HSBC Finance Corp. 2Q 10Q - 1

HSBC Holdings PLC 30 July 2007 Part 1 of 2

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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from_________to_________

COMMISSION FILE NUMBER 1-8198

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HSBC FINANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 86-1052062
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

2700 SANDERS ROAD, PROSPECT HEIGHTS, 60070
ILLINOIS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(847) 564-5000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer ( ) Accelerated filer ( ) Non-accelerated
filer (X)

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)

As of June 30, 2007, there were 56 shares of the registrant's common stock
outstanding, all of which are owned by HSBC Investments (North America) Inc.

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HSBC FINANCE CORPORATION

FORM 10-Q

TABLE OF CONTENTS

FINANCIAL
PART I. INFORMATION

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Consolidated
Item 1. Financial Statements
Statement of
Income.............. 3
Balance Sheet....... 4
Statement of Changes
in Shareholders'
Equity.............. 5
Statement of Cash
Flows............... 6
Notes to
Consolidated
Financial
Statements.......... 7
Management's
Discussion and
Analysis of
Financial Condition
and Results of
Item 2. Operations
Forward-Looking
Statements.......... 28
Executive Overview.. 28
Basis of Reporting.. 33
Receivables Review.. 40
Results of
Operations.......... 42
Segment
Results - IFRS
Management Basis.... 50
Credit Quality...... 57
Liquidity and
Capital Resources... 64
Risk Management..... 69
Reconciliations to
GAAP Financial
Measures............ 71
Controls and
Item 4. Procedures.......... 72

PART II. OTHER INFORMATION
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Item 1. Legal Proceedings... 72
Item 6. Exhibits............ 74
Signature .................... 75

PART I. FINANCIAL INFORMATION

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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HSBC Finance Corporation

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CONSOLIDATED STATEMENT OF INCOME

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
2007 2006 2007 2006
--------------------------------------------------------------------------------------
(IN MILLIONS)

Finance and other interest income.................. $4,685 $4,311 $9,397 $8,398
Interest expense:
HSBC affiliates.................................. 217 173 451 326
Non-affiliates................................... 1,811 1,589 3,648 3,059
------ ------ ------ ------
NET INTEREST INCOME................................ 2,657 2,549 5,298 5,013
Provision for credit losses........................ 1,947 1,248 3,647 2,114
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES........................................... 710 1,301 1,651 2,899
------ ------ ------ ------
Other revenues:
Securitization related revenue................... 22 51 43 122
Insurance revenue................................ 193 226 423 470
Investment income................................ 32 34 58 68
Derivative (expense) income...................... (39) (7) (46) 50
Gain (loss) on debt designated at fair value and
related derivatives........................... (130) - 14 -
Fee income....................................... 629 429 1,202 811
Enhancement services revenue..................... 150 130 298 253
Taxpayer financial services revenue.............. 4 20 243 254
Gain on receivable sales to HSBC affiliates...... 109 97 204 182
Servicing and other fees from HSBC affiliates.... 132 116 265 234
Other (expense) income........................... (88) 79 (48) 152
------ ------ ------ ------
TOTAL OTHER REVENUES............................... 1,014 1,175 2,656 2,596
------ ------ ------ ------
Costs and expenses:
Salaries and employee benefits................... 587 564 1,196 1,145
Sales incentives................................. 62 98 130 178
Occupancy and equipment expenses................. 85 79 163 162
Other marketing expenses......................... 220 176 440 349
Other servicing and administrative expenses...... 242 222 505 475
Support services from HSBC affiliates............ 299 270 584 522
Amortization of intangibles...................... 63 63 126 143
Policyholders' benefits.......................... 90 107 214 225
------ ------ ------ ------
TOTAL COSTS AND EXPENSES........................... 1,648 1,579 3,358 3,199
------ ------ ------ ------
Income before income tax expense................... 76 897 949 2,296
Income tax expense................................. 13 329 345 840
------ ------ ------ ------
NET INCOME......................................... $ 63 $ 568 $ 604 $1,456
====== ====== ====== ======

The accompanying notes are an integral part of the consolidated financial
statements.

HSBC Finance Corporation

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CONSOLIDATED BALANCE SHEET

JUNE 30, DECEMBER 31,
2007 2006
------------------------------------------------------------------------------------
(IN MILLIONS,
EXCEPT SHARE DATA)

ASSETS
Cash....................................................... $ 882 $ 871
Interest bearing deposits with banks....................... 45 424
Securities purchased under agreements to resell............ 1 171
Securities................................................. 3,462 4,695
Receivables, net........................................... 152,621 157,262
Intangible assets, net..................................... 2,092 2,218
Goodwill................................................... 6,896 7,010
Properties and equipment, net.............................. 442 426
Real estate owned.......................................... 1,004 794
Derivative financial assets................................ 358 298
Other assets............................................... 5,550 5,049
-------- --------
TOTAL ASSETS............................................... $173,353 $179,218
======== ========
LIABILITIES
Debt:
Commercial paper, bank and other borrowings.............. $ 12,057 $ 11,055
Due to affiliates........................................ 14,863 15,172
Long term debt (with original maturities over one year,
including $32,085 million at June 30, 2007 and $0 at
December 31, 2006 carried at fair value).............. 121,783 127,590
-------- --------
Total debt................................................. 148,703 153,817
-------- --------
Insurance policy and claim reserves........................ 1,009 1,319
Derivative related liabilities............................. 29 6
Liability for pension benefits............................. 369 355
Other liabilities.......................................... 3,496 3,631
-------- --------
TOTAL LIABILITIES........................................ 153,606 159,128
SHAREHOLDERS' EQUITY
Redeemable preferred stock, 1,501,100 shares authorized,
Series B, $0.01 par value, 575,000 shares issued......... 575 575
Common shareholder's equity:
Common stock, $0.01 par value, 100 shares authorized,
56 shares issued.................................... - -
Additional paid-in capital............................ 17,460 17,279
Retained earnings..................................... 1,302 1,877
Accumulated other comprehensive income................ 410 359
-------- --------
TOTAL COMMON SHAREHOLDER'S EQUITY.......................... 19,172 19,515
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $173,353 $179,218
======== ========

The accompanying notes are an integral part of the consolidated financial
statements.

HSBC Finance Corporation

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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2007 2006
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(IN MILLIONS)

PREFERRED STOCK
Balance at beginning and end of period...................... $ 575 $ 575
======= =======
COMMON SHAREHOLDER'S EQUITY
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period........................... $17,279 $17,145
Capital contribution from parent company................. 200 -
Employee benefit plans, including transfers and other.... (19) (25)
------- -------
Balance at end of period................................. $17,460 $17,120
------- -------
RETAINED EARNINGS
Balance at beginning of period........................... $ 1,877 $ 1,280
Adjustment to initially apply the fair value method of
accounting under FASB statement No. 159, net of tax.... (542) -
Net income............................................... 604 1,456
Cash dividend equivalents on HSBC's Restricted Share
Plan................................................... (4) -
Dividends:
Preferred stock........................................ (18) (18)
Common stock........................................... (615) (423)
------- -------
Balance at end of period................................. $ 1,302 $ 2,295
------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period........................... $ 359 $ 479
Net change in unrealized gains (losses), net of tax, on:
Derivatives classified as cash flow hedges............. 23 101
Securities available for sale and interest-only strip
receivables......................................... (16) (60)
Foreign currency translation adjustments................. 44 150
------- -------
Other comprehensive income, net of tax................... 51 191
------- -------
Balance at end of period................................. $ 410 $ 670
------- -------
TOTAL COMMON SHAREHOLDER'S EQUITY............................. $19,172 $20,085
------- -------
COMPREHENSIVE INCOME
Net income.................................................. $ 604 $ 1,456
Other comprehensive income.................................. 51 191
------- -------
COMPREHENSIVE INCOME.......................................... $ 655 $ 1,647
======= =======

The accompanying notes are an integral part of the consolidated financial
statements.

HSBC Finance Corporation

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STATEMENT OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2007 2006
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(IN MILLIONS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................... $ 604 $ 1,456
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on receivable sales to HSBC affiliates.................. (204) (182)
Loss on real estate secured loan sale to third party......... 20 -
Provision for credit losses.................................. 3,647 2,114
Insurance policy and claim reserves.......................... (46) (135)
Depreciation and amortization................................ 173 201
Net change in other assets................................... 11 162
Net change in other liabilities.............................. (297) 218
Net change in loans held for sale............................ (1,238) (419)
Net change in derivative related assets and liabilities...... 212 (323)
Net change in debt designated at fair value and related
derivatives............................................... (172) -
Excess tax benefits from share-based compensation
arrangements.............................................. (1) (9)
Other, net................................................... 559 336
-------- --------
Net cash provided by (used in) operating activities............ 3,268 3,419
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities:
Purchased.................................................... (693) (1,166)
Matured...................................................... 492 841
Sold......................................................... 95 135
Net change in short-term securities available for sale......... 960 (170)
Net change in securities purchased under agreements to resell.. 170 72
Net change in interest bearing deposits with banks............. 257 (40)
Receivables:
Originations, net of collections............................. 165 (14,927)
Purchases and related premiums............................... (201) (548)
Cash received in portfolio sales to third party................ 2,147 -
Cash received in sale of U.K. credit card business............. - 90
Properties and equipment:
Purchases.................................................... (65) (32)
Sales........................................................ 2 12
-------- --------
Net cash provided by (used in) investing activities............ 3,329 (15,733)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt:
Net change in short-term debt and deposits................... 979 1,960
Net change in due to affiliates.............................. (395) (84)
Long term debt issued........................................ 10,783 20,105
Long term debt retired....................................... (17,485) (9,488)
Redemption of company obligated mandatorily redeemable
preferred securities of subsidiary trusts.................... - (206)
Insurance:
Policyholders' benefits paid................................. (159) (116)
Cash received from policyholders............................. 129 188
Capital contribution from parent............................... 200 -
Shareholders' dividends........................................ (633) (441)
Excess tax benefits from share-based compensation
arrangements................................................. 1 9
-------- --------
Net cash provided by (used in) financing activities............ (6,580) 11,927
-------- --------
Effect of exchange rate changes on cash........................ (6) 10
-------- --------
Net change in cash............................................. 11 (377)
Cash at beginning of period.................................... 871 903
-------- --------
CASH AT END OF PERIOD.......................................... $ 882 $ 526
======== ========

The accompanying notes are an integral part of the consolidated financial
statements.

HSBC Finance Corporation

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION
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HSBC Finance Corporation and subsidiaries is an indirect wholly owned subsidiary
of HSBC North America Holdings Inc. ("HSBC North America"), which is an indirect
wholly owned subsidiary of HSBC Holdings plc ("HSBC"). The accompanying
unaudited interim consolidated financial statements of HSBC Finance Corporation
and its subsidiaries have been prepared in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all normal and recurring
adjustments considered necessary for a fair presentation of financial position,
results of operations and cash flows for the interim periods have been made.
HSBC Finance Corporation may also be referred to in this Form 10-Q as "we," "us"
or "our." These unaudited interim consolidated financial statements should be
read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2006 (the "2006 Form 10-K"). Certain reclassifications have been
made to prior period amounts to conform to the current period presentation.

The preparation of financial statements in conformity with U.S. GAAP requires
the use of estimates and assumptions that affect reported amounts and
disclosures. Actual results could differ from those estimates. Interim results
should not be considered indicative of results in future periods.

2. SALE OF U.K. INSURANCE OPERATIONS
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Our U.K. Insurance Operations are reported in the International Segment. As our
carrying value for the U.K. Insurance Operations, including allocated goodwill,
was more than the estimated sales price, we recorded an adjustment of $31
million during the three months ended March 31, 2007 as a component of total
costs and expenses to record our investment in these operations at the lower of
cost or market. No additional adjustment was determined to be necessary during
the three months ended June 30, 2007. At June 30, 2007, the assets consisted
primarily of investments of $490 million, unearned credit insurance premiums and
claim reserves on consumer receivables of ($123) million and goodwill of $73
million. The liabilities consist primarily of insurance reserves which totaled
$224 million at June 30, 2007. The purchaser will assume all the liabilities of
the U.K. Insurance Operations as a result of this transaction. Due to our
continuing involvement as discussed above, this transaction did not meet the
discontinued operation reporting requirements contained in SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets."

HSBC Finance Corporation

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3. SECURITIES
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Securities consisted of the following available-for-sale investments:

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30, 2007 COST GAINS LOSSES VALUE
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(IN MILLIONS)

Corporate debt securities...................... $2,157 $4 $(55) $2,106
Money market funds............................. 420 - - 420
U.S. government sponsored enterprises(1)....... 326 - (4) 322
U.S. government and Federal agency debt
securities................................... 48 - (3) 45
Non-government mortgage backed securities...... 309 - (1) 308
Other.......................................... 230 - (3) 227
------ -- ---- ------
Subtotal....................................... 3,490 4 (66) 3,428
Accrued investment income...................... 34 - - 34
------ -- ---- ------
Total securities available for sale............ $3,524 $4 $(66) $3,462
====== == ==== ======

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2006 COST GAINS LOSSES VALUE
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(IN MILLIONS)

Corporate debt securities...................... $2,530 $11 $(40) $2,501
Money market funds............................. 1,051 - - 1,051
U.S. government sponsored enterprises(1)....... 369 1 (3) 367
U.S. government and Federal agency debt
securities................................... 43 - (1) 42
Non-government mortgage backed securities...... 271 - - 271
Other.......................................... 428 - (3) 425
------ --- ---- ------
Subtotal....................................... 4,692 12 (47) 4,657
Accrued investment income...................... 38 - - 38
------ --- ---- ------
Total securities available for sale............ $4,730 $12 $(47) $4,695
====== === ==== ======

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()(1) Includes primarily mortgage-backed securities issued by the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation.

Money market funds include $209 million at June 30, 2007 and $854 million at
December 31, 2006 which are restricted for the sole purpose of paying down
certain secured financings at the established payment date.

