Hang Seng pt 5/6

HSBC Holdings PLC
05 March 2007



Current, savings and other deposit accounts

Figures in HK$m                                                   At 31Dec06       At 31Dec05

Current, savings and other deposit accounts:
- as stated in consolidated balance sheet                            482,821          430,995
- structured deposits reported as
  trading liabilities                                                 35,066           24,422
                                                                     517,887          455,417
By type:
- demand and current accounts                                         29,594           27,248
- savings accounts                                                   223,255          188,839
- time and other deposits                                            265,038          239,330
                                                                     517,887          455,417

Certificates of deposit and other debt securities in issue

Figures in HK$m                                                   At 31Dec06       At 31Dec05

Certificates of deposit and other debt securities in issue:
- as stated in consolidated balance sheet                              7,595           10,023
- structured certificates of deposit and other debt 
  securities in issue reported as trading liabilities                 14,821           13,616
                                                                      22,416           23,639
By type:
- certificates of deposit in issue                                    18,075           22,525
- other debt securities in issue                                       4,341            1,114
                                                                      22,416           23,639

Customer deposits and certificates of deposit and other debt securities in issue
rose by 12.8 per cent to HK$540.3 billion. Both HK dollar and US dollar savings
accounts rose, reflecting customers' preference for liquidity in an active
investment market. Structured deposits, structured certificates of deposit and
other debt securities in issue rose 31.2 per cent as the bank continued to
increase the diversity and sophistication of these products for customers to
capture market opportunities.

Deposits at mainland branches grew 51.1 per cent following efforts to increase
the customer base through expansion of the network and the PFS sales force. To
further develop the wealth management business, the mainland branches expanded 
the range of investment-linked deposit products to meet the needs of the Prestige
Banking customer segment.

Trading liabilities

Figures in HK$m                               At 31Dec06            At 31Dec05

Structured certificates of deposit and
  other debt securities in issue                  14,821                13,616
Structured deposits                               35,066                24,422
Short positions in securities and other           10,206                 7,766
                                                  60,093                45,804

Trading liabilities include customer deposits and certificates of deposit with
embedded options or other derivatives, the market risk of which was managed in
the trading book.

Other liabilities

Figures in HK$m                               At 31Dec06            At 31Dec05

Items in the course of transmission
  to other banks                                   6,469                 6,517
Accruals                                           2,641                 1,653
Acceptances and endorsements                       2,855                 2,371
Other                                              4,158                 3,597
                                                  16,123                14,138

Subordinated liabilities

Figures in HK$m                                   At 31Dec06       At 31Dec05

Nominal value    Description

Amount owed to third parties

HK$1,500 million Callable floating rate
                   subordinated notes due June 2015    1,496            1,495

HK$1,000 million 4.125 per cent callable fixed
                   rate subordinated notes due
                   June 2015                             987              967

US$450 million   Callable floating rate
                   subordinated notes
                   due July 2016                       3,483                _

Amount owed to HSBC Group undertakings

US$260 million   Callable floating rate
                   subordinated loan debt due
                   December 2015                       2,021            2,016
                                                       7,987            4,478

Representing:
- measured at amortised cost                           7,000            3,511
- designated at fair value                               987              967
                                                       7,987            4,478

During the year, the bank issued floating-rate subordinated notes amounting to
US$450 million that mature in July 2016 with a one-time call option exercisable
by the bank in July 2011. The notes were issued at the price of 99.869 per cent,
bearing interest at the rate of three-month US dollar LIBOR plus 0.30 per cent,
payable quarterly from the issue date to the call option date. Thereafter, if
the notes are not redeemed on the call option date, the interest rate will be
reset to three-month US dollar LIBOR plus 0.80 per cent payable quarterly. The
notes, which qualify as tier 2 capital, serve to help the bank maintain a more
balanced capital structure and support business growth.

Shareholders' funds

Figures in HK$m                                At 31Dec06       At 31Dec05

Share capital                                       9,559            9,559
Retained profits                                   29,044           26,052
Premises revaluation reserve                        3,491            3,543
Cash flow hedges reserve                             (220)            (483)
Available-for-sale investments reserve                923              (17)
Capital redemption reserve                             99               99
Other reserves                                        452              185
Total reserves                                     33,789           29,379
                                                   43,348           38,938
Proposed dividends                                  3,633            3,633
Shareholders' funds                                46,981           42,571

Return on average shareholders' funds                27.4%            27.5%

Shareholders' funds (excluding proposed dividends) increased by HK$4,410
million, or 11.3 per cent, to HK$43,348 million at 31 December 2006. Retained
profits rose by HK$2,992 million, reflecting the growth in attributable profit
and the realisation of property revaluation reserves on the disposal of
properties during the year. The available-for-sale investments reserve also
rose.

The return on average shareholders' funds was 27.4 per cent, compared with 27.5
per cent in 2005.

