Grupo Financiero HSBC First Half 2011 Results

RNS Number : 3255L

HSBC Holdings PLC

29 July 2011

 



29 July 2011

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

FIRST HALF 2011 FINANCIAL RESULTS - HIGHLIGHTS

·    Net income before taxes for the first half of 2011 was MXN1,968m, an increase of MXN683m or 53.2% compared with MXN1,285m in the first half of 2010. The 2011 results were affected by restructuring charges, the majority of which related to a reorganization of the bank's regional services. Excluding the effect of these charges, net income before taxes would have been MXN2,945m, up by MXN1,660m or 129.2% compared to the first half of 2010.

·    Net income for the first half of 2011 was MXN1,583m, an increase of MXN536m or 51.2% compared to the first six months of 2010. Excluding the effect of the restructuring charges, net income would have been MXN2,267m, up MXN1,220m or 116.5% compared with the first half of 2010.

·    Total operating income, net of loan impairment charges, for the first half of 2011 was MXN14,911m, an increase of MXN2,785m or 23.0% compared with MXN12,126m in the first six months of 2010.

·    Loan impairment charges for the first half of 2011 were MXN3,202m, a decrease of MXN2,089m or 39.5% compared with MXN5,291m in the first six months of 2010.

·    Net loans and advances to customers were MXN178.2bn at 30 June 2011, an increase of MXN34.2bn or 23.8% compared with MXN144.0bn at 30 June 2010. Total impaired loans as a percentage of gross loans and advances to customers improved to 2.5% compared with 4.2% at 30 June 2010. The coverage ratio (allowance for loan losses divided by impaired loans) was 215.8% compared with 158.1% at 30 June 2010.

·    At 30 June 2011, deposits were MXN273.3bn, an increase of MXN41.9bn or 18.1% compared with MXN231.4bn at 30 June 2010.

·    Return on equity was 6.5% for the first half of 2011, compared with 4.4% for the same period in 2010.

·    At 30 June 2011, the bank's capital adequacy ratio was 13.98% and the Tier 1 capital ratio was 10.77%, compared with 16.63% and 12.89%, respectively at 30 June 2010, and 14.5 per cent and 11.2 per cent respectively at 31 December 2010.

·    From the first quarter of 2011, regulatory requirements issued by the Comisión Nacional Bancaria y de Valores - CNBV - require financial figures for both the insurance and bond companies, HSBC Seguros and Fianzas Mexico respectively, to be presented on a consolidated basis. As a result, first half 2010 financial results have been re-stated to be comparable with first half of 2011.

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 first half ended 30 June 2011) 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

The economic environment in the first half of 2011 has been mixed. During the first half of 2011, the Mexican economy continued the recovery observed in the last quarter of 2010. In the second quarter of 2011, however, there has been a slowdown in economic momentum in the US, which is likely to have a negative impact on the Mexican industrial sector in the second half of the year.

Domestic demand continues to expand at a moderate pace, slowed by unemployment which is still relatively high. Despite this, the Mexican economy is still expected to grow by 4.1% in 2011. Inflationary pressures continue to be benign, aided by the strengthening of the Mexican peso.

During the first six months of 2011, Grupo Financiero HSBC's net income was MXN1,583m, a increase of MXN536m or 51.2% compared with the first six months of 2010. Higher trading income and lower impairment charges were offset by lower net interest income, net fee income and increased administrative expenses, the latter largely impacted by the restructuring charges.

Net interest income was MXN10,708m, a decrease of MXN561m or 5.0% compared with the first six months of 2010. This decline was mainly driven by higher funding costs, lower credit card balances, and a contraction in spreads in lending products, which were partially offset by higher spreads on available for sale securities.

Loan impairment charges were MXN3,202m, a decline of MXN2,089m or 39.5% compared with the first six months of 2010. This decrease is due to a general improvement in credit quality across the portfolios and lower credit card volumes.

Net fee income was MXN2,910m, a decrease of MXN422m or 12.7% compared with the first six months of 2010. This reduction was mainly a result of a decline in the volume of credit cards and fewer account services and ATM fees, where increased charges to non-HSBC customers led to a change in customer behaviour. Fee income has been also affected by regulatory restrictions limiting the fees that can be charged for ATM and customer deposit services.

Trading income was MXN1,898m, an increase of MXN814m or 75.1% compared with the first six months of 2010. The improvement in trading income is mainly the result of a strong performance in derivatives, partially offset by lower foreign exchange and debt trading results.

