HSBC FY05 REL2; Pt3/7

HSBC Holdings PLC
06 March 2006

20. Rescheduled advances to customers

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

At 31Dec05

Rescheduled advances to customers       1,941              623            -      2,564  

Rescheduled advances to 
  customers as a percentage of 
  gross advances to customers             0.3%             0.2%           -        0.3%  

At 31Dec04 (restated)

Rescheduled advances to customers       4,009              465            5      4,479  
Rescheduled advances to customers
  as a percentage of gross 
  advances to customers                   0.7%             0.1%        35.7%       0.5%  

Rescheduled advances are those advances which have been restructured or
renegotiated because of a deterioration in the financial position of the
borrower, or because of the inability of the borrower to meet the original
repayment schedule.

Rescheduled advances to customers are stated net of any advances which have
subsequently become overdue for over three months and which are included in
overdue advances to customers (Note 19).

21. Analysis of advances to customers based on categories used by the HSBC Group

The following analysis of advances to customers is based on categories used by the HSBC
Group, including The Hongkong and Shanghai Banking Corporation Limited and its subsidiary
companies, to manage associated risks.

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

At 31Dec05

Residential mortgages            182,257          117,211           4        299,472

Hong Kong SAR Government's
  Home Ownership Scheme, 
  Private Sector
  Participation Scheme and
  Tenants Purchase Scheme
  mortgages                       36,291                -           -         36,291

Other personal                    57,362           47,855           1        105,218
Total personal                   275,910          165,066           5        440,981

Commercial, industrial and
  international trade            129,774          110,668           -        240,442

Commercial real estate            97,364           32,615           -        129,979

Other property-related lending    47,661           17,340           -         65,001

Government                         2,347            5,891           -          8,238

Other commercial                  53,681           37,851           -         91,532
Total corporate and commercial   330,827          204,365           -        535,192  

Non-bank financial institutions   15,246           11,987           -         27,233  

Settlement accounts                2,173              323           -          2,496  
Total financial                   17,419           12,310           -         29,729  

Gross advances to customers      624,156          381,741           5      1,005,902  

Impairment allowances             (3,092)          (3,484)          -         (6,576)  

Net advances to customers        621,064          378,257           5        999,326  


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

At 31Dec04 (restated)

Residential mortgages            184,631           98,516           2        283,149  

Hong Kong SAR Government's 
  Home Ownership Scheme, 
  Private Sector
  Participation Scheme and
  Tenants Purchase Scheme
  mortgages                       41,845                -           -         41,845  

Other personal                    50,741           37,873           7         88,621  
Total personal                   277,217          136,389           9        413,615  

Commercial, industrial and
  international trade            109,655          105,133           -        214,788  

Commercial real estate            80,726           27,956           5        108,687  

Other property-related lending    46,319           14,070           -         60,389  

Government                         4,781            5,150           -          9,931  

Other commercial                  56,607           35,006           -         91,613  
Total corporate and commercial   298,088          187,315           5        485,408  

Non-bank financial institutions   15,008            9,148           -         24,156  

Settlement accounts                3,470             472            -          3,942  
Total financial                   18,478            9,620           -         28,098  

Gross advances to customers      593,783          333,324          14        927,121  

Impairment allowances             (4,032)          (3,892)         (5)        (7,929)  

Net advances to customers        589,751          329,432           9        919,192  

Advances to customers increased by HK$80 billion, or 8.7 per cent, since the end
of 2004.

Advances in Hong Kong grew by HK$31 billion, or 5.3 per cent, since the end of
2004, on account of the buoyant economy. Mortgage lending fell, attributable to
persistent price competition in a flat market, and lending under the GHOS
continued to decline as the scheme remained suspended during 2005. Other
personal lending rose, mainly on credit cards, reflecting the increase in
cardholder spending. Corporate and commercial lending rose by 11.0 per cent,
with particularly strong growth in the manufacturing sector and property
investment.

