Final Results - Year Ended 31 Dec 1999, Part 2

HSBC Hldgs PLC
28 February 2000

Part 2


Operating expenses

Figures in US$m                1999                   1998         
                                                                   
By geographical segment:                                           
                                           %                     % 
Europe                        5,454     47.2         5,197    46.2 
Hong Kong                     1,896     16.4         1,851    16.5 
Rest of Asia-Pacific          1,162     10.1         1,052     9.4 
North America                 1,585     13.7         1,424    12.7 
Latin America                 1,450     12.6         1,711    15.2 
                             11,547    100.0        11,235   100.0 
Intra-Group elimination        (198)                  (231)       
Group total                  11,349                 11,004         


By expense category:                                               
                                                                   
Staff costs                   6,692                  6,321         
                                                                   
Premises and equipment                                             
  (excluding depreciation)    1,329                  1,454         
                                                                   
Other administrative        
  expenses                    2,329                  2,315
Administrative expenses      10,350^                10,090^       

Depreciation and
  amortisation                  999                    914         
 
Total operating expenses     11,349                 11,004         

Cost:income ratio              54.0%                  54.9%       


^   Included in administrative expenses were US$164 million
    of restructuring costs relating to RNYC and SRH (1998 costs
    included US$180 million of Canary Wharf vacant space
    provisions).

In markets where revenue growth was subdued considerable
focus was directed to controlling our cost base. In
particular, operating costs continued to be tightly
controlled in Hong Kong and the Rest of Asia-Pacific as cost
structures were adjusted to the changed economic environment.
The business in Hong Kong operated under a pay freeze, which
is continuing into 2000. However, higher performance-related
remuneration reflecting improved investment banking results
caused an overall increase in staff costs in Hong Kong. In
Malaysia we introduced a Voluntary Separation Scheme, at a
cost of US$16 million, which has reduced year-end headcount
by 1,000. Elsewhere in the Rest of Asia-Pacific, there were
cost increases to support business expansion with 15 new
branches opened across the region, call centres upgraded in
Malaysia and Australia and mobile salesforces established or
expanded in India,Taiwan and Malaysia.

In Europe, higher business volumes and new business initiatives
(particularly in wealth management products) contributed to an
increase in costs in UK Banking and stronger investment banking
results also led to higher performance-related remuneration.

The devaluation of the Brazilian real benefited expenses by
US$524 million and, on a constant exchange basis, the Latin
American cost base grew by 22.2 per cent. Our former
associates in Argentina, Maxima and La Buenos Aires New York
Life, which offer pension management and life insurance
services, became subsidiaries during the year and HSBC Bank
Malta (formerly Mid-Med Bank) joined the Group in June 1999.
These structural changes added US$124 million to the 1999
cost base when compared to 1998. Although the 1999 results do
not include any contributions from RNYC and SRH, US$164
million of restructuring charges in respect of these
acquisitions was charged to expenses in 1999. Costs for 1998
included US$180 million for the prospective move to Canary
Wharf. The cost growth within Investment Banking was
essentially in performance-related remuneration based on
exceptional results.

The Group's cost:income ratio improved to 54.0 per cent.

Bad and doubtful debts

Figures in US$m               1999                  1998          

By geographical segment:
                                           %                    % 
Europe                         438      21.1         369     14.0 
Hong Kong                      585      28.2         747     28.3 
Rest of Asia-Pacific           809      39.1       1,219     46.3 
North America                  108       5.2         109      4.1 
Latin America                  133       6.4         193      7.3 

Group total                  2,073     100.0       2,637    100.0

By category:

Loans and advances to
  customers

- specific charge:
  new provisions             2,993                  3,273 
  releases and recoveries     (869)                  (655)
                             2,124                  2,618 

- net general
  (release)/charge             (47)                    10

Customer bad and doubtful
  debt charge                2,077                  2,628

Loans and advances to banks

- net specific 
  (release)/charge             (4)                      9

Total bad and doubtful 
  debt charge                2,073                  2,637

New and additional specific provisions against exposures to
customer advances were 8.6 per cent lower than in 1998.
Releases and recoveries also improved in 1999 and the bad
and doubtful debt charge fell by 21.0 per cent to US$2,077
million representing 89 basis points of average loans and
advances to customers.

