Grupo Financiero HSBC Q1 2012

RNS Number : 3586C

HSBC Holdings PLC

30 April 2012

 



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

FIRST QUARTER 2012 FINANCIAL RESULTS - HIGHLIGHTS

·    Net income before taxes for the first quarter of 2012 was MXN1,280m, an increase of MXN287m or 28.9% compared with MXN993m in the first quarter of 2011. The first quarter 2011 results were affected by restructuring expenses of MXN634m, a one off gain of MXN279m from the sale of an equity investment and the inclusion of the results of the Afore business which was sold in the third quarter of 2011. First quarter 2012 restructuring expenses were MXN314m.  Excluding the effect of these items, net income before taxes was MXN1,594m, up by MXN320m or 25.1% compared to the first quarter of 2011.

·    Net income for the first quarter of 2012 was MXN1,198m, an increase of MXN343m or 40.1% compared with MXN855m for the first quarter of 2011. Excluding the effect of the restructuring expenses, the one off gain on the sale of an equity investment in the first quarter of 2011 and the results of the Afore business sold in the third quarter of 2011, net income was MXN1,418m, up MXN346m or 32.3% compared to the first quarter of 2011.

·    Total operating income, net of loan impairment charges, for the first quarter of 2012 was MXN6,747m, a decrease of MXN687m or 9.2% compared with MXN7,434m for the first quarter of 2011. Excluding the effect of the one off gain on the sale of an equity investment in the first quarter of 2011 and the sale of the Afore business in the third quarter of 2011, total operating income was MXN6,747m, a decrease of MXN262m or 3.7% compared to the first quarter of 2011.

·    Loan impairment charges for the first quarter of 2012 were MXN1,654m, unchanged from that reported in the first quarter of 2011.

·    Net loans and advances to customers were MXN179.6bn at 31 March 2012, an increase of MXN12.4bn or 7.4% compared with MXN167.2bn at 31 March 2011. Total impaired loans as a percentage of gross loans and advances improved to 2.6% compared with 2.7% at 31 March 2011. The coverage ratio (allowance for loan losses divided by impaired loans) was 222.2% compared with 197.7% at 31 March 2011.

·    At 31 March 2012, deposits were MXN301.3bn, an increase of MXN41.6bn or 16.0% compared with MXN259.6bn at 31 March 2011.

·    Return on equity was 10.5% for the first quarter of 2012 compared with 7.2% for the first quarter of 2011.

·    At 31 March 2012, the bank's capital adequacy ratio was 14.7% and the tier 1 capital ratio was 11.4% compared with 14.4% and 10.9% respectively at 31 March 2011.

·    On 29 March 2012, the bank paid a dividend of MXN1,400m representing MXN0.81 per share. On 30 March 2012, Grupo Financiero HSBC paid a dividend of MXN2,400m representing MXN0.94 per share.

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 31 March 2012) 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. HSBC Seguros, S.A. de C.V. Grupo Financiero HSBC (HSBC Seguros) is Grupo Financiero HSBC's insurance operations.

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

Overview

The outlook for the Mexican economy in 2012 remains positive. Latest trade figures suggest exports have regained momentum, largely as a result of improved US economic data. In addition, recent figures suggest that domestic demand continues to strengthen and inflation data is below expectations. The Mexican peso strengthened against the US dollar during the first quarter of 2012.

For the quarter ended 31 March 2012, Grupo Financiero HSBC's net income was MXN1,198m, an increase of MXN343m or 40.1% compared with the first quarter of 2011. Improved net income was mainly driven by lower administrative expenses, partially offset by lower trading income.  

Net interest income was MXN5,310m, an increase of MXN96m or 1.8% compared with the first quarter of 2011. Higher net interest income was due to an increase in loan portfolio balances mainly in payroll and personal loans, which were partially offset by lower spread in credit card and payroll loans, and increased deposit volumes.

