Annual Report and Accounts -

RNS Number : 7337P

HSBC Holdings PLC

31 March 2009

 



16    Trading assets

	2008		2007
	US$m		US$m
Trading assets:
-  not subject to repledge or resale by counterparties	340,675		308,286
-  which may be repledged or resold by counterparties	86,654		137,682
	427,329		445,968
Treasury and other eligible bills	32,458		16,439
Debt securities	199,619		178,834
Equity securities	21,878		51,476
	253,955		246,749
Loans and advances to banks	73,055		100,440
Loans and advances to customers	100,319		98,779
	427,329		445,968

The following table provides an analysis of trading securities:

	Fair value
	2008		2007
	US$m		US$m
US Treasury and US Government agencies1	26,621		17,335
UK Government	10,586		11,607
Hong Kong Government	6,648		5,517
Other government	98,983		80,268
Asset-backed securities2	6,566		21,502
Corporate debt and other securities	82,673		59,044
Equity securities	21,878		51,476
	253,955		246,749

1    Includes securities that are supported by an explicit guarantee issued by the US Government.

2    Excludes asset-backed securities included under US Treasury and US Government agencies.

Included within the above figures are debt securities issued by banks and other financial institutions of US$49,997 million (2007: US$69,818 million), of which US$3,449 million (2007: US$1,488 million) are guaranteed by various governments.

The following table analyses trading securities between those listed on a recognised exchange and those that are unlisted:

	Treasury     and other     eligible bills		Debt     securities		Equity    securities		Total
	US$m		US$m		US$m		US$m
Fair value at 31 December 2008
Listed on a recognised exchange1	1		145,370		20,871		166,242
Unlisted	32,457		54,249		1,007		87,713
	32,458		199,619		21,878		253,955
Fair value at 31 December 2007
Listed on a recognised exchange1	34		115,593		50,092		165,719
Unlisted	16,405		63,241		1,384		81,030
	16,439		178,834		51,476		246,749

1    Included within listed investments are US$3,870 million (2007: US$6,977 million) of investments listed in Hong Kong.

Loans and advances to banks held for trading consist of:

	2008		2007
	US$m		US$m
Reverse repos	48,188		80,476
Settlement accounts	4,337		8,227
Stock borrowing	1,888		8,259
Other	18,642		3,478
	73,055		100,440

Loans and advances to customers held for trading consist of:

	2008		2007
	US$m		US$m
Reverse repos	58,285		51,543
Stock borrowing	13,740		24,254
Settlement accounts	10,116		6,216
Other	18,178		16,766
	100,319		98,779

17    Financial assets designated at fair value

	2008		2007
	US$m		US$m
Treasury and other eligible bills	235		181
Debt securities	16,349		21,150
Equity securities	10,993		20,047
Securities designated at fair value	27,577		41,378
Loans and advances to banks	230		178
Loans and advances to customers	726		8
	28,533		41,564

Securities designated at fair value

	Fair value
	2008		2007
	US$m		US$m
US Treasury and US Government agencies1	93		252
UK Government	992		788
Hong Kong Government	284		314
Other government	3,624		4,427
Asset-backed securities2	6,492		8,132
Corporate debt and other securities	5,099		7,418
Equities	10,993		20,047
	27,577		41,378

1    Includes securities that are supported by an explicit guarantee issued by the US Government.

2    Excludes asset-backed securities included under US Treasury and US Government agencies.

Included within the above figures are debt securities issued by banks and other financial institutions of US$10,351 million (2007: US$14,401 million), of which US$14 million (2007: nil) are guaranteed by various governments.

	Treasury     and other     eligible bills		Debt     securities		Equity    securities		Total
	US$m		US$m		US$m		US$m
Fair value at 31 December 2008
Listed on a recognised exchange1	80		3,490		8,140		11,710
Unlisted	155		12,859		2,853		15,867
	235		16,349		10,993		27,577
Fair value at 31 December 2007
Listed on a recognised exchange1	50		8,659		15,449		24,158
Unlisted	131		12,491		4,598		17,220
	181		21,150		20,047		41,378

1    Included within listed investments are US$576 million of investments listed in Hong Kong (2007: US$1,502 million).

18    Derivatives

Fair values of derivatives by product contract type held by HSBC

	Assets						Liabilities
	Trading		Hedging		Total		Trading		Hedging		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2008
Foreign exchange	115,803		2,010		117,813		115,311		826		116,137
Interest rate	259,672		4,481		264,153		252,131		4,435		256,566
Equities	18,660		-		18,660		21,913		-		21,913
Credit derivatives	91,271		-		91,271		89,715		-		89,715
Commodity and other	2,979		-		2,979		2,729		-		2,729
Total fair values	488,385		6,491		494,876		481,799		5,261		487,060
At 31 December 2007
Foreign exchange	52,018		3,490		55,508		50,608		371		50,979
Interest rate	83,982		1,759		85,741		83,374		2,013		85,387
Equities	20,229		1		20,230		19,458		-		19,458
Credit derivatives	25,268		-		25,268		26,247		-		26,247
Commodity and other	1,107		-		1,107		1,322		-		1,322
Total fair values	182,604		5,250		187,854		181,009		2,384		183,393

The 163 per cent increase in the fair value of derivative assets during 2008 was driven by increased volatility and movement in yield curves, foreign exchange rates and credit spreads. The increase in the notional contract amounts of HSBC's derivative assets in the year was only 8 per cent. However, IFRSs only permit netting of assets and liabilities with the same counterparty in very limited circumstances, even when there are contractually agreed netting arrangements in place.

Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries

	2008				2007
	Trading		Trading		Trading		Trading
	assets		liabilities		assets		liabilities
	US$m		US$m		US$m		US$m
Foreign exchange	1,772		1,324		2,381		2
Interest rate	1,910		-		279		42
Total fair values	3,682		1,324		2,660		44

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives enable users to increase, reduce or alter exposure to credit or market risks. HSBC makes markets in derivatives for its customers and uses derivatives to manage its exposure to credit and market risks.

Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. A description of how the fair value of derivatives is derived is set out on page 165. Derivative assets and liabilities on different transactions are only set off if the transactions are with the same counterparty, a legal right of set-off exists and the cash flows are intended to be settled on a net basis. 

Use of derivatives

HSBC transacts derivatives for three primary purposes: to create risk management solutions for clients, for proprietary trading purposes, and to manage and hedge HSBC's own risks. Derivatives (except for derivatives which are designated as effective hedging instruments as defined in IAS 39) are held for trading. The held for trading classification includes two types of derivatives: those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments designated at fair value. These activities are described more fully below.

HSBC's derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to ensure that they remain within acceptable risk levels, with matching deals being utilised to achieve this where necessary. When entering into derivative transactions, HSBC employs the same credit risk management procedures to assess and approve potential credit exposures that are used for traditional lending.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities in derivatives are entered into principally for the purpose of generating profits from short-term fluctuations in price or margin. Positions may be traded actively or be held over a period of time to benefit from expected changes in exchange rates, interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage activities. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume; positioning means managing market risk positions in the expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and profiting from price differentials between markets and products.

As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives, ineffective hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the criteria for hedge accounting. These include derivatives managed in conjunction with financial instruments designated at fair value.

Gains and losses from changes in the fair value of derivatives, including the contractual interest, that do not qualify for hedge accounting are reported in 'Net trading income', except for derivatives managed in conjunction with financial instruments designated at fair value, where gains and losses are reported in 'Net income from financial instruments designated at fair value', together with the gains and losses on the hedged items. Where the derivatives are managed with debt securities in issue, the contractual interest is shown in 'interest expense' together with the interest payable on the issued debt. Substantially all of HSBC Holdings' derivatives entered into with HSBC undertakings are managed in conjunction with financial liabilities designated at fair value.

Notional contract amounts of derivatives held for trading purposes by product type

The notional contract amounts of these instruments indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

	HSBC				HSBC Holdings
	2008		2007		2008		2007
	US$m		US$m		US$m		US$m
Foreign exchange	3,045,017		3,243,738		14,312		12,790
Interest rate	12,435,965		10,672,971		7,804		7,804
Equities	221,053		286,927		-		-
Credit derivatives	1,583,337		1,893,802		-		-
Commodity and other	63,103		33,188		-		-
	17,348,475		16,130,626		22,116		20,594

Credit derivatives

HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad range of users, structuring deals to produce risk management products for its customers, or making markets in certain products. Risk is typically controlled through entering into offsetting credit derivative contracts with other counterparties.

HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products. 

Credit derivatives are also deployed to a limited extent for the risk management of the Group's loan portfolios. 

The notional contract amount of credit derivatives of US$1,583,337 million (2007: US$1,893,802 million) consisted of protection bought of US$777,556 million (2007: US$926,794 million) and protection sold of US$805,781 million (2007: US$967,008 million).

The difference between the notional amounts bought and sold is attributable to HSBC selling protection on large, diversified, predominantly investment grade portfolios (including the most senior tranches) and then offsetting the risk on these positions by buying protection on the more subordinated tranches of the same portfolios. In addition, HSBC uses securities to mitigate risks on certain derivative positions and credit derivative contracts to reduce counterparty exposures. Consequently, while there is a mismatch in notional amounts of credit derivatives bought and sold this should not be interpreted as representing the open risk position. The credit derivative business operates within the market risk management framework described on pages 241 to 251.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

	2008		2007
	US$m		US$m
Unamortised balance at 1 January	306		214
Deferral on new transactions	326		384
Recognised in the income statement during the period:
- amortisation	(168)		(85)
- subsequent to unobservable inputs becoming observable	(118)		(83)
- maturity, termination or offsetting derivative	(99)		(121)
Exchange differences	(38)		4
Risk hedged	(5)		(7)
Unamortised balance at 31 December1	204		306

1    This amount is yet to be recognised in the consolidated income statement.

Hedging instruments 

HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities. 

The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges, or hedges in net investment of foreign operations. These are described under the relevant headings below:

Notional contract amounts of derivatives held for hedging purposes by product type

The notional contract amounts of these instruments indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

	At 31 December 2008				At 31 December 2007
	Cash flow     hedge		Fair value     hedge		Cash flow     hedge		Fair value     hedge
	US$m		US$m		US$m		US$m
Foreign exchange	14,931		2,602		21,641		3,116
Interest rate	229,785		27,305		248,134		34,897
Equities	-		-		-		24
	244,716		29,907		269,775		38,037

Fair value hedges

HSBC's fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are recognised in the income statement. If the hedge relationship is terminated, the fair value adjustment to the hedged item continues to be reported as part of the basis of the item and is amortised to the income statement as a yield adjustment over the remainder of the hedging period.

