HSBC FY05 REL2; Pt2/7

HSBC Holdings PLC
06 March 2006


1. Net interest income

                                                     Year ended       Year ended
                                                        31Dec05          31Dec04
Figures in HK$m                                                         restated

Net interest income                                      43,491           36,970
Average interest-earning assets                       2,031,314        1,925,044
Net interest spread                                        1.89%            1.82%
Net interest margin                                        2.14%            1.92%

Net interest income of HK$43,491 million was HK$6,521 million, or 17.6 per cent,
higher than in 2004.

Net interest income from the Personal Financial Services business rose by
HK$6,016 million, or 28.9 per cent, primarily due to improved deposit spreads
resulting from rises in Hong Kong dollar and US dollar interest rates this year.
This was coupled with strong growth in net interest income in the rest of
Asia-Pacific, driven by increased mortgage lending in Australia, Korea,
Singapore, Taiwan and India, and significant growth in credit card receivables
particularly in Hong Kong, Taiwan and Indonesia. Net interest income from the
Commercial Banking business was HK$4,024 million, or 57.0 per cent, higher than
last year, mainly due to growth in lending and deposits and improved deposit
spreads in Hong Kong. Net interest income from Corporate, Investment Banking and
Markets fell by HK$2,533 million, or 22.5 per cent, largely due to the maturity
of high yielding treasury assets in Hong Kong, and flat yield curves that gave
limited opportunity for position-taking. This was partly offset by the effect of
the reclassification this year of net interest expense of HK$1,484 million on
trading assets and liabilities to 'Trading income', which was made on adoption
of the new accounting standards. Corporate lending grew in Hong Kong, mainland
China, Korea and India, while deposit balances increased and spreads improved
throughout the region. Included in net interest income this year is income
earned on held-to-maturity investments in the insurance businesses of HK$1,692
million, which last year was classified as 'Net investment income on assets
backing policyholder liabilities', and there has been a reclassification of
HK$505 million of net interest income to 'Net income from financial instruments
designated at fair value'. Both of these reclassifications were made on adoption
of the new accounting standards.

Average interest-earning assets rose by HK$106 billion, or 5.5 per cent, to
HK$2,031 billion. Average advances to customers grew by HK$103 billion, or 11.9
per cent, with strong growth in mortgage lending in Australia, Korea, Singapore,
Taiwan and India, and increases in commercial lending and trade finance in Hong
Kong. Credit card receivables rose in most countries, notably Hong Kong, Taiwan
and Indonesia. Average loans to banks were HK$91 billion higher, principally in
the bank in Hong Kong, and lending to fellow subsidiaries rose by HK$18 billion,
but these increases were offset by the reclassification of certain
interest-earning assets to 'Trading assets' on adoption of the new accounting
standards.

The Group's net interest margin of 2.14 per cent for 2005 was 22 basis points
higher than 2004. The benefit to margin of the reclassification in 2005 of the
net interest expense on trading assets and liabilities and net interest income
from financial instruments designated at fair value was 24 basis points, and the
inclusion of net interest income on held-to-maturity investments in the
insurance businesses increased margin by four basis points. These benefits were,
however, partly offset by higher funding costs as the rise in the number of
preference shares issued and higher funding costs thereon, impacted margin by
seven basis points.

For the banking operations in Hong Kong (excluding Hang Seng Bank), net interest
margin increased by 46 basis points to 2.20 per cent for 2005. Spread improved
by 28 basis points to 1.92 per cent. This increase was principally due to the
reclassification of net interest expense on net trading liabilities to trading
income. Wholesale rates increased significantly during the year as the surplus
liquidity, which had kept rates depressed in prior years, was withdrawn from the
system. Spreads on Hong Kong dollar and foreign currency current, savings and
deposit accounts benefited, with an increase in the value of funds, although the
effect was partly offset by a smaller increase in interest paid to customers.
Spreads on mortgages, credit cards and corporate lending were adversely impacted
by a higher cost of funds and competitive pressures on margins. The average
yield on the residential mortgage portfolio, excluding Government Home Ownership
Scheme ('GHOS') and staff loans, declined to 239 basis points below BLR in 2005
compared with 201 basis points below BLR in 2004. The contribution from net free
funds rose by 18 basis points compared with the same period last year.