HSBC Finance Corporation

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The decrease in securities available for sale at June 30, 2007 is due to the
reclassification to other assets of approximately $400 million of securities
related to the U.K. Insurance Operation which at June 30, 2007 are classified as
"Held for Sale," and included within other assets, as well as the use of
approximately $650 million in money market funds to pay down secured financings
during the second quarter. A summary of gross unrealized losses and related fair
values as of June 30, 2007 and December 31, 2006, classified as to the length of
time the losses have existed follows:

LESS THAN ONE YEAR GREATER THAN ONE YEAR
--------------------------------------- ---------------------------------------
NUMBER GROSS AGGREGATE NUMBER GROSS AGGREGATE
OF UNREALIZED FAIR VALUE OF OF UNREALIZED FAIR VALUE OF
JUNE 30, 2007 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS
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(DOLLARS ARE IN MILLIONS)

Corporate debt securities.... 255 $(18) $693 455 $(37) $1,031
U.S. government sponsored
enterprises................ 56 (2) 169 37 (2) 116
U.S. government and Federal
agency debt securities..... 13 (1) 22 13 (2) 20
Non-government mortgage
backed securities.......... 23 (1) 178 7 - 5
Other........................ 23 (1) 83 42 (2) 131

LESS THAN ONE YEAR GREATER THAN ONE YEAR
--------------------------------------- ---------------------------------------
NUMBER GROSS AGGREGATE NUMBER GROSS AGGREGATE
OF UNREALIZED FAIR VALUE OF OF UNREALIZED FAIR VALUE OF
DECEMBER 31, 2006 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS
----------------------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)

Corporate debt securities.... 133 $(6) $465 511 $(34) $1,178
U.S. government sponsored
enterprises................ 30 -(1) 101 43 (3) 149
U.S. government and Federal
agency debt securities..... 8 -(1) 21 20 (1) 16
Non-government mortgage
backed securities.......... 10 -(1) 60 9 - 7
Other........................ 16 -(1) 57 52 (3) 173

--------

()(1) Less than $500 thousand.

The gross unrealized losses on our securities available for sale have increased
during the first half of 2007 due to increases in the intermediate and long-term
interest rates during the period and wider credit spreads. The contractual terms
of these securities do not permit the issuer to settle the securities at a price
less than the par value of the investment. Since substantially all of these
securities are rated A- or better, and because we have the ability and intent to
hold these investments until maturity or a market price recovery, these
securities are not considered other-than-temporarily impaired.

HSBC Finance Corporation

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4. RECEIVABLES
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Receivables consisted of the following:

JUNE 30, DECEMBER 31,
2007 2006
------------------------------------------------------------------------------------
(IN MILLIONS)

Real estate secured........................................ $ 92,296 $ 97,761
Auto finance............................................... 12,933 12,504
Credit card................................................ 28,594 27,714
Private label.............................................. 2,553 2,509
Personal non-credit card................................... 21,277 21,367
Commercial and other....................................... 152 181
-------- --------
Total receivables.......................................... 157,805 162,036
HSBC acquisition purchase accounting fair value
adjustments.............................................. (54) (60)
Accrued finance charges.................................... 2,299 2,228
Credit loss reserve for receivables........................ (7,157) (6,587)
Unearned credit insurance premiums and claims reserves..... (301) (412)
Interest-only strip receivables............................ 6 6
Amounts due and deferred from receivable sales............. 23 51
-------- --------
Total receivables, net..................................... $152,621 $157,262
======== ========

HSBC acquisition purchase accounting fair value adjustments represent
adjustments which have been "pushed down" to record our receivables at fair
value on March 28, 2003, the date we were acquired by HSBC.

We have a subsidiary, Decision One Mortgage Company, LLC ("Decision One"), which
directly originates and sells mortgage loans sourced by mortgage brokers.
Historically, Decision One sold all loans to affiliated and unaffiliated
secondary market purchasers, including our Mortgage Services business. We
continue to originate mortgage loans through Decision One largely for resale to
HSBC Bank USA to support the secondary market activities of our affiliates.
Loans held for sale to external parties by this subsidiary totaled $.5 billion
at June 30, 2007 and $1.7 billion at December 31, 2006 and are included in real
estate secured receivables. Our Consumer Lending business also had loans held
for sale totaling $11 million at June 30, 2007 and $32 million at December 31,
2006 relating to its subsidiary, Solstice Capital Group Inc. ("Solstice").

In November 2006, we acquired $2.5 billion of real estate secured receivables
from Champion Mortgage ("Champion") a division of KeyBank, N.A. and on December
1, 2005 we acquired $5.3 billion of receivables as part of our acquisition of
Metris Companies Inc. ("Metris"). The receivables acquired were subject to the
requirements of Statement of Position 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer" ("SOP 03-3") to the extent there was
evidence of deterioration of credit quality since origination and for which it
was probable, at acquisition, that all contractually required payments would not
be collected and in the case of Metris, that the associated line of credit had
been closed.

The carrying amount of Champion real estate secured receivables subject to the
requirements of SOP 03-3 was $89 million at June 30, 2007 and $116 million at
December 31, 2006 and is included in the real estate secured receivables in the
table above. The outstanding contractual balance of these receivables was $112
million at June 30, 2007 and $143 million at December 31, 2006. At June 30, 2007
and December 31, 2006, no credit loss reserve for the portions of the acquired
receivables subject to SOP 03-3 had been established as there had been no
decrease to the expected future cash flows since the acquisition. During the
quarter ended June 30, 2007, there was a reclassification to accretable yield
from non-accretable difference representing an increase to the estimated cash
flows to be collected on the underlying Champion portfolio.

HSBC Finance Corporation

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The carrying amount of the Metris receivables which were subject to SOP 03-3 was
$152 million as of June 30, 2007 and $223 million at December 31, 2006 and is
included in the credit card receivables in the table above. The outstanding
contractual balance of these receivables was $226 million at June 30, 2007 and
$334 million at December 31, 2006. At June 30, 2007 and December 31, 2006, no
credit loss reserve for the acquired receivables subject to SOP 03-3 had been
established as there had been no decrease to the expected future cash flows
since the acquisition. There were no additions to accretable yield or
reclassifications from non-accretable yield during the quarter ended June 30,
2007. During the quarter ended June 30, 2006 there was a reclassification to
accretable yield from non-accretable difference representing an increase to the
estimated cash flows to be collected on the underlying Metris portfolio.

The following summarizes the accretable yield on Metris and Champion receivables
at June 30, 2007 and June 30, 2006:

THREE MONTHS ENDED JUNE 30, 2007 2006
--------------------------------------------------------------------------------
(IN
MILLIONS)

Accretable yield beginning of period.............................. $(61) $ (92)
Accretable yield amortized to interest income during the period... 13 32
Reclassification from non-accretable difference................... (2) (51)
---- -----
Accretable yield at end of period................................. $(50) $(111)
==== =====

SIX MONTHS ENDED JUNE 30, 2007 2006
--------------------------------------------------------------------------------
(IN
MILLIONS)

Accretable yield beginning of period.............................. $(76) $(122)
Accretable yield amortized to interest income during the period... 28 62
Reclassification from non-accretable difference................... (2) (51)
---- -----
Accretable yield at end of period................................. $(50) $(111)
==== =====

Real estate secured receivables are comprised of the following:

JUNE 30, DECEMBER 31,
2007 2006
-------------------------------------------------------------------------------------
(IN MILLIONS)

Real estate secured:
Closed-end:
First lien............................................. $73,953 $77,901
Second lien............................................ 14,295 15,090
Revolving:
First lien............................................. 499 556
Second lien............................................ 3,549 4,214
------- -------
Total real estate secured receivables....................... $92,296 $97,761
======= =======

We generally serve non-conforming and non-prime consumers. Such customers are
individuals who have limited credit histories, modest incomes, high debt-to-
income ratios or have experienced credit problems caused by occasional
delinquencies, prior charge-offs, bankruptcy or other credit related actions. As
a result, the majority of our secured receivables have a high loan-to-value
ratio. Our Decision One mortgage operation offers, among other products,
interest-only loans largely for resale to HSBC Bank USA to support the secondary
market activities of our affiliates. These interest-only loans allow customers
to pay the interest only portion of the monthly payment for a period of time
which results in lower payments during the initial loan period. However,
subsequent events affecting a customer's financial position could affect the
ability of customers to repay the loan in the future when the principal payments
are required. As with all our other non-conforming and non-prime loan products,
we underwrite and price

HSBC Finance Corporation

--------------------------------------------------------------------------------

interest-only loans in a manner that is intended to compensate us for the
anticipated risk. At June 2007, the outstanding balance of our interest-only
loans was $6.2 billion, or 4 percent of receivables. At December 31, 2006, the
outstanding balance of our interest-only loans was $6.7 billion, or 4 percent of
receivables.

Also due to customer demand, we offer adjustable rate mortgage loans under which
pricing adjusts on the receivable in line with market movements, in some cases,
following an introductory fixed rate period. At June 30, 2007, we had
approximately $22.0 billion in adjustable rate mortgage loans at our Consumer
Lending and Mortgage Services businesses. At December 31, 2006, we had
approximately $29.8 billion in adjustable rate mortgage loans at our Consumer
Lending and Mortgage Services businesses. In the second half of 2007 and
throughout 2008, approximately $5.7 billion and $4.1 billion, respectively, of
our adjustable rate mortgage loans will experience their first interest rate
reset based on receivable levels outstanding at June 30, 2007. In addition, our
analysis indicates that a significant portion of the second lien mortgages in
our Mortgage Services portfolio at June 30, 2007 are subordinated to first lien
adjustable rate mortgages that will face a rate reset between now and 2009. As
interest rates have risen over the last three years, many adjustable rate loans
are expected to require a significantly higher monthly payment following their
first adjustment. A customer's financial situation at the time of the interest
rate reset could affect our customer's ability to repay the loan after the
adjustment.

During 2006 and 2005 we increased our portfolio of stated income loans. Stated
income loans are underwritten based on the loan applicant's representation of
annual income which is not verified by receipt of supporting documentation and,
accordingly, carry a higher risk of default if the customer has not accurately
reported their income. Currently, our Decision One mortgage operation offers
stated income loans largely for resale to HSBC Bank USA to support the secondary
market activities of our affiliates. We price stated income loans in a manner
that is intended to compensate us for their anticipated risk. The outstanding
balance of stated income loans in our real estate secured portfolio was $9.4
billion at June 30, 2007 and $11.8 billion at December 31, 2006.

The Federal Financial Regulatory Agencies (the "Agencies") recently issued a
final statement on subprime mortgage lending which reiterates many of the
principles addressed in the existing guidance relating to risk management
practices and consumer protection laws involving adjustable rate mortgage
products and the underwriting process on stated income and interest-only loans.
While we believe a significant portion of our business is already substantially
in compliance with this final statement, we are currently assessing the full
impact of this statement on our operations.

Receivables serviced with limited recourse consisted of the following:

JUNE 30, DECEMBER 31,
2007 2006
--------------------------------------------------------------------------------------
(IN MILLIONS)

Auto finance................................................. $ 98 $271
Credit card.................................................. 500 500
Personal non-credit card..................................... 13 178
---- ----
Total........................................................ $611 $949
==== ====

HSBC Finance Corporation

--------------------------------------------------------------------------------

5. CREDIT LOSS RESERVES
--------------------------------------------------------------------------------

An analysis of credit loss reserves was as follows:

THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
2007 2006 2007 2006
----------------------------------------------------------------------------------------
(IN MILLIONS)

Credit loss reserves at beginning of period...... $ 6,798 $ 4,468 $ 6,587 $ 4,521
Provision for credit losses...................... 1,947 1,248 3,647 2,114
Charge-offs...................................... (1,837) (1,233) (3,520) (2,287)
Recoveries....................................... 250 153 445 279
Other, net....................................... (1) 13 (2) 22
------- ------- ------- -------
Credit loss reserves at end of period............ $ 7,157 $ 4,649 $ 7,157 $ 4,649
======= ======= ======= =======

Provision and charge-off levels for the three and six month periods ended June
30, 2007, reflect the impact of higher receivable levels, higher delinquency
levels due to growth and normal portfolio seasoning, increased levels of
personal bankruptcy filings compared to the exceptionally low filing levels
experienced in the first half of 2006 as a result of the new bankruptcy law in
the United States which became effective October 2005, and the expected
progression of portions of our Mortgage Services portfolio purchased in 2005 and
2006 into various stages of delinquency and net charge-off.

Further analysis of credit quality and credit loss reserves and our credit loss
reserve methodology are presented in Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Form 10-Q
under the caption "Credit Quality."

6. INTANGIBLE ASSETS
--------------------------------------------------------------------------------

Intangible assets consisted of the following:

ACCUMULATED CARRYING
GROSS AMORTIZATION VALUE
----------------------------------------------------------------------------------------
(IN MILLIONS)

JUNE 30, 2007
Purchased credit card relationships and related
programs............................................ $1,736 $ 649 $1,087
Retail services merchant relationships................ 270 230 40
Other loan related relationships...................... 333 151 182
Trade names........................................... 717 13 704
Technology, customer lists and other contracts........ 282 203 79
------ ------ ------
Total................................................. $3,338 $1,246 $2,092
====== ====== ======
DECEMBER 31, 2006
Purchased credit card relationships and related
programs............................................ $1,736 $ 580 $1,156
Retail services merchant relationships................ 270 203 67
Other loan related relationships...................... 333 135 198
Trade names........................................... 717 13 704
Technology, customer lists and other contracts........ 282 189 93
------ ------ ------
Total................................................. $3,338 $1,120 $2,218
====== ====== ======

HSBC Finance Corporation

--------------------------------------------------------------------------------

Estimated amortization expense associated with our intangible assets for each of
the following years is as follows:

YEAR ENDING DECEMBER 31,
-----------------------------------------------------------------------------------
(IN MILLIONS)

2007................................................................ $253
2008................................................................ 211
2009................................................................ 198
2010................................................................ 169
2011................................................................ 169
Thereafter.......................................................... 355

7. GOODWILL
--------------------------------------------------------------------------------

Goodwill balances associated with our foreign businesses will change from period
to period due to movements in foreign exchange. During the second quarter of
2007, the impact of movements in foreign exchange rates on our goodwill balances
was immaterial. Changes in estimates of the tax basis in our assets and
liabilities or other tax estimates recorded pursuant to Statement of Financial
Accounting Standards Number 109, "Accounting for Income Taxes," resulted in our
goodwill balances decreasing by approximately $33 million in the three month and
approximately $65 million in the six month periods ended June 30, 2007, as a
result of such changes in tax estimates. In addition, goodwill of approximately
$73 million allocated to our U.K. Insurance Operations was transferred to assets
held for sale during the first quarter of 2007.