Fair value of derivatives designated as fair value hedges

	At 31 December 2008				At 31 December 2007
	Fair value				Fair value
	Assets		Liabilities		Assets		Liabilities
	US$m		US$m		US$m		US$m
Foreign exchange	265		10		163		65
Interest rate	574		1,257		171		338
Equities	-		-		1		-
	839		1,267		335		403

Gains or losses arising from fair value hedges

	2008		2007		2006
	US$m		US$m		US$m
Gains/(losses):
-     on hedging instruments	(296)		(186)		8
-     on the hedged items attributable to the hedged risk	301		205		8
	5		19		16

The gains and losses on ineffective portions of fair value hedges are recognised immediately in 'Net trading income'.

Cash flow hedges 

HSBC's cash flow hedges consist principally of interest rate and cross-currency swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions. Gains and losses are initially recognised directly in equity, in the cash flow hedging reserve, and are transferred to the income statement when the forecast cash flows affect the income statement. 

Fair value of derivatives designated as cash flow hedges

	At 31 December 2008				At 31 December 2007
	Fair value				Fair value
	Assets		Liabilities		Assets		Liabilities
	US$m		US$m		US$m		US$m
Foreign exchange	1,745		816		3,327		306
Interest rate	3,907		3,178		1,588		1,675
	5,652		3,994		4,915		1,981

The schedule of forecast principal balances on which interest cash flows are expected to arise as at 31 December 2008 is as follows:

	3 months     or less		More than 3     months but less     than 1 year		5 years or less     but more than     1 year		More than     5 years
	US$m		US$m		US$m		US$m
At 31 December 2008
Assets	99,426		71,491		52,988		2,081
Liabilities	(83,019)		(77,656)		(62,633)		(7,817)
Net cash inflows/(outflows) exposure	16,407		(6,165)		(9,645)		(5,736)
At 31 December 2007
Assets	90,575		78,215		36,952		227
Liabilities	(89,891)		(77,389)		(68,189)		(5,955)
Net cash inflows/(outflows) exposure	684		826		(31,237)		(5,728)

This table reflects the interest rate repricing profile of the underlying hedged items. 

The gains and losses on ineffective portions of such derivatives are recognised immediately in 'Net trading income'. During the year to 31 December 2008, a loss of US$40 million (2007: loss of US$77 million; 2006: loss of US$122 million) was recognised due to hedge ineffectiveness. 

Hedges of net investments in foreign operations

HSBC's consolidated balance sheet is affected by exchange differences between the US dollar and all the nonߛUS dollar functional currencies of subsidiaries. HSBC hedges structural foreign exchange exposures only in limited circumstances. Hedging is undertaken using forward foreign exchange contracts which are accounted for as hedges of a net investment in a foreign operation, or by financing with borrowings in the same currencies as the functional currencies involved. 

At 31 December 2008, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were liabilities of US$52 million (2007: US$450 million) and notional contract values of US$161 million (2007: US$1,204 million).

The ineffectiveness recognised in 'Net trading income' in the year ended 31 December 2008 that arose from hedges in foreign operations was nil (2007 and 2006: nil).

19    Financial investments 

	2008		2007
	US$m		US$m
Financial investments:
-     not subject to repledge or resale by counterparties	287,479		271,126
-     which may be repledged or resold by counterparties	12,756		11,874
	300,235		283,000

	2008				2007
	Carrying amount		Fair  value		Carrying amount		Fair value
	US$m		US$m		US$m		US$m
Treasury and other eligible bills	41,027		41,027		30,104		30,104
-    available-for-sale	41,027		41,027		30,104		30,104
Debt securities	251,957		253,001		240,302		240,688
-    available-for-sale	237,944		237,944		230,534		230,534
-    held-to-maturity	14,013		15,057		9,768		10,154
Equity securities	7,251		7,251		12,594		12,594
-    available-for-sale	7,251		7,251		12,594		12,594
Total financial investments	300,235		301,279		283,000		283,386
					Amortised    cost		Fair    value
					US$m		US$m
At 31 December 2008
US Treasury					11,528		11,755
US Government agencies1					8,131		8,307
US Government sponsored entities1					15,109		15,240
UK Government					16,077		16,217
Hong Kong Government					966		989
Other government					60,755		61,528
Asset-backed securities2					55,685		36,052
Corporate debt and other securities					145,269		143,940
Equities					5,901		7,251
					319,421		301,279
At 31 December 2007
US Treasury					6,799		6,831
US Government agencies1					5,709		5,732
US Government sponsored entities1					14,732		14,533
UK Government					757		749
Hong Kong Government					3,941		3,942
Other government					60,109		60,320
Asset-backed securities2					64,186		63,976
Corporate debt and other securities					114,955		114,709
Equities					8,405		12,594
					279,593		283,386
At 31 December 2006
US Treasury					10,219		10,203
US Government agencies1					6,004		5,968
US Government sponsored entities1					14,010		13,799
UK Government					7,515		7,502
Hong Kong Government					1,085		1,080
Other government					37,828		38,198
Asset-backed securities2					26,752		26,750
Corporate debt and other securities					93,217		93,311
Equities					6,295		8,297
					202,925		205,108

1    Includes securities that are supported by an explicit guarantee issued by the US Government.

2    Excludes asset-backed securities included under US Government agencies and sponsored entities.

Included within the above figures are debt securities issued by banks and other financial institutions of US$140,878 million (2007: US$142,863 million; 2006: US$86,649 million), of which US$39,213 million (2007: US$2,490 million; 2006: nil) are guaranteed by various governments.

