HSBC FY05 REL3; Pt2/5

HSBC Holdings PLC 06 March 2006 Consolidated Cash Flow Statement 31Dec05 31Dec04 Figures in HK$m restated Net cash inflow from operating activities 26,840 17,623 Cash flows from investing activities Purchase of an interest in an associate - (1,634) Dividends received from associates 75 21 Purchase of available-for-sale investments (48,780) - Purchase of held-to-maturity debt securities (190) (61,039) Proceeds from sale or redemption of available-for-sale investments 21,888 - Proceeds from sale or redemption of held-to-maturity debt securities 33 39,337 Purchase of fixed assets (167) (139) Proceeds from sale of fixed assets 186 181 Interest received from available-for-sale investments 4,495 3,258 Dividends received from available-for-sale investments 58 131 Net cash outflow from investing activities (22,402) (19,884) Cash flows from financing activities Dividends paid (9,942) (9,750) Interest paid for subordinated liabilities (58) - Proceeds from subordinated liabilities, including financial liabilities designated at fair value 4,478 - Net cash outflow from financing activities (5,522) (9,750) Decrease in cash and cash equivalents (1,084) (12,011) Cash and cash equivalents at 1 January 67,051 77,575 Effect of foreign exchange rate changes (454) 1,487 Cash and cash equivalents at 31 December 65,513 67,051 Financial Review Net interest income 2005 2004 Figures in HK$m restated Net interest income^ 11,068 10,005 Average interest-earning assets 505,221 480,317 Net interest spread 1.94% 2.00% Net interest margin 2.19% 2.08% ^ Included within net interest income is HK$20 million in respect of interest income accrued on impaired advances. Net interest income increased by HK$1,063 million, or 10.6 per cent, compared with 2004, with an increase of HK$24.9 billion, or 5.2 per cent, in average interest-earning assets. Net interest margin improved by 11 basis points to 2.19 per cent. Net interest spread fell 6 basis points to 1.94 per cent, while the contribution from net free funds rose by 17 basis points to 0.25 per cent, benefiting from the steady rise in market interest rates. The gradual rise in market interest rates in 2005 led to a widening of deposit spreads and boosted the contribution made by net free funds. The net interest margin also benefited from the growth in customer advances, particularly higher yielding cards and personal and SME loans, and the increase in interest earned on the life insurance debt securities portfolio. The exclusion of HK$272 million in net interest expense of the trading and fair value portfolio following the change in accounting presentation in 2005 also contributed to the increase in net interest income. Treasury securities investment and money market portfolios were negatively affected by the rise in funding costs and the flattening of yield curves. Average mortgage portfolio yields were lower than in 2004, although new mortgage pricing moved up gradually in the second half of 2005. The impact of individual factors on net interest income and net interest margin is analysed below: HK$m Basis points Net interest Net interest income margin Widening of deposit spreads 354 7 Increase in interest income from insurance fund assets 148 3 Narrowing of spreads on treasury securities investment and money market portfolios (758) (15) Fall in mortgage portfolio yields (199) (4) Contribution from net free funds 859 17 Loan growth and spread improvement 137 3 Growth in average interest-earning assets 522 - 1,063 11 The average yield on the residential mortgage portfolio (excluding GHOS mortgages and staff loans) was 225 basis points below Best Lending Rate ('BLR') for 2005, compared with 202 basis points below BLR in 2004. The average yield was on a downward trend during the first half of 2005 but stabilised in the second half, with BLR and mortgage pricing gradually moving up. Mortgage incentive payments totaled HK$91 million, compared with HK$157 million in 2004. With effect from 1 January 2005, and in accordance with HKAS 30, interest income and expenses of financial instruments for trading and designated at fair value are reported as net trading income and net income from financial instruments designated at fair value respectively. The following table shows the total net interest income from all sources for both years on a comparable basis. 2005 2004 Figures in HK$m restated Net interest income as per income statement 11,068 10,005 Interest income less expense from: - trading financial instruments (306) - - fair value financial instruments 34 - Total net interest income 10,796 10,005 Net fee income 2005 2004 Figures in HK$m restated - Stockbroking and related services 493 560 - Retail investment products and funds under management 916 1,388 - Insurance 116 101 - Account services 225 214 - Private banking 174 111 - Remittances 141 125 - Cards 705 598 - Credit facilities 117 268 - Trade services 375 360 - Other 132 116 Fee income 3,394 3,841 Fee expense (520) (416) 2,874 3,425 Net fee income was HK$551 million, or 16.1 per cent, lower than in 2004. Sales of capital-guaranteed funds slowed significantly under a rising interest rate environment, leading to a fall of 34.0 per cent in fee income from retail investment products and funds under management. This was partly compensated by growth in the issue of market-linked instruments, which generate trading income instead of fee income. Credit facilities fees fell by HK$151 million, due mainly to the amortisation