Annual Financial Report - 33 of 41

RNS Number : 8705D

HSBC Holdings PLC

30 March 2011

3 Net income/(expense) from financial instruments designated at fair value

Net income/(expense) from financial instruments designated at fair value includes:

· all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value, including liabilities under investment contracts;

· all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities designated at fair value; and

· interest income, interest expense and dividend income in respect of:

- financial assets and liabilities designated at fair value; and

- derivatives managed in conjunction with the above,

except for interest arising from HSBC's issued debt securities and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'.

Net income/(expense) from financial instruments designated at fair value

HSBC

	2010	2009	2008
	US$m	US$m	US$m
Net income/(expense) arising on:
- financial assets held to meet liabilities under insurance and investment contracts ..............................................................................................	2,349	3,793	(5,064)
- other financial assets designated at fair value ............................................	230	2	1,738
- derivatives managed in conjunction with other financial assets designated at fair value ..........................................................................	(149)	(249)	77

	2,430	3,546	(3,249)

- liabilities to customers under investment contracts ...................................	(946)	(1,329)	1,751
- HSBC's long-term debt issued and related derivatives ................................	(258)	(6,247)	6,679
- changes in own credit spread on long-term debt ....................................	(63)	(6,533)	6,570
- derivatives managed in conjunction with HSBC's issued debt securities ..	(275)	(1,726)	4,413
- other changes in fair value ....................................................................	80	2,012	(4,304)
- other financial liabilities designated at fair value .......................................	(18)	492	(1,368)
- derivatives managed in conjunction with other financial liabilities designated at fair value ..........................................................................	12	7	39

	(1,210)	(7,077)	7,101

	1,220	(3,531)	3,852

HSBC Holdings

	2010	2009	2008
	US$m	US$m	US$m
Net income/(expense) arising on HSBC Holdings long-term debt issued and related derivatives
- changes in own credit spread on long-term debt ....................................	248	(2,612)	2,262
- derivatives managed in conjunction with HSBC Holdings issued debt securities .......................................................................................	(482)	(352)	688
- other changes in fair value ....................................................................	373	201	37

	139	(2,763)	2,987

4 Net earned insurance premiums

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2010
Gross earned premiums .........................................	1,275	5,427	1,956	2,951	11,609
- gross written premiums ..................................	1,192	5,357	1,956	2,951	11,456
- movement in unearned premiums ..................	83	70	-	-	153

Reinsurers' share of gross earned premiums ..........	(160)	(289)	(14)	-	(463)
- gross written premiums ceded to reinsurers ....	(172)	(266)	(8)	-	(446)
- reinsurers' share of movement in unearned premiums ......................................................	12	(23)	(6)	-	(17)


	1,115	5,138	1,942	2,951	11,146

2009
Gross earned premiums .........................................	1,572	5,218	1,427	2,774	10,991
- gross written premiums ..................................	1,339	5,285	1,427	2,774	10,825
- movement in unearned premiums ..................	233	(67)	-	-	166

Reinsurers' share of gross earned premiums ..........	(225)	(278)	(17)	-	(520)
- gross written premiums ceded to reinsurers ....	(215)	(280)	(11)	-	(506)
- reinsurers' share of movement in unearned premiums ......................................................	(10)	2	(6)	-	(14)


	1,347	4,940	1,410	2,774	10,471

2008
Gross earned premiums .........................................	1,834	6,086	1,825	2,802	12,547
- gross written premiums ..................................	1,776	6,257	1,825	2,802	12,660
- movement in unearned premiums ..................	58	(171)	-	-	(113)

Reinsurers' share of gross earned premiums ..........	(263)	(851)	(583)	-	(1,697)
- gross written premiums ceded to reinsurers ....	(260)	(878)	(564)	-	(1,702)
- reinsurers' share of movement in unearned premiums ......................................................	(3)	27	(19)	-	5


	1,571	5,235	1,242	2,802	10,850

1 Discretionary participation features.

5 Net insurance claims incurred and movement in liabilities to policyholders

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2010
Gross claims incurred and movement in liabilities .	625	5,108	2,520	3,716	11,969
- claims, benefits and surrenders paid ................	815	1,355	507	2,023	4,700
- movement in liabilities ..................................	(190)	3,753	2,013	1,693	7,269

Reinsurers' share of claims incurred and movement in liabilities ....................................	(100)	(201)	99	-	(202)
- claims, benefits and surrenders paid ................	(114)	(143)	(45)	-	(302)
- movement in liabilities ..................................	14	(58)	144	-	100


	525	4,907	2,619	3,716	11,767

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2009
Gross claims incurred and movement in liabilities .	1,281	4,669	2,676	3,934	12,560
- claims, benefits and surrenders paid ................	987	2,098	325	1,818	5,228
- movement in liabilities ..................................	294	2,571	2,351	2,116	7,332

Reinsurers' share of claims incurred and movement in liabilities ....................................	(158)	(98)	146	-	(110)
- claims, benefits and surrenders paid ................	(156)	(159)	(21)	-	(336)
- movement in liabilities ..................................	(2)	61	167	-	226


	1,123	4,571	2,822	3,934	12,450

2008
Gross claims incurred and movement in liabilities .	1,044	5,480	939	1,743	9,206
- claims, benefits and surrenders paid ................	1,044	1,491	481	1,911	4,927
- movement in liabilities ..................................	-	3,989	458	(168)	4,279

Reinsurers' share of claims incurred and movement in liabilities ....................................	(83)	(792)	(1,442)	-	(2,317)
- claims, benefits and surrenders paid ................	(158)	(172)	(44)	-	(374)
- movement in liabilities ..................................	75	(620)	(1,398)	-	(1,943)


	961	4,688	(503)	1,743	6,889

1 Discretionary participation features.

6 Net operating income

Net operating income is stated after the following items of income, expense, gains and losses:

	2010	2009	2008
	US$m	US$m	US$m
Income
Interest recognised on impaired financial assets ............................................	516	941	1,040
Fees earned on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ............................................................	11,445	12,310	14,511
Fees earned on trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ...............................................	3,074	2,735	3,314
Income from listed investments ...................................................................	7,418	9,201	11,425
Income from unlisted investments ................................................................	7,187	7,085	11,359
Losses from the fraud at Bernard L Madoff Investment Securities LLC (within net trading income) ......................................................................	-	(72)	(984)
Gain arising from dilution of interests in associates .......................................	188	-	-

Expense
Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value .................................................	(17,549)	(19,737)	(45,525)
Fees payable on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ............................................................	(1,529)	(1,580)	(1,866)
Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ............................	(151)	(116)	(159)

Gains/(losses)
Gain on disposal or settlement of loans and advances ...................................	121	244	94
Impairment of available-for-sale equity securities .........................................	(105)	(358)	(1,042)
Gains on disposal of property, plant and equipment, intangible assets and non-financial investments ........................................................................	639	457	465
Gain on sale/repurchase of properties ...........................................................	250	576	416

Loan impairment charges and other credit risk provisions ................	(14,039)	(26,488)	(24,937)
Net impairment charge on loans and advances ..........................................	(13,548)	(24,942)	(24,131)
Impairment of available-for-sale debt securities ........................................	(472)	(1,474)	(737)
Impairment in respect of other credit risk provisions ...............................	(19)	(72)	(69)

7 Employee compensation and benefits

	2010	2009	2008
	US$m	US$m	US$m

Wages and salaries ........................................................................................	17,193	16,268	18,169
Social security costs ......................................................................................	1,567	1,512	1,625
Post-employment benefits ...........................................................................	1,076	688	998

	19,836	18,468	20,792

Average number of persons employed by HSBC during the year

	2010	2009	2008

Europe .........................................................................................................	79,902	84,056	87,864
Hong Kong ...................................................................................................	29,105	28,894	30,030
Rest of Asia-Pacific ......................................................................................	89,737	88,122	87,954
Middle East ..................................................................................................	8,983	8,468	8,201
North America .............................................................................................	36,822	42,202	53,090
Latin America ..............................................................................................	57,778	57,774	64,319

Total ............................................................................................................	302,327	309,516	331,458

Post-employment benefit plans

Income statement charge

	2010	2009	2008
	US$m	US$m	US$m

Defined benefit pension plans .......................................................................	468	161	477
- HSBC Bank (UK) Pension Scheme .........................................................	308	(179)	255
- Other plans ............................................................................................	160	340	222

Defined contribution pension plans ..............................................................	545	492	498

	1,013	653	975
Defined benefit healthcare plans ...................................................................	58	31	13
Defined contribution healthcare plans ..........................................................	5	4	10

	1,076	688	998

Net assets/(liabilities) recognised on balance sheet in respect of defined benefit plans

	2010	2009
	US$m	US$m

Defined benefit pension plans .................................................................................................	(2,867)	(6,147)

HSBC Bank (UK) Pension Scheme ......................................................................................	(622)	(3,822)
- fair value of plan assets ...............................................................................................	22,236	17,701
- present value of defined benefit obligations .................................................................	(22,858)	(21,523)

Other plans .........................................................................................................................	(2,245)	(2,325)
- fair value of plan assets ...............................................................................................	7,559	6,822
- present value of defined benefit obligations .................................................................	(9,785)	(9,109)
- effect of limit on plan surpluses ...................................................................................	(47)	(47)
- unrecognised past service cost .....................................................................................	28	9

Defined benefit healthcare plans ..........................................................................................	(946)	(820)
- fair value of plan assets ...............................................................................................	165	142
- present value of defined benefit obligations .................................................................	(1,087)	(937)
- unrecognised past service cost .....................................................................................	(24)	(25)

Fair value of plan assets ..........................................................................................................	29,960	24,665
Present value of defined benefit obligations .............................................................................	(33,730)	(31,569)
Effect of limit on plan surpluses ..............................................................................................	(47)	(47)
Unrecognised past service cost ................................................................................................	4	(16)

	(3,813)	(6,967)

Retirement benefit liabilities ...................................................................................................	(3,856)	(6,967)
Retirement benefit assets ........................................................................................................	43	-

Cumulative actuarial gains/(losses) recognised in other comprehensive income

	2010	2009
	US$m	US$m

At 1 January ............................................................................................................................	(4,660)	(1,074)

HSBC Bank (UK) Pension Scheme ..........................................................................................	321	(3,692)
Other plans .............................................................................................................................	(275)	179
Healthcare plans ......................................................................................................................	(112)	(36)
Change in the effect of limit on plan surpluses¹ .......................................................................	6	(37)

Total actuarial losses recognised in other comprehensive income ............................................	(60)	(3,586)

At 31 December² .....................................................................................................................	(4,720)	(4,660)

1 Excludes exchange differences of US$6m (2009: US$1m).

2 Includes cumulative movements related to the limit on plan surpluses. This limit is US$47m at 31 December 2010 (2009: US$47m).