Administrative and personnel expenses were MXN12,960m, an increase of MXN2,116m or 19.5% compared with the first six months of 2010. This increase is mainly driven by IT related costs, higher personnel expenses and restructuring charges, partially explained by headcount reduction. Excluding the effect of the restructuring charges, the increase in expenses would have been MXN1,139m or 10.5% compared with the first six months of 2010.

Other operating income was MXN2,597m, an increase of MXN865m or 49.9% compared to the first six months of 2010. This increase is mainly driven by the gain on the sale and leaseback of certain branches in the network.

The performance of non-banking subsidiaries, particularly HSBC Seguros, contributed positively to the bank's results, reporting a net profit of MXN 1,517m for the six months to 30 June 2011, an increase of 25% when compared with the first six months of 2010. The higher results were driven by a 20% growth in net premium income since 30 June 2010, while expenses reduced by 16%. The claims ratio improved 11% when compared to the same period of 2010, mainly due to (T-5) individual life products. In addition, expenses in respect of claims decreased as the result of a refinement to the methodology for calculating claims reserves.

Net loans and advances to customers increased MXN34.2bn or 23.8% to MXN178.2bn at 30 June 2011 compared with 30 June 2010. This increase is mainly driven by growth in the commercial portfolio.

At 30 June 2011, total impaired loans had decreased by 29.7% to MXN4.5bn compared with 30 June 2010, mainly due to a 43.1% reduction in impaired consumer loans, as collections and underwriting processes were tightened. Total impaired loans as a percentage of gross loans and advances to customers improved to 2.5% from 4.2% at 30 June 2010.

Total loan loss allowances at 30 June 2011 were MXN9.7bn, a decrease of MXN414m or 4.1% compared to 30 June 2010. The total coverage ratio (allowance for loan losses divided by impaired loans) was 215.8% at 30 June 2011 compared with 158.1% at 30 June 2010. This increase in the coverage ratio is primarily driven by a reduction in impaired consumer loans, particularly in credit cards.

Total deposits were MXN273.3bn at 30 June 2011, an increase of MXN41.9bn or 18.1% compared with 30 June 2010. This is the result of targeted promotions of the 'Advance', 'Inversion diaria' and 'Premier' deposit products.

At 30 June 2011, the bank's capital adequacy ratio was 13.98% compared with 16.63% at 30 June 2010. The Tier 1 capital ratio was 10.77% compared with 12.89% at 30 June 2010. The reduction in the capital adequacy ratio is mainly due to an increase in credit risk assets, the impact of the adoption of local regulatory operational risk requirements, dividends paid in the first quarter of 2011 and a decrease in retained earnings related to change in local provisioning methodology. Additionally, available for sale security valuations decreased during the first half of 2011, negatively impacting the capital ratio, however this was partially offset by a decrease in market risk RWAs.

In the first quarter of 2011, the bank paid a dividend of MXN1,800m representing MXN1.095 per share and Grupo Financiero HSBC paid a dividend of MXN3,520m representing MXN1.377 per share.

Business Highlights

Retail Banking and Wealth Management (RBWM)

During the first half of 2011, RBWM continued to achieve solid sales in its consumer loan portfolios and repositioned the wealth management business. The New Branch Operating Model is the primary support platform, aimed at developing relationship managers into financial advisors.

New product offerings and promotions were launched in order to reinforce our focus on wealth management, such as: equity trading through personal internet banking and campaigns targeted at providing investment solutions to our affluent customers.

Special focus was placed on leveraging our Global Banking and Commercial Banking relationships to cross-sell our payroll service capabilities. This resulted in the highest payroll account increase in a quarter in the last 6 years, reporting at the second quarter of 2011 a 175% increase in accumulated new payrolls compared with the first quarter of 2011.

Credit card balances across the industry remained flat. However, as a result of the "+ Puntos & + Millas" campaign, we have increased credit card sales by 43% compared to the last quarter. This campaign has also resulted in increased balances in our credit card portfolio. In addition, we launched several strategies aimed at reducing the seasonal balance decrease with campaigns such as instalments on purchases, balance transfers, credit limit increases, extended preferential rates, cash advances and convenience cheques.

We also continued improving the efficiency of our branch network through consolidation where we closed 66 branches during the first half of the year. At the same time, average total branch floor space increased from 410m² in 2010 to 413m² at 30 June 2011.

