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

Advances to customers increased by HK$104.2 billion, or 12.8 per cent, since the
end of 2003.

Advances in Hong Kong grew by HK$34.2 billion, or 6.1 per cent, since the end of
2003, reflecting improved economic conditions, notwithstanding continued price
competition particularly in the mortgage market. In both the bank in Hong Kong
and Hang Seng Bank, there was a moderate increase in non-GHOS residential
mortgage loans, although lending under the GHOS continued to decline as the
scheme remained suspended during 2004. Other personal lending rose, mainly on
credit cards, reflecting the increase in cardholder spending. There was
significant growth in commercial lending, particularly trade finance and lending
to the property and transport sectors, reflecting the success of the bank's
strategy to appoint dedicated relationship managers in the middle market sector,
and the establishment of new business banking centres to service the SME sector.
Advances to financial institutions fell due to a significant reduction in stock
borrowing.

In the rest of the Asia-Pacific region, net advances to customers increased by
HK$70.1 billion, or 27.1 per cent, since the end of 2003. There was strong
growth in personal, commercial and corporate lending across the region. Mortgage
loans increased by 24.0 per cent, principally in Singapore, Taiwan, Korea,
India, mainland China and Australia. The cards business continued to expand and
outstanding credit card advances rose by 32.6 per cent, notably in Taiwan,
Thailand and Australia. Lending to commercial and corporate customers rose by
27.0 per cent, mainly in mainland China, Japan and Korea.











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