HSBC pension plans

	2010	2009	2008

Number of plans worldwide ...........................................................................	218	211	205

	%	%	%
Percentage of HSBC employees:
- enrolled in defined contribution plans .....................................................	63	59	50
- enrolled in defined benefit plans .............................................................	27	29	36

- covered by HSBC pension plans .............................................................	90	88	86

HSBC has been progressively offering all new employees membership of defined contribution plans.

The majority of the Group's defined benefit plans are funded plans. The assets of most of the larger plans are held in trusts or similar funds separate from HSBC. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligations and related current service costs vary according to the economic conditions of the countries in which the plans are situated.

Pension plans in the UK

The largest plan exists in the UK, where the HSBC Bank (UK) Pension Scheme ('the Scheme') covers employees of HSBC Bank plc and certain other employees of HSBC. This comprises a funded defined benefit plan ('the principal plan'), which is closed to new entrants, and a defined contribution plan which was established in July 1996 for new employees.

The latest actuarial valuation of the principal plan was made as at 31 December 2008 by C G Singer, Fellow of the Institute of Actuaries, of Towers Watson Limited. At that date, the market value of the HSBC Bank (UK) Pension Scheme's assets was £10.6bn (US$15.5bn) (including assets relating to the defined benefit plan, the defined contribution plan and additional voluntary contributions). The market value of the plan assets represented 77% of the amount expected to be required, on the basis of the assumptions adopted, to provide the benefits accrued to members after allowing for expected future increases in earnings, and the resulting deficit amounted to £3.2bn (US$4.7bn). The method adopted for this investigation was the projected unit method.

The expected cash flows from the principal plan were projected by reference to the Retail Price Index ('RPI') swap break-even curve at 31 December 2008. Salary increases were assumed to be 0.5% per annum above RPI and inflationary pension increases, subject to a minimum of zero per cent and a maximum of 5% (maximum of 3% per annum in respect of service accrued since 1 July 2009), were assumed to be in line with RPI. The projected cash flows were discounted at the LIBOR swap curve at 31 December 2008 plus a margin for the expected return on the investment strategy of 190 basis points per annum. The mortality experience of the principal plan's pensioners over the three year period since the previous valuation was analysed and, on the basis of this analysis, the mortality assumptions were set based on the SAPS S1 series of tables which best fit the pensioner experience. Allowance was made for future improvements to mortality rates in line with the medium cohort projections with a minimum improvement rate set at 1.75% for males and 1.25% for females. The benefits payable from the defined benefit plan are expected to be as shown in the chart below.

Benefit payments (US$m)

The expected cash flows of the principal plan were projected by reference to the RPI swap curve in calculating the liability recognised. The Occupational Pensions (Revaluation) Order 2010 confirmed the UK Government's intention to move to using the Consumer Prices Index ('CPI') rather than RPI as the inflation measure for determining the minimum pension increases to be applied to the statutory index-linked features of retirement benefits. Historical annual CPI increases have generally been lower than annual RPI increases. The rules of the principal plan prescribe that annual increases will be in line with RPI for pensions in payment and statutory index-linked prior to retirement for deferred pensions. In respect of deferred pensioners, consistent with communications to scheme members, HSBC continued to use RPI in calculating the liability recognised as at 31 December 2010. Using CPI to value the schemes liabilities in respect of deferred pensioners would result in a reduction in the principal plan's liabilities of approximately US$400m based on the financial and demographic assumptions as at 31 December 2010.

As part of the 31 December 2008 valuation, calculations were also carried out as to the amount of assets that might be needed to meet the liabilities if the Scheme was discontinued and the members' benefits bought out with an insurance company (although in practice this may not be possible for a plan of this size) or the Trustee continued to run the plan without the support of HSBC. The amount required under this approach is estimated to be £19.8bn (US$28.9bn) as at 31 December 2008. In arriving at this estimation, a more prudent assumption about future mortality was made than for the assessment of the ongoing position and it was assumed that the Trustee would alter the investment strategy to be an appropriately matched portfolio of UK government bonds. An explicit allowance for expenses was also included.

Information on the investment strategy of the principal plan can be found on page 172.

In February 2010, HSBC Bank plc agreed with the Trustee of the Scheme to reduce the deficit of the plan by meeting a schedule of future funding payments. On 17 June 2010, HSBC Bank plc agreed with the Trustee to accelerate the reduction of the deficit of the plan with a special contribution of £1,760m (US$2,638m) in 2010 followed by a revised payment schedule in the following years, as shown below:

Additional future funding payments to the principal plan

	Original plan	Original plan	Revised plan	Revised plan
	US$m¹	£m	US$m¹	£m

2011 .....................................................	-	-	-	-
2012 .....................................................	722	465	-	-
2013 .....................................................	722	465	-	-
2014 .....................................................	722	465	-	-
2015 .....................................................	978	630	-	-
2016 .....................................................	978	630	768	495
2017 .....................................................	978	630	978	630
2018 .....................................................	978	630	978	630

1 The payment schedule was agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the exchange rate effective as at 31 December 2010.

HSBC considers that the contributions set out above, together with investment returns at an expected level of 240 basis points above the LIBOR swap curve, would be sufficient to meet the deficit as at 31 December 2008 over the agreed period. At each subsequent actuarial valuation, HSBC has agreed with the Trustee that any shortfall in investment returns relative to this expected level, subject to a maximum of 50 basis points per annum, will be eliminated by payment of equal cash instalments over the remaining years to the end of this recovery plan period.

HSBC Bank plc also agreed to make ongoing contributions to the principal plan in respect of the accrual of benefits of defined benefit section members at the rate of 34% of pensionable salaries (less member contributions) payable from 1 April 2010 until the completion of the next actuarial valuation, due as at 31 December 2011. During 2009, HSBC paid contributions at the rate of 38% of pensionable salaries (less member contributions) and continued contributions at this rate until 31 March 2010.

On 1 July 2009, changes to the design of the defined benefit section of the principal plan were made. This included the introduction of employee contributions, optionality concerning future benefit accrual and, with effect from 1 April 2010, an increased normal retirement age of 65 years. In addition, enhancements to the defined contribution section were also introduced.

Pension plans in Hong Kong

In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The Hongkong and Shanghai Banking Corporation and certain other employees of HSBC. The scheme comprises a funded defined benefit scheme (which provides a lump sum on retirement but is now closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees. The latest actuarial valuation of the defined benefit scheme was made at 31 December 2009, and was performed by Estella Chiu, fellow of the Society of Actuaries of the United States of America, of HSBC Insurance (Asia) Limited, a subsidiary of HSBC Holdings. At that valuation date, the market value of the defined benefit scheme's assets was US$1,088m. On an ongoing basis, the actuarial value of the scheme's assets represented 105% of the actuarial present value of the benefits accrued to members, after allowing for expected future increases in salaries, and the resulting surplus amounted to US$71m. On a wind-up basis, the scheme's assets represented 107% of the members' vested benefits, based on current salaries, and the resulting surplus amounted to US$89m. The attained age method has been adopted for the valuation and the major assumptions used in this valuation were a discount rate of 6% per annum and long-term salary increases of 5% per annum.

Pension plans in North America

The HSBC North America (US) Retirement Income Plan covers all employees of HSBC Bank USA, HSBC Finance and other HSBC entities in the US who have reached the age of 21 and met the one year of service participation requirement. The Retirement Income Plan is a funded defined benefit plan which provides final average pay benefits to legacy participants and cash balance benefits to all other participants. All new employees participate in the cash balance section of the plan. In November 2009, the Board of Directors of HSBC North America Holdings, Inc. ('HNAH') approved actions to cease all future benefit accruals for legacy participants under the final average pay formula components of the HSBC North America Retirement Income Plan with effect from 1 January 2011. Affected employees were informed of this decision in February 2010. As a result of these changes, HNAH recorded a one-time curtailment gain of US$144m.

The most recent actuarial valuation of the plan to determine compliance with US statutory funding requirements was made at 1 January 2010 by Jennifer Jakubowski, Fellow of the Society of Actuaries, Enrolled Actuary, member of the American Academy of Actuaries, of Mercer. At that date, the market value of the plan's assets was US$2,321m. The assets represented 85% of the benefits accrued to members as valued under the provisions of the Pension Protection Act of 2006 that was effective for the plan year beginning 1 January 2008. The resulting deficit amounted to US$400m. The method employed for this valuation was the traditional unit credit method and the discount rate was determined using a segment rate method as selected by HSBC under the relevant regulations, which resulted in an effective interest rate of 6.64% per annum.

These determinations described above for actuarial funding valuation purposes are based on different methods and assumptions than those used for financial reporting purposes, and as a result should neither be compared nor related to other determinations included in these financial statements.

The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and the HSBC North America (US) Retirement Income Plan cover 34% of HSBC's employees and represent 82% of the Group's present value of defined benefit obligations.

HSBC healthcare benefits plans

HSBC also provides post-employment healthcare benefits under plans in the UK, the US, Bermuda, Canada, Mexico and Brazil, the majority of which are unfunded. The majority of post-employment healthcare benefits plans are defined benefit plans and are accounted for in the same manner as defined benefit pension plans. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligation and related current service cost vary according to the economic conditions of the countries in which they are situated.