In the rest of Asia-Pacific, advances rose by HK$49 billion, or 14.8 per cent,
since the end of 2004, reflecting successful business expansion across the
region. Mortgage advances increased by 19.0 per cent, principally in Korea,
Singapore, Taiwan and India. Credit card receivables grew by 31.7 per cent,
largely in Taiwan, India, the Philippines and India. Lending to corporate and
commercial customers rose by 9.1 per cent, most significantly in mainland China,
Korea and India.

22. Analysis of advances to customers by geographical area according to the
location of counterparties, after risk transfer


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


At 31Dec05

Gross advances to customers     570,329        354,626     73,959    6,988   1,005,902  
Overdue advances to customers     2,337          2,222        224        8       4,791  

At 31Dec04 (restated)

Gross advances to customers     543,997        319,512     59,461    4,151     927,121  
Overdue advances to customers     3,212          2,343         74        -       5,629  

23. Analysis of advances to customers by industry sector based on categories and
definitions used by the Hong Kong Monetary Authority ('HKMA')

The following analysis of advances to customers is based on the categories
contained in the 'Quarterly Analysis of Loans and Advances and Provisions'
return required to be submitted to the HKMA by branches of the bank and by
banking subsidiary companies in Hong Kong.

                                           At31Dec05       At 31Dec04
Figures in HK$m                                              restated

Gross advances to customers for 
  use in Hong Kong

Industrial, commercial and financial
Property development                          41,141           36,230
Property investment                          104,214           93,696
Financial concerns                            12,667           14,784
Stockbrokers                                   1,094            1,185
Wholesale and retail trade                    34,256           32,099
Manufacturing                                 17,847           14,336
Transport and transport equipment             31,202           35,418
Others                                        44,697           41,134
                                             287,118          268,882

Individuals
Advances for the purchase of flats
  under the Hong Kong SAR Government's 
  Home Ownership Scheme, Private Sector
  Participation and Tenants Purchase
  Scheme                                      36,291           41,845
Advances for the purchase of other
  residential properties                     165,148          169,482
Credit card advances                          29,882           23,162
Others                                        23,826           20,257
                                             255,147          254,746

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

Gross advances to customers for 
  use in Hong Kong                           542,265          523,628

Trade finance                                 49,902           49,408

Gross advances to customers for
  use outside Hong Kong made by 
  branches of the bank and 
  subsidiary companies in Hong Kong           31,989           20,747

Gross advances to customers made
  by branches of the bank and
  subsidiary companies in Hong Kong          624,156          593,783

Gross advances to customers made
  by branches of the bank and
  subsidiary companies outside Hong Kong
- Rest of Asia-Pacific                       381,741          333,324
- Americas/Europe                                  5               14

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

An explanation of the significant differences between the categories of advances
and their definitions used by the HSBC Group and those used by the HKMA is given
on page 18 of the Annual Report and Accounts for 2004.

24. Cross-border exposure

The country risk exposures shown below are prepared in accordance with the HKMA
Return of External Positions Part II: Cross-Border Claims (MA(BS)9) guidelines.

Cross-border claims are on-balance sheet exposures to counterparties based on
the location of the counterparties after taking into account the transfer of
risk.

The tables show claims on individual countries and territories or areas, after
risk transfer, amounting to 10 per cent or more of the aggregate cross-border
claims.

Cross-border risk is controlled centrally through a well-developed system of
country limits and is frequently reviewed to avoid concentration of transfer,
economic or political risk.