The Group's credit experience in 1999 reflected the different
stages reached in the economic cycles throughout the world.
The significant provisions made in 1998 against exposures to
customers in Indonesia and Thailand have proved to be
appropriately conservative and further provisioning against
exposures in these countries in 1999 was approximately 12 per
cent of the comparable charge in 1998.

In Malaysia, the deterioration in credit quality experienced
since the second half of 1998 has stabilised. Although the
1999 charge against Malaysian exposure was broadly in line
with that for 1998, the second half charge was significantly
lower than in the first half and reflected the slower growth
in non-performing loans during the latter part of the year.

A single major Korean relationship adversely impacted the
second half bad and doubtful debt charge with the
provisioning requirement impacting facilities arising in Asia
and in the UK. The other major deterioration in credit
quality in 1999 arose from certain exposures related to
mainland China. Just over 30 per cent of the provisions
booked in Hong Kong and the Rest of Asia-Pacific, excluding
those in Malaysia and the Korean relationship referred to
above, was attributable to these exposures. However, there
are signs that asset quality related to mainland China
exposures is stabilising.

Asset quality in Hong Kong has stabilised and economic
conditions improved, with the result that the 1999 charge for
bad and doubtful debts was significantly lower than in 1998.

In the UK, the increase in the provision charge reflected
both the return to a more normal credit environment and an
increase in the level of personal lending. Personal lending
exposure, by its nature, requires a higher level of
provisioning and this, together with provisions raised
against a small number of corporate lending exposures,
resulted in the increased charge in 1999.

There was a small net release of general provisions. This
mainly reflected the contraction in corporate lending in
Asia. Given the time lag generally experienced between an
improvement in economic conditions and the bottom of the
credit cycle, the special general provision of US$290 million
in respect of Asian risk raised in 1997 remained intact.
However, if economic conditions continue to improve in Asia,
the Group may begin to release this provision during the
course of 2000.

Non-performing customer advances, which included those coming
from acquisitions, increased by US$1,501 million to US$10,372
million in 1999 although the rate of growth slowed
considerably in the second half of the year. Non-performing
loans grew by US$551 million, net of write-offs, in the
second half of 1999 and were impacted by acquisitions and the
Korean relationship referred to earlier. At 31 December 1999,
non-performing customer advances represented 4.0 per cent of
gross customer advances (31 December 1998: 3.7 per cent).


Customer loans and advances and provisions

Figures in US$m                            1999          1998

Loans and advances to customers (gross) 262,351        242,489

Residential mortgages                    66,397         62,212
Hong Kong SAR Government Home
  Ownership Scheme                        6,565          6,291
Other personal                           31,706         25,732
Total personal                          104,668         94,235
Commercial, industrial and 
  international trade                    60,843         61,411
Commercial real estate                   24,823         24,116
Other property-related                    8,208          8,249
Government                                5,173          5,285
Non-bank financial institutions          17,125         11,763
Settlement accounts                       3,769          4,963
Other commercial^                        37,742         32,467


Specific provisions outstanding against
  loans and advances                      5,692          4,608

Non-performing loans^^                   10,372          8,871

Specific provisions outstanding as a
  percentage of non-performing loans^^     54.9%          51.9%

Non-performing loans as a percentage of
  gross loans and advances to
  customers^^                               4.0%           3.7%

Customer bad and doubtful debt charge
  as a percentage of closing gross
  loans and advances^^^                    0.85%           1.1%

^   Includes advances in respect of Agriculture, Transport,
    Energy and Utilities

^^  Net of suspended interest

^^^ Excluding RNYC and SRH


Country risk and cross-border exposure
                              Brazil   Indonesia   Malaysia   South   Thailand
Figures in US$bn                                              Korea

At 31 December 1999

In-country local currency 
  obligations                    6.2         0.5         6.2    1.1        0.7

In-country foreign currency
  obligations                    0.2         0.8         0.7    0.8        0.4

