Grupo Financiero HSBC 3Q 2010

RNS Number : 2160V

HSBC Holdings PLC

29 October 2010

 



29 October 2010

GRUPO FINANCIERO HSBC, S.A. DE C.V.

THIRD QUARTER 2010 FINANCIAL RESULTS - HIGHLIGHTS

·    Net income before tax and before including the undistributed profits of subsidiaries for the nine months to 30 September 2010 was MXN1,325 million, an increase of MXN447 million or 50.9 per cent compared with MXN878 million for the same period in 2009.

·    Net income for the nine months to 30 September 2010 was MXN1,887 million, an increase of MXN324 million or 20.7 per cent compared with MXN1,563 million for the same period in 2009.

·    Total operating income for the nine months to 30 September 2010 was MXN16,016 million, an increase of MXN863 million or 5.7 per cent compared with MXN15,153 million in the same period in 2009.

·    Loan impairment charges for nine months to 30 September 2010 were MXN7,508 million, a decrease of MXN3,908 or 34.2 per cent compared with MXN11,416 million for the same period in 2009.

·    Net loans and advances to customers were MXN152.9 billion at 30 September 2010, an increase of MXN5.4 billion or 3.7 per cent compared with MXN147.5 billion at 30 September 2009. Total impaired loans as a percentage of gross loans and advances to customers improved to 3.6 per cent compared with 5.7 per cent at 30 September 2009.  The coverage ratio was 175.2 per cent compared with 121.3 per cent at 30 September 2009.

·    Deposits were MXN245.8 billion at 30 September 2010, an increase of MXN23.7 billion or 10.6 per cent compared with MXN222.1 billion at 30 September 2009.

·    Return on equity was 5.2 per cent for the nine months to 30 September 2010, compared with 5.6 per cent for the same period in 2009. The decrease in return on equity is largely driven by the capital injection received in December 2009.

·    At 30 September 2010, the bank's capital adequacy ratio was 15.9 per cent and the tier 1 capital ratio was 12.3 per cent, compared with 13.5 per cent and 9.7 per cent respectively at 30 September 2009.

HSBC Mexico S.A. (the bank) is Grupo Financiero HSBC, S.A. de C.V.'s (Grupo Financiero HSBC) primary subsidiary company and is subject to supervision by the Mexican Banking and Securities Commission. The bank is required to file financial information on a quarterly basis (in this case for the quarter ended 30 September 2010) and this information is publicly available. Given that this information is available in the public domain, Grupo Financiero HSBC, S.A. de C.V. has elected to file this release.

Results are prepared in accordance with Mexican GAAP (Generally Accepted Accounting Principles).

Overview

GDP for the third quarter of 2010 recovered strongly, increasing 7.6 per cent year-on-year and 3.2 per cent on a seasonally adjusted quarterly basis. Expectations of a less dynamic US economy pose negative risks for the Mexican industrial sector. Domestically, high unemployment levels, tight credit conditions, and low levels of consumer confidence will likely restrain domestic demand.

2010 inflation forecasts have reduced to 4.5 per cent from 4.9 per cent. As such, it is now expected that the Central Bank will gradually begin to tighten monetary policy in the last quarter of 2011 to 5.0 per cent from the current rate of 4.5 per cent.

Grupo Financiero HSBC continues to focus on its strategy to become the best bank for its clients, shareholders and employees. Asset quality continues to improve as a result of prudent risk management and strengthened collections operations. Capital strength remains a key pillar to support business growth and investments in our branch network and technological infrastructure.

For the nine months to 30 September 2010, Grupo Financiero HSBC's net income was MXN1,887 million, an increase of MXN324 million or 20.7 per cent compared with the same period in 2009. The reduction in loan impairment charges and growth in net income from subsidiaries continue to drive improved results, more than offsetting lower revenues and increased expenses in the bank when compared to the same period in 2009.

Net interest income was MXN14,996 million, a decrease of MXN909 million or 5.7 per cent compared with the same period in 2009. This reduction is driven by lower margins on customer deposits as a result of lower interest rates and lower consumer portfolio volumes, particularly credit cards.

Loan impairment charges were MXN7,508 million, a decrease of MXN3,908 million or 34.2 per cent when compared with the same period in 2009. This reduction is mainly driven by improved credit quality, achieved through tighter origination criteria and enhanced collection practices, particularly in consumer lending. The decrease in loan impairment charges was achieved despite MXN550 million additional reserves for the "Punto Final" programme recognised in July 2010.