Commercial Banking

During the first half of 2011, the Commercial Banking loan portfolio and deposits grew by 30% and 21% respectively compared to 30 June 2010. 

The "HSBC Empresas" credit card, which was launched three months ago to our business banking customers, is growing strongly. Various strategies are being implemented to encourage the use of this credit card.

Our business proposition for the Business Banking upper segment, which provides customers with a dedicated relationship manager, was launched in the second quarter of 2011. This will be rolled out to the large cities of the northern and central regions of the country during the second half of the year.

For our corporate clients, we are implementing business strategies aimed at increasing our participation in Trade and Supply Chain, Payments and Cash Management, and Global Markets.

Global Banking and Markets

For the first half of 2011, Global Markets continued to report good revenues in balance sheet management and trading.

Cross-selling of Global Markets' products and services to all the bank's customer segments remains the key growth driver. A clear illustration of the success of these initiatives is the distribution of FX structured notes. 

In the Debt Capital Markets business, we have placed and participated in bond issuances for a total transaction amount of MXN78,417m, including United Mexican States (UMS), CEMEX, Inbursa, Santander, INFONAVIT, Bancomext, Alsea, Gas Natural and Interacciones. As a result of these issuances, Grupo Financiero HSBC is placed second in local debt capital market league tables.

During the first half of 2011, Global Banking's credit and lending business originated new lending to corporate clients in excess of MXN11,960m, compared to MXN8,000m in the first half of 2010.

Global Banking continues to grow average balances, particularly in Client Bank Deposits which have reported a 63% increase in average balances compared to 30 June 2010.

During the first half of 2011, our Advisory platform participated in two major transactions, the acquisition of business assets by Petrotemex and the merger of Embotelladora Arca and Grupo Continental, creating the second largest Coca Cola bottler in Latin America.

Sale of HSBC Afore to Principal Financial Group

On 11 April 2011, Grupo Financiero HSBC signed an agreement to sell HSBC Afore, S.A. de C.V., its pension funds management business, to Principal Financial Group, S.A. de C.V. ('Principal') for a cash consideration of MXN2,360m (approximately US$198m).

Grupo Financiero HSBC and Principal are working together to ensure a smooth transition and have agreed to establish an exclusive distribution agreement, under which Principal will continue the sale and servicing of its pension fund products through Grupo Financiero HSBC's retail banking network in Mexico.

The transaction, which is awaiting all regulatory approvals, is expected to be completed in the third quarter of 2011.

Grupo Financiero HSBC 2011 financial results as reported to HSBC Holdings plc, our ultimate parent company, under International Financial Reporting Standards (IFRS)

For the first half of 2011, Grupo Financiero HSBC reported pre-tax profits of MXN3,433m, an increase of MXN601m or 21.2% compared with MXN2,832m in the first half of 2010.

The higher results compared to that reported under Mexican GAAP is largely due to lower loan impairment charges as result of the different provisioning methodologies. A reconciliation and explanation between the Mexican GAAP and IFRS results is included with the financial statements of this document.

About HSBC

Grupo Financiero HSBC, is one of the leading financial groups in Mexico with 1,078 branches, 6,249 ATMs, approximately eight and a half million total customer accounts and more than 19,000 employees. For more information, consult our website at www.hsbc.com.mx.

Grupo Financiero HSBC is a 99.99% directly owned subsidiary of HSBC Latin America Holdings (UK) Limited, which is a wholly owned subsidiary of HSBC Holdings plc, and a member of the HSBC Group. With around 7,500 offices in 87 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa and with assets of US$2,598bn at 31 March 2011, 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]

