HK & Shanghai Bk Pt 3/3

HSBC Holdings PLC 05 March 2007 20. Analysis of advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority ('HKMA') The following analysis of advances to customers is based on the categories contained in the 'Quarterly Analysis of Loans and Advances and Provisions' return required to be submitted to the HKMA by branches of the bank and by banking subsidiary companies in Hong Kong. Figures in HK$m At 31Dec06 At 31Dec05 Gross advances to customers for use in Hong Kong Industrial, commercial and financial Property development 46,352 41,141 Property investment 99,580 104,214 Financial concerns 10,136 12,667 Stockbrokers 964 1,094 Wholesale and retail trade 36,101 34,256 Manufacturing 17,331 17,847 Transport and transport equipment 27,408 31,202 Others 43,612 44,697 281,484 287,118 Individuals Advances for the purchase of flats under the Hong Kong SAR Government's Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme 31,708 36,291 Advances for the purchase of other residential properties 171,014 165,148 Credit card advances 31,315 29,882 Others 26,966 23,826 261,003 255,147 Gross advances to customers for use in Hong Kong 542,487 542,265 Trade finance 56,121 49,902 Gross advances to customers for use outside Hong Kong made by branches of the bank and subsidiary companies in Hong Kong 35,628 31,989 Gross advances to customers made by branches of the bank and subsidiary companies in Hong Kong 634,236 624,156 Gross advances to customers made by branches of the bank and subsidiary companies outside Hong Kong: - Rest of Asia-Pacific 416,383 381,741 - Americas/Europe 6 5 Gross advances to customers 1,050,625 1,005,902 21. 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 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 At 31Dec05 Americas United States 38,673 72,477 34,515 145,665 Other 39,328 9,909 50,744 99,981 78,001 82,386 85,259 245,646 Europe United Kingdom 111,377 14 22,232 133,623 Other 338,060 5,842 39,509 383,411 449,437 5,856 61,741 517,034 Asia-Pacific excluding Hong Kong 154,135 33,897 108,476 296,508 22. Customer accounts Figures in HK$m At 31Dec06 At 31Dec05 Current accounts 292,450 245,094 Savings accounts 785,659 682,412 Other deposit accounts 911,358 807,604 1,989,467 1,735,110 Customer accounts increased by HK$254.4 billion, or 14.7 per cent since the end of 2005. This excludes structured deposits, which rose by HK$26.0 billion, as these are included with 'Trading liabilities'. In Hong Kong, customer accounts rose by HK$160.6 billion, or 12.6 per cent, largely in savings 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$100.7 billion, or 12.2 per cent, as a result. In Commercial Banking and Corporate, Investment Banking and Markets, customer account balances grew by HK$59.9 billion, or 13.0 per cent, supported by targeted campaigns and a new, dedicated service team to capture the SME customer base, and there was continued growth in the payments and cash management business. In the rest of Asia-Pacific, customer accounts increased by HK$94.0 billion, or 20.6 per cent, as the group actively sought to grow the deposit base throughout the region. Deposits from personal customers grew by HK$37.7 billion, or 23.0 per cent, notably in Singapore, Australia and China. Customer account balances held by corporate customers rose by HK$56.3 billion, or 19.8 per cent, largely in India, mainland China, Taiwan and Singapore. The group's advances-to-deposits ratio fell to 52.5 per cent at 31 December 2006 from 57.6 per cent at 31 December 2005. 23. Reserves Figures in HK$m At 31Dec06 At 31Dec05 Other reserves - Property revaluation reserve 4,798 4,082 - Available-for-sale investment reserve 25,812 2,899 - Cash flow hedge reserve (166) (1,767) - Foreign exchange reserve 2,805 53 - Other 2,265 770 35,514 6,037 Retained profits 80,942 64,303 Total reserves 116,456 70,340 The property revaluation reserve includes an amount of HK$62 million in relation to properties classified as assets held for sale at 31 December 2006 (31 December 2005: nil). Assets held for sale are included in 'Other assets' in the consolidated balance sheet. 24. Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec06 Contingent liabilities - Guarantees 100,964 73,862 60,534 - Other 35 35 35 100,999 73,897 60,569 Commitments - Documentary credits and short-term trade-related transactions 56,732 21,632 11,680 - Undrawn note issuing and revolving underwriting facilities 1,166 583 - - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 94,241 47,120 43,635 - under one year 887,680 - - 1,039,819 69,335 55,315 Derivatives Exchange rate contracts - Spot and forward foreign exchange 3,267,333 52,122 13,334 - Swap and other exchange rate contracts 1,262,208 56,377 16,868 4,529,541 108,499 30,202 Interest rate contracts - Interest rate swaps 6,919,779 69,936 17,832 - Other interest rate contracts 918,146 5,641 1,808 7,837,925 75,577 19,640 Forward asset purchases and forward forward deposits placed 2,588 2,588 2,463 Other derivative contracts 554,801 27,935 9,041 557,389 30,523 11,504 Impact of counterparty netting agreements on derivatives exposure - (67,516) (14,352) At 31Dec05 Contingent liabilities - Guarantees 83,114 60,166 48,893 - Other 37 37 37 83,151 60,203 48,930 Commitments - Documentary credits and short-term trade-related transactions 55,402 20,650 10,905 - Undrawn note issuing and