HK & Shanghai Bk pt 3/3

HSBC Holdings PLC
03 March 2008


 
20. Cross-border exposure

The country risk exposures in the tables below are prepared in accordance with
the HKMA Return of External Positions Part II: Cross-Border Claims (MA(BS)9)
guidelines.

Cross-border claims are on-balance sheet exposures to counterparties based on
the location of the counterparties after taking into account the transfer of
risk.

The tables show claims on individual countries and territories or areas, after
risk transfer, amounting to 10 per cent or more of the aggregate cross-border
claims.

Cross-border risk is controlled centrally through a well-developed system of
country limits and is frequently reviewed to avoid concentration of transfer,
economic or political risk.

                                             Banks and
                                                 other    Public
                                             financial    sector
Figures in HK$m                           institutions  entities    Other    Total

At 31Dec07

Americas
United States                                   53,963    63,624   62,638  180,225
Other                                           48,643     2,713   51,189  102,545
                                               102,606    66,337  113,827  282,770

Europe
United Kingdom                                 322,972        17   46,218  369,207
Other                                          450,375     1,651   48,113  500,139
                                               773,347     1,668   94,331  869,346

Asia-Pacific excluding Hong Kong               241,481   104,092  171,184  516,757

At 31Dec06

Americas
United States                                   62,558    78,354   72,669  213,581
Other                                           38,585     6,568   47,393   92,546
                                               101,143    84,922  120,062  306,127

Europe
United Kingdom                                 138,625        17   24,324  162,966
Other                                          405,950     5,010   18,981  429,941
                                               544,575     5,027   43,305  592,907

Asia-Pacific excluding Hong Kong               213,292    93,968  116,242  423,502

21. Customer accounts

Figures in HK$m                                             At 31Dec07  At 31Dec06

Current accounts                                               417,786     292,450
Savings accounts                                               983,874     785,659
Other deposit accounts                                       1,084,446     911,358
                                                             2,486,106   1,989,467

Customer accounts increased by HK$497 billion, or 25 per cent, compared with the
end of 2006.

In Hong Kong, customer accounts rose by HK$271 billion, or 18.8 per cent,
largely in savings and other account balances, attributable to successful
deposit campaigns and effective pricing which made savings products more
attractive to customers. Deposits from personal customers increased by HK$101
billion, or 12.2 per cent.

In the rest of Asia-Pacific, customer accounts increased HK$226 billion, or 41.0
per cent, as the group continued to expand the deposit base throughout the
region. The group's focus was on attracting mass affluent customers through HSBC
Premier and increasing corporate balances by growing the payments and cash
management business and the securities services business. Deposits from personal 
customers grew by HK$54 billion, or 26.7 per cent,notably in India, Australia 
and mainland China. Customer account balances held by corporate customers in 
Commercial Banking and Global Banking and Markets rose by HK$169 billion, or 
49.5 per cent, largely in mainland China, India, Singapore and South Korea.

The group's advances-to-deposits ratio decreased to 48.8 per cent at 31 December
2007, from 52.5 per cent at 31 December 2006.

22. Reserves


Figures in HK$m                                                          At 31Dec07   At 31Dec06 
                                                                                     
Other reserves                                                                       
- Property revaluation reserve                                                6,995        4,798
- Available-for-sale investment reserve                                      58,757       25,812
- Cash flow hedge reserve                                                       677         (166)
- Foreign exchange reserve                                                    8,887        2,805
- Other                                                                       8,636        2,265
                                                                             83,952       35,514
Retained profits                                                            107,908       80,942
Total reserves                                                              191,860      116,456
                                                                                    
An amount of HK$4,180 million (excluding an amount of HK$555 million recognised
in minority interests), being the amount of the gains arising from the dilution
of investments in associates, has been transferred from retained profits to
other reserves.