Consolidated Balance Sheet

		GROUP				BANK
Figures in MXN millions		30 Jun		30 Jun		30 Jun		30 Jun
		2011		2010		2011		2010
Assets
Cash and deposits in banks		53,637		46,593		53,634		46,590
Margin accounts		8		3		8		3
Investment in securities		172,448		175,312		157,931		160,384
Trading securities		37,665		63,383		30,808		56,639
Available-for-sale securities		119,913		95,795		119,913		95,478
Held to maturity securities		14,870		16,134		7,210		8,267
Repurchase agreements		7,774		-		7,773		-
Derivative transactions		28,633		27,829		28,633		27,829
Performing loans
Commercial loans		86,489		64,781		86,489		64,781
Loans to financial intermediaries		17,042		11,979		17,042		11,979
Consumer loans		28,613		27,306		28,613		27,306
Mortgage loans		17,834		19,477		17,834		19,477
Loans to government entities		27,992		24,207		27,992		24,207
Total performing loans		177,970		147,750		177,970		147,750
Impaired loans
Commercial loans		1,330		1,857		1,330		1,857
Consumer loans		1,324		2,325		1,324		2,325
Mortgage loans		1,850		2,226		1,850		2,226
Total impaired loans		4,504		6,408		4,504		6,408
Gross loans and advances to customers		182,474		154,158		182,474		154,158
Allowance for loan losses		(9,720)		(10,134)		(9,720)		(10,134)
Receivable		5,488		-		5,488		-
Net loans and advances to customers		178,242		144,024		178,242		144,024
Premium receivables		310		306		-		-
Accounts receivables from reinsurers and rebonding companies		343		409		-		-
Other accounts receivable		32,804		28,414		32,887		28,616
Foreclosed assets		165		165		161		165
Property, furniture and equipment, net		8,205		7,739		8,205		7,736
Long-term investments in equity securities		192		192		113		118
Long-term assets available for sale		2,361		2,330		1		-
Deferred taxes		5,454		4,552		5,328		4,558
Goodwill		1,218		1,218		-		-
Other assets, deferred charges and intangibles		4,260		4,213		3,917		3,900
Total assets		496,054		443,299		476,833		423,923

		GROUP				BANK
Figures in MXN millions		30 Jun		30 Jun		30 Jun		30 Jun
		2011		2010		2011		2010
Liabilities
Deposits		273,255		231,370		274,106		231,570
Demand deposits		158,190		126,400		159,041		126,600
Time deposits		110,829		100,735		110,829		100,735
Issued credit securities		4,236		4,235		4,236		4,235
Bank deposits and other liabilities		30,161		16,767		30,161		16,767
On demand		3,950		5,194		3,950		5,194
Short-term		24,744		9,938		24,744		9,938
Long-term		1,467		1,635		1,467		1,635
Repurchase agreements		48,985		23,630		54,509		27,953
Stock borrowing		2		-		2		1
Settlement accounts		-		13,155		-		13,155
Collateral sold		10,292		18,589		4,769		14,264
Derivative transactions		27,274		31,376		27,274		31,376
Technical reserves		10,675		10,263		-		-
Reinsurers		83		241		-		-
Other payable accounts		37,547		38,086		38,743		37,408
Income tax		1,162		1,405		694		1,083
Contributions for future capital increases		-		-		2,013		-
Sundry creditors and other accounts Payable		36,385		36,681		36,036		36,325
Subordinated debentures outstanding		9,824		10,160		9,824		10,159
Deferred taxes		645		848		606		812
Total liabilities		448,743		394,485		439,994		383,465
Equity
Paid in capital		32,673		32,678		25,605		25,605
Capital stock		5,111		9,434		5,087		5,087
Additional paid in capital		27,562		23,244		20,518		20,518
Other reserves		14,627		16,125		11,231		14,850
Capital reserves		1,832		1,726		11,069		14,449
Retained earnings		11,262		13,058		(302)		-
Result from the mark-to-market of    available-for-sale securities		220		607		220		477
Result from cash flow hedging    transactions		(270)		(313)		(270)		(312)
Net income		1,583		1,047		514		236
Minority interest in capital		11		11		3		3
Total equity		47,311		48,814		36,839		40,458
Total liabilities and equity		496,054		443,299		476,833		423,923

		GROUP				BANK
Figures in MXN millions		30 Jun		30 Jun		30 Jun		30 Jun
		2011		2010		2011		2010
Memorandum Accounts		2,729,366		2,527,369		2,625,729		2,414,302
Third party accounts		95,467		79,360		51,453		44,303
Clients current accounts		149		23		-		-
Custody operations		31,969		24,946		-		-
Transactions on behalf of clients		11,896		10,088		-		-
Third party investment banking operations, net		51,453		44,303		51,453		44,303
Proprietary position		2,633,899		2,448,009		2,574,276		2,369,999
Guarantees granted		16		26		16		26
Contingent assets and liabilities		95		124		95		124
Irrevocable lines of credit granted		16,909		16,185		16,909		16,185
Goods in trust or mandate		311,753		277,105		311,753		277,105
Goods in custody or under administration		265,996		250,496		260,885		245,386
Collateral received by the institution		40,791		21,896		40,791		21,827
Collateral received and sold or delivered as guarantee		40,524		23,643		34,990		19,322
Values in deposit		53		53		-		-
Suspended interest on impaired loans		224		274		224		273
Recovery guarantees for issued bonds		36,649		48,011		-		-
Paid claims		14		13		-		-
Cancelled claims		2		17		-		-
Responsibilities from bonds in force		3,614		3,591		-		-
Other control accounts		1,917,259		1,806,575		1,908,613		1,789,751

