2008 Interim Report Section 1

RNS Number : 6207A

HSBC Holdings PLC

04 August 2008

 



16    Notes on the cash flow statement

	Half-year to
	30 June     2008		30 June     2007		31 December     2007
	US$m		US$m		US$m
Non-cash items included in profit before tax
Depreciation, amortisation and impairment	1,766		1,184		1,338
Gains arising from dilution of interests in associates	-		(1,076)		(16)
Revaluations on investment property	(27)		(48)		(104)
Share-based payment expense	427		413		457
Loan impairment losses gross of recoveries	10,436		6,635		11,547
Provisions for liabilities and charges	107		282		707
Impairment of financial investments	418		18		86
Charge for defined benefit plans	234		342		385
Accretion of discounts and amortisation of premiums	(461)		(392)		(57)
	12,900		7,358		14,343
Change in operating assets
Change in prepayments and accrued income	2,294		(2,280)		(2,789)
Change in net trading securities and net derivatives	(29,675)		10,487		(15,459)
Change in loans and advances to banks	1,605		(357)		(8,565)
Change in loans and advances to customers	(76,452)		(66,739)		(65,147)
Change in financial assets designated at fair value	2,923		(5,872)		(7,488)
Change in other assets	(1,826)		(924)		(11,405)
	(101,131)		(65,685)		(110,853)
Change in operating liabilities
Change in accruals and deferred income	(4,219)		547		4,572
Change in deposits by banks	20,947		29,661		2,933
Change in customer accounts	63,277		84,496		115,310
Change in debt securities in issue	(16,522)		(1,086)		(11,403)
Change in financial liabilities designated at fair value	(181)		5,755		6,549
Change in other liabilities	6,093		3,875		8,886
	69,395		123,248		126,847
Cash and cash equivalents comprise
Cash and balances at central banks	13,473		16,651		21,765
Items in the course of collection from other banks	16,719		23,152		9,777
Loans and advances to banks of one month or less	244,608		220,136		232,320
Treasury bills, other bills and certificates of deposit  less than three months	28,067		32,684		41,819
Less: items in the course of transmission to other banks	(15,329)		(20,339)		(8,672)
	287,538		272,284		297,009
Interest and dividends
Interest paid	(31,752)		(31,002)		(32,624)
Interest received	53,945		47,423		55,970
Dividends received	1,339		1,426		407

17    Contingent liabilities, contractual commitments and guarantees

	At     30 June     2008		At     30 June     2007		At     31 December     2007
	US$m		US$m		US$m
Contingent liabilities and guarantees
Guarantees and irrevocable letters of credit pledged as collateral  security	83,640		71,251		77,885
Other contingent liabilities	275		297		334
	83,915		71,548		78,219
Commitments
Documentary credits and short-term trade-related transactions	15,898		11,827		13,510
Forward asset purchases and forward forward deposits placed	1,380		734		490
Undrawn note issuing and revolving underwriting facilities	105		37		109
Undrawn formal standby facilities, credit lines and other commitments to lend	741,543		751,372		750,348
	758,926		763,970		764,457

The above table discloses the nominal principal amounts of contingent liabilities, commitments and guarantees; mainly credit-related instruments including both financial and non-financial guarantees and commitments to extend credit. Contingent liabilities arising from litigation against the Group are disclosed in Note 21. Nominal principal amounts represent the amounts at risk should contracts be fully drawn upon and clients default. The amount of the loan commitments shown above reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. As a significant proportion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not representative of future liquidity requirements. 

18    Segmental analysis

Net operating income and profit before tax is presented below by geography, HSBC's primary basis of segmental reporting.

Net operating income

	Europe		Hong Kong		Rest of Asia-     Pacific		North     America		Latin America		Intra- HSBC items		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
Half-year to:
30 June 2008	13,369		5,027		5,472		2,433		4,285		(1,169)		29,417
30 June 2007	11,934		4,982		4,912		7,660		3,511		(852)		32,147
31 December 2007	13,091		6,109		4,513		2,967		4,057		(1,133)		29,604

Profit/(loss) before tax

	Europe		Hong Kong		Rest of Asia-Pacific		North America		Latin America		Intra-HSBC items		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
Half-year to:
30 June 2008	5,177		3,073		3,624		(2,893)		1,266		-		10,247
30 June 2007	4,050		3,330		3,344		2,435		1,000		-		14,159
31 December 2007	4,545		4,009		2,665		(2,344)		1,178		-		10,053

19    Gains from dilution of interests in associates

During 2007, certain HSBC associates issued new shares. HSBC did not subscribe for any of the shares issued under these offers and, as a result, its interests in the associates' equity decreased. This has been accounted for as a partial disposal of the Group's interests in the associates and the resulting dilution gains are presented in the income statement. The transactions are described on page 362 in the Annual Report and Accounts 2007.

20    Goodwill impairment

It is HSBC's policy to test goodwill for impairment annually, and to perform an impairment test more frequently for cash generating units ('CGUs') when there are indications that conditions have changed for those CGUs since the last goodwill impairment test that would result in a different outcome. 