23. Contingent liabilities, commitments and derivatives

a Off-balance sheet contingent liabilities and commitments


Figures in HK$m                                                          At 31Dec07   At 31Dec06

Contingent liabilities and financial guarantee contracts
- Guarantees and irrevocable letters of credit pledged as collateral              
  security                                                                  161,493      121,911  
- Other contingent liabilities                                                  122           34
                                                                            161,615      121,945

Commitments
- Documentary credits and short-term trade-related transactions              54,803       34,538
- Forward asset purchases and forward forward deposits placed                   461          319
- Undrawn note issuing and revolving underwriting facilities                      -        1,166
- Undrawn formal standby facilities, credit lines and other commitments
  to lend:
  - 1 year and under                                                      1,037,691      887,680
  - over 1 year                                                              93,111       93,970
                                                                          1,186,066    1,017,673

The above table discloses the nominal principal amounts of third party
off-balance sheet transactions, the amounts relating to other contingent
liabilities and the nominal principal amounts relating to financial guarantee
contracts. Contingent liabilities and commitments are mainly credit-related
instruments which include non-financial guarantees and commitments to extend
credit. Contractual amounts represent the amounts at risk should contracts be
fully drawn upon and clients default. Since a significant portion of guarantees
and commitments are expected to expire without being drawn upon, the total of
the contractual amounts is not representative of future liquidity requirements.

b Guarantees (including financial guarantee contracts)

The group provides guarantees and similar undertakings on behalf of both third
party customers and other entities within the group. These guarantees are
generally provided in the normal course of the banking business. The principal
types of guarantees provided, and the maximum potential amount of future
payments which the group could be required to make at 31 December 2007, were as
follows:

                                                    At 31Dec07                       At 31Dec06

                                                               Guarantees                    Guarantees by
                                                             by the group                     the group in
                                            Guarantees in    in favour of    Guarantees in       favour of
                                          favour of third      other HSBC  favour of third      other HSBC
Figures in HK$m                                   parties  Group entities          parties  Group entities

Guarantee type
Financial guarantee contracts^                     26,157           3,912           22,195           4,229
Standby letters of credit which are
  financial guarantee contracts^^                  25,366              28           17,734              65
Other direct credit substitutes^^^                 30,384              21           27,778               4
Performance bonds^^^^                              35,666           3,628           25,962           3,078
Bid bonds^^^^                                       2,223             147            1,175             132
Standby letters of credit related to
  particular transactions^^^^                       4,942             137            1,703             102
Other transaction-related guarantees^^^^           27,559           4,509           20,685           1,654
                                                  152,297          12,382          117,232           9,264

^    Financial guarantees are contracts that require the issuer to make
     specified payments to reimburse the holder for a loss incurred because a
     specified debtor fails to make payment when due in accordance with the
     original or modified terms of a debt instrument. The amounts in the above
     table are nominal principal amounts.

^^   Standby letters of credit which are financial guarantee contracts are
     irrevocable obligations on the part of the group to pay third parties when
     customers fail to make payments when due.

^^^  Other direct credit substitutes include re-insurance letters of credit and
     trade-related letters of credit issued without provision for the issuing
     entity to retain title to the underlying shipment.

^^^^ Performance bonds, bid bonds, standby letters of credit and other
     transaction-related guarantees are undertakings by which the obligation on
     the group to make payment depends on the outcome of a future event.

The amounts disclosed in the above table reflect the group's maximum exposure
under a large number of individual guarantee undertakings. The risks and
exposures from guarantees are captured and managed in accordance with HSBC's
overall credit risk management policies and procedures. Approximately half of
the above guarantees have a term of less than one year. Guarantees with terms of
more than one year are subject to HSBC's annual credit review process.

c Contingencies

The group is named in and defending legal actions in a number of jurisdictions
including Hong Kong, arising out of its normal business operations. None of the
actions is regarded as material litigation, and none is expected to result in a
significant adverse effect on the financial position of the group, either
collectively or individually. Management believes that adequate provisions have
been made in respect of such litigation.

24. Foreign exchange exposure

Foreign exchange exposures may be divided broadly into two categories:
structural and non-structural. Structural exposures are normally long-term in
nature and include those arising from investments in overseas subsidiaries,
branches, associates and strategic investments as well as capital instruments
denominated in currencies other than Hong Kong dollars. Non-structural exposures
arise primarily from trading positions and balance sheet management activities.
Non-structural exposures can arise and change rapidly. Foreign currency
exposures are managed in accordance with the group's risk management policies
and procedures.

The group had the following structural foreign currency exposures which exceeded
10 per cent of the total net structural exposure in all foreign currencies:

Figures in HK$m                                            Net structural position

At 31Dec07

Chinese renminbi                                                           104,825
  Indian rupee                                                              18,774

At 31Dec06

Chinese renminbi                                                            54,960
United States dollars                                                       15,886

The increase in the Chinese renminbi structural position during 2007 was
principally due to an increase in the valuation of the group's strategic
long-term foreign currency equity investments.

