2/4: HK&S BK CORP FY04 PT3

HSBC Holdings PLC 28 February 2005 15. Analysis of advances to customers by geographical area according to the location of counterparties, after risk transfer Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Others Total At 31Dec04 Gross advances to customers, net of suspended interest 544,185 319,512 59,461 4,151 927,309 Overdue advances to customers 3,676 2,452 74 - 6,202 Non-performing advances to customers 5,851 4,352 172 - 10,375 At 31Dec03 Gross advances to customers, net of suspended interest 499,432 260,108 64,116 4,618 828,274 Overdue advances to customers 6,679 3,958 366 1 11,004 Non-performing advances to customers 11,527 6,267 1,462 2 19,258 16. Analysis of advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority ('HKMA') The following analysis of advances to customers is based on the categories contained in the 'Quarterly Analysis of Loans and Advances and Provisions' return required to be submitted to the HKMA by branches of the bank and by banking subsidiary companies in Hong Kong and is shown net of suspended interest. Figures in HK$m At 31Dec04 At 31Dec03 Gross advances to customers for use in Hong Kong Industrial, commercial and financial Property development 36,230 37,873 Property investment 93,747 74,938 Financial concerns 14,784 16,218 Stockbrokers 1,185 612 Wholesale and retail trade 32,103 26,689 Manufacturing 14,366 10,498 Transport and transport equipment 35,418 31,482 Others 41,140 39,641 268,973 237,951 Individuals Advances for the purchase of flats under the Hong Kong SAR Government's Home Ownership, Private Sector Participation and Tenants Purchase Schemes 41,991 48,830 Advances for the purchase of other residential properties 169,835 168,841 Credit card advances 23,162 20,747 Others 20,247 17,689 255,235 256,107 Gross advances to customers for use in Hong Kong 524,208 494,058 Trade finance 49,414 38,086 Gross advances to customers for use outside Hong Kong made by branches of the bank and subsidiary companies in Hong Kong 20,748 32,077 Gross advances to customers made by branches of the bank and subsidiary companies in Hong Kong 594,370 564,221 Gross advances to customers made by branches of the bank and subsidiary companies outside Hong Kong - rest of Asia-Pacific 332,925 264,041 - Americas/Europe 14 12 Gross advances to customers net of suspended interest 927,309 828,274 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 page 18 of the Annual Report and Accounts for 2003. 17. Cross-border exposure The country risk exposures shown below are prepared in accordance with the HKMA Return of External Positions Part II 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$m institutions entities Other Total At 31Dec04 Americas United States 45,518 80,047 32,010 157,575 Other 43,044 16,143 47,297 106,484 88,562 96,190 79,307 264,059 Europe United Kingdom 86,613 27 23,294 109,934 Other 332,581 4,219 22,168 358,968 419,194 4,246 45,462 468,902 Asia-Pacific excluding Hong Kong 151,183 18,454 77,266 246,903 At 31Dec03 Americas United States 21,464 58,929 23,304 103,697 Other 39,840 23,040 20,898 83,778 61,304 81,969 44,202 187,475 Europe United Kingdom 81,520 16 31,175 112,711 Other 253,748 1,567 30,124 285,439 335,268 1,583 61,299 398,150 Asia-Pacific excluding Hong Kong 110,348 37,847 79,558 227,753 18. Current, savings and other deposits Figures in HK$m At 31Dec04 At 31Dec03 Customer accounts - Current accounts 280,809 211,749 - Savings accounts 796,977 682,412 - Other deposit accounts 652,709 665,234 1,730,495 1,559,395 Certificates of deposit in issue 114,741 92,521 Other debt securities in issue 35,437 17,788 1,880,673 1,669,704 Current, savings and other deposits increased by HK$211 billion, or 12.6 per cent, since the end of 2003. In Hong Kong, customer accounts grew by HK$102.2 billion, or 8.4 per cent. The low interest rate environment, which persisted throughout 2004, prompted personal account customers to seek higher returns by investing in wealth management products, while surplus funds were kept in current and savings accounts, as interest rate differentials on savings and deposit accounts fell to near zero levels. Deposits from the Commercial and Corporate, Investment Banking and Markets businesses rose by HK$75.7 billion, or 21.8 per cent, compared with the end of 2003, mostly in the bank in Hong Kong. In the rest of the Asia-Pacific region, customer accounts rose by HK$69.1 billion, or 20.1 per cent. Deposits from personal customers grew by 9.9 per cent, mainly from expansion in mainland China and Australia. Deposits from Commercial Banking customers increased by 17.6 per cent, principally in Singapore and mainland China. Deposits from Corporate, Investment Banking and Markets customers rose by 31.5 per cent, with increases in Singapore, Korea, Japan, Brunei, Taiwan and India, reflecting the strong rise in funds received from securities custody and clearing customers. The increase in certificates of deposit in issue related to wealth management products launched by the bank in Hong Kong and by Hang Seng Bank, while the rise in other debt securities in issue was mainly in Australia to fund business expansion. The group's advances-to-deposits ratio increased to 48.9 per cent at 31 December 2004 from 48.8 per cent at 31 December 2003. 19. Reserves Figures in HK$m At 31Dec04 At 31Dec03 Share premium account 3,883 3,878 Revaluation reserves - Premises revaluation reserve 9,832 5,439 - Investment properties revaluation reserve 2,075 1,696 - Long-term equity investments revaluation reserve 1,609 1,182 13,516 8,317 Retained profits 51,083 37,764 68,482 49,959 20. Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec04 Contingent liabilities - Acceptances and endorsements 22,714 4,559 4,423 - Guarantees 157,833 136,474 48,837 - Other 35 35 33 180,582 141,068 53,293 Commitments - Documentary credits and short-term trade-related transactions 48,493 13,770 9,591 - Forward asset purchases and forward forward deposits placed 10,166 10,166 3,716 - Undrawn note issuing and revolving underwriting facilities 4,116 2,058 1,680 - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 82,142 41,071 38,311 - under one year 657,682 - - 802,599 67,065 53,298 Exchange rate contracts - Spot and forward foreign exchange 2,411,793 46,694 11,759 - Swaps and other exchange rate contracts 696,883 39,635 11,180 3,108,676 86,329 22,939 Interest rate contracts - Interest rate swaps 3,754,053 57,131 14,679 - Other interest rate contracts 684,692 3,117 875 4,438,745 60,248 15,554 Other derivative contracts 71,395 4,030 1,222 Impact of counterparty netting agreements on derivatives exposure - (59,487) (12,535) 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 - Swaps and 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) 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 Hong Kong 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 derivatives 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-weighted 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 customer 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 31Dec04 At 31Dec03 Exchange rate contracts 54,216 42,119 Interest rate contracts 41,486 39,360 Other derivative contracts 1,722 601 97,424 82,080 Less: netting adjustments (39,907) (31,259) cash collateral received (2,100) (2,889) 55,417 47,932 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 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 HKMA in the calculation of risk-weighted assets for the capital adequacy ratio. Cash collateral received represents amounts specifically held against identifiable transactions which meet the offset criteria. 21. 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$m Net structural position At 31Dec04 Australian dollars 4,911 Chinese renminbi 18,154 Indian rupees 4,979 Korean won 3,266 Singapore dollars 3,370 United States dollars (56,355) Thai baht 1,575 At 31Dec03 Australian dollars 2,510 Indian rupees 3,824 Singapore dollars 3,432 United States dollars (43,558) The group had the following non-structural foreign currency positions which exceeded 10 per cent of the group's net foreign currency non-structural positions in all currencies: United States Singapore Brunei Figures in HK$m dollars dollars dollars At 31Dec04 Spot assets 1,126,118 83,986 5,129 Spot liabilities (1,042,445) (74,193) (15,134) Forward purchases 1,497,043 104,625 - Forward sales (1,516,913) (104,339) - Net options position (721) - - 63,082 10,079 (10,005) At 31Dec03 Spot assets 985,356 Spot liabilities (954,240) Forward purchases 1,320,615 Forward sales (1,239,787) Net options position (560) 111,384 22. Reconciliation of operating profit to cash (used in)/generated from operations Figures in HK$m 2004 2003 Operating profit 41,430 33,879 Net interest income (38,232) (38,738) Dividend income (186) (252) Depreciation and amortisation 2,171 2,044 Provisions for bad and doubtful debts (812) 3,386 Advances written off net of recoveries (4,416) (6,183) Other provisions for liabilities and charges 668 641 Provisions utilised (906) (445) Interest received 45,593 43,376 Interest paid (18,294) (15,960) Net cash inflow from trading activities 27,016 21,748 Change in treasury bills with original term to maturity of more than three months (48,741) 4,879 Change in placings with banks maturing after one month 38,841 (22,436) Change in certificates of deposit with original term to maturity of more than three months (1,142) (286) Change in securities held for dealing purposes 10,492 5,229 Change in advances to customers (99,035) (82,829) Change in amounts due from fellow subsidiary companies (25,203) (35,302) Change in other assets (41,555) (70,550) Change in current, savings and other deposit accounts 210,969 196,165 Change in deposits by banks 4,987 22,566 Change in amounts due to fellow subsidiary companies 5,809 276 Change in amounts due to ultimate holding company 104 (66) Change in other liabilities 40,745 35,290 Exchange adjustments 898 1,695 Cash generated from operations 124,185 76,379 23. Analysis of cash and cash equivalents a. Changes in cash and cash equivalents during the year Figures in HK$m 2004 2003 Balance at 1 January 311,435 266,407 Net cash inflow before the effect of foreign exchange movements 85,170 33,892 Effect of foreign exchange movements 7,596 11,136 Balance at 31 December 404,201 311,435 b. Analysis of balances of cash and cash equivalents Figures in HK$m 2004 2003 Cash in hand and current balances with banks 54,564 35,301 Placings with banks 328,172 227,100 Treasury bills 16,954 43,906 Certificates of deposit 4,511 5,128 404,201 311,435 c. Analysis of net outflow of cash and cash equivalents in respect of acquisition of and increased shareholding in subsidiary companies Figures in HK$m 2004 2003 Cash consideration (972) (833) Cash and cash equivalents acquired - 38 (972) (795) 24. 