HSBC FinCorp 05 Rslts 10K Pt3

HSBC Holdings PLC
06 March 2006

                                                        HSBC Finance Corporation
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SEGMENT RESULTS - MANAGED BASIS
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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 and Visa credit card business. Our
International segment consists of our foreign operations in the United Kingdom,
Canada, the Republic of Ireland Slovakia, the Czech Republic and Hungary. 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 2004 Form
10-K.

The accounting policies of the reportable segments are described in Note 2,
"Summary of Significant Accounting Policies," to the accompanying financial
statements. For segment reporting purposes, intersegment transactions have not
been eliminated. We generally account for transactions between segments as if
they were with third parties.

We have historically monitored our operations and evaluated trends on a managed
basis (a non-GAAP financial measure), which assumes that securitized receivables
have not been sold and are still on our balance sheet. This is because the
receivables that we securitize are subjected to underwriting standards
comparable to our owned portfolio, are serviced by operating personnel without
regard to ownership and result in a similar credit loss exposure for us. In
addition, we fund our operations and make decisions about allocating resources
such as capital on a managed basis.

When reporting on a managed basis, net interest income, provision for credit
losses and fee income related to receivables securitized are reclassified from
securitization related revenue in our owned statement of income into the
appropriate caption.

CONSUMER SEGMENT The following table summarizes the managed basis results for
our Consumer segment:

YEAR ENDED DECEMBER 31,                                         2005      2004      2003
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                                                                     (IN MILLIONS)
Net income..................................................  $  1,498   $ 1,563   $ 1,061
Operating net income........................................     1,498     1,247     1,061
Net interest income.........................................     6,887     7,699     7,333
Securitization related revenue..............................      (622)   (1,433)      337
Fee and other income, excluding gain on the bulk sale of the
  domestic private label receivable portfolio...............     1,194       638       664
Gain on bulk sale of private label receivable portfolio.....         -       683         -
Intersegment revenues.......................................       108       101       107
Provision for credit losses.................................     2,461     2,575     4,275
Total costs and expenses, excluding settlement charge and
  related expenses..........................................     2,638     2,528     2,358
Receivables.................................................   108,345    87,839    87,104
Assets......................................................   109,214    89,809    89,791
Net interest margin.........................................      7.09%     8.20%     8.59%
Return on average managed assets............................      1.53      1.64      1.22

Our Consumer Segment reported higher operating net income in 2005 and 2004.
Operating net income is a non-GAAP financial measure of net income which
excludes the gain on the bulk sale of the domestic private label portfolio
(excluding retail sales contracts at our consumer lending business) and the
impact of adoption of FFIEC charge-off policies for this domestic private label
portfolio in 2004. In 2005, the increase in operating net income was primarily
due to higher fee and other income, higher securitization related revenue and a
lower provision for credit losses, partially offset by lower net interest income
and higher costs and

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expenses. The increase in fee and other income is due to gains on the daily
sales of domestic private label receivable originations to HSBC Bank USA and
receipt of servicing revenue for servicing this portfolio, partially offset by
lower fee income related to the sold receivables. Securitization related revenue
was higher due to lower amortization of prior period gains as a result of
reduced securitization levels. Costs and expenses were higher due to higher
salary expense and higher support services from affiliates, partially offset by
lower REO expenses as well as a lower estimate of exposure relating to accrued
finance charges associated with certain loan restructures.

Net interest income and net interest margin decreased in 2005 primarily due to a
shift in mix to lower yielding real estate secured receivables resulting from
significantly lower levels of private label receivables resulting from the
private label portfolio sale in December 2004 as well as organic growth of real
estate secured receivables. Also contributing to the decrease were lower yields
on real estate secured and auto finance receivables as a result of competitive
pressure on pricing and product expansion into near-prime consumer segments, as
well as the run-off of higher yielding real estate secured receivables,
including second lien loans, largely due to refinance activity. Our auto finance
business experienced lower yields as we have targeted higher credit quality
customers. Although higher credit quality receivables generate lower yields,
such receivables are expected to result in lower operating costs, delinquency
ratios and charge-off. The decreases in yield for our consumer segment
receivable portfolio discussed above were partially offset by higher pricing on
our variable rate products. A higher cost of funds due to a rising interest rate
environment also contributed to the decrease in net interest income and margin.

Our managed basis provision for credit losses, which includes both provision for
owned basis receivables and over-the-life provision for receivables serviced
with limited recourse, decreased during 2005 due to lower net charge-off levels
as a result of improved credit quality and the impact of the sale of the
domestic private label receivable portfolio in December 2004, as well as lower
securitization levels. We have experienced lower dollars of net charge-offs in
our owned portfolio during 2005 due to the sale of $12.2 billion of owned
domestic private label receivables in December 2004 and as a result of improved
credit quality. These factors more than offset the increased provision
requirements associated with receivable growth, the impact from Katrina and the
new bankruptcy legislation in the United States which, as discussed more fully
below, have resulted in a decrease to our owned provision for credit losses.
Over-the-life provision for credit losses for securitized receivables recorded
in any given period reflects the level and product mix of securitizations in
that period. Subsequent charge-offs of securitized receivables result in a
decrease in the over-the-life reserves without any corresponding increase to
managed loss provision. In 2005, we increased managed loss reserves as net
charge-offs were less than the provision for credit losses by $57 million. For
2004, we decreased managed loss reserves as net charge-offs were greater than
the provision for credit losses by $1,229 million.

Our managed basis provision for credit losses also reflects an estimate of
incremental credit loss exposure relating to Katrina. The incremental provision
for credit losses for Katrina in the Consumer Segment in 2005 was $130 million
and represents our best estimate of Katrina's impact on our loan portfolio. As
additional information becomes available relating to the financial condition of
our affected customers, the physical condition of the collateral for loans which
are secured by real estate and the resultant impact on customer payment
patterns, we will continue to review our estimate of credit loss exposure
relating to Katrina and any adjustments will be reported in earnings when they
become known. In an effort to assist our customers affected by the disaster, we
initiated various programs including extended payment arrangements for up to 90
days or more depending upon customer circumstances. These interest and fee
waivers were not material to the Consumer Segment's 2005 results.

As previously discussed, the United States enacted new bankruptcy legislation
which resulted in a spike in bankruptcy filings prior to the October 2005
effective date. We had been maintaining credit loss reserves in anticipation of
the impact this new legislation would have on net charge-offs. However, the
magnitude of the spike in bankruptcies experienced immediately before the new
legislation became effective was larger than anticipated. Our fourth quarter
results include an increase of approximately $113 million in our owned provision
for credit losses due to the spike in bankruptcy filings prior to the effective
date. While the

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Consumer Segment experienced an increase in the bankruptcy filings related to
this new legislation, the associated accounts have not yet migrated to
charge-off in accordance with our charge-off policy for real estate secured and
personal non-credit card receivables. This provision expense included in our
fourth quarter results relating to bankruptcies in our secured and personal
non-credit card portfolios will not begin to migrate to charge-off until 2006.
As expected, the number of bankruptcy filings subsequent to the enactment of
this new legislation has decreased dramatically. We believe that a portion of
this increase is an acceleration of charge-offs that would have otherwise been
experienced in future periods.

Compared to net income in 2003, the increase in operating net income in 2004 was
due to increases in net interest income and decreases in provision for credit
losses which were partially offset by higher operating expenses and
substantially lower securitization related revenue. Net interest income
increased primarily due to higher receivable levels. Net interest margin,
however, decreased primarily due to faster growth in lower yielding real estate
secured lending, lower yields on real estate secured, auto finance and personal
non-credit card receivables as a result of competitive pressure on pricing, as
well as the run off of higher yielding real estate secured receivables,
including second lien loans largely due to refinance activity. Our auto finance
business experienced lower yields as we have targeted lower yielding but higher
credit quality customers. These decreases were partially offset by lower cost of
funds. Securitization related revenue decreased in 2004 as a result of a
significant decline in receivables securitized, including the impact of higher
run-off due to shorter expected lives as a result of our decision to structure
all new collateralized funding transactions as secured financings beginning in
the third quarter of 2004. Securitization levels were also lower in 2004 as we
used funding from HSBC, including proceeds from sales of receivables, to assist
in the funding of our operations. Operating expenses increased in 2004 as the
result of additional operating costs to support the increased receivable levels,
including higher salaries and sales incentives. In December 2004, we adopted
FFIEC charge-off policies for our domestic private label credit card portfolio
(excluding retail sales contracts at our consumer lending business) which
resulted in a reduction to net income of $120 million and subsequently sold the
portfolio to HSBC Bank USA. We recorded a pre-tax gain of $663 million on the
sale. See "Credit Quality" and Note 4, "Sale of Domestic Private Label
Receivable Portfolio and Adoption of FFIEC Policies," to the accompanying
consolidated financial statements for further discussion of the adoption of
FFIEC charge-off policies and the portfolio sale.

Managed receivables increased 23 percent to $108.3 billion at December 31, 2005
as compared to $87.8 billion at December 31, 2004. We experienced strong growth
in 2005 in our real estate secured portfolio in both our correspondent and
branch-based consumer lending businesses. We have continued to focus on junior
lien loans through portfolio acquisitions and have expanded our sources for
purchasing newly originated loans from flow correspondents. Real estate secured
receivable levels at December 31, 2005 do not include $1.5 billion of
correspondent receivables purchased directly by HSBC Bank USA, a portion of
which we otherwise would have purchased. Growth in real estate secured
receivables was also supplemented by purchases from a single correspondent
relationship which totaled $1.1 billion in 2005. Also contributing to the
increase were purchases of $1.7 billion in 2005 from a portfolio acquisition
program. Our auto finance portfolio also reported growth due to strong organic
growth, principally in the near-prime portfolios. This came from newly
originated loans acquired from our dealer network, growth in the consumer direct
loan program and expanded distribution through alliance channels. Personal
non-credit card receivables increased from the prior year as we began to
increase the availability of this product in the second half of 2004 as a result
of an improving U.S. economy as well as the success of several large direct mail
campaigns that occurred in 2005.

Managed receivables increased 1 percent to $87.8 billion at December 31, 2004
compared to $87.1 billion at December 31, 2003. The rate of increase in managed
receivables was impacted by the sale of $15.6 billion in domestic private label
receivables to HSBC Bank USA in December of 2004. Had this sale not taken place,
managed receivables would have increased by $16.3 billion or 19 percent in 2004.
We experienced strong growth in 2004 in our real estate secured receivables in
both our correspondent and branch-based consumer lending businesses, which was
partially offset by $2.8 billion of correspondent receivables purchased directly
by HSBC Bank USA, a portion of which we otherwise would have purchased. Growth
in our correspondent

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business was supplemented by purchases from a single correspondent relationship
which totaled $2.6 billion in 2004. We also experienced growth in auto finance
receivables though our dealer network and increased direct mail solicitations.
Personal non-credit card receivables also experienced growth in 2004 as we began
to increase availability of this product in the second half of the year as a
result of an improving economy. Prior to the sale of the domestic portfolio in
December 2004, our private label receivables increased due to organic growth
through existing merchants and a $.5 billion portfolio acquisition.

Return on average managed assets ("ROMA") was 1.53 percent in 2005, 1.64 percent
in 2004 and 1.22 percent in 2003. On an operating basis, ROMA was 1.53 percent
in 2005, 1.32 percent in 2004 and 1.22 percent in 2003. The increase in the
operating ratio in 2005 and 2004 is due to the increase in net income discussed
above which grew faster than average managed assets.

In accordance with Federal Financial Institutions Examination Council ("FFIEC")
guidance, the required minimum monthly payment amounts for domestic private
label credit card accounts has changed. The implementation of these new
requirements began in the fourth quarter of 2005 and will be completed in the
first quarter of 2006. As previously discussed, we sell new domestic private
label receivable originations (excluding retail sales contracts) to HSBC Bank
USA on a daily basis. Estimates of the potential impact to the business are
based on numerous assumptions and take into account a number of factors which
are difficult to predict, such as changes in customer behavior, which will not
be fully known or understood until the changes are implemented. Based on current
estimates, we anticipate that these changes will reduce the premium associated
with these daily sales in 2006. It is not expected this reduction will have a
material impact on either the results of the Consumer Segment or our
consolidated results.

CREDIT CARD SERVICES SEGMENT The following table summarizes the managed basis
results for our Credit Card Services segment.

YEAR ENDED DECEMBER 31,                                        2005      2004      2003
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                                                                     (IN MILLIONS)
Net income..................................................  $   661   $   380   $   500
Operating net income........................................      661       381       500
Net interest income.........................................    2,150     2,070     1,954
Securitization related revenue..............................     (192)     (338)       (6)
Fee and other income........................................    2,016     1,731     1,537
Intersegment revenues.......................................       21        25        30
Provision for credit losses.................................    1,564     1,625     1,598
Total costs and expenses....................................    1,370     1,238     1,099
Receivables.................................................   26,181    19,670    19,552
Assets......................................................   27,109    20,049    22,505
Net interest margin.........................................    10.38%    10.00%     9.87%
Return on average managed assets............................     3.34      1.82      2.44

In December 2005, our Credit Card Services Segment acquired Metris in an
all-cash transaction for $1.6 billion. This acquisition will expand our presence
in the near-prime credit card market and will strengthen our capabilities to
serve the full spectrum of credit card customers. This acquisition increased our
MasterCard/Visa receivables by $5.3 billion. Net income for the Credit Card
Services Segment includes the results of Metris from December 1, 2005 forward
and did not have a significant impact to the results of the Credit Card Services
segment in 2005.

Our Credit Card Services Segment reported higher net income in 2005. The
increase in net income was primarily due to higher fee and other income, higher
net interest income, higher securitization related revenue and lower provision
for credit losses partially offset by higher costs and expenses. Increases in
fee and other income resulted from portfolio growth and improved interchange
rates, as well as increased gains from the

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daily sales of new volume related to the MasterCard/Visa account relationships
purchased from HSBC Bank USA in July 2004. Net interest income increased as a
result of higher average receivables and growth in non-prime receivables. The
increase in net interest income from our receivables reflects increased pricing
on variable yield products and higher receivable balances. Net interest margin
increased in 2005 primarily due to increases in non-prime receivable levels,
higher pricing on variable rate products as well as other repricing initiatives.
Lower average interest earning assets due to lower levels of low yielding
investment securities and the impact of lower amortization from receivable
origination costs resulting from changes in the contractual marketing
responsibilities in July 2004 associated with the GM co-branded credit card also
contributed to the increase. These increases were partially offset by higher
interest expense. Although our non-prime receivables tend to have smaller
balances, they generate higher returns both in terms of net interest margin and
fee income. Higher costs and expenses were to support receivable growth and
increases in marketing expenses. The increase in marketing expenses was due to
higher non-prime marketing expense, investments in new marketing initiatives and
changes in contractual marketing responsibilities in July 2004 associated with
the domestic GM co-branded credit card.

The managed basis provision for credit losses decreased in 2005 due to improved
credit quality, partially offset by receivable growth as well as the increased
credit loss provision relating to the impact of Katrina and the increased
bankruptcy filings resulting from the new bankruptcy legislation in the United
States. Excluding the impact of Katrina and the increased bankruptcy filings,
provision for credit losses on an owned basis also decreased in 2005. We have
experienced higher dollars of net charge-offs in our owned portfolio due to
higher receivable levels as well as the increased credit card charge-offs in the
fourth quarter of 2005 which resulted from the spike in bankruptcy filings prior
to the October 2005 effective date of the new bankruptcy legislation. We had
been maintaining credit loss reserves in anticipation of the impact this new
legislation would have on net charge-offs. However, the magnitude of the spike
in bankruptcies experienced immediately before the new legislation became
effective was larger than anticipated which resulted in an additional $100
million credit loss provision being recorded during the third quarter of 2005.
Our fourth quarter results include an estimated $125 million in incremental
charge-offs of principal, interest and fees attributable to bankruptcy reform
which was offset by a release of our owned credit loss reserves of $125 million.
As expected, the number of bankruptcy filings subsequent to the enactment of
this new legislation has decreased dramatically. We believe that a portion of
the increase in charge-offs resulting from the higher bankruptcy filings is an
acceleration of charge-offs that would otherwise have been experienced in future
periods. For the year, we have increased our managed loss reserves by recording
loss provision greater than net charge-offs of $120 million in 2005.