The group had the following non-structural foreign currency positions which
exceeded 10 per cent of the group's net non-structural positions in all foreign
currencies:

                                       United States  Singapore   Brunei   Chinese
Figures in HK$m                              dollars    dollars  dollars  renminbi

At 31Dec07
Spot assets                                2,754,883     35,820   65,053   222,368
Spot liabilities                          (2,700,125)   (81,235) (26,586) (201,629)
Forward purchases                          3,584,670    258,370       58   252,162
Forward sales                             (3,653,773)  (206,637) (44,713) (274,787)
Net options position                          18,068          -        -         -
                                               3,723      6,318   (6,188)   (1,886)

At 31Dec06
Spot assets                                1,205,314    118,964   27,665    78,111
Spot liabilities                          (1,222,334)  (140,566)    (107)  (69,689)
Forward purchases                          2,222,005    168,534   24,949    97,130
Forward sales                             (2,210,290)  (141,505) (57,857) (104,949)
Net options position                            (132)         -        -         -
                                              (5,437)     5,427   (5,350)      603

25. Segmental analysis

The allocation of earnings reflects the benefits of shareholders' funds to the
extent that these are actually allocated to businesses in the segment by way of
intra-group capital and funding structures. Interest is charged based on market
rates. Common costs are included in segments on the basis of the actual
recharges made. Geographical information has been classified by the location of
the principal operations of the subsidiary company or, in the case of the bank,
by the location of the branch responsible for reporting the results or advancing
the funds. Due to the nature of the group structure, the analysis of profits
shown below includes intra-group items between geographical regions with the
elimination shown in a separate column.

Consolidated income statement

                                                                                 Intra-
Figures in HK$m                                        Rest of   Americas/      segment
                                       Hong Kong  Asia-Pacific      Europe  elimination    Total

Year ended 31Dec07
Interest income                           96,700         54,384      1,079       (8,010) 144,153
Interest expense                         (54,538)       (33,877)      (995)       8,018  (81,392)
Net interest income                       42,162         20,507         84            8   62,761
Fee income                                27,644         14,355          1         (851)  41,149
Fee expense                               (3,930)        (3,116)       (13)         851   (6,208)
Net trading income/(loss)                  7,026          9,033          1           (4)  16,056
Net income from financial instruments
  designated at fair value                 5,322            883          -           (4)   6,201
Gains less losses from financial
  investments                                737            155          -            -      892
Gains arising from dilution of
  investments in associates                    -          4,735          -            -    4,735
Dividend income                              385            308          -            -      693
Net earned insurance premiums             21,934          1,761          -            -   23,695
Other operating income                     6,580            597         22       (3,143)   4,056
Total operating income                   107,860         49,218         95       (3,143) 154,030
Net insurance claims incurred and
  movement in policyholders'
  liabilities                            (25,044)        (1,977)         -            -  (27,021)
Net operating income before loan
  impairment charges and other
  credit risk provisions                  82,816         47,241         95       (3,143) 127,009
Loan impairment charges and
  other credit risk provisions            (1,799)        (4,006)         -            -   (5,805)
Net operating income                      81,017         43,235         95       (3,143) 121,204
Operating expenses                       (27,446)       (22,848)       (27)       3,143  (47,178)
Operating profit                          53,571         20,387         68            -   74,026
Share of profit in associates and
  joint ventures                             221          4,514          -            -    4,735
Profit before tax                         53,792         24,901         68            -   78,761
Tax expense                               (8,826)        (4,623)        (7)           -  (13,456)
Profit for the year                       44,966         20,278         61            -   65,305

Profit attributable to shareholders       38,605         19,362         61            -   58,028
Profit attributable to minority
  interests                                6,361            916          -            -    7,277