Loan impairment charges were MXN1,654m, unchanged from that reported in the first quarter of 2011. Given the increase in loan portfolio balances, this reflects enhanced pre-screening of new customers, robust collection strategies and an overall improvement in the domestic credit climate.

Net fee income was MXN1,504m, a decrease of MXN114m or 7.0% compared with the first quarter of 2011. This decrease was mainly due to the non-recurrence of fee income as a result of the sale of the Afore business in third quarter of 2011.

Trading income was MXN716m, a decrease of MXN499m or 41.1% compared with the first quarter of 2011. The decrease is mostly due to non-recurring large derivatives deals and the gain of MXN279m arising from the sale of one of our equity investments in the first quarter of 2011.

Administrative and personnel expenses were MXN5,475m, a decrease of MXN966m or 15.0% compared with the first quarter of 2011. Excluding the effect of the restructuring charges, which were MXN320m lower than those incurred in the first quarter of 2011, and the expenses of the Afore business which was sold in the third quarter of 2011, the decrease would have been MXN583m or 10.1% compared with the first quarter of 2011. This reduction is mainly driven by the effect of cost reduction initiatives in both regional and Mexico local operations, such as sale and lease back of branches, restructuring our regional operations, write-off of intangible assets and other rationalisation programmes.

The cost efficiency ratio was 65.2% for the quarter ended 31 March 2012, compared with 70.9% for the quarter ended 31 March 2011. Excluding the effect of the restructuring expenses, the one off gain on sale of an equity investment and the results of the Afore business sold in the third quarter of 2011, the cost efficiency ratio was 61.4% for the quarter ended 31 March 2012, compared with 66.3% for the quarter ended 31 March 2011.

The performance of non-banking subsidiaries contributed positively to Grupo Financiero HSBC's results, particularly HSBC Seguros, which reported net income before taxes of MXN524m for the first quarter of 2012, up 12.1% compared with the first quarter of 2011. HSBC Seguros increased product sales, mainly in life products, which led to higher gross premiums, and in addition, investment income was higher compared to the same period in 2011. At 31 March 2012, the persistency ratio⁽¹⁾ (percentage of insurance policies remaining in force) increased to 11.1% from 10.4% at 31 March 2011.

Net loans and advances to customers increased by MXN12.4bn or 7.4% to MXN179.6bn at 31 March 2012 compared with 31 March 2011, driven by growth in both the commercial and consumer portfolios. Commercial portfolio growth is mainly due to higher lending to corporate clients and mid-market enterprises, while consumer portfolio growth was mainly driven by increased payroll and personal loans.

At 31 March 2012, total impaired loans increased by 2.9% to MXN5.0bn compared with 31 March 2011. A reduction in impaired consumer and mortgage loans was offset by an increase in impaired commercial loans, most of which arose from a single exposure. Total impaired loans as a percentage of total loans and advances to customers improved to 2.6% compared with 2.7% reported at 31 March 2011.

Total loan loss allowances at 31 March 2012 were MXN11.1bn, an increase of MXN1.5bn or 15.7% compared with 31 March 2011. The total coverage ratio (allowance for loan losses divided by impaired loans) was 222.2% at 31 March 2012 compared with 197.7% at 31 March 2011.

Total deposits were MXN301.3bn at 31 March 2012, an increase of MXN41.6bn or 16.0% compared with 31 March 2011. This is the result of increased sales efforts and targeted promotions, particularly for 'Inversion Express', 'Advance' and 'Premier' deposit products, as well as increases in payroll and commercial deposits.

At 31 March 2012, the bank's capital adequacy ratio was 14.7% compared with 14.4% at 31 March 2011. The tier 1 capital ratio was 11.4% compared with 10.9% at 31 March 2011.

On 29 March 2012, the bank paid a dividend of MXN1,400m representing MXN0.81 per share. On 30 March 2012, Grupo Financiero HSBC paid a dividend of MXN2,400m representing MXN0.94 per share.