of fees as part of effective interest income under the new accounting standards. Income from stockbroking and securities-related activities fell by HK$67 million, or 12.0 per cent, affected by the fall in retail investor activity. Private banking investment services and advisory income rose by 56.8 per cent to HK$174 million. Card services income rose by HK$107 million, or 17.9 per cent. There has been a growth of 19.7 per cent in cardholder spending, the result of various cash dollar awards and merchant sponsored benefit campaigns, improved consumer sentiment and an expansion of 10.2 per cent in the credit card base following a series of successful acquisition programmes. Insurance agency commission also recorded encouraging growth of 14.9 per cent, mainly from commercial banking business. Net trading income 2005 2004 Figures in HK$m restated Dealing profits: - Foreign exchange 785 975 - Securities, derivatives and other trading activities 100 49 - Income from insurance fund assets - 89 885 1,113 Net interest expense on trading assets and liabilities (306) - 579 1,113 Net trading income fell by HK$534 million, or 48.0 per cent, compared with the previous year. Net trading income was maintained at the same level as that in 2004 excluding the impact of certain changes due to the application of new accounting standards that came into effect on 1 January 2005. These changes are the inclusion of net interest expense of HK$306 million on trading assets and liabilities and revaluation losses of HK$145 million on forward foreign exchange contracts linked to money market activities, and the reduction in the income of HK$89 million from the trading portfolio of life insurance fund assets. There was a significant rise in income earned on derivatives embedded in currency and other market-linked deposits and instruments. This was offset by a fall in foreign exchange income due to lower customer transaction volumes, losses on securities and other trading in an adverse interest rate environment, and revaluation losses on certain financial instruments that failed to satisfy the hedging criteria of HKAS 39. Net income from financial instruments designated at fair value Net income from financial instruments designated at fair value amounted to HK$2 million, including net interest income and expense, investment income, and revaluation gains and losses. On adoption of HKAS 39 with effect from 1 January 2005, certain financial assets, liabilities and derivatives are designated at fair value, mainly to eliminate or significantly reduce accounting mismatch. Certain long-term insurance fund assets are also designated at fair value to meet policyholders' liabilities. Prior to the adoption of HKAS 39, these income streams were reported under their respective income categories. Other operating income 2005 2004 Figures in HK$m restated Rental income from invested properties 207 202 Value of in-force long-term assurance business 316 255 Other 275 316 798 773 Analysis of income from wealth management businesses 2005 2004 Figures in HK$m restated Investment income: - retail investment products and funds under management^ 1,199 1,413 - private banking 188 123 - stockbroking and related services 493 560 - margin trading 63 66 1,943 2,162 Insurance income: - life insurance -- underwriting including embedded value 869 623 -- life investment income^^ 406 418 - general insurance and others 270 269 1,545 1,310 Total 3,488 3,472 ^ Income from retail investment products and funds under management includes income reported under net fee income on the sale of unit trust funds and third party investment products. It also includes profits on the issue of structured investment products, reported under net trading income. ^^ Investment income from insurance funds includes income reported as net interest income, net trading income and net income from financial instruments designated at fair value. Wealth management income rose by HK$16 million, with the 17.9 per cent growth in insurance income making up for the 10.1 per cent reduction in income from investment services. The life insurance business continued to gain momentum, achieving a 66.4 per cent growth in annualised premiums and gaining market share, with an increase in both the number of policies concluded and in the premium per policy. New products, such as 'Three Year Express Wealth' which provides comprehensive life cover and potential enhancement in investment return, have been very well received. The investment services business became more diversified in 2005. Under a rising interest rate environment, focus was shifted from the sale of longer-term, capital-guaranteed funds which generate higher upfront fee income, to the issue of shorter-term, market-linked deposits and instruments which turn over more quickly but with lower profit margins. Private banking business continued to expand its customer base and funds under management, and reported growth of 52.8 per cent in investment services and advisory fees. Stockbroking and related services, however, fell by 12.0 per cent, affected by the fall in retail investor activity. Total funds under management, including discretionary and advisory, grew by 18.1 per cent to HK$106.2 billion. Loan impairment (charges)/releases and other credit risk provisions 2005 2004 Figures in HK$m restated Loan impairment (charges)/releases - individually assessed (309) 141 - collectively assessed -- portfolio basis (122) (176) -- individually