Year ended 31Dec06

Interest income                           82,301         40,151        884       (7,408) 115,928
Interest expense                         (46,490)       (24,960)      (804)       7,425  (64,829)
Net interest income                       35,811         15,191         80           17   51,099
Fee income                                17,347          9,925          -         (718)  26,554
Fee expense                               (3,030)        (1,826)       (12)         718   (4,150)
Net trading income/(loss)                  3,077          5,871        (13)         (17)   8,918
Net income from financial
  instruments designated at
  fair value                               2,048            622          -            -    2,670
Gains less losses from financial
  investments                              1,245            221          -            -    1,466
Dividend income                              525            224          -            -      749
Net earned insurance premiums             20,495          1,351          -            -   21,846
Other operating income                     6,171          2,073         22       (2,613)   5,653
Total operating income                    83,689         33,652         77       (2,613) 114,805
Net insurance claims incurred and
  movement in policyholders'
  liabilities                            (20,991)        (1,489)         -            -  (22,480)
Net operating income before loan
  impairment charges and other
  credit risk provisions                  62,698         32,163         77       (2,613)  92,325
Loan impairment charges and
  other credit risk provisions            (1,336)        (3,473)         -            -   (4,809)
Net operating income                      61,362         28,690         77       (2,613)  87,516
Operating expenses                       (23,534)       (17,287)       (31)       2,613  (38,239)
Operating profit                          37,828         11,403         46            -   49,277
Share of profit in associates and
  joint ventures                             150          2,589          -            -    2,739
Profit before tax                         37,978         13,992         46            -   52,016
Tax expense                               (6,079)        (3,317)       (15)           -   (9,411)
Profit for the year                       31,899         10,675         31            -   42,605

Profit attributable to shareholders       27,206         10,472         31            -   37,709
Profit attributable to minority
  interests                                4,693            203          -            -    4,896

26. Capital adequacy

The following table shows the capital adequacy ratio and the components of the
capital base contained in the 'Capital Adequacy Ratio' return required to be
submitted to the HKMA by The Hongkong and Shanghai Banking Corporation Limited
on a consolidated basis that is specified by the HKMA under the requirement of
section 98(2) of the Banking Ordinance.

The Banking (Capital) Rules ('the Rules') came into effect on 1 January 2007.
The Hongkong and Shanghai Banking Corporation Limited uses the standardised
(credit risk) approach and standardised (securitisation) approach to calculate
its credit risk for non-securitisation exposures and credit risk for
securitisation exposures respectively. It also uses the standardised
(operational risk) approach and standardised (market risk) approach to calculate
its operational risk and market risk respectively. However, an internal model
approach is adopted for calculating the general market risk and a separate model
is used for calculating the market risk relating to equity options. This basis
is different from the basis used at 31 December 2006, and the numbers are
therefore not strictly comparable.

Figures in HK$m

At 31Dec07

Composition of capital
Core Capital:
Paid-up ordinary share capital                                              21,040
Paid-up irredeemable non-cumulative preference shares                       51,882
Published reserves                                                          72,069
Profit and loss account                                                     29,543
Minority interests^^^^                                                      21,318
Less: Deduction from core capital                                          (11,111)
Less: 50% of total amount of deductible items (@50%)^^^^^                  (28,894)
Total core capital                                                         155,847

Supplementary Capital:
Property revaluation reserves^                                               5,869
Available-for-sale investments revaluation reserves^^                        4,434
Unrealised fair value gains from financial instruments
  designated at fair value through profit or loss                              137
Regulatory reserve^^^                                                        4,148
Collective provisions                                                        5,078
Perpetual subordinated debt                                                  9,415
Paid-up irredeemable cumulative preference shares                           16,610
Term subordinated debt                                                      11,970
Paid-up term preference shares                                              21,835
Less: 50% of total amount of deductible items (@50%)^^^^^                  (28,894)
Total supplementary capital                                                 50,602
Capital base                                                               206,449

Total deductible items^^^^^                                                 57,788

There is no relevant capital shortfall in any of the group's subsidiaries which
are not included in its consolidation group for regulatory purposes.

^     Includes the revaluation surplus on investment properties which is reported
      as part of retained profits.

^^    Includes adjustments made in accordance with guidelines issued by the HKMA.

^^^   The regulatory reserve is maintained for satisfying the Banking Ordinance
      for prudential supervision.

^^^^  After deduction of minority interests in unconsolidated subsidiary
      companies.

^^^^^ Total deductible items are deducted from institution's core capital and
      supplementary capital.

The capital ratios on a consolidated basis calculated in accordance with the
Rules are as follows:

                                                                        At 31Dec07

Capital adequacy ratio                                                        11.6%

Core capital ratio                                                             8.8%

The table below sets out an analysis of regulatory capital and capital adequacy
ratios for the group. They are calculated in accordance with the Third Schedule
of the Hong Kong Banking Ordinance.

This basis is different from the basis used at 31 December 2007, and the numbers
are therefore not strictly comparable.