8. INCOME TAXES
--------------------------------------------------------------------------------

Effective January 1, 2007, we adopted FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109"
("FIN No. 48"). FIN No. 48 establishes threshold and measurement attributes for
financial statement measurement and recognition of tax positions taken or
expected to be taken in a tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48 did not have a
significant impact on our financial results and did not result in a cumulative
effect adjustment to the January 1, 2007 balance of retained earnings. The
adoption resulted in the reclassification of $65 million of deferred tax
liability to current tax liability to account for uncertainty in the timing of
tax benefits as well as the reclassification of $141 million of deferred tax
asset to current tax asset to account for highly certain pending adjustments in
the timing of tax benefits. The total amount of unrecognized tax benefits was
$273 million at January 1, 2007 and $215 million at June 30, 2007. The state tax
portion of these amounts is reflected gross and not reduced by the federal tax
effect. The total amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate was $70 million at January 1, 2007 and $84
million at June 30, 2007.

We remain subject to Federal income tax examination for years 1998 and forward
and State income tax examinations for years 1996 and forward. The Company does
not anticipate that any significant tax positions have a reasonable possibility
of being effectively settled within the next twelve months.

It is our policy to recognize interest accrued related to unrecognized tax
benefits as a component of other servicing and administrative expenses in the
consolidated income statement. As of January 1, 2007, we had accrued $67 million
for the payment of interest associated with uncertain tax positions. During the
six months ended June 30, 2007, we reduced our accrual for the payment of
interest associated with uncertain tax positions by $6 million.

Our effective tax rates were as follows
THREE
MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------- -----------
2007 2006 2007 2006
------------------------------------------------------------------------------------

Effective tax rate....................................... 17.1% 36.7% 36.4% 36.6%

HSBC Finance Corporation

--------------------------------------------------------------------------------

The decrease in the effective tax rate for the three month period ended June 30,
2007 was due to a decrease in pretax income with only slightly lower tax
credits. The decrease in the effective tax rate for the six month period ended
June 30, 2007 was primarily due to lower state taxes, partially offset by the
adjustment recorded to reduce our investment in our U.K. Insurance Operations to
the lower of cost or market and the acceleration of tax from sales of leveraged
leases. The effective tax rate differs from the statutory federal income tax
rate primarily because of the effects of state and local income taxes, tax
credits, leveraged lease sales, and the lower of cost or market adjustment.

9. RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------

In the normal course of business, we conduct transactions with HSBC and its
subsidiaries. These transactions occur at prevailing market rates and terms and
include funding arrangements, derivative execution, purchases and sales of
receivables, servicing arrangements, information technology services, item and
statement processing services, banking and other miscellaneous services. The
following tables present related party balances and the income and (expense)
generated by related party transactions:

JUNE 30, DECEMBER 31,
2007 2006
-------------------------------------------------------------------------------------
(IN MILLIONS)

ASSETS, (LIABILITIES) AND EQUITY:
Derivative financial assets (liability), net................ $ 340 $ 234
Affiliate preferred stock received in sale of U.K. credit
card business(1).......................................... 301 294
Other assets................................................ 691 528
Due to affiliates........................................... (14,863) (15,172)
Other liabilities........................................... (474) (506)
Premium on sale of European Operations in 2006 to an
affiliate recorded as an increase to additional paid in
capital................................................... - 13

--------

()(1) Balance may fluctuate between periods due to foreign currency exchange
rate impact.

HSBC Finance Corporation

--------------------------------------------------------------------------------

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
2007 2006 2007 2006
-------------------------------------------------------------------------------------
(IN MILLIONS)

INCOME/(EXPENSE):
Interest expense on borrowings from HSBC and
subsidiaries........................................ $(217) $(173) $(451) $(326)
Interest income on advances to HSBC affiliates........ 8 6 15 11
HSBC Bank USA, National Association ("HSBC Bank USA"):
Real estate secured servicing, sourcing,
underwriting and pricing revenues................ 2 3 4 6
Gain on daily sale of domestic private label
receivable originations.......................... 94 88 178 165
Gain on daily sale of credit card receivables....... 15 9 26 17
Taxpayer financial services loan origination and
other fees....................................... (1) (1) (19) (17)
Domestic private label receivable servicing and
related fees..................................... 98 95 199 193
Other servicing, processing, origination and support
revenues......................................... 25 11 49 21
Support services from HSBC affiliates, primarily HSBC
Technology and Services (USA) Inc. ("HTSU")......... (299) (270) (584) (522)
HTSU:
Rental revenue...................................... 12 12 24 23
Administrative services revenue..................... 3 3 6 6
Servicing and other fees from other HSBC
affiliates....................................... 4 4 7 8
Stock based compensation expense with HSBC............ (28) (22) (60) (39)

The notional value of derivative contracts outstanding with HSBC subsidiaries
totaled $86.3 billion at June 30, 2007 and $82.8 billion at December 31, 2006.
When the fair value of our agreements with affiliate counterparties requires the
posting of collateral by the affiliate, it is provided in the form of cash and
recorded on our balance sheet, consistent with third party arrangements. The
level of the fair value of our agreements with affiliate counterparties above
which collateral is required to be posted is $75 million. At June 30, 2007, the
fair value of our agreements with affiliate counterparties required the
affiliate to provide cash collateral of $1.1 billion which is offset against the
fair value amount recognized for derivative instruments that have been offset
under the same master netting arrangement and recorded in our balance sheet as a
component of derivative related assets. At December 31, 2006, the fair value of
our agreements with affiliate counterparties required the affiliate to provide
cash collateral of $1.0 billion which is offset against the fair value amount
recognized for derivative instruments that have been offset under the same
master netting arrangement and recorded in our balance sheet as a component of
derivative related assets.

We had extended a line of credit of $2 billion to HSBC USA Inc. which expired in
July of 2006 and was not renewed. No balances were outstanding under this line
at June 30, 2006. Annual commitment fees associated with this line of credit
were recorded in interest income and reflected as Interest income on advances to
HSBC affiliates in the table above.

We have extended a revolving line of credit to HTSU, which was increased to $.6
billion on January 5, 2007. The balance outstanding under this line of credit
was $.6 billion at June 30, 2007 and $.5 billion at December 31, 2006 and is
included in other assets. Interest income associated with this line of credit is
recorded in interest income and reflected as Interest income on advances to HSBC
affiliates in the table above.

We extended a promissory note of $.2 billion to HSBC Securities (USA) Inc.
("HSI") on December 28, 2005. This promissory note was repaid during January
2006. At December 31, 2005, this promissory note was included in other assets.
Interest income associated with this line of credit is recorded in interest
income and reflected as Interest income on advances to HSBC affiliates in the
table above.

HSBC Finance Corporation

--------------------------------------------------------------------------------

We have extended revolving lines of credit to subsidiaries of HSBC Bank USA for
an aggregate total of $2.3 billion. There are no balances outstanding under any
of these lines of credit at either June 30, 2007 or December 31, 2006.

Due to affiliates includes amounts owed to subsidiaries of HSBC (other than
preferred stock).

At June 30, 2007 and December 31, 2006, we had a commercial paper back stop
credit facility of $2.5 billion from HSBC supporting domestic issuances and a
revolving credit facility of $5.7 billion from HSBC Bank plc ("HBEU") to fund
our operations in the U.K. As of June 30, 2007, $4.1 billion was outstanding
under the U.K. lines and no balances were outstanding on the domestic lines. As
of December 31, 2006, $4.3 billion was outstanding under the U.K. lines and no
balances were outstanding on the domestic lines. Annual commitment fee
requirements to support availability of these lines are included as a component
of Interest expense on borrowings from HSBC and subsidiaries.

In the six months ended June 30, 2007, we sold approximately $371 million of
real estate secured receivables originated by our subsidiary, Decision One, to
HSBC Bank USA. We recorded a pre-tax loss on these sales of $.4 million in the
year-to-date period. In the fourth quarter of 2006 we sold approximately $669
million of real estate secured receivables originated by our subsidiary,
Decision One, to HSBC Bank USA and recorded a pre-tax gain of $17 million on the
sale. Each of these sales were effected as part of our strategy to originate
loans through Decision One for sale and securitization through the mortgage
trading operations of HSBC Bank USA.

On November 9, 2006, as part of our continuing evaluation of strategic
alternatives with respect to our U.K. and European operations, we sold all of
the capital stock of our operations in the Czech Republic, Hungary, and Slovakia
(the "European Operations") to a wholly owned subsidiary of HBEU for an
aggregate purchase price of approximately $46 million. Because the sale of this
business was between affiliates under common control, the premium received in
excess of the book value of the stock transferred was recorded as an increase to
additional paid-in capital and was not reflected in earnings. The assets
consisted primarily of $199 million of receivables and goodwill which totaled
approximately $13 million. The liabilities consisted primarily of debt which
totaled $179 million. HBEU assumed all the liabilities of the European
Operations as a result of this transaction.

In December 2005, we sold our U.K. credit card business, including $2.5 billion
of receivables, the associated cardholder relationships and the related retained
interests in securitized credit card receivables to HBEU for an aggregate
purchase price of $3.0 billion. The purchase price, which was determined based
on a comparative analysis of sales of other credit card portfolios, was paid in
a combination of cash and $261 million of preferred stock issued by a subsidiary
of HBEU with a rate of one-year Sterling LIBOR, plus 1.30 percent. In addition
to the assets referred to above, the sale also included the account origination
platform, including the marketing and credit employees associated with this
function, as well as the lease associated with the credit card call center and
related leaseholds and call center employees to provide customer continuity
after the transfer as well as to allow HBEU direct ownership and control of
origination and customer service. We have retained the collection operations
related to the credit card operations and have entered into a service level
agreement for a period of not less than two years to provide collection services
and other support services, including components of the compliance, financial
reporting and human resource functions, for the sold credit card operations to
HBEU for a fee. We received $8 million during the three months ended June 30,
2007 and $16 million during the six months ended June 30, 2007 under this
service level agreement. We received $3 million during the three months ended
June 30, 2006 and $11 million during the six months ended June 30, 2006 under
this service level agreement. Additionally, the management teams of HBEU and our
remaining U.K. operations will be jointly involved in decision making involving
card marketing to ensure that growth objectives are met for both businesses.
Because the sale of this business was between affiliates under common control,
the premium received in excess of the book value of the assets transferred of
$182 million, including the goodwill assigned to this business, was recorded as
an increase to additional paid-in capital and has not been included in earnings.

In December 2004, we sold our domestic private label receivable portfolio
(excluding retail sales contracts at our Consumer Lending business), including
the retained interests associated with our securitized domestic private label
receivables to HSBC Bank USA for $12.4 billion. We continue to service the sold
private label receivables and receive servicing and related fee income from HSBC
Bank USA for these services. As of June 30, 2007, we were

HSBC Finance Corporation

--------------------------------------------------------------------------------

servicing $17.6 billion of domestic private label receivables for HSBC Bank USA
and as of December 31, 2006, we were servicing $18.1 billion of domestic private
label receivables for HSBC Bank USA. We received servicing and related fee
income from HSBC Bank USA of $98 million during the three months ended June 30,
2007 and $199 million during the six months ended June 30, 2007. We received
servicing and related fee income from HSBC Bank USA of $95 million during the
three months ended June 30, 2006 and $193 million during the six months ended
June 30, 2006. Servicing and related fee income is reflected as Domestic private
label receivable servicing and related fees in the table above. We continue to
maintain the related customer account relationships and, therefore, sell new
domestic private label receivable originations (excluding retail sales
contracts) to HSBC Bank USA on a daily basis. We sold $10.5 billion of private
label receivables to HSBC Bank USA during the six months ended June 30, 2007 and
$10.0 billion during the six months ended June 30, 2006. The gains associated
with the sale of these receivables are reflected in the table above and are
recorded in Gain on daily sale of domestic private label receivable
originations.

In 2003 and 2004, we sold approximately $3.7 billion of real estate secured
receivables from our Mortgage Services business to HSBC Bank USA. Under a
separate servicing agreement, we service all real estate secured receivables
sold to HSBC Bank USA including loans purchased from correspondents prior to
September 1, 2005. As of June 30, 2007, we were servicing $2.8 billion of real
estate secured receivables for HSBC Bank USA. The fee revenue associated with
these receivables is recorded in servicing fees from HSBC affiliates and is
reflected as Real estate secured servicing, sourcing, underwriting and pricing
revenues in the above table.

In the second quarter of 2007, we sold $2.2 billion of loans from the Mortgage
Services portfolio to third parties. HSBC Markets (USA) Inc., a related HSBC
entity, assisted in the transaction by placing the loans with interested third
parties. Fees paid for these services totaled $4 million and were included as a
component of the approximately $20 million loss realized on the sale of this
loan portfolio. As a result of the loan sales, however, the lower cost funding
previously supporting the $2.2 billion of loans sold is available to be
redeployed to fund new originators, which should result in reduced overall
funding costs in future periods.

Under various service level agreements, we also provide other services to HSBC
Bank USA. These services include credit card servicing and processing activities
through our Credit Card Services business, loan servicing through our Auto
Finance business and other operational and administrative support. Fees received
for these services are reported as servicing fees from HSBC affiliates and are
reflected as Other servicing, processing, origination and support revenues in
the table above. Additionally, HSBC Bank USA services certain real estate
secured loans on our behalf. Fees paid for these services are reported as
support services from HSBC affiliates and are reflected as Support services from
HSBC affiliates, primarily HTSU in the table above.