Our managed basis provision for credit losses also reflects an estimate of
incremental credit loss exposure relating to Katrina. The incremental provision
for credit losses for Katrina in the Credit Card Services Segment in 2005 was
$55 million and represents our best estimate of Katrina's impact on our loan
portfolio. As additional information becomes available relating to the financial
condition of our affected customers and the resultant impact on customer payment
patterns, we will continue to review our estimate of credit loss exposure
relating to Katrina and any adjustments will be reported in earnings when they
become known. In an effort to assist our customers affected by the disaster, we
initiated various programs including extended payment arrangements and interest
and fee waivers for up to 90 days or more depending upon customer circumstances.
These interest and fee waivers were not material to the Credit Card Services
Segment's 2005 results.

Our Credit Card Services Segment reported lower net income and operating net
income in 2004. The decrease in net income was due to lower securitization
levels and higher operating expenses, particularly marketing expenses, partially
offset by increases in net interest income as well as fee and other income.
Increases in net interest income as well as fee and other income in 2004
resulted from higher non-prime receivable levels. Net interest margin increased
compared to 2003 due to higher non-prime receivable levels and lower funding
costs. Securitization related revenue declined as a result of a decline in
receivables securitized, including higher run-off due to higher principal
repayment rates. Our provision for credit losses was essentially flat in 2004 as
reductions due to improving credit quality and changes in securitization levels
were offset by higher levels of

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non-prime receivables which carry a higher reserve requirement and a corporate
adjustment to increase owned reserve levels. We increased managed loss reserves
by recording loss provision greater than net charge-offs of $123 million in
2004. As previously discussed, in December 2004, we adopted FFIEC charge-off
policies for the remainder of our domestic MasterCard and Visa portfolio, which
resulted in an immaterial reduction to net income. See "Credit Quality" for
further discussion of the FFIEC policies and the impact of their adoption.

Managed basis receivables increased 33 percent to $26.2 billion at December 31,
2005 compared to $19.7 billion at December 31, 2004. As discussed above, the
increase was primarily due to the acquisition of Metris in December 2005 which
increased our managed basis receivables by $5.3 billion. Organic growth in our
HSBC branded prime, Union Privilege and non-prime portfolios, partially offset
by the continued decline in certain older acquired portfolios, also contributed
to the increase. Managed basis receivables at December 31, 2004 were flat
compared to $19.6 billion at December 31, 2003. In 2004, increases in our AFL-
CIO Union Plus portfolios, non-prime and prime portfolios were substantially
offset by the continued decline in certain older acquired portfolios.

The increase in ROMA in 2005 is primarily due to the higher net income discussed
above as well as the impact of lower average managed assets. The decrease in
average managed assets is due to lower investment securities during 2005 as a
result of the elimination of investments dedicated to our credit card bank in
2003 resulting from our acquisition by HSBC. ROMA decreased in 2004 compared to
2003 reflecting the lower net income as discussed above.

In accordance with FFIEC guidance, our credit card services business adopted a
plan to phase in changes to the required minimum monthly payment amount and
limit certain fee billings for non-prime credit card accounts. The
implementation of these new requirements began in July 2005 with the
requirements fully phased in by December 31, 2005. Estimates of the potential
impact to the business are based on numerous assumptions and take into account a
number of factors which are difficult to predict, such as changes in customer
behavior and impact of other issuers implementing requirements, which will not
be fully known or understood until the changes have been in place for a period
of time. It is anticipated that the changes will result in decreased non-prime
credit card fee income and fluctuations in the provision for credit losses as
credit loss provisions for prime accounts will increase as a result of higher
required monthly payments while the non-prime provision decreases due to lower
levels of fees incurred by customers. Although we do not expect this will have a
material impact on our consolidated results, the impact to the Credit Card
Services Segment in 2006 will be material.

INTERNATIONAL SEGMENT The following table summarizes the managed basis results
for our International segment:

YEAR ENDED DECEMBER 31,                                        2005      2004      2003
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                                                                     (IN MILLIONS)
Net (loss) income...........................................  $    (5)  $    95   $   170
Net interest income.........................................      907       797       753
Securitization related revenue..............................       20       (88)       17
Fee and other income........................................      563       503       380
Intersegment revenues.......................................       17        15        12
Provision for credit losses.................................      642       336       359
Total costs and expenses....................................      847       726       530
Receivables.................................................    9,260    13,263    11,003
Assets......................................................   10,109    14,236    11,923
Net interest margin.........................................     7.16%     6.83%     7.44%
Return on average managed assets............................     (.04)      .76      1.57

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Our International Segment reported lower net income in 2005 and 2004 driven by a
significant decline in earnings at our U.K. subsidiary. Overall, the decrease in
net income reflects higher operating expenses, and in 2005, higher provision for
credit losses, partially offset by increased fee and other income, and higher
net interest income. Applying constant currency rates, which uses the average
rate of exchange for the 2004 period to translate current period net income, net
loss would have been higher by $4 million in 2005. Applying constant currency
rates for the 2003 period to translate 2004 income, net income for 2004 would
have been lower by $6 million.

Net interest income increased in 2005 and 2004 primarily due to higher average
interest earning assets. Net interest margin increased in 2005 due to increased
yields on credit cards due to repricing initiatives and interest-free balances
not being promoted as strongly in 2005 as in the past, partially offset by
run-off of higher yielding receivables, competitive pricing pressures holding
down yields on our personal loans in the U.K. and increased cost of funds. Net
interest margin decreased in 2004 as the run-off of higher yielding receivables,
competitive pricing pressures and higher cost of funds discussed above were
partially offset by increased yields on credit cards due to less promotion of
interest-free balances. Securitization related revenue increased in 2005 due to
lower amortization of prior period gains as a result of reduced securitization
levels, higher levels of receivable replenishments to support previously issued
securities in the U.K. as well as the recognition of residual balances
associated with certain expired securitization transactions. Securitization
related revenue declined in 2004 as a result of lower levels of securitized
receivables. Fee and other income increased in both years primarily due to
higher insurance revenues.

Provision for credit losses increased in 2005 primarily due to higher
delinquency and charge-off levels in the U.K. due to a general increase in
consumer bad debts in the U.K. market, including increased bankruptcies.
Provision for credit losses decreased in 2004 due to changes in securitization
levels, partially offset by a higher provision for credit losses on owned
receivables due to receivable growth and the higher delinquency and charge-off
levels in the U.K. discussed above. We increased managed loss reserves in 2005
by recording loss provision greater than net charge-offs of $145 million. In
2004, we decreased managed loss reserves by recording loss provision less than
net charge-offs of $29 million. Total costs and expenses increased in 2005 and
2004 due to higher expenses to support receivable growth and collection
activities, increased costs associated with branch expansions in Canada and
higher policyholder benefits because of increased insurance sales volumes. Total
costs and expenses in 2004 were also higher due to the full year impact of
operating costs associated with a 2003 private label portfolio acquisition.

We previously reported that as part of ongoing integration efforts with HSBC we
have been working with HSBC to determine if management efficiencies could be
achieved by transferring all or a portion of our U.K. and other European
operations to HBEU, a U.K. based subsidiary of HSBC, and/or one or more
unrelated third parties. In December 2005, we sold our U.K. credit card
business, including $2.5 billion of receivables ($3.1 billion on a managed
basis), 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
the 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. 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 is between affiliates under common control, the
premium received in excess of the book

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value of the assets transferred of $182 million, including the goodwill assigned
to this business, has been recorded as an increase to additional paid in capital
and has not been included in earnings. In future periods, the net interest
income, fee income and provision for credit losses related to the U.K. credit
card business will be reduced, while other income will be increased by the
receipt of servicing and support services revenue from HBEU. While we do not
anticipate that the net effect of this sale will result in a material reduction
of net income of our consolidated results, the impact will likely be material to
our International segment. We continue to evaluate strategic alternatives with
respect to our other U.K. and European operations.

Additionally, in a separate transaction in December 2005, we transferred our
information technology services employees in the U.K. to a subsidiary of HBEU.
As a result, 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. During the
first quarter of 2006, we anticipate that the information technology equipment
in the U.K. will be sold to HBEU for book value.

Managed receivables of $9.3 billion at December 31, 2005 decreased 30 percent
compared to $13.3 billion at December 31, 2004. The decrease was primarily due
to the sale of the U.K. credit card business to HBEU in December 2005, which
included managed receivables of $3.1 billion. In addition to the sale of our
credit card operations in the U.K., our U.K. based unsecured receivable products
decreased in 2005 due to lower retail sales volume following a slow down in
retail consumer spending in the U.K. These decreases were partially offset by
growth in the receivable portfolio in our Canadian operations. Branch expansions
in Canada in 2005 resulted in strong secured and unsecured receivable growth.
Additionally, the Canadian auto finance program, which was introduced in the
second quarter of 2004, grew to a network of over 1,000 active dealer
relationships at December 31, 2005. Also contributing to the receivable growth
in Canada was the successful launch of a MasterCard/Visa credit card program.
Receivable growth at December 31, 2005 reflects negative foreign exchange
translation impacts of $.6 million compared to December 31, 2004 foreign
exchange rates. Receivable growth at December 31, 2004 reflects positive foreign
exchange translation impacts of $1 billion compared to December 31, 2003 foreign
exchange rates.

The decrease in ROMA for 2005 and 2004 reflects the lower net income as
discussed above as well as higher average managed assets primarily due to
receivable growth.

RECONCILIATION OF MANAGED BASIS SEGMENT RESULTS As discussed above, we have
historically monitored our operations on a managed basis. Therefore, an
adjustment is required to reconcile the managed financial information to our
reported financial information in our consolidated financial statements. This
adjustment reclassifies net interest income, fee income and loss provision into
securitization related revenue. See Note 22, "Business Segments," in the
accompanying consolidated financial statements for a reconciliation of our
managed basis segment results to managed basis and owned basis consolidated
totals.

CREDIT QUALITY
--------------------------------------------------------------------------------

DELINQUENCY AND CHARGE-OFF POLICIES AND PRACTICES Our delinquency and net
charge-off ratios reflect, among other factors, changes in the mix of loans in
our portfolio, the quality of our receivables, the average age of our loans, the
success of our collection and customer account management efforts, bankruptcy
trends, general economic conditions and significant catastrophic events such as
Katrina. The levels of personal bankruptcies also have a direct effect on the
asset quality of our overall portfolio and others in our industry.

Our credit and portfolio management procedures focus on risk-based pricing and
effective collection and customer account management efforts for each loan. We
believe our credit and portfolio management process gives us a reasonable basis
for predicting the credit quality of new accounts. This process is based on our
experience with numerous marketing, credit and risk management tests. We also
believe that our frequent and early contact with delinquent customers, as well
as restructuring and other customer account management techniques which are
designed to optimize account relationships, are helpful in maximizing customer

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collections. See Note 2, "Summary of Significant Accounting Policies," in the
accompanying consolidated financial statements for a description of our
charge-off and nonaccrual policies by product.

Our charge-off policies focus on maximizing the amount of cash collected from a
customer while not incurring excessive collection expenses on a customer who
will likely be ultimately uncollectible. We believe our policies are responsive
to the specific needs of the customer segment we serve. Our real estate and auto
finance charge-off policies consider customer behavior in that initiation of
foreclosure or repossession activities often prompts repayment of delinquent
balances. Our collection procedures and charge-off periods, however, are
designed to avoid ultimate foreclosure or repossession whenever it is reasonably
economically possible. Our MasterCard/Visa charge-off policy is consistent with
industry practice. Charge-off periods for our personal non-credit card product
and, prior to December 2004, our domestic private label credit card product were
designed to be responsive to our customer needs and may therefore be longer than
bank competitors who serve a different market. Our policies have generally been
consistently applied in all material respects. Our loss reserve estimates
consider our charge-off policies to ensure appropriate reserves exist for
products with longer charge-off lives. We believe our current charge-off
policies are appropriate and result in proper loss recognition.

DELINQUENCY - OWNED BASIS

Our policies and practices for the collection of consumer receivables, including
our customer account management policies and practices, permit us to reset the
contractual delinquency status of an account to current, based on indicia or
criteria which, in our judgment, evidence continued payment probability. When we
use a customer account management technique, we may treat the account as being
contractually current and will not reflect it as a delinquent account in our
delinquency statistics. However, if the account subsequently experiences payment
defaults and becomes at least two months contractually delinquent, it will be
reported in our delinquency ratios. See "Customer Account Management Policies
and Practices" for further detail of our practices.

The following table summarizes two-months-and-over contractual delinquency (as a
percent of consumer receivables):

                                          2005                                      2004
                         ---------------------------------------   ---------------------------------------
                         DEC. 31   SEPT. 30   JUNE 30   MARCH 31   DEC. 31   SEPT. 30   JUNE 30   MARCH 31
----------------------------------------------------------------------------------------------------------
Real estate secured....   2.72%      2.51%     2.56%      2.62%     2.96%      3.27%     3.39%      3.87%
Auto finance...........   2.34       2.09      2.08       1.65      2.07       1.81      2.12       1.68
MasterCard/Visa(1).....   3.66       4.46      4.14       4.60      4.88       5.84      5.83       5.90
Private label..........   5.43       5.22      4.91       4.71      4.13       4.72      5.00       5.38
Personal non-credit
  card.................   9.40       9.18      8.84       8.63      8.69       8.83      8.92       9.64
                          ----       ----      ----       ----      ----       ----      ----       ----
Total consumer(1)......   3.84%      3.78%     3.73%      3.78%     4.07%      4.43%     4.57%      5.01%
                          ====       ====      ====       ====      ====       ====      ====       ====

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

(1) In December 2005, we completed the acquisition of Metris which included
    receivables of $5.3 billion. This event had a significant impact on this
    ratio. Excluding the receivables from the Metris acquisition from this
    calculation, our consumer delinquency ratio for our MasterCard/Visa
    portfolio was 4.01% and total consumer delinquency was 3.89%.

Compared to September 30, 2005, our total consumer delinquency increased 6 basis
points at December 31, 2005. The increase was due to higher delinquency levels
at December 31, 2005 for our real estate secured and personal non-credit card
receivable portfolios resulting from portfolio seasoning. The spike in
bankruptcy filings in the period leading up to the effective date of new
bankruptcy legislation in the United States, which will not begin to migrate to
charge-off until 2006 in accordance with our charge-off policies also has led to
increased delinquency. These increases were partially offset by the continuing
strong economy in the United States, better underwriting and improved quality of
originations. The increase in delinquency in our real estate secured portfolio
reflects maturation of recent receivable growth and, as discussed above, the
impact of the spike in bankruptcy filings, partially offset by the strong level
of recent originations, the recent trend of better

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quality new originations and a continuing strong economy. The increase in auto
finance delinquency is due to seasonal increases in delinquency during the
fourth quarter. Excluding the impact of the receivables acquired from Metris and
the sale of our U.K. credit card business in December 2005, our MasterCard/Visa
receivable delinquency ratio decreased 49 basis points as compared to the
September 2005 delinquency ratio. This decrease is a result of lower migration
to two-months-and over contractual delinquency as a result of the spike in
bankruptcy filings experienced in the period leading up to the effective date of
the new bankruptcy legislation as well as changes in receivable mix resulting
from lower securitization levels and the benefit of seasonal receivable growth.
The increase in private label delinquency (which primarily consists of our
foreign private label portfolio that was not sold to HSBC Bank USA in December
2004) reflects increased bankruptcy filings in the U.K. Personal non-credit card
delinquencies increased as a result of higher bankruptcy filings in both the
United States and the U.K., partially offset by improved collection efforts and
strong economic conditions in the U.S.

Compared to December 31, 2004, our total consumer delinquency ratio decreased 23
basis points generally as a result of better underwriting standards, improved
credit quality of originations and improvements in the economy in addition to
the impact of the factors discussed above.

See "Credit Quality Statistics - Managed Basis" for additional information
regarding our managed basis credit quality. See "Customer Account Management
Policies and Practices" regarding the treatment of restructured accounts and
accounts subject to forbearance and other customer account management tools. See
Note 2, "Summary of Significant Accounting Policies," for a detail of our
charge-off policy by product.

