HSBC Fin Corp Q1 2005 10-Q-2
HSBC Holdings PLC
16 May 2005
PART 2
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
2005 2004
----------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
RETURN ON AVERAGE ASSETS:
Net income.................................................. $ 626 $ 470
-------- --------
Average assets:
Owned basis............................................... $131,954 $119,388
Serviced with limited recourse............................ 12,884 25,278
-------- --------
Managed basis............................................. $144,838 $144,666
-------- --------
Return on average owned assets.............................. 1.90% 1.57%
Return on average managed assets............................ 1.73 1.30
======== ========
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY:
Net income.................................................. $ 626 $ 470
Dividends on preferred stock................................ (18) (18)
-------- --------
Net income available to common shareholders................. $ 608 $ 452
-------- --------
Average common shareholder's equity......................... $ 16,170 $ 16,645
-------- --------
Return on average common shareholder's equity............... 15.04% 10.86%
======== ========
NET INTEREST MARGIN:
Net interest income:
Owned basis............................................... $ 1,888 $ 1,820
Serviced with limited recourse............................ 332 754
-------- --------
Managed basis............................................. $ 2,220 $ 2,574
-------- --------
Average interest-earning assets:
Owned basis............................................... $112,985 $ 99,676
Serviced with limited recourse............................ 12,884 25,278
-------- --------
Managed basis............................................. $125,869 $124,954
-------- --------
Owned basis net interest margin............................. 6.68% 7.30%
Managed basis net interest margin........................... 7.06 8.24
======== ========
MANAGED BASIS RISK ADJUSTED REVENUE:
Net interest income......................................... $ 2,220 $ 2,574
Other revenues, excluding securitization revenue............ 1,468 1,072
Less: Net charge-offs....................................... (1,118) (1,442)
-------- --------
Risk adjusted revenue....................................... 2,570 2,204
Average interest-earning assets............................. $125,869 $124,954
-------- --------
Managed basis risk adjusted revenue......................... 8.17% 7.06%
======== ========
43
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
THREE MONTHS ENDED
------------------------------------
MARCH 31, MARCH 31, DECEMBER 31,
2005 2004 2004
-------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS ARE IN MILLIONS)
CONSUMER NET CHARGE-OFF RATIO:
Consumer net charge-offs:
Owned basis.............................................. $ 856 $ 970 $ 1,127
Serviced with limited recourse........................... 255 472 375
-------- -------- --------
Managed basis............................................ $ 1,111 $ 1,442 $ 1,502
-------- -------- --------
Average consumer receivables:
Owned basis.............................................. $108,928 $ 92,974 $111,691
Serviced with limited recourse........................... 12,884 25,278 18,601
-------- -------- --------
Managed basis............................................ $121,812 $118,252 $130,292
-------- -------- --------
Owned basis consumer net charge-off ratio.................. 3.15% 4.17% 4.04%
Managed basis consumer net charge-off ratio................ 3.65 4.88 4.61
======== ======== ========
RESERVES AS A PERCENTAGE OF NET CHARGE-OFFS
Loss reserves:
Owned basis.............................................. $ 3,581 $ 3,753 $ 3,625
Serviced with limited recourse........................... 661 2,159 890
-------- -------- --------
Managed basis............................................ $ 4,242 $ 5,912 $ 4,515
-------- -------- --------
Net charge-offs:
Owned basis.............................................. $ 863 $ 970 $ 1,127
Serviced with limited recourse........................... 255 472 375
-------- -------- --------
Managed basis............................................ $ 1,118 $ 1,442 $ 1,502
-------- -------- --------
Owned basis reserves as a percentage of net charge-offs.... 103.7% 96.7% 80.4%
Managed basis reserves as a percentage of net
charge-offs.............................................. 94.9 102.5 75.2
======== ======== ========
EFFICIENCY RATIO:
Total costs and expenses less policyholders' benefits...... $ 1,420 $ 1,297
-------- --------
Net interest income and other revenues less policyholders'
benefits:
Owned basis.............................................. $ 3,228 $ 2,930
Serviced with limited recourse........................... 30 253
-------- --------
Managed basis............................................ $ 3,258 $ 3,183
-------- --------
Owned basis efficiency ratio............................... 43.99% 44.27%
Managed basis efficiency ratio............................. 43.59 40.75
======== ========
44
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
MARCH 31, DECEMBER 31, MARCH 31,
2005 2004 2004
-------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS ARE IN MILLIONS)
TWO-MONTHS-AND-OVER-CONTRACTUAL DELINQUENCY:
Consumer two-months-and-over-contractual delinquency:
Owned basis.............................................. $ 4,229 $ 4,333 $ 4,671
Serviced with limited recourse........................... 626 788 1,280
-------- -------- --------
Managed basis............................................ $ 4,855 $ 5,121 $ 5,951
-------- -------- --------
Consumer receivables:
Owned basis.............................................. $111,911 $106,564 $ 93,299
Serviced with limited recourse........................... 11,486 14,225 24,357
-------- -------- --------
Managed basis............................................ $123,397 $120,789 $117,656
-------- -------- --------
Consumer two-months-and-over-contractual delinquency:
Owned basis.............................................. 3.78% 4.07% 5.01%
Managed basis............................................ 3.93 4.24 5.06
======== ======== ========