During 2003, Household Capital Trust VIII issued $275 million in mandatorily
redeemable preferred securities to HSBC. Interest expense recorded on the
underlying junior subordinated notes is included in Interest expense on
borrowings from HSBC and subsidiaries in the table above.

During 2004, our Canadian business began to originate and service auto loans for
an HSBC affiliate in Canada. Fees received for these services are included in
other income and are reflected in Servicing and other fees from other HSBC
affiliates in the table above.

Since October 1, 2004, HSBC Bank USA has served as an originating lender for
loans initiated by our Taxpayer Financial Services business for clients of
various third party tax preparers. Starting on January 1, 2007, HSBC Trust
Company (Delaware), N.A. ("HTCD") also began to serve as an originating lender
for these loans. We purchase the loans originated by HSBC Bank USA or HTCD daily
for a fee. Origination fees paid for these loans totaled $1 million during the
three months ended June 30, 2007 and $19 million during the six months ended
June 30, 2007. Origination fees paid to HSBC Bank USA or HTCD totaled $1 million
during the three months ended June 30, 2006 and $17 million during the six
months ended June 30, 2006. These origination fees are included as an offset to
taxpayer financial services revenue and are reflected as Taxpayer financial
services loan origination and other fees in the above table.

On July 1, 2004, HSBC Bank Nevada, National Association ("HBNV"), formerly known
as Household Bank (SB), N.A., purchased the account relationships associated
with $970 million of credit card receivables from HSBC Bank

HSBC Finance Corporation

--------------------------------------------------------------------------------

USA for approximately $99 million, which are included in intangible assets. The
receivables continue to be owned by HSBC Bank USA. We service these receivables
for HSBC Bank USA and receive servicing and related fee income from HSBC Bank
USA. As of June 30, 2007 we were servicing $1.2 billion of credit card
receivables for HSBC Bank USA. Originations of new accounts and receivables are
made by HBNV and new receivables are sold daily to HSBC Bank USA. We sold $1.3
billion of credit card receivables to HSBC Bank USA during the six months ended
June 30, 2007 and $1.1 billion during the six months ended June 30, 2006. The
gains associated with the sale of these receivables are reflected in the table
above and are recorded in Gain on daily sale of credit card receivables.

Effective January 1, 2004, our technology services employees, as well as
technology services employees from other HSBC entities in North America, were
transferred to HTSU. In addition, technology related assets and software
purchased subsequent to January 1, 2004 are generally purchased and owned by
HTSU. Technology related assets owned by HSBC Finance Corporation prior to
January 1, 2004 currently remain in place and were not transferred to HTSU. In
addition to information technology services, HTSU also provides certain item
processing and statement processing activities to us pursuant to a master
service level agreement. Support services from HSBC affiliates includes services
provided by HTSU as well as banking services and other miscellaneous services
provided by HSBC Bank USA and other subsidiaries of HSBC. We also receive
revenue from HTSU for rent on certain office space, which has been recorded as a
reduction of occupancy and equipment expenses, and for certain administrative
costs, which has been recorded as other income.

Additionally, in a separate transaction in December 2005, we transferred our
information technology services employees in the U.K. to a subsidiary of HBEU.
Subsequent to the transfer, operating expenses relating to information
technology, which have previously been reported as salaries and fringe benefits
or other servicing and administrative expenses, are now billed to us by HBEU and
reported as Support services from HSBC affiliates. Additionally, during the
first quarter of 2006, the information technology equipment in the U.K. was sold
to HBEU for a purchase price equal to the book value of these assets of $8
million.

In addition, we utilize HSBC Markets (USA) Inc., a related HSBC entity, to lead
manage the underwriting of a majority of our ongoing debt issuances. Fees paid
for such services totaled approximately $8 million during the three months ended
June 30, 2007 and $11 million during the six months ended June 30, 2007. Fees
paid for such services totaled approximately $7 million during the three months
ended June 30, 2006 and $22 million during the six months ended June 30, 2006.
For debt not accounted for under the fair value option, these fees are amortized
over the life of the related debt.

Domestic employees of HSBC Finance Corporation participate in a defined benefit
pension plan sponsored by HSBC North America. See Note 10, "Pension and Other
Postretirement Benefits," for additional information on this pension plan.

Employees of HSBC Finance Corporation participate in one or more stock
compensation plans sponsored by HSBC. Our share of the expense of these plans
was $28 million during the three months ended June 30, 2007 and $60 million
during the six months ended June 30, 2007. Our share of the expense of these
plans was $22 million during the three months ended June 30, 2006 and $39
million for the six months ended June 30, 2006. These expenses are recorded in
salary and employee benefits and are reflected in the above table as Stock based
compensation expense with HSBC.

10. PENSION AND OTHER POSTRETIREMENT BENEFITS
--------------------------------------------------------------------------------

Effective January 1, 2005, the two previously separate domestic defined benefit
pension plans of HSBC Finance Corporation and HSBC Bank USA were combined into a
single HSBC North America defined benefit pension plan which facilitated the
development of a unified employee benefit policy and unified employee benefit
plan for HSBC companies operating in the United States.

HSBC Finance Corporation

--------------------------------------------------------------------------------

The components of pension expense for the domestic defined benefit pension plan
reflected in our consolidated statement of income are shown in the table below
and reflect the portion of the pension expense of the combined HSBC North
America pension plan which has been allocated to HSBC Finance Corporation:

THREE
MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------- -----------
2007 2006 2007 2006
------------------------------------------------------------------------------------
(IN MILLIONS)

Service cost - benefits earned during the period......... $ 13 $ 13 $ 26 $ 26
Interest cost............................................ 16 15 32 30
Expected return on assets................................ (21) (20) (42) (40)
Recognized losses........................................ 1 3 2 6
---- ---- ---- ----
Net periodic benefit cost................................ $ 9 $ 11 $ 18 $ 22
==== ==== ==== ====

We sponsor various additional defined benefit pension plans for our foreign
based employees. Pension expense for our foreign defined benefit pension plans
was $.8 million for the three months ended June 30, 2007 and $1.6 million for
the six months ended June 30, 2007. Pension expense for our foreign defined
benefit pension plans was $.7 million for the three months ended June 30, 2006
and $1.3 million for the six months ended June 30, 2006.

Components of the net periodic benefit cost for our postretirement benefits
other than pensions are as follows:

THREE
MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------- -----------
2007 2006 2007 2006
-------------------------------------------------------------------------------------
(IN MILLIONS)

Service cost - benefits earned during the period.......... $1 $1 $2 $ 2
Interest cost............................................. 4 4 7 8
Expected return on assets................................. - - - -
Recognized (gains) losses................................. - - - -
-- -- -- ---
Net periodic benefit cost................................. $5 $5 $9 $10
== == == ===

11. BUSINESS SEGMENTS
--------------------------------------------------------------------------------

We have three reportable segments: Consumer, Credit Card Services and
International. Our Consumer segment consists of our Consumer Lending, Mortgage
Services, Retail Services and Auto Finance businesses. Our Credit Card Services
segment consists of our domestic MasterCard(1) and Visa(1) and other credit card
business. Our International segment consists of our foreign operations in the
United Kingdom, Canada and the Republic of Ireland and, prior to November 9,
2006, our operations in Slovakia, the Czech Republic and Hungary. The All Other
caption includes our Insurance and Taxpayer Financial Services and Commercial
businesses, each of which falls below the quantitative threshold test under SFAS
No. 131 for determining reportable segments, as well as our corporate and
treasury activities.

In May 2007, we announced the planned integration of our Retail Services and
Credit Card Services businesses. Combining Retail Services with Credit Card
Services enhances our ability to provide a single credit card and private label
solution for the market place. We are currently evaluating the impact this
integration will have on our financial reporting in the future, including
segment reporting. There have been no changes in the basis of our segmentation
or any changes in the measurement of segment profit as compared with the
presentation in our 2006 Form 10-K.

----------
(1) MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of Visa USA, Inc.

HSBC Finance Corporation

--------------------------------------------------------------------------------

Our segment results are presented on an International Financial Reporting
Standards ("IFRSs") management basis (a non-U.S. GAAP financial measure) ("IFRS
Management Basis") as operating results are monitored and reviewed, trends are
evaluated and decisions about allocating resources, such as employees, are made
almost exclusively on an IFRS Management Basis as we report results to our
parent, HSBC, who prepares its consolidated financial statements in accordance
with IFRSs. IFRS Management Basis results are IFRSs results adjusted to assume
that the private label and real estate secured receivables transferred to HSBC
Bank USA have not been sold and remain on our balance sheet. Operations are
monitored and trends are evaluated on an IFRS Management Basis because the
customer loan sales to HSBC Bank USA were conducted primarily to appropriately
fund prime customer loans within HSBC and such customer loans continue to be
managed and serviced by us without regard to ownership. However, we continue to
monitor capital adequacy, establish dividend policy and report to regulatory
agencies on a U.S. GAAP basis.

Fair value adjustments related to purchase accounting resulting from our
acquisition by HSBC and related amortization have been allocated to Corporate,
which is included in the "All Other" caption within our segment disclosure.

HSBC Finance Corporation

--------------------------------------------------------------------------------

Reconciliation of our IFRS Management Basis segment results to the U.S. GAAP
consolidated totals are as follows:

IFRS
MANAGEMENT
CREDIT ADJUSTMENTS/ BASIS MANAGEMENT
CARD INTER- ALL RECONCILING CONSOLIDATED BASIS IFRS
CONSUMER SERVICES NATIONAL OTHER ITEMS TOTALS ADJUSTMENTS(4) ADJUSTMENTS(5)
------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)

THREE MONTHS ENDED
JUNE 30, 2007
Net interest income... $ 2,143 $ 827 $ 217 $ (200) $ - $ 2,987 $ (328) $ 22
Other operating income
(Total other
revenues)........... 173 755 48 25 (74)(1) 927 35 (104)
Loan impairment
charges (Provision
for credit losses).. 1,382 640 161 - 2(2) 2,185 (215) (17)
Operating expenses
(Total costs and
expenses)........... 748 494 142 131 - 1,515 (2) (3)
Net income............ 120 284 (31) (139) (48) 186 (52) (71)
Customer loans
(Receivables)....... 138,976 29,106 9,853 153 - 178,088 (20,389) 95
Assets................ 138,281 28,933 10,669 29,476 (8,204)(3) 199,155 (19,917) (4,973)
Intersegment
revenues............ 65 5 6 (2) (74)(1) - - -
-------- ------- ------- ------- ------- -------- -------- -------
THREE MONTHS ENDED
JUNE 30, 2006
Net interest income... $ 2,189 $ 872 $ 201 $ (211) $ - $ 3,051 $ (314) $ (156)
Other operating income
(Total other
revenues)........... 349 563 74 111 (76)(1) 1,021 73 (77)
Loan impairment
charges (Provision
for credit losses).. 894 328 124 (1) 1(2) 1,346 (153) 86
Operating expenses
(Total costs and
expenses)........... 793 435 119 136 - 1,483 (3) (58)
Net income............ 539 423 19 (156) (49) 776 (58) (150)
Customer loans
(Receivables)....... 138,685 25,726 9,637 196 - 174,244 (20,326) 41
Assets................ 140,991 26,931 11,127 28,093 (8,197)(3) 198,945 (19,495) (5,644)
Intersegment
revenues............ 63 5 9 (1) (76)(1) - - -
-------- ------- ------- ------- ------- -------- -------- -------
SIX MONTHS ENDED JUNE
30, 2007
Net interest income... $ 4,301 $ 1,648 $ 421 $ (427) $ - $ 5,943 $ (638) $ 26
Other operating income
(Total other
revenues)........... 365 1,453 95 512 (141)(1) 2,284 75 (57)
Loan impairment
charges (Provision
for credit losses).. 2,602 1,060 409 (1) 3(2) 4,073 (392) (28)
Operating expenses
(Total costs and
expenses)........... 1,507 977 270 286 - 3,040 (5) (4)
Net income............ 358 673 (121) (17) (91) 802 (113) (85)
Intersegment
revenues............ 123 10 11 (3) (141)(1) - - -
-------- ------- ------- ------- ------- -------- -------- -------
SIX MONTHS ENDED JUNE
30, 2006
Net interest income... $ 4,371 $ 1,604 $ 411 $ (462) $ - $ 5,924 $ (646) $ (202)
Other operating income
(Total other
revenues)........... 587 1,041 115 447 (144)(1) 2,046 142 3
Loan impairment
charges (Provision
for credit losses).. 1,444 577 228 (2) 3(2) 2,250 (294) 174
Operating expenses
(Total costs and
expenses)........... 1,530 869 231 289 - 2,919 (8) (70)
Net income............ 1,258 755 41 (173) (93) 1,788 (137) (195)
Intersegment
revenues............ 120 10 16 (2) (144)(1) - - -
-------- ------- ------- ------- ------- -------- -------- -------

IFRS U.S. GAAP
RECLASS- CONSOLIDATED
IFICATIONS(6) TOTALS
---------------------------------------------------
(IN MILLIONS)

THREE MONTHS ENDED
JUNE 30, 2007
Net interest income... $ (24) $ 2,657
Other operating income
(Total other
revenues)........... 156 1,014
Loan impairment
charges (Provision
for credit losses).. (6) 1,947
Operating expenses
(Total costs and
expenses)........... 138 1,648
Net income............ - 63
Customer loans
(Receivables)....... 11 157,805
Assets................ (912) 173,353
Intersegment
revenues............ - -
------- --------
THREE MONTHS ENDED
JUNE 30, 2006
Net interest income... $ (32) $ 2,549
Other operating income
(Total other
revenues)........... 158 1,175
Loan impairment
charges (Provision
for credit losses).. (31) 1,248
Operating expenses
(Total costs and
expenses)........... 157 1,579
Net income............ - 568
Customer loans
(Receivables)....... - 153,959
Assets................ (3,112) 170,694
Intersegment
revenues............ - -
------- --------
SIX MONTHS ENDED JUNE
30, 2007
Net interest income... $ (33) $ 5,298
Other operating income
(Total other
revenues)........... 354 2,656
Loan impairment
charges (Provision
for credit losses).. (6) 3,647
Operating expenses
(Total costs and
expenses)........... 327 3,358
Net income............ - 604
Intersegment
revenues............ - -
------- --------
SIX MONTHS ENDED JUNE
30, 2006
Net interest income... $ (63) $ 5,013
Other operating income
(Total other
revenues)........... 405 2,596
Loan impairment
charges (Provision
for credit losses).. (16) 2,114
Operating expenses
(Total costs and
expenses)........... 358 3,199
Net income............ - 1,456
Intersegment
revenues............ - -
------- --------

--------

()(1) Eliminates intersegment revenues.

