HK & Shanghai Bk Pt 1/3

HSBC Holdings PLC
05 March 2007


              THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
                     2006 CONSOLIDATED RESULTS - HIGHLIGHTS

-    Net operating income before loan impairment charges and other credit risk
     provisions up 19.6 per cent to HK$92,325 million (HK$77,222 million in
     2005).
-    Pre-tax profit up 15.0 per cent to HK$52,016 million (HK$45,249 million in
     2005).
-    Attributable profit up 14.7 per cent to HK$37,709 million (HK$32,873
     million in 2005).
-    Return on average shareholders' equity of 31.1 per cent (37.4 per cent in
     2005).
-    Assets up 17.9 per cent to HK$3,151 billion (HK$2,673 billion at the end of
     2005); risk-weighted assets up 10.5 per cent to HK$1,368 billion (HK$1,238
     billion at 31 December 2005).
-    Total capital ratio of 13.5 per cent; tier 1 capital ratio of 12.3 per cent
     (12.4 per cent and 11.7 per cent at 31 December 2005).
-    Cost efficiency ratio of 41.4 per cent (41.2 per cent for 2005).

Within this document, the Hong Kong Special Administrative Region of the
People's Republic of China has been referred to as 'Hong Kong'.

Comment by Vincent Cheng, Chairman

In 2006, The Hongkong and Shanghai Banking Corporation achieved a robust pre-tax
profit of HK$52,016 million, up 15.0 per cent over 2005. Buoyant economic
conditions, expansion of customer group businesses and widening net interest
margins in the region supported this strong result. In Hong Kong, pre-tax profit
grew 10.9 per cent to HK$37,978 million. For the rest of Asia-Pacific, pre-tax
profit was up 27.6 per cent to HK$13,992 million - a significant increase as we
continued to reap the benefits of our investments in businesses in countries
with strong economic growth.

Around the region, there were several outstanding achievements in 2006. In
India, our pre-tax profit grew 86.0 per cent to HK$2,336 million. Meanwhile,
HSBC's mainland China network, excluding associates, recorded a 34.6 per cent
rise in profit to HK$998 million. With more than 50 outlets (including Hang Seng
Bank), our mainland China network also remains the largest of any foreign bank.
We launched direct banking in Taiwan in September 2006 and in Korea in February
of this year. Our consumer finance businesses in Australia and India, launched
in 2005, began to pick up momentum and we launched a new consumer finance
operation in Indonesia in 2006. In addition, in February 2007 we announced an
agreement to increase our stake in Vietnam Technological and Commercial
Joint-Stock Bank (Techcombank) from 10 per cent to 20 per cent once regulations
permit. In 2006, we launched a new Takaful (Islamic insurance) joint venture
company in partnership with Jerneh Asia Berhad and The Employees Provident Fund
of Malaysia. While we continue to focus on growing our businesses in the region
organically, we remain open to expanding the scope and breadth of our reach
through strategic acquisitions if the right opportunities arise.

Our net operating income before loan impairment charges was HK$92,325 million,
up 19.6 per cent. Balance sheet growth, wider deposit spreads, growth in demand
for wealth management products in rising equity markets, and successful Global
Markets trading activities in the region all contributed to this growth.

The net charge for loan impairment and other credit risk provisions rose by
HK$2,745 million to HK$4,809 million, reflecting significantly higher provisions
linked to personal lending outside Hong Kong, particularly in Taiwan and
Indonesia, and higher charges resulting from volume growth in credit cards in
Hong Kong.

Personal Financial Services reported a pre-tax profit of HK$21,889 million,
which was up 1.2 per cent compared to 2005 due to the impact of the
aforementioned provisions including Taiwan and Indonesia. Net operating income
before loan impairment charges rose strongly by 15.9 per cent to HK$46,073
million as our operations in the region continued to expand.