Risk adjusted net interest income as of 30 September 2010 was MXN7,488 million, up by MXN2,999 million or 66.8 per cent when compared with MXN4,489 million for the same period in 2009.

Net fee income was MXN5,922 million, a decrease of MXN1,551 million or 20.8 per cent compared with the same period in 2009. Lower credit card fees continue to negatively impact fee income, mainly driven by lower volume. In addition, lower transactional volumes from payments and cash management and ATM transactions have also contributed to the decrease in fee income.

Trading income was MXN1,912 million, a decrease of MXN659 million or 25.6 per cent compared with the same period in 2009. This reduction mostly results from strong performance in foreign exchange in 2009 as a result of greater market volatility. Market conditions have been less volatile in 2010 which have led to lower foreign exchange and debt trading operations, partially offset by an increase in securities sales and derivative trading.

Administrative and personnel expenses were MXN16,894 million, an increase of MXN1,074 million or 6.8 per cent compared with the same period in 2009. This increase is mainly due to higher personnel costs, resulting from increased headcount and increased expenditure related to infrastructure and technology.

Non-banking subsidiaries continue to report solid performance. This was most notable in the insurance company HSBC Seguros, which reported net profit of MXN958 million up by 4.9 per cent compared with the same period in 2009.  This increase is primarily a result of higher earned premiums in individual life products (T-5) and life endowment products, in addition to higher income in the investment portfolio. Results have also benefited from savings from renegotiation of reinsurance contracts for 2010 and tight expense control.

Net loans and advances to customers increased MXN5.4 billion or 3.7 per cent to MXN152.9 billion at 30 September 2010 compared with 30 September 2009. This increase is mainly due to growth in high quality assets, such as loans to financial institutions and government entities.

Total impaired loans decreased by 36.2 per cent to MXN5.8 billion at 30 September 2010 when compared with 30 September 2009, mainly due to a 61.6 per cent reduction in non-performing consumer loans. Total impaired loans as a percentage of gross loans and advances to customers improved to 3.6 per cent from 5.7 per cent at 30 September 2009.

Total loan loss allowances at 30 September 2010 were MXN10.2 billion, a decrease of MXN0.9 billion or 7.9 per cent when compared with 30 September 2009. The total coverage ratio (allowance for loan losses divided by impaired loans) was 175.2 per cent at 30 September 2010, when compared with 121.3 per cent at 30 September 2009.

Total deposits were MXN245.8 billion at 30 September 2010, an increase of MXN23.7 billion or 10.6 per cent when compared with 30 September 2009. This is due to an increased focus on sales and promotion of deposit products. Demand deposits increased MXN29.6 billion or 26.1 percent to MXN143.4 billion and time deposits decreased MXN6.0 billion or 5.8 percent to MXN98.1 billion.

At 30 September 2010, the bank's capital adequacy ratio was 15.9 per cent when compared with 13.5 per cent at 30 September 2009. The tier 1 capital ratio was 12.3 per cent when compared with 9.7 per cent at 30 September 2009.  This increase is primarily the result of the MXN8,954 million capital injection received in the fourth quarter of 2009.

Business Highlights

Personal Financial Services (PFS)

During the third quarter of the year, PFS increased product penetration and cross selling to the current customer base.  In addition special focus was given to promoting products to the affluent segment.

As a sign of success in our strategy to improve the customer experience, our flagship deposit account products "Flexible" and "Nomina" received the highest ranking by the Commission for Financial Services Users Protection -  (CONDUSEF) for transparency and quality of information provided to customers.

Payroll accounts continue to grow as a result of further product enhancements and nationwide advertising campaigns.

Despite a contraction in the consumer lending market, several strategies were deployed to promote our consumer products. Some of the promotions implemented for credit cards include instalments on all purchases, back-to-school offers, balance transfers, preferential interest rates and convenience cheque cash advances. In July 2010, the Advance Visa credit card was launched in order to provide our new Advance segment customers with a superior credit card proposition.

For consumer loans, we have deployed large scale marketing campaigns and targeted direct mail marketing campaigns for payroll and personal loan customers. In August 2010, record sales were achieved in payroll and personal loans. Special focus has also been given to improving customer sales experience through simplified ATM screens to facilitate payroll and personal loan disbursements.

New wealth management product offerings have been made available for our more affluent customers, such as our enhanced range of mutual funds.  All of our mutual funds can now also be purchased direct through internet banking.