As a result of the continued deterioration in economic and credit conditions in North America, and the resulting further restructuring in the Personal Financial Services - North America CGU, an impairment test was performed on this CGU at 30 June 2008. This involved comparing the recoverable amount of the CGU to its carrying value including goodwill. Recoverable amount is estimated using a value in use calculation based on future cash flow estimates discounted to present value. Cash flow estimates are based on management's cash flow projections, extrapolated in perpetuity using a nominal long-term growth rate based on current market assessment of GDP and inflation for the countries within which the CGU operates. Cash flows are extrapolated in perpetuity due to the long-term perspective within the Group of the business units making up its CGUs. The discount rate used reflects the cost of capital HSBC allocates to investments in North America, as well as the cost of capital for each type of business within the CGU. The test confirmed that goodwill for the CGU was impaired and an impairment charge of US$527 million was recognised as goodwill impairment in the income statement. There was no prior impairment recognised on this CGU. 

The process of identifying and evaluating goodwill impairment is inherently uncertain because it requires significant management judgement in making a series of estimations, the results of which are highly sensitive to the assumptions used. The review of goodwill impairment represents management's best estimate of the factors discussed in detail on page 133 in the Annual Report and Accounts 2007.

The goodwill impairment testing performed for the Personal Financial Services - North America CGU is highly sensitive to the assumptions and estimates used, and it is possible that the outcomes within the second half of 2008 could be different from the assumptions and estimates made as at 30 June 2008. In the event of further significant deterioration in the economic and credit conditions beyond the levels already reflected by management in the cash flow forecasts for the CGU, a further special review would be made. If this review indicated that a further deterioration in economic and credit conditions and future outlook was sufficiently severe, this could result in a further material impairment to the carrying amount of goodwill.

Two key assumptions upon which management has based its determination of the recoverable amount of the Personal Financial Services - North America CGU are the discount rate and the long-term growth rate. The blended discount rate and the blended long-term growth rate used in the impairment testing at 30 June 2008 were 12.9 per cent and 4.0 per cent respectively (31 December 2007: 12.3 per cent and 4.0 per cent respectively). A 50 basis point increase in the discount rate, assuming no effects on other variables, would decrease the recoverable amount of goodwill by US$2 billion. A 50 basis point decrease in the long-term growth rate, assuming no effects on other variables, would decrease the recoverable amount of goodwill by US$1.1 billion. 

21    Litigation

HSBC is party to legal actions in a number of jurisdictions including the UK, Hong Kong and the US, arising out of its normal business operations. HSBC considers that none of the actions is material, and none is expected to result in a significant adverse effect on the financial position of HSBC, either individually or in the aggregate. Management believes that adequate provisions have been made in respect of such litigation. HSBC has not disclosed any contingent liability associated with these legal actions because it is not practicable to do so, except as set out below. 

On 27 July 2007, the UK Office of Fair Trading issued High Court legal proceedings against a number of UK financial institutions, including HSBC Bank plc, to determine the legal status and enforceability of certain of the charges applied to their personal customers in relation to unauthorised overdrafts (the 'charges'). 

Certain preliminary issues in these proceedings were heard in a trial in the Commercial Division of the High Court on 17th January 2008 and judgment was given on 24 April 2008. This confirmed that HSBC Bank plc's current charges are capable of being tested for fairness but are not capable of being penalties. HSBC Bank plc is appealing the finding that the charges are capable of being tested for fairness. A further hearing took place on 7 to 9 July 2008, at which the Court considered certain further preliminary issues relating to HSBC Bank plc's historic charges. Judgment on such preliminary issues is awaited.

The proceedings remain at an early stage and may, allowing for appeals on the preliminary issues (and/or subsequently on substantive issues), take a number of years to conclude. A wide range of outcomes is possible, depending, initially, upon the outcome of the preliminary issues in the Commercial Division and/or Court of Appeal and, to the extent applicable, upon the Court's subsequent assessment of each charge across the period under review. Since July 2001, there have been a variety of charges applied by HSBC Bank plc across different charging periods under the then existing contractual arrangements. HSBC Bank plc considers the charges to be and to have been valid and enforceable, and intends strongly to defend its position. 

If, contrary to HSBC Bank plc's current assessment, the Court should ultimately (after appeals) reach a decision adverse to HSBC Bank plc that results in a liability for it, a large number of different outcomes is possible, each of which would have a different financial impact. Based on the facts currently available, and a number of assumptions, HSBC Bank plc estimates that the financial impact could be approximately US$700 million. To make an estimate of the potential financial impact at this stage with any precision is extremely difficult, owing to (among other things) the complexity of the issues, the number of permutations of possible outcomes, and the early stage of the proceedings. In addition, the assumptions made by HSBC Bank plc may prove to be incorrect.