In Hong Kong there were also several notable successes. In 2006, HSBC was the
leading bank in new residential mortgage lending, credit card issuance and
receivables, unit trust sales, and the origination and distribution of
structured products. In new residential mortgage lending we captured a 17.6 per
cent market share, largely due to a simplified pricing campaign launched in the
first quarter of 2006. Including Hang Seng Bank, the HSBC Group's market share
reached 33.3 per cent. HSBC, again including Hang Seng Bank, now has 4.6 million
cards in issue in the territory, up 16.7 per cent from 2005. Average receivables
in these portfolios also grew strongly, up 15.0 per cent to HK$26,655 million.
Group fee income from cards rose by HK$671 million, up 29.1 per cent. Group unit
trust sales grew by 60.9 per cent to HK$59,000 million. Insurance revenues grew
by 13.0 per cent to HK$4,719 million.

In the rest of the region, competitive pricing and increased marketing activity
boosted income from mortgages in Singapore and Taiwan. Similarly, increased
marketing led to a rise in income from interest earned on credit cards in the
Philippines, Indonesia and India. Our cards in issue in the region continued to
grow strongly. In India we added 800,000 cards to reach two million in issue.
Cards in issue increased elsewhere as well: up 34.6 per cent in the Philippines
to 816,000; up 20.0 per cent in Singapore to 531,000; up 42.2 per cent in Sri
Lanka to 265,000; and up 28.0 per cent in Australia to 189,000. In 2006, HSBC
was the second largest credit card issuer in the Philippines in terms of
billings and receivables.

Our Commercial Banking business had an outstanding year, reporting pre-tax
profit of HK$14,945 million, up 34.3 per cent. This result was driven by balance
sheet growth and widening deposit spreads. Commercial Banking continued to grow
deposits, which rose 17.2 per cent to HK$439 billion, and lending balances, also
up 17.2 per cent to HK$276 billion. We also continued to expand our presence in
the SME sector and to increase cross-border referrals to capture opportunities
arising from the growing cross-border flows in trade, services and investment.
Our Commercial Banking business continues to position itself to provide support
for and to benefit from the growing regional trade and payment flows, in
particular those associated with China's economic expansion and development.
Income from insurance and investment sales rose significantly in Hong Kong, up
59.2 per cent to HK$1,523 million.

Corporate, Investment Banking and Markets reported a pre-tax profit of HK$15,243
million, up 15.0 per cent and driven by robust performances in Global
Transaction Banking and strong trading profits in Global Markets. These trading
results were largely on the back of customer flows, with particular success
outside Hong Kong. Declining balance sheet management revenues continued to drag
on earnings as the cost of funding fixed rate asset positions, put on in earlier
periods, rose significantly. These positions had largely run off by the end of
the first half of 2006. Net interest income in Global Transaction Banking
increased by 62.7 per cent from business growth and improved deposits spreads
most notably in India, Hong Kong, Singapore, Taiwan, mainland China and Korea.
Overall, net fee income was boosted by the rising volumes in regional equity
markets in the year, increasing by 28.7 per cent to HK$6,937 million. In
particular, fee income from securities services increased 42.0 per cent from
rising equity market volumes, notably in India, mainland China and Singapore,
and fee income from asset management business rose 48.1 per cent. Net trading
income rose 20.3 per cent to HK$8,682 million as currency volatility provided
good trading opportunities and customer volumes increased in India, mainland
China and Singapore.

Looking forward, we will continue to invest in growth markets across the
Asia-Pacific region, which remains an important growth engine for the HSBC
Group. We intend to further strengthen our distribution capability. Our
extensive and unique footprint in the region already provides us with a
competitive advantage and the use of channels such as direct banking further
extends our reach to both existing and new customers. We will continue to
enhance and grow our product and service capabilities to ensure we provide
comprehensive services for our target customer segments across the region. We
will also continue to watch for opportunities presented by possible strategic
and selective acquisitions. In Hong Kong, which continues to be a major gateway
to mainland China, our operations remain the regional hub and fulcrum point of
HSBC in Asia. Our strategy in the territory is straightforward: we intend to
maintain our leading position as we further grow both our market share and our
share of our customers' business. We will also actively and prudently manage our
costs. In mainland China, we will continue our successful two-pronged strategy
of growing organically and developing our strategic partnerships.

The general outlook for Asia's burgeoning economies remains positive against a
backdrop of supportive global economic growth, demand for goods and services
from OECD countries and growth in intra-regional trade, including 'South South'
economic flows. HSBC, for its part, has made significant progress in recent
years investing in its Asian emerging market operations. As a result, we are
well positioned to pursue the expanding opportunities in financial services as
these economies grow and develop.