Save for the US$450 million subordinated notes issue, there was no purchase,
sale or redemption of the group's listed securities by the bank or any of its
subsidiaries during 2006.

Capital resources management

Analysis of capital base and risk-weighted assets

Figures in HK$m                                      At 31Dec06     At 31Dec05

Capital base
Tier 1 capital
- Share capital                                           9,559          9,559
- Retained profits                                       25,724         21,439
- Classified as regulatory reserve                         (518)          (510)
- Capital redemption reserve                                 99             99
- Less: goodwill                                           (330)          (318)
- Total                                                  34,534         30,269
Tier 2 capital
- Property revaluation reserve                            4,259          5,114
- Available-for-sale investment
  and equity revaluation reserve                            542             (5)
- Collective impairment allowances                          518            510
- Regulatory reserve                                        518            510
- Term subordinated debt                                  7,988          4,479
- Total                                                  13,825         10,608
Unconsolidated investments and
  other deductions                                       (4,242)        (3,444)
Total capital base after deductions                      44,117         37,433

Risk-weighted assets
On-balance sheet                                        308,127        277,617
Off-balance sheet                                        15,251         14,739
Total risk-weighted assets                              323,378        292,356
Total risk-weighted assets adjusted for
  market risk                                           324,007        291,570

Capital adequacy ratios
After adjusting for market risk
- Tier 1^                                                  10.7%          10.4%
- Total^                                                   13.6%          12.8%

Before adjusting for market risk
- Tier 1                                                   10.7%          10.4%
- Total                                                    13.6%          12.8%

^ The capital ratios take into account market risks in accordance with the
relevant HKMA guideline in the Supervisory Policy Manual.

In accordance with the HKMA guideline, Impact of the New Hong Kong Accounting
Standards on Authorised Institutions' Capital Base and Regulatory Reporting, the
group has earmarked a 'regulatory reserve' from retained profits. This
regulatory reserve is included as tier 2 capital together with the group's
collective impairment allowances.

The total capital ratio rose by 0.8 percentage points to 13.6 per cent at 31
December 2006, compared with 12.8 per cent at 31 December 2005. The tier 1 ratio
increased from 10.4 per cent to 10.7 per cent. The capital base increased by
HK$6,684 million to HK$44,117 million, mainly due to the increase in retained
profits (including the realisation of property revaluation reserves on disposed
properties) and the issue of US$450 million subordinated notes, which qualify as
tier 2 capital. Risk-weighted assets adjusted for market risk grew by 11.1 per
cent, attributable to the increase in advances to customers and financial
investments.

Liquidity ratio

The average liquidity ratio for the year, calculated in accordance with the
Fourth Schedule of the Hong Kong Banking Ordinance, is as follows:

                                                              2006       2005

The bank and its major banking subsidiaries                   51.9%      45.1%

Reconciliation of cash flow statement

(a) Reconciliation of operating profit to net cash flow from operating
    activities

                                                        2006           2005
Figures in HK$m                                                   (restated)

Operating profit                                      12,576         11,068
Net interest income                                  (11,694)       (10,796)
Dividend income                                          (47)           (60)  
Loan impairment charges and other
  credit risk provisions                                 264            618
Depreciation                                             323            280
Amortisation of intangible assets                         10              9
Amortisation of available-for-sale investments          (532)            12
Amortisation of held-to-maturity debt securities           2              _
Advances written off net of recoveries                  (336)          (575)
Interest received                                     22,232         14,262
Interest paid                                        (16,693)        (8,399)
Operating profit before changes in working capital     6,105          6,419
Change in treasury bills and certificates of 
  deposit with original maturity more than three 
  months                                               5,077          8,113
Change in placings with and advances to banks
  maturing after one month                            (9,035)         2,534
Change in trading assets                               4,252          3,983
Change in financial assets designated at fair value      (56)         1,060
Change in derivative financial instruments              (433)          (395)
Change in advances to customers                      (18,589)        (8,857)
Change in other assets                                (6,427)       (11,929)
Change in financial liabilities designated at fair
  value                                                   20              _
Change in current, savings and other deposit accounts 51,826         (9,189)
Change in deposits from banks                          5,637            110
Change in trading liabilities                         14,289         29,263
Change in certificates of deposit and
  other debt securities in issue                      (2,428)        (2,589)
Change in other liabilities                            8,458          9,423
Elimination of exchange differences
  and other non-cash items                            (3,707)           315
Cash generated from operating activities              54,989         28,261
Taxation paid                                         (1,448)        (1,421)
Net cash inflow from operating activities             53,541         26,840

(b) Analysis of the balances of cash and cash equivalents
                                     
Figures in HK$m                               At 31Dec06         At 31Dec05

Cash and balances with banks and
  other financial institutions                     9,390              9,201
Placings with and advances to banks and
  other financial institutions maturing 
  within one month                                74,072             53,294
Treasury bills                                     5,158              3,018
Certificates of deposit                            1,655                  _
                                                  90,275             65,513