Commercial Banking

Deposits and loans grew by 14 per cent and 39 per cent respectively when compared to 30 September 2009.

Our specialised Business Banking sales force is now nationwide and enhancements to the "Credito a Negocios" product have increased credit applications by 100 per cent.

During this quarter we have supported our corporate clients with integrated foreign exchange and treasury solutions and structured finance products. The latter has contributed to our strategy to be a Leading International Business partner.

The States and Municipalities credit portfolio has increased 43 per cent. The increase in credit has leveraged a deposit growth of 29 per cent compared with the third quarter of 2009.

Global Banking and Markets

Global Markets reported strong results for the nine months to 30 September 2010, with the third quarter being the strongest reporting period to date. 

Balance Sheet Management continued to benefit from prudent interest rate positioning. Year to date trading results, although encouraging, continue to be lower when compared to 30 September 2009. The bank continued to strengthen its presence in the local market, evidenced by improved rankings and market share in Interest Rates and Foreign Exchange products.

Debt Capital Markets continued to support the growth of local debt markets through active involvement in first-of-its kind transactions, and introducing new asset classes such as the State of Mexico's securitisation of future real estate registry revenue. The bank continues to consolidate its position as a leading underwriter in Mexico by maintaining its second position in the local debt issuance league tables.

The Global Banking business continued to grow in line with its strategy. A recent example of connectivity between the local and HSBC New York based Global Banking teams was the referral of a transaction for one of the world's largest wireless telecom providers, involving the issuance of an inaugural fixed income bond denominated in Euro and Sterling, which provided a new funding source for the company.

Advisory deals have been executed successfully in a joint effort with the HSBC Global Banking business worldwide. For example, HSBC acted as an exclusive financial and M&A advisor in an important acquisition with a company dedicated to the production and distribution of soft drinks. The bank also acted as arranger in a senior unsecured term loan for a branded consumer food company to acquire a leading value brand company in the packaged meat sector in the US. These transactions set a precedent for future offerings of alternative funding options to our clients.

About HSBC

Grupo Financiero HSBC, S.A. de C.V. is one of the leading financial groups in Mexico with 1,187 branches, 6,503 ATMs, approximately eight million total customer accounts and more than 20,000 employees. For more information, consult our website at www.hsbc.com.mx.

Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly owned subsidiary of HSBC Holdings plc, and a member of the HSBC Group. With around 8,000 offices in 87 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa and assets of US$2,418 billion at 30 June 2010, HSBC is one of the world's largest banking and financial services organisations. HSBC is marketed worldwide as 'the world's local bank'.

For further information contact:

London
Brendan McNamara	Alastair Brown
Group Media Relations	Investor Relations
Telephone: [phone]	Telephone: [phone]
Mexico City
Lyssette Bravo	Yordana Aparicio
Public Affairs	Investor Relations
Telephone: [phone]	Telephone: [phone]

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Balance Sheet

		GROUP				BANK
Figures in MXN millions		30 Sep		30 Sep		30 Sep		30 Sep
		2010		2009		2010		2009
Assets
Cash and deposits in banks		70,238		60,387		70,238		60,387
Margin accounts		2		3,685		2		3,685
Investment in securities		148,262		116,290		146,757		115,616
Trading securities		46,681		60,071		46,020		59,870
Available-for-sale securities		93,360		47,450		92,516		46,977
Held to maturity securities		8,221		8,769		8,221		8,769
Repurchase agreements		-		3,500		-		3,500
Derivative transactions		35,337		31,865		35,337		31,865
Performing loans
Commercial loans		73,610		72,034		73,610		72,034
Loans to financial intermediaries		11,948		7,008		11,948		7,008
Consumer loans		27,076		32,734		27,076		32,734
Mortgage loans		19,302		19,834		19,302		19,834
Loans to government entities		25,343		17,807		25,343		17,807
Total performing loans		157,279		149,417		157,279		149,417
Impaired loans
Commercial loans		1,809		2,153		1,809		2,153
Consumer loans		1,826		4,756		1,826		4,756
Mortgage loans		2,176		2,200		2,176		2,200
Total impaired loans		5,811		9,109		5,811		9,109
Gross loans and advances to customers		163,090		158,526		163,090		158,526
Allowance for loan losses		(10,179)		(11,051)		(10,179)		(11,051)
Net loans and advances to customers		152,911		147,475		152,911		147,475
Benefits to be received from trading operations		-		168		-		168
Other accounts receivable		45,039		16,845		44,931		16,615
Foreclosed assets		167		164		167		164
Property, furniture and equipment, net		7,932		6,721		7,932		6,714
Long-term investments in equity securities		4,656		4,000		119		127
Deferred taxes		4,023		4,168		4,088		4,228
Goodwill		2,749		2,749		-		-
Other assets, deferred charges and intangibles		4,725		2,602		4,623		2,522
Total assets		476,041		400,619		467,105		393,066