                                Banks and
                                    other     Public 
                                financial     sector 
Figures in HK$m              institutions   entities     Other     Total

At 31Dec05

Americas
United States                      38,673     72,477    34,515   145,665
Other                              39,328      9,909    50,744    99,981
                                   78,001     82,386    85,259   245,646

Europe
United Kingdom                    111,377         14    22,232   133,623
Other                             338,060      5,842    39,509   383,411
                                  449,437      5,856    61,741   517,034

Asia-Pacific excluding Hong Kong  154,135     33,897   108,476   296,508

At 31Dec04

Americas
United States                      45,518     80,047    32,010   157,575
Other                              43,044     16,143    47,297   106,484
                                   88,562     96,190    79,307   264,059

Europe
United Kingdom                     86,613         27    23,294   109,934
Other                             332,581      4,219    22,168   358,968
                                  419,194      4,246    45,462   468,902

Asia-Pacific excluding Hong Kong  151,183     18,454    77,266   246,903

25. Customer accounts

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

Current accounts and demand deposits       925,008         1,069,178
Savings accounts                           664,478           516,237
Other deposit accounts                     145,624           142,696

                                         1,735,110         1,728,111

Customer accounts increased by HK$7 billion compared with the end of 2004.

Certain structured deposits that were previously recorded in 'Other deposit
accounts' have, in accordance with revised accounting standards, been
reclassified in 2005 to 'Trading liabilities'. Excluding the effect of this
reclassification, customer accounts rose by HK$84 billion, or 4.9 per cent.

In Hong Kong, customer accounts, including accounts reclassified as trading,
increased by HK$20.0 billion, or 1.5 per cent. Current accounts and demand
deposits fell by HK$161 billion reflecting the shift into savings and time
deposits as interest rates rose during 2005, coupled with a net outflow of
deposits from personal customers attributable to intense market competition in
the higher interest rate environment. Customer account balances, including
trading accounts, in Commercial Banking and Corporate, Investment Banking and
Markets increased by HK$43 billion, or 10.2 per cent, reflecting the success of
the group's cash management capabilities in attracting new deposits from small
and larger businesses alike.

In the rest of Asia-Pacific, customer accounts, including trading accounts, rose
by HK$65 billion, or 15.7 per cent. Deposits from personal customers increased
by 8.5 per cent, notably in mainland China, Singapore and Indonesia. Deposits in
Commercial Banking and Corporate, Investment Banking and Markets grew by 19.6
per cent, with increases in mainland China, India, Korea, Singapore, Brunei and
Taiwan, attributable to business expansion, particularly in the payments and
cash management business, and higher balances from securities custody and
clearing customers.

The group's advances-to-deposits ratio increased to 57.6 per cent at 31 December
2005 from 53.2 per cent at 31 December 2004.

26. Trading liabilities

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

Certificates of deposit in issue            83,937                -

Other debt securities in issue              20,361                -
Short positions in securities               55,025           37,281
Deposits by banks                           13,488                -
Customer accounts                           77,387                -

                                           250,198           37,281

Trading liabilities include customer deposits, certificates of deposit and other
debt securities in issue, which may contain embedded options or other
derivatives, the market risk of which is managed in the trading book. In prior
years, these liabilities were not shown separately.

The reclassification in 2005 was made on adoption of HKAS 39.

27. Financial liabilities designated at fair value

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

Deposits by banks                              360                -
Customer accounts                            1,600                -
Subordinated liabilities                       967                -
                                             2,927                -

Financial liabilities designated at fair value are liabilities 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.

28. Debt securities in issue

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

Certificates of deposit                     49,068          110,922
Other debt securities                       12,400           44,240
                                            61,468          155,162

The fall in debt securities in issue compared with the end of 2004 reflects the
reclassification of certain securities as 'Trading liabilities' and 'Financial
assets designated at fair value', as detailed in Notes 26 and 27. The
reclassification was made on adoption of HKAS 39 in 2005.

29. Reserves

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

Other reserves
- Property revaluation reserve                           4,082            3,065
- Available-for-sale investment reserve                  2,899                -
- Long-term equity investment revaluation reserve            -            1,799
- Cash flow hedge reserve                               (1,767)               -
- Foreign exchange reserve                                  53              843
- Other                                                    770              322
                                                         6,037            6,029
Retained profits                                        64,303           50,484
Total reserves                                          70,340           56,513

30. Derivatives

Derivatives are financial instruments that derive their value from the price of
an underlying item such as equities, bonds, interest rates, foreign exchange
rates, credit spreads, commodity prices and equity or other indices.