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 31Dec04 Interest income 38,534 21,739 602 60,875 Interest expense (10,946) (11,223) (474) (22,643) Net interest income 27,588 10,516 128 38,232 Dividend income 171 15 - 186 Fees and commissions receivable 14,014 6,167 1 20,182 Fees and commissions payable (1,903) (1,577) (12) (3,492) Dealing profits 4,034 2,581 - 6,615 Rental income from investment properties 211 - - 211 Other 6,007 1,009 9 7,025 Operating income 50,122 18,711 126 68,959 Operating expenses (18,041) (10,229) (28) (28,298) Operating profit before provisions 32,081 8,482 98 40,661 Provisions for bad and doubtful debts 1,701 (895) 6 812 Provisions for contingent liabilities and commitments (28) (12) (3) (43) Operating profit 33,754 7,575 101 41,430 Profit on tangible fixed assets and long-term investments 1,975 122 1 2,098 Surplus on property revaluation 960 64 - 1,024 Share of profits less losses of associated companies 66 348 - 414 Profit on ordinary activities before tax 36,755 8,109 102 44,966 Tax on profit on ordinary activities (4,725) (2,355) (6) (7,086) Profit on ordinary activities after tax 32,030 5,754 96 37,880 Minority interests (4,288) (27) - (4,315) Profit attributable to shareholders 27,742 5,727 96 33,565 Profit and loss account: 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 Interest income and interest expense include intra-group interest of HK$2,964 million (2003: HK$2,452 million). Fees and commissions receivable and fees and commissions payable include intra-group fees of HK$308 million (2003: HK$179 million). Other operating income and operating expenses include intra-group items of HK$1,306 million (2003: HK$1,034 million). 25. Capital adequacy The table below sets out an analysis of regulatory capital and capital adequacy ratios for the group. Figures in HK$m At 31Dec04 At 31Dec03 Composition of capital Tier 1: Shareholders' funds 147,495 110,012 Less: proposed dividends (4,800) (8,450) property revaluation reserves (11,907) (7,135) long-term equity investments revaluation reserve (1,609) (1,182) term preference shares (3,886) (3,882) goodwill (5,771) (961) Minority interests^ 14,384 14,167 Total qualifying tier 1 capital 133,906 102,569 Tier 2: Property revaluation reserves (@70%)^^ 7,977 4,994 Long-term equity investments revaluation reserve (@70%) 1,126 827 General provisions 2,447 4,138 Perpetual subordinated debt 9,328 9,316 Term subordinated debt 1,814 2,099 Term preference shares^^^ 3,109 3,882 Total qualifying tier 2 capital 25,801 25,256 Investments in associated companies (12,063) (1,443) Investments in unconsolidated subsidiary companies (6,461) (4,812) Investments in other banks (1,727) (501) Total capital 139,456 121,069 Risk-weighted assets 1,173,432 1,008,824 ^After deduction of minority interests in unconsolidated subsidiary companies. ^^Balance at 31 December 2004 is capped at the December 1998 amount. ^^^Balance at 31 December 2004 includes a discount for term preference shares with residual maturity of less than five years. The group's capital adequacy ratios adjusted for market risks calculated in accordance with the HKMA Guideline on 'Maintenance of Adequate Capital Against Market Risks' are as follows: At 31Dec04 At 31Dec03 Total capital 11.9% 12.0% Tier 1 capital 11.4% 10.2% 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% 11.8% Tier 1 capital 11.4% 10.0% 26. Liquidity ratio The Hong Kong 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. 2004 2003 The average liquidity ratio for the year was as follows Hong Kong branches of the bank 41.7% 49.0% 27. Property revaluation The group's premises and investment properties were revalued as at 30 September 2004 and updated for any material changes at 31 December 2004. 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 2003. Premises and investment properties in the Hong Kong SAR, the Macau SAR and mainland China, which represent 92.5 per cent by value of the group's properties subject to valuation, were valued by DTZ Debenham Tie Leung Limited. The valuations were carried out by independent qualified valuers who are members of the Hong Kong Institute of Surveyors. Properties in 11 other countries, which represent 7.5 per cent by value of the group's properties, were valued by different, independent, professionally qualified valuers. The September property revaluation, together with the revaluation of Hong Kong properties undertaken in June 2004, has resulted in an increase in the group's revaluation reserves of HK$5,542 million net of deferred tax, and a credit to the profit and loss account before taxation of HK$1,024 million. 28. Accounting policies The accounting policies adopted are consistent with those described in the Annual Report and Accounts for 2003. 29. 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 2004 which were approved by the Board of Directors on 28 February 2005 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 28 February 2005. The Annual Report and Accounts for the year ended 31 December 2004, 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.hk on or after 31 March 2005. 30. Ultimate holding company The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc. Media enquiries to: David Hall Telephone no: + 852 2822 1133 Gareth Hewett Telephone no: + 852 2822 4929 Richard Beck Telephone no: + 44 20 7991 0633 Karen Ng Telephone no: + 44 20 7991 0655 This information is provided by RNS The company news service from the London Stock Exchange

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