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Balance Sheet
(continued)

		GROUP				BANK
Figures in MXN millions		30 Sep		30 Sep		30 Sep		30 Sep
		2010		2009		2010		2009
Liabilities
Deposits		245,789		222,147		245,986		222,269
Demand deposits		143,404		113,750		143,601		113,872
Time deposits		98,123		104,136		98,123		104,136
Issued credit securities		4,262		4,261		4,262		4,261
Bank deposits and other liabilities		13,869		23,029		13,869		23,029
On demand		3,000		-		3,000		-
Short-term		9,282		21,629		9,282		21,629
Long-term		1,587		1,400		1,587		1,400
Repurchase agreements		42,476		32,612		42,476		32,612
Settlement accounts		10,606		161		10,606		161
Collateral sold		4,415		6,697		4,415		6,697
Derivative transactions		38,175		31,621		38,175		31,621
Other payable accounts		59,977		36,346		59,741		35,972
Income tax and employee profit sharing payable		1,149		1,742		1,001		1,587
Sundry creditors and other accounts payable		58,828		34,604		58,740		34,385
Subordinated debentures outstanding		10,074		9,655		10,074		9,655
Deferred taxes		724		538		724		538
Total liabilities		426,105		362,806		426,066		362,554
Equity
Paid in capital		32,678		23,725		25,605		16,623
Capital stock		9,434		8,452		5,087		4,334
Additional paid in capital		23,244		15,273		20,518		12,289
Other reserves		17,253		14,083		15,431		13,886
Capital reserves		1,726		1,648		14,449		14,313
Retained earnings		13,058		11,582		-		-
Result from the mark-to-market of   available-for-sale securities		890		(490)		750		(593)
Result from cash flow hedging transactions		(308)		(220)		(308)		(220)
Net income		1,887		1,563		540		386
Minority interest in capital		5		5		3		3
Total equity		49,936		37,813		41,039		30,512
Total liabilities and equity		476,041		400,619		467,105		393,066

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Balance Sheet
(continued)

		GROUP				BANK
Figures in MXN millions		30 Sep		30 Sep		30 Sep		30 Sep
		2010		2009		2010		2009
Memorandum Accounts
Guarantees granted		21		31		21		31
Contingent assets and liabilities		119		124		119		124
Irrevocable lines of credit granted		17,785		11,850		17,785		11,850
Goods in trust or mandate		282,699		249,973		282,699		249,973
Goods in custody or under administration		265,633		204,931		260,522		200,803
Collateral received by the institution		12,730		14,844		8,432		10,198
Collateral received and sold or delivered as guarantee		12,037		11,342		7,739		6,697
Third party investment banking operations, net		51,096		56,489		51,096		56,489
Other control accounts		1,925,633		1,610,312		1,884,434		1,572,110
		2,567,753		2,159,896		2,512,847		2,108,275

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Income Statement

		GROUP				BANK
Figures in MXN millions		30 Sep		30 Sep		30 Sep		30 Sep
		2010		2009		2010		2009
Interest income		21,007		24,219		20,972		24,118
Interest expense		(6,011)		(8,314)		(6,005)		(8,163)
Net interest income		14,996		15,905		14,967		15,955
Loan impairment charges		(7,508)		(11,416)		(7,508)		(11,416)
Risk-adjusted net interest income		7,488		4,489		7,459		4,539
Fees and commissions receivable		6,971		8,206		6,271		7,524
Fees payable		(1,049)		(733)		(1,020)		(725)
Trading income		1,912		2,571		1,905		2,565
Other operating income		694		620		694		620
Total operating income		16,016		15,153		15,309		14,523
Administrative and personnel   expenses		(16,894)		(15,820)		(16,795)		(15,449)
Net operating income		(878)		(667)		(1,486)		(926)
Other income		3,096		2,571		3,201		2,440
Other expenses		(893)		(1,026)		(838)		(1,023)
Net other income		2,203		1,545		2,363		1,417
Net income before taxes		1,325		878		877		491
Income tax and employee profit   sharing tax		(684)		(2,514)		(543)		(2,372)
Deferred income tax		228		2,221		197		2,241
Net income before subsidiaries		869		585		531		360
Undistributed income from   subsidiaries		1,010		979		0		27
Income from ongoing operations		1,879		1,564		531		387
Minority interest		8		(1)		9		(1)
Net income		1,887		1,563		540		386