NET CHARGE-OFFS OF CONSUMER RECEIVABLES - OWNED BASIS

The following table summarizes net charge-off of consumer receivables as a
percent of average consumer receivables:

                                                2005                                            2004
                            --------------------------------------------- ---------------------------------------------
                                         QUARTER ENDED (ANNUALIZED)              QUARTER ENDED (ANNUALIZED)      2003(1)
                            FULL   -------------------------------------- FULL ---------------------------------    FULL
                            YEAR   DEC. 31   SEPT. 30   JUNE 30 MAR. 31  YEAR   DEC. 31 SEPT. 30 JUNE 30 MAR. 31    YEAR
------------------------------------------------------------------------------------------------------------------------
Real estate secured.......   .76%    .66%       .75%      .78%    .87%    1.10%   1.04% 1.19%   1.04%     1.15%     .99%
Auto finance..............  3.27    3.42       3.25      2.61    3.80     3.43    2.73  3.66    3.05      4.65     4.91
MasterCard/Visa(2)........  7.12    7.99       6.24      6.93    7.17     8.85    8.44  8.50    9.91      8.66     9.18
Private label(2)..........  4.83    5.60       5.35      4.36    4.18     6.17    9.16  4.79    5.06      5.29     5.75
Personal non-credit
  card....................  7.88    7.59       8.01      7.77    8.18     9.75    8.06  9.50   10.59     11.17     9.89
                            ----    ----       ----      ----    ----     ----    ----  ----   -----     -----     ----
Total consumer............  3.03%   3.10%      2.93%     2.93%   3.15%    4.00%   4.04% 3.77%   4.02%     4.17%    4.06%
                            ====    ====       ====      ====    ====     ====    ====  ====   =====     =====     ====
Real estate charge-offs
  and REO expense as a
  percent of average real
  estate secured
  receivables.............   .87%    .78%       .88%      .84%   1.01%    1.38%   1.17% 1.31%   1.47%     1.63%    1.42%
                            ====    ====       ====      ====    ====     ====    ====  ====   =====     =====     ====

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

(1) We adopted FSP 144-1 in November 2003. The adoption increased real estate
    charge-offs by $9.1 million and auto finance charge-offs by $1.2 million for
    the quarter ended December 31, 2003. The adoption increased real estate
    charge-offs by 7 basis points for the quarter ended December 31, 2003 and 1
    basis point for the full year 2003, auto finance charge-offs by 12 basis
    points for the quarter ended December 31, 2003 and 4 basis points for the
    full year 2003, and total consumer charge-offs by 4 basis points for the
    quarter ended December 31, 2003 and 1 basis point for the full year 2003.
    The impact on prior periods was not material.

(2) The adoption of FFIEC charge-off policies for our domestic private label
    (excluding retail sales contracts at our consumer lending business) and
    MasterCard/Visa portfolios in December 2004 increased private label net
    charge-offs by $155 million (432 basis points), MasterCard/Visa net
    charge-offs by $3 million (9 basis points) and total consumer net charge-off
    by $158 million (57 basis points) for the quarter ended December 31, 2004.
    Full year, the adoption increased private label net charge-offs by 119 basis
    points, MasterCard/Visa net charge-offs by 2 basis points and total consumer
    net charge-offs by 16 basis points.

Net charge-offs as a percentage of average consumer receivables decreased 97
basis points for the full year of 2005 as compared to the full year of 2004. The
net charge-off ratio for full year 2004 was impacted by the adoption of FFIEC
charge-off policies for our domestic private label (excluding retail sales
contracts at our consumer lending business) and MasterCard/Visa portfolios.
Excluding the additional charge-offs in 2004

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resulting from the adoption of these FFIEC policies, net charge-offs for the
full year 2005 decreased 81 basis points compared to 2004 as a result of
receivable growth, the positive impact from the lower delinquency levels we have
experienced as a result of a strong economy as well as improved credit quality
of originations. This was partially offset by the increased charge-offs in the
fourth quarter of 2005 for our MasterCard/Visa receivable portfolio resulting
from the spike in bankruptcy filings prior to the effective date of new
bankruptcy legislation in the United States. Our real estate secured portfolio
experienced a decrease in net charge-offs for full year 2005 reflecting
receivables growth, the recent trend of better quality in new originations and
continuing strong economic conditions. The decrease in the auto finance ratio
for the full year 2005 reflects receivable growth with improved credit quality
of originations, improved collections and better underwriting standards. The
decrease in the MasterCard/Visa and personal non-credit card receivable net
charge-off ratios reflects the positive impact of changes in receivable mix
resulting from lower securitization levels and continued improved credit
quality. As discussed above, the decrease in the MasterCard/Visa ratio was
partially offset by increased net charge-offs resulting from higher
bankruptcies. The net charge-off ratio for the private label portfolio for the
full year 2004 includes the domestic private label portfolio sold to HSBC Bank
USA which contributed 242 basis points to the ratio. The net charge-off ratio
for our private label receivables for the full year 2005 consists primarily of
our foreign private label portfolio which deteriorated in 2005 as a result of a
general increase in consumer bad debts in the U.K. markets, including increased
bankruptcies.

We experienced a decrease in overall net charge-off dollars in 2005. This was
primarily due to lower delinquency levels we have experienced as a result of the
strong economy as well as improved credit quality of originations. These
improvements were partially offset by higher receivable levels in 2005 as well
as higher net charge-offs in the fourth quarter of 2005 of an estimated $125
million for our MasterCard/Visa receivable portfolio resulting from the
increased bankruptcy filings as discussed above. While our real estate secured,
auto finance and personal non-credit card receivable portfolios also experienced
higher bankruptcy filings in the period leading up to the effective date of the
new bankruptcy legislation in the United States, these accounts will not begin
to migrate to charge-off until 2006 in accordance with our charge-off policy for
these receivable products. As expected, the number of bankruptcy filings
subsequent to the enactment of this new legislation have decreased dramatically.
We believe that a portion of the increase in charge-offs resulting from the
higher bankruptcy filings is an acceleration of charge-offs that would otherwise
have been experienced in future periods.

The decrease in real estate charge-offs and REO expense as a percent of average
real estate secured receivables in 2005 from the 2004 ratio was primarily due to
strong receivable growth which will not season for a period of time, the
continuing strong economy and better credit quality of recent originations. As
discussed above, the 2005 ratio was not negatively impacted by the increased
filings associated with the new bankruptcy legislation in the United States due
to the timing of the bankruptcy filings and our charge-off policy for real
estate secured receivables.

Net charge-offs as a percentage of average consumer receivables decreased for
the full year of 2004 as compared to full year 2003 as the lower delinquency
levels we experienced due to an improving economy had an impact on charge-offs.
Average receivable growth also positively impacted the ratios. The decrease in
our net charge-off percentage was reduced by the adoption of FFIEC charge-off
policies for our domestic private label (excluding consumer lending retail sales
contracts) and MasterCard/Visa portfolios. Excluding the additional charge-offs
resulting from the adoption of these FFIEC policies, net charge-offs for the
full year 2004 decreased 22 basis points compared to 2003. Our real estate
secured portfolio experienced increases in net charge-offs reflecting lower
estimates of net realizable value as a result of process changes in 2004 to
better estimate property values at the time of foreclosure. The decrease in the
auto finance ratio reflects receivable growth with improved credit quality of
originations, improved collections and better underwriting standards. The
decrease in the MasterCard/Visa ratio reflects changes in receivable mix and
improved credit quality of originations. The decrease in net charge-offs in the
personal non-credit card portfolio is a result of improved credit quality and
receivable growth as well as improved economic conditions.

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While net consumer charge-offs as a percentage of average receivables decreased
during 2004, we experienced an increase in overall net charge-off dollars in
2004. This is due to higher delinquencies due to adverse economic conditions
which existed in 2003 migrating to charge-off in 2004 as well as to higher
receivable levels in 2004.

The decrease in real estate charge-offs and REO expense as a percent of average
real estate secured receivables in 2004 over the 2003 ratio was the result of
the improved economy, better credit quality of recent originations and fewer
bankruptcy filings in 2004.

See "Credit Quality Statistics - Managed Basis" for additional information
regarding our managed basis credit quality.

OWNED NONPERFORMING ASSETS

AT DECEMBER 31,                                                2005     2004     2003
--------------------------------------------------------------------------------------
                                                                   (IN MILLIONS)
Nonaccrual receivables......................................  $3,533   $3,012   $3,144
Accruing consumer receivables 90 or more days delinquent....     621      507      904
Renegotiated commercial loans...............................       -        2        2
                                                              ------   ------   ------
Total nonperforming receivables.............................   4,154    3,521    4,050
Real estate owned...........................................     510      587      631
                                                              ------   ------   ------
Total nonperforming assets..................................  $4,664   $4,108   $4,681
                                                              ======   ======   ======

The increase in total nonperforming assets is primarily due to the receivable
growth we have experienced in 2005 as well as the impact of the increased
bankruptcy filings on our secured and personal non-credit card receivable
portfolios. Total nonperforming assets at December 31, 2004 decreased due to
improved credit quality and collection efforts as well as the bulk sale of
domestic private label receivables to HSBC Bank USA in December 2004, partially
offset by growth. Consistent with industry practice, accruing consumer
receivables 90 or more days delinquent includes domestic MasterCard/Visa
receivables and, for December 31, 2003, our domestic private label credit card
receivables.

CREDIT LOSS RESERVES We maintain credit loss reserves to cover probable losses
of principal, interest and fees, including late, overlimit and annual fees.
Credit loss reserves are based on a range of estimates and are intended to be
adequate but not excessive. We estimate probable losses for owned consumer
receivables using a roll rate migration analysis that estimates the likelihood
that a loan will progress through the various stages of delinquency, or buckets,
and ultimately charge-off. This analysis considers delinquency status, loss
experience and severity and takes into account whether loans are in bankruptcy,
have been restructured or rewritten, or are subject to forbearance, an external
debt management plan, hardship, modification, extension or deferment. Our credit
loss reserves also take into consideration the loss severity expected based on
the underlying collateral, if any, for the loan in the event of default.
Delinquency status may be affected by customer account management policies and
practices, such as the restructure of accounts, forbearance agreements, extended
payment plans, modification arrangements, external debt management programs,
loan rewrites and deferments. If customer account management policies, or
changes thereto, shift loans from a "higher" delinquency bucket to a "lower"
delinquency bucket, this will be reflected in our roll rate statistics. To the
extent that restructured accounts have a greater propensity to roll to higher
delinquency buckets, this will be captured in the roll rates. Since the loss
reserve is computed based on the composite of all of these calculations, this
increase in roll rate will be applied to receivables in all respective
delinquency buckets, which will increase the overall reserve level. In addition,
loss reserves on consumer receivables are maintained to reflect our judgment of
portfolio risk factors that may not be fully reflected in the statistical roll
rate calculation. Risk factors considered in establishing loss reserves on
consumer receivables include recent growth, product mix, bankruptcy trends,
geographic concentrations, economic conditions, portfolio seasoning, account
management policies and practices, current levels of charge-offs and
delinquencies, changes in laws

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and regulations and other items which can affect consumer payment patterns on
outstanding receivables, such as the impact of Katrina.

While our credit loss reserves are available to absorb losses in the entire
portfolio, we specifically consider the credit quality and other risk factors
for each of our products. We recognize the different inherent loss
characteristics in each of our products as well as customer account management
policies and practices and risk management/collection practices. Charge-off
policies are also considered when establishing loss reserve requirements to
ensure the appropriate reserves exist for products with longer charge-off
periods. We also consider key ratios such as reserves to nonperforming loans and
reserves as a percentage of net charge-offs in developing our loss reserve
estimate. Loss reserve estimates are reviewed periodically and adjustments are
reported in earnings when they become known. As these estimates are influenced
by factors outside of our control, such as consumer payment patterns and
economic conditions, there is uncertainty inherent in these estimates, making it
reasonably possible that they could change.

The following table sets forth owned basis credit loss reserves for the periods
indicated:

                                                                 AT DECEMBER 31,
                                                    ------------------------------------------
                                                     2005     2004     2003     2002     2001
----------------------------------------------------------------------------------------------
                                                            (DOLLARS ARE IN MILLIONS)
Owned credit loss reserves........................  $4,521   $3,625   $3,793   $3,333   $2,663
Reserves as a percent of receivables..............    3.23%    3.39%    4.11%    4.04%    3.33%
Reserves as a percent of net charge-offs..........   123.8(2)  89.9(1) 105.7    106.5    110.5
Reserves as a percent of nonperforming loans......   108.8    103.0     93.7     94.5     92.7

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

(1) In December 2004, we adopted FFIEC charge-off policies for our domestic
    private label (excluding retail sales contracts at our consumer lending
    business) and MasterCard/Visa portfolios and subsequently sold this domestic
    private label receivable portfolio. These events had a significant impact on
    this ratio. Reserves as a percentage of net charge-offs excluding net
    charge-offs associated with the sold domestic private label portfolio and
    charge-off relating to the adoption of FFIEC was 109.2% at December 31,
    2004.

(2) The acquisition of Metris in December 2005 has positively impacted this
    ratio. Reserves as a percentage of net charge-offs excluding Metris was
    118.2 percent.

Owned credit loss reserve levels at December 31, 2005, reflect the additional
reserve requirements resulting from higher levels of owned receivables,
including lower securitization levels, higher delinquency levels in our
portfolios driven by growth, the impact of Katrina and minimum monthly payment
changes, additional reserves resulting from the Metris acquisition and the
higher levels of personal bankruptcy filings in both the United States and the
U.K., partially offset by improved asset quality. Credit loss reserves at
December 31, 2005 also reflect the sale of our U.K. credit card business in
December 2005 which decreased credit loss reserves by $104 million. In 2005, we
recorded owned loss provision greater than net charge-offs of $890 million.
Owned credit loss reserve levels at December 31, 2004 reflect the sale of our
domestic private label portfolio (excluding retail sales contracts at our
consumer lending business) which had decreased credit loss reserves by $505
million. Excluding this sale, owned credit loss reserves would have increased
during 2004 reflecting growth in our loan portfolio partially offset by improved
asset quality. In 2004, we recorded owned loss provision greater than net
charge-offs of $301 million. Excluding the impact of adopting FFIEC charge-off
policies for owned domestic private label (excluding retail sales contracts at
our consumer lending business) and MasterCard/Visa portfolios, we recorded owned
loss provision $421 million greater than net charge-offs in 2004.

Beginning in 2004 and continuing in 2005, we have experienced a shift in our
loan portfolio to higher credit quality and lower yielding receivables,
particularly real estate secured and auto finance receivables. Reserves as a
percentage of receivables at December 31, 2005 and 2004 were lower than at
December 31, 2003 as a result of portfolio growth and improved credit quality,
partially offset in 2005 by the impact of additional credit loss reserves
resulting from the impact of Katrina, minimum monthly payment changes and
increased bankruptcy filings. Reserves as a percentage of receivables at
December 31, 2003 were higher than at December 31, 2002 as a result of the sale
of $2.8 billion of higher quality real estate secured loans to HSBC
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Bank USA in December 2003. Had this sale not occurred, reserves as a percentage
of receivables at December 2003 would have been lower than 2002 as a result of
improving credit quality in the latter half of 2003 as delinquency rates
stabilized and charge-off levels began to improve. The trends in the reserve
ratios for 2003 and 2002 reflect the impact of the weak economy, higher
delinquency levels, and uncertainty as to the ultimate impact the weakened
economy would have on delinquency and charge-off levels.

Reserves as a percentage of nonperforming loans increased in 2005. While
nonperforming loans increased in 2005 as discussed above, reserve levels in 2005
increased at a more rapid pace due to receivable growth, the additional reserve
requirements related to Katrina and impact of increased bankruptcy filings on
our secured receivable and personal non-credit card receivable portfolios, which
will not begin to migrate to charge-off until 2006. Reserves as a percentage of
nonperforming loans increased in 2004 as nonperforming loans declined due to
improved credit quality and the private label receivable sale while loss reserve
levels declined at a slower pace due to receivable growth.

Reserves as a percentage of net charge-offs also increased in 2005. As discussed
above, the 2005 ratio was significantly impacted by the acquisition of Metris
and the 2004 ratio was significantly impacted by both the sale of our domestic
private label receivable portfolio (excluding retail sales contracts) in
December 2004 as well as the adoption of FFEIC charge-off policies for our
domestic private label (excluding retail sales contracts) and MasterCard/Visa
portfolios. Excluding these items, reserves as a percentage of net charge-offs
increased 900 basis points. While both our reserve levels at December 31, 2005
and net charge-offs in 2005 were higher than 2004, our reserve levels grew for
the reasons discussed above more rapidly than our net charge-offs.