At Hang Seng Bank, net interest margin improved by 11 basis points to 2.19 per
cent, reflecting the rise in deposit spreads resulting from higher interest
rates and the inclusion of interest income from the held-to-maturity investment
portfolios held by life assurance funds. Spread fell by six basis points, as
returns on treasury products were affected by the rise in funding costs and flat
yield curves, and mortgage portfolio yields continued to be affected by market
competition. The average yield on the residential mortgage portfolio, excluding
GHOS and staff loans, fell to 225 basis points below BLR for 2005, compared with
202 basis points last year. The contribution from net free funds rose by 17
basis points, benefiting from the rise in market interest rates.

In the rest of Asia-Pacific, net interest margin at 2.00 per cent for 2005 was 4
basis points higher than in 2004. Spread improved by 4 basis points to 1.85 per
cent. All major sites faced an increase in funding costs, but margins rose in
several countries, notably mainland China and Indonesia from higher yields on
corporate lending, in India due to higher mortgage yields and an increase in low
cost current account balances from custody and clearing customers, and in
Australia from higher margins on personal lending. These increases were partly
offset by lower margins on mortgage advances in Taiwan and Korea, and higher
treasury funding costs in Singapore. The contribution from net free funds was
unchanged at 15 basis points.

2. Net fee income

                                                    2005       2004
Figures in HK$m                                            restated

Account services                                   1,314      1,206
Credit facilities                                  1,159      1,447
Import/export                                      2,777      2,676
Remittances                                        1,248      1,103
Securities/stockbroking                            3,402      2,842
Cards                                              4,231      3,439
Insurance                                            280        217
Unit trusts                                        1,627      2,488
Funds under management                             2,233      1,216
Other                                              3,400      2,842

Fee income                                        21,671     19,476

Fee expense                                       (3,574)    (3,195)

                                                  18,097     16,281

Net fee income was HK$1,816 million, or 11.2 per cent, higher than 2004. Credit
card fee income rose by 23.0 per cent, reflecting the increase in the number of
cards in issue and higher cardholder spending. Customer demand for wealth
management products slowed this year in Hong Kong, although the fall in demand
for unit trusts was partially offset by increased sales of structured deposit
products. The increase in contribution from the Bank of Bermuda businesses,
following their integration into the group during the second half of last year,
was HK$967 million, principally from funds under management and securities/
stockbroking, which also benefited from higher stock market turnover in Hong
Kong and throughout the region. Credit facility fees decreased due to a change
in accounting treatment whereby certain fees are now included as part of the
effective interest rate and amortised through net interest income, rather than
through net fee income as in prior years.

3. Net trading income
                                                    2005       2004
Figures in HK$m                                            restated

Dealing profits
- Foreign exchange                                 5,548      4,680
- Interest rate derivatives                        2,442      2,380
- Debt securities                                    278       (260)
- Equities and other trading                         292        203
                                                   8,560      7,003

Loss from hedging activities
  Fair value hedges
- Net loss on hedged items attributable
  to the hedged risk                              (1,085)         -
- Net gain on hedging instruments                  1,085          -
  Cash flow hedges
- Net hedging loss                                    (1)         -
                                                      (1)         -

Interest on trading assets and
  liabilities
- Interest income                                  4,989          -
- Interest expense                                (6,473)         -
                                                  (1,484)         -

Dividend income from trading securities              105          -

                                                   7,180      7,003

Net trading income rose by 2.5 per cent to HK$7,180 million. Foreign exchange
profits benefited from higher exchange rate volatility and the group's growing
customer franchise across the region. Debt securities trading benefited from
correct positioning as short-term spreads on Hong Kong dollar bonds contracted
in the low interest rate environment in the earlier part of 2005, but this was
partly offset by losses on certain high yield bonds following the downgrading of
companies in the automobile sector during the second quarter, and low volatility
in credit spreads made for a difficult credit trading environment later in the
year. Interest rate derivatives trading performed satisfactorily, reflecting an
enhanced capability in structured products in Hong Kong, Korea and Singapore,
which more than offset the fall in demand for wealth management products in Hong
Kong as customers switched to deposit products in the higher interest rate
environment. Equity and structured credit derivatives revenues also grew despite
narrow credit spreads and low volatility in the market, and realised gains were
made on the disposal of certain private equity investments.

Net interest expense on trading assets and liabilities largely represents
interest payable on the group's own debt and structured deposits managed in the
trading book, partly offset by interest income on debt securities. All such
interest was classified under 'Net interest income' in prior years.