Figures in HK$m

At 31Dec06

Composition of capital

Tier 1:
Total shareholders' equity                                                 145,450
Less: proposed dividend                                                     (6,500)
  property revaluation reserves^                                            (7,892)
  available-for-sale investment reserve^^                                  (26,028)
  classified as regulatory reserve^^^                                       (1,689)
  goodwill                                                                  (4,182)
  others                                                                      (138)
Irredeemable non-cumulative preference shares                               51,735
Minority interests^^^^                                                      17,483
Total qualifying tier 1 capital                                            168,239

Tier 2:
Property revaluation reserves (@70%)                                         5,524
Available-for-sale investment reserve (@70%)                                18,220
Collective impairment provision and regulatory reserve                       6,610
Perpetual subordinated debt                                                  9,370
Term subordinated debt                                                       9,849
Term preference shares                                                       8,165
Irredeemable cumulative preference shares                                   16,563
Total qualifying tier 2 capital                                             74,301

Deductions                                                                 (58,559)
Total capital                                                              183,981

Risk-weighted assets                                                     1,367,607

^    Includes the revaluation surplus on investment properties, which is now
     reported as part of retained profits.

^^   Includes adjustments made in accordance with guidelines issued by HKMA.

^^^  The regulatory reserve is maintained for the purpose of satisfying the
     Banking Ordinance for prudential supervision. Movements in this reserve are
     made in consultation with the HKMA.

^^^^ After deduction of minority interests in unconsolidated accounts of
     subsidiary companies.

The group's capital adequacy ratios adjusted for market risks calculated in
accordance with the HKMA Guideline on 'Maintenance of Adequate Capital Against
Market Risks' are as follows:

                                                                        At 31Dec06

Total capital                                                                 13.5%

Tier 1 capital                                                                12.3%

The group's capital adequacy ratios calculated in accordance with the provisions
of the Third Schedule of the Banking Ordinance, which does not take into account
market risks, are as follows:

                                                                        At 31Dec06

Total capital                                                                 13.0%

Tier 1 capital                                                                11.8%

27. Liquidity ratio

The Hong Kong Banking Ordinance requires banks operating in Hong Kong to
maintain a minimum liquidity ratio of 25 per cent, calculated in accordance with
the provisions of the Fourth Schedule of the Banking Ordinance. This requirement
applies separately to the Hong Kong branches of the bank and to those subsidiary
companies which are Authorised Institutions under the Banking Ordinance in Hong
Kong.

                                                                       2007   2006
The average liquidity ratio for the year was as follows:

Hong Kong branches of the bank                                         57.0%  49.3%

28. Property revaluation

The group's premises and investment properties were revalued as at 30 September
2007 and updated for any material changes as at 31 December 2007. The basis of
valuation was open market value or depreciated replacement cost.

Premises and investment properties in the Hong Kong SAR, the Macau SAR and
mainland China, which represent 93 per cent by value of the group's properties
subject to valuation, were valued by DTZ Debenham Tie Leung Limited. The
valuations were carried out by qualified valuers who are members of the Hong
Kong Institute of Surveyors. Properties in 11 other countries, which represent
seven per cent by value of the group's properties, were valued by different
independent professionally qualified valuers.

The September property revaluation, together with the revaluation of Hong Kong
properties undertaken in June 2007, has resulted in an increase in the group's
revaluation reserves of HK$2,432 million, net of deferred taxation of HK$658
million, and a credit to the income statement of HK$384 million. Of the HK$384
million credit to the income statement, HK$262 million represents the surplus on
the revaluation of investment properties and HK$122 million relates to the
reversal of previous revaluation deficits that had arisen when the value of
certain premises fell below depreciated historical cost.

29. Accounting policies

The accounting policies applied in preparing this news release are the same as
those applied in preparing the financial statements for the year ended 31
December 2006, as disclosed in the Annual Report and Accounts for 2006.

30. Statutory accounts

The information in this news release is not audited and does not constitute
statutory accounts.

Certain financial information in this news release is extracted from the
financial statements for the year ended 31 December 2007, which were approved by
the Board of Directors on 3 March 2008 and will be delivered to the Registrar of
Companies and the HKMA. The Auditors expressed an unqualified opinion on those
financial statements in their report dated 3 March 2008. The Annual Report and
Accounts for the year ended 31 December 2007, which include the financial
statements, can be obtained on request from Group Communications, The Hongkong
and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong, and
will be made available on our website: www.hsbc.com.hk. A further press release
will be issued to announce the availability of this information.

31. Ultimate holding company

The Hongkong and Shanghai Banking Corporation Limited is an indirectly held,
wholly-owned subsidiary of HSBC Holdings plc.





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