⁽¹⁾This ratio has been calculated on a cumulative basis over five years because the most significant insurance product is the T5, which has a maturity of five years.

Business highlights

Retail Banking and Wealth Management (RBWM)

RBWM reported growth in loans and deposits compared to 31 March 2011 and continues to benefit from a general improvement in credit quality of the portfolios. The increase in customer lending was driven mainly by payroll and personal loans as a result of a strong emphasis placed on targeted sales, utilising our customer relationship management capabilities.

Our branch operating model has evolved to minimise queues in branches and increase the use of our direct channels, while increasing customer satisfaction.

As part of our wealth management strategy, we are developing our Premier Relationship Managers to offer financial advisory services with the objective of increasing our existing customers' 'total relationship balance' and attracting new customers.

Commercial Banking

During the first quarter of 2012, Commercial Banking achieved a significant increase in deposits compared to 31 March 2011.

As part of our global strategy to capture international business opportunities, we have increased the promotion of products such as foreign exchange, trade and receivable finance.

In Business Banking, initiatives were launched to provide improvements in customer service, such as ATM loans disbursements, loan payments using alternative channels and sales campaigns through our recently established outbound call centre.

Additionally, we have been working on improving our products and processes based on the results of our 2011 Client Engagement Programme.

Global Banking and Markets

During the first quarter of 2012, our Debt Capital Markets business maintained its status as a leading underwriter in Mexico.  It has placed and participated in bond issuances for a total transaction amount of MXN25,473m, including INFONAVIT, Mexichem, Ford Credit, Bladex, NR Finance and Bancomext.

Global Banking continues to grow average balances, particularly in client bank deposits which have reported a 41.7% increase in average balances compared to 31 March 2011.

During the first quarter of 2012, HSBC acted as Mandated Lead Arranger (Trustee, Hedge and Stand-by letter Provider) for the largest project financing in the Latin America wind renewable energy sector.

Sale of HSBC general insurance manufacturing to AXA Group

In March 2012, Grupo Financiero HSBC announced that it had entered into agreements to sell its general insurance manufacturing portfolio to AXA Group.

HSBC and AXA Group are working together to ensure a seamless transition with a target completion date in the second half of 2012, subject to normal regulatory approvals.

Grupo Financiero HSBC first quarter 2012 financial results as reported to HSBC Holdings plc, our ultimate parent company, under International Financial Reporting Standards (IFRS)

For the quarter ended 31 March 2012, on an IFRS basis, Grupo Financiero HSBC reported pre-tax profits of MXN2,124m, an increase of MXN528m or 33.1% compared with MXN1,596m in March 2011.

The lower profit reported under Mexican GAAP is largely due to lower loan impairment charges under IFRS 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 1,066 branches, 6,201 ATMs, approximately eight and a half million total customer accounts and approximately 18,500 employees. For more information, visit 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 7,200 offices in over 80 countries and territories in Europe, the Asia-Pacific region, North and Latin America, the Middle East and Africa and with assets of US$2,556bn at 31 December 2011, HSBC is one of the world's largest banking and financial services organisations.

For further information contact:

London
Brendan McNamara	Guy Lewis
Group Media Relations	Investor Relations
Telephone: [phone]	Telephone: [phone]
Mexico City
Lyssette Bravo	Andrea Colín
Public Affairs	Investor Relations
Telephone: [phone]	Telephone: [phone]