Defined benefit pension plans

Net liability under defined benefit pension plans

	HSBC Bank (UK) Pension Scheme		Other plans
	2010	2009	2010	2009
	US$m	US$m	US$m	US$m

Fair value of plan assets
At 1 January ......................................................................	17,701	14,865	6,822	6,024
Expected return on plan assets ...........................................	1,092	959	437	381
Contributions by HSBC ......................................................	2,890	367	422	596
- normal ........................................................................	252	367	194	178
- special .........................................................................	2,638	-	228	418

Contributions by employees ...............................................	23	5	17	17
Experience gains ................................................................	1,772	871	394	65
Benefits paid ......................................................................	(744)	(884)	(440)	(522)
Transfers ...........................................................................	136	-	(136)	-
Assets distributed on curtailments .......................................	-	-	(7)	(5)
Assets distributed on settlements ........................................	-	-	(10)	(6)
Exchange differences .........................................................	(634)	1,518	60	272

At 31 December .................................................................	22,236	17,701	7,559	6,822

Present value of defined benefit obligations
At 1 January ......................................................................	(21,523)	(15,257)	(9,109)	(8,787)
Current service cost ...........................................................	(252)	(260)	(300)	(334)
Interest cost .......................................................................	(1,148)	(1,019)	(438)	(397)
Contributions by employees ...............................................	(23)	(5)	(17)	(17)
Actuarial (losses)/gains .......................................................	(1,451)	(4,563)	(669)	114
Benefits paid ......................................................................	744	884	518	608
Past service cost - vested immediately ...............................	-	-	(11)	(20)
Past service cost - unvested benefits ..................................	-	-	(20)	-
Business combinations ........................................................	-	-	-	(4)
Transfers ...........................................................................	(136)	-	136	-
Reduction in liabilities resulting from curtailments .............	-	-	158	41
Liabilities extinguished on settlements ...............................	-	499	12	1
Exchange differences .........................................................	931	(1,802)	(45)	(314)

At 31 December .................................................................	(22,858)	(21,523)	(9,785)	(9,109)
Funded ............................................................................	(22,858)	(21,523)	(9,241)	(8,588)
Unfunded ........................................................................	-	-	(544)	(521)

Effect of limit on plan surpluses .........................................	-	-	(47)	(47)
Unrecognised past service cost ...........................................	-	-	28	9

Net liability ........................................................................	(622)	(3,822)	(2,245)	(2,325)

Retirement benefit liabilities recognised in the balance sheet ...........................................................................................	(622)	(3,822)	(2,288)	(2,325)
Retirement benefit assets recognised in the balance sheet (within 'Other assets') ....................................................	-	-	43	-

Plan assets of the Group's pension schemes included US$57m (2009: US$62m) of equities and US$1m (2009: US$2m) of bonds issued by HSBC and US$1,592m (2009: US$1,925m) of other assets placed or transacted with HSBC. The fair value of plan assets included derivatives entered into with HSBC Bank plc by the HSBC Bank (UK) Pension Scheme with a positive fair value of US$2,173m at 31 December 2010 (2009: US$1,049m positive fair value) and US$77m positive fair value (2009: US$27m positive fair value) in respect of the HSBC International Staff Retirement Benefits Scheme. Further details of these swap arrangements are included in Note 45.

On 17 June 2010, HSBC Bank plc made a £1,760m (US$2,638m) special contribution to accelerate the reduction of the deficit of the HSBC Bank (UK) Pension Scheme. On the same day the Scheme used the contribution to acquire debt securities with a fair value of £1,760m (US$2,638m) from HSBC in a transaction at an arm's length value determined by the Scheme's independent third-party advisors. The debt securities sold comprised supranational, agency and government-guaranteed securities, asset-backed securities, corporate subordinated debt and auction rate securities. The contribution together with net actuarial gains of US$321m helped achieve a reduction in the net liability of the scheme from US$3,822m at 31 December 2009 to US$622m at 31 December 2010.

The special contributions of US$228m to other plans include an additional contribution of US$187m to the HSBC North America (US) Retirement Income Plan which was made to maintain a minimum funding level.

The actual return on plan assets for the year ended 31 December 2010 was a positive return of US$3,695m (2009: positive US$2,276m).

HSBC expects to make US$880m of contributions to defined benefit pension plans during 2011. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

Benefits expected to be paid from plans

	2011	2012	2013	2014	2015	2016-2020
	US$m	US$m	US$m	US$m	US$m	US$m

HSBC Bank (UK) Pension Scheme ..................................................	716	745	790	835	903	5,665
Other significant plans .................	502	506	528	568	579	3,639

Total (income)/expense recognised in the income statement in 'Employee compensation and benefits'

	HSBC Bank (UK) Pension Scheme			Other plans
	2010	2009	2008	2010	2009	2008
	US$m	US$m	US$m	US$m	US$m	US$m

Current service cost ......................	252	260	387	300	334	357
Interest cost .................................	1,148	1,019	1,227	438	397	466
Expected return on plan assets .....	(1,092)	(959)	(1,359)	(437)	(381)	(549)
Past service cost ...........................	-	-	-	12	21	9
Gains on curtailments ...................	-	-	-	(151)	(36)	(20)
(Gains)/losses on settlements ........	-	(499)	-	(2)	5	(41)

Total (income)/expense ...............	308	(179)	255	160	340	222

The US$499m settlement gain in 2009 relates to an accounting benefit following a restructuring of the basis of delivery of death in service and ill health early retirement benefits to certain UK employees.

Summary

	HSBC Bank (UK) Pension Scheme
	2010	2009	2008	2007	2006
	US$m	US$m	US$m	US$m	US$m

Defined benefit obligation ....................................	(22,858)	(21,523)	(15,257)	(23,512)	(24,332)
Fair value of plan assets .......................................	22,236	17,701	14,865	22,704	20,587

Net deficit ............................................................	(622)	(3,822)	(392)	(808)	(3,745)

Experience gains/(losses) on plan liabilities ..........	(327)	(234)	(49)	(64)	540
Experience gains/(losses) on plan assets ...............	1,772	871	(2,861)	29	-
Gains/(losses) from changes in actuarial assumptions ......................................................	(1,124)	(4,329)	3,081	2,459	(570)

Total net actuarial gains/(losses) ..........................	321	(3,692)	171	2,424	(30)

Summary (continued)

	Other plans
	2010	2009	2008	2007	2006
	US$m	US$m	US$m	US$m	US$m

Defined benefit obligation ....................................	(9,785)	(9,109)	(8,787)	(8,873)	(7,916)
Fair value of plan assets .......................................	7,559	6,822	6,024	7,768	7,116

Net deficit ............................................................	(2,226)	(2,287)	(2,763)	(1,105)	(800)

Experience gains/(losses) on plan liabilities ..........	(73)	20	(52)	(354)	(167)
Experience gains/(losses) on plan assets ...............	394	65	(1,452)	157	203
Gains/(losses) from changes in actuarial assumptions ......................................................	(596)	94	(306)	(121)	(44)

Total net actuarial gains/(losses) ..........................	(275)	179	(1,810)	(318)	(8)

Defined benefit healthcare plans

Net liability under defined benefit healthcare plans

	2010	2009
	US$m	US$m
Fair value of plan assets
At 1 January ...........................................................................................................................	142	128
Expected return on plan assets ................................................................................................	13	11
Contributions by HSBC ...........................................................................................................	9	11
Experience gains .....................................................................................................................	6	8
Benefits paid ...........................................................................................................................	(12)	(4)
Assets distributed on settlements .............................................................................................	(2)	(4)
Exchange differences ..............................................................................................................	9	(8)

At 31 December ......................................................................................................................	165	142

Present value of defined benefit obligations
At 1 January ...........................................................................................................................	(937)	(839)
Current service cost ................................................................................................................	(12)	(11)
Interest cost ............................................................................................................................	(60)	(55)
Contributions by employees ....................................................................................................	(1)	(2)
Actuarial losses .......................................................................................................................	(118)	(44)
Benefits paid ...........................................................................................................................	52	43
Reduction in liabilities resulting from curtailments ..................................................................	-	22
Liabilities extinguished on settlements ....................................................................................	2	4
Exchange differences ..............................................................................................................	(13)	(55)

At 31 December ......................................................................................................................	(1,087)	(937)
Funded .................................................................................................................................	(197)	(148)
Unfunded .............................................................................................................................	(890)	(789)

Unrecognised past service cost ................................................................................................	(24)	(25)

At 31 December ......................................................................................................................	(946)	(820)

The actual return on plan assets for the year ended 31 December 2010 was a positive return of US$19m (2009: positive US$19m).

HSBC expects to make US$61m of contributions to post-employment healthcare benefit plans during 2011. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

Benefits expected to be paid from plans

	2011	2012	2013	2014	2015	2016-2020
	US$m	US$m	US$m	US$m	US$m	US$m

Significant plans ...........................	57	58	60	62	64	334

Total expense recognised in the income statement in 'Employee compensation and benefits'

	2010	2009	2008
	US$m	US$m	US$m

Current service cost ......................................................................................	12	11	19
Interest cost .................................................................................................	60	55	65
Expected return on plan assets .....................................................................	(13)	(11)	(12)
Past service cost ...........................................................................................	(1)	(2)	(2)
Gains on curtailments ...................................................................................	-	(22)	(31)
Gains on settlements ....................................................................................	-	-	(26)

Total expense ..............................................................................................	58	31	13

Summary

	2010	2009	2008	2007	2006
	US$m	US$m	US$m	US$m	US$m

Defined benefit obligation ....................................	(1,087)	(937)	(839)	(1,038)	(1,106)
Fair value of plan assets .......................................	165	142	128	146	133

Net deficit ............................................................	(922)	(795)	(711)	(892)	(973)

Experience gains/(losses) on plan liabilities ..........	(27)	13	(34)	15	(12)
Experience gains/(losses) on plan assets ...............	6	8	(14)	(6)	(1)
Gains/(losses) from changes in actuarial assumptions .........................................................................	(91)	(57)	32	94	(25)

Total net actuarial gains/(losses) ..........................	(112)	(36)	(16)	103	(38)

Post-employment defined benefit plans' principal actuarial financial assumptions

The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December for each period, and used as the basis for measuring periodic costs under the plans in the following periods, were as follows.