Contingent liabilities, commitments and derivatives
                                                        Credit        Risk-
                                         Contract   equivalent     weighted
Figures in HK$m                            amount       amount       amount

At 31Dec06

Contingent liabilities:
Guarantees                                  4,150        3,877        3,679

Commitments:
Documentary credits and short-term
  trade-related transactions                8,717        1,745        1,738
Undrawn formal standby facilities,
  credit lines and other commitments 
  to lend:
- under one year                          142,463            _            _
- one year and over                        18,719        9,360        8,696
Other                                         193          193          193
                                          170,092       11,298       10,627

Exchange rate contracts:
Spot and forward foreign exchange         267,822        2,715          591
Other exchange rate contracts              64,377          499          110
                                          332,199        3,214          701

Interest rate contracts:
Interest rate swaps                       162,969        1,376          295
Other interest rate contracts               2,350            2            _
                                          165,319        1,378          295

Other derivative contracts                  5,668          382           90

                                                        Credit        Risk-
                                         Contract   equivalent     weighted
Figures in HK$m                            amount       amount       amount

At 31Dec05

Contingent liabilities:
Guarantees                                  4,133        3,907        3,131

Commitments:
Documentary credits and short-term
  trade-related transactions                7,402        1,480        1,480
Undrawn formal standby facilities,
  credit lines and and other commitments 
  to lend:
- under one year                          109,369            _            _
- one year and over                        20,385       10,193        9,158
Other                                         220          220          220
                                          137,376       11,893       10,858

Exchange rate contracts:
Spot and forward foreign exchange         188,088        1,426          333
Other exchange rate contracts              15,176          193           48
                                          203,264        1,619          381

Interest rate contracts:
Interest rate swaps                       161,083        1,472          308
Other interest rate contracts               4,255           20            4
                                          165,338        1,492          312

Other derivative contracts                  1,194           86           17

The tables above give the nominal contract, credit equivalent and risk-weighted
amounts of off-balance sheet transactions. The credit equivalent amounts are
calculated for the purposes of deriving the risk-weighted amounts. These are
assessed in accordance with the Third Schedule of the Hong Kong Banking
Ordinance ('the Third Schedule') on capital adequacy and depend on the status of
the counterparty and the maturity characteristics. The risk weights used range
from 0 per cent to 100 per cent for contingent liabilities and commitments, and
from 0 per cent to 50 per cent for exchange rate, interest rate and other
derivative contracts.

In accordance with the Third Schedule, contingent liabilities and commitments
are credit-related instruments that include acceptances and endorsements,
letters of credit, guarantees and commitments to extend credit. The risk
involved is essentially the same as the credit risk involved in extending loan
facilities to customers. These transactions are, therefore, subject to the same
credit origination, portfolio maintenance and collateral requirements as for
customers applying for loans. As the facilities may expire without being drawn
upon, the total of the contract amounts is not representative of future
liquidity requirements.

In accordance with HKAS 39, acceptances and endorsements are recognised on the
balance sheet in 'Other assets' and 'Other liabilities'. These acceptances and
endorsements are included in the capital adequacy calculation as contingencies
in accordance with the Third Schedule.

Derivative financial instruments arise from futures, forward, swap and option
transactions undertaken in the foreign exchange, interest rate and equity
markets. The contract amounts of these instruments indicate the volume of
transactions outstanding at the balance sheet date and do not represent amounts
at risk. The credit equivalent amount of these instruments is measured as the
sum of positive marked-to-market values and the potential future credit exposure
in accordance with the Third Schedule.

Derivative financial instruments are held for trading or designated as either
fair value hedge or cash flow hedges. The following table shows the nominal
contract amounts and marked-to-market value of assets and liabilities by class
of derivatives.

                                      At 31Dec06                 At 31Dec05
Figures in HK$m             Trading      Hedging       Trading      Hedging

Contract amounts:
Interest rate contracts     105,001       60,318       102,233       63,105
Exchange rate contracts     332,199            _       203,264            _
Other derivative contracts    5,668            _         1,194            _
                            442,868       60,318       306,691       63,105

Derivative assets:
Interest rate contracts         435          513           481          454
Exchange rate contracts         866            _           776            _
Other derivative contracts       73            _             4            _
                              1,374          513         1,261          454

Derivative liabilities:
Interest rate contracts         573          217           998          457
Exchange rate contracts         722            _           310            _
Other derivative contracts       19            _            27            _
                              1,314          217         1,335          457

The above derivative assets and liabilities, being the positive or negative
marked-to-market value of the respective derivative contracts, represent gross
replacement costs, as none of these contracts are subject to any bilateral
netting arrangements.




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