The fair value of the debt securities issued by banks and other financial institutions was US$141,526 million (2007: US$143,023 million; 2006: US$86,596 million). 

	Treasury     and other     eligible bills     available-    for-sale		Debt     securities     available-     for-sale		Debt     securities     held-to-     maturity		Equity     securities		Total
	US$m		US$m		US$m		US$m		US$m
Carrying amount at 31 December 2008
Listed on a recognised exchange	3,539		108,972		2,332		471		115,314
Unlisted	37,488		128,972		11,681		6,780		184,921
	41,027		237,944		14,013		7,251		300,235
Carrying amount at 31 December 2007
Listed on a recognised exchange	1,062		107,059		3,399		3,301		114,821
Unlisted	29,042		123,475		6,369		9,293		168,179
	30,104		230,534		9,768		12,594		283,000

The fair value of listed held-to-maturity debt securities as at 31 December 2008 was US$4,926 million (2007: US$3,469 million). Included within listed investments were US$1,475 million (2007: US$2,066 million) of investments listed in Hong Kong.

The maturities of investment in debt securities at their carrying amount are analysed as follows:

	At 31 December
	2008		2007
	US$m		US$m
Remaining contractual maturity of total debt securities:
1 year or less	72,551		80,979
5 years or less but over 1 year	93,824		76,306
10 years or less but over 5 years	28,141		34,175
Over 10 years	57,441		48,842
	251,957		240,302
Remaining contractual maturity of debt securities available for sale:
1 year or less	71,967		80,498
5 years or less but over 1 year	89,931		74,279
10 years or less but over 5 years	22,402		30,607
Over 10 years	53,644		45,150
	237,944		230,534
Remaining contractual maturity of debt securities held to maturity:
1 year or less	584		481
5 years or less but over 1 year	3,893		2,027
10 years or less but over 5 years	5,739		3,568
Over 10 years	3,797		3,692
	14,013		9,768

The following table provides an analysis of contractual maturities and weighted average yields of investment debt securities as at 31 December 2008:

	Within one year			After one year but within five years			After five years but within ten years			After ten years
	Amount	Yield		Amount	Yield		Amount	Yield		Amount	Yield
	US$m	%		US$m	%		US$m	%		US$m	%
Available-for-sale
US Treasury	41	2.44		1,049	1.14		225	1.89		985	4.52
US Government agencies	-	-		15	6.67		298	5.03		7,324	3.74
US Government-sponsored  agencies	760	4.61		569	6.68		1,398	3.15		10,466	4.70
UK Government	-	-		446	2.47		-	-		1,385	3.25
Hong Kong Government	136	2.21		15	2.84		186	4.84		-	-
Other governments	20,604	3.30		17,182	6.00		3,609	4.56		2,493	3.38
Asset-backed securities	1,088	1.57		2,626	1.87		6,021	2.34		45,765	2.04
Corporate debt and other  securities	49,065	4.28		68,760	3.53		12,460	3.76		3,648	4.22
Total amortised cost	71,694			90,662			24,197			72,066
Total carrying value	71,967			89,931			22,402			53,644
Held-to-maturity
US Treasury	-	-		30	3.45		42	4.76		44	4.55
US Government agencies	-	-		-	-		6	8.81		487	6.37
US Government-sponsored  agencies	-	-		44	4.76		38	7.89		1,845	5.88
Hong Kong Government	19	5.26		-	-		-	-		-	-
Other governments	148	4.73		149	4.70		301	4.32		532	6.58
Asset-backed securities	-	-		-	-		-	-		185	5.95
Corporate debt and other  securities	417	3.84		3,670	4.28		5,352	4.58		704	4.83
Total amortised cost	584			3,893			5,739			3,797
Total carrying value	584			3,893			5,739			3,797

The maturity distributions of asset-backed securities are presented in the above table based upon contractual maturity dates. The weighted average yield for each range of maturities in the above table is calculated by dividing the annualised interest income for the year ended 31 December 2008 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.

20    Transfers of financial assets not qualifying for de-recognition 

HSBC enters into transactions in the normal course of business by which it transfers recognised financial assets directly to third parties or to SPEs. These transfers may give rise to the full or partial derecognition of the financial assets concerned.

• Full derecognition occurs when HSBC transfers its contractual right to receive cash flows from the financial assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, and transfers substantially all the risks and rewards of ownership. The risks include credit, interest rate, currency, prepayment and other price risks. 

• Partial derecognition occurs when HSBC sells or otherwise transfers financial assets in such a way that some but not substantially all of the risks and rewards of ownership are transferred but control is retained. These financial assets are recognised on the balance sheet to the extent of HSBC's continuing involvement. 