For securitized receivables, we also record a provision for estimated probable
losses that we expect to incur under the recourse provisions. The following
table sets forth managed credit loss reserves for the periods indicated:

AT DECEMBER 31,                                      2005     2004     2003     2002     2001
----------------------------------------------------------------------------------------------
                                                                      (DOLLARS ARE IN MILLIONS
Managed credit loss reserves......................
                                                    $4,736   $4,515   $6,167   $5,092   $3,811
Reserves as a percent of receivables..............
                                                      3.29%    3.73%    5.20%    4.74%    3.78%
Reserves as a percent of net charge-offs..........
                                                     108.6(2)  79.6(1) 117.4    113.8    110.7
Reserves as a percent of nonperforming loans......
                                                     108.8    108.4    118.0    112.6    105.0

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

(1) In December 2004 we adopted FFIEC charge-off policies for our domestic
    private label (excluding retail sales contracts at our consumer lending
    business) and MasterCard/Visa portfolios and subsequently sold this domestic
    private label receivable portfolio. These events had a significant impact on
    this ratio. Reserves as a percentage of net charge-offs excluding net
    charge-offs associated with the sold domestic private label portfolio and
    charge-off relating to the adoption of FFIEC policies was 96.0% on a managed
    basis at December 31, 2004.

(2) The acquisition of Metris in December 2005 has positively impacted this
    ratio. Reserves as a percentage of net charge-offs excluding Metris was
    103.9 percent.

Managed credit loss reserves at December 31, 2005 also increased as the
increases in our owned credit loss reserves as discussed above were offset by
lower reserves on securitized receivables due to run-off and the decision in the
third quarter of 2004 to structure new collateralized funding transactions as
secured financings and the December 2004 domestic private label receivable sale.
Securitized receivables of $4.1 billion at December 31, 2005 decreased $10.1
billion from December 31, 2004.

See the "Analysis of Credit Loss Reserves Activity," "Reconciliations to GAAP
Financial Measures" and Note 7, "Credit Loss Reserves," to the accompanying
consolidated financial statements for additional information regarding our owned
basis and managed basis loss reserves.

CUSTOMER ACCOUNT MANAGEMENT POLICIES AND PRACTICES Our policies and practices
for the collection of consumer receivables, including our customer account
management policies and practices, permit us to reset the contractual
delinquency status of an account to current, based on indicia or criteria which,
in our
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judgment, evidence continued payment probability. Such policies and practices
vary by product and are designed to manage customer relationships, maximize
collection opportunities and avoid foreclosure or repossession if reasonably
possible. If the account subsequently experiences payment defaults, it will
again become contractually delinquent.

In the third quarter of 2003, we implemented certain changes to our
restructuring policies. These changes were intended to eliminate and/or
streamline exception provisions to our existing policies and were generally
effective for receivables originated or acquired after January 1, 2003.
Receivables originated or acquired prior to January 1, 2003 generally are not
subject to the revised restructure and customer account management policies.
However, for ease of administration, in the third quarter of 2003, our Mortgage
Services business elected to adopt uniform policies for all products regardless
of the date an account was originated or acquired. Implementation of the uniform
policy by Mortgage Services had the effect of only counting restructures
occurring on or after January 1, 2003 in assessing restructure eligibility for
purposes of the limitation that no account may be restructured more than four
times in a rolling sixty-month period. Other business units may also elect to
adopt uniform policies. The changes adopted in the third quarter of 2003 have
not had a significant impact on our business model or on our results of
operations as these changes have generally been phased in as new receivables
were originated or acquired. As discussed in more detail below, we also revised
certain policies for our domestic private label credit card and MasterCard and
Visa portfolios in December 2004.

As discussed previously and described more fully in the table below, we adopted
FFIEC account management policies regarding restructuring of past due accounts
for our domestic private label credit card and MasterCard/Visa portfolios in
December 2004. These changes have not had a significant impact on our business
model or on our results of operations.

Approximately two-thirds of all restructured receivables are secured products,
which in general have less loss severity exposure because of the underlying
collateral. Credit loss reserves take into account whether loans have been
restructured, rewritten or are subject to forbearance, an external debt
management plan, modification, extension or deferment. Our credit loss reserves
also take into consideration the loss severity expected based on the underlying
collateral, if any, for the loan.

Our restructuring policies and practices vary by product and are described in
the table that follows and reflect the revisions from the adoption of FFIEC
charge-off and account management policies for our domestic private label
(excluding retail sales contracts at our consumer lending business) and
MasterCard/Visa receivables in December 2004. The fact that the restructuring
criteria may be met for a particular account does not require us to restructure
that account, and the extent to which we restructure accounts that are eligible
under the criteria will vary depending upon our view of prevailing economic
conditions and other factors which may change from period to period. In
addition, for some products, accounts may be restructured without receipt of a
payment in certain special circumstances (e.g.  upon reaffirmation of a debt
owed to us in connection with a Chapter 7 bankruptcy proceeding). We use account
restructuring as an account and customer management tool in an effort to
increase the value of our account relationships, and accordingly, the
application of this tool is subject to complexities, variations and changes from
time to time. These policies and practices are continually under review and
assessment to assure that they meet the goals outlined above, and accordingly,
we modify or permit exceptions to these general policies and practices from time
to time. In addition, exceptions to these policies and practices may be made in
specific situations in response to legal or regulatory agreements or orders.

In the policies summarized below, "hardship restructures" and "workout
restructures" refer to situations in which the payment and/or interest rate may
be modified on a temporary or permanent basis. In each case, the contractual
delinquency status is reset to current. "External debt management plans" refers
to situations in which consumers receive assistance in negotiating or scheduling
debt repayment through public or private agencies.

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                                                          RESTRUCTURING POLICIES AND PRACTICES
      HISTORICAL RESTRUCTURING POLICIES                       FOLLOWING CHANGES IMPLEMENTED
          AND PRACTICES(1),(2),(3)              IN THE THIRD QUARTER 2003 AND IN DECEMBER 2004(1),(2),(3)
---------------------------------------------------------------------------------------------------------
REAL ESTATE SECURED                             REAL ESTATE SECURED
  Real Estate - Overall                           Real Estate - Overall
  - An account may be restructured if we          - Accounts may be restructured upon receipt of two
     receive two qualifying payments within          qualifying payments within the 60 days preceding the
     the 60 days preceding the restructure;          restructure
     we may restructure accounts in hardship,     - Accounts generally are not eligible for restructure
     disaster or strike situations with one          until nine months after origination
     qualifying payment or no payments            - Accounts will be limited to four collection
  - Accounts that have filed for Chapter 7           restructures in a rolling sixty-month period
     bankruptcy protection may be                 - Accounts whose borrowers have filed for Chapter 7
     restructured upon receipt of a signed           bankruptcy protection may be restructured upon
     reaffirmation agreement                         receipt of a signed reaffirmation agreement
  - Accounts subject to a Chapter 13 plan         - Accounts whose borrowers are subject to a Chapter 13
     filed with a bankruptcy court generally         plan filed with a bankruptcy court generally may be
     require one qualifying payment to be            restructured upon receipt of one qualifying payment
     restructured                                 - Except for bankruptcy reaffirmation and filed Chapter
  - Except for bankruptcy reaffirmation and          13 plans, accounts will generally not be
     filed Chapter 13 plans, agreed automatic        restructured more than once in a twelve-month period
     payment withdrawal or                        - Accounts whose borrowers agree to pay by automatic
     hardship/disaster/strike, accounts are          withdrawal are generally restructured upon receipt
     generally limited to one restructure            of one qualifying payment after initial
     every twelve-months                             authorization for automatic withdrawal(4)
  - Accounts generally are not eligible for
     restructure until they are on the books
     for at least six months
  Real Estate - Consumer Lending                  Real Estate - Mortgage Services(5)
  - Accounts whose borrowers agree to pay by      - Accounts will generally not be eligible for
     automatic withdrawal are generally              restructure until nine months after origination and
     restructured upon receipt of one                six months after acquisition
     qualifying payment after initial
     authorization for automatic withdrawal
AUTO FINANCE                                    AUTO FINANCE
  - Accounts may be extended if we receive        - Accounts may generally be extended upon receipt of
     one qualifying payment within the 60            two qualifying payments within the 60 days preceding
     days preceding the extension                    the extension
  - Accounts may be extended no more than         - Accounts may be extended by no more than three months
     three months at a time and by no more           at a time
     than three months in any twelve-month        - Accounts will be limited to four extensions in a
     period                                          rolling sixty-month period, but in no case will an
  - Extensions are limited to six months over        account be extended more than a total of six months
     the contractual life                            over the life of the account
  - Accounts that have filed for Chapter 7        - Accounts will be limited to one extension every six
     bankruptcy protection may be                    months
     restructured upon receipt of a signed        - Accounts will not be eligible for extension until
     reaffirmation agreement

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                                                          RESTRUCTURING POLICIES AND PRACTICES
      HISTORICAL RESTRUCTURING POLICIES                       FOLLOWING CHANGES IMPLEMENTED
          AND PRACTICES(1),(2),(3)              IN THE THIRD QUARTER 2003 AND IN DECEMBER 2004(1),(2),(3)
---------------------------------------------------------------------------------------------------------
  - Accounts whose borrowers are subject to a        they are on the books for at least six months
     Chapter 13 plan may be restructured upon     - Accounts whose borrowers have filed for Chapter 7
     filing of the plan with a bankruptcy            bankruptcy protection may be restructured upon
     court                                           receipt of a signed reaffirmation agreement
                                                  - Accounts whose borrowers are subject to a Chapter 13
                                                     plan may be restructured upon filing of the plan
                                                     with the bankruptcy court.
MASTERCARD AND VISA                             MASTERCARD AND VISA
  - Typically, accounts qualify for               Accounts originated between January 2003 - December
     restructuring if we receive two or three     2004
     qualifying payments prior to the             - Accounts typically qualified for restructuring if we
     restructure, but accounts in approved           received two or three qualifying payments prior to
     external debt management programs may           the restructure, but accounts in approved external
     generally be restructured upon receipt          debt management programs could generally be
     of one qualifying payment                       restructured upon receipt of one qualifying payment.
  - Generally, accounts may be restructured       - Generally, accounts could have been restructured once
     once every six months                           every six months.
                                                  Beginning in December 2004, all accounts regardless of
                                                  origination date
                                                  - Domestic accounts qualify for restructuring if we
                                                     receive three consecutive minimum monthly payments
                                                     or a lump sum equivalent.
                                                  - Domestic accounts qualify for restructuring if the
                                                     account has been in existence for a minimum of nine
                                                     months and the account has not been restructured in
                                                     the prior twelve months and not more than once in
                                                     the prior five years.
                                                  - Domestic accounts entering third party debt
                                                     counseling programs are limited to one restructure
                                                     in a five-year period in addition to the general
                                                     limits of one restructure in a twelve-month period
                                                     and two restructures in a five-year period.
PRIVATE LABEL(6)                                PRIVATE LABEL(6)
  Private Label - Overall                         Private Label - Overall
  - An account may generally be restructured      Prior to December 2004 for accounts originated after
     if we receive one or more qualifying         October 2002
     payments, depending upon the merchant.       - For certain merchants, receipt of two or three
  - Restructuring is limited to once every           qualifying payments was required, except accounts in
     six months (or longer, depending upon           an approved external debt management program could
     the merchant) for revolving accounts and        be restructured upon receipt of one qualifying
     once every twelve-months for closed-end         payment.
     accounts

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                                                          RESTRUCTURING POLICIES AND PRACTICES
      HISTORICAL RESTRUCTURING POLICIES                       FOLLOWING CHANGES IMPLEMENTED
          AND PRACTICES(1),(2),(3)              IN THE THIRD QUARTER 2003 AND IN DECEMBER 2004(1),(2),(3)
---------------------------------------------------------------------------------------------------------
                                                  - Accounts must have been on the books for at least
                                                     nine months to be restructured and a minimum of two
                                                     qualifying payments were received within the 60 days
                                                     preceding the restructure.
                                                  - Accounts were not eligible for subsequent restructure
                                                     until twelve months after a prior restructure and
                                                     upon receipt of three qualifying payments within the
                                                     90 days preceding the restructure.
                                                  Beginning in December 2004, all accounts regardless of
                                                  origination date
                                                  - Domestic accounts qualify for restructuring if we
                                                     receive three consecutive minimum monthly payments
                                                     or a lump sum equivalent.
                                                  - Domestic accounts qualify for restructuring if the
                                                     account has been in existence for a minimum of nine
                                                     months and the account has not been restructured in
                                                     the prior twelve months and not more than once in
                                                     the prior five years.
                                                  - Domestic accounts entering a workout program,
                                                     including internal and third party debt counseling
                                                     programs, are limited to one restructure in a
                                                     five-year period in addition to the general limits
                                                     of one restructure in a twelve-month period and two
                                                     restructures in a five-year period.
  Private Label - Consumer Lending Retail
Sales
  Contracts                                       Private Label - Consumer Lending Retail Sales Contracts
  - Accounts may be restructured if we            - Accounts may be restructured upon receipt of two
     receive one qualifying payment within           qualifying payments within the 60 days preceding the
     the 60 days preceding the restructure;          restructure
     may restructure accounts in a                - Accounts will be limited to one restructure every six
     hardship/disaster/strike situation with         months
     one qualifying payment or no payments        - Accounts will be limited to four collection
  - If an account is never more than 90 days         restructures in a rolling sixty-month period
     delinquent, it may generally be              - Accounts will not be eligible for restructure until
     restructured up to three times per year         six months after origination
  - If an account is ever more than 90 days
     delinquent, generally it may be
     restructured with one qualifying payment
     no more than four times over its life;
     however, generally the account may
     thereafter be restructured if two
     qualifying payments are received
  - Accounts subject to programs for hardship
     or strike may require only the receipt
     of reduced

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                                                          RESTRUCTURING POLICIES AND PRACTICES
      HISTORICAL RESTRUCTURING POLICIES                       FOLLOWING CHANGES IMPLEMENTED
          AND PRACTICES(1),(2),(3)              IN THE THIRD QUARTER 2003 AND IN DECEMBER 2004(1),(2),(3)
---------------------------------------------------------------------------------------------------------
     payments in order to be restructured;
     disaster may be restructured with no
     payments
PERSONAL NON-CREDIT CARD                        PERSONAL NON-CREDIT CARD
  - Accounts may be restructured if we            - Accounts may be restructured upon receipt of two
     receive one qualifying payment within           qualifying payments within the 60 days preceding the
     the 60 days preceding the restructure;          restructure
     may restructure accounts in a                - Accounts will be limited to one restructure every six
     hardship/disaster/strike situation with         months
     one qualifying payment or no payments        - Accounts will be limited to four collection
  - If an account is never more than 90 days         restructures in a rolling sixty-month period
     delinquent, it may generally be              - Accounts will not be eligible for restructure until
     restructured up to three times per year         six months after origination
  - If an account is ever more than 90 days
     delinquent, generally it may be
     restructured with one qualifying payment
     no more than four times over its life;
     however, generally the account may
     thereafter be restructured if two
     qualifying payments are received
  - Accounts subject to programs for hardship
     or strike may require only the receipt
     of reduced payments in order to be
     restructured; disaster may be
     restructured with no payments

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

(1) We employ account restructuring and other customer account management
    policies and practices as flexible customer account management tools as
    criteria may vary by product line. In addition to variances in criteria by
    product, criteria may also vary within a product line. Also, we continually
    review our product lines and assess restructuring criteria and they are
    subject to modification or exceptions from time to time. Accordingly, the
    description of our account restructuring policies or practices provided in
    this table should be taken only as general guidance to the restructuring
    approach taken within each product line, and not as assurance that accounts
    not meeting these criteria will never be restructured, that every account
    meeting these criteria will in fact be restructured or that these criteria
    will not change or that exceptions will not be made in individual cases. In
    addition, in an effort to determine optimal customer account management
    strategies, management may run more conservative tests on some or all
    accounts in a product line for fixed periods of time in order to evaluate
    the impact of alternative policies and practices.

(2) For our United Kingdom business, all portfolios have a consistent account
    restructure policy. An account may be restructured if we receive two or more
    qualifying payments within two calendar months, limited to one restructure
    every 12 months, with a lifetime limit of three times. In hardship
    situations an account may be restructured if a customer makes three
    consecutive qualifying monthly payments within the last three calendar
    months. Only one hardship restructure is permitted in the life of a loan.
    There were no changes to the restructure policies of our United Kingdom
    business in 2005 or 2004.