()(2) Eliminates bad debt recovery sales between operating segments.

()(3) Eliminates investments in subsidiaries and intercompany borrowings.

()(4) Management Basis Adjustments represent the private label and real estate
secured receivables transferred to HBUS.

()(5) IFRS Adjustments consist of the accounting differences between U.S. GAAP
and IFRSs which have been described more fully below.

()(6) Represents differences in balance sheet and income statement presentation
between IFRSs and U.S. GAAP.

HSBC Finance Corporation

--------------------------------------------------------------------------------

A summary of the significant differences between U.S. GAAP and IFRSs as they
impact our results are summarized below:

SECURITIZATIONS - On an IFRSs basis, securitized receivables are treated as
owned. Any gains recorded under U.S. GAAP on these transactions are reversed. An
owned loss reserve is established. The impact from securitizations resulting in
higher net income under IFRSs is due to the recognition of income on securitized
receivables under U.S. GAAP in prior periods.

DERIVATIVES AND HEDGE ACCOUNTING (INCLUDING FAIR VALUE ADJUSTMENTS) - The IFRSs
derivative accounting model is similar to U.S. GAAP requirements, but IFRSs does
not permit use of the short-cut method of hedge effectiveness testing. Prior to
January 1, 2007, the differences between U.S. GAAP and IFRSs related primarily
to the fact that a different population of derivatives qualified for hedge
accounting under IFRSs than U.S. GAAP and that HSBC Finance Corporation had
elected the fair value option under IFRSs on a significant portion of its fixed
rate debt which was being hedged by receive fixed swaps. Prior to the issuance
of FASB Statement No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities," ("SFAS No. 159") in February 2007, U.S. GAAP did not
permit the use of the fair value option. As a result of our early adoption of
SFAS No. 159 which is more fully discussed in Note 12, "Fair Value Option,"
effective January 1, 2007, we utilize fair value option reporting for the same
fixed rate debt issuances under both U.S. GAAP and IFRSs.

INTANGIBLE ASSETS - Intangible assets under IFRSs are significantly lower than
those under U.S. GAAP as the newly created intangibles associated with our
acquisition by HSBC are reflected in goodwill for IFRSs therefore, amortization
of intangible assets is lower under IFRSs.

PURCHASE ACCOUNTING ADJUSTMENTS - There are differences in the valuation of
assets and liabilities under U.K. GAAP (which were carried forward into IFRSs)
and U.S. GAAP which result in a different amortization for the HSBC acquisition.
Additionally there are differences in the valuation of assets and liabilities
under IFRSs and U.S. GAAP resulting from the Metris acquisition in December
2005.

DEFERRED LOAN ORIGINATION COSTS AND PREMIUMS - Under IFRSs, loan origination
cost deferrals are more stringent and result in lower costs being deferred than
permitted under U.S. GAAP. In addition, all deferred loan origination fees,
costs and loan premiums must be recognized based on the expected life of the
receivables under IFRSs as part of the effective interest calculation while
under U.S. GAAP they may be amortized on either a contractual or expected life
basis.

CREDIT LOSS IMPAIRMENT PROVISIONING - IFRSs requires a discounted cash flow
methodology for estimating impairment on pools of homogeneous customer loans
which requires the incorporation of the time value of money relating to recovery
estimates. Also under IFRSs, future recoveries on charged-off loans are accrued
for on a discounted basis and interest is recorded based on collectibility.

LOANS HELD FOR RESALE - IFRSs requires loans held for resale to be treated as
trading assets and recorded at their fair market value. Under U.S. GAAP, loans
held for resale are designated as loans on the balance sheet and recorded at the
lower of amortized cost or market. Under U.S. GAAP, the income and expenses
related to loans held for sale are reported similarly to loans held for
investment. Under IFRSs, the income and expenses related to loans held for sale
are reported in other operating income.

INTEREST RECOGNITION - The calculation of effective interest rates under IFRS 39
requires an estimate of "all fees and points paid or recovered between parties
to the contract" that are an integral part of the effective interest rate be
included. In June 2006, we implemented a methodology for calculating the
effective interest rate for introductory rate credit card receivables under
IFRSs over the expected life of the product. In December 2006, we implemented a
methodology to include prepayment penalities as part of the effective interest
rate and recognized such penalties over the expected life of the receivables.
U.S. GAAP generally prohibits recognition of interest income to the extent the
net interest in the loan would increase to an amount greater than the amount at
which the borrower could settle the obligation. Also under U.S. GAAP, prepayment
penalties are generally recognized as received.

OTHER - There are other less significant differences between IFRSs and U.S. GAAP
relating to pension expense, changes in tax estimates and other miscellaneous
items.

HSBC Finance Corporation

--------------------------------------------------------------------------------

See "Basis of Reporting" in Item 7. Management's Discussion and Analysis of
Financial Condition and results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2006 for a more complete discussion of
differences between U.S. GAAP and IFRSs.

12. FAIR VALUE OPTION
--------------------------------------------------------------------------------

Effective January 1, 2007, we early adopted SFAS No. 159 which provides for a
fair value option election that allows companies to irrevocably elect fair value
as the initial and subsequent measurement attribute for certain financial assets
and liabilities, with changes in fair value recognized in earnings as they
occur. SFAS No. 159 permits the fair value option election ("FVO") on an
instrument by instrument basis at the initial recognition of an asset or
liability or upon an event that gives rise to a new basis of accounting for that
instrument. We elected FVO for certain issuances of our fixed rate debt in order
to align our accounting treatment with that of HSBC under IFRSs. Under IFRSs, an
entity can only elect FVO accounting for financial assets and liabilities that
meet certain eligibility criteria which are not present under SFAS No. 159. When
we elected FVO reporting for IFRSs, in addition to certain fixed rate debt
issuances which did not meet the eligibility criteria, there were also certain
fixed rate debt issuances for which only a portion of the issuance met the
eligibility criteria to qualify for FVO reporting. To align our U.S. GAAP and
IFRSs accounting treatment, we have adopted SFAS No. 159 only for the fixed rate
debt issuances which also qualify for FVO reporting under IFRSs.

The following table presents information about the eligible instruments for
which we elected FVO and for which a transition adjustment was recorded.

BALANCE SHEET BALANCE SHEET
JANUARY 1, JANUARY 1,
2007 2007
PRIOR TO ADOPTION NET GAIN (LOSS) AFTER ADOPTION
OF FVO UPON ADOPTION OF FVO
---------------------------------------------------------------------------------------------------
(IN MILLIONS)

Fixed rate debt designated at fair value..... $(30,088) $(855) $(30,943)
======== ----- ========
Pre-tax cumulative-effect of adoption of
FVO........................................ (855)
Increase in deferred tax asset............... 313
-----
After-tax cumulative-effect of adoption of
FVO adjustment to retained earnings........ $(542)
=====

Long term debt (with original maturities over one year) of $121.8 billion at
June 30, 2007, includes $32.1 billion of fixed rate debt accounted for under
FVO. We did not elect FVO for $35.8 billion of fixed rate debt currently carried
on our balance sheet within long term debt for the reasons discussed above.
Fixed rate debt accounted for under FVO at June 30, 2007 has an aggregate unpaid
principal balance of $32.4 billion.

The fair value of the fixed rate debt accounted for under FVO is determined by a
third party and includes the full market price (credit and interest rate impact)
based on observable market data. The adoption of FVO has not impacted how
interest expense is calculated and reported for the fixed rate debt instruments.
The adoption of FVO has however impacted the way we report realized gains and
losses on the swaps associated with this debt which previously qualified as
effective hedges under SFAS No. 133. Upon the adoption of SFAS No. 159 for
certain fixed rate debt, we eliminated hedge accounting on these swaps and, as a
result, realized gains and losses are no longer reported in interest expense but
instead are reported as "Gain (loss) on debt designated at fair value and
related derivatives" within other revenues.

During the three months ended June 30, 2007, we recorded a net gain from fair
value changes on our fixed rate debt accounted for under FVO of $509 million and
a net gain from fair value changes on our fixed rate debt accounted for under
FVO of $611 million during the six months ended June 30, 2007 which is included
in "Gain (loss) on debt designated at fair value and related derivatives" as a
component of other revenues in the consolidated statement of income. "Gain
(loss) on debt designated at fair value and related derivatives" in the
consolidated statement of income also includes the mark-to-market adjustment on
derivatives related to the debt designated at fair value as

HSBC Finance Corporation

--------------------------------------------------------------------------------

well as net realized gains or losses on these derivatives. The components of
"Gain (loss) on debt designated at fair value and related derivatives" are as
follows:

THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2007 2007
-----------------------------------------------------------------------------------------
(IN MILLIONS)

Interest rate component................................. $ 515 $ 373
Credit risk component................................... (6) 238
----- -----
Total mark-to-market on debt designated at fair value... 509 611
Mark-to-market on the related derivatives............... (557) (439)
Net realized gains (losses) on the related derivatives.. (82) (158)
----- -----
Gain (loss) on debt designated at fair value and related
derivatives........................................... $(130) $ 14
===== =====

The movement in the fair value reflected in "Gain (loss) on debt designated at
fair value and related derivatives" includes the effect of credit spread changes
and interest rate changes, including any ineffectiveness in the relationship
between the related swaps and our debt. As credit spreads narrow, accounting
losses are booked and the reverse is true if credit spreads widen. Differences
arise between the movement in the fair value of our debt and the fair value of
the related swap due to the different credit characteristics coupled with the
sensitivity of the floating leg of the swap due to changes in interest rates.
The size and direction of the accounting consequences of such changes can be
volatile from period to period but do not alter the cash flows intended as part
of the documented interest rate management strategy.

The changes in the interest rate component for both periods reflect an increase
in the LIBOR curve since December 31, 2006, although the increase in the LIBOR
curve since March 31, 2007 was much greater than the increase since December 31,
2006. Changes in the credit risk component of the debt were insignificant during
the three month period ended June 30, 2007. For the six month period, the
changes in credit risk were due to a general widening of financial sector fixed
income credit spreads in combination with specific spread widening attributable
to our participation in the subprime mortgage market.

13. FAIR VALUE MEASUREMENTS
--------------------------------------------------------------------------------

Effective January 1, 2007, we elected to early adopt FASB Statement No. 157,
"Fair Value Measurements," ("SFAS No. 157"). SFAS No. 157 establishes a single
authoritative definition of value, sets out a framework for measuring fair
value, and provides a hierarchal disclosure framework for assets and liabilities
measured at fair value. The adoption of SFAS No. 157 did not have any impact on
our financial position or results of operations.

HSBC Finance Corporation

--------------------------------------------------------------------------------

The following table presents information about our assets and liabilities
measured at fair value on a recurring basis as of June 30, 2007, and indicates
the fair value hierarchy of the valuation techniques utilized to determine such
fair value. In general, fair values determined by Level 1 inputs use quoted
prices (unadjusted) in active markets for identical assets or liabilities that
we have the ability to access. Fair values determined by Level 2 inputs use
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets where there are few
transactions and inputs other than quoted prices that are observable for the
asset or liability, such as interest rates and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs for the
asset or liability and include situations where there is little, if any, market
activity for the asset or liability.

ASSETS
(LIABILITIES) QUOTED PRICES IN
MEASURED AT ACTIVE MARKETS FOR SIGNIFICANT OTHER SIGNIFICANT
FAIR VALUE AT IDENTICAL ASSETS OBSERVABLE INPUTS UNOBSERVABLE INPUTS
JUNE 30, 2007 (LEVEL 1) (LEVEL 2) (LEVEL 3)
-------------------------------------------------------------------------------------------------------------
(IN MILLIONS)

Derivatives:
Risk management related,
net(1).................... $ 1,383 $ - $ 1,383 $-
Loan and forward sales
commitments............... -(3) - - -(3)
Available for sale securities.. 3,462 3,462 - -
Real estate owned(2)........... 1,057 - 1,057 -
Repossessed vehicles(2)........ 39 - 39 -
Long term debt carried at fair
value........................ 32,085 - 32,085 -

--------

()(1) The fair value disclosed excludes swap collateral that we either receive
or deposit with our interest rate swap counterparties. Such swap
collateral is recorded on our balance sheet at an amount which
"approximates fair value" as discussed in FASB Staff Position No. FIN 39-
1, "Amendment of FASB Interpretation No. 39" and is netted on the balance
sheet with the fair value amount recognized for derivative instruments.

()(2) The fair value disclosed is unadjusted for transaction costs as required
by SFAS No. 157. The amounts recorded in the consolidated balance sheet
are recorded net of transaction costs as required by FASB Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

()(3) Less than $500 thousand.

The balances of our commitments which utilize significant unobservable inputs
(Level 3) did not change significantly during the quarter.

The following table presents information about our assets measured at fair value
on a non-recurring basis as of June 30, 2007 and indicates the fair value
hierarchy of the valuation techniques utilized to determine such fair value, as
defined by SFAS No. 157.

Loans held for sale............ $256(1) $- $ - $256
Net investment in U.K.
Insurance Operations held for
sale......................... 231 - 231 -

--------

()(1) The fair value disclosed above excludes loans held for sale for which the
fair value exceeds our carrying value.

Loans held for sale are recorded at the lower of aggregate cost or fair value.
At June 30, 2007, loans held for sale with a carrying value of $338 million were
written down to their current fair value resulting in an impairment charge

HSBC Finance Corporation

--------------------------------------------------------------------------------

of $82 million. Fair value is generally determined by estimating a gross premium
or discount. The estimated gross premium or discount is derived from historical
prices received on prior sales and commitments in relation to the 2-year swap
rate, the weighted average coupon of the loans as well as market liquidity and
loan related credit characteristics. The historical pricing data is based upon
the specific asset classes of loans.