4. Gains less losses from financial investments

                                         2005       2004
Figures in HK$m                                 restated

Profit on disposal of
  available-for-sale securities           762          -

Profit on disposal of
  long-term investments                     -      1,311

Reversal of impairment of
  long-term investments                     -        186

Other                                      (6)         -

                                          756      1,497

The profit on disposal of available-for-sale securities primarily comprises
gains on the sale of equity securities, partly offset by losses on the disposal
of US dollar bonds.

The profit on disposal of long-term investments in 2004 comprised gains from the
sale of equity investments in Hong Kong.

In 2004, there was a partial write-back of a provision against an equity
investment.

5. Dividend income

                                                    2005       2004
Figures in HK$m                                            restated

Listed investments                                   102        100
Unlisted investments                                 266         63

                                                     368        163

6. Net earned insurance premiums

                                                    2005          2004
Figures in HK$m                                               restated

Gross insurance premium income                    19,850        14,610
Less: reinsurance premiums                          (510)         (525)

                                                  19,340        14,085


Premium income was HK$5,255 million, or 37.3 per cent, higher than 2004,
attributable to an enhanced range of life assurance and general insurance
products, coupled with successful sales and marketing initiatives.

7. Other operating income

                                                    2005       2004
Figures in HK$m                                            restated

Rental income from investment properties             215        211
Movement in present value of
  in force insurance business                      1,185        833
Profit on disposal of property,
  plant and equipment                                104        192
Profit on disposal of subsidiaries
  and associates                                      53        342
Surplus arising on property                       
  revaluation                                      1,537      1,038
Other                                              1,803      1,498

                                                   4,897      4,114

Profit on disposal of subsidiaries and associates for 2005 comprises a gain made
on the sale of HSBC Asset Management (Australia) Limited. Profit for 2004
included a gain on the exchange of the group's interest in World Finance
International Limited, an associated company, for an interest in Bergesen
Worldwide.

The surplus arising on property revaluation comprises gains on the revaluation
of investment properties and the reversal of previous revaluation deficits that
had arisen when the value of certain premises fell below depreciated historical
cost. As permitted by the revised Hong Kong Accounting Standard 40, prior year
profit and loss figures have not been restated to include revaluation gains on
investment properties.

'Other' includes profits on the sale of a residential property in Hong Kong held
on an operating lease, and miscellaneous income from fellow HSBC Group
subsidiary companies representing recoveries of shared operating costs.

8. Loan impairment charges and other credit risk provisions

                                                    2005       2004
Figures in HK$m                                            restated

Net charge/(release) for impairment provisions

Advances to customers
- Individually assessed impairment provisions^
New provisions                                     2,127      4,016
Releases                                          (1,755)    (2,450)
Recoveries                                          (267)      (617)
                                                     105        949
- Net charge/(release) for collectively
  assessed impairment provisions^^                 1,961     (1,723)

- Country risk provisions                              2          -
                                                   2,068       (774)

Placings with banks maturing after one month
- Net release of individually assessed                 
  provisions^                                          -         (1)
                                                   2,068       (775)

Net release of other credit risk provisions           (4)       (87)


Net charge/(release) for loan
  impairment and other credit risk provisions      2,064       (862)

^  Individually assessed impairment provisions in 2004 refer to specific
   provisions.
^^ Collectively assessed impairment provisions in 2004 refer to general
   provisions.

There was a net charge for loan impairment and other credit risk provisions of
HK$2,064 million compared with a net release of HK$862 million in 2004. The
charge for new individually assessed provisions was lower as credit card
provisions were classified as individual in 2004, but collective in 2005. New
individually assessed provisions against mortgages and other personal lending
fell, in line with the improving economy in Hong Kong, with lower bankruptcies,
falling unemployment and a rise in property prices, although new provisions
against commercial banking customers in Hong Kong increased. Releases and
recoveries were lower, largely relating to corporates in Hong Kong, Singapore
and Thailand, but this was partly offset by higher releases against personal
lending in Hong Kong and against lending to commercial banking customers in
mainland China. There was a net charge for collectively assessed provisions,
reflecting the reclassification of credit card provisions as collectively
assessed, and a small charge against corporate lending, reflecting a rise in
lending while the credit environment across the region was stable. The net
charge for provisions against credit card lending rose by 35.3 per cent,
attributable to the increase in delinquency levels in Taiwan, coupled with
growth in receivables throughout the region.