Consolidated Balance Sheet

		GROUP				BANK
Figures in MXN millions		31 Mar		31 Mar		31 Mar		31 Mar
		2012		2011		2012		2011
Assets
Cash and deposits in banks		45,343		53,879		45,345		53,881
Margin accounts		43		50		43		50
Investment in securities		162,092		170,573		147,606		156,672
Trading securities		34,471		36,473		28,435		30,554
Available-for-sale securities		111,857		119,390		111,857		118,799
Held to maturity securities		15,764		14,710		7,314		7,319
Repurchase agreements		9,787		362		9,787		362
Derivative transactions		36,151		25,379		36,151		25,379
Performing loans
Commercial loans		103,356		90,506		103,356		90,506
Loans to financial intermediaries		6,873		7,757		6,873		7,757
Consumer loans		30,603		26,948		30,603		26,948
Mortgage loans		18,355		17,553		18,355		17,553
Loans to government entities		26,471		29,136		26,471		29,136
Total performing loans		185,658		171,900		185,658		171,900
Impaired loans
Commercial loans		2,292		1,721		2,292		1,721
Consumer loans		1,059		1,260		1,059		1,260
Mortgage loans		1,626		1,854		1,626		1,854
Total impaired loans		4,977		4,835		4,977		4,835
Gross loans and advances to customers		190,635		176,735		190,635		176,735
Allowance for loan losses		(11,059)		(9,560)		(11,059)		(9,560)
Net loans and advances to customers		179,576		167,175		179,576		167,175
Premium receivables		71		54		-		-
Accounts receivables from reinsurers and rebonding companies		207		222		-		-
Other accounts receivable		48,136		28,800		47,523		28,839
Foreclosed assets		204		165		201		165
Property, furniture and equipment, net		7,834		8,799		7,834		8,795
Long-term investments in equity securities		155		583		143		120
Assets held for sale		181		188		-		-
Deferred taxes		6,328		5,741		6,224		5,636
Goodwill		1,172		2,696		-		-
Other assets, deferred charges and intangibles		4,326		5,208		4,083		5,011
Total assets		501,606		469,874		484,516		452,085

		GROUP				BANK
Figures in MXN millions		31 Mar		31 Mar		31 Mar		31 Mar
		2012		2011		2011		2010
Liabilities
Deposits		301,271		259,637		302,116		260,297
Demand deposits		173,047		153,463		173,892		154,123
Time deposits		123,955		101,906		123,955		101,906
Money market instruments		4,269		4,268		4,269		4,268
Bank deposits and other liabilities		23,888		19,921		23,888		19,921
On demand		-		3,827		-		3,827
Short-term		22,487		14,607		22,487		14,607
Long-term		1,401		1,487		1,401		1,487
Repurchase agreements		12,637		49,816		18,219		54,392
Stock lending		3		-		3		-
Financial assets pending to be settled		-		1,440		-		1,440
Collateral sold		7,849		9,215		2,227		4,639
Derivative transactions		34,969		24,009		34,969		24,009
Technical reserves		10,504		9,829		-		-
Reinsurers		20		17		-		-
Other payable accounts		54,578		40,020		53,305		41,452
Income tax		1,462		1,236		1,079		918
Contributions for future capital increases		-		-		-		2,013
Sundry creditors and other accounts Payable		53,116		38,784		52,226		38,521
Subordinated debentures outstanding		10,153		9,881		10,153		9,881
Deferred taxes		507		641		505		639
Total liabilities		456,379		424,426		445,385		416,670
Equity
Paid in capital		32,673		32,673		27,618		25,605
Capital stock		5,111		5,111		5,261		5,087
Additional paid in capital		27,562		27,562		22,357		20,518
Other reserves		12,545		12,764		11,513		9,807
Capital reserves		1,832		1,726		9,657		10,636
Retained earnings		8,959		11,368		514		131
Result from the valuation of available-for-sale securities		683		(1,277)		683		(1,277)
Result from cash flow hedging transactions		(127)		92		(127)		92
Net income		1,198		855		786		225
Minority interest in capital		9		11		-		3
Total equity		45,227		45,448		39,131		35,415
Total liabilities and equity		501,606		469,874		484,516		452,085