In accordance with the provisions of FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," our U.K. Insurance Operations with
a net carrying amount of $262 million, including the goodwill allocated to these
operations, were written down to their fair value of $231 million, resulting in
a loss of $31 million, which was included as a component of total costs and
expenses during the three months ended March 31, 2007. No additional adjustment
was determined to be necessary during the three months ended June 30, 2007.

Assets and liabilities which could also be measured at fair value on a non-
recurring basis include goodwill and intangible assets.

14. NEW ACCOUNTING PRONOUNCEMENTS
--------------------------------------------------------------------------------

In April 2007, the FASB issued FASB Staff Position No. FIN 39-1, "Amendment of
FASB Interpretation No. 39" ("FSP 39-1"). FSP 39-1 allows entities that are
party to a master netting arrangement to offset the receivable or payable
recognized upon payment or receipt of cash collateral against fair value amounts
recognized for derivative instruments that have been offset under the same
master netting arrangement in accordance with FASB Interpretation No. 39. The
guidance in FSP 39-1 is effective for fiscal years beginning after November 15,
2007, with early adoption permitted. Entities are required to recognize the
effects of applying FSP 39-1 as a change in accounting principle through
retroactive application for all financial statements presented unless it is
impracticable to do so. We adopted FSP 39-1 during the second quarter of 2007
and retroactively applied its requirements to all prior periods as required by
FSP 39-1. At June 30, 2007 and December 31, 2006, the fair value of derivatives
included in derivative financial assets have been reduced by $1,109 million and
$1,164 million, respectively, representing the payable recognized upon receipt
of cash collateral for derivative instruments that have been offset under the
same master netting arrangement in accordance with FSP 39-1. At June 30, 2007
and December 31, 2006, the fair value of derivatives included in derivative
financial liabilities have been reduced by $57 million and $53 million,
respectively, representing the receivable recognized upon payment of cash
collateral for derivative instruments that have been offset under the same
master netting arrangement in accordance with FSP 39-1. The adoption of FSP 39-1
had no impact on our results of operations or our cash flows.

HSBC Finance Corporation

--------------------------------------------------------------------------------

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------

FORWARD-LOOKING STATEMENTS
--------------------------------------------------------------------------------

Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report and
with our Annual Report on Form 10-K for the year ended December 31, 2006 (the
"2006 Form 10-K"). MD&A may contain certain statements that may be forward-
looking in nature within the meaning of the Private Securities Litigation Reform
Act of 1995. In addition, we may make or approve certain statements in future
filings with the SEC, in press releases, or oral or written presentations by
representatives of HSBC Finance Corporation that are not statements of
historical fact and may also constitute forward-looking statements. Words such
as "may", "will", "should", "would", "could", "intend", "believe", "expect",
"estimate", "target", "plan", "anticipates", "goal" and similar expressions are
intended to identify forward-looking statements but should not be considered as
the only means through which these statements may be made. These matters or
statements will relate to our future financial condition, results of operations,
plans, objectives, performance or business developments and will involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from that which
was expressed or implied by such forward-looking statements. Forward-looking
statements are based on our current views and assumptions and speak only as of
the date they are made. HSBC Finance Corporation undertakes no obligation to
update any forward-looking statement to reflect subsequent circumstances or
events.

EXECUTIVE OVERVIEW
--------------------------------------------------------------------------------

HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC Holdings
plc ("HSBC"). HSBC Finance Corporation may also be referred to in the MD&A as
"we", "us", or "our".

Pre-tax income was $76 million for the three months ended June 30, 2007, a
decrease of 91 percent, compared to $873 million for the three months ended
March 31, 2007. The primary drivers of this decrease are summarized below:

-----------------------------------------------------------------------------------
(IN MILLIONS)

Pre-tax income - March 31, 2007..................................... $ 873
Higher provision for credit losses.................................. (247)
Lower gain (loss) on debt designated at fair value and related
derivatives....................................................... (274)
Lower taxpayer financial services revenue........................... (235)
Higher Decision One losses on loans held for sale................... (67)
Other, net.......................................................... 26
-----
Pre-tax income - June 30, 2007...................................... $ 76
=====

The increase in our provision for credit losses in the second quarter of 2007
compared to the first quarter of 2007 was largely driven by our Credit Card
Services and Consumer Lending businesses due to receivables growth, higher
delinquency levels due to growth, seasonality as customers used their tax
refunds in the first quarter to reduce their outstanding balances, and normal
portfolio seasoning as well as higher loss estimates for restructured loans in
our United Kingdom business. The increase was partially offset by a lower
provision for credit losses in our United Kingdom business due to lower
receivable levels and lower delinquency and charge-offs. Also, the first quarter
credit loss provision for our United Kingdom business reflected a refinement in
the methodology to calculate roll rate percentages which led to an increase in
the provision for credit losses. The lower gain (loss) on debt designated at
fair value and related derivatives in the second quarter reflects a
significantly lower mark-to-market adjustment related to credit risk on fair
value option debt as the first quarter benefited from a general widening of
credit spreads, including an adverse impact from the subprime mortgage markets.
Taxpaper financial services revenue was significantly lower in the second
quarter due to the seasonal nature of this business which generates most of its

HSBC Finance Corporation

--------------------------------------------------------------------------------

revenues through March. Losses on loans held for sale by our Decision One
mortgage operations were also much higher in the second quarter reflecting a
deterioration of general market conditions in the quarter.

Net income was $63 million for the three months ended June 30, 2007, a decrease
of 89 percent, compared to $568 million in the prior year quarter. Net income
was $604 million for the six months ended June 30, 2007, a decrease of 59
percent, compared to $1,456 million in the prior year period. The decrease in
net income in both periods is largely due to a higher provision for credit
losses and the impact of lower receivable growth driven largely by our planned
reduction in real estate secured receivables at our Mortgage Services business
as more fully discussed below. The prior year credit loss provision benefited
from exceptionally low levels of personal bankruptcy filings in the United
States as a result of the new bankruptcy law which took effect in October 2005,
the impact of significant receivable growth in 2004 and 2005 which had not yet
fully seasoned and an overall favorable credit environment in the United States
which affects the comparability of the provision for credit losses between
periods. Higher costs and expenses to support growth as well as increased
collection activities and for the three months ended June 30, 2007, lower other
revenues also contributed to the decrease in net income, partially offset by
higher net interest income and in the year-to-date period, higher other
revenues. When compared to the year-ago periods, the increase in provision for
credit losses in 2007 reflects higher loss estimates in our Credit Card Services
business due to higher levels of receivables, higher levels of delinquency
driven by growth and normal portfolio seasoning, increased levels of personal
bankruptcy filings as discussed above, the progression of portions of our
Mortgage Services portfolio purchased in 2005 and 2006 into various stages of
delinquency and charge-off and, for the three month period, higher loss
estimates on restructured loans in our United Kingdom business of $68 million.
Provision for credit losses also increased during the year-to-date period due to
higher loss estimates at our United Kingdom business due to a refinement in the
methodology used to calculate roll rate percentages which we believe results in
a better estimate of probable losses currently inherent in the loan portfolio
and higher loss estimates in second lien loans purchased in 2004 through the
third quarter of 2006 by our Consumer Lending business as part of a second lien
bulk acquisition program which has subsequently been discontinued. At June 30,
2007, the outstanding principal balance of these second lien loans acquired by
the Consumer Lending business was approximately $1.3 billion.

As previously discussed, we are experiencing higher delinquency and loss
estimates at our Mortgage Services business as compared to the year-ago periods.
Reserve levels at our Mortgage Services business were as follows:

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- --------------
2007 2006 2007 2006
-------------------------------------------------------------------------------------
(IN MILLIONS)

Credit loss reserves at beginning of period......... $2,140 $ 426 $2,085 $ 421
Provision for credit losses......................... 387 247 741 337
Charge-offs......................................... (386) (119) (696) (209)
Recoveries.......................................... 27 5 38 8
Release of credit loss reserves related to loan
sales............................................. (21) - (21) -
Other, net.......................................... - (2) - -
------ ----- ------ -----
Credit loss reserves at end of period............... $2,147 $ 557 $2,147 $ 557
====== ===== ====== =====

Credit loss reserve levels at Mortgage Services remained relatively flat at June
30, 2007 compared with March 31, 2007 and December 31, 2006 as a significant
portion of rate resets on first lien adjustable rate mortgage loans, including
second lien loans that are subordinate to underlying first lien adjustable rate
mortgages, has yet to occur and we remain cautious about losses inherent in this
portfolio due to economic factors beyond our control. The provision for credit
losses reflects our best estimate of losses which have been incurred in the
periods presented above. See "Credit Quality" included in this MD&A for further
discussion on charge-off trends experienced by our Mortgage Services business in
2007.

HSBC Finance Corporation

--------------------------------------------------------------------------------

The increase in net interest income during both periods was due to growth in
average receivables and an improvement in the overall yield on the portfolio,
partly offset by a higher cost of funds. Changes in receivable mix also
contributed to the increase in yield due to the impact of increased levels of
higher yielding products due in part to lower securitization levels, and higher
levels of average credit card and personal non-credit card receivables as
compared to the year-ago periods. Overall yield improvements were partially
offset by the impact of growth in non-performing loans. Other revenues decreased
in the three month period reflecting lower derivative income, the impact of
adopting FASB Statement No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities," ("SFAS No. 159") and lower other income due to realized
losses incurred on sales of real estate secured receivables by our Decision One
mortgage operations and the sale of a $2.2 billion Mortgage Services loan
portfolio, partially offset by higher fee income as a result of higher volume in
our credit card portfolios. Other revenues increased during the six month period
as lower derivative income and lower other income as explained above were more
than offset by higher fee income and the positive impact to revenue from SFAS
No. 159 due to the widening credit spreads experienced in the first quarter of
2007 which stabilized in the second quarter. Based on the change in the fair
value of the underlying fair value optioned debt related to credit risk, lower
derivative income was due to changes in the interest rate curve and to the
adoption of SFAS No. 159. Rising interest rates caused the net outgoing payments
on pay variable/received fix economic hedges to increase as compared with the
same periods in 2006. Additionally, as a result of the adoption of SFAS No. 159,
we eliminated hedge accounting for all fixed rate debt designated at fair value.
The fair value change in the associated swaps, which accounted for the majority
of the derivative income in 2006, is now reported as "Gain (loss) on debt
designated at fair value and related derivatives" in the consolidated statement
of income along with the mark-to-market on the fixed rate debt.

Our return on average owned assets ("ROA") was .14 percent for the quarter ended
June 30, 2007 and .68 percent for the six months ended June 30, 2007 compared to
1.36 percent for the three months ended June 30, 2006 and 1.76 percent for the
six months ended June 30, 2006. ROA decreased during these periods as a result
of the lower net income during the period, as discussed above, and higher
average assets.

We continue to monitor the impact of several trends affecting the mortgage
lending industry. Real estate markets in a large portion of the United States
have been affected by a general slowing in the rate of appreciation in property
values, or an actual decline in some markets, while the period of time available
properties remain on the market has increased. Additionally, the ability of some
borrowers to repay their adjustable rate mortgage ("ARM") loans have been
impacted as the interest rates on their loans increase as rates adjust under
their contracts. Interest rate adjustments on first mortgages may also have a
direct impact on a borrower's ability to repay any underlying second lien
mortgage loan on a property. Similarly, as interest-only mortgage loans leave
the interest-only payment period, the ability of borrowers to make the increased
payments may be impacted. The rating agencies have recently announced their
intention to downgrade a number of debt issuances secured by subprime mortgages.
This could serve to further lessen liquidity in the marketplace for subprime
mortgages, cause further tightening of lending standards, and cause higher
mortgage rates which would further reduce the refinancing opportunities of our
ARM customers and increase expected defaults. Industry statistics and reports
indicate that mortgage loan originations throughout the industry from 2005 and
2006 are performing worse than originations from prior periods.

In 2005 and continuing into the first six months of 2006, second lien mortgage
loans in our Mortgage Services business increased significantly as a percentage
of total loans acquired when compared to prior periods. During the second
quarter of 2006, we began to witness deterioration in the performance of
mortgage loans acquired in 2005 by our Mortgage Services business, particularly
in the second lien and portions of the first lien portfolios. The deterioration
continued in the third quarter and fourth quarters of 2006 and began to affect
these same components of loans acquired in 2006 by this business. In the fourth
quarter of 2006 deterioration of these components worsened considerably, largely
related to the first lien adjustable rate mortgage portfolio, as well as loans
in the second lien portfolios. We are continuing to experience higher than
normal delinquency levels in the first half of 2007 in these portions of the
Mortgage Services business although the rate of increase in delinquency in 2007
has slowed from the rate of increase in the prior year. A significant number of
our second lien customers have underlying adjustable rate first mortgages that
face repricing in the near-term which has impacted the probability of repayment
on the related second lien mortgage loan. As the interest rate adjustments will
occur in an environment of substantially higher interest rates, lower home value
appreciation and tightening credit, we expect the probability of default for

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adjustable rate first mortgages subject to repricing as well as any second lien
mortgage loans that are subordinate to an adjustable rate first lien held by
another lender will be greater than what we have historically experienced.