Consolidated Income Statement

		GROUP				BANK
Figures in MXN millions		30 Jun		30 Jun		30 Jun		30 Jun
		2011		2010		2011		2010
Interest income		14,811		14,683		14,447		14,367
Interest expense		(4,800)		(3,985)		(4,810)		(3,977)
Earned premiums		1,519		1,375		-		-
Increase in technical reserves		(133)		(135)		-		-
Claims		(689)		(669)		-		-
Net interest income		10,708		11,269		9,637		10,390
Loan impairment charges		(3,202)		(5,291)		(3,202)		(5,291)
Risk-adjusted net interest income		7,506		5,978		6,435		5,099
Fees and commissions receivable		3,876		4,432		3,723		4,251
Fees payable		(966)		(1,100)		(677)		(670)
Trading income		1,898		1,084		1,521		811
Other operating income		2,597		1,732		2,731		2,047
Total operating income		14,911		12,126		13,733		11,538
Administrative and personnel expenses		(12,960)		(10,844)		(13,096)		(11,150)
Net operating income		1,951		1,282		637		388
Undistributed income from subsidiaries		17		3		18		2
Net income before taxes		1,968		1,285		655		390
Income tax		(776)		(1,017)		(318)		(711)
Deferred income tax		229		560		183		549
Net income before discontinued operations		1,421		828		520		228
Discontinued operations		168		211		-		-
Minority interest		(6)		8		(6)		8
Net income		1,583		1,047		514		236

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 millions
Balances at 1 January 2011	32,673	1,726	13,058	140	(213)	2,119	10	49,513
Movements inherent to the shareholders' decision
Transfer of    result of prior    years	-	106	2,013	-	-	(2,119)	-	-
Cash    dividends	-	-	(3,520)	-	-	-	-	(3,520)
Other	-	-	(289)	-	-	-	-	(289)
Total	-	106	(1,796)	-	-	(2,119)	-	(3,809)
Movements for the recognition of the comprehensive income
Net income	-	-	-	-	-	1,583	1	1,584
Result from    valuation of    available-    for-sale     securities	-	-	-	80	-	-	-	80
Result from    cash flow    hedging     transactions	-	-	-	-	(57)	-	-	(57)
Total	-	-	-	80	(57)	1,583	1	1,607
Balances at 30 June 2011	32,673	1,832	11,262	220	(270)	1,583	11	47,311

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 2011	25,605	12,436	-	(48)	(213)	420	3	38,203
Movements inherent to the shareholders'  decision
Transfer of result of prior years	-	433	(13)	-	-	(420)	-	-
Cash dividends	-	(1,800)	-	-	-	-	-	(1,800)
Other	-	-	(289)	-	-	-	-	(289)
Total	-	(1,367)	(302)	-	-	(420)	-	(2,089)
Movements for the recognition of the comprehensive income
Net income	-	-	-	-	-	514	-	514
Result from valuation of available- for-sale securities	-	-	-	268	-	-	-	268
Result from cash flow hedging transactions	-	-	-	-	(57)	-	-	(57)
Total	-	-	-	268	(57)	514	-	725
Balances at 30 June 2011	25,605	11,069	(302)	220	(270)	514	3	36,839