The majority of financial assets that do not qualify for derecognition are (i) debt securities held by counterparties as collateral under repurchase agreements or (ii) equity securities lent under securities lending agreements. The following table analyses the carrying amount of financial assets that did not qualify for derecognition and their associated financial liabilities:

	2008				2007
	Carrying     amount of      transferred     assets		Carrying     amount of     associated     liabilities		Carrying     amount of      transferred     assets		Carrying     amount of     associated     liabilities
	US$m		US$m		US$m		US$m
Nature of transaction
Repurchase agreements	94,154		91,139		126,534		126,111
Securities lending agreements	4,497		4,096		24,087		23,304
	98,651		95,235		150,621		149,415

A small proportion of financial assets that do not qualify for derecognition relate to loans, credit cards, debt securities and trade receivables that have been securitised under arrangements by which HSBC retains a continuing involvement in such transferred assets. Continuing involvement may entail retaining the rights to future cash flows arising from the assets after investors have received their contractual terms (for example, interest rate strips); providing subordinated interest; liquidity support; continuing to service the underlying asset; or entering into derivative transactions with the securitisation vehicles. As such, HSBC continues to be exposed to risks associated with these transactions.

The rights and obligations that HSBC retains from its continuing involvement in securitisations are initially recorded as an allocation of the fair value of the financial asset between the part that is derecognised and the part that continues to be recognised on the date of transfer. The following analyses the carrying amount of financial assets to the extent of HSBC's continuing involvement that qualified for partial derecognition during the year, and their associated liabilities:

	Securitisations at 31 December
	2008		2007
	US$m		US$m
Carrying amount of assets (original)	17,427		17,713
Carrying amount of assets (currently recognised)	299		598
Carrying amount of associated liabilities (currently recognised)	149		299

21    Interests in associates and joint ventures

Principal associates of HSBC

	At 31 December 2008				At 31 December 2007
	Carrying     amount		Fair      value		Carrying     amount		Fair      value
	US$m		US$m		US$m		US$m
Listed
Bank of Communications Co., Limited	4,612		6,717		3,957		12,992
Financiera Independencia S.A.B. de C.V.2	-		-		69		206
Industrial Bank Company Limited1	913		1,368		683		4,538
Ping An Insurance (Group) Company of  China, Limited	3,727		5,965		3,790		13,232
SABB Takaful Company3	4		29		5		101
The Saudi British Bank	1,214		3,453		1,082		5,719
	10,470		17,532		9,586		36,788
	At 31 December 2008				At 31 December 2007
	Carrying     amount		Fair      value		Carrying     amount		Fair      value
	US$m		US$m		US$m		US$m
Listed
Bank of Communications Co., Limited	4,612		6,717		3,957		12,992
Financiera Independencia S.A.B. de C.V.2	-		-		69		206
Industrial Bank Company Limited1	913		1,368		683		4,538
Ping An Insurance (Group) Company of  China, Limited	3,727		5,965		3,790		13,232
SABB Takaful Company3	4		29		5		101
The Saudi British Bank	1,214		3,453		1,082		5,719
	10,470		17,532		9,586		36,788

1    Listed on the Shanghai Stock Exchange on 5 February 2007.

2    Listed on the Mexican Stock Exchange on 31 October 2007. HSBC disposed of its share in Financiera Independencia on 25 November 2008.

3    Listed on the Saudi Stock Exchange on 16 June 2007.

	At 31 December 2008
		Country of    incorporation		HSBC's     interest in     equity capital		Issued     equity     capital
Listed
Bank of Communications Co., Limited		PRC1		19.01%		RMB48,994m
Industrial Bank Company Limited3		PRC1		12.78%		RMB5,000m
Ping An Insurance (Group) Company of China, Limited		PRC1		16.78%		RMB7,345m
SABB Takaful Company		Saudi Arabia		32.50%		SR100m
The Saudi British Bank		Saudi Arabia		40.00%		SR6,000m
Unlisted
Barrowgate Limited2,3		Hong Kong		24.64%		-
British Arab Commercial Bank Limited		England		48.92%		£32m fully paid
						£5m nil paid
Vietnam Technological and Commercial Joint Stock Bank3		Vietnam		20.00%	VND3,642,015m
VocaLink		England		13.95%		£100m
Yantai City Commercial Bank3		PRC		20.00%		RMB2,000m
Wells Fargo HSBC Trade Bank, N.A.4		United States		20.00%		-
	At 31 December 2008
		Country of    incorporation		HSBC's     interest in     equity capital		Issued     equity     capital
Listed
Bank of Communications Co., Limited		PRC1		19.01%		RMB48,994m
Industrial Bank Company Limited3		PRC1		12.78%		RMB5,000m
Ping An Insurance (Group) Company of China, Limited		PRC1		16.78%		RMB7,345m
SABB Takaful Company		Saudi Arabia		32.50%		SR100m
The Saudi British Bank		Saudi Arabia		40.00%		SR6,000m
Unlisted
Barrowgate Limited2,3		Hong Kong		24.64%		-
British Arab Commercial Bank Limited		England		48.92%		£32m fully paid
						£5m nil paid
Vietnam Technological and Commercial Joint Stock Bank3		Vietnam		20.00%	VND3,642,015m
VocaLink		England		13.95%		£100m
Yantai City Commercial Bank3		PRC		20.00%		RMB2,000m
Wells Fargo HSBC Trade Bank, N.A.4		United States		20.00%		-

1    People's Republic of China.

2    Issued equity capital is less than HK$1 million. 

3    Investment held through Hang Seng Bank Limited, a 62.14 per cent owned subsidiary of HSBC.

4    Issued equity capital is less than US$1 million.

All the above investments in associates are owned by subsidiaries of HSBC Holdings. 