		GROUP				BANK
Figures in MXN millions		31 Mar		31 Mar		31 Mar		31 Mar
		2012		2011		2012		2011
Memorandum Accounts		2,794,342		2,490,065		2,683,426		2,383,147
Third party accounts		96,836		90,431		48,062		50,542
Clients current accounts		100		(24)		-		-
Custody operations		36,268		29,793		-		-
Transactions on behalf of clients		12,406		10,120		-		-
Third party investment banking operations, net		48,062		50,542		48,062		50,542
Proprietary position		2,697,506		2,399,634		2,635,364		2,332,605
Guarantees granted		9		16		9		16
Contingent assets and liabilities		-		115		-		115
Irrevocable lines of credit granted		24,668		17,185		24,668		17,185
Goods in trust or mandate		348,119		310,733		348,119		310,733
Goods in custody or under administration		288,199		257,710		283,088		252,599
Collateral received by the institution		55,443		14,220		55,443		14,220
Collateral received and sold or delivered as guarantee		53,144		17,926		47,566		13,346
Values in deposit		53		53		-		-
Suspended interest on impaired loans		239		236		239		236
Recovery guarantees for issued bonds		35,535		45,011		-		-
Paid claims		9		5		-		-
Cancelled claims		-		1		-		-
Responsibilities from bonds in force		3,723		3,623		-		-
Other control accounts		1,888,365		1,732,800		1,876,232		1,724,155

Consolidated Income Statement

		GROUP				BANK
Figures in MXN millions		31 Mar		31 Mar		31 Mar		31 Mar
		2012		2011		2012		2011
Interest income		7,932		7,187		7,742		7,017
Interest expense		(2,813)		(2,191)		(2,818)		(2,196)
Earned premiums		693		601		-		-
Technical reserves		(223)		(110)		-		-
Claims		(279)		(273)		-		-
Net interest income		5,310		5,214		4,924		4,821
Loan impairment charges		(1,654)		(1,654)		(1,654)		(1,654)
Risk-adjusted net interest income		3,656		3,560		3,270		3,167
Fees and commissions receivable		2,058		2,050		1,959		1,841
Fees payable		(554)		(432)		(448)		(328)
Trading income		716		1,215		607		839
Other operating income		871		1,041		971		1,124
Total operating income		6,747		7,434		6,359		6,643
Administrative and personnel expenses		(5,475)		(6,441)		(5,588)		(6,477)
Net operating income		1,272		993		771		166
Undistributed income from subsidiaries		8		-		6		9
Net income before taxes		1,280		993		777		175
Income tax		(304)		(315)		(137)		(41)
Deferred income tax		165		121		146		94
Net income before discontinued operations		1,141		799		786		228
Discontinued operations		57		59		-		-
Minority interest		-		(3)		-		(3)
Net income		1,198		855		786		225

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 2012	32,673	1,832	8,849	547	(243)	2,510	11	46,179
Movements inherent to the shareholders' decision
Transfer of result of      prior years	-	-	2,510	-	-	(2,510)	-	-
Cash dividends	-	-	(2,400)	-	-	-	-	(2,400)
Total	-	-	110	-	-	(2,510)	-	(2,400)
Movements for the recognition of the comprehensive income
Net income	-	-	-	-	-	1,198	-	1,198
Result from      valuation of available-      for-sale securities	-	-	-	136	-	-	-	136
Result from cash flow    hedging transactions	-	-	-	-	116	-	-	116
Others							(2)	(2)
Total	-	-	-	136	116	1,198	(2)	1,448
Balances at 31 March 2012	32,673	1,832	8,959	683	(127)	1,198	9	45,227

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 2012	27,618	11,057	(202)	547	(243)	716	3	39,496
Movements inherent to    the shareholders'    decision
Transfer of result of prior years	-	-	716	-	-	(716)	-	-
Constitution of reserves	-	-	-	-	-	-	-	-
Cash dividends	-	(1,400)	-	-	-	-	-	(1,400)
Total	-	(1,400)	716	-	-	(716)	-	(1,400)
Movements for the    recognition of the    comprehensive income
Net income	-	-	-	-	-	786	-	786
Result from     valuation of available-     for-sale securities	-	-	-	136	-	-	-	136
Result from cash flow    hedging transactions	-	-	-	-	116	-	-	116
Others	-	-	-	-	-	-	(3)	(3)
Total	-	-	-	136	116	786	(3)	1,035
Balances at 31 March 2012	27,618	9,657	514	683	(127)	786	-	39,131