Results by Customer Group

                                                          Corporate,
                                                          Investment
                                    Personal                 Banking                         Intra-
                                   Financial  Commercial         and  Private               segment
Figures in HK$m                     Services     Banking     Markets  Banking   Other   elimination      Total

Year ended 31Dec06

Net interest income/(expense)         30,090      14,006       9,104       45  (4,201)        2,055     51,099

Net fee income/(expense)              10,512       5,018       6,937      101    (164)            -     22,404

Net trading income                       889         796       8,682       14     825        (2,288)     8,918

Net income/(loss) from financial
  instruments designated at
  fair value                           3,364        (384)         74       (1)   (616)          233      2,670

Gains less losses from
  financial investments                  108           -         226        -   1,132             -      1,466

Dividend income                            9          10          55        -     675             -        749

Net earned insurance premiums         20,741         972         133        -       -             -     21,846

Other operating income                 2,262         348         430       14   7,005        (4,406)     5,653

Total operating income                67,975      20,766      25,641      173   4,656        (4,406)   114,805

Net insurance claims
  incurred and movement in
  policyholders' liabilities         (21,902)       (478)       (100)       -       -             -    (22,480)

Net operating income before
  loan impairment charges and
  other credit risk provisions        46,073      20,288      25,541      173   4,656        (4,406)    92,325

Loan impairment charges and
  other credit risk provisions        (4,528)       (446)        250        -     (85)            -     (4,809)

Net operating income                  41,545      19,842      25,791      173   4,571        (4,406)    87,516

Operating expenses                   (19,913)     (6,531)    (11,219)    (167) (4,815)        4,406    (38,239)

Operating profit/(loss)               21,632      13,311      14,572        6    (244)            -     49,277

Share of profit in associates
  and joint venture                      257       1,634         671        -     177             -      2,739

Profit/(loss) before tax              21,889      14,945      15,243        6     (67)            -     52,016

Share of profit/(loss) before tax       42.1%       28.7%       29.3%       -    (0.1%)           -      100.0%

Advances to customers                446,990     276,172     301,069    3,312  16,239             -  1,043,782

Customer accounts                  1,121,286     438,943     417,335    7,253   4,650             -  1,989,467

Year ended 31Dec05

Net interest income/(expense)         26,801      11,089       8,725       63  (3,800)          613     43,491

Net fee income                         8,050       4,524       5,388       55      80             -     18,097

Net trading income/(loss)                683         638       7,215       10    (582)         (784)     7,180

Net income/(loss) from financial
  instruments designated at
  fair value                             666        (648)        122        -      73           171        384

Gains less losses from
  financial investments                    -          23          19        -     714             -        756

Dividend income                            5          14         167        -     182             -        368

Net earned insurance premiums         18,437         756         147        -       -             -     19,340

Other operating income                 1,984         295         572       13   6,338        (4,305)     4,897

Total operating income                56,626      16,691      22,355      141   3,005        (4,305)    94,513

Net insurance claims
  incurred and movement in
  policyholders' liabilities         (16,889)       (330)        (72)       -       -             -    (17,291)

Net operating income before
  loan impairment charges and
  other credit risk provisions        39,737      16,361      22,283      141   3,005        (4,305)    77,222

Loan impairment charges and
  other credit risk provisions        (1,344)       (896)        165        -      11             -     (2,064)

Net operating income                  38,393      15,465      22,448      141   3,016        (4,305)    75,158

Operating expenses                   (16,932)     (5,424)     (9,642)    (113) (4,008)        4,305    (31,814)

Operating profit/(loss)               21,461      10,041      12,806       28    (992)            -     43,344

Share of profit in associates
  and joint venture                      179       1,090         446        -     190             -      1,905

Profit/(loss) before tax              21,640      11,131      13,252       28    (802)            -     45,249

Share of profit/(loss) before tax       47.8%       24.6%       29.3%       -    (1.7%)           -      100.0%

Advances to customers                436,676     235,675     309,092    3,230  14,653             -    999,326

Customer accounts                    984,734     374,370     366,752    7,405   1,849             -  1,735,110

Personal Financial Services reported profit before tax of HK$21,889 million, an
increase of 1.2 per cent over 2005 as strong growth in operating income of 15.9
per cent was offset by higher credit card impairment allowances in Taiwan and
Indonesia, and investment expenditure in the rest of Asia-Pacific.