Principal actuarial assumptions

					Healthcare cost trend
	Discount rate	Inflation rate	Rate of increase for pensions¹	Rate of pay increase	Initial rate	Ultimate rate	Year of ultimate rate
	%	%	%	%	%	%
At 31 December 2010
UK² .......................................	5.40	3.70	3.50	4.20	7.70	7.70	n/a
Hong Kong ............................	2.85	n/a	n/a	5.00	n/a	n/a	n/a
US ..........................................	5.41	2.50	n/a	2.75	7.20	4.50	2027
Jersey .....................................	5.40	3.70	3.70	5.45	n/a	n/a	n/a
Mexico ..................................	7.50	3.50	3.50	4.50	6.75	6.75	n/a
Brazil .....................................	10.51	4.50	4.50	5.50	10.00	5.50	2020
France ....................................	4.75	2.00	2.00	3.00	n/a	n/a	n/a
Canada ...................................	5.45	2.50	n/a	3.72	8.00	5.00	2015
Switzerland .............................	2.60	1.50	n/a	2.50	n/a	n/a	n/a
Germany ................................	5.00	2.00	2.00	3.00	n/a	n/a	n/a

At 31 December 2009
UK² .......................................	5.70	3.70	3.50	4.20	7.70	7.70	n/a
Hong Kong ............................	2.58	n/a	n/a	5.00	n/a	n/a	n/a
US ..........................................	5.92	2.50	n/a	3.50	7.40	4.50	2027
Jersey .....................................	5.70	3.70	3.70	5.45	n/a	n/a	n/a
Mexico ..................................	8.50	3.50	3.50	4.50	6.75	6.75	n/a
Brazil .....................................	11.25	4.50	4.50	5.50	10.00	5.50	2019
France ....................................	5.50	2.00	2.00	3.00	n/a	n/a	n/a
Canada ...................................	6.25	2.50	n/a	3.72	8.00	5.00	2015
Switzerland .............................	3.25	1.50	n/a	2.50	n/a	n/a	n/a
Germany ................................	5.50	2.00	2.00	3.00	n/a	n/a	n/a

Principal actuarial assumptions (continued)

					Healthcare cost trend
	Discount rate	Inflation rate	Rate of increase for pensions¹	Rate of pay increase	Initial rate	Ultimate rate	Year of ultimate rate
	%	%	%	%	%	%
At 31 December 2008
UK² .......................................	6.50	2.90	3.00	3.40	6.90	6.90	n/a
Hong Kong ............................	1.19	n/a	n/a	5.00	n/a	n/a	n/a
US ..........................................	6.05	2.50	n/a	3.50	8.90	5.00	2018
Jersey .....................................	6.50	2.90	2.90	4.65	n/a	n/a	n/a
Mexico ..................................	8.10	3.50	2.00	4.50	6.75	6.75	n/a
Brazil .....................................	10.75	4.50	4.50	5.50	10.00	5.50	2018
France ....................................	5.75	2.00	2.00	3.00	n/a	n/a	n/a
Canada ...................................	7.19	2.50	n/a	3.85	8.20	4.90	2012
Switzerland .............................	2.60	1.50	n/a	2.39	n/a	n/a	n/a
Germany ................................	5.75	2.00	2.00	3.00	n/a	n/a	n/a

1 Rate of increase for pensions in payment and deferred pensions (except for the UK).

2 Rate of increase for pensions in the UK is for pensions in payment only, capped at 5%. Deferred pensions are projected to increase in line with the assumed inflation rate.

HSBC determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA rated or equivalent) debt instruments, with maturities consistent with those of the defined benefit obligations. In countries where there is not a deep market in corporate bonds, government bond yields have been used. The yield curve has been extrapolated where the term of the liabilities is longer than the duration of available bonds and the discount rate used then takes into account the term of the liabilities and the shape of the yield curve. When determining the discount rate with reference to a bond index, an appropriate index for the specific region has been used.

Mortality tables and average life expectancy at age 65

	Mortality table	Life expectancy at age 65 for a male member currently:		Life expectancy at age 65 for a female member currently:
		Aged 65	Aged 45	Aged 65	Aged 45
At 31 December 2010
UK ............................	SAPS MC¹	22.4	24.3	23.4	25.3
Hong Kong⁴ ..............	n/a	n/a	n/a	n/a	n/a
US .............................	RP 2000 fully generational	19.3	20.8	21.2	22.1
Jersey ........................	80% of PNA00²	24.2	26.2	26.6	28.5
Mexico ......................	EMSSA-97 AA generational scale from RP 2000 series	18.6	20.1	21.1	22.0
Brazil ........................	RP 2000 fully generational	19.3	20.8	21.2	22.1
France .......................	TG 05	23.4	26.1	26.8	29.7
Canada ......................	UP94 generational	19.5	21.1	22.0	22.8
Switzerland ................	BVG 2005³	17.9	17.9	21.0	21.0
Germany ...................	Heubeck 2005 G	18.4	21.1	22.5	25.1

At 31 December 2009
UK ............................	SAPS MC¹	22.3	24.2	23.3	25.2
Hong Kong⁴ ..............	n/a	n/a	n/a	n/a	n/a
US .............................	RP 2000 fully generational	19.2	20.7	21.2	22.1
Jersey ........................	80% of PNA00²	24.1	26.1	26.5	28.4
Mexico ......................	EMSSA-97 AA generational scale from RP 2000 series	18.5	20.1	21.1	22.0
Brazil ........................	RP 2000 fully generational	19.2	20.7	21.2	22.1
France .......................	TG 05	23.2	26.0	26.7	29.6
Canada ......................	UP94 generational	19.5	21.1	22.0	22.8
Switzerland ................	BVG 2005³	17.9	17.9	21.0	21.0
Germany ...................	Heubeck 2005 G	18.3	21.0	22.4	25.0

1 SAPS MC projections with 1% minimum improvement beyond 2002. Light table with 1.08 rating for male and standard table with 1.06 rating for female.

2 PNA00 year of birth and medium cohort with 1% minimum improvement thereafter.

3 Additional 8.5% liability loading for future mortality improvements.

4 The significant plans in Hong Kong are lump sum plans which do not use a post-retirement mortality table.

Expected rates of return

	2010		2009
	Expected rates of return¹	Value	Expected rates of return¹	Value
	%	US$m	%	US$m
HSBC Bank (UK) Pension Scheme
Fair value of plan assets .....................................................		22,236		17,701
Equities ..........................................................................	8.4	3,415	8.4	2,770
Bonds .............................................................................	5.3	15,638	5.3	12,597
Property ........................................................................	7.6	1,438	7.7	1,502
Other .............................................................................	4.0	1,745	5.3	832


Other plans
Fair value of plan assets .....................................................		7,559		6,822
Equities ..........................................................................	8.2	2,617	8.2	2,302
Bonds .............................................................................	5.0	4,073	5.0	3,809
Property ........................................................................	6.1	98	6.4	55
Other .............................................................................	6.2	771	3.5	656

Healthcare plans
Fair value of plan assets .....................................................		165		142
Equities ..........................................................................	12.0	49	12.2	43
Bonds .............................................................................	8.4	81	8.7	72
Other..............................................................................	7.6	35	4.6	27

1 The expected rates of return are used to measure the net defined benefit pension costs in each subsequent year, and weighted on the basis of the fair value of the plan assets.

The expected return on plan assets represents the best estimate of long-term future asset returns, which takes into account historical market returns plus additional factors such as the current rate of inflation and interest rates.

Actuarial assumption sensitivities

The discount rate is sensitive to changes in market conditions arising during the reporting period. The mortality rates used are sensitive to experience from the plan member profile. The following table shows the effect of changes in these and the other key assumptions on the principal defined benefit pension plan:

The effect of changes in key assumptions on the principal plan

	HSBC Bank (UK) Pension Scheme
	2010	2009
	US$m	US$m
Discount rate
Change in pension obligation at year end from a 25bps increase ..........................................	(941)	(879)
Change in pension obligation at year end from a 25bps decrease ..........................................	1,003	946
Change in 2011 pension cost from a 25bps increase ............................................................	(9)	(13)
Change in 2011 pension cost from a 25bps decrease ............................................................	9	13

Rate of inflation
Change in pension obligation at year end from a 25bps increase ..........................................	1,029	964
Change in pension obligation at year end from a 25bps decrease ..........................................	(978)	(907)
Change in 2011 pension cost from a 25bps increase ............................................................	67	65
Change in 2011 pension cost from a 25bps decrease ............................................................	(64)	(63)

Rate of increase for pensions in payment and deferred pensions
Change in pension obligation at year end from a 25bps increase ..........................................	813	800
Change in pension obligation at year end from a 25bps decrease ..........................................	(775)	(766)
Change in 2011 pension cost from a 25bps increase ............................................................	48	50
Change in 2011 pension cost from a 25bps decrease ............................................................	(45)	(49)

Rate of pay increase
Change in pension obligation at year end from a 25bps increase ..........................................	216	195
Change in pension obligation at year end from a 25bps decrease ..........................................	(203)	(174)
Change in 2011 pension cost from a 25bps increase ............................................................	20	18
Change in 2011 pension cost from a 25bps decrease ............................................................	(17)	(16)

Investment return
Change in 2011 pension cost from a 25bps increase ............................................................	(54)	(44)
Change in 2011 pension cost from a 25bps decrease ............................................................	54	44

Mortality
Change in pension obligation from each additional year of longevity assumed .....................	497	487

The effect of changes in the discount rate and in mortality rates on plans other than the principal plan

	Other plans
	2010	2009
	US$m	US$m

Change in defined benefit obligation at year end from a 25bps increase in discount rate .........	(290)	(269)
Change in 2011 pension cost from a 25bps increase in discount rate ......................................	(1)	(3)
Increase in defined benefit obligation from each additional year of longevity assumed ...........	131	120

Effect of one percentage point change in assumed healthcare cost trend rates

	2010		2009
	1% increase	1% decrease	1% increase	1% decrease
	US$m	US$m	US$m	US$m

Increase/(decrease) of the aggregate of the current service cost and interest cost ......................................................	8	(7)	8	(7)
Increase/(decrease) of defined benefit obligation .................	106	(86)	86	(75)

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2010 amounted to US$244m (2009: US$217m). The average number of persons employed by HSBC Holdings during 2010 was 1,015 (2009: 876).

Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme.

Directors' emoluments

The aggregate emoluments of the Directors of HSBC Holdings, computed in accordance with the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 were:

	2010	2009	2008
	US$000	US$000	US$000

Fees ..............................................................................................................	3,597	3,756	2,529
Salaries and other emoluments ......................................................................	12,841	11,835	11,584
Bonuses ........................................................................................................	14,294	-	-
	-
	30,732	15,591	14,113
	-
Gains on the exercise of share options ..........................................................	-	-	23
Vesting of Long-Term Incentive awards .......................................................	8,523	1,579	7,147

In addition, there were payments under retirement benefit agreements with former Directors of US$1,016,089 (2009: US$1,036,385). The provision at 31 December 2010 in respect of unfunded pension obligations to former Directors amounted to US$17,628,508 (2009: US$16,296,028).

During the year, aggregate contributions to pension schemes in respect of Directors were US$1,055,582 (2009: US$788,734). Discretionary bonuses for Directors are based on a combination of individual and corporate performance and are determined by the Remuneration Committee. Details of Directors' remuneration, share options and conditional awards under the Restricted Share Plan 2000 and the HSBC Share Plan are included in the 'Directors' Remuneration Report' on pages 232 and 233.

8 Auditors' remuneration

Auditors' remuneration in relation to the statutory audit amounted to US$51.4m (2009: US$50.7m; 2008: US$54.9m). The following fees were payable by HSBC to the Group's principal auditor, KPMG Audit Plc and its associates (together 'KPMG'):

Fees payable by HSBC to KPMG

	2010	2009	2008
	US$m	US$m	US$m

Audit fees for HSBC Holdings' statutory audit¹ .............................................	2.4	2.3	2.1
-. fees relating to current year ..................................................................	2.4	2.1	2.5
-. fees relating to prior year .....................................................................	-	0.2	(0.4)

Fees payable to KPMG for other services provided to HSBC ........................	75.9	77.1	88.3
Audit-related services:
-. audit of HSBC's subsidiaries, pursuant to legislation² ..........................	46.7	45.9	48.6
-. other services pursuant to legislation³ ...............................................	20.8	24.2	26.5
Tax services⁴ ............................................................................................	2.4	2.6	3.1
Other services:
-. services relating to information technology⁵ .....................................	0.1	0.3	0.6
-. services related to corporate finance transactions⁶ ............................	-	0.1	1.4
-. all other services⁷ ..............................................................................	5.9	4.0	8.1


Total fees payable ........................................................................................	78.3	79.4	90.4

1 Fees payable to KPMG Audit Plc for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They exclude amounts payable for the statutory audit of HSBC Holdings' subsidiaries which have been included in 'Fees payable to KPMG for other services provided to HSBC'.

2 Including fees payable to KPMG for the statutory audit of HSBC's subsidiaries.

3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews.

4 Including tax compliance services and tax advisory services.

5 Including advice on IT security and business continuity and performing agreed-upon IT testing procedures.

6 Including fees payable to KPMG for transaction-related work, including US debt issuances.

7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of financial models.

No fees were payable by HSBC to KPMG for the following types of services: internal audit services, valuation and actuarial services, services related to litigation and services related to recruitment and remuneration.

Fees payable by HSBC's associated pension schemes to KPMG

	2010	2009	2008
	US$000	US$000	US$000

Audit fees .....................................................................................................	384	670	720
Tax services .................................................................................................	-	-	73
All other services .........................................................................................	-	260	-

Total fees payable ........................................................................................	384	930	793

No fees were payable by HSBC's associated pension schemes to KPMG for the following types of services: other services pursuant to legislation, services relating to information technology, internal audit services, valuation and actuarial services, services related to litigation, services related to recruitment and remuneration, and services related to corporate finance transactions.

In addition to the above, KPMG estimate they have been paid fees of US$14.9m (2009: US$8.1m; 2008: US$4.8m) by parties other than HSBC but where HSBC is connected with the contracting party and therefore may be involved in appointing KPMG. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.

Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for HSBC Group.

9 Share-based payments

During 2010, US$813m was charged to the income statement in respect of share-based payment transactions settled in equity (2009: US$683m; 2008: US$819m). This expense, which was computed from the fair values of the share-based payment transactions when contracted, arose under employee share awards made in accordance with HSBC's reward structures.

Calculation of fair values

Fair values of share options/awards, measured at the date of grant of the option/award, are calculated using a Black-Scholes model. When modelling options/awards with vesting dependent on HSBC's Total Shareholder Return ('TSR') over a period, the TSR performance targets are incorporated into the model using Monte Carlo simulation. The expected life of options depends on the behaviour of option holders, which is incorporated into the option model on the basis of historical observable data. The fair values calculated are inherently subjective and uncertain due to the assumptions made and the limitations of the model used.

Significant weighted average assumptions used to estimate the fair value of options granted

	Savings-related share option plans
	1-year plan	3-year plans	5-year plans
2010
Risk-free interest rate¹ (%) ...........................................................................	0.7	1.9	2.9
Expected life² (years) ...................................................................................	1	3	5
Expected volatility³ (%) ...............................................................................	30	30	30
Share price at grant date (£) .........................................................................	6.82	6.82	6.82

2009
Risk-free interest rate¹ (%) ...........................................................................	0.7	2.1	2.4
Expected life² (years) ...................................................................................	1	3	5
Expected volatility³ (%) ...............................................................................	50	35	30
Share price at grant date (£) .........................................................................	4.65	4.65	4.65

2008
Risk-free interest rate¹ (%) ...........................................................................	4.5	4.5	4.5
Expected life² (years) ...................................................................................	1	3	5
Expected volatility³ (%) ...............................................................................	25	25	25
Share price at grant date (£) .........................................................................	8.80	8.80	8.80

1 The risk-free rate was determined from the UK gilts yield curve for the UK Savings-Related Share Option Plans. A similar yield curve was used for the International Savings-Related Share Option Plans.

2 Expected life is not a single input parameter but a function of various behavioural assumptions.

3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded options over HSBC shares of similar maturity to those of the employee options.

The expected US dollar denominated dividend yield was determined to be 4.5% per annum in line with consensus analyst forecasts (2009: 4.5%). Prior to 2009, HSBC adopted a dividend growth model and incorporated expected dividends into the valuation model for share options and awards. In 2008, the expected dividend growth was determined to be 7% for the first year and 8% thereafter.

The HSBC Share Plan

The HSBC Share Plan was approved at the 2005 Annual General Meeting and amendments were approved at the 2008 Annual General Meeting. Under this plan, Performance Share awards, Restricted Share awards and share option awards may be made. The aim of the HSBC Share Plan is to align the interests of executives with the creation of shareholder value and recognise individual performance and potential. Awards are also made under this plan for recruitment and retention purposes.

Performance Share awards

Awards of Performance Shares are made to executive Directors and other senior executives after taking into account individual performance in the previous year. For awards made prior to 2008, each award is divided into two equal parts for testing attainment against pre-determined benchmarks. One half of the award is subject to a TSR measure, based on HSBC's ranking against a comparator group of 28 major banks; the other half is subject to an earnings per share ('EPS') target. For each element of the award, shares are released to the employee on a sliding scale from 30% to 100% of the award, depending on the scale of achievement against the benchmarks, providing that the minimum criteria for each performance measure have been met.

For awards made during 2008 and prospectively, each award is divided into three parts for testing attainment against pre-determined benchmarks. 40% of the award is subject to a TSR measure, based on a free-float market capitalisation ranking method; 40% is subject to an economic profit measure, calculated as the average annual difference between return on invested capital and HSBC's benchmark cost of capital; and 20% is subject to an EPS target. For the TSR and EPS elements of the awards, shares are released to the employee on a sliding scale from 20% to 100% of the award, depending on the scale of achievement against the benchmarks. For the economic profit element of the awards, shares are released to the employee on a sliding scale from zero to 100%, depending on the scale of achievement against the benchmark. In all cases, shares are only released when the minimum criteria for each performance measure has been met. The performance conditions are measured over a three year performance period and awards forfeited to the extent they have not been met.

In addition to the performance conditions mentioned above, before an award can vest, the Remuneration Committee needs to be satisfied that the Group has shown a sustained improvement in the period since the award was made. In determining this, the Remuneration Committee will take account of all relevant factors, in particular, comparisons against the TSR comparator group in areas such as revenue growth and mix, cost efficiency, credit performance as measured by risk-adjusted revenues, cash return on cash invested, dividend performance and TSR.

Movement in Performance Share awards under the HSBC Share Plan

	2010	2009
	Number	Number
	(000s)	(000s)

Outstanding at 1 January .........................................................................................................	7,360	11,619
Additions during the year¹........................................................................................................	351	333
Adjustment for rights issue ......................................................................................................	-	1,712
Released in the year ................................................................................................................	(1,181)	(1,076)
Forfeited in the year ...............................................................................................................	(2,105)	(5,228)

Outstanding at 31 December ...................................................................................................	4,425	7,360

1 Additions during the year comprised reinvested dividend equivalents.

No Performance Shares were awarded by HSBC in 2010 and 2009.

Restricted Share awards

Awards of Restricted Shares are made to employees on the basis of their performance, potential and retention requirements, to aid recruitment or as a part-deferral of annual bonuses. Shares are awarded without corporate performance conditions and generally vest between one and three years from the date of award, providing the employees have remained continually employed by HSBC for this period.