Net cross-border obligations     1.3         0.5         0.5    1.3        0.2
                                 1.5         1.3         1.2    2.1        0.6

Claims under contracts in
  financial derivatives          0.1           -           -      -          -

Total exposure                   7.8         1.8         7.4    3.2        1.3

Figures in US$m

Non-performing customer
  loans^                          80         551         992    316        358

Specific provisions
  outstanding                     65         473         596    223        217

At 30 June 1999

Figures in US$bn

Total exposure                   6.0         1.7         7.5    3.9        1.6

Figures in US$m

Non-performing customer
  loans^                         126         588         950      7        499

Specific provisions
  outstanding                     82         443         550      5        333

At 31 December 1998

Figures in US$bn

Total exposure                   9.2         1.4         7.4    3.6        2.3

Figures in US$m

Non-performing customer
  loans^                         135         643         693     34        575

Specific provisions
  outstanding                     89         410         357     23        350

^ Net of suspended interest

The table provides in-country and cross-border outstandings
and claims under contracts in financial derivatives for
Indonesia, South Korea, Thailand, and Brazil, all of which
have negotiated arrangements with the International Monetary
Fund (IMF), as well as Malaysia, which implemented currency
control restrictions in 1998. They are prepared in accordance
with the Bank of England Country Exposure Report (Form C1)
guidelines. On this basis, the figures exclude accrued
interest and intra-Group exposures.

In-country obligations represent local offices' on-balance-
sheet exposures to and acceptances given under facilities
opened on behalf of local residents.

Net cross-border obligations represent non-local offices' on-
balance-sheet exposures to and acceptances given under
facilities opened on behalf of customers based on the country
of residence of the borrower or guarantor of ultimate risk,
irrespective of whether such exposures are in local or
foreign currency.

Cross-border risk is controlled centrally through a well-
developed system of country limits, which are frequently
reviewed to avoid concentrations of transfer, economic or
political risks.

Brazil signed an agreement with the IMF in December 1998
designed to sustain confidence in Brazil's exchange rate
regime following economic uncertainty after the default by
Russia on its domestic debt. After the float of the Brazilian
currency in January 1999, Brazil agreed to revised economic
targets with the IMF, thereby allowing it to resume drawing
funds under the IMF programme. Subsequently, in March 1999,
Brazil reached agreement with a group of international banks
(including HSBC) whereby the banks voluntarily maintained
their trade-related business and inter-bank lines with Brazil
for a period of six months. This agreement was not extended
in view of the improvement in economic stability and an
inflow of foreign investment.

In September 1998, Malaysia introduced a limited form of
exchange controls to curb currency speculation against the
Malaysian ringgit following the regional economic crisis
which commenced in 1997. This involved, inter alia, fixing
the exchange rate at 3.8 Malaysian ringgit to the US dollar.
As pressure on the ringgit subsided, interest rates fell and
the markets calmed, the Malaysian authorities have
subsequently been able to relax the majority of these
controls. A comprehensive programme to restructure and
recapitalise the banking system has been put in place through
the establishment of two government agencies: Pengurusan
Danaharta Nasional Berhad, which has absorbed non-performing
loans from Malaysian banks; and Danamodal Nasional Berhad,
which works to recapitalise banks where required.

On 31 March 1998, a loan agreement was signed between a group
of international banks (including HSBC) and the Republic of
Korea, which was the first stage of the programme to address
South Korea's economic problems. The loan agreement
facilitated a voluntary exchange of short-term credits owed
by Korean banks for new loans with one, two and three year
maturities guaranteed by the Republic of Korea. Subsequent to
the completion of the loan exchange, foreign currency
liquidity pressures in South Korea eased considerably, and
the sovereign rating of the country was reinstated to
investment grade. On 8 April 1999, repayment of the one year
maturity tranche of these loans took place and all principal
and interest remains current. In September 1999, some Korean
obligors prepaid a portion of their remaining debt under this
scheme.

Thailand has not entered into any specific arrangements with
the foreign banking community to restructure its foreign
currency obligations. However, Thailand has taken positive
steps under its IMF programme to recapitalise its financial
system.