(3) Historically, policy changes are not applied to the entire portfolio on the
    date of implementation but are applied to new, or recently originated or
    acquired accounts. However, the policies adopted in the third quarter of
    2003 for the mortgage services business and the fourth quarter of 2004 for
    the domestic private label (excluding retail sales contracts) and
    MasterCard/Visa credit card portfolios were applied more broadly. The policy
    changes for the mortgage services business which occurred in the third
    quarter of 2003, unless otherwise noted, were generally applied to accounts
    originated or acquired after January 1, 2003 and the historical
    restructuring policies and practices are effective for all accounts
    originated or acquired prior to January 1, 2003. Implementation of this
    uniform policy had the effect of only counting restructures occurring on or
    after January 1, 2003 in assessing restructure eligibility for the purpose
    of the limitation that no account may be restructured more than four times
    in a rolling 60 month period. These policy changes adopted in the third
    quarter of 2003 did not have a significant impact on our business model or
    results of operations as the changes are, in effect, phased in as
    receivables were originated or acquired. For the adoption of FFIEC policies
    which occurred in the fourth quarter of 2004, the policies were effective
    immediately for all receivables in the domestic private label credit card
    and the MasterCard and Visa portfolios. Other business units may also elect
    to adopt uniform policies in future periods.

(4) Our mortgage services business implemented this policy for all accounts
    effective March 1, 2004.

(5) Prior to January 1, 2003, accounts that had made at least six qualifying
    payments during the life of the loan and that agreed to pay by automatic
    withdrawal were generally restructured with one qualifying payment.

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                                                        HSBC Finance Corporation
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(6) For our Canadian business, private label accounts are limited to one
    restructure every four months and if originated or acquired after January 1,
    2003, two qualifying payments must be received, the account must be on the
    books for at least six months, at least six months must have elapsed since
    the last restructure, and there may be no more than four restructures in a
    rolling 60 month period.

In addition to our restructuring policies and practices, we employ other
customer account management techniques, which we typically use on a more limited
basis, that are similarly designed to manage customer relationships, maximize
collection opportunities and avoid foreclosure or repossession if reasonably
possible. These additional customer account management techniques include, at
our discretion, actions such as extended payment arrangements, approved external
debt management plans, forbearance, modifications, loan rewrites and/or
deferment pending a change in circumstances. We typically use these customer
account management techniques with individual borrowers in transitional
situations, usually involving borrower hardship circumstances or temporary
setbacks that are expected to affect the borrower's ability to pay the
contractually specified amount for some period of time. For example, under a
forbearance agreement, we may agree not to take certain collection or credit
agency reporting actions with respect to missed payments, often in return for
the borrower's agreeing to pay us an additional amount with future required
payments. In some cases, these additional customer account management techniques
may involve us agreeing to lower the contractual payment amount and/or reduce
the periodic interest rate. In most cases, the delinquency status of an account
is considered to be current if the borrower immediately begins payment under the
new account terms. When we use a customer account management technique, we may
treat the account as being contractually current and will not reflect it as a
delinquent account in our delinquency statistics. However, if the account
subsequently experiences payment defaults, it will again become contractually
delinquent. We generally consider loan rewrites to involve an extension of a new
loan, and such new loans are not reflected in our delinquency or restructuring
statistics. Our account management actions vary by product and are under
continual review and assessment to determine that they meet the goals outlined
above.

The tables below summarize approximate restructuring statistics in our managed
basis domestic portfolio. We report our restructuring statistics on a managed
basis only because the receivables that we securitize are subject to
underwriting standards comparable to our owned portfolio, are generally serviced
and collected without regard to ownership and result in a similar credit loss
exposure for us. As previously reported, in prior periods we used certain
assumptions and estimates to compile our restructure statistics. The systemic
counters used to compile the information presented below exclude from the
reported statistics loans that have been reported as contractually delinquent
but have been reset to a current status because we have determined that the
loans should not have been considered delinquent (e.g., payment application
processing errors). We continue to enhance our ability to capture and segment
restructure data across all business units. When comparing restructuring
statistics from different periods, the fact that our restructure policies and
practices will change over time, that exceptions are made to those policies and
practices, and that our data capture methodologies have been enhanced, should be
taken into account.

TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD - DOMESTIC PORTFOLIO(1)
(MANAGED BASIS)

AT DECEMBER 31,                                               2005    2004
---------------------------------------------------------------------------
Never restructured..........................................   89.5%   86.7%
Restructured:
  Restructured in the last 6 months.........................    4.0     5.1
  Restructured in the last 7-12 months......................    2.4     3.2
  Previously restructured beyond 12 months..................    4.1     5.0
                                                              -----   -----
  Total ever restructured(2)................................   10.5    13.3
                                                              -----   -----
Total.......................................................  100.0%  100.0%
                                                              =====   =====

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TOTAL RESTRUCTURED BY PRODUCT - DOMESTIC PORTFOLIO(1)
(MANAGED BASIS)

AT DECEMBER 31,                                                    2005             2004
---------------------------------------------------------------------------------------------
                                                                     (DOLLARS ARE IN MILLIONS
Real estate secured.........................................  $ 8,334   10.4%  $ 8,572   13.8%
                                                              
Auto finance................................................    1,688   14.5     1,545   15.2
                                                                
MasterCard/Visa.............................................      774    3.0       619    3.2
                                                                  
Private label(3)............................................       26    7.3        21    6.1
                                                                   
Personal non-credit card....................................    3,369   19.9     3,541   22.4
                                                                
                                                              -------   ----   -------   ----
Total(2)....................................................  $14,191   10.5%  $14,298   13.3%
                                                              =======   ====   =======   ====

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

(1) Excludes foreign businesses, commercial and other.

(2) Total including foreign businesses was 10.3 percent at December 31, 2005 and
    12.3 percent at December 31, 2004.

(3) Only reflects consumer lending retail sales contracts which have
    historically been classified as private label. All other domestic private
    label receivables were sold to HSBC Bank USA in December 2004.

See "Credit Quality Statistics" for further information regarding owned basis
and managed basis delinquency, charge-offs and nonperforming loans.

The amount of domestic and foreign managed receivables in forbearance,
modification, credit card services approved consumer credit counseling
accommodations, rewrites or other customer account management techniques for
which we have reset delinquency and that is not included in the restructured or
delinquency statistics was approximately $.4 billion or .3 percent of managed
receivables at December 31, 2005 compared with $.4 billion or .4 percent of
managed receivables at December 31, 2004

In addition to the above, we granted an initial 30 or 60 day payment deferral
(based on product) to customers living in the Katrina FEMA designated Individual
Assistance disaster areas. This deferral was extended for a period of up to 90
days or longer in certain cases based on a customer's specific circumstances,
consistent with our natural disaster policies. In certain cases these
arrangements have resulted in a customer's delinquency status being reset by 30
days. These extended payment arrangements totaled $1.1 billion or .8 percent of
managed receivables at December 31, 2005 and are not reflected as restructures
in the table above or included in the other customer account management
techniques described in the paragraph above.

ADOPTION OF FFIEC CHARGE-OFF AND ACCOUNT MANAGEMENT POLICIES Upon receipt of
regulatory approval for the sale of our domestic private label portfolio
(excluding retail sales contracts at our consumer lending business) to HSBC Bank
USA in December 2004, we adopted charge-off and account management guidelines in
accordance with the Uniform Retail Credit Classification and Account Management
Policy issued by the Federal Financial Institutions Examination Council for our
domestic private label (excluding retail sales contracts at our consumer lending
business) and our MasterCard and Visa portfolios. The adoption of FFIEC
charge-off policies for our domestic private label and MasterCard/Visa
receivables resulted in a reduction to our net income in December 2004 of
approximately $121 million.

GEOGRAPHIC CONCENTRATIONS The state of California accounts for 12 percent of
both our domestic owned and managed portfolios. No other state accounts for more
than 10 percent of either our domestic owned or managed portfolio. Because of
our centralized underwriting, collections and processing functions, we can
quickly change our credit standards and intensify collection efforts in specific
locations. We believe this lowers risks resulting from such geographic
concentrations.

Our foreign consumer operations located in the United Kingdom and the rest of
Europe accounted for 4 percent of owned consumer receivables and Canada
accounted for 2 percent of owned consumer receivables at December 31, 2005.

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LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

While the funding synergies resulting from our acquisition by HSBC have allowed
us to reduce our reliance on traditional sources to fund our growth, our
continued success and prospects for growth are dependent upon access to the
global capital markets. Numerous factors, internal and external, may impact our
access to and the costs associated with issuing debt in these markets. These
factors may include our debt ratings, overall capital markets volatility and the
impact of overall economic conditions on our business. We continue to focus on
balancing our use of affiliate and third-party funding sources to minimize
funding expense while maximizing liquidity. As discussed below, we supplemented
unsecured debt issuance during 2005 with proceeds from the continuing sale of
newly originated domestic private label receivables (excluding retail sales
contracts) to HSBC Bank USA following the bulk sale of this portfolio in
December 2004, debt issued to affiliates, the issuance of Series B preferred
stock, the issuance of additional common equity to HINO and the sale of our U.K.
credit card business to HBEU in December 2005.

Because we are now a subsidiary of HSBC, our credit spreads relative to
Treasuries have tightened compared to those we experienced during the months
leading up to the announcement of our acquisition by HSBC. Primarily as a result
of these tightened credit spreads, we recognized cash funding expense savings of
approximately $600 million in 2005, $350 million in 2004 and $125 million in
2003 compared to the funding costs we would have incurred using average spreads
from the first half of 2002. It is anticipated that these tightened credit
spreads in combination with the issuance of new HSBC Finance Corporation debt
and other funding synergies including asset transfers and external fee savings
will enable HSBC to realize annual cash funding expense savings in excess of $1
billion per year as our existing term debt matures which is anticipated to be
achieved in 2006. In 2005, the cash funding expense savings realized by HSBC
totaled approximately $865 million. The portion of these savings to be realized
by HSBC Finance Corporation will depend in large part upon the amount and timing
of various initiatives between HSBC Finance Corporation and other HSBC
subsidiaries. Amortization of purchase accounting fair value adjustments to our
external debt obligations, reduced interest expense by $656 million in 2005,
including $1 million relating to Metris, $946 million in 2004 and $773 million
in 2003.

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Debt due to affiliates and other HSBC related funding are summarized in the
following table:

DECEMBER 31,                                                  2005    2004
---------------------------------------------------------------------------
                                                              (IN BILLIONS)
Debt outstanding to HSBC subsidiaries:
  Drawings on bank lines in the U.K. and Europe.............  $ 4.2   $ 7.5
  Term debt.................................................   11.0     6.0
  Preferred securities issued by Household Capital Trust
     VIII to HSBC...........................................     .3      .3
                                                              -----   -----
  Total debt outstanding to HSBC subsidiaries...............   15.5    13.8
                                                              -----   -----
Debt outstanding to HSBC clients:
  Euro commercial paper.....................................    3.2     2.6
  Term debt.................................................    1.3      .8
                                                              -----   -----
  Total debt outstanding to HSBC clients....................    4.5     3.4
Series A preferred stock issued to HINO.....................      -     1.1(1)
Cash received on bulk and subsequent sale of domestic
  private label credit card receivables to HSBC Bank USA,
  net (cumulative)..........................................   15.7    12.4
Real estate secured receivable activity with HSBC Bank USA:
  Cash received on sales (cumulative).......................    3.7     3.7
  Direct purchases from correspondents (cumulative).........    4.2     2.8
  Reductions in real estate secured receivables sold to HSBC
     Bank USA...............................................   (3.3)   (1.5)
                                                              -----   -----
Total real estate secured receivable activity with HSBC Bank
  USA.......................................................    4.6     5.0
Cash received from sale of U.K. credit card business to
  HBEU......................................................    2.6       -
Capital contribution by HINO................................    1.2(2)     -
                                                              -----   -----
Total HSBC related funding..................................  $44.1   $35.7
                                                              =====   =====

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

(1) In December 2005, the $1.1 billion Series A preferred stock plus all accrued
    and unpaid dividends was exchanged for a like amount of common equity and
    the Series A preferred stock was retired. We issued 4 shares of common
    equity to HINO as part of the exchange.

(2) This capital contribution was made in connection with our acquisition of
    Metris.

At December 31, 2005, funding from HSBC, including debt issuances to HSBC
subsidiaries and clients, represented 15 percent of our total managed debt and
preferred stock funding. At December 31, 2004, funding from HSBC, including debt
issuances to HSBC subsidiaries and clients and preferred stock held by HINO,
represented 15 percent of our total managed debt and preferred stock funding.

Cash proceeds from the December 2005 sale of our managed basis U.K. credit card
receivables to HBEU of $2.6 billion in cash were used to partially pay down
drawings on bank lines from HBEU for the U.K. and fund operations. Proceeds from
the December 2004 domestic private label receivable sale to HSBC Bank USA of
$12.4 billion were used to pay down short-term domestic borrowings, including
outstanding commercial paper balances, and to fund operations. Excess liquidity
from the sale was used to temporarily fund available for sale investments.
Proceeds from the March 2004 real estate secured receivable sale were used to
pay-down commercial paper balances which had been used as temporary funding in
the first quarter of 2004 and to fund various debt maturities.

At December 31, 2005, we had commercial paper back stop credit facility of $2.5
billion from HSBC domestically and a revolving credit facility of $5.3 billion
from HSBC in the U.K. At December 31, 2004, we had commercial paper back stop
credit facility of $2.5 billion from HSBC domestically and a revolving credit
facility of $7.5 billion from HSBC in the U.K. At December 31, 2005, $4.2
billion was outstanding under the HBEU lines for the U.K. and no balances were
outstanding under the domestic lines. At December 31, 2004, $7.5 billion was
outstanding under HBEU lines for the U.K. and no balances were outstanding under
the
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                                                        HSBC Finance Corporation
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domestic lines. A $4.0 billion revolving credit facility with HSBC Private Bank
(Suisse) SA, which was in place during a portion of 2004 to allow temporary
increases in commercial paper issuances in anticipation of the sale of the
private label receivables to HSBC Bank USA, expired on December 30, 2004. We had
derivative contracts with a notional value of $72.2 billion, or approximately 95
percent of total derivative contracts, outstanding with HSBC affiliates at
December 31, 2005. At December 31, 2004, we had derivative contracts with a
notional value of $62.6 billion, or approximately 87 percent of total derivative
contracts, outstanding with HSBC affiliates.

SECURITIES AND OTHER SHORT-TERM INVESTMENTS Securities totaled $4.1 billion at
December 31, 2005 and $3.6 billion at December 31, 2004. Securities purchased
under agreements to resell totaled $78 million at December 31, 2005 and $2.7
billion at December 31, 2004. Interest bearing deposits with banks totaled $384
million at December 31, 2005 and $603 million at December 31, 2004.

COMMERCIAL PAPER, BANK AND OTHER BORROWINGS totaled $11.4 billion at December
31, 2005 and $9.0 billion at December 31, 2004. The increase at December 31,
2005 was primarily a result of a plan to increase our commercial paper issuances
as a result of lowering the coverage ratio of bank credit facilities to
outstanding commercial paper from 100% to 80%. This plan also requires that the
combination of bank credit facilities and undrawn committed conduit facilities
will, at all times, exceed 115% of outstanding commercial paper. This plan,
which was reviewed with the relevant rating agencies, resulted in an increase in
our maximum outstanding commercial paper balance to in excess of $12.0 billion.
At December 31, 2004, we were carrying lower levels of commercial paper as the
proceeds from the bulk sale of domestic private label receivables to HSBC Bank
USA were used to reduce the outstanding balances. Included in this total was
outstanding Euro commercial paper sold to customers of HSBC of $3.2 billion at
December 31, 2005 and $2.6 billion at December 31, 2004.

LONG TERM DEBT (with original maturities over one year) increased to $105.2
billion at December 31, 2005 from $85.4 billion at December 31, 2004. As part of
our overall liquidity management strategy, we continue to extend the maturity of
our liability profile. Significant issuances during 2005 included the following:
     - $10.5 billion of domestic and foreign medium-term notes
     - $6.0 billion of foreign currency-denominated bonds (including $227
       million which was issued to customers of HSBC)
     - $1.8 billion of InterNotes(SM) (retail-oriented medium-term notes)
     - $11.2 billion of global debt
     - $1.0 billion of junior subordinated notes issued to Household Capital
       Trust IX.
     - $9.7 billion of securities backed by real estate secured, auto finance
       and MasterCard/Visa receivables. For accounting purposes, these
       transactions were structured as secured financings.

Additionally, as part of the Metris acquisition we assumed $4.6 billion of
securities backed by MasterCard/ Visa receivables which we restructured to fail
sale treatment and are now accounted for as secured financings.

In January 2006, we redeemed the junior subordinated notes issued to Household
Capital Trust VI with an outstanding principal balance of $206 million. In
November 2005, we issued $1.0 billion of preferred securities of Household
Capital Trust IX. The interest rate on these securities is 5.911% from the date
of issuance through November 30, 2015 and is payable semiannually beginning May
30, 2006. After November 30, 2015, the rate changes to the three-month LIBOR
rate, plus 1.926% and is payable quarterly beginning on February 28, 2016. In
June 2005, we redeemed the junior subordinated notes issued to Household Capital
Trust V with an outstanding principal balance of $309 million.