Details of all HSBC associates and joint ventures will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.

HSBC had US$8,339 million (2007: US$7,747 million) of investments in associates and joint ventures listed in Hong Kong.

For the year ended 31 December 2008, HSBC's share of associates and joint ventures' tax on profit was US$515 million (2007: US$469 million), which is included within share of profit in associates and joint ventures in the income statement.

Summarised aggregate financial information on associates 

	2008		2007
	US$m		US$m
HSBC's share of:
- assets	123,283		100,799
- liabilities	114,578		94,178
- revenues	5,939		5,568
- profit after tax	1,600		1,466

HSBC's investment in Industrial Bank Company Limited was equity accounted with effect from May 2004, reflecting HSBC's significant influence over this associate. HSBC's significant influence was established as a result of representation on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is assisting in the development of financial and operating policies.

HSBC's investment in Ping An Insurance (Group) Company of China, Limited was equity accounted with effect from 31 August 2005, reflecting HSBC's significant influence over this associate. HSBC's significant influence was established as a result of representation on the Board of Directors.

HSBC's significant influence in Bank of Communications Co., Limited was established as a result of representation on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is assisting in the development of financial and operating policies and a number of staff have been seconded to assist in this process.

The statutory accounting reference date of Bank of Communications Co., Limited, Ping An Insurance (Group) Company of China, Limited and Industrial Bank Company Limited is 31 December. For the year ended 31 December 2008, these companies were included on the basis of financial statements made up for the twelve months to 30 September 2008, taking into account changes in the subsequent period from 1 October 2008 to 31 December 2008 that would have materially affected their results.

HSBC also has a 100 per cent interest in the issued preferred stock (less than US$1 million) of Wells Fargo HSBC Trade Bank, N.A. HSBC has a 40 per cent economic interest in Wells Fargo HSBC Trade Bank, N.A. by virtue of the joint agreement under which HSBC's equity capital and preferred stock interests are being held.

HSBC's investment in Financiera Independencia S.A.B. de C.V. was equity accounted with effect from June 2006, reflecting HSBC's significant influence over this associate. HSBC's influence results from representation on the Board of Directors. HSBC disposed of its equity interest in Financiera Independencia on 25 November 2008.

HSBC acquired 15 per cent of Vietnam Technological & Commercial Joint Stock Bank in October 2007. This investment was equity accounted from that date due to HSBC's representation on the Board of Directors and involvement in the Technical Support and Assistance Agreement. In December 2007, as a result of a rights issue in which HSBC did not participate, HSBC's equity interest was diluted to 14.44 per cent. In September 2008, HSBC increased its equity interest to 20 per cent.

HSBC acquired 13.95 per cent of VocaLink in June 2007. This investment was equity accounted from that date, reflecting HSBC's significant influence over that entity arising from representation on the Board of Directors and transactions with the associate.

During 2007, certain HSBC associates issued new shares which HSBC did not subscribe for. As a result, its interests in the associates' equity decreased. The resulting gains from dilution of the Group's interest in the associates are described in Note 4.

Principal interests in joint ventures

	At 31 December 2008
	Country of     incorporation		Principal     activity	HSBC's interest     in equity     capital			Issued     equity     capital
HSBC Saudi Arabia Limited	Saudi Arabia		Investment banking		60.00%		SR50m
Vaultex UK Limited	England		Cash management		50.00%		£10m
Hana HSBC Life Insurance Co., Ltd	South Korea		Insurance manufacturing		49.99%		KRW120,402m
Canara HSBC Oriental Bank of Commerce  Life Insurance Company Limited	India		Insurance manufacturing		26.00%		INR5,250m

Summarised aggregate financial information on joint ventures 

	2008		2007
	US$m		US$m
HSBC's share of:
- current assets	594		448
- non-current assets	281		76
- current liabilities	260		397
- non-current liabilities	449		46
- income	301		339
- expenses	240		302

Goodwill included in carrying amount of associates and joint ventures

	2008		2007
	US$m		US$m
Gross amount
At 1 January	1,308		1,172
Additions	88		203
Disposals	(46)		(29)
Exchange differences	86		90
Other changes	17		(128)
At 31 December	1,453		1,308

Included in the above total, the carrying amount of goodwill arising from joint ventures was US$39 million (2007: nil).

22    Goodwill and intangible assets

Goodwill and intangible assets includes goodwill arising on business combinations, the PVIF long-term insurance business, and other intangible assets.