22    Events after the balance sheet date

Korea Exchange Bank

On 3 September, HSBC announced that its indirect, wholly-owned subsidiary, HSBC Asia Pacific Holdings (UK) Limited ('HSBC Asia') had entered into a conditional agreement to acquire 51.02 per cent of the issued share capital of Korea Exchange Bank ('KEB') from LSF-KEB Holdings SCA ('Lone Star'). The acquisition agreement provides that the acquisition is subject to a number of conditions, including the receipt of applicable governmental and regulatory approvals, in particular approval from Korea's Financial Services Commission ('FSC Approval').

On 29 April 2008, HSBC Asia and Lone Star agreed to extend the deadline for completion of this transaction (the 'Long-stop Date') from 30 April 2008 to 31 July 2008. The parties also agreed that if FSC Approval is obtained during the currency of the acquisition agreement, the Long-stop Date will automatically be re-fixed as the date which is two months after the date of the FSC Approval. The acquisition agreement provides that either HSBC Asia or Lone Star may terminate the acquisition agreement if completion has not occurred on or before the Long-stop Date.

The regulatory filing in respect of the proposed acquisition was submitted to the Korean Financial Services Commission in December 2007 but, as at 1 August 2008, FSC Approval had not been granted. Accordingly, from 31 July 2008, the existing acquisition agreement may be terminated at any time by either party up until such time as FSC Approval is granted.

At the date of these financial statements, HSBC Asia had not terminated the acquisition agreement nor had it received a notice of termination from Lone Star. HSBC Asia and Lone Star are discussing how this transaction may be taken forward. 

Other events after the balance sheet date

On 2 July 2008, HSBC completed the sale of seven regional banks to Banque Fédérale des Banques Populaires for €2.1 billion (US$3.2 billion). At 30 June 2008, the aggregate third party total assets attributable to the French regional banking subsidiaries were €6,741 million (US$10,636 million), and they generated net profits after tax of €62 million (US$95 million) for the six months ended 30 June 2008. The Group's pre-tax profit on sale was US$2.1 billion. 

In July 2008, HSBC decided to cease originating new business in the North American vehicle finance business of HSBC Finance and place the business in run-off. Total assets attributable to the HSBC Finance vehicle finance business at 30 June 2008 amounted to US$12.5 billion and, in the six months ended 30 June 2008, the business made profit before tax of US$27 million (year ended 31 December 2007:US$229 million). HSBC management estimate that some 80 per cent of the portfolio will be run off in the normal course of business in the next three years, with the remaining balance reducing thereafter.

23    Interim Report 2008 and statutory accounts

The information in this Interim Report 2008 is unaudited and does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985 ('the Act'). The Interim Report 2008 was approved by the Board of Directors on 4 August 2008. The statutory accounts for the year ended 31 December 2007 have been delivered to the Registrar of Companies in England and Wales in accordance with section 242 of the Act. The auditor has reported on those accounts. Its report was (i) unqualified, (ii) did not include reference to any matters which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237(2) or (3) of the Act.

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; 

• the Interim Management Report includes a fair review of the information required by: 

(a)     DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of     the financial year ending 31 December 2008 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and 

(b)     DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related parties transactions that have taken place in the first six months of the     financial year ending 31 December 2008 and that have materially affected the financial position or performance of HSBC during that period; and any changes in the related parties transactions described in the Annual Report 2007 that could do so. 

S K Green (Group Chairman), M F Geoghegan (Group Chief Executive), S A Catz†, V H C Cheng (Chairman of The Hongkong and Shanghai Banking Corporation Limited), J D Coombe†, J L Durán†, R A Fairhead†, D J Flint (Group Finance Director), A A Flockhart (Chief Executive Officer of The Hongkong and Shanghai Banking Corporation Limited and Global Head of Commercial Banking), W K L Fung*, S T Gulliver (Head of Global Banking and Markets and HSBC Global Asset Management), J W J Hughes-Hallett†, W S H Laidlaw†, Sir Mark Moody-Stuart†, G Morgan†, N R N Murthy†, S W Newton†, S M Robertson† and Sir Brian Williamson†.

* Non-executive Director

† Independent non-executive Director

4 August 2008

Introduction

We have been engaged by HSBC Holdings plc ('the Company') to review the financial information for the six months ended 30 June 2008 set out on pages 207 to 236 which comprises the consolidated income statement, consolidated balance sheet, consolidated statement of recognised income and expense, consolidated cash flow statement and related notes. We have read the other information contained in the Interim Report 2008 and considered whether it contains any apparent misstatements or material inconsistencies with the information in the financial information.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Services Authority ('the UK FSA'). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The Interim Report 2008 is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Report 2008 in accordance with the DTR of the UK FSA. As disclosed in note 1, the annual financial statements of the Company are prepared in accordance with IFRSs as adopted by the EU. The financial information included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the financial information in the Interim Report 2008 based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the financial information in the Interim Report 2008 for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA. 

KPMG Audit Plc

Chartered Accountants

London    4 August 2008

 

END

 

 

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