9. Employee compensation and benefits

                                                    2005       2004
Figures in HK$m                                            restated

Wages, salaries and other costs                   16,428     13,816
Social security costs                                238        184
Retirement benefit costs                           1,070        765

                                                  17,736     14,765

Staff numbers by region^

                                              At 31Dec05 At 31Dec04

Hong Kong                                         24,842     23,947

Rest of Asia-Pacific                              25,956     21,009

Americas/Europe                                       18         16

Total                                             50,816     44,972

^ Full-time equivalent

Staff costs increased by HK$2,971, or 20.1 per cent, compared with 2004,
attributable to the increase in headcount throughout the region of 5,844. Staff
numbers rose in all customer groups, notably in Personal Financial Services in
India, Taiwan, Korea and Indonesia, in Commercial Banking in Hong Kong and
mainland China, and in Corporate, Investment Banking and Markets as the build-up
of the investment banking division in Hong Kong was substantially completed.
Headcount in the Group Service Centre in Guangdong rose by more than 1,000 in
order to support the expansion in processing work. Performance-related
remuneration increased in line with the improved operating profits.

10. General and administrative expenses

                                                       2005          2004
Figures in HK$m                                                  restated

Premises and equipment
- Rental expenses                                     1,243         1,144
- Amortisation of prepaid operating lease
  payments                                               56            55
- Other premises and equipment                        2,089         1,761
                                                      3,388         2,960

Other administrative expenses                         8,394         7,202

Litigation and other provisions                         313           131

                                                     12,095        10,293

The increase in general and administrative expenses of HK$1,802 million, or 17.5
per cent, reflected additional costs incurred in business expansion throughout
the region. Advertising and marketing expenditure increased in Hong Kong, Korea,
Taiwan, Thailand and India, in line with the growth in the Personal Financial
Services business in these countries. Technology costs increased as the group's
growth initiatives required investment in systems and the development of
distribution channels. Other general expenses, including rental, communications
and travel costs increased in support of business expansion across the region.

11. Share of profit in associates

Share of profit in associates in 2005 included the group's share of post-tax
profits from Bank of Communications and Industrial Bank, and amortisation of
intangible assets arising on acquisition, for the 12 months to 30 September
2005. In 2004, this included share of profits and amortisation for the period
from the date of acquisition (August 2004 and May 2004 for Bank of
Communications and Industrial Bank respectively) to 30 September 2004.

12. Tax expense

The charge for taxation in the consolidated income statement comprises:

                                                    2005       2004
Figures in HK$m                                            restated

Current income tax
- Hong Kong profits tax                            4,974      3,982
- Overseas taxation                                2,598      2,497
Deferred taxation                                    479        509
                                                   8,051      6,988

The effective rate of tax for 2005 was 17.8 per cent compared with 16.1 per cent
in 2004, largely as a result of the interest expense on preference shares for
which tax relief is not available, and a different product and geographic mix of
taxable profits.

13. Dividends
                                                          2005                  2004
                                                      HK$       HK$m        HK$       HK$m
                                                      per                   per
                                                    share                 share

Dividends paid on ordinary share capital
- in respect of the previous financial
  year, approved and paid during the year            0.53      4,800       1.30      8,450
- in respect of the current financial year           1.76     15,800       2.18     15,500
                                                     2.29     20,600       3.48     23,950

The Directors have declared a fourth interim dividend in respect of the
financial year ending 31 December 2005 of HK$4,500 million (HK$0.50 per ordinary
share).

14. Trading assets

                                             At 31Dec05        At 31Dec04
Figures in HK$m                                                  restated

Debt securities                                 108,687            82,159
Equity shares                                    22,677             5,573
Treasury bills                                   69,880                 -
Other                                            14,437                 -

                                                215,681            87,732

Treasury bills held for trading have been reclassified from 'Cash and short-term
funds' to 'Trading assets' on adoption of HKAS 39.

15. Financial assets designated at fair value

                                             At 31Dec05        At 31Dec04
Figures in HK$m                                                  restated

Debt securities                                  15,070                 -
Equity shares                                    18,320                 -
Treasury bills                                       94                 -
Other                                             3,589                 -
                                                 37,073                 -

Financial assets designated at fair value are assets which have been designated
as such so that movements in their fair value can be taken to the income
statement rather than reserves (see Accounting policies Note (f)).

This classification in 2005 was made on adoption of HKAS 39. There was no such
category in 2004.