Overall, net interest income increased by HK$3,289 million, or 12.3 per cent,
compared with 2005. In Hong Kong, net interest income rose by HK$2,029 million,
or 10.0 per cent, as effective management of deposit pricing amid the continued
trend of rising interest rates resulted in a further widening of liability
spreads. Average customer account balances rose by 7.1 per cent, reflecting
successful promotional campaigns and customer preference for maintaining
liquidity in order to take advantage of short-term investment opportunities. The
local mortgage market remained highly competitive as sales volumes in the
housing market slowed and margins were impacted by a higher cost of funds and
competitor price promotions. However, HSBC regained leadership in market share
of new business, largely as a result of a simplified pricing campaign launched
by the bank in Hong Kong in the first quarter of 2006. Credit card lending grew,
but net interest income fell as the benefit of higher receivables was more than
offset by a rise in funding costs.

In the rest of Asia-Pacific, net interest income rose by HK$1,260 million, or
19.6 per cent, reflecting strong balance sheet growth across the region. The
deposit base expanded in a number of countries, particularly Singapore,
Indonesia and mainland China, reflecting evolution of the focused strategy on
HSBC Premier customers, and deposit spreads improved on the back of higher
interest rates. Income from mortgages increased as lending grew, notably in
Singapore and Taiwan, led by competitive pricing and increased marketing
activity. Interest earned on credit cards was higher in the Philippines,
Indonesia and India, reflecting growth in receivables, but spreads narrowed in
the face of increased funding costs. Credit card interest income fell
significantly in Taiwan as lending was reduced following the introduction of a
government debt renegotiation scheme with zero or low rates for delinquent
borrowers. Income from personal instalment loans rose, notably in India, Korea
and Indonesia, following the successful launch of these products in mid-2005.

Net fee income of HK$10,512 million was 30.6 per cent higher than in 2005,
driven by buoyant regional and global stock markets and greater demand for
wealth management products. In Hong Kong, fee income was up by HK$1,828 million,
or 31.7 per cent. Fee income from stockbroking and custody services rose by 80.3
per cent, reflecting higher stock market transaction volumes. Sales of unit
trusts increased significantly as investors switched to equity-related products,
encouraged by improved markets and the launch of new investment funds. In the
rest of Asia-Pacific, fee income rose by 27.7 per cent on the back of strong
demand for investment products in Korea, Taiwan, India and Singapore, with
revenue from wealth management sales in the region increasing by HK$355 million,
or 33.8 per cent.

Fee income from credit cards was HK$671 million, or 29.1 per cent, higher than
in 2005 as the group strengthened its position as the largest card issuer in
Hong Kong, with over 4.6 million cards in force. In the rest of Asia-Pacific,
particularly India and the Philippines, expansion of the cards business
continued. This was supported by extensive marketing campaigns and sales
efforts, resulting in a rise of 21.3 per cent in the number of cards to a total
of 5.7 million issued, and a 19.3 per cent increase in cardholder spending.

Insurance income rose by 13.0 per cent, with continued focus on the development
of the group's retirement planning proposition and was supported by increased
levels of marketing activity and distribution channel development. Sales of
other life assurance products also grew and revenue from general insurance,
particularly medical, travel and home insurance, increased.

Gains from financial investments principally comprise profit realised from the
partial disposal of shares held in MasterCard Inc.

Other operating income increased by HK$278 million, attributable to gains on the
sale of the Australian stockbroking, margin lending and broker-originated
mortgage businesses, and the share of profit attributable to Personal Financial
Services from the transfer of the credit card merchant acquiring business to a
joint venture company set up with Global Payments Inc. These gains were
partially offset by lower IT cost recoveries in Hong Kong from other regional
group entities resulting from a change in the charging methodology across
customer groups.