PREFERRED SHARES In June 2005, we issued 575,000 shares of Series B Preferred
Stock for $575 million. Dividends on the Series B Preferred Stock are
non-cumulative and payable quarterly at a rate of 6.36 percent commencing
September 15, 2005. The Series B Preferred Stock may be redeemed at our option
after June 23, 2010. In 2005, we paid dividends totaling $17 million on the
Series B Preferred Stock.

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                                                        HSBC Finance Corporation
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COMMON EQUITY We issued four shares of common equity to HINO in December 2005 in
exchange for the $1.1 billion Series A Preferred Stock plus all accrued and
unpaid dividends. Additionally, in connection with our acquisition of Metris,
HINO made a capital contribution of $1.2 billion in exchange for one share of
common stock.

SELECTED CAPITAL RATIOS In managing capital, we develop targets for tangible
shareholder's(s') equity to tangible managed assets ("TETMA"), tangible
shareholder's(s') equity plus owned loss reserves to tangible managed assets
("TETMA + Owned Reserves") and tangible common equity to tangible managed
assets. These ratio targets are based on discussions with HSBC and rating
agencies, risks inherent in the portfolio, the projected operating environment
and related risks, and any acquisition objectives. Our targets may change from
time to time to accommodate changes in the operating environment or other
considerations such as those listed above. We are committed to maintaining at
least a mid-single "A" rating and as part of that effort will continue to review
appropriate capital levels with our rating agencies.

On January 30, 2006, Moody's Investor Service raised the Senior Debt Rating for
HSBC Finance Corporation from A1 to Aa3 with positive outlook. Our short-term
rating was also affirmed at Prime-1.

Selected capital ratios are summarized in the following table:

DECEMBER 31,                                                  2005    2004
---------------------------------------------------------------------------
TETMA(1),(2)................................................   7.56%   6.27%
TETMA + Owned Reserves(1),(2)...............................  10.55    9.04
Tangible common equity to tangible managed assets(1)........   6.07    4.67
Common and preferred equity to owned assets.................  12.43   13.01
Excluding HSBC acquisition purchase accounting adjustments:
  TETMA(1),(2)..............................................   8.52%   7.97%
  TETMA + Owned Reserves(1),(2).............................  11.51   10.75
  Tangible common equity to tangible managed assets(1)......   7.02    6.38

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

(1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed
    assets represent non-GAAP financial ratios that are used by HSBC Finance
    Corporation management and applicable rating agencies to evaluate capital
    adequacy and may differ from similarly named measures presented by other
    companies. See "Basis of Reporting" for additional discussion on the use of
    non-GAAP financial measures and "Reconciliations to GAAP Financial Measures"
    for quantitative reconciliations to the equivalent GAAP basis financial
    measure.

(2) Beginning in the third quarter of 2005, and with the agreement of applicable
    rating agencies, we have refined our definition of TETMA and TETMA + Owned
    Reserves to exclude the Adjustable Conversion-Rate Equity Security Units for
    all periods subsequent to our acquisition by HSBC as this more accurately
    reflects the impact of these items on our equity. Prior period amounts have
    been revised to reflect the current period presentation.

HSBC FINANCE CORPORATION. HSBC Finance Corporation is an indirect wholly owned
subsidiary of HSBC Holdings plc. On March 28, 2003, HSBC acquired Household
International, Inc. by way of merger in a purchase business combination.
Effective January 1, 2004, HSBC transferred its ownership interest in Household
to a wholly owned subsidiary, HSBC North America Holdings Inc., which
subsequently contributed Household to its wholly owned subsidiary, HSBC
Investments (North America) Inc. ("HINO"). On December 15, 2004, Household
merged with its wholly owned subsidiary, Household Finance Corporation, with
Household as the surviving entity. At the time of the merger, Household changed
its name to "HSBC Finance Corporation."

HSBC Finance Corporation is the parent company that owns the outstanding common
stock of its subsidiaries. Our main source of funds is cash received from
operations and subsidiaries in the form of dividends. In addition, we receive
cash from third parties or affiliates by issuing preferred stock and debt.

HSBC Finance Corporation received cash dividends from its subsidiaries of $514
million in 2005 and $120 million in 2004.

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                                                        HSBC Finance Corporation
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In conjunction with the acquisition by HSBC, we issued a series of 6.50 percent
cumulative preferred stock in the amount of $1.1 billion ("Series A Preferred
Stock") to HSBC on March 28, 2003. In September 2004, HNAH issued a new series
of preferred stock totaling $1.1 billion to HSBC in exchange for our Series A
Preferred Stock. In October 2004, our immediate parent, HINO, issued a new
series of preferred stock to HNAH in exchange for our Series A Preferred Stock.
We paid dividends on our Series A Preferred Stock of $66 million in October 2005
and $108 million in October 2004. On December 15, 2005, we issued 4 shares of
common stock to HINO in exchange for the $1.1 billion Series A Preferred Stock
plus the accrued and unpaid dividends and the Series A Preferred Stock was
retired.

In November 2005, we issued $1.0 billion of preferred securities of Household
Capital Trust IX. The interest rate on these securities is 5.911% from the date
of issuance through November 30, 2015 and is payable semiannually beginning May
30, 2006. After November 30, 2015, the rate changes to the three-month LIBOR
rate, plus 1.926% and is payable quarterly beginning on February 28, 2016. In
June 2005, we redeemed the junior subordinated notes issued to the Household
Capital Trust V with an outstanding principal balance of $309 million.

In June 2005, we issued 575,000 shares of Series B Preferred Stock for $575
million. Dividends on the Series B Preferred Stock are non-cumulative and
payable quarterly at a rate of 6.36 percent commencing September 15, 2005. The
Series B Preferred Stock may be redeemed at our option after June 23, 2010. In
2005, we paid dividends totaling $17 million on the Series B Preferred Stock.

HSBC Finance Corporation has a number of obligations to meet with its available
cash. It must be able to service its debt and meet the capital needs of its
subsidiaries. It also must pay dividends on its preferred stock and may pay
dividends on its common stock. Dividends of $980 million were paid to HINO, our
immediate parent company, on our common stock in 2005 and $2.6 billion were paid
in 2004. We anticipate paying future dividends to HINO, but will maintain our
capital at levels necessary to maintain at least a mid-single "A" rating either
by limiting the dividends to or through capital contributions from our parent.

At various times, we will make capital contributions to our subsidiaries to
comply with regulatory guidance, support receivable growth, maintain acceptable
investment grade ratings at the subsidiary level, or provide funding for
long-term facilities and technology improvements. HSBC Finance Corporation made
capital contributions to certain subsidiaries of $2.2 billion in 2005 and $1.1
billion in 2004.

SUBSIDIARIES At December 31, 2005, HSBC Finance Corporation had one major
subsidiary, Household Global Funding ("Global"), and manages all domestic
operations. Prior to December 15, 2004, we had two major subsidiaries: Household
Finance Corporation ("HFC"), which managed all domestic operations, and Global.
On December 15, 2004, HFC merged with and into Household International which
changed its name to HSBC Finance Corporation.

DOMESTIC OPERATIONS HSBC Finance Corporation's domestic operations are funded
through the collection of receivable balances; issuing commercial paper,
medium-term debt and long-term debt; securitizing and borrowing under secured
financing facilities and selling consumer receivables. Domestically, HSBC
Finance Corporation markets its commercial paper primarily through an in-house
sales force. The vast majority of our domestic medium-term notes and long-term
debt is now marketed through subsidiaries of HSBC. Domestic medium-term notes
may also be marketed through our in-house sales force and investment banks.
Long-term debt may also be marketed through unaffiliated investment banks.

At December 31, 2005, advances from subsidiaries of HSBC for our domestic
operations totaled $11.0 billion. At December 31, 2004, advances from
subsidiaries of HSBC for our domestic operations totaled $6.0 billion. The
interest rates on funding from HSBC subsidiaries are market-based and comparable
to those available from unaffiliated parties.

Outstanding commercial paper related to our domestic operations totaled $10.9
billion at December 31, 2005 and $8.7 billion at December 31, 2004. As discussed
above, the outstanding domestic commercial paper balance increased significantly
in 2005 as a result of the plan to increase our commercial paper issuances as a

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                                                        HSBC Finance Corporation
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result of lowering the coverage ratio of bank credit facilities to outstanding
commercial paper from 100% to 80%. This plan also requires that the combination
of bank credit facilities and undrawn committed conduit facilities will, at all
times, exceed 115% of outstanding commercial paper.

Following our acquisition by HSBC, we established a new Euro commercial paper
program, largely targeted towards HSBC clients, which expanded our European
investor base. Under the Euro commercial paper program, commercial paper
denominated in Euros, British pounds and U.S. dollars is sold to foreign
investors. Outstanding Euro commercial paper sold to customers of HSBC totaled
$3.2 billion at December 31, 2005 and $2.6 billion at December 31, 2004. We
actively manage the level of commercial paper outstanding to ensure availability
to core investors while maintaining excess capacity within our
internally-established targets as communicated with the rating agencies.

The following table shows various debt issuances by HSBC Finance Corporation and
its domestic subsidiaries during 2005 and 2004.

                                                               2005    2004
----------------------------------------------------------------------------
                                                              (IN BILLIONS)
Medium term notes, excluding issuances to HSBC customers and
  subsidiaries of HSBC......................................  $ 9.5    $6.4
Medium term notes issued to HSBC customers..................     .2      .3
Medium term notes issued to subsidiaries of HSBC............    5.0     4.6
Foreign currency-denominated bonds, excluding issuances to
  HSBC customers and subsidiaries of HSBC...................    5.8     1.0
Junior subordinated notes issued to the Household Capital
  Trust IX..................................................    1.0       -
Foreign currency-denominated bonds issued to HSBC
  customers.................................................     .2      .2
Foreign currency-denominated bonds issued to subsidiaries of
  HSBC......................................................      -      .6
Global debt.................................................   11.2     4.5
InterNotes(SM) (retail-oriented medium-term notes)..........    1.8     1.4
Securities backed by home equity, auto finance and
  MasterCard/Visa receivables structured as secured
  financings................................................    9.7     5.1

Additionally, as part of the Metris acquisition we assumed $4.6 billion of
securities backed by MasterCard/ Visa receivables which we restructured to fail
sale treatment and are now accounted for as secured financings.

In order to eliminate future foreign exchange risk, currency swaps were used at
the time of issuance to fix in U.S. dollars substantially all
foreign-denominated notes in 2005 and 2004.

HSBC Finance Corporation issued securities backed by dedicated receivables of
$9.7 billion in 2005 and $5.1 billion in 2004. For accounting purposes, these
transactions were structured as secured financings, therefore, the receivables
and the related debt remain on our balance sheet. At December 31, 2005,
closed-end real estate secured, auto finance and MasterCard/Visa receivables
totaling $21.8 billion secured $15.1 billion of outstanding debt. At December
31, 2004, closed-end real estate secured and auto finance receivables totaling
$10.3 billion secured $7.3 billion of outstanding debt.

HSBC Finance Corporation had committed back-up lines of credit totaling $10.6
billion at December 31, 2005 for its domestic operations. Included in the
December 31, 2005 total are $2.5 billion of revolving credit facilities with
HSBC. None of these back-up lines were drawn upon in 2005. The back-up lines
expire on various dates through 2008. The most restrictive financial covenant
contained in the back-up line agreements that could restrict availability is an
obligation to maintain minimum shareholder's equity of $10.0 billion which is
substantially below our December 31, 2005 common and preferred shareholder's
equity balance of $19.5 billion.

At December 31, 2005, we had facilities with commercial and investment banks
under which our domestic operations may issue securities backed with receivables
up to $15 billion of receivables, including up to

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                                                        HSBC Finance Corporation
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$12.7 billion of auto finance, MasterCard, Visa, and personal non-credit card
and $2.3 billion of real estate secured receivables. We have increased our total
conduit capacity by $2.2 billion in 2005. Conduit capacity for real estate
secured receivables was decreased $.2 billion and capacity for other products
was increased $2.4 billion. The facilities are renewable at the banks' option.
At December 31, 2005, $5.6 billion of auto finance, MasterCard/Visa, personal
non-credit card and real estate secured receivables were used in collateralized
funding transactions structured either as securitizations or secured financings
under these funding programs and unsecured debt funding. In addition, we have
available a $4 billion single seller mortgage facility (none of which was
outstanding at December 31, 2005). The amount available under the facilities
will vary based on the timing and volume of public securitization transactions.
Through existing term bank financing and new debt issuances, we believe we will
continue to have adequate sources of funds.

GLOBAL Global includes our foreign subsidiaries in the United Kingdom, the rest
of Europe and Canada. Global's assets were $10.7 billion at December 31, 2005
and $14.3 billion at December 31, 2004. Consolidated shareholder's(s') equity
includes the effect of translating our foreign subsidiaries' assets, liabilities
and operating results from their local currency into U.S. dollars.

Each foreign subsidiary conducts its operations using its local currency. While
each foreign subsidiary usually borrows funds in its local currency, both our
United Kingdom and Canadian subsidiaries have historically borrowed funds in
foreign currencies. This allowed the subsidiaries to achieve a lower cost of
funds than that available at that time in their local markets. These borrowings
were converted from foreign currencies to their local currencies using currency
swaps at the time of issuance.

UNITED KINGDOM Our United Kingdom operation is funded with HBEU debt and
previously issued long-term debt. Prior to 2004, at various times we have also
utilized securitizations of receivables, wholesale deposits, commercial paper
and short-term and intermediate term bank lines of credit to fund our U.K.
operations. The following table summarizes the funding of our United Kingdom
operation:

                                                              2005    2004
---------------------------------------------------------------------------
                                                              (IN BILLIONS)
Due to HSBC affiliates......................................  $4.2    $7.5
Long term debt..............................................    .9     1.0

At December 31, 2005, $.9 billion of long term debt was guaranteed by HSBC
Finance Corporation. HSBC Finance Corporation receives a fee for providing the
guarantee. In 2005 and 2004, our United Kingdom subsidiary primarily received
its funding directly from HSBC.

As previously discussed, in December 2005, our U.K. operations sold its credit
card operations to HBEU for total consideration of $3.0 billion, including $261
million in preferred stock of a subsidiary of HBEU, and used the proceeds to
partially pay down amounts due to HBEU on bank lines in the U.K. and to pay a
cash dividend of $489 million to HSBC Finance Corporation. Our U.K. operations
also provided a dividend to HSBC Finance Corporation of $41 million of the
preferred stock received in the transaction.

CANADA Our Canadian operation is funded with commercial paper, intermediate debt
and long-term debt. Outstanding commercial paper totaled $442 million at
December 31, 2005 compared to $248 million at December 31, 2004. Intermediate
and long-term debt totaled $2.5 billion at December 31, 2005 compared to $1.9
billion at December 31, 2004. At December 31, 2005, $2.9 billion of the Canadian
subsidiary's debt was guaranteed by HSBC Finance Corporation for which it
receives a fee for providing the guarantee. Committed back-up lines of credit
for Canada were approximately $86 million at December 31, 2005. All of these
back-up lines are guaranteed by HSBC Finance Corporation and none were used in
2005. In 2005, our Canadian operations paid a dividend of $25 million to HSBC
Finance Corporation.

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2006 FUNDING STRATEGY As discussed previously, the acquisition by HSBC has
improved our access to the capital markets as well as expanded our access to a
worldwide pool of potential investors. Our current estimated domestic funding
needs and sources for 2006 are summarized in the table that follows.

                                                               (IN BILLIONS)
----------------------------------------------------------------------------
FUNDING NEEDS:
  Net asset growth..........................................     $15 - 25
  Commercial paper, term debt and securitization
     maturities.............................................      30 - 36
  Other.....................................................       1 -  3
                                                                 --------
Total funding needs.........................................     $46 - 64
                                                                 ========
FUNDING SOURCES:
  External funding, including commercial paper..............     $45 - 59
  HSBC and HSBC subsidiaries................................       1 -  5
                                                                 --------
Total funding sources.......................................     $46 - 64
                                                                 ========

Commercial paper outstanding in 2006 is expected to be in line with the December
31, 2005 balances, except during the first three months of 2006 when commercial
paper balances will be temporarily high due to the seasonal activity of our TFS
business. Approximately two-thirds of outstanding commercial paper is expected
to be domestic commercial paper sold both directly and through dealer programs.
Euro commercial paper is expected to account for approximately one-third of
outstanding commercial paper and will be marketed predominately to HSBC clients.