Goodwill

Reconciliation of goodwill

	Europe		Hong Kong		Rest of      Asia-      Pacific		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
Gross amount
At 1 January 2008	16,744		124		350		12,561		4,474		34,253
Additions	12		-		142		-		1		155
Disposals	(415)		-		-		(13)		-		(428)
Exchange differences	(775)		(2)		(59)		(61)		(609)		(1,506)
Other changes	(55)		-		-		-		-		(55)
At 31 December 2008	15,511		122		433		12,487		3,866		32,419
Accumulated impairment losses
At 1 January 2008	-		-	-	-	-	-		-	-	-
Impairment losses	-		-	-	-	-	(10,564)		-	-	(10,564)
At 31 December 2008	-		-	-	-	-	(10,564)		-	-	(10,564)
Net carrying amount at  31 December 2008	15,511		122		433		1,923		3,866		21,855
Gross amount
At 1 January 2007	15,234		124		325		12,527		4,262		32,472
Additions	42		-		6		-		143		191
Disposals	(43)		-		-		(12)		-		(55)
Exchange differences	1,516		-		19		46		120		1,701
Other changes	(5)		-		-		-		(51)		(56)
At 31 December 2007	16,744		124		350		12,561		4,474		34,253

Impairment charges recognised

At 31 December 2008, HSBC recognised an impairment charge of US$10,564 million (2007: nil) in respect of Personal Financial Services - North America. This was a result of the very significant deterioration in the economic and credit conditions in North America and the resulting further restructuring in the Personal Financial Services - North America cash generating unit ('CGU') in the latter part of 2008. The reduction in the recoverable amount of the main business lines was driven by higher losses than were expected for 2008, including higher levels of impairment charges, contraction in new business from lending activities and a delay in the expected return to profitability of the business. The deterioration in the financial performance was particularly severe in the fourth quarter of 2008. In addition, the discount rate used increased as observed market discount rates increased for US consumer finance and banking businesses.

Impairment testing

Timing of impairment testing 

HSBC's impairment test in respect of goodwill allocated to each CGU is performed as at 1 July each year. In line with the accounting policy set out in Note 2, goodwill is also retested for impairment whenever there is an indication that goodwill may be impaired. Given the extraordinary market events experienced globally during 2008, HSBC performed an additional impairment test on all the CGU's within the Group as at 31 December 2008. For the purpose of impairment testing, the Group's CGUs are based on customer groups and global business separated by geographical region. The CGUs represent the lowest level at which goodwill is monitored by key management personnel.

Basis of the recoverable amount - value in use or fair value less costs to sell

The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use ('VIU') at each respective testing date for 2007 and 2008.

For each significant CGU, the VIU is calculated by discounting management's cash flow projections for each CGU. The pre-tax discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the CGU operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective within the Group of the business units making up the CGUs. However, due to the economic downturn in Personal Financial Services - North America, a 10 year cash flow projection was used.

Key assumptions in VIU calculation and management's approach to determining the values assigned to each key assumption

	2008						2007
Cash-generating unit	Goodwill at 3    31 December 2    2008		Discount     rate		Nominal      growth rate      beyond     initial      cash flow      projections		Goodwill at     1 July      2007		Discount     rate		Nominal      growth rate      beyond      initial      cash flow      projections
	US$m		%		%		US$m		%		%
Personal Financial Services - Europe	4,422		10.0		3.5		4,197		10.3		5.2
Commercial Banking - Europe	3,427		10.0		3.5		3,045		10.1		4.6
Private Banking - Europe	4,470		9.0		3.5		4,694		10.0		3.8
Global Banking and Markets - Europe	3,451		11.0		3.5		3,894		10.1		4.4
Personal Financial Services - North America	-		13.6		3.9		10,564		12.3		4.0
Personal Financial Services - Latin America	2,189		16.8		8.8		2,781		16.4		7.8
Total goodwill in the CGUs listed above	17,959						29,175

At 31 December 2008, aggregate goodwill of US$3,896 million (1 July 2007: US$3,850 million) had been allocated to CGUs that were not considered individually significant. These CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.

Nominal long-term growth rate: external data that reflects the market's assessment of GDP and inflation for the countries within which the CGU operates. The rates used for 2007 and 2008 are taken as an average of the last 10 years.

Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived using a Capital Asset Pricing Model ('CAPM'). The CAPM depends on inputs reflecting a number of financial and economic variables including the risk-free rate in the country concerned and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market's assessment of the economic variables and management's judgement. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM with cost of capital rates produced by external sources. HSBC uses the externally-sourced cost of capital rates where, in management's judgement, those rates reflect more accurately the current market and economic conditions. At 31 December 2008, the rates used in the impairment test for Personal Financial Services - Latin America was based on externally sourced rates.

Management's judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are based on plans approved by the Group Management Board. The key assumptions in addition to the discount rate and nominal long-term growth rate for each significant CGU are discussed below.

Personal Financial Services - Europe and Commercial Banking - Europe: the assumptions included in the cash flow projections for Personal Financial Services - Europe and Commercial Banking - Europe reflect the economic environment and financial outlook of the European countries within these two segments. Key assumptions include the level of interest rates and the level and change in unemployment rates, particularly in the UK. While current economic conditions and the economic outlook in Europe remain challenging, management's cash flow projections are based on these prevailing conditions. Despite the severity of the conditions at the balance sheet date, management does not expect these conditions to continue over the longer term. The downside risks to this assessment include the risk of a prolonged and severe economic recession in the UK, accompanied by higher discount rates reflecting increased investor perceptions of risk. Management's current assessment is that the probability of this downside risk scenario is low. Accordingly, based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Personal Financial Services - Europe or Commercial Banking - Europe.

Private Banking - Europe: the revenues in Private Banking - Europe are predominately generated through HSBC's client relationships. For 2009, the forecast cash flows reflect the downward pressure on brokerage and portfolio management fees, with the latter being affected by the decline in equity market values. Thereafter, the nominal long-term growth rates described in the table above have been used. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Private Banking - Europe.