revolving underwriting facilities 3,249 1,625 975 - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 97,207 48,604 41,115 - under one year 752,797 - - 908,655 70,879 52,995 Derivatives Exchange rate contracts - Spot and forward foreign exchange 2,536,795 36,655 9,753 - Swap and other exchange rate contracts 884,046 41,124 12,481 3,420,841 77,779 22,234 Interest rate contracts - Interest rate swaps 4,775,236 55,580 14,442 - Other interest rate contracts 815,110 4,159 1,340 5,590,346 59,739 15,782 Forward asset purchases and forward forward deposits placed 1,849 1,849 775 Other derivative contracts 289,019 15,885 5,649 290,868 17,734 6,424 Impact of counterparty netting agreements on derivatives exposure - (55,354) (11,915) The tables above give the nominal contract amounts, credit equivalent amounts and risk-weighted amounts of contingent liabilities, commitments and derivatives. 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 on capital adequacy and depend on the status of the counterparty and maturity characteristics. The risk-weights used range from 0 per cent to 100 per cent. Contingent liabilities and commitments are credit-related instruments. The contract amounts represent the amounts at risk should the contracts be fully drawn upon and the customers default. Since a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements. Derivatives arise from futures, forward, swap and option transactions undertaken by the group in the foreign exchange, interest rate, equity, credit and commodity markets. The contract amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date; they do not represent amounts at risk. Fair value of derivative assets Figures in HK$m At 31Dec06 At 31Dec05 Exchange rate contracts 42,862 31,074 Interest rate contracts 46,809 38,319 Other derivative contracts 9,496 2,646 99,167 72,039 Less: netting adjustments (40,339) (32,038) 58,828 40,001 The fair value of derivative assets represents the mark-to-market amounts of all derivative contracts with a positive value. These assets arise from contracts with third parties and fellow subsidiaries and are included in the balance sheet as 'Derivatives'. Fair value is a close approximation of the credit risk for these contracts at the balance sheet date. The actual credit risk is measured internally as the sum of positive mark-to-market values and an estimate for the future fluctuation risk, using a future risk factor. The netting adjustments represent amounts where the group has in place legally enforceable rights of offset with individual counterparties to offset the gross amount of positive mark-to-market assets with any negative mark-to-market liabilities with the same customer. These offsets are recognised by the HKMA in the calculation of risk assets for the capital adequacy ratio. 25. Foreign exchange exposure Foreign exchange exposures may be divided broadly into two categories: structural and non-structural. Structural exposures are normally long-term in nature and include those arising from investments in overseas subsidiaries, branches, associates and strategic investments as well as capital instruments denominated in currencies other than Hong Kong dollars. Non-structural exposures arise primarily from trading positions and balance sheet management activities. Non-structural exposures can arise and change rapidly. Foreign currency exposures are managed in accordance with the group's risk management policies and procedures. The group had the following structural foreign currency exposures which exceeded 10 per cent of the total net structural exposure in all foreign currencies: Figures in HK$m Net structural position At 31Dec06 Chinese renminbi 54,960 United States dollars 15,886 At 31Dec05 Chinese renminbi 32,510 Indian rupees 7,979 United States dollars 11,780 The increase in the Chinese renminbi structural position during 2006 was largely attributable to the rise in the market value of the group's shareholding in Ping An Insurance. The Indian rupee exposure fell to below 10 per cent of the group's total foreign currency structural exposure following the disposal of shares in UTI Bank. 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 Figures in HK$m dollars dollars dollars At 31Dec06 Spot assets 1,205,314 118,964 27,665 Spot liabilities (1,222,334) (140,566) (107) Forward purchases 2,222,005 168,534 24,949 Forward sales (2,210,290) (141,505) (57,857) Net options position (132) - - (5,437) 5,427 (5,350) At 31Dec05 Spot assets 1,229,340 107,578 5,523 Spot liabilities (1,188,737) (90,549) (18,062) Forward purchases 1,507,086 157,007 43 Forward sales (1,558,902) (161,647) - Net options position 3,361 - - (7,852) 12,389 (12,496) 26. Segmental analysis The allocation of earnings reflects the benefits of shareholders' funds to the extent that these are actually allocated to businesses in the segment by way of intra-group capital and funding structures. Interest is charged based on market rates. Common costs are included in segments on the basis of the actual recharges made. Geographical information has been classified by the location of the principal operations of the subsidiary company or, in the case of the bank, by the location of the branch responsible for reporting the results or advancing the funds. Due to the nature of the group structure, the analysis of profits shown below includes intra-group