Term debt issuances are expected to utilize several ongoing programs to achieve
the desired funding. Approximately 70 percent of term debt funding is expected
to be achieved through transactions including U.S. dollar global and Euro
transactions and large medium-term note ("MTN") offerings. Domestic and foreign
retail note programs are expected to account for approximately 20 percent of
term debt issuances. The remaining term debt issuances are expected to consist
of smaller domestic and foreign currency MTN offerings.

As a result of our decision in 2004 to fund all new collateralized funding
transactions as secured financings, we anticipate securitization levels will
continue to decline in 2006. Because existing public MasterCard and Visa credit
card transactions were structured as sales to revolving trusts that require
replenishments of receivables to support previously issued securities,
receivables will continue to be sold to these trusts until the revolving periods
end, the last of which is currently projected to occur in 2008. In addition, we
will continue to replenish at reduced levels, certain non-public personal
non-credit card securities issued to conduits for a period of time in order to
manage liquidity. Since our securitized receivables have varying lives, it will
take time for these receivables to pay-off and the related interest-only strip
receivables to be reduced to zero. The termination of sale treatment on new
collateralized funding activity reduced our reported net income under U.S. GAAP.
There was no impact, however, on cash received from operations or on IFRS
reported results. Because we believe the market for securities backed by
receivables is a reliable, efficient and cost-effective source of funds, we will
continue to use secured financings of consumer receivables as a source of our
funding and liquidity. We anticipate that secured financings in 2006 should
increase significantly over the 2005 levels.

HSBC received regulatory approval in 2003 to provide the direct funding required
by our United Kingdom operations. Accordingly, in 2004 we eliminated all back-up
lines of credit which had previously supported our United Kingdom subsidiary.
All new funding for our United Kingdom subsidiary is now provided directly by
HSBC. Our Canadian operation will continue to fund itself independently through
traditional third-party funding sources such as commercial paper and medium
term-notes. Funding needs in 2006 are not expected to be significant for Canada.

CAPITAL EXPENDITURES We made capital expenditures of $78 million in 2005 and $96
million in 2004.

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COMMITMENTS We also enter into commitments to meet the financing needs of our
customers. In most cases, we have the ability to reduce or eliminate these open
lines of credit. As a result, the amounts below do not necessarily represent
future cash requirements at December 31, 2005:

                                                               (IN BILLIONS)
----------------------------------------------------------------------------
Private label, MasterCard and Visa credit cards.............      $176.2
Other consumer lines of credit..............................        15.0
                                                                  ------
Open lines of credit(1).....................................      $191.2
                                                                  ======

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

(1) Includes an estimate for acceptance of credit offers mailed to potential
    customers prior to December 31, 2005.

At December 31, 2005, our mortgage services business had commitments with
numerous correspondents to purchase up to $1.6 billion of real estate secured
receivables at fair market value, subject to availability based on underwriting
guidelines specified by our mortgage services business and at prices indexed to
general market rates. These commitments have terms of up to one year and can be
renewed upon mutual agreement.

CONTRACTUAL CASH OBLIGATIONS The following table summarizes our long-term
contractual cash obligations at December 31, 2005 by period due:

                                     2006      2007      2008      2009      2010     THEREAFTER    TOTAL
-----------------------------------------------------------------------------------------------------------
                                                                 (IN MILLIONS)
PRINCIPAL BALANCE OF DEBT:
  Time certificates of deposit....  $     -   $     9   $     -   $     -   $     -    $     -     $      9
  Due to affiliates...............    5,466       624         -     1,831     1,505      6,108       15,534
  Long term debt (including
    secured financings)...........   19,291    18,805    14,937    11,390    11,357     28,291      104,071
                                    -------   -------   -------   -------   -------    -------     --------
  Total debt......................   24,757    19,438    14,937    13,221    12,862     34,399      119,614
                                    -------   -------   -------   -------   -------    -------     --------
OPERATING LEASES:
  Minimum rental payments.........      197       136       118        96        61        123          731
  Minimum sublease income.........       76        28        28        27        16          1          176
                                    -------   -------   -------   -------   -------    -------     --------
  Total operating leases..........      121       108        90        69        45        122          555
                                    -------   -------   -------   -------   -------    -------     --------
OBLIGATIONS UNDER MERCHANT AND
  AFFINITY PROGRAMS...............      127       128       124       124       116        480        1,099
NON-QUALIFIED PENSION AND
  POSTRETIREMENT BENEFIT
  LIABILITIES(1)..................       24        25        30        27        31      1,102        1,239
                                    -------   -------   -------   -------   -------    -------     --------
TOTAL CONTRACTUAL CASH
  OBLIGATIONS.....................  $25,029   $19,699   $15,181   $13,441   $13,054    $36,103     $122,507
                                    =======   =======   =======   =======   =======    =======     ========

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

(1) Expected benefit payments calculated include future service component.

These cash obligations could be funded primarily through cash collections on
receivables, from the issuance of new unsecured debt or through secured
financings of receivables. Our receivables and other liquid assets generally
have shorter lives than the liabilities used to fund them.

In January 2006 we entered into a lease for a building in the Village of
Mettawa, Illinois. The new facility will consolidate our Prospect Heights, Mount
Prospect and Deerfield offices. Construction of the building will begin in the
spring of 2006 with the move planned for first and second quarter 2008. An
estimate of the contractual cash obligation associated with this lease will not
be finalized until later in 2006.

Our purchase obligations for goods and services at December 31, 2005 were not
significant.

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OFF BALANCE SHEET ARRANGEMENTS AND SECURED FINANCINGS
--------------------------------------------------------------------------------

SECURITIZATIONS AND SECURED FINANCINGS Securitizations (collateralized funding
transactions structured to receive sale treatment under Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a Replacement of FASB
Statement No. 125," ("SFAS No. 140")) and secured financings (collateralized
funding transactions which do not receive sale treatment under SFAS No. 140) of
consumer receivables have been a source of funding and liquidity for us.
Securitizations and secured financings have been used to limit our reliance on
the unsecured debt markets and often are more cost-effective than alternative
funding sources.

In a securitization, a designated pool of non-real estate consumer receivables
is removed from the balance sheet and transferred through a limited purpose
financing subsidiary to an unaffiliated trust. This unaffiliated trust is a
qualifying special purpose entity ("QSPE") as defined by SFAS No. 140 and,
therefore, is not consolidated. The QSPE funds its receivable purchase through
the issuance of securities to investors, entitling them to receive specified
cash flows during the life of the securities. The receivables transferred to the
QSPE serve as collateral for the securities. At the time of sale, an
interest-only strip receivable is recorded, representing the present value of
the cash flows we expect to receive over the life of the securitized
receivables, net of estimated credit losses and debt service. Under the terms of
the securitizations, we receive annual servicing fees on the outstanding balance
of the securitized receivables and the rights to future residual cash flows on
the sold receivables after the investors receive their contractual return. Cash
flows related to the interest-only strip receivables and servicing the
receivables are collected over the life of the underlying securitized
receivables.

Certain securitization trusts, such as credit cards, are established at fixed
levels and, due to the revolving nature of the underlying receivables, require
the sale of new receivables into the trust to replace runoff so that the
principal dollar amount of the investors' interest remains unchanged. We refer
to such activity as replenishments. Once the revolving period ends, the
amortization period begins and the trust distributes principal payments to the
investors.

When loans are securitized in transactions structured as sales, we receive cash
proceeds from investors, net of transaction costs and expenses. These proceeds
are generally used to re-pay other debt and corporate obligations and to fund
new loans. The investors' shares of finance charges and fees received from the
securitized loans are collected each month and are primarily used to pay
investors for interest and credit losses and to pay us for servicing fees. We
retain any excess cash flow remaining after such payments are made to investors.

Generally, for each securitization and secured financing we utilize credit
enhancement to obtain investment grade ratings on the securities issued by the
trust. To ensure that adequate funds are available to pay investors their
contractual return, we may retain various forms of interests in assets securing
a funding transaction, whether structured as a securitization or a secured
financing, such as over-collateralization, subordinated series, residual
interests (in the case of securitizations) in the receivables or we may fund
cash accounts. Over-collateralization is created by transferring receivables to
the trust issuing the securities that exceed the balance of the securities to be
issued. Subordinated interests provide additional assurance of payment to
investors holding senior securities. Residual interests are also referred to as
interest-only strip receivables and represent rights to future cash flows from
receivables in a securitization trust after investors receive their contractual
return. Cash accounts can be funded by an initial deposit at the time the
transaction is established and/or from interest payments on the receivables that
exceed the investor's contractual return.

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Our retained securitization interests are not in the form of securities and are
included in receivables on our consolidated balance sheets. These retained
interests were comprised of the following at December 31, 2005 and 2004:

                                                              AT DECEMBER 31,
                                                              ---------------
                                                               2005     2004
-----------------------------------------------------------------------------
                                                               (IN MILLIONS)
Overcollateralization.......................................  $  295   $  826
Interest-only strip receivables.............................      23      323
Cash spread accounts........................................     150      225
Other subordinated interests................................   2,190    2,809
                                                              ------   ------
Total retained securitization interests.....................  $2,658   $4,183
                                                              ======   ======

In a secured financing, a designated pool of receivables are conveyed to a
wholly owned limited purpose subsidiary which in turn transfers the receivables
to a trust which sells interests to investors. Repayment of the debt issued by
the trust is secured by the receivables transferred. The transactions are
structured as secured financings under SFAS No. 140. Therefore, the receivables
and the underlying debt of the trust remain on our balance sheet. We do not
recognize a gain in a secured financing transaction. Because the receivables and
the debt remain on our balance sheet, revenues and expenses are reported
consistently with our owned balance sheet portfolio. Using this source of
funding results in similar cash flows as issuing debt through alternative
funding sources.

Securitizations are treated as secured financings under both IFRS and U.K. GAAP.
In order to align our accounting treatment with that of HSBC initially under
U.K. GAAP and now under IFRS, we began to structure all new collateralized
funding transactions as secured financings in the third quarter of 2004.
However, because existing public MasterCard and Visa credit card transactions
were structured as sales to revolving trusts that require replenishments of
receivables to support previously issued securities, receivables will continue
to be sold to these trusts and the resulting replenishment gains recorded until
the revolving periods end, the last of which is currently projected to occur in
early 2008. Private label trusts that publicly issue securities will now be
replenished by HSBC Bank USA as a result of the daily sale of new domestic
private label credit card originations to HSBC Bank USA. We will continue to
replenish at reduced levels, certain non-public personal non-credit card and
MasterCard/ Visa securities issued to conduits and record the resulting
replenishment gains for a period of time in order to manage liquidity. Since our
securitized receivables have varying lives, it will take time for these
receivables to pay-off and the related interest-only strip receivables to be
reduced to zero. The termination of sale treatment on new collateralized funding
activity reduced our reported net income under U.S. GAAP. There was no impact,
however, on cash received from operations.

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                                                        HSBC Finance Corporation
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Securitizations and secured financings were as follows:

                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2005      2004      2003
-----------------------------------------------------------------------------------------
                                                                     (IN MILLIONS)
INITIAL SECURITIZATIONS:
Auto finance................................................  $     -   $     -   $ 1,523
MasterCard/Visa.............................................        -       550       670
Private label...............................................        -       190     1,250
Personal non-credit card....................................        -         -     3,320
                                                              -------   -------   -------
Total.......................................................  $     -   $   740   $ 6,763
                                                              =======   =======   =======
REPLENISHMENT SECURITIZATIONS:
MasterCard/Visa.............................................  $ 8,620   $20,378   $23,433
Private label...............................................        -     9,104     6,767
Personal non-credit card....................................      211       828       675
                                                              -------   -------   -------
Total.......................................................  $ 8,831   $30,310   $30,875
                                                              =======   =======   =======
SECURED FINANCINGS:
Real estate secured.........................................  $ 4,516   $ 3,299   $ 3,260
Auto finance................................................    3,418     1,790         -
MasterCard/Visa.............................................    1,785         -         -
                                                              -------   -------   -------
Total.......................................................  $ 9,719   $ 5,089   $ 3,260
                                                              =======   =======   =======

Additionally, as part of the Metris acquisition we assumed $4.6 billion of
securities backed by MasterCard/Visa receivables which we restructured to fail
sale treatment and are now accounted for as secured financings.

Our securitization levels in 2005 were lower while secured financings were
higher in 2005 reflecting the decision in the third quarter of 2004 to structure
all new collateralized funding transactions as secured financings and the use of
additional sources of liquidity provided by HSBC and its subsidiaries.

Outstanding securitized receivables consisted of the following:

                                                              AT DECEMBER 31,
                                                              ----------------
                                                               2005     2004
------------------------------------------------------------------------------
                                                               (IN MILLIONS)
Real estate secured.........................................  $    -   $    81
Auto finance................................................   1,192     2,679
MasterCard/Visa.............................................   1,875     7,583
Personal non-credit card....................................   1,007     3,882
                                                              ------   -------
Total.......................................................  $4,074   $14,225
                                                              ======   =======

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                                                        HSBC Finance Corporation
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The following table summarizes the expected amortization of our securitized
receivables at December 31, 2005:

                                                               2006    2007   2008   2009   TOTAL
--------------------------------------------------------------------------------------------------
                                                                         (IN MILLIONS)
Real estate secured.........................................  $    -   $  -   $  -    $-    $    -
Auto finance................................................     931    261      -     -     1,192
MasterCard/Visa.............................................   1,375    167    333     -     1,875
Personal non-credit card....................................     885    122      -     -     1,007
                                                              ------   ----   ----    --    ------
Total.......................................................  $3,191   $550   $333    $-    $4,074
                                                              ======   ====   ====    ==    ======

At December 31, 2005, the expected weighted-average remaining life of these
transactions was .76 years.

The securities issued in connection with collateralized funding transactions may
pay off sooner than originally scheduled if certain events occur. For certain
auto transactions, early payoff of securities may occur if established
delinquency or loss levels are exceeded or if certain other events occur. For
all other transactions, early payoff of the securities begins if the annualized
portfolio yield drops below a base rate or if certain other events occur. We do
not presently believe that any early payoff will take place. If early payoff
occurred, our funding requirements would increase. These additional requirements
could be met through issuance of various types of debt or borrowings under
existing back-up lines of credit. We believe we would continue to have adequate
sources of funds if an early payoff event occurred.

At December 31, 2005, securitizations structured as sales represented 3 percent
and secured financings represented 11 percent of the funding associated with our
managed funding portfolio. At December 31, 2004, securitizations structured as
sales represented 12 percent and secured financings represented 6 percent of the
funding associated with our managed funding portfolio.

We continue to believe the market for securities backed by receivables is a
reliable, efficient and cost-effective source of funds, and we will continue to
use secured financings of consumer receivables as a source of our funding and
liquidity. However, if the market for securities backed by receivables were to
change, we may be unable to enter into new secured financings or to do so at
favorable pricing levels. Factors affecting our ability to structure
collateralized funding transactions as secured financings or to do so at
cost-effective rates include the overall credit quality of our securitized
loans, the stability of the securitization markets, the securitization market's
view of our desirability as an investment, and the legal, regulatory, accounting
and tax environments governing collateralized funding transactions.

At December 31, 2005, we had domestic facilities with commercial and investment
banks under which we may use up to $15 billion of our receivables in
collateralized funding transactions structured either as securitizations or
secured financings. The facilities are renewable at the banks' option. At
December 31, 2005, $5.6 billion of auto finance, MasterCard/Visa, personal
non-credit card and real estate secured receivables were used in collateralized
funding transactions structured either as securitizations or secured financings
under these funding programs. In addition, we have available a $4 billion single
seller mortgage facility (none of which was outstanding at December 31, 2005)
structured as a secured financing. As a result of the sale of the managed basis
U.K. credit card receivables to HBEU as previously discussed, we no longer have
any securitized receivables or conduit lines in the U.K. As previously
discussed, beginning in the third quarter of 2004, we decided to fund all new
collateralized funding transactions as secured financings to align our
accounting treatment with that of HSBC initially under U.K. GAAP and now under
IFRS. The amount available under the facilities will vary based on the timing
and volume of collateralized funding transactions. Through existing term bank
financing and new debt issuances, we believe we should continue to have adequate
sources of funds, which could be impacted from time to time by volatility in the
financial markets or if one or more of these facilities were unable to be
renewed.

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                                                        HSBC Finance Corporation
--------------------------------------------------------------------------------

For additional information related to our securitization activities, including
the amount of revenues and cash flows resulting from these arrangements, see
Note 8, "Asset Securitizations," to our accompanying consolidated financial
statements.