The charge for loan impairment increased by HK$3,184 million to HK$4,528
million, largely attributable to higher credit card delinquency levels in Taiwan
and Indonesia. Delinquency rates and write-offs rose in Taiwan largely as a
result of government measures to control consumer credit growth. Indonesia has
been affected by higher minimum repayment rules, coupled with a hefty reduction
in the government subsidy of fuel prices. Volume growth in credit card
receivables in Hong Kong and in personal instalment loans in other parts of the
region also contributed to the increased charge, whereas the prior period
benefited from non-recurring releases of provisions against mortgage lending and
restructured facilities in Hong Kong.

Operating expenses were HK$2,981 million, or 17.6 per cent, higher than in 2005,
principally driven by continued investment to develop and expand the business in
the rest of the Asia-Pacific region. In Hong Kong, operating expenses rose by
10.6 per cent, largely in relation to major credit card marketing campaigns and
headcount growth in customer-facing roles. Staff recruitment increased to
support the introduction in September 2006 of the five-day working week and
extended opening hours, and payroll costs further rose due to higher
performance-related bonuses and annual salary increments. Technology costs were
also higher, reflecting investment in customer portfolio management systems and
the enhancement of distribution channel capabilities. In the rest of
Asia-Pacific, costs increased by HK$1,936 million, or 27.4 per cent, notably in
India and Korea, as the group continued to pursue organic growth in the region.
Headcount rose by 29.1 per cent as sales and support functions were expanded,
and premises costs rose as new branches were opened in mainland China and a
number of other countries. Higher marketing costs were incurred to drive sales
and promote the HSBC brand, with specific campaigns targeted to increase
customer numbers and raise market share in credit cards, mortgages and personal
loans, and to attract new deposits. In addition, costs were incurred in the
start-up of the consumer finance business in the region, particularly in India,
Australia and Indonesia, and in relation to the launch of HSBC Direct in Taiwan
and Korea in September 2006 and February 2007 respectively.

Income from associates of HK$257 million includes improved results from Bank of
Communications and Industrial Bank.

Commercial Banking reported profit before tax of HK$14,945 million, an increase
of 34.3 per cent over 2005, driven by improved deposit spreads and balance sheet
growth.

Net interest income increased by HK$2,917 million, or 26.3 per cent, compared
with 2005. This reflected growth in average deposits and advances as well as
improvements in deposit spreads following further rises in interest rates across
the region this year. In Hong Kong, net interest income rose by HK$1,916
million, or 22.5 per cent, due to growth in liability balances, reflecting the
active promotion of the 'BusinessVantage' account in Hong Kong and the widening
of deposit spreads. Strong demand for credit continued in the property sector
and from manufacturers with operations on the Mainland, but lending margins were
compressed due to keen market competition and higher funding costs. Emphasis on
the small business segment was strengthened with the opening of dedicated small
business banking centres, more relationship managers and sales staff, and the
launch of a streamlined lending process. Cross-border relationships continued to
be an area of emphasis, and the regional alignment proposition was enhanced to
capture business flows between Hong Kong, mainland China, Taiwan and Vietnam,
which led to a significant increase in inter-office referrals.

In the rest of Asia-Pacific, net interest income grew by 39.0 per cent.
Liability spreads improved across the region and the deposit base expanded in
various countries, particularly in Taiwan, Singapore and India, following
successful marketing campaigns and sales incentives. Account balances in India
increased also due to the receipt of IPO funds. In addition, the offshore
business in Mauritius performed well. Term lending and trade finance increased,
notably in mainland China, India, Korea and Australia as a result of promotional
activities, enhanced packaged lending propositions, together with expansion of
the branch network and internet banking. Asset spreads also improved.

Net fee income rose by HK$494 million, or 10.9 per cent, largely attributable to
higher fees from account services and remittances, particularly in Hong Kong as
a result of enhancements to the product range and increased cross-border
remittances. Credit card merchant acquiring fees dropped by 11.5 per cent as the
majority of the business was transferred in July 2006 into a joint venture
company set up with Global Payments Inc. Fees from trade services were higher
with increases in mainland China, India, Bangladesh and Indonesia partially
offset by lower revenues in Hong Kong due to intense market competition. Buoyant
local equity markets and the launch of new investment products contributed to
increased wealth management sales in Hong Kong. Income from sales of foreign
exchange and interest rate derivative products increased by 24.8 per cent,
benefiting from an increase in hedging transactions and cross-border payments.