Movement in Restricted Share awards under the HSBC Share Plan

	2010	2009
	Number	Number
	(000s)	(000s)

Outstanding at 1 January .........................................................................................................	184,318	122,206
Additions during the year ........................................................................................................	110,711	108,439
Adjustment for rights issue ......................................................................................................	-	26,119
Released in the year ................................................................................................................	(55,419)	(49,718)
Forfeited in the year ...............................................................................................................	(10,518)	(22,728)

Outstanding at 31 December ...................................................................................................	229,092	184,318

The weighted average fair value of Restricted Share awards in 2010 was US$10.50 (2009: US$6.31).

Share options

A small number of discretionary share options were granted in 2005 exclusively to individuals employed by HSBC France under the HSBC Share Plan rules, after the expiry of the Group Share Option Plan rules.

Nil-cost share options were granted to senior executives on the basis of their performance in the previous year. The share options were subject to the achievement of the same corporate performance conditions as the 2005 Performance Share awards. The options vested after three years in the same proportion as the 2005 Performance Shares but were only exercisable up to the fourth anniversary of the date of grant. These options have now lapsed and there are currently no options with outstanding performance conditions.

Share options were also awarded to a number of employees under the HSBC Share Plan rules. These options may vest after three years and are exercisable up to the tenth anniversary of the date of the grant, after which they lapse.

Movement in share options under the HSBC Share Plan

	2010		2009
	Number	Weighted average exercise price	Number	Weighted average exercise price
	(000s)	£	(000s)	£

Outstanding at 1 January ....................................................	86	7.99	300	8.89
Adjustment for rights issue .................................................	-	-	44	7.75
Forfeited and expired in the year ........................................	-	-	(258)	7.66

Outstanding and exercisable at 31 December ......................	86	7.99	86	7.99

No share options were granted in 2010 and 2009. The weighted average remaining contractual life of options outstanding at the balance sheet date was 4.8 years (2009: 5.8 years). The exercise price of options outstanding at the balance sheet date was £7.99 (2009: £7.99).

Savings-related share option plans

Savings-related share option plans invite eligible employees to enter into savings contracts to save up to £250 per month (or its equivalent in US dollars, Hong Kong dollars or euros), with the option to use the savings to acquire shares. The aim of the plans is to align the interests of all employees with the creation of shareholder value. The options are exercisable within three months following the first anniversary of the commencement of a one-year savings contract or within six months following either the third or the fifth anniversaries of the commencement of three-year or five-year savings contracts, respectively. The exercise price is set at a 20% (2009: 20%) discount to the market value immediately preceding the date of invitation (except for the one-year options granted under the US sub-plan where a 15% discount is applied).

Movement in savings-related share options

	2010		2009
	Number	Weighted average exercise price	Number	Weighted average exercise price
	(000s)	£	(000s)	£

Outstanding at 1 January ....................................................	172,526	3.69	74,401	6.97
Granted in the year ............................................................	22,017	5.39	152,796	3.32
Adjustment for rights issue .................................................	-	-	7,970	6.08
Exercised in the year ..........................................................	(16,830)	4.18	(5,011)	5.72
Forfeited, cancelled and expired in the year ........................	(19,858)	4.44	(57,630)	5.96

Outstanding at 31 December ..............................................	157,855	3.87	172,526	3.69

The weighted average fair value of options granted during the year was US$2.41 (2009: US$2.03). The weighted average share price at the date the share options were exercised was US$10.08 (2009: US$10.23). The exercise price range and weighted average remaining contractual life for options outstanding at the balance sheet date were as follows:

	2010	2009

Exercise price range (£) ..........................................................................................................	3.31 - 6.69	3.31 - 6.69
Weighted average remaining contractual life (years) ...............................................................	2.76	3.47
Of which exercisable:
Number (000s) ....................................................................................................................	1,883	5,145
Weighted average exercise price (£) ....................................................................................	6.23	6.26

HSBC Holdings Restricted Share Plan 2000

Restricted Share awards made under the Restricted Share Plan

Awards of Restricted Shares were made under the Restricted Share Plan to eligible employees from 2000 to 2005, after taking into account the employees' performance in the previous year, their potential and retention requirements. Restricted shares were also awarded as part-deferral of annual bonuses or for recruitment purposes. Shares were awarded without corporate performance conditions and in most cases fully vest within three years from the date of award, providing the employees have remained continuously employed by HSBC for the period.

Movement on Restricted Share awards under the HSBC Holdings Restricted Share Plan

	2010 Number	2009 Number
	(000s)	(000s)

Outstanding at 1 January .........................................................................................................	173	2,717
Additions during the year¹ .......................................................................................................	-	30
Adjustment for rights issue ......................................................................................................	-	376
Released in the year ................................................................................................................	-	(2,916)
Forfeited in the year ...............................................................................................................	(173)	(34)

Outstanding at 31 December ...................................................................................................	-	173

1 Additions in 2009 principally comprised reinvested dividend equivalents.

At 31 December 2009 the weighted average remaining vesting period was 0.3 years.

HSBC Holdings Group Share Option Plan

The HSBC Holdings Group Share Option Plan was a long-term incentive plan under which certain HSBC employees between 2000 and 2005 were awarded share options. The aim of the plan was to align the interests of those higher performing employees with the creation of shareholder value. In most jurisdictions, this was achieved by setting certain TSR targets which would normally have to be attained in order for the awards to vest. Options were granted at market value and are normally exercisable between the third and tenth anniversaries of the date of grant, subject to vesting conditions. Options granted after May 2005 are made under the HSBC Share Plan.

Movement on the HSBC Holdings Group Share Option Plan awards

	2010		2009
	Number	Weighted average exercise price	Number	Weighted average exercise price
	(000s)	£	(000s)	£

Outstanding and exercisable at 1 January ............................	157,719	7.12	142,593	8.16
Adjustment for rights issue .................................................	-	-	21,333	7.12
Exercised in the year ..........................................................	(1,015)	6.08	(1,548)	6.28
Forfeited and expired in the year ........................................	(3,946)	7.36	(4,659)	7.15

Outstanding and exercisable at 31 December ......................	152,758	7.12	157,719	7.12

The weighted average share price at the date the share options were exercised was US$10.26 (2009: US$9.14). The number of options, weighted average exercise price and weighted average remaining contractual life of options outstanding at the balance sheet date, analysed by exercise price range, were as follows:

	2010		2009

Exercise price range (£) ..................................................	6.00 - 7.00	7.01 - 8.50	6.00 - 7.00	7.01 - 8.50

Number (000s) ...............................................................	26,927	125,831	28,406	129,313
Weighted average exercise price (£) ...............................	6.03	7.36	6.03	7.36
Weighted average remaining contractual life (years) .......	2.33	2.34	3.33	3.34
Of which exercisable:
Number (000s) ............................................................	26,927	125,831	28,406	129,313
Weighted average exercise price (£) ............................	6.03	7.36	6.03	7.36

HSBC Holdings Executive Share Option Scheme

The HSBC Holdings Executive Share Option Scheme was a long-term incentive plan under which certain senior HSBC employees were awarded share options before the adoption of the HSBC Holdings Group Share Option Plan in 2000. The aim of the plan was to align the interests of those higher performing senior employees with the creation of shareholder value. This was achieved by setting certain TSR targets to be attained in order for the awards to vest. Options were granted at market value and were exercisable between the third and tenth anniversaries of the date of grant, subject to vesting conditions. No awards have been made under this plan since 2000 and all options have now expired or been exercised.

Movement on the HSBC Holdings Executive Share Option Scheme awards

	2010		2009
	Number	Weighted average exercise price	Number	Weighted average exercise price
	(000s)	£	(000s)	£

Outstanding and exercisable at 1 January ............................	6,707	6.50	13,964	6.92
Adjustment for rights issue .................................................	-	-	2,046	6.04
Exercised in the year ..........................................................	(4,229)	6.50	(920)	6.39
Expired in the year ............................................................	(2,478)	6.50	(8,383)	5.61

Outstanding and exercisable at 31 December ......................	-	-	6,707	6.50

The weighted average share price at the date the share options were exercised was US$10.26 (2009: US$9.14).

At 31 December 2009, the exercise price range for options outstanding was £5.50-£7.00 and the weighted average remaining contractual life of options outstanding was 0.26 years.

HSBC France and subsidiary company plans

Before its acquisition by HSBC in 2000, HSBC France and certain of its subsidiaries operated employee share option plans. Options over HSBC France shares granted between 1994 and 1999 vested upon announcement of HSBC's agreement to acquire HSBC France and were therefore included in the valuation of HSBC France.

HSBC France granted 909,000 options in 2000 after the public announcement of the acquisition. The options vested on 1 January 2002. The HSBC France shares obtained on exercise of the options were exchangeable for HSBC Holdings ordinary shares of US$0.50. Options were granted at market value and are exercisable within ten years of the date of grant. Movements in options granted after the public announcement are shown below.

Movement on HSBC France share options

	2010		2009
	Number	Exercise price	Number	Exercise price
	(000s)	€	(000s)	€

Outstanding and exercisable at 1 January ............................	604	142.5	604	142.5
Forfeited in the year ..........................................................	(604)	142.5	-	-

Outstanding and exercisable at 31 December ......................	-	-	604	142.5

At 31 December 2009, the remaining contractual life for options outstanding was 0.3 years.

At the date of its acquisition, certain of HSBC France's subsidiary companies also operated employee share option plans. On exercise of certain of these options, the subsidiary shares are exchanged for HSBC ordinary shares. The total number of HSBC ordinary shares exchanged under such arrangements in 2010 was 9,281 (2009: 70,257).

HSBC Finance

Upon acquisition, HSBC Finance share options previously granted were converted to share options over HSBC ordinary shares of US$0.50 each at a rate of 2.675 HSBC share options (the same ratio as the Exchange Offer for HSBC Finance) for each HSBC Finance share option. Options granted under HSBC Finance's own share option schemes prior to the announcement of the acquisition by HSBC in November 2002 vested as options over HSBC shares upon acquisition by HSBC. Options granted after the announcement of the acquisition but prior to its completion on 28 March 2003 generally vest equally over four years and expire ten years from the date of grant. Options granted after the announcement are shown in the table below.