On 4 June 1998, an agreement was reached between the Steering
Committee of Banks for Indonesia (including HSBC) and the
Indonesia Debt Negotiation team for a comprehensive programme
to address Indonesia's external debt problems. The programme
consists of three principal components: (i) the voluntary
maintenance of trade finance by foreign banks to the
Indonesian banking system, effected by the completion of
individual agreements between Bank Indonesia (the central
bank) and the foreign banks during the second half of 1998;
(ii) an exchange offer through which foreign banks could
exchange specified existing exposures to Indonesian banks for
loans guaranteed by Bank Indonesia with maturities of one,
two, three and four years, which is evidenced by a number of
separate loan agreements completed during the second half of
1998; and (iii) 'INDRA', the Government of Indonesia's
voluntary programme for the provision of foreign exchange
availability to Indonesian corporate obligors which is
applicable on a case-by-case basis. In respect of (ii) above,
on 8 April 1999, a second exchange offer was concluded
extending maturities in years 2000 and 2001 to years 2002 to
2005. In August 1999, repayments of the one year maturities
were made on schedule.

Asset disposition

Figures in US$m                 At 31DEC98          At 31DEC99

Total assets 
                                            %                   % 
Europe                       190,823     40.2      211,222    37.7 
Hong Kong                    149,127     31.3      165,420    29.6 
Rest of Asia-Pacific          57,253     12.0       55,291     9.9 
North America                 63,903     13.4      110,120    19.7 
Latin America                 14,614      3.1       17,181     3.1 
                                                                  
Group total                  475,720    100.0      559,234   100.0 

Asset disposition                                                     
                                                                 
                              At                Other         At  
Figures in US$m          31DEC98   RNYC/SRH  movements    31DEC99 
                                                                    
Loans and advances to                                               
  customers              235,295      18,449      (177)   253,567 
                                                                   
Loans and advances to                                             
  banks                   85,315      8,766      5,996    100,077 
                                                                  
Debt securities           69,185     32,060      8,823    110,068 
                                                                  
Treasury bills and                                                
  other eligible bills    21,980        222      1,011     23,213 
                                                                  
Equity shares              4,221        443       (186)     4,478 
                                                                   
Other                     59,724      13,113     (5,006)    67,831 
                         475,720      73,053     10,461    559,234 
                                                                   
HK SAR Government                                                  
  certificates of                                                  
  indebtedness             7,408                             9,905 
Total assets             483,128                           569,139 
                                                                   
Loans and advances to                                              
  customers include:                                               
  - reverse repos          2,951                             8,411 
  - settlement                                                     
    accounts               4,959                             3,769 
                                                                   
Loans and advances to                                              
  banks include:                                                   
  - reverse repos          7,411                            10,172 
  - settlement                                                     
    accounts               2,207                             1,579 

Total assets increased by US$86 billion, mostly as a result
of the acquisitions of RNYC and SRH, made during the year.

Excluding RNYC and SRH, an underlying increase in gross
lending to customers in Europe, from a growth in personal
lending, was offset by reductions in Asia and Latin America
as a result of the weak economic conditions and currency
devaluation in Brazil. In Hong Kong, advances fell due to a
reduced demand for corporate lending and the Group taking a
lower market share of new residential mortgage business due
to intense price competition. This was partially offset by an
increase in advances made under the Government Home Ownership
Scheme. In the rest of the Asia-Pacific region, there was an
encouraging increase in the level of personal lending
following the expansion in personal banking within several
countries in the region. However, this growth was outweighed
by a fall in demand for corporate lending.

Debt securities held in accrual books showed an unrecognised
loss, net of off-balance-sheet hedges, of US$110 million
(December 1998: unrealised gain US$298 million). Equity
shares included US$1,521 million (December 1998: US$1,140
million) held on investment account, on which there was an
unrecognised gain of US$911 million (December 1998: US$589
million).