Insurance revenues, particularly from life insurance products, continued to grow
following the establishment of a dedicated commercial banking insurance division
last year. Income increased by 71.2 per cent. Fees from the Mandatory Provident
Fund business in Hong Kong also grew strongly.

Other operating income increased by HK$53 million, due to the share of profit
attributable to Commercial Banking from the transfer of the credit card merchant
acquiring business to a joint venture company set up with Global Payments Inc.

The charge for loan impairment was HK$450 million lower than in 2005, reflecting
a decrease in new specific provisions in Hong Kong, although releases in Hong
Kong, mainland China, India and Singapore were lower. Credit quality generally
remained stable.

Operating expenses increased by 20.4 per cent over 2005. The number of sales and
back-office staff rose in support of SME initiatives, insurance business
expansion, product development and increased branch presence, and expenditure
rose on marketing campaigns to win new business and raise market penetration.
Ongoing investment in the development and promotion of internet banking and
other lower-cost delivery channels resulted in higher IT and infrastructure
costs. Business Internet Banking in Hong Kong continued to show impressive
growth and was enhanced to support sales of unit trusts and structured deposits.
User numbers increased by over 20 per cent and the proportion of online
transactions grew by 42.2 per cent. Staff costs and marketing expenditure rose
in Korea and mainland China in order to further develop the group's commercial
banking business in these countries.

Income from associates was HK$544 million higher than in the prior year and
includes improved results from Bank of Communications and Industrial Bank.

Corporate, Investment Banking and Markets reported profit before tax of
HK$15,243 million, 15.0 per cent higher than 2005, attributable to an excellent
performance in Global Transaction Banking and strong trading profits in Global
Markets.

Net interest income increased by HK$379 million, or 4.3 per cent, compared with
2005. In Global Markets, balance sheet management revenues declined as the cost
of funding fixed rate asset positions, put on in earlier periods, rose
significantly, although these asset positions had, however, largely run off by
the end of the first half of 2006. In addition, flat yield curves made it
difficult to generate income through position-taking. Net interest income in
Global Transaction Banking increased by 62.7 per cent, notably in India, Hong
Kong, Singapore, Taiwan, mainland China and Korea as a result of business growth
and interest rate rises in the region. Deposit balances grew by 22.3 per cent as
the payments and cash management business successfully completed the
implementation of a record number of domestic and cross-border cash management
mandates. The securities services business performed well, particularly in
India, Taiwan and Korea. Trade finance revenues grew, notably in Japan and
Korea. Net interest income from corporate lending fell by 4.7 per cent as the
benefit of balance sheet growth in Hong Kong was offset by competitive pressures
on spreads. Strong growth in advances to corporates in mainland China was
achieved, reflecting investment made in expanding customer relationships and
inflow of business into the group's new branches on the Mainland.

Net fee income increased by HK$1,549 million, or 28.7 per cent. In Global
Transaction Banking, fees rose by HK$1,294 million, or 34.2 per cent. The
securities services business continued to broaden capabilities across the
region, and was strengthened by the acquisition of the sub-custody business in
Australia and New Zealand from Westpac. Volumes benefited from buoyant local
stock markets, particularly in Hong Kong, Korea and India. Fee income from the
asset management business increased by 48.1 per cent, reflecting higher fund
advisory and distribution fees and growth in funds under management. Investment
banking revenues were higher as the division arranged a number of structured
finance transactions in Hong Kong, but underwriting income declined although
several mandates for mid-tier IPOs were won.

Net trading income rose by 20.3 per cent to HK$8,682 million. Foreign exchange
and interest rate derivatives revenues were higher as currency volatility
provided good trading opportunities, particularly in regional currencies, and
customer volumes increased reflecting HSBC's focus on capturing emerging market
flows from heightened client interest in emerging markets, particularly in India
and mainland China. Strong results were achieved from equities and equity
derivatives trading, reflecting business expansion in these areas and buoyant
regional stock markets. Private equity investments also performed strongly.
Tighter credit spreads in the corporate bond market created fewer trading
opportunities compared to previous years, and there was a reduced contribution
from the structured interest rate derivatives business as investors focused on
shorter-dated interest rate products and other asset classes.