Movement on HSBC Finance share options

	2010		2009
	Number	Exercise price	Number	Exercise price
	(000s)	US$	(000s)	US$

Outstanding at 1 January ....................................................	2,736	9.29	2,402	10.66
Adjustment for rights issue .................................................	-	-	354	9.29
Exercised in the year ..........................................................	(307)	9.29	(20)	9.29
Expired in the year ............................................................	-	-	-	9.29

Outstanding and exercisable at 31 December ......................	2,429	9.29	2,736	9.29

The weighted average share price at the date the share options were exercised was US$10.26 (2009: US$9.14). The remaining contractual life for options outstanding at the balance sheet date was 1.9 years (2009: 2.9 years).

10 Tax expense

	2010	2009	2008
	US$m	US$m	US$m
Current tax
UK Corporation tax .....................................................................................	383	206	1,671
- on current year profit ............................................................................	404	280	1,738
- adjustments in respect of prior years ......................................................	(21)	(74)	(67)

Overseas tax .................................................................................................	3,328	1,847	1,703
- on current year profit ............................................................................	3,235	1,826	1,732
- adjustments in respect of prior years ......................................................	93	21	(29)


	3,711	2,053	3,374

Deferred tax
Origination and reversal of temporary differences ........................................	1,176	(1,672)	(504)
Effect of changes in tax rates .......................................................................	31	(10)	(89)
Adjustments in respect of prior years ...........................................................	(72)	14	28

	1,135	(1,668)	(565)

Tax expense .................................................................................................	4,846	385	2,809

The UK corporation tax rate applying to HSBC Holdings and its subsidiaries was 28% (2009: 28%; 2008: 30% to 31 March 2008 and 28% thereafter). Overseas tax included Hong Kong profits tax of US$962m (2009: US$783m; 2008: US$846m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2009: 16.5%; 2008: 16.5%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

The following table reconciles the tax expense which would apply if all profits had been taxed at the UK corporation tax rate:

Analysis of tax expense

	2010		2009		2008
	US$m	%	US$m	%	US$m	%
Taxation at UK corporation tax rate of 28% (2009: 28%; 2008: 28.5%)¹ ................	5,330	28.0	1,982	28.0	2,652	28.5
Goodwill impairment ...............................	-	-	-	-	3,010	32.3
Non-deductible loss on foreign exchange swaps on rights issue proceeds² ...........................	-	-	96	1.4	-	-
Effect of taxing overseas profits in principal locations at different rates ..................................	(744)	(3.9)	(1,345)	(19.0)	(1,339)	(14.4)
Gains not subject to tax ...........................	(275)	(1.4)	(238)	(3.4)	(1,016)	(10.9)
Adjustments in respect of prior period liabilities ..............................................	-	-	(39)	(0.6)	(67)	(0.7)
Low income housing tax credits³ .............	(86)	(0.5)	(98)	(1.4)	(103)	(1.1)
Effect of profit in associates and joint ventures ..............................................	(705)	(3.7)	(499)	(7.1)	(473)	(5.1)
Tax impact of intra-group transfer of subsidiary⁴ ...........................................	1,216	6.4	-	-	-	-
Impact of gains arising from dilution of interests in associates ........................................	(53)	(0.3)	-	-	-	-
Deferred tax temporary differences not provided/(previously not recognised)⁵ ..	(6)	-	360	5.1	157	1.7
Non taxable income ................................	(374)	(2.0)	(365)	(5.2)	(519)	(5.6)
Permanent disallowables ..........................	276	1.5	223	3.2	217	2.3
Additional provision for tax on overseas dividends .............................................	-	-	341	4.8	294	3.2
Effect of bank payroll tax .......................	79	0.4	-	-	-	-
Change in tax rates .................................	31	0.2	(10)	(0.1)	(89)	(0.9)
Local taxes and overseas withholding tax	61	0.3	12	0.1	122	1.3
Other items .............................................	96	0.5	(35)	(0.4)	(37)	(0.4)

Tax expense¹ ..........................................	4,846	25.5	385	5.4	2,809	30.2

1 The change in the UK corporation tax rate from 30% to 28% with effect from 1 April 2008 gave rise to a blended tax rate for 2008 of 28.5%.

2 In August 2009, the UK Government enacted legislation that gains or losses on transactions designated to hedge foreign exchange exposures connected to rights issues should be disregarded for tax purposes.

3 Low income housing tax credits arise in the US and are designed to encourage the provision of rental housing for low income households.

4 This relates to the transfer of HSBC Bank Canada, which was part of the sub-group headed by HSBC North America Holdings Inc, to HSBC Overseas Holdings (UK) Limited. A taxable gain arises on this disposal but the crystallisation of deferred tax assets and utilisation of current year foreign tax credits meant that no tax was paid on this transfer.

5 2009 and 2008 include the effect of previously unrecognised temporary differences principally related to the recognition of foreign tax credits and trading losses, respectively.

On 22 June 2010, the UK Government announced its intention to reduce the main rate of corporation tax from 28% to 24%. It is proposed that the reduction will be phased in over a period of four years with a 1% decrease in the main corporation tax rate for each year starting on 1 April 2011. As at 31 December 2010, only the initial phase to reduce the main rate of UK corporation tax from 28% to 27% has been substantively enacted and therefore only this change has been reflected in the amounts recognised as at that date. However, it is not expected that the future proposed rate changes will have a significant effect on the net UK deferred tax asset recognised at 31 December 2010 of US$383m.

Deferred taxation

The following table shows the deferred tax assets and liabilities before offsetting balances within countries and the related movements recognised in the income statement, other comprehensive income and directly in equity.

Movement of deferred tax assets and liabilities before offsetting balances within countries

	Retirement benefits	Loan impairment allowances	Unused tax losses	Accelerated capital allowances		Available- for-sale investments		Cash flow hedges	Share- based payments	Assets leased to customers	Revaluation of property	Fee income	Relief for unused tax credits		Other	Total
2010	US$m	US$m	US$m		US$m		US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m	US$m

Assets .................................................	1,772	6,363	164		215		68	229	196	-	-	-		243	1,535	10,785
Liabilities ...........................................	-	-	-		(129)		(340)	(91)	-	(1,121)	(399)	(1,080)		-	(842)	(4,002)

At 1 January 2010 ..............................	1,772	6,363	164		86		(272)	138	196	(1,121)	(399)	(1,080)		243	693	6,783
Acquisitions and disposals ...................	-	8	-		-		12	(2)	-	-	-	-		-	(16)	2
Income statement ..............................	(468)	(1,702)	2		14		(16)	3	50	250	75	386		(72)	343	(1,135)
Other comprehensive income:
- available-for-sale investment ......	-	-	-		-		(73)	-	-	-	-	-		-	-	(73)
- cash flow hedges .........................	-	-	-		-		-	70	-	-	-	-		-	-	70
- actuarial losses ............................	(1)	-	-		-		-	-	-	-	-	-		-	-	(1)
Equity:
- share-based payments .................	-	-	-		-		-	-	(14)	-	-	-		-	-	(14)
Foreign exchange and other adjustments ........................................................	235	130	15		(117)		225	55	9	164	99	(62)		(4)	(463)	286

At 31 December 2010 ......................	1,538	4,799	181		(17)		(124)	264	241	(707)	(225)	(756)		167	557	5,918

Assets .................................................	1,538	4,799	181		109		11	352	241	-	-	-		170	957	8,358
Liabilities ...........................................	-	-	-		(126)		(135)	(88)	-	(707)	(225)	(756)		(3)	(400)	(2,440)

2009

Assets .................................................	927	5,891	282		99		518	1,145	245	-	-	-		94	363	9,564
Liabilities ...........................................	-	-	-		(167)		(121)	(280)	-	(916)	(374)	(930)		-	(1,620)	(4,408)

At 1 January 2009 ..............................	927	5,891	282		(68)		397	865	245	(916)	(374)	(930)		94	(1,257)	5,156
Acquisitions and disposals ...................	-	-	-		-		-	-	-	-	-	-		-	-	-
Income statement ..............................	(193)	19	(141)		132		(33)	(4)	(82)	136	29	3		414	1,388	1,668
Other comprehensive income:
- available-for-sale investment ......	-	-	-		-		(587)	-	-	-	-	-		-	-	(587)
- cash flow hedges .........................	-	-	-		-		-	(517)	-	-	-	-		-	-	(517)
- actuarial losses ............................	978	-	-		-		-	-	-	-	-	-		-	-	978
Equity:
- share-based payments .................	-	-	-		-		-	-	9	-	-	-		-	-	9
Foreign exchange and other adjustments ........................................................	60	453	23		22		(49)	(206)	24	(341)	(54)	(153)		(265)	562	76

At 31 December 2009 ........................	1,772	6,363	164		86		(272)	138	196	(1,121)	(399)	(1,080)		243	693	6,783

Assets .................................................	1,772	6,363	164		215		68	229	196	-	-	-		243	1,535	10,785
Liabilities ...........................................	-	-	-		(129)		(340)	(91)	-	(1,121)	(399)	(1,080)		-	(842)	(4,002)

Presentation of deferred tax balances

Deferred tax balances are presented in the consolidated balance sheet after offsetting asset and liability balances where HSBC has the legal right to set off and intends to settle on a net basis, as follows:

	2010	2009
	US$m	US$m

Deferred tax assets ..................................................................................................................	7,011	8,620
Deferred tax liabilities .............................................................................................................	(1,093)	(1,837)

	5,918	6,783

Analysis of deferred tax assets by country

	2010	2009
	US$m	US$m

US ...........................................................................................................................................	4,043	5,110
Brazil ......................................................................................................................................	883	1,289
Mexico ...................................................................................................................................	665	620
UK ..........................................................................................................................................	383	395
Other ......................................................................................................................................	1,037	1,206

	7,011	8,620

The amount of temporary differences, unused tax losses and unused tax credits excluding the US, for which no deferred tax asset is recognised in the balance sheet is US$2,473m (2009: US$1,723m). Of this amount, US$2,366m (2009: US$1,608m) has no expiry date, US$107m (2009: US$115m) is scheduled to expire within 10 years (2009: 10 years) and the remaining will expire after 10 years. The deferred tax asset unrecognised in respect of these items is US$601m (2009: US$491m), of which US$564m (2009: US$450m) has no expiry date, US$37m (2009: US$40m) is scheduled to expire within 10 years (2009: 10 years) and the remaining will expire after 10 years.