RESERVES AS A PERCENTAGE OF RECEIVABLES:
Loss reserves:
Owned basis.............................................. $ 3,581 $ 3,625 $ 3,753
Serviced with limited recourse........................... 661 890 2,159
-------- -------- --------
Managed basis............................................ $ 4,242 $ 4,515 $ 5,912
-------- -------- --------
Receivables:
Owned basis.............................................. $112,161 $106,855 $ 93,650
Serviced with limited recourse........................... 11,486 14,225 24,357
-------- -------- --------
Managed basis............................................ $123,647 $121,080 $118,007
-------- -------- --------
Reserves as a percentage of receivables:
Owned basis.............................................. 3.19% 3.39% 4.01%
Managed basis............................................ 3.43 3.73 5.01
======== ======== ========
RESERVES AS A PERCENTAGE OF NONPERFORMING LOANS:
Loss reserves:
Owned basis.............................................. $ 3,581 $ 3,625 $ 3,753
Serviced with limited recourse........................... 661 890 2,159
-------- -------- --------
Managed basis............................................ $ 4,242 $ 4,515 $ 5,912
-------- -------- --------
Nonperforming loans:
Owned basis.............................................. $ 3,456 $ 3,521 $ 3,881
Serviced with limited recourse........................... 511 646 1,055
-------- -------- --------
Managed basis............................................ $ 3,967 $ 4,167 $ 4,936
-------- -------- --------
Reserves as a percentage of nonperforming loans:
Owned basis.............................................. 103.6% 103.0% 96.7%
Managed basis............................................ 106.9 108.4 119.8
======== ======== ========
45
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
MARCH 31, DECEMBER 31,
2005 2004
----------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
TANGIBLE COMMON EQUITY:
Common shareholder's equity................................. $ 16,553 $ 15,841
Exclude:
Unrealized (gains) losses on cash flow hedging
instruments............................................ (253) (119)
Minimum pension liability................................. 4 4
Unrealized gains on investments and interest-only strip
receivables............................................ (37) (53)
Intangible assets......................................... (2,594) (2,705)
Goodwill.................................................. (6,835) (6,856)
-------- --------
Tangible common equity...................................... 6,838 6,112
Purchase accounting adjustments............................. 3,224 2,227
-------- --------
Tangible common equity, excluding purchase accounting
adjustments............................................... $ 10,062 $ 8,339
======== ========
TANGIBLE SHAREHOLDER'S EQUITY:
Tangible common equity...................................... $ 6,838 $ 6,112
Preferred stock............................................. 1,100 1,100
Mandatorily redeemable preferred securities of Household
Capital Trusts............................................ 988 994
Adjustable Conversion-Rate Equity Security Units............ 533 530
-------- --------
Tangible shareholder's equity............................... 9,459 8,736
Purchase accounting adjustments............................. 3,211 2,208
-------- --------
Tangible shareholder's equity, excluding purchase accounting
adjustments............................................... $ 12,670 $ 10,944
======== ========
TANGIBLE SHAREHOLDER'S EQUITY PLUS OWNED LOSS RESERVES:
Tangible shareholder's equity............................... $ 9,459 $ 8,736
Owned loss reserves......................................... 3,581 3,625
-------- --------
Tangible shareholder's equity plus owned loss reserves...... 13,040 12,361
Purchase accounting adjustments............................. 3,211 2,208
-------- --------
Tangible shareholder's equity plus owned loss reserves,
excluding purchase accounting adjustments................. $ 16,251 $ 14,569
======== ========
TANGIBLE MANAGED ASSETS:
Owned assets................................................ $132,003 $130,190
Receivables serviced with limited recourse.................. 11,486 14,225
-------- --------
Managed assets.............................................. 143,489 144,415
Exclude:
Intangible assets......................................... (2,594) (2,705)
Goodwill.................................................. (6,835) (6,856)
Derivative financial assets............................... (3,017) (4,049)
-------- --------
Tangible managed assets..................................... 131,043 130,805
Purchase accounting adjustments............................. (174) (202)
-------- --------
Tangible managed assets, excluding purchase accounting
adjustments............................................... $130,869 $130,603
======== ========
EQUITY RATIOS:
Common and preferred equity to owned assets................. 13.37% 13.01%
Tangible common equity to tangible managed assets........... 5.22 4.67
Tangible shareholder's equity to tangible managed assets
("TETMA")................................................. 7.22 6.68
Tangible shareholder's equity plus owned loss reserves to
tangible managed assets ("TETMA + Owned Reserves")........ 9.95 9.45
Excluding purchase accounting adjustments:
Tangible common equity to tangible managed assets......... 7.69 6.38
TETMA..................................................... 9.68 8.38
TETMA + Owned Reserves.................................... 12.42 11.16
======== ========
46
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
DISCLOSURE CONTROLS We conducted an evaluation, with the participation of the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Our disclosure controls and procedures are designed to ensure that
information required to be disclosed by HSBC Finance Corporation in the reports
we file under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported on a timely basis. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report so as to alert them in a timely fashion
to material information required to be disclosed in reports we file under the
Exchange Act.