RISK MANAGEMENT
--------------------------------------------------------------------------------

Our activities involve analysis, evaluation, acceptance and management of some
degree of risk or combination of risks. Accordingly, we have comprehensive risk
management policies to address potential financial risks, which include credit
risk, liquidity risk, market risk (which includes interest rate and foreign
currency exchange risks), reputational risk and operational risk. Our risk
management policies are designed to identify and analyze these risks, to set
appropriate limits and controls, and to monitor the risks and limits continually
by means of reliable and up-to-date administrative and information systems. We
continually modify and enhance our risk management policies and systems to
reflect changes in markets and products and in best practice risk management
processes. Training, individual responsibility and accountability, together with
a disciplined, conservative and constructive culture of control, lie at the
heart of our management of risk. Our risk management policies are primarily
carried out in accordance with practice and limits set by the HSBC Group
Management Board. The HSBC Finance Corporation Asset Liability Committee
("ALCO") meets regularly to review risks and approve appropriate risk management
strategies within the limits established by the HSBC Group Management Board.
Additionally, our Audit Committee receives regular reports on our liquidity
positions in relation to the established limits.

CREDIT RISK MANAGEMENT Credit risk is the risk that financial loss arises from
the failure of a customer or counterparty to meet its obligations under a
contract. Our credit risk arises primarily from lending and treasury activities.

We have established detailed policies to address the credit risk that arises
from our lending activities. Our credit and portfolio management procedures
focus on risk-based pricing and effective collection and customer account
management efforts for each loan. Our lending guidelines, which delineate the
credit risk we are willing to take and the related terms, are specific not only
for each product, but also take into consideration various other factors
including borrower characteristics. We also have specific policies to ensure the
establishment of appropriate credit loss reserves on a timely basis to cover
probable losses of principal, interest and fees. See "Credit Quality" for a
detailed description of our policies regarding the establishment of credit loss
reserves, our delinquency and charge-off policies and practices and our customer
account management policies and practices. While we develop our own policies and
procedures for all of our lending activities, they are based on standards
established by HSBC and are regularly reviewed and updated both on an HSBC
Finance Corporation and HSBC level.

Counterparty credit risk is our primary exposure on our interest rate swap
portfolio. Counterparty credit risk is the risk that the counterparty to a
transaction fails to perform according to the terms of the contract. We control
counterparty credit risk in derivative instruments through established credit
approvals, risk control limits, collateral, and ongoing monitoring procedures.
Counterparty limits have been set and are closely monitored as part of the
overall risk management process and control structure. During the third quarter
of 2003 and continuing through 2005, we utilize an affiliate, HSBC Bank USA, as
the primary provider of new domestic derivative products. We have never suffered
a loss due to counterparty failure.

Currently the majority of our existing derivative contracts are with HSBC
subsidiaries, making them our primary counterparty in derivative transactions.
Most swap agreements, both with unaffiliated and affiliated third parties,
require that payments be made to, or received from, the counterparty when the
fair value of the agreement reaches a certain level. Generally, third-party swap
counterparties provide collateral in the form of cash which is recorded in our
balance sheet as other assets or derivative related liabilities and totaled $91
million at December 31, 2005 and $.4 billion at December 31, 2004. Affiliate
swap counterparties provide collateral in the form of securities as required,
which are not recorded on our balance sheet. At December 31, 2005, the fair
value of our agreements with affiliate counterparties was below the $1.2 billion
level requiring posting of collateral. As such, at December 31, 2005, we were
not holding any swap collateral from HSBC

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                                                        HSBC Finance Corporation
--------------------------------------------------------------------------------

affiliates in the form of securities. At December 31, 2004, affiliate swap
counterparties had provided collateral in the form of securities, which were not
recorded on our balance sheet, totaling $2.2 billion. At December 31, 2005, we
had derivative contracts with a notional value of approximately $75.9 billion,
including $71.3 billion outstanding with HSBC Bank USA. At December 31, 2004, we
had derivative contracts with a notional value of approximately $71.6 billion,
including $61.3 billion outstanding with HSBC Bank USA.

See Note 15 to the accompanying consolidated financial statements, "Derivative
Financial Instruments," for additional information related to interest rate risk
management and Note 24, "Fair Value of Financial Instruments," for information
regarding the fair value of certain financial instruments.

LIQUIDITY RISK The management of liquidity risk is addressed in HSBC Finance
Corporation's funding management policies and practices. HSBC Finance
Corporation funds itself principally through unsecured term funding in the
markets, through secured financings and securitization transactions and through
borrowings from HSBC and HSBC clients. Generally, the lives of our assets are
shorter than the lives of the liabilities used to fund them. This initially
reduces liquidity risk by ensuring that funds are received prior to liabilities
becoming due.

Our ability to ensure continuous access to the capital markets and maintain a
diversified funding base is important in meeting our funding needs. To manage
this liquidity risk, we offer a broad line of debt products designed to meet the
needs of both institutional and retail investors. We maintain investor diversity
by placing debt directly with customers, through selected dealer programs and by
targeted issuance of large liquid transactions. Through collateralized funding
transactions, we are able to access an alternative investor base and further
diversify our funding strategies. We also maintain a comprehensive, direct
marketing program to ensure our investors receive consistent and timely
information regarding our financial performance.

The measurement and management of liquidity risk is a primary focus. Three
standard analyses are utilized to accomplish this goal. First, a rolling 60 day
funding plan is updated daily to quantify near-term needs and develop the
appropriate strategies to fund those needs. As part of this process, debt
maturity profiles (daily, monthly, annually) are generated to assist in planning
and limiting any potential rollover risk (which is the risk that we will be
unable to pay our debt or borrow additional funds as it becomes due). Second,
comprehensive plans identifying monthly funding requirements for the next twelve
months are updated at least weekly and monthly funding plans for the next two
years are maintained. These plans focus on funding projected asset growth and
drive both the timing and size of debt issuances. These plans are shared on a
regular basis with HSBC. And third, a Maximum Cumulative Outflow (MCO) analysis
is updated regularly to measure liquidity risk. Cumulative comprehensive cash
inflows are subtracted from outflows to generate a net exposure that is tracked
both monthly over the next 12 month period and annually for 5 years. Net outflow
limits are reviewed by HSBC Finance Corporation's ALCO and HSBC.

We recognize the importance of being prepared for constrained funding
environments. While the potential scenarios driving this analysis have changed
due to our affiliation with HSBC, contingency funding plans are still maintained
as part of the liquidity management process. Alternative funding strategies are
updated regularly for a rolling 12 months and assume limited access to unsecured
funding and continued access to the collateralized funding markets. These
alternative strategies are designed to enable us to achieve monthly funding
goals through controlled growth, sales of receivables and access to committed
sources of contingent liquidity including bank lines and undrawn securitization
conduits. Although our overall liquidity situation has improved significantly
since our acquisition by HSBC, the strategies and analyses utilized in the past
to successfully manage liquidity remain in place today. The combination of this
process with the funding provided by HSBC subsidiaries and clients should ensure
our access to diverse markets, investor bases and adequate funding for the
foreseeable future.

See "Liquidity and Capital Resources" for further discussion of our liquidity
position.

MARKET RISK The objective of our market risk management process is to manage and
control market risk exposures in order to optimize return on risk while
maintaining a market profile as a provider of financial products and services.
Market risk is the risk that movements in market risk factors, including
interest rates and foreign currency exchange rates, will reduce our income or
the value of our portfolios.

                                        88
                                                        HSBC Finance Corporation
--------------------------------------------------------------------------------

Future net interest income is affected by movements in interest rates. Although
our main operations are in the U.S., we also have operations in Canada and the
U.K. which prepare their financial statements in their local currency.
Accordingly, our financial statements are affected by movements in exchange
rates between the functional currencies of these subsidiaries and the U.S.
dollar. We maintain an overall risk management strategy that uses a variety of
interest rate and currency derivative financial instruments to mitigate our
exposure to fluctuations caused by changes in interest rates and currency
exchange rates. We manage our exposure to interest rate risk primarily through
the use of interest rate swaps, but also use forwards, futures, options, and
other risk management instruments. We manage our exposure to foreign currency
exchange risk primarily through the use of currency swaps, options and forwards.
We do not use leveraged derivative financial instruments for interest rate risk
management. Since our acquisition by HSBC, we have not entered into foreign
exchange contracts to hedge our investment in foreign subsidiaries.

Prior to the acquisition by HSBC, the majority of our fair value and cash flow
hedges were effective hedges which qualified for the shortcut method of
accounting. Under the Financial Accounting Standards Board's interpretations of
SFAS No. 133, the shortcut method of accounting was no longer allowed for
interest rate swaps which were outstanding at the time of our acquisition by
HSBC. As a result of the acquisition, we were required to reestablish and
formally document the hedging relationship associated with all of our fair value
and cash flow hedging instruments and assess the effectiveness of each hedging
relationship, both at the date of the acquisition and on an ongoing basis. As a
result of deficiencies in our contemporaneous hedge documentation at the time of
acquisition, we lost the ability to apply hedge accounting to our entire cash
flow and fair value hedging portfolio that existed at the time of acquisition by
HSBC. Substantially all derivative financial instruments entered into subsequent
to the acquisition qualify as effective hedges under SFAS No. 133 and beginning
in 2005 are being accounted for under the long-haul method of accounting.

Interest rate risk is defined as the impact of changes in market interest rates
on our earnings. We use simulation models to measure the impact of changes in
interest rates on net interest income. The key assumptions used in these models
include expected loan payoff rates, loan volumes and pricing, cash flows from
derivative financial instruments and changes in market conditions. These
assumptions are based on our best estimates of actual conditions. The models
cannot precisely predict the actual impact of changes in interest rates on our
earnings because these assumptions are highly uncertain. At December 31, 2005,
our interest rate risk levels were below those allowed by our existing policy.

We generally fund our assets with liabilities that have similar interest rate
features, or are combined at issuance with derivatives to produce liabilities
with repricing features similar to the assets. This initially reduces interest
rate risk. Over time, however, customer demand for our receivable products
shifts between fixed rate and floating rate products, based on market conditions
and preferences. These shifts in loan products produce different interest rate
risk exposures. We use derivative financial instruments, principally interest
rate swaps, to manage these exposures. Interest rate futures, interest rate
forwards and purchased options are also used on a limited basis to reduce
interest rate risk.

We monitor the impact that an immediate hypothetical increase or decrease in
interest rates of 25 basis points applied at the beginning of each quarter over
a 12 month period would have on our net interest income assuming a growing
balance sheet and the current interest rate risk profile. The following table
summarizes such estimated impact:

                                                                   AT
                                                              DECEMBER 31,
                                                              -------------
                                                              2005    2004
---------------------------------------------------------------------------
                                                              (IN MILLIONS)
Decrease in net interest income following a hypothetical 25
  basis points rise in interest rates applied at the
  beginning of each quarter over the next 12 months.........  $213    $176
Increase in net interest income following a hypothetical 25
  basis points fall in interest rates applied at the
  beginning of each quarter over the next 12 months.........  $120    $169

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                                                        HSBC Finance Corporation
--------------------------------------------------------------------------------

These estimates include both the net interest income impact of the derivative
positions we have entered into which are considered to be effective hedges under
SFAS No. 133 and the impact of economic hedges of certain underlying debt
instruments which do not qualify for hedge accounting as previously discussed,
as if they were effective hedges under SFAS No. 133. These estimates also assume
we would not take any corrective actions in response to interest rate movements
and, therefore, exceed what most likely would occur if rates were to change by
the amount indicated.

As part of our overall risk management strategy to reduce earnings volatility,
in 2005 a significant number of our pay fixed/receive variable interest rate
swaps which had not previously qualified for hedge accounting under SFAS No.
133, have been designated as effective hedges using the long-haul method of
accounting, and certain other interest rate swaps were terminated. This will
significantly reduce the volatility of the mark-to-market on the previously
non-qualifying derivatives which have been designated as effective hedges going
forward, but will result in the recording of ineffectiveness under the long-haul
method of accounting under SFAS No. 133. In order to further reduce earnings
volatility that would otherwise result from changes in interest rates, we
continue to evaluate the steps required to regain hedge accounting treatment
under SFAS No. 133 for the remaining swaps which do not currently qualify for
hedge accounting. These derivatives remain economic hedges of the underlying
debt instruments. We will continue to manage our total interest rate risk on a
basis consistent with the risk management process employed since the
acquisition.

HSBC Group also has certain limits and benchmarks that serve as guidelines in
determining the appropriate levels of interest rate risk. One such limit is
expressed in terms of the Present Value of a Basis Point ("PVBP"), which
reflects the change in value of the balance sheet for a one basis point movement
in all interest rates. Our PVBP limit as of December 31, 2005 was $2 million,
which includes the risk associated with hedging instruments. Thus, for a one
basis point change in interest rates, the policy dictates that the value of the
balance sheet shall not increase or decrease by more than $2 million. As of
December 31, 2005, we had a PVBP position of less than $1 million reflecting the
impact of a one basis point increase in interest rates. While the total PVBP
position will not change as a result of the loss of hedge accounting following
our acquisition by HSBC, the following table shows the components of PVBP:

                                                              2005    2004
---------------------------------------------------------------------------
                                                              (IN MILLIONS)
Risk related to our portfolio of ineffective hedges.........  $(1.4)  $(2.7)
Risk for all other remaining assets and liabilities.........    2.3     1.9
                                                              -----   -----
Total PVBP risk.............................................  $  .9   $  .8
                                                              =====   =====

Foreign currency exchange risk refers to the potential changes in current and
future earnings or capital arising from movements in foreign exchange rates. We
enter into foreign exchange rate forward contracts and currency swaps to
minimize currency risk associated with changes in the value of
foreign-denominated liabilities. Currency swaps convert principal and interest
payments on debt issued from one currency to another. For example, we may issue
Euro-denominated debt and then execute a currency swap to convert the obligation
to U.S. dollars. Prior to the acquisition, we had periodically entered into
foreign exchange contracts to hedge portions of our investments in our United
Kingdom and Canada subsidiaries. We estimate that a 10 percent adverse change in
the British pound/U.S. dollar and Canadian dollar/U.S. dollar exchange rate
would result in a decrease in common shareholder's(s') equity of $162 million at
December 31, 2005 and $188 million at December 31, 2004 and would not have a
material impact on net income.

We have issued debt in a variety of currencies and simultaneously executed
currency swaps to hedge the future interest and principal payments. As a result
of the loss of hedge accounting on currency swaps outstanding at the time of our
acquisition, the recognition of the change in the currency risk on these swaps
is recorded differently than the corresponding risk on the underlying foreign
denominated debt. Currency risk on the swap is now recognized immediately on the
net present value of all future swap payments. On the corresponding debt,
currency risk is recognized on the principal outstanding which is converted at
the period

                                        90
                                                        HSBC Finance Corporation
--------------------------------------------------------------------------------

end spot translation rate and on the interest accrual which is converted at the
average spot rate for the reporting period.

OPERATIONAL RISK Operational risk is the risk of loss arising through fraud,
unauthorized activities, error, omission, inefficiency, systems failure or from
external events. It is inherent in every business organization and covers a wide
spectrum of issues. We manage this risk through a controls-based environment in
which processes are documented, authorization is independent and transactions
are reconciled and monitored. This is supported by an independent program of
periodic reviews undertaken by Internal Audit. We also monitor external
operations risk events which take place to ensure that we remain in line with
best practice and take account of lessons learned from publicized operational
failures within the financial services industry. We also maintain and test
emergency policies and procedures to support operations and our personnel in the
event of disasters.

REPUTATIONAL RISK The safeguarding of our reputation is of paramount importance
to our continued prosperity and is the responsibility of every member of our
staff. Reputational risk can arise from social, ethical or environmental issues,
or as a consequence of operations risk events. Our good reputation depends upon
the way in which we conduct our business, but can also be affected by the way in
which customers, to whom we provide financial services, conduct themselves.

Reputational risk is considered and assessed by the HSBC Group Management Board,
our Board of Directors and senior management during the establishment of
standards for all major aspects of business and the formulation of policy. These
policies, which are an integral part of the internal control systems, are
communicated through manuals and statements of policy, internal communication
and training. The policies set out operational procedures in all areas of
reputational risk, including money laundering deterrence, environmental impact,
anti-corruption measures and employee relations.

We have established a strong internal control structure to minimize the risk of
operational and financial failure and to ensure that a full appraisal of
reputational risk is made before strategic decisions are taken. The HSBC
internal audit function monitors compliance with our policies and standards.

                                        91



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