Gains on the disposal of financial investments were HK$207 million higher than
in 2005 and largely comprised profits made on the sale of Philippine government
securities in 2006, together with the non-recurrence of losses on disposals of
securities sold in 2005, following strategic decisions to reduce interest rate
risk in certain portfolios.

There was a net release of loan impairment provisions of HK$250 million,
compared with a release of HK$165 million in 2005, as the corporate credit
environment throughout the region remained benign.

Operating expenses increased by 16.4 per cent compared with 2005, reflecting
headcount increases and IT investment to support business expansion in all areas
and higher performance-related remuneration in the investment banking division
and in Global Markets. The transfer to the group of HSBC Securities Japan from
another HSBC Group company in the second quarter of 2005 also contributed to the
increase in expenses as a full period of costs was reflected this year.

Income from associates of HK$671 million includes improved results from Bank of
Communications and Industrial Bank.

Other includes income and expenses relating to certain funding, investment,
property and other activities that are not allocated to other customer groups.

Gains from financial investments largely comprise profit on the disposal of part
of the group's stake in UTI Bank, and other operating income includes profits
made on property sales. These gains were partially offset by lower revaluation
gains on investment property.

Consolidated Income Statement

                                                            Year ended   Year ended
Figures in HK$m                                                31Dec06      31Dec05

Interest income                                                115,928       80,199
Interest expense                                               (64,829)     (36,708)
Net interest income                                             51,099       43,491
Fee income                                                      26,554       21,671
Fee expense                                                     (4,150)      (3,574)
Net fee income                                                  22,404       18,097
Net trading income                                               8,918        7,180
Net income from financial instruments designated
  at fair value                                                  2,670          384
Gains less losses from financial investments                     1,466          756
Dividend income                                                    749          368
Net earned insurance premiums                                   21,846       19,340
Other operating income                                           5,653        4,897
Total operating income                                         114,805       94,513
Net insurance claims incurred and movement in
  policyholders' liabilities                                   (22,480)     (17,291)
Net operating income before loan impairment charges and
  other credit risk provisions                                  92,325       77,222
Loan impairment charges and other credit risk  provisions       (4,809)      (2,064)
Net operating income                                            87,516       75,158
Employee compensation and benefits                             (21,042)     (17,736)
General and administrative expenses                            (14,949)     (12,095)
Depreciation of property, plant and equipment                   (1,905)      (1,825)
Amortisation of intangible assets                                 (343)        (158)
Total operating expenses                                       (38,239)     (31,814)
Operating profit                                                49,277       43,344
Share of profit in associates and joint venture                  2,739        1,905
Profit before tax                                               52,016       45,249
Tax expense                                                     (9,411)      (8,051)
Profit for the year                                             42,605       37,198

Profit attributable to shareholders                             37,709       32,873
Profit attributable to minority interests                        4,896        4,325

Extract from the Consolidated Balance Sheet

Figures in HK$m                                             At 31Dec06   At 31Dec05

ASSETS
Cash and short-term funds                                      518,022      502,730
Items in the course of collection from other banks              46,519       17,782
Placings with banks maturing after one month                   104,037       69,554
Certificates of deposit                                         73,200       53,831
Hong Kong SAR Government certificates of indebtedness          102,374       97,344
Trading assets                                                 338,792      215,681
Financial assets designated at fair value                       50,514       37,073
Derivatives                                                     99,167       72,039
Advances to customers                                        1,043,782      999,326
Financial investments                                          484,841      394,497
Amounts due from group companies                               161,118      101,173
Investments in associates and joint venture                     25,534       23,061
Goodwill and intangible assets                                  10,428        7,252
Property, plant and equipment                                   29,159       29,805
Deferred tax assets                                              1,245        1,272
Retirement benefit assets                                        2,191        1,788
Other assets                                                    59,917       48,324
Total assets                                                 3,150,840    2,672,532