items between geographical regions with the elimination shown in a separate column. Consolidated income statement Intra- Rest of Americas/ segment Figures in HK$m Hong Kong Asia-Pacific Europe elimination Total 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 venture 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 Year ended 31Dec05 Interest income 55,139 29,613 529 (5,082) 80,199 Interest expense (24,149) (17,336) (305) 5,082 (36,708) Net interest income 30,990 12,277 224 - 43,491 Fee income 14,237 7,921 2 (489) 21,671 Fee expense (2,252) (1,803) (8) 489 (3,574) Net trading income/(loss) 3,152 4,198 (170) - 7,180 Net income/(loss) from financial instruments designated at fair value (69) 453 - - 384 Gains less losses from financial investments 714 42 - - 756 Dividend income 350 18 - - 368 Net earned insurance premiums 18,140 1,200 - - 19,340 Other operating income 6,480 1,131 22 (2,736) 4,897 Total operating income 71,742 25,437 70 (2,736) 94,513 Net insurance claims incurred and movement in policyholders' liabilities (16,002) (1,289) - - (17,291) Net operating income before loan impairment charges and other credit risk provisions 55,740 24,148 70 (2,736) 77,222 Loan impairment charges and other credit risk provisions (1,161) (915) 12 - (2,064) Net operating income 54,579 23,233 82 (2,736) 75,158 Operating expenses (20,514) (13,998) (38) 2,736 (31,814) Operating profit 34,065 9,235 44 - 43,344 Share of profit in associates and joint venture 178 1,727 - - 1,905 Profit before tax 34,243 10,962 44 - 45,249 Tax expense (5,411) (2,634) (6) - (8,051) Profit for the year 28,832 8,328 38 - 37,198 Profit attributable to shareholders 24,644 8,191 38 - 32,873 Profit attributable to minority interests 4,188 137 - - 4,325 27. Capital adequacy The table below sets out an analysis of regulatory capital and capital adequacy ratios for the group: Figures in HK$m At 31Dec06 At 31Dec05 Composition of capital Tier 1: Total shareholders' equity 145,450 97,334 Less: proposed dividend (6,500) (4,500) property revaluation reserves^ (7,892) (7,892) available-for-sale investment reserve^^ (26,028) (3,051) classified as regulatory reserve^^^ (1,689) (1,319) goodwill (4,182) (3,784) others (138) 1,769 Irredeemable non-cumulative preference shares 51,735 51,587 Minority interests^^^^ 17,483 14,808 Total qualifying tier 1 capital 168,239 144,952 Tier 2: Property revaluation reserves (@70%) 5,524 5,524 Available-for-sale investment reserve (@70%) 18,220 2,136 Collective impairment provision and regulatory reserve 6,610 5,112 Perpetual subordinated debt 9,370 9,359 Term subordinated debt 9,849 6,117 Term preference shares 8,165 3,877 Irredeemable cumulative preference shares 16,563 16,516 Total qualifying tier 2 capital 74,301 48,641 Deductions (58,559) (39,528) Total capital 183,981 154,065 Risk-weighted assets 1,367,607 1,238,164 ^ 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 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 At 31Dec05 Total capital 13.5% 12.4% Tier 1 capital 12.3% 11.7% 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: Total capital 13.0% 12.0% Tier 1 capital 11.8% 11.2% With effect from 1 January 2007, the group has adopted the 'standardised approach' of capital calculation under the HKMA 'Banking (Capital) Rules'. The increase in the group's total capital ratio at 31 December 2006 reflects additional capital raised in anticipation of different capital requirements under the new rules. 28. 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. 2006 2005 The average liquidity ratio for the year was as follows: Hong Kong branches of the bank 49.3% 48.2% 29. Property revaluation The group's premises and investment properties were revalued as at 30 September 2006 and updated for any material changes as at 31 December 2006. 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 95 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 five 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 2006, has resulted in an increase in the group's revaluation reserves of HK$1,356 million, net of deferred taxation of HK$383 million, and a credit to the income statement of HK$389 million. Of the HK$389 million credit to the income statement, HK$319 million represents the surplus on the revaluation of investment properties and HK$70 million relates to the reversal of previous revaluation deficits that had arisen when the value of certain premises fell below depreciated historical cost. 30. 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 2005, as disclosed in the Annual Report and Accounts for 2005. 31. 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 2006, which were approved by the Board of Directors on 5 March 2007 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 5 March 2007. The Annual Report and Accounts for the year ended 31 December 2006, which include the financial statements, can be obtained on request from Group Public Affairs, The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong, and may be viewed on our website: www.hsbc.com.hk on or after 3 April 2007. 32. Ultimate holding company The Hongkong and Shanghai Banking Corporation Limited is an indirectly held, wholly-owned subsidiary of HSBC Holdings plc. This information is provided by RNS The company news service from the London Stock Exchange MTMMMR

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