INTERNAL CONTROLS In our annual report on Form 10-K for the year ended December
31, 2004, we reported that management had identified a material weakness in our
internal controls over financial reporting (as that term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) relating to the process of
establishing and maintaining effective hedges under the "shortcut" method of
accounting pursuant to Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." As previously
reported, management implemented the remedial actions described in the annual
report on Form 10-K during the first quarter of 2005. There have not been any
other changes in our internal control over financial reporting during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
--------------------------------------------------------------------------------
As approved by the Audit Committee of the Board of Directors, we have engaged
KPMG to perform certain non-audit services during the year. Those services
include language translation services relating to debt offerings of
subsidiaries, preparation of SAS 70 reports relating to services performed for
contractual counterparties and certain tax services including account analysis,
advice regarding certain transactions and preparation of returns for
securitization trusts.
ITEM 6. EXHIBITS
--------------------------------------------------------------------------------
Exhibits included in this Report:
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Debt and Preferred Stock Securities Ratings.
47
SIGNATURE
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HSBC FINANCE CORPORATION
(Registrant)
/s/ Simon C. Penney
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
Date: May 16, 2005
48
EXHIBIT INDEX
--------------------------------------------------------------------------------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Debt and Preferred Stock Securities Ratings.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
THREE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
---------------------------------------------------------------------------------
(DOLLARS ARE IN
MILLIONS)
Net income.................................................. $ 626 $ 470
Income tax expense.......................................... 341 235
------ ------
Income before income tax expense............................ 967 705
------ ------
Fixed charges:
Interest expense.......................................... 1,062 708
Interest portion of rentals(1)............................ 15 14
------ ------
Total fixed charges......................................... 1,077 722
------ ------
Total earnings as defined................................... $2,044 $1,427
====== ======
Ratio of earnings to fixed charges.......................... 1.90 1.98
Preferred stock dividends(2)................................ 28 27
Ratio of earnings to combined fixed charges and preferred
stock dividends........................................... 1.85 1.91
---------------
(1) Represents one-third of rentals, which approximates the portion representing
interest.
(2) Preferred stock dividends are grossed up to their pretax equivalents.
EXHIBIT 31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Siddharth N. Mehta, Chairman and Chief Executive Officer of HSBC Finance
Corporation, certify that:
1. I have reviewed this report on Form 10-Q of HSBC Finance
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 16, 2005
/s/ SIDDHARTH N. MEHTA
--------------------------------------
Siddharth N. Mehta
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Simon C. Penney, Senior Executive Vice President and Chief Financial Officer
of HSBC Finance Corporation, certify that:
1. I have reviewed this report on Form 10-Q of HSBC Finance
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 16, 2005
/s/ SIMON C. PENNEY
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Q
for the period ending March 31, 2005 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Siddharth N. Mehta, Chairman
and Chief Executive Officer of HSBC Finance Corporation, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ SIDDHARTH N. MEHTA
--------------------------------------
Siddharth N. Mehta
Chairman and Chief Executive Officer
May 16, 2005
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Q
for the period ending March 31, 2005 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Simon C. Penney, Senior
Executive Vice President and Chief Financial Officer of HSBC Finance
Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ SIMON C. PENNEY
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
May 16, 2005
This certification accompanies each Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Signed originals of these written statements required by Section 906 of the
Sarbanes-Oxley Act of 2002 have been provided to HSBC Finance Corporation and
will be retained by HSBC Finance Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
EXHIBIT 99.1
DEBT AND PREFERRED STOCK SECURITIES RATINGS
STANDARD & MOODY'S
POOR'S INVESTORS
CORPORATION SERVICE FITCH, INC.
---------------------------------------------------------------------------------------------------
AT MARCH 31, 2005
HSBC Finance Corporation
Senior debt............................................... A A1 AA-
Senior subordinated debt.................................. A- A2 A+
Commercial Paper.......................................... A-1 P-1 F-1+
HFC Bank Limited
Senior debt............................................... A A1 AA-
Commercial paper.......................................... A-1 P-1 F-1+
HSBC Bank Nevada, National Association
Senior debt............................................... A A1 AA-
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