Derivatives enable users to increase, reduce or alter exposure to credit or
market risks. The group makes markets in derivatives for its customers and uses
derivatives to manage its exposure to credit and market risks.

Derivatives are carried at fair value and are shown in the balance sheet as
separate totals of assets and liabilities. Asset and liability values represent
the cost to the group of replacing all transactions, with positive or negative
fair value respectively, assuming that all of the group's relevant
counterparties default at the same time, and that the transactions can be
replaced instantaneously.

Derivative assets and liabilities on different transactions are only netted if
the transactions are with the same counterparty, a legal right of set-off exists
and the cash flows are intended to be settled on a net basis. Changes in the
values of derivatives are recognised in 'Net trading income' or 'Net income from
financial instruments designated at fair value' unless they qualify as hedges
for accounting purposes.

                                           2005                         2004              
Figures in HK$m                      Assets   Liabilities        Assets      Liabilities  

Fair values of derivative open 
  positions held for trading 
  purposes

Exchange rate                        31,074        29,254        54,247           54,302  
Interest rate                        36,004        35,739        38,430           36,185  
Equity                                1,388         2,570         1,475            1,518
Credit                                  970         2,802           240              351
Commodity and other                     288           568             6                6
                                     69,724        70,933        94,398           92,362 

Fair values of outstanding
  derivatives designated as 
  fair value hedges

Interest rate                           658           437             -                -  

Fair values of outstanding
  derivatives designated as 
  cash flow hedges

Interest rate                         1,657           639             -                -

Total                                72,039        72,009        94,398           92,362

The tables below give the nominal contract amounts, credit equivalent amounts
and risk-weighted amounts of off-balance sheet transactions. The credit
equivalent amounts are calculated for the purposes of deriving the risk-weighted
amounts. These are assessed in accordance with the Third Schedule of the Hong
Kong Banking Ordinance on capital adequacy and depend on the status of the
counterparty and the maturity characteristics. The risk weights used range from
zero per cent to 50 per cent for exchange rate and interest rate contracts, and
from zero per cent to 100 per cent for other derivative contracts. The group has
executed close-out netting agreements with certain counterparties, which allow
for positive and negative mark-to-market values on different transactions to be
offset and settled by a single payment in the event of default by either party.
These have been taken into account in calculating total risk assets.

Derivatives arise from futures, forward, swap and option transactions undertaken
by the group in the foreign exchange, interest rate, equity, credit and
commodity markets. The contract amounts of these instruments indicate the volume
of transactions outstanding at the balance sheet date; they do not represent
amounts at risk.

                                           2005                                  2004                 
                                             Credit      Risk-                     Credit      Risk-  
                               Contract  equivalent   weighted      Contract   equivalent   weighted  
Figures in HK$m                  amount      amount     amount        amount       amount     amount  

Exchange rate contracts:
- Spot and forward foreign
  exchange                    2,536,795      36,655      9,753     2,411,793       46,694     11,759  
- Swaps and other exchange 
  rate contracts                884,046      41,124     12,481       696,883       39,635     11,180  
                              3,420,841      77,779     22,234     3,108,676       86,329     22,939  

Interest rate contracts:
- Interest rate swaps         4,775,236      55,580     14,442     3,754,053       57,131     14,679  
- Other interest rate 
  contracts                     815,110       4,159      1,340       684,692        3,117        875  
                              5,590,346      59,739     15,782     4,438,745       60,248     15,554  

Other derivative contracts      289,019      15,885      5,649        71,395        4,030      1,222  

Impact of counterparty
  netting agreements on 
  derivatives exposure                -     (55,354)   (11,915)           -       (59,487)   (12,535)  