Accordingly, while overall credit performance, as measured by delinquency and
charge-off is generally performing as expected across other parts of our
domestic mortgage portfolio, we are continuing to report higher delinquency and
losses in the Mortgage Services business, largely as a result of the affected
2005 and 2006 originations progressing to various stages of delinquency and to
charge-off. Numerous risk mitigation efforts have been implemented relating to
the affected components of the Mortgage Services portfolio. These include
enhanced segmentation and analytics to identify the higher risk portions of the
portfolio and increased collections capacity. As appropriate and in accordance
with defined policies, we will restructure and/or modify loans if we believe the
customer has the ability to pay for the foreseeable future under the
restructured/modified terms. We are also contacting customers who have
adjustable rate mortgage loans nearing the first reset that we expect will be
the most impacted by a rate adjustment in order to assess their ability to make
the adjusted payment and, as appropriate, modify the loans. In the second half
of 2006, we slowed growth in this portion of the portfolio by implementing
repricing initiatives in selected origination segments and tightening
underwriting criteria, especially for second lien, stated income and lower
credit scoring segments. In March 2007, we announced our decision to discontinue
new correspondent channel acquisitions by our Mortgage Services business subject
to fulfilling earlier commitments, which were immaterial. Our Decision One
mortgage operation, which originates loans sourced by brokers primarily for
resale, continues to originate mortgage loans, largely for resale to HSBC Bank
USA to support the secondary market activities of our affiliates. Our branch-
based Consumer Lending business retail channel will continue with its current
operating strategy. These actions, combined with normal portfolio attrition will
continue to result in significant reductions in the principal balance of our
Mortgage Services loan portfolio during 2007. As part of our effort to reduce
exposure in this channel, during the second quarter of 2007 we sold $2.2 billion
of real estate secured loans from the Mortgage Services loan portfolio, which
did not include any loans that were 30 days or more contractually delinquent. We
expect portions of the Mortgage Services portfolio to remain under pressure as
the 2005 and 2006 originations season further progressing to various stages of
delinquency and ultimately to charge-off.

Effective January 1, 2007, we early adopted SFAS No. 159 which provides for a
fair value option election that allows companies to irrevocably elect fair value
as the initial and subsequent measurement attribute for certain assets and
liabilities, with changes in fair value recognized in earnings when they occur.
SFAS No. 159 permits the fair value option election ("FVO") on an instrument by
instrument basis at the initial recognition of an asset or liability or upon an
event that gives rise to a new basis of accounting for that instrument. We
elected FVO for certain issuances of our fixed rate debt in order to align our
accounting treatment with that of HSBC under International Financial Reporting
Standards ("IFRSs"). The adoption of SFAS No. 159 resulted in a $542 million
cumulative-effect after-tax reduction to the January 1, 2007 opening balance
sheet. In addition, the impact of the adoption of SFAS No. 159 on 2007 revenue
based on the change in the credit risk component of fair value optioned debt was
($6) million in the three months ended June 30, 2007 and $238 million in the
year-to-date period.

As part of our continuing evaluation of strategic alternatives with respect to
our U.K. operations, we have entered into a non-binding agreement to sell the
capital stock of our U.K. insurance operations ("U.K. Insurance Operations") to
a third party for cash. The sales price will be determined, in part, based on
the actual net book value of the assets sold at the time the sale is closed
which is anticipated in the second half of 2007. The agreement also provides for
the purchaser to distribute insurance products through our U.K. branch network
for which we will receive commission revenue. The sale is subject to the
execution of a definitive agreement and any regulatory approvals that may be
required. At June 30, 2007, we have classified the U.K. Insurance Operations as
"Held for Sale" and combined assets of $464 million and liabilities of $233
million related to the U.K. Insurance Operations separately in our consolidated
balance sheet within other assets and other liabilities. Because our carrying
value for the U.K. Insurance Operations, including allocated goodwill, was more
than the estimated sales price, we recorded an adjustment of $31 million to
total costs and expenses during the three months ended March 31, 2007 to record
our investment in these operations at the lower of cost or market value. No
additional adjustment was determined to be necessary during the three months
ended June 30, 2007. We continue to evaluate the scope of our other U.K.
operations.

HSBC Finance Corporation

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We are currently considering the possibility of transferring our General Motors
MasterCard and Visa portfolio (the "GM Portfolio") to HSBC Bank USA in the
future based upon continuing evaluation of capital and liquidity at each entity
and obtaining the necessary regulatory approval. We would, however, maintain the
customer account relationships and, subsequent to the initial receivable sale,
additional volume would be sold to HSBC Bank USA on a daily basis. At June 30,
2007, the GM Portfolio had an outstanding receivable balance of approximately
$6.9 billion.

In 2007, we began a strategic review of our Taxpayer Financial Services ("TFS")
business to ensure that we offer only the most value-added tax products. As a
result, in March 2007 we announced that beginning with the 2008 tax season we
will discontinue pre-season and pre-file products. The discontinuation of these
specific tax products will not have a material effect on our consolidated
results of operations. The strategic review of our TFS business remains on-
going.

On June 29, 2007, the Federal Financial Regulatory Agencies (the "Agencies")
issued a final statement on subprime mortgage lending which reiterates many of
the principles addressed in the existing guidance relating to risk management
practices and consumer protection laws involving adjustable rate mortgage
products and the underwriting process on stated income and interest-only loans.
While we believe a significant portion of our business is already substantially
in compliance with this final statement, we are currently assessing the full
impact of this statement on our operations. We anticipate being fully compliant
with these new guidelines by December 31, 2007.

The financial information set forth below summarizes selected financial
highlights of HSBC Finance Corporation as of June 30, 2007 and 2006 and for the
three and six month periods ended June 30, 2007 and 2006.

Net income......................................... $ 63 $ 568 $ 604 $1,456
Return on average owned assets..................... .14% 1.36% .68% 1.76%
Return on average common shareholder's equity
("ROE").......................................... 1.13 11.19 6.14 14.62
Net interest margin................................ 6.54 6.66 6.47 6.68
Consumer net charge-off ratio, annualized.......... 3.96 2.88 3.82 2.73
Efficiency ratio(1)................................ 43.51 40.70 40.62 40.28

AS OF JUNE 30, 2007 2006
----------------------------------------------------------------------------------
(DOLLARS ARE IN
MILLIONS)

Receivables.................................................. $157,805 $153,959
Two-month-and-over contractual delinquency ratios............ 5.09% 3.71%

--------

()(1) Ratio of total costs and expenses less policyholders' benefits to net
interest income and other revenues less policyholders' benefits.

Receivables were $157.8 billion at June 30, 2007, $160.1 billion at March 31,
2007 and $154.0 billion at June 30, 2006. While real estate secured receivables
have been a primary driver of growth in recent years, in the first half of 2007
real estate secured growth in our Consumer Lending business was more than offset
by lower receivable balances in our Mortgage Services business resulting from
the decision in the second quarter of 2006 to reduce purchases of second lien
and selected higher risk products in our Mortgage Services business and the
decision in March 2007 to discontinue new correspondent channel acquisitions by
our Mortgage Services business subject to fulfilling earlier commitments, which
were immaterial, as discussed above. Additionally, in the second quarter of
2007, we sold $2.2 billion of real estate secured loans from our Mortgage
Services portfolio. These decisions will continue to result in a significant
reduction in the receivable balance in the Mortgage Services portfolio on an on-
going basis. Compared to March 31, 2007, receivable levels primarily reflect
attrition in our Mortgage Services portfolio as discussed above, partially
offset by growth in our Consumer Lending and Credit Card businesses. Compared to
June 30, 2006, with the exception of real estate secured receivables due to the
lower receivable balances at our Mortgage Services business, we experienced
growth in all of our receivable products.

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Our two-months-and-over contractual delinquency ratio increased compared to both
the prior year quarter and prior quarter. Compared to both periods, with the
exception of our private label portfolio, all products reported higher
delinquency levels due to higher receivable levels and normal seasonal trends,
including higher real estate secured delinquency primarily at our Mortgage
Services business as discussed above. The two-months-and-over contractual
delinquency ratio was also negatively impacted by lower real estate secured
receivables growth driven largely by our strategy to discontinue new
correspondent channel acquisitions by our Mortgage Services business subject to
fulfilling earlier commitments, which were immaterial, which significantly
reduced the outstanding principal balance of the Mortgage Services loan
portfolio.

Net charge-offs as a percentage of average consumer receivables for the quarter
increased compared to both the prior year quarter and prior quarter. Compared to
the prior year quarter, net charge-offs as a percent, annualized, of average
consumer receivables increased primarily due to higher charge-offs in our real
estate secured portfolio in our Mortgage Services business, the impact of lower
receivable levels driven by our planned reduction in correspondent purchases, as
well as higher charge-offs in our credit card portfolio. The increase in charge-
offs in the credit card portfolio is due to increased levels of personal
bankruptcy filings as compared to the exceptionally low levels experienced in
the first quarter of 2006 following enactment of the new bankruptcy law in the
United States and higher receivable balances. Compared to the prior quarter,
increases in net charge-offs as a percentage of average consumer receivables for
our real estate secured and personal non-credit card portfolios were partially
offset by lower ratios in our other products.

Our efficiency ratio deteriorated as compared to the prior year quarter and the
year-ago period. Excluding the change in fair value on the fixed rate debt
related to credit risk resulting from the adoption of SFAS No. 159, the
efficiency ratio deteriorated 274 basis points as compared to the prior year
quarter and 163 basis points as compared to the year-ago period. The
deterioration was a result of higher costs and expenses to support receivable
growth and increased collection activities as well as realized losses on real
estate secured receivable sales, partially offset by higher net interest income
and higher fee income due to higher levels of receivables.

During the first half of 2007, we supplemented funding through unsecured debt
issuances with proceeds from the continuing sale of newly originated domestic
private label receivables to HSBC Bank USA and higher levels of commercial
paper.

BASIS OF REPORTING
--------------------------------------------------------------------------------

Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP"). Unless noted,
the discussion of our financial condition and results of operations included in
MD&A are presented on a U.S. GAAP basis of reporting. Certain reclassifications
have been made to prior year amounts to conform to the current year
presentation.

EQUITY RATIOS Tangible shareholder's equity to tangible managed assets
("TETMA"), tangible shareholder's equity plus owned loss reserves to tangible
managed assets ("TETMA + Owned Reserves") and tangible common equity to tangible
managed assets are non-U.S. GAAP financial measures that are used by HSBC
Finance Corporation management and certain rating agencies to evaluate capital
adequacy. These ratios exclude the equity impact of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the equity impact of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
and the impact of the adoption of SFAS No. 159 including the subsequent changes
in fair value recognized in earnings associated with credit risk on debt for
which we elected the fair value option. Preferred securities issued by certain
non-consolidated trusts are also considered equity in the TETMA and TETMA +
Owned Reserves calculations because of their long-term subordinated nature and
our ability to defer dividends. Managed assets include owned assets plus loans
which we have sold and service with limited recourse. We and certain rating
agencies also monitor our equity ratios excluding the impact of the HSBC
acquisition purchase accounting adjustments. We do so because we believe that
the HSBC acquisition purchase accounting adjustments represent non-cash
transactions which do not affect our business operations, cash flows or ability
to meet our debt obligations. These ratios may differ from similarly named
measures presented by other companies. The most directly comparable U.S. GAAP
financial measure is the common and preferred equity to owned assets ratio. For
a quantitative reconciliation of these non-U.S. GAAP

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financial measures to our common and preferred equity to owned assets ratio, see
"Reconciliations to U.S. GAAP Financial Measures."

INTERNATIONAL FINANCIAL REPORTING STANDARDS Because HSBC reports results in
accordance with IFRSs and IFRSs results are used in measuring and rewarding
performance of employees, our management also separately monitors net income
under IFRSs (a non-U.S. GAAP financial measure). The following table reconciles
our net income on a U.S. GAAP basis to net income on an IFRSs basis:

THREE
MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------- -------------
2007 2006 2007 2006
------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)

Net income - U.S. GAAP basis........................... $ 63 $568 $604 $1,456
Adjustments, net of tax:
Securitizations...................................... 9 13 8 34
Derivatives and hedge accounting (including fair
value adjustments)................................ 18 (19) 1 (90)
Intangible assets.................................... 25 26 51 62
Purchase accounting adjustments...................... 12 (19) 21 13
Loan origination..................................... (19) (1) (15) (21)
Loan impairment...................................... (20) 10 (27) 19
Loans held for resale................................ 7 18 (22) 18
Interest recognition................................. 13 101 26 101
Lower of cost or market adjustment for U.K.
Insurance Operations............................ - - (6) -
Other................................................ 27 18 45 53
---- ---- ---- ------
Net income - IFRSs basis............................... $135 $715 $686 $1,645
==== ==== ==== ======

Significant differences between U.S. GAAP and IFRSs are as follows:

SECURITIZATIONS

IFRSs
- The recognition of securitized assets is governed by a three-step
process, which may be applied to the whole asset, or a part of an asset:
- If the rights to the cash flows arising from securitized assets have
been transferred to a third party and all the risks and rewards of the
assets have been transferred, the assets concerned are derecognized.
- If the rights to the cash flows are retained by HSBC but there is a
contractual obligation to pay them to another party, the securitized
assets concerned are derecognized if certain conditions are met such
as, for example, when there is no obligation to pay amounts to the
eventual recipient unless an equivalent amount is collected from the
original asset.
- If some significant risks and rewards of ownership have been
transferred, but some have also been retained, it must be determined
whether or not control has been retained. If control has been retained,
HSBC continues to recognize the asset to the extent of its continuing
involvement; if not, the asset is derecognized.
- The impact from securitizations resulting in higher net income under
IFRSs is due to the recognition of income on securitized receivables
under U.S. GAAP in prior periods.

U.S. GAAP
- SFAS 140 "Accounting for Transfers and Servicing of Finance Assets and
Extinguishments of Liabilities" requires that receivables that are sold
to a special purpose entity ("SPE") and securitized can only be
derecognized and a gain or loss on sale recognized if the originator has
surrendered control over the securitized assets.

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- Control is surrendered over transferred assets if, and only if, all of
the following conditions are met:
- The transferred assets are put presumptively beyond the reach of the
transferor and its creditors, even in bankruptcy or other receivership.
- Each holder of interests in the transferee (i.e. holder of issued
notes) has the right to pledge or exchange their beneficial interests,
and no condition constrains this right and provides more than a trivial
benefit to the transferor.
- The transferor does not maintain effective control over the assets
through either an agreement that obligates the transferor to repurchase
or to redeem them before their maturity or through the ability to
unilaterally cause the holder to return specific assets, other than
through a clean-up call.
- If these conditions are not met the securitized assets should continue to
be consolidated.
- When HSBC retains an interest in the securitized assets, such as a
servicing right or the right to residual cash flows from the SPE, HSBC
recognizes this interest at fair value on sale of the assets to the SPE.