Global Banking and Markets - Europe: the cash flows generated by Global Banking and Markets - Europe are diversified and there is no one key assumption that drives the cash flow projection of this CGU. 

The forecast cash flows in the 2009 plan continue to reflect challenging global economic conditions. One of the key factors which may impact the carrying value of this CGU is the level of impairment charges which may emerge in the future, particularly in respect of holdings of available-for-sale sub-prime and Alt-A Residential MBSs. Based on management's current assessment of the credit quality of these securities, which includes stressed scenarios for collateral defaults and house prices, and the level of credit support available, management determined that based on the conditions at the balance sheet date a reasonably possible change in impairment of available-for-sale sub-prime and Alt-A Residential MBSs would not cause an impairment to be recognised in respect of Global Banking and Markets - Europe.

Personal Financial Services - Latin America: the assumptions included in the cash flow projections for Personal Financial Services - Latin America reflect the economic environment and financial outlook of the countries within this segment, with Brazil and Mexico being two of the largest countries included within this segment. Key assumptions include the growth in lending and deposit volumes, the credit quality of the loan portfolios and operational efficiency improvements. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Personal Financial Services - Latin America.

The present value of in-force long-term insurance business 

Movement on the PVIF

	2008		2007
	US$m		US$m
At 1 January	1,965		1,549
Value of new business written during the year	452		380
Acquisition of subsidiaries or portfolios	-		390
Movement from in-force business (including investment return variances and changes in investment assumptions)	(311)		(204)
Exchange differences and other movements	(73)		(150)
At 31 December	2,033		1,965

PVIF-specific assumptions

The key assumptions used in the computation of PVIF for HSBC's main life insurance operations were:

	2008						2007
	UK		Hong Kong		France		UK		Hong Kong		France
	%		%		%		%		%		%
Risk free rate	4.30		1.14		4.03		4.30		3.51		4.26
Risk discount rate	8.00		11.00		8.00		8.00		11.00		8.00
Expenses inflation	3.50		3.00		2.00		3.40		3.00		2.00

The PVIF represents the value of the shareholder's interest in the in-force business of the life insurance operations. The calculation of the PVIF is based upon assumptions that take into account risk and uncertainty. To project these cash flows, a variety of assumptions regarding future experience is made by each insurance operation which reflects local market conditions and management's judgement of local future trends. Some of the Group's insurance operations incorporate risk margins separately into the projection assumptions for each product, while others incorporate risk margins into the overall discount rate. This is reflected in the wide range of risk discount rates applied.

Other intangible assets

The analysis of the movement of intangible assets, excluding the PVIF, was as follows:

	Trade names		Mortgage     servicing     rights		Internally generated software		Purchased software		Customer/ merchant relation- ships		Other		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
Cost
At 1 January 2008	63		1,202		3,473		760		1,866		165		7,529
Additions1	-		158		764		118		169		23		1,232
Acquisition of subsidiaries	10		-		-		68		4		267		349
Disposals	-		-		(43)		(26)		(25)		(3)		(97)
Exchange differences	(8)		-		(561)		(59)		(264)		(24)		(916)
Other changes	2		-		(204)		6		(1)		(7)		(204)
At 31 December 2008	67		1,360		3,429		867		1,749		421		7,893
Accumulated amortisation
At 1 January 2008	(44)		(724)		(2,167)		(549)		(541)		(33)		(4,058)
Charge for the year2	(6)		(299)		(365)		(114)		(227)		(20)		(1,031)
Impairment	-		-		-		(1)		-		-		(1)
Disposals	-		-		18		6		10		-		34
Exchange differences	5		-		311		36		80		1		433
Other changes	-		-		211		(9)		(3)		-		199
At 31 December 2008	(45)		(1,023)		(1,992)		(631)		(681)		(52)		(4,424)
Net carrying amount at 31 December 2008	22		337		1,437		236		1,068		369		3,469
Cost
At 1 January 2007	57		1,078		2,871		645		1,655		179		6,485
Additions1	-		124		587		104		140		6		961
Acquisition of subsidiaries	-		-		-		-		4		-		4
Disposals	-		-		(7)		(21)		(6)		(2)		(36)
Exchange differences	6		-		81		38		83		1		209
Other changes	-		-		(59)		(6)		(10)		(19)		(94)
At 31 December 2007	63		1,202		3,473		760		1,866		165		7,529
Accumulated amortisation
At 1 January 2007	(21)		(619)		(1,772)		(426)		(320)		(13)		(3,171)
Charge for the year2	(20)		(108)		(327)		(120)		(209)		(21)		(805)
Impairment	-		-		(3)		-		-		-		(3)
Disposals	-		-		-		18		6		1		25
Exchange differences	(3)		-		(51)		(25)		(17)		-		(96)
Other changes	-		3		(14)		4		(1)		-		(8)
At 31 December 2007	(44)		(724)		(2,167)		(549)		(541)		(33)		(4,058)
Net carrying amount at 31 December 2007	19		478		1,306		211		1,325		132		3,471
Net carrying amount at  1 January 2007	36		459		1,099		219		1,335		166		3,314

1    At 31 December 2008, HSBC had US$2 million (2007: US$47 million) of contractual commitments to acquire intangible assets. 

2    The amortisation charge for the year is recognised within the income statement under 'Amortisation and impairment of intangible assets', with the exception of the amortisation of mortgage servicing rights that is charged to net fee income.

 

END

 

 

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