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Statement of Changes in Shareholders' Equity

GROUP

	Capital  contributed	Capital  reserves	Retained  earnings	Result from valuation of available-for-sale securities	Result from cash flow hedging transactions	Net  income	Minority interest	Total  equity
Figures in MXN million
Balances at 1 January 2010	32,678	1,648	11,582	(76)	(400)	1,554	3	46,989
Movements inherent to the shareholders' decision
Transfer of result of prior years	-	78	1,476	-	-	(1,554)	-	-
Total	-	78	1,476	-	-	(1,554)	-	-
Movements for the recognition of the comprehensive income
Net income	-	-	-	-	-	1,887	2	1,889
Result from      valuation of available-      for-sale securities	-	-	-	966	-	-	-	966
Result from cash flow    hedging transactions	-	-	-	-	92	-	-	92
Total	-	-	-	966	92	1,887	2	2,947
Balances at 30 September 2010	32,678	1,726	13,058	890	(308)	1,887	5	49,936

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Statement of Changes in Shareholders' Equity
(continued)

BANK

Figures in MXN millions	Capital  contributed	Capital  reserves	Retained  earnings	Result from valuation of available-for-sale securities	Result from cash flow hedging transactions	Net  income	Minority interest	Total  equity
Balances at 1 January 2010	25,605	14,313	-	(160)	(400)	136	3	39,497
Movements inherent to    the shareholders'    decision
Transfer of result of      prior years	-	136	-	-	-	(136)	-	-
Total	-	136	-	-	-	(136)	-	-
Movements for the    recognition of the    comprehensive income
Net income	-	-	-	-	-	540	-	540
Result from      valuation of available-      for-sale securities	-	-	-	910	-	-	-	910
Result from cash flow    hedging transactions	-	-	-	-	92	-	-	92
Total	-	-	-	910	92	540	-	1,542
Balances at 30 September 2010	25,605	14,449	-	750	(308)	540	3	41,039

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Statement of Cash Flows

GROUP

Figures in MXN millions	30 Sep 2010
Net income	1,887
Adjustments for items not involving cash flow:	6,354
Gain or loss on appraisal of activities associated with investment & financing	(1,669)
Allowances for loan losses	7,534
Depreciation and amortisation	1,021
Income tax and deferred taxes	456
Undistributed income from subsidiaries	(988)
Changes in items related to operating activities:
Investment securities	(14,054)
Repurchase agreements	1,593
Derivative (assets)	(10,275)
Loan portfolio	(10,914)
Foreclosed assets	(19)
Operating assets	(37,331)
Deposits	7,250
Bank deposits and other liabilities	(10,987)
Creditors repo transactions	17,974
Collateral sold or delivered as guarantee	(1,890)
Derivative (liabilities)	11,043
Subordinated debentures outstanding	(147)
Other operating liabilities	44,894
Funds provided by operating activities	(2,863)
Investing activities:
Acquisition of property, furniture and equipment	(1,434)
Intangible assets acquisitions	(2,028)
Funds used in investing activities	(3,462)
Financing activities:
Increase in cash and equivalents	1,916
Cash and equivalents at beginning of period	68,322
Cash and equivalents at end of period	70,238

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Statement of Cash Flows
(continued)

BANK

Figures in MXN millions	30 Sep 2010
Net income	540
Adjustments for items not involving cash flow:	7,252
Gain or loss on appraisal of activities associated with investment & financing	(1,667)
Allowances for loan losses	7,534
Depreciation and amortisation	1,021
Income tax and deferred taxes	346
Undistributed income from subsidiaries	18
Changes in items related to operating activities:
Investment securities	(13,830)
Repurchase agreements	1,593
Derivative (assets)	(10,339)
Loan portfolio	(10,914)
Foreclosed assets	(19)
Operating assets	(37,311)
Deposits	7,260
Bank deposits and other liabilities	(10,987)
Creditors repo transactions	17,932
Collateral sold or delivered as guarantee	(1,890)
Derivative (liabilities)	11,043
Subordinated debentures outstanding	(147)
Other operating liabilities	45,180
Funds provided by operating activities	(2,429)
Investing activities:
Acquisition of property, furniture and equipment	(1,432)
Intangible assets acquisitions	(2,015)
Funds used in investing activities	(3,447)
Financing activities:
Increase in cash and equivalents	1,916
Cash and equivalents at beginning of period	68,322
Cash and equivalents at end of period	70,238