LIABILITIES
Hong Kong SAR currency notes in circulation                    102,374       97,344
Items in the course of transmission to other banks              57,226       20,927
Deposits by banks                                              108,125       83,802
Customer accounts                                            1,989,467    1,735,110
Trading liabilities                                            272,545      250,198
Financial liabilities designated at fair value                  36,554       33,291
Derivatives                                                     98,659       72,009
Debt securities in issue                                        69,195       61,468
Retirement benefit liabilities                                     465          394
Amounts due to group companies                                  31,356       24,777
Other liabilities                                               56,478       46,628
Liabilities under insurance contracts issued                    61,350       41,845
Current tax liabilities                                          4,500        2,044
Deferred tax liabilities                                         4,284        3,729
Subordinated liabilities                                        16,353       12,561
Preference shares                                               76,464       71,980
Total liabilities                                            2,985,395    2,558,107

EQUITY
Share capital                                                   22,494       22,494
Other reserves                                                  35,514        6,037
Retained profits                                                80,942       64,303
Proposed fourth interim dividend                                 6,500        4,500
Total shareholders' equity                                     145,450       97,334
Minority interests                                              19,995       17,091
                                                               165,445      114,425
Total equity and liabilities                                 3,150,840    2,672,532

Consolidated Statement of Recognised Income and Expense

                                                            Year ended   Year ended
Figures in HK$m                                                31Dec06      31Dec05

Available-for-sale investments:
- fair value changes taken to equity                            25,115       (1,885)
- fair value changes transferred to the income statement
  on disposal or impairment                                     (1,464)        (787)
- fair value changes transferred to the income statement
  on hedged items due to hedged risk                              (105)       1,077

Cash flow hedges:
- fair value changes taken to equity                              (165)      (2,743)
- fair value changes transferred to the income statement         2,277          538

Property revaluation:
- fair value changes taken to equity                             1,977        2,448

Share of changes in equity of associates and joint venture        (186)       1,098
Exchange differences                                             2,779         (782)
Actuarial gains on post-employment benefits                         93          144
                                                                30,321         (892)
Net deferred tax on items taken directly to equity                (738)         253
Total income and expense taken to equity during the year        29,583         (639)
Profit for the year                                             42,605       37,198
Total recognised income and expense for the year                72,188       36,559

Total recognised income and expense for the year
  attributable to:
- shareholders                                                  66,448       32,594
- minority interests                                             5,740        3,965
                                                                72,188       36,559

Consolidated Cash Flow Statement

                                                            Year ended   Year ended
Figures in HK$m                                                31Dec06      31Dec05

Operating activities
Cash generated from operations                                  88,942       31,009
Interest received on financial investments                      17,527       14,759
Dividends received on financial investments                        711          339
Dividends received from associates                                 766          108
Taxation paid                                                   (6,159)      (7,313)
Net cash inflow from operating activities                      101,787       38,902

Investing activities
Purchase of financial investments                             (402,459)    (335,668)
Proceeds from sale or redemption of financial
  investments                                                  361,794      366,294
Purchase of property, plant and equipment                       (2,085)      (1,749)
Proceeds from sale of property, plant and equipment              2,697        1,153
Purchase of other intangible assets                             (1,142)        (670)
Proceeds from sale of assets held for sale                       1,479            -
Net cash outflow in respect of the acquisition of and
  increased shareholding in subsidiary companies                   (22)      (1,644)
Net cash inflow in respect of the sale of subsidiary
  companies                                                        409          151
Net cash outflow in respect of the purchase of
  interests in business portfolios                                (775)           -
Net cash outflow in respect of the purchase of
  interests in associates and joint venture                       (462)      (3,358)
Proceeds from the sale of interests in business portfolios      16,501            -
Proceeds from the sale of interests in associates                    -           10
Net cash (outflow)/inflow from investing activities            (24,065)      24,519

Net cash inflow before financing                                77,722       63,421

Financing
Issue of preference share capital                                4,277       16,567
Change in minority interest stake                                  976          362
Repayment of subordinated liabilities                           (1,018)           -
Issue of subordinated liabilities                                4,661        2,500
Ordinary dividends paid                                        (18,757)     (20,600)
Dividends paid to minority interests                            (3,841)      (3,983)
Interest paid on preference shares                              (3,935)      (1,574)
Interest paid on subordinated liabilities                         (946)        (555)
Net cash outflow from financing                                (18,583)      (7,283)

Increase in cash and cash equivalents                           59,139       56,138



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