Capital resources                                                 
                                       At 31DEC99        At 31DEC98 
                                                                    
Capital ratios                                  %                 % 
                                                                    
Total capital ratio                          13.2              13.6 
                                                                    
Tier 1 capital ratio                          8.5               9.7 
                                                                    
Composition of capital                                              
Figures in US$m                                                     
Tier 1:                                                             
  Shareholders' funds and minorities                                
  less property revaluation reserves and                            
  goodwill capitalised                     28,533            29,352 
                                                                    
Tier 2:                                                             
  Property revaluation reserves             2,353             2,121 
  General provisions                        2,088             1,807 
  Perpetual subordinated debt               3,264             3,276 
  Term subordinated debt                   10,151             6,433 
  Minority interests in tier 2 capital        577                 - 
                                                                    
Total qualifying tier 2 capital            18,433            13,637 
                                                                    
Unconsolidated investments                 (1,487)           (1,266)
Investments in other banks                 (1,032)             (503)
Other deductions                             (177)             (128)
Total capital                              44,270            41,092 
                                                                    
Total risk-weighted assets                336,126           301,950 
                                                                    
The above figures were computed in accordance with the EU
Consolidated Supervision Directive.

Tier 1 capital decreased by US$3.4 billion due to the
acquisition of RNYC and SRH. The US$3 billion ordinary share
capital raised to partially fund the acquisitions was more
than offset by US$6.2 billion of goodwill. Internal capital
generation continued to be strong with US$2.5 billion of
profit retained being added to capital during the year.

Tier 2 capital increased mainly due to the subordinated debt
and preference shares taken on with RNYC and SRH as part of
their acquisition (US$2.9 billion) and issues made by HSBC
Holdings during the year (US$1.3 billion).

Risk-weighted assets increased following the acquisition of
RNYC and SRH (US$29 billion and US$9 billion respectively).
These increases were partially offset by small reductions
elsewhere in the Group.


HSBC European Operations
                                                                          
Financial Review by Geographical Segment

HSBC European Operations                                                  
                                                                          
Figures in US$m                                     1999             1998 
                                                                          
Profit before tax                                  3,322            2,884 
                                                                          
Share of Group pre-tax profits                      41.6%            43.9%
                                                                          
Total assets                                     211,222          190,823 
                                                                          
Share of Group total assets                         37.7%            40.2%
                                                                          
Year end staff numbers (FTE basis)                53,861           49,798 
                                                                          
Cost:income ratio                                   59.5%            62.0%
                                                                          

Our European operations contributed US$3,322 million to the
Group's profit before tax for 1999, an increase of 15.2 per
cent over 1998, and represented 41.6 per cent of the Group's
profit before tax. At constant exchange rates, Europe's profit
before tax increased by 18.6 per cent over 1998.

HSBC Bank plc's UK Banking operating profit before provisions
increased by 7.1 per cent from US$2,580 million in 1998 to
US$2,764 million. Operating profit was US$2,184 million, an
increase of 1.2 per cent compared with 1998. At constant
exchange rates, the underlying increase in UK Banking's
operating profit before provisions was 9.8 per cent. The
following commentary on UK Banking's results is based on the
underlying currency results.

HSBC Bank continued to focus on the delivery of wealth
management services to personal customers, growing the bank's
commercial business and extending the range of services
available to our large corporate customers. Particular emphasis
was placed on growing fee-based business and on making our
product range competitive and transparent to our personal
customers. This strategy was rewarded through growth in current
accounts of US$6.0 billion or 13 per cent, an increase in
savings and deposit accounts of US$2.1 billion or 28 per cent,
and a 26.9 per cent increase in income from the sale of Life,
Pensions and Investments products.

First Direct also continued to perform well with pre-tax
profit increasing by US$29 million to US$81 million. First
Direct acquired 117,000 new cheque account customers in 1999
bringing the total cheque account customer base to over
966,000. Additionally, First Direct was rated favourite on-
line bank by Interactive Investor International in October
1999.

UK Banking's net interest income was US$138 million higher at
US$3,257 million principally due to growth in personal and
business current account and savings balances, supported by
the simplification of the bank's product range and pricing in
1998.

MORE TO FOLLOW



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