Grupo Financiero HSBC, S.A. de C.V.	Differences between Mexican GAAP and International Financial Reporting Standards (IFRS)

Grupo Financiero HSBC

HSBC Holdings plc, the parent of Grupo Financiero HSBC S.A. de C.V. reports its results under International Financial Reporting Standards (IFRS). Set out below is a reconciliation of the results of Grupo Financiero HSBC S.A. de C.V. from Mexican GAAP to IFRS for the nine months to 30 September 2010 and an explanation of the key reconciling items.

		30 Sep
	Figures in MXN millions	2010
	Grupo Financiero - Net Income Under Mexican GAAP	1,887
	Differences arising from:
	Valuation of pensions and post retirement healthcare benefits W	60
	Acquisition costs relating to long-term investment contracts W	(26)
	Deferral of fees received and paid on the origination of loans	29
	Recognition and provisioning for loan impairments W	1,274
	Purchase accounting adjustments W	(15)
	Recognition of the present value in-force of long-term insurance contracts W	(11)
	Other W	257
	Net income under IFRS	3,455
	US dollar equivalent (millions)	272
	Add back tax expense	877
	Profit before tax under IFRS	4,332
	US dollar equivalent (millions)	341
	Exchange rate used for conversion	12.71

^W Net of tax at 30 per cent.

Summary of key differences between Grupo Financiero's results as reported under Mexican GAAP and IFRS

Valuation of pensions and post retirement healthcare benefits

Mexican GAAP

Obligations are recognised in the Income Statement of each year based on actuarial computations of the present value of those obligations using the projected unit credit method and real interest rates.

Unrecognised past service costs are amortised on an estimated service life of the employees.

IFRS

Obligations are recognised in the Income Statement of each year based on actuarial computations of the present value of those obligations using the projected unit credit method.

Actuarial gains and losses are recognised in stockholders equity as they arise.

Unrecognised past service costs are recognised in the Income Statement as they arise.

Acquisition costs of long-term investment contracts

Mexican GAAP

All costs related to the acquisition of long-term investment contracts are expensed as they are incurred.

IFRS

Incremental costs relating to the acquisition of long-term investment contracts are deferred and amortised over the expected life of the contract.

Fees paid and received on origination of loans

Mexican GAAP

All fees received on loan origination are deferred and amortised over the life of the loan using straight line method. However, this policy was introduced 1 January 2007, all fees having previously been recognised up front.

IFRS

Fees and expenses received or paid on origination of a loan that are directly attributable to the origination of that loan are accounted for under the effective interest rate method over the expected life of the loan. This policy has been in effect since 1 January 2005.

Loan impairment charges

Mexican GAAP

Loan impairment charges are calculated following the rules issued by the Mexican Ministry of Finance and the National Banking and Securities Commission. Such rules establish authorised methodologies for determining the amount of provision for each type of loan.

IFRS

Impairment losses on collectively assessed loans are calculated as follows:

·      When appropriate empirical information is available, the Bank utilises roll rate methodology. This methodology employs statistical analysis of historical data and experience of delinquency and default to estimate the amount of loans that will eventually be written off as a result of events occurring before the balance sheet date which the Bank is not able to identify on an individual loan basis, and that can be reliably estimated.

·      In other cases, loans are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective loss.

Impairment losses on individually assessed loans are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the resultant present value with the loans current carrying value.

Purchase accounting adjustments

Purchase accounting adjustments arose from the valuation of assets and liabilities on acquiring Grupo Financiero Bital in November 2002 under IFRS. Under Mexican GAAP, a different valuation methodology is applied.

Recognition of present value of in-force long-term life insurance contracts

Mexican GAAP

The present value of future earnings is not recognised. Premiums are accounted for on a received basis and reserves are calculated in accordance with guidance as set out by the Insurance Regulator (Comisión Nacional de Seguros y Fianzas).

IFRS

A value is placed on insurance contracts that are classified as long-term insurance business and are in-force at the balance sheet date. The present value of in-force long-term insurance business is determined by discounting future earnings expected to emerge from business currently in force using appropriate assumptions in assessing factors such as recent experience and general economic conditions.

 

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