31. Contingent liabilities and commitments

                                                          Credit      Risk-
                                           Contract   equivalent   weighted
Figures in HK$m                              amount       amount     amount

At 31Dec05

Contingent liabilities
- Acceptances and endorsements                    -            -          -
- Guarantees                                 83,114       60,166     48,893
- Other                                          37           37         37
                                             83,151       60,203     48,930

Commitments
- Documentary credits and short-term
  trade-related transactions                 55,402       20,650     10,905
- Forward asset purchases and forward
  forward deposits placed                     1,849        1,849        775
- Undrawn note issuing and revolving
  underwriting facilities                     3,249        1,625        975
- Undrawn formal standby facilities,
  credit lines and other commitments:
  - one year and over                        97,207       48,604     41,115
  - under one year                          752,797            -          -
                                            910,504       72,728     53,770

At 31Dec04

Contingent liabilities
- Acceptances and endorsements               22,714        4,559      4,423
- Guarantees                                 87,243       65,884     48,837
- Other                                          35           35         33
                                            109,992       70,478     53,293

Commitments
- Documentary credits and short-term
  trade-related transactions                 48,493       13,770      9,591
- Forward asset purchases and forward
  forward deposits placed                    10,166       10,166      3,716
- Undrawn note issuing and revolving
  underwriting facilities                     4,116        2,058      1,680
- Undrawn formal standby facilities,
  credit lines and other commitments:
  - one year and over                        82,142       41,071     38,311
  - under one year                          657,682            -          -
                                            802,599       67,065     53,298

The tables above give the nominal contract amounts, credit equivalent amounts
and risk-weighted amounts of contingent liabilities and commitments. The credit
equivalent amounts are calculated for the purposes of deriving the risk-weighted
amounts. These are assessed in accordance with the Third Schedule of the Hong
Kong Banking Ordinance on capital adequacy and depend on the status of the
counterparty and the maturity characteristics. The risk-weights used range from
0 per cent to 100 per cent for contingent liabilities and commitments.

Contingent liabilities and commitments are credit-related instruments which
include letters of credit, guarantees and commitments to extend credit. The
contract amounts represent the amounts at risk should the contract be fully
drawn upon and the client default. Since a significant portion of guarantees and
commitments is expected to expire without being drawn upon, the total of the
contract amounts is not representative of future liquidity requirements.

In 2005, assets and liabilities relating to acceptances and endorsements were
recognised on the balance sheet, and have been included in 'Other assets' and
'Other liabilities'. This reclassification was made on adoption of the new
accounting standards.

32. Foreign exchange exposure

The group had the following structural foreign currency exposures which exceeded
10 per cent of the net structural foreign currency exposure in all currencies:

Figures in HK$m                                Net structural position

At 31Dec05

Chinese renminbi                                                32,510
Indian rupees                                                    7,979
United States dollars                                           11,780

At 31Dec04 (restated)

Australian dollars                                               4,911
Chinese renminbi                                                17,398
Indian rupees                                                    5,808
United States dollars                                            7,476

The group had the following non-structural foreign currency positions which
exceeded 10 per cent of the group's net foreign currency non-structural
positions in all currencies:

                              United States        Singapore          Brunei 
Figures in HK$m                     dollars          dollars         dollars 


At 31Dec05

Spot assets                       1,229,340          107,578           5,523 
Spot liabilities                 (1,188,737)         (90,549)        (18,062) 
Forward purchases                 1,507,086          157,007              43 
Forward sales                    (1,558,902)        (161,647)              - 
Net options position                  3,361                -               - 
                                     (7,852)          12,389         (12,496) 

At 31Dec04 (restated)

Spot assets                       1,060,593           83,986           5,129  
Spot liabilities                 (1,042,370)         (74,193)        (15,134) 
Forward purchases                 1,471,800          104,625               - 
Forward sales                    (1,490,489)        (104,339)              - 
Net options position                   (707)               -               - 
                                     (1,173)          10,079         (10,005) 



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