16. Advances to customers                                                
                                     At 31Dec05           At 31Dec04
Figures in HK$m                                             restated

Gross advances to customers           1,005,902              927,121

Impairment allowances
- Individually assessed^                 (2,963)              (5,482)
- Collectively assessed^^                (3,600)              (2,447)
- Country risk allowances                   (13)                   -
                                         (6,576)              (7,929)
                                        999,326              919,192

Allowances as a percentage of gross
  advances to customers:
Individually assessed                      0.29%                0.59%
Collectively assessed                      0.36%                0.26%
Country risk allowances                       -                    -
Total allowances                           0.65%                0.85%

^ Individually assessed impairment allowances in 2004 refer to specific provisions.
^^ Collectively assessed impairment allowances in 2004 refer to general provisions.

17. Impairment allowances against advances to customers


                                    Individually   Collectively      Country
                                        assessed       assessed         risk
Figures in HK$m                       allowances     allowances   allowances    Total

At 1Jan05 (restated^)                      4,719          3,179           11    7,909
Amounts written off                       (1,982)        (1,948)           -   (3,930)
Recoveries of advances
  written off in previous years              267            395            -      662
Net charge to income statement
  (Note 8)                                   105          1,961            2    2,068
Unwinding of discount of
  loan impairment                            (81)             -            -      (81)
Exchange and other adjustments               (65)            13            -      (52)

At 31Dec05                                 2,963          3,600           13    6,576

^ Includes the effect of adoption of HKAS 39.

18. Impaired advances to customers and allowances

The geographical information shown below, and in notes 19, 20, 21 and 23, has
been classified by location of the principal operations of the subsidiary
company or, in the case of the bank, by location of the branch responsible for
advancing the funds.

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

Year ended 31Dec05

Impairment provision charge/(release)           1,156              924           (12)       2,068

At 31Dec05

Advances to customers which are
  considered to be impaired are as
  follows:

Gross impaired advances                         3,920            3,079             -        6,999

Individually assessed allowances               (1,335)          (1,628)            -       (2,963)
                                                2,585            1,451             -        4,036

Individually assessed allowances
  as a percentage of gross
  impaired advances                              34.1%            52.9%            -         42.3%

Gross impaired advances as a
  percentage of gross advances to
  customers                                       0.6%             0.8%            -          0.7%
    
   

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


Year ended 31Dec04 (restated)

Impairment provision charge/(release)          (1,680)             912             (6)       (774)

At 31Dec04 (restated)

Advances to customers which are
  considered to be impaired are as
  follows:

Gross impaired advances^                        5,423            4,268              5       9,696

Individually assessed allowances^^             (2,485)          (2,992)            (5)     (5,482)
                                                2,938            1,276              -       4,214

Individually assessed allowances
  as a percentage of gross
  impaired advances                              45.8%            70.1%         100.0%       56.5%

Gross impaired advances as a
  percentage of gross advances to
  customers                                       0.9%             1.3%          35.7%        1.0%

Impaired advances to customers are those advances where objective evidence
exists that full repayment of principal or interest is considered unlikely.

The individually assessed allowances are made after taking into account the
value of collateral in respect of such advances.

^ Impaired advances in 2004 refer to non-performing advances.
^^ Individually assessed allowances in 2004 refer to specific provisions.

19. Overdue advances to customers
                                            Hong            Rest of      Americas/
Figures in HK$m                             Kong       Asia-Pacific         Europe     Total


At 31Dec05

Gross advances to customers which
  have been overdue with respect to
  either principal or interest for periods
  of:

- six months or less but over three 
  months                                   1,073                891               -     1,964

- one year or less but over six
  months                                     272                430               -       702

- over one year                            1,053              1,071               -     2,124
                                           2,398              2,392               -     4,790

Overdue advances to customers as
  a percentage of gross advances to
  customers:

- six months or less but over
  three months                               0.2%               0.2%              -       0.2%

- one year or less but over six
  months                                       -                0.1%              -       0.1%
 
- over one year                              0.2%               0.3%              -       0.2%
                                             0.4%               0.6%              -       0.5%


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


At 31Dec04 (restated)

Gross advances to customers which
  have been overdue with respect to
  either principal or interest for 
  periods of:

- six months or less but over                
  three months                               959                706              -     1,665

- one year or less but over six              
  months                                     607                296              -       903

- over one year                            1,631              1,430              -     3,061
                                           3,197              2,432              -     5,629

Overdue advances to customers as
  a percentage of gross advances to
  customers:

- six months or less but over                
  three months                               0.1%               0.2%             -       0.2%

- one year or less but over six              
  months                                     0.1%               0.1%             -       0.1%

- over one year                              0.3%               0.4%             -       0.3%
                                             0.5%               0.7%             -       0.6%







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