DERIVATIVES AND HEDGE ACCOUNTING

IFRSs
- Derivatives are recognized initially, and are subsequently remeasured, at
fair value. Fair values of exchange-traded derivatives are obtained from
quoted market prices. Fair values of over-the-counter ("OTC") derivatives
are obtained using valuation techniques, including discounted cash flow
models and option pricing models.
- In the normal course of business, the fair value of a derivative on
initial recognition is considered to be the transaction price (that is
the fair value of the consideration given or received). However, in
certain circumstances the fair value of an instrument will be evidenced
by comparison with other observable current market transactions in the
same instrument (without modification or repackaging) or will be based on
a valuation technique whose variables include only data from observable
markets, including interest rate yield curves, option volatilities and
currency rates. When such evidence exists, HSBC recognizes a trading gain
or loss on inception of the derivative. When unobservable market data
have a significant impact on the valuation of derivatives, the entire
initial change in fair value indicated by the valuation model is not
recognized immediately in the income statement but is recognized over the
life of the transaction on an appropriate basis or recognized in the
income statement when the inputs become observable, or when the
transaction matures or is closed out.
- Derivatives may be embedded in other financial instruments; for example,
a convertible bond has an embedded conversion option. An embedded
derivative is treated as a separate derivative when its economic
characteristics and risks are not clearly and closely related to those of
the host contract, its terms are the same as those of a stand-alone
derivative, and the combined contract is not held for trading or
designated at fair value. These embedded derivatives are measured at fair
value with changes in fair value recognized in the income statement.
- Derivatives are classified as assets when their fair value is positive,
or as liabilities when their fair value is negative. Derivative assets
and liabilities arising from different transactions are only netted if
the transactions are with the same counterparty, a legal right of offset
exists, and the cash flows are intended to be settled on a net basis.
- The method of recognizing the resulting fair value gains or losses
depends on whether the derivative is held for trading, or is designated
as a hedging instrument and, if so, the nature of the risk being hedged.
All gains and losses from changes in the fair value of derivatives held
for trading are recognized in the income statement. When derivatives are
designated as hedges, HSBC classifies them as either: (i) hedges of the
change in fair value of recognized assets or liabilities or firm
commitments ("fair value hedge"); (ii) hedges of the variability in
highly probable future cash flows attributable to a recognized asset or
liability, or a forecast transaction ("cash flow hedge"); or (iii) hedges
of net investments in a foreign operation ("net investment hedge"). Hedge
accounting is applied to derivatives designated as hedging instruments in
a fair value, cash flow or net investment hedge provided certain criteria
are met.

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Hedge Accounting:
- It is HSBC's policy to document, at the inception of a hedge, the
relationship between the hedging instruments and hedged items, as well
as the risk management objective and strategy for undertaking the
hedge. The policy also requires documentation of the assessment, both
at hedge inception and on an ongoing basis, of whether the derivatives
used in the hedging transactions are highly effective in offsetting
changes in fair values or cash flows of hedged items attributable to
the hedged risks.

Fair value hedge:
- Changes in the fair value of derivatives that are designated and
qualify as fair value hedging instruments are recorded in the income
statement, together with changes in the fair values of the assets or
liabilities or groups thereof that are attributable to the hedged
risks.
- If the hedging relationship no longer meets the criteria for hedge
accounting, the cumulative adjustment to the carrying amount of a
hedged item is amortized to the income statement based on a
recalculated effective interest rate over the residual period to
maturity, unless the hedged item has been derecognized whereby it is
released to the income statement immediately.

Cash flow hedge:
- The effective portion of changes in the fair value of derivatives that
are designated and qualify as cash flow hedges are recognized in
equity. Any gain or loss relating to an ineffective portion is
recognized immediately in the income statement.
- Amounts accumulated in equity are recycled to the income statement in
the periods in which the hedged item will affect the income statement.
However, when the forecast transaction that is hedged results in the
recognition of a non-financial asset or a non-financial liability, the
gains and losses previously deferred in equity are transferred from
equity and included in the initial measurement of the cost of the asset
or liability.
- When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss
existing in equity at that time remains in equity until the forecast
transaction is ultimately recognized in the income statement. When a
forecast transaction is no longer expected to occur, the cumulative
gain or loss that was reported in equity is immediately transferred to
the income statement.

Net investment hedge:
- Hedges of net investments in foreign operations are accounted for in a
similar manner to cash flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is recognized
in equity; the gain or loss relating to the ineffective portion is
recognized immediately in the income statement. Gains and losses
accumulated in equity are included in the income statement on the
disposal of the foreign operation.

Hedge effectiveness testing:
- IAS 39 requires that at inception and throughout its life, each hedge
must be expected to be highly effective (prospective effectiveness) to
qualify for hedge accounting. Actual effectiveness (retrospective
effectiveness) must also be demonstrated on an ongoing basis.
- The documentation of each hedging relationship sets out how the
effectiveness of the hedge is assessed.
- For prospective effectiveness, the hedging instrument must be expected
to be highly effective in achieving offsetting changes in fair value or
cash flows attributable to the hedged risk during the period for which
the hedge is designated. For retrospective effectiveness, the changes
in fair value or cash flows must offset each other in the range of 80
per cent to 125 per cent for the hedge to be deemed effective.

Derivatives that do not qualify for hedge accounting:
- All gains and losses from changes in the fair value of any derivatives
that do not qualify for hedge accounting are recognized immediately in
the income statement.

HSBC Finance Corporation

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U.S. GAAP
- The accounting under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" is generally consistent with that under IAS 39,
which HSBC has followed in its IFRSs reporting from January 1, 2005, as
described above. However, specific assumptions regarding hedge
effectiveness under U.S. GAAP are not permitted by IAS 39.
- The requirements of SFAS No. 133 have been effective from January 1,
2001.
- The U.S. GAAP 'shortcut method' permits an assumption of zero
ineffectiveness in hedges of interest rate risk with an interest rate
swap provided specific criteria have been met. IAS 39 does not permit
such an assumption, requiring a measurement of actual ineffectiveness at
each designated effectiveness testing date. As of June 30, 2007, we do
not have any hedges accounted for under the shortcut method.
- In addition, IFRSs allows greater flexibility in the designation of the
hedged item. Under U.S. GAAP, all contractual cash flows must form part
of the designated relationship, whereas IAS 39 permits the designation of
identifiable benchmark interest cash flows only.
- Under U.S. GAAP, derivatives receivable and payable with the same
counterparty may be reported net on the balance sheet when there is an
executed ISDA Master Netting Arrangement covering enforceable
jurisdictions. These contracts do not meet the requirements for offset
under IAS 32 and hence are presented gross on the balance sheet under
IFRSs.
DESIGNATION OF FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT AND
LOSS

IFRSs
- Under IAS 39, a financial instrument, other than one held for trading, is
classified in this category if it meets the criteria set out below, and
is so designated by management. An entity may designate financial
instruments at fair value where the designation:
- eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring financial
assets or financial liabilities or recognizing the gains and losses on
them on different bases; or
- applies to a group of financial assets, financial liabilities or a
combination of both that is managed and its performance evaluated on a
fair value basis, in accordance with a documented risk management or
investment strategy, and where information about that group of
financial instruments is provided internally on that basis to
management; or
- relates to financial instruments containing one or more embedded
derivatives that significantly modify the cash flows resulting from
those financial instruments.
- Financial assets and financial liabilities so designated are recognized
initially at fair value, with transaction costs taken directly to the
income statement, and are subsequently remeasured at fair value. This
designation, once made, is irrevocable in respect of the financial
instruments to which it relates. Financial assets and financial
liabilities are recognized using trade date accounting.
- Gains and losses from changes in the fair value of such assets and
liabilities are recognized in the income statement as they arise,
together with related interest income and expense and dividends.

U.S. GAAP
- Prior to the adoption of SFAS No. 159, generally, for financial assets to
be measured at fair value with gains and losses recognized immediately in
the income statement, they were required to meet the definition of
trading securities in SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities". Financial liabilities were usually reported
at amortized cost under U.S. GAAP.
- SFAS No. 159 was issued in February 2007, which provides for a fair value
option election that allows companies to irrevocably elect fair value as
the initial and subsequent measurement attribute for certain financial
assets and liabilities, with changes in fair value recognized in earnings
as they occur. SFAS No. 159 permits the fair value option election on an
instrument by instrument basis at the initial recognition of an asset or
liability or upon an event that gives rise to a new basis of accounting
for that instrument. We adopted SFAS No. 159 retroactive to January 1,
2007.

HSBC Finance Corporation

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GOODWILL, PURCHASE ACCOUNTING AND INTANGIBLES

IFRSs
- Prior to 1998, goodwill under U.K. GAAP was written off against equity.
HSBC did not elect to reinstate this goodwill on its balance sheet upon
transition to IFRSs. From January 1, 1998 to December 31, 2003 goodwill
was capitalized and amortized over its useful life. The carrying amount
of goodwill existing at December 31, 2003 under U.K. GAAP was carried
forward under the transition rules of IFRS 1 from January 1, 2004,
subject to certain adjustments.
- IFRS 3 "Business Combinations" requires that goodwill should not be
amortized but should be tested for impairment at least annually at the
reporting unit level by applying a test based on recoverable amounts.
- Quoted securities issued as part of the purchase consideration are fair
valued for the purpose of determining the cost of acquisition at their
market price on the date the transaction is completed.

U.S. GAAP
- Up to June 30, 2001, goodwill acquired was capitalized and amortized over
its useful life which could not exceed 25 years. The amortization of
previously acquired goodwill ceased with effect from December 31, 2001.
- Quoted securities issued as part of the purchase consideration are fair
valued for the purpose of determining the cost of acquisition at their
average market price over a reasonable period before and after the date
on which the terms of the acquisition are agreed and announced.

LOAN ORIGINATION

IFRSs
- Certain loan fee income and incremental directly attributable loan
origination costs are amortized to the income statement over the life of
the loan as part of the effective interest calculation under IAS 39.

U.S. GAAP
- Certain loan fee income and direct but not necessarily incremental loan
origination costs, including an apportionment of overheads, are amortized
to the income statement account over the life of the loan as an
adjustment to interest income (SFAS No. 91 "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases".)

LOAN IMPAIRMENT

IFRSs
- Where statistical models, using historic loss rates adjusted for economic
conditions, provide evidence of impairment in portfolios of loans, their
values are written down to their net recoverable amount. The net
recoverable amount is the present value of the estimated future
recoveries discounted at the portfolio's original effective interest
rate. The calculations include a reasonable estimate of recoveries on
loans individually identified for write-off pursuant to HSBC's credit
guidelines.

U.S. GAAP
- Where the delinquency status of loans in a portfolio is such that there
is no realistic prospect of recovery, the loans are written off in full,
or to recoverable value where collateral exists. Delinquency depends on
the number of days payment is overdue. The delinquency status is applied
consistently across similar loan products in accordance with HSBC's
credit guidelines. When local regulators mandate the delinquency status
at which write-off must occur for different retail loan products and
these regulations reasonably reflect estimated recoveries on individual
loans, this basis of measuring loan impairment is reflected in U.S. GAAP
accounting. Cash recoveries relating to pools of such written-off loans,
if any, are reported as loan recoveries upon collection.

HSBC Finance Corporation

--------------------------------------------------------------------------------

LOANS HELD FOR RESALE

IFRSs
- Under IAS 39, loans held for resale are treated as trading assets.
- As trading assets, loans held for resale are initially recorded at fair
value, with changes in fair value being recognized in current period
earnings.
- Any gains realized on sales of such loans are recognized in current
period earnings on the trade date.

U.S. GAAP
- Under U.S. GAAP, loans held for resale are designated as loans on the
balance sheet.
- Such loans are recorded at the lower of amortized cost or market value
(LOCOM). Therefore, recorded value cannot exceed amortized cost.
- Subsequent gains on sales of such loans are recognized in current period
earnings on the settlement date.

INTEREST RECOGNITION

IFRSs
- The calculation and recognition of effective interest rates under IAS 39
requires an estimate of "all fees and points paid or received between
parties to the contract" that are an integral part of the effective
interest rate be included.

U.S. GAAP
- FAS 91 also generally requires all fees and costs associated with
originating a loan to be recognized as interest, but when the interest
rate increases during the term of the loan it prohibits the recognition
of interest income to the extent that the net investment in the loan
would increase to an amount greater than the amount at which the borrower
could settle the obligation.

During the second quarter of 2006, we implemented a methodology for calculating
the effective interest rate for introductory rate credit card receivables which
resulted in an increase to interest income under IFRSs of $154 million ($97
million after-tax). Of the amounts recognized, approximately $58 million (after-
tax) would otherwise have been recorded as an IFRSs opening balance sheet
adjustment as at January 1, 2005.

IFRS MANAGEMENT BASIS REPORTING Our segment results are presented on an IFRSs
management basis (a non-U.S. GAAP financial measure) ("IFRS Management Basis")
as operating results are monitored and reviewed, trends are evaluated and
decisions about allocating resources, such as employees, are made almost
exclusively on an IFRS Management Basis as we report results to our parent,
HSBC, who prepares its consolidated financial statements in accordance with
IFRSs. IFRS Management Basis results are IFRSs results adjusted to assume that
the private label and real estate secured receivables transferred to HSBC Bank
USA have not been sold and remain on our balance sheet. Operations are monitored
and trends are evaluated on an IFRS Management Basis because the customer loan
sales to HSBC Bank USA were conducted primarily to appropriately fund prime
customer loans within HSBC and such customer loans continue to be managed and
serviced by us without regard to ownership. However, we continue to monitor
capital adequacy, establish dividend policy and report to regulatory agencies on
a U.S. GAAP basis. A summary of the significant differences between U.S. GAAP
and IFRSs as they impact our results are summarized in Note 11, "Business
Segments."

This information is provided by RNS
The company news service from the London Stock Exchange

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Wednesday, 24th July 2024

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