Consolidated Statement of Cash Flows

GROUP

Figures in MXN millions	30 Jun 2011
Net income	1,583
Adjustments for items not involving cash flow:	7,932
Gain or loss on appraisal of activities associated with investment & financing	(788)
Allowances for loan losses	3,234
Depreciation and amortisation	1,561
Provisions	3,088
Income tax and deferred taxes	547
Technical reserves	133
Discontinued operations	168
Undistributed income from subsidiaries	(11)
Changes in items related to operating activities:
Margin accounts	34
Investment securities	(29,938)
Repurchase agreements	(5,918)
Stock borrowing	2
Derivative (assets)	306
Loan portfolio	(13,831)
Receivables	(5,488)
Foreclosed assets	(35)
Operating assets	(9,803)
Deposits	19,919
Bank deposits and other liabilities	8,230
Settlement accounts	(2,359)
Creditors repo transactions	19,074
Collateral sold or delivered as guarantee	(1,492)
Derivative (liabilities)	(3,271)
Subordinated debentures outstanding	(183)
Accounts receivables from reinsurers and coinsurers	(343)
Accounts receivables from premiums	(310)
Reinsurers and bonding	83
Other operating liabilities	19,565
Funds provided by operating activities	(5,758)
Investing activities:
Acquisition of property, furniture and equipment	1,758
Intangible asset acquisitions	607
Funds used in investing activities	2,365
Financing activities:
Cash dividends	(3,520)
Others	(289)
Funds used in financing activities	(3,809)
Financing activities:
Decrease in cash and equivalents	2,313
Cash and equivalents at beginning of period	51,324
Cash and equivalents at end of period	53,637

BANK

Figures in MXN millions	30 Jun 2011
Net income	514
Adjustments for items not involving cash flow:	7,218
Gain or loss on appraisal of activities associated with investment & financing	(788)
Allowances for loan losses	3,235
Depreciation and amortisation	1,561
Provisions	3,087
Income tax and deferred taxes	135
Undistributed income from subsidiaries	(12)
Changes in items related to operating activities:
Margin accounts	34
Investment securities	(18,126)
Repurchase agreements	(5,917)
Derivative (assets)	306
Loan portfolio	(13,831)
Receivables	(5,488)
Foreclosed assets	1
Operating assets	(10,016)
Deposits	20,493
Bank deposits and other liabilities	8,230
Settlement accounts	(2,359)
Creditors repo transactions	19,641
Stock borrowing	2
Collateral sold or delivered as guarantee	(2,058)
Derivative (liabilities)	(3,271)
Subordinated debentures outstanding	(183)
Other operating liabilities	9,048
Funds provided by operating activities	(3,494)
Investing activities:
Acquisition of property, furniture and equipment	(675)
Intangible asset acquisitions	836
Funds used in investing activities	161
Financing activities:
Cash dividends	(1,800)
Other	(289)
Funds used in financing activities	(2,089)
Financing activities:
Decrease in cash and equivalents	2,310
Cash and equivalents at beginning of period	51,324
Cash and equivalents at end of period	53,634

Differences between Mexican GAAP and International Financial Reporting Standards (IFRS

Grupo Financiero HSBC

HSBC Holdings plc, the ultimate parent of Grupo Financiero HSBC, reports its results under International Financial Reporting Standards (IFRS). Set out below is a reconciliation of the results of Grupo Financiero HSBC from Mexican GAAP to IFRS for the six months ended 30 June 2011 and an explanation of the key reconciling items.

		30 Jun
	Figures in MXN millions	2011
	Grupo Financiero HSBC - Net Income Under Mexican GAAP	1,583
	Differences arising from:
	Valuation of defined benefit pensions and post retirement healthcare benefits W	45
	Acquisition costs relating to long-term investment contracts W	(5)
	Deferral of fees received and paid on the origination of loans	(12)
	Loan impairment charges W	718
	Purchase accounting adjustments W	(143)
	Recognition of the present value in-force of long-term insurance contracts W	99
	Other W	100
	Net income under IFRS	2,385
	US dollar equivalent (millions)	200
	Add back tax expense	1,048
	Profit before tax under IFRS	3,433
	US dollar equivalent (millions)	288
	Exchange rate used for conversion	11.90

^W Net of tax at 30%.

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

Valuation of defined benefit pensions and post retirement healthcare benefits

Mexican GAAP

Defined benefit pension costs and the present value of defined benefit obligations are calculated at the reporting date by the schemes' actuaries using the Projected Unit Credit Method and real interest rates.

IFRS

Defined benefit pension costs and the present value of defined benefit obligations are calculated at the reporting date by the schemes' actuaries using the Projected Unit Credit Method. The net charge to the income statement mainly comprises the current service cost, plus the unwinding of the discount rate on plan liabilities, less the expected return on plan assets, and is presented in operating expenses. Past service costs are charged immediately to the income statement to the extent that the benefits have vested, and are otherwise recognised on a straight-line basis over the average period until the benefits vest. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions. Actuarial gains and losses are recognised in other comprehensive income in the period in which 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 the origination of loans

Mexican GAAP

From 1 January 2007, loan origination fees are required to be deferred and amortised over the life of the loan on a straight line basis. Prior to 2007, loan origination fees were 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 using 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 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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