Consolidated Statement of Cash Flows

GROUP

Figures in MXN millions	31 Mar 2012
Net income	1,198
Adjustments for items not involving cash flow:	2,412
Depreciation and amortisation	525
Provisions	1,476
Income tax and deferred taxes	138
Technical reserves	223
Discontinued operations	57
Undistributed income from subsidiaries	(7)
Changes in items related to operating activities:
Margin accounts	(16)
Investment securities	15,860
Repurchase agreements	(4,038)
Stock borrowing	(1)
Derivative (assets)	6,755
Loan portfolio	(2,838)
Foreclosed assets	2
Operating assets	(18,848)
Deposits	3,843
Bank deposits and other liabilities	(8,648)
Creditors repo transactions	3,310
Collateral sold or delivered as guarantee	(9,855)
Derivative (liabilities)	(8,327)
Subordinated debentures outstanding	(334)
Accounts receivables from reinsurers and coinsurers	107
Accounts receivables from premiums	196
Reinsurers and bonding	(29)
Other operating liabilities	16,416
Funds provided by operating activities	(6,445)
Investing activities:
Acquisition of property, furniture and equipment	(399)
Intangible asset acquisitions	(247)
Funds used in investing activities	(646)
Financing activities:
Cash dividends	(2,400)
Funds used in financing activities	(2,400)
Financing activities:
Increase / Decrease in cash and equivalents	(5,881)
Cash and equivalents at beginning of period	51,224
Cash and equivalents at end of period	45,343

Consolidated Statement of Cash Flows (continued)

BANK

Figures in MXN millions	31 Mar 2012
Net income	786
Adjustments for items not involving cash flow:	1,986
Depreciation and amortisation	525
Provisions	1,476
Income tax and deferred taxes	(9)
Undistributed income from subsidiaries	(6)
Changes in items related to operating activities:
Margin accounts	(17)
Investment securities	14,392
Repurchase agreements	(4,038)
Derivative (assets)	6,756
Loan portfolio	(2,838)
Foreclosed assets	2
Operating assets	(18,186)
Deposits	3,995
Bank deposits and other liabilities	(8,648)
Creditors repo transactions	2,847
Stock borrowing	(1)
Collateral sold or delivered as guarantee	(9,431)
Derivative (liabilities)	(8,327)
Subordinated debentures outstanding	(334)
Other operating liabilities	18,193
Income tax paid	(759)
Funds provided by operating activities	(6,394)
Investing activities:
Acquisition of property, furniture and equipment	(280)
Intangible asset acquisitions	(577)
Funds used in investing activities	(857)
Financing activities:
Cash dividends	(1,400)
Funds used in financing activities	(1,400)
Financing activities:
Increase / Decrease in cash and equivalents	(5,879)
Cash and equivalents at beginning of period	51,224
Cash and equivalents at end of period	45,345

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 quarter ended 31 March 2012 and an explanation of the key reconciling items.

		31 Mar
	Figures in MXN millions	2012
	Grupo Financiero HSBC - Net Income Under Mexican GAAP	1,198
	Differences arising from:
	Valuation of defined benefit pensions and post retirement healthcare benefitsW	24
	Deferral of fees received and paid on the origination of loansW	12
	Loan impairment chargesW	495
	Purchase accounting adjustmentsW	(3)
	Recognition of the present value in-force of long-term insurance contractsW	3
	OtherW	(137)
	Net income under IFRS	1,592
	US dollar equivalent (millions)	123
	Add back tax expense	532
	Profit before tax under IFRS	2,124
	US dollar equivalent (millions)	164
	Exchange rate used for conversion	12.97

^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.

Deferral of 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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