In the US, the deferred tax asset unrecognised in respect of temporary differences, unused tax losses and unused tax credits was US$1,715m (2009: US$1,577m), of which US$70m (2009: US$52m) has no expiry date, US$908m (2009: US$932m) is scheduled to expire within 10 years (2009: 10 years) and the remaining will expire within 20 years.

The US deferred tax assets not recognised of US$1,715m (2009: US$1,577m) comprise unused state losses of US$694m (2009: US$854m), unused federal losses of US$43m (2009: nil), unused tax credits of US$908m (2009: US$716m) and other differences of US$70m (2009: US$7m). The gross temporary difference in respect of the unused state losses is US$12,486m (2009: US$15,517m), the unused federal losses are US$122m (2009: nil), the other differences are US$200m (2009: US$20m), while no gross equivalent is applied to the unused tax credits.

Deferred tax of US$89m (2009: US$94m) has been provided in respect of distributable reserves of associates that, on distribution, would attract withholding tax.

Deferred tax is not recognised in respect of the Group's investments in subsidiaries and branches where remittance is not contemplated, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise. The aggregate amount of temporary differences associated with investments where no deferred tax liability is recognised is nil (2009: nil; 2008: US$38,443m). Following the change in the UK tax treatment of dividends on 1 July 2009, no UK tax is expected to arise on distributions from group entities and no temporary difference exists except where withholding tax or other foreign tax could arise on the investments. No amount is disclosed for the unrecognised deferred tax or the 2010 and 2009 temporary differences associated with such investments, as it is impracticable to determine the amount of income taxes that would be payable when any temporary differences reverse.

Of the total net deferred tax assets of US$7.0bn at 31 December 2010 (2009: US$8.6bn), US$4.0bn (2009: US$5.1bn) arose in respect of HSBC's US operations where there has been a recent history of losses. Management's analysis of the recognition of these deferred tax assets significantly discounts any future expected profits from the US operations and relies to a greater extent on capital support to the US operations from HSBC Holdings plc, including tax planning strategies implemented in relation to such support. Further to the implementation of this strategy, the transfer of HSBC Bank Canada, which was part of the sub-group headed by HSBC North America Holdings Inc., to HSBC Overseas Holdings (UK) Limited in an internal reorganisation on 31 January 2010, provided substantial support for the recoverability of the US deferred tax assets. The associated taxable gain arising in the US operations reduced the deferred tax assets by US$1.2bn. US legislation enacted on 6 November 2009 allowed for an extended carryback period for certain federal tax net operating losses. This had the effect of crystallising deferred tax assets related to such losses at 31 December 2009 by approximately US$1.6bn. Currently, it has been determined that the US operations primary tax planning strategy, in combination with other tax planning strategies, provides support for the realisation of the net deferred tax assets recorded for the US operations. Such determination is based on HSBC's business forecasts and assessments as to the most efficient and effective deployment of HSBC capital, most importantly including the length of time such capital will need to be maintained in the US for purposes of the tax planning strategy.

The deferred tax assets relating to HSBC's Brazil operation is US$0.9bn (2009: US$1.3bn) and the Mexican operation is US$0.7bn (2009: US$0.6bn). On the evidence available, including management projections of income and the state of the Brazilian and Mexican economies, there will be sufficient taxable income generated by the businesses to support these assets.

HSBC Holdings

	Deferred tax assets/(liabilities)
	2010	2009
	US$m	US$m
Temporary differences:
- short-term timing differences ...........................................................................................	1	1
- available-for-sale investments ..........................................................................................	(21)	(99)
- fair valued assets and liabilities ..........................................................................................	61	76
- share-based payments .......................................................................................................	16	8

	57	(14)

11 Dividends

Dividends to shareholders of the parent company

	2010			2009			2008
	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m

Dividends declared on ordinary shares
In respect of previous year:
- fourth interim dividend ............	0.10	1,733	838	0.10	1,210	624	0.39	4,620	2,233
In respect of current year:
- first interim dividend ...............	0.08	1,394	746	0.08	1,384	190	0.18	2,158	256
- second interim dividend ...........	0.08	1,402	735	0.08	1,385	696	0.18	2,166	727
- third interim dividend ..............	0.08	1,408	205	0.08	1,391	160	0.18	2,175	380

	0.34	5,937	2,524	0.34	5,370	1,670	0.93	11,119	3,596

Quarterly dividends on preference shares classified as equity
March dividend ..............................	15.50	22		15.50	22		15.50	22
June dividend ..................................	15.50	23		15.50	23		15.50	23
September dividend ........................	15.50	22		15.50	22		15.50	22
December dividend .........................	15.50	23		15.50	23		15.50	23

	62.00	90		62.00	90		62.00	90

Quarterly coupons on capital securities classified as equity¹
January coupon ..............................	0.508	44		0.508	44		-	-
April coupon ..................................	0.508	45		0.508	45		-	-
July coupon ....................................	0.508	45		0.508	45		0.541	47
September coupon ..........................	0.450	68		-	-		-	-
October coupon .............................	0.508	45		0.508	45		0.508	45
December coupon ..........................	0.500	76		-	-		-	-

	2.982	323		2.032	179		1.049	92

1 HSBC Holdings issued Perpetual Subordinated Capital Securities of US$3,800m in June 2010 and US$2,200m in April 2008, which are classified as equity under IFRSs.

The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended 31 December 2010 of US$0.12 per ordinary share, a distribution of approximately US$2,125m. The fourth interim dividend will be payable on 5 May 2011 to holders of record on 17 March 2011 on the Hong Kong Overseas Branch Register and 18 March 2011 on the Principal Register in the UK or the Bermuda Overseas Branch Register. No liability is recorded in the financial statements in respect of the fourth interim dividend for 2010.

On 18 January 2011, HSBC paid a further coupon on the capital securities of US$0.508 per security, a distribution of US$44m. No liability is recorded in the balance sheet at 31 December 2010 in respect of this coupon payment.

12 Earnings per share

Basic earnings per ordinary share was calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share was calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.

Profit attributable to the ordinary shareholders of the parent company

	2010	2009	2008
	US$m	US$m	US$m

Profit attributable to shareholders of the parent company ............................	13,159	5,834	5,728
Dividend payable on preference shares classified as equity ............................	(90)	(90)	(90)
Coupon payable on capital securities classified as equity ...............................	(323)	(179)	(92)

Profit attributable to the ordinary shareholders of the parent company ........	12,746	5,565	5,546

Basic and diluted earnings per share

	2010				2009				2008
	Profit US$m	Number of shares (millions)		Per share US$	Profit US$m	Number of shares (millions)		Per share US$	Profit US$m	Number of shares (millions)		Per share US$

Basic¹ ...........................................	12,746		17,404	0.73	5,565		16,277	0.34	5,546		13,555	0.41
Effect of dilutive potential ordinary shares..........................			229				143				118
- Savings-related Share Option Plan .....................................			55				26				13
- Executive Share Option Scheme .................................			-				-				3
- Group Share Option Plan ......			-				-				5
- Restricted and performance share awards ...............................			174				117				95
- HSBC France share options ..			-				-				1
- HSBC Finance share options .			-				-				1


Diluted² ........................................	12,746		17,633	0.72	5,565		16,420	0.34	5,546		13,673	0.41

1 Weighted average number of ordinary shares outstanding.

2 Weighted average number of ordinary shares outstanding assuming dilution.

The weighted average number of dilutive potential ordinary shares excludes 150m employee share options that were anti-dilutive (2009: 214m; 2008: 166m).

13 Segmental analysis

HSBC's operating segments are organised into six geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, Middle East, North America and Latin America. Due to the nature of the Group, HSBC's chief operating decision-maker regularly reviews operating activity on a number of bases, including by geographical region, customer group and global business and retail businesses by geographical region. The segmental analysis is presented on a geographical basis because, although information is reviewed on a number of bases, capital resources are allocated and performance is assessed primarily by geographical region. Also, the economic conditions of each geographical region are highly influential in determining the performance of the different businesses carried out in each region. As a result, provision of segmental information on a geographical basis provides the most meaningful basis from which to assess performance. HSBC's chief operating decision-maker is the Group Management Board which operates as a general management committee under the direct authority of the Board.

Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by the location of the branch responsible for reporting the results or advancing the funds.

Information provided to HSBC's chief operating decision-maker to make decisions about allocating resources to, and assessing the performance of, operating segments is measured in accordance with IFRSs. The financial information shown below includes the effects of intra-HSBC transactions between operating segments which are conducted on an arm's length basis and eliminated in a separate column. Shared costs are included in operating segments on the basis of the actual recharges made.

Products and services

HSBC provides a comprehensive range of banking and related financial services to its customers in its six geographical regions. The products and services offered to customers are organised by customer group and global business.

· Personal Financial Services offers a broad range of products and services to meet the personal banking, consumer finance and wealth management needs of individual customers. Personal banking products typically include current and savings accounts, mortgages and personal loans, credit cards, debit cards, insurance, wealth management and local and international payment services.

· Commercial Banking product offerings include the provision of financing services, payments and cash management, international trade finance, treasury and capital markets, commercial cards, insurance, and online and direct banking offerings.

· Global Banking and Markets provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services; a markets business that provides services in credit, rates, foreign exchange, money markets and securities services; global asset management services and principal investment activities.

· Global Private Banking provides a range of services to meet the banking, investment and wealth advisory needs of high net worth individuals.

Financial information

In the following segmental analysis, the benefit of shareholders' funds impacts the analysis only to the extent that these funds are actually allocated to businesses in the segment by way of intra-HSBC capital and funding structures.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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