unimpaired loans (187) 812 (618) 777 Of which: - new and additional (1,070) (463) - releases 351 1,131 - recoveries 101 109 (618) 777 Loan impairment charges and other credit risk provisions amounted to HK$618 million, compared with a net release of HK$777 million in 2004. Impairment charges on individually assessed loans amounted to HK$309 million, with the increase in charges on commercial banking accounts partially offset by net releases from mortgages and personal loans, which benefited from rising property prices, falling unemployment, and a reduction in bankruptcy cases. This compared with a net release of HK$141 million, mainly from corporate and commercial banking customer accounts, in 2004. Charges on collectively assessed portfolios of small homogeneous loans amounted to HK$122 million, reflecting the improvement in credit card charge-off rates under the favourable economic environment. This compared favourably with the charge of HK$176 million on loans collectively assessed on a portfolio basis in 2004. Collective assessment of the loans not individually identified as impaired recorded a charge of HK$187 million, as loss rates were updated in the light of historic experience. This compared with a release of HK$812 million in 2004. Operating expenses 2005 2004 Figures in HK$m restated Employee compensation and benefits: - salaries and other costs 2,144 2,065 - retirement benefit costs 137 169 2,281 2,234 General and administrative expenses: - rental expenses 207 193 - other premises and equipment 751 677 - other operating expenses 1,018 864 1,976 1,734 Depreciation of business premises and equipment 280 256 Amortisation of intangible assets 9 8 4,546 4,232 Cost efficiency ratio 28.0% 26.4% Staff numbers by region^ 2005 2004 Hong Kong 7,425 7,228 Mainland and others 420 314 Total 7,845 7,542 ^ Full-time equivalent Operating expenses rose by HK$314 million, or 7.4 per cent. Staff costs increased by 2.1 per cent, due to the salary increment at the beginning of the year and the increase in staff numbers. The 10.9 per cent increase in other premises and equipment expenses was mainly attributable to information technology expenditure on the enhancement of the group's e-banking platform, credit management systems and new product launches. Other operating expenses rose by 17.8 per cent. The group stepped up its marketing expenditure to support the launch of new investment and insurance products and credit card promotion campaigns. Processing fees also increased with the further migration of back-office functions to HSBC Group service centres in lower cost areas. Depreciation of business premises and equipment rose by 9.4 per cent as a result of the increase in fair value of group premises. The number of full-time equivalent staff increased by 303. The increased staff number in Hong Kong was mainly to further strengthen the Personal Financial Services and Commercial Banking relationship management teams. The expansion of the group's mainland network in 2005 (with the opening of a branch in Beijing and two sub-branches in Shanghai, plus the expansion of the Fuzhou branch) brought the mainland workforce to 377 full-time equivalent staff at 31 December 2005, an increase of 32.7 per cent over the previous year end. The cost efficiency ratio for 2005 was 28.0 per cent, compared with 26.4 per cent for 2004. Profit on disposal of fixed assets and financial investments 2005 2004 Figures in HK$m restated Profit on disposal of available-for-sale securities - realisation of amounts previously recognised in reserves at 1 January 611 - - net losses arising in current year (153) - 458 - Profit on disposal of long-term financial investments - realisation of amounts previously recognised in reserves at 1 January - 371 - net gains arising in current year - 41 - 412 Profit less loss on disposal of fixed assets 19 30 477 442 The profit on disposal of financial investments comprises gains on sales of equity securities less losses on disposals of available-for-sale debt securities. Tax expenses Taxation in the consolidated income statement represents: 2005 2004 Figures in HK$m restated Current tax - provision for Hong Kong profits tax Tax for the year 1,501 1,522 Current tax - taxation outside Hong Kong Tax for the year 12 7 Deferred tax Origination and reversal of temporary differences 282 182 Total tax expenses 1,795 1,711 The current tax provision is based on the estimated assessable profit for 2005, and is determined for the bank and its subsidiaries operating in the Hong Kong SAR by using the Hong Kong profits tax rate of 17.5 per cent (the same rate as in 2004). For subsidiaries and branches operating in other jurisdictions, the appropriate tax rates prevailing in the relevant countries are used. Deferred tax is calculated at the tax rates that are expected to apply in the year when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement except when it relates to items charged or credited directly to reserves, in which case the deferred tax is also recorded within reserves. The carrying amount of deferred tax assets/liabilities is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the related tax benefit to be utilised. Earnings per share The calculation of earnings per share in 2005 is based on earnings of HK$11,342 million (HK$11,364 million in 2004) and on the weighted average number of ordinary shares in issue of 1,911,842,736 shares (unchanged from 2004). Dividends per share 2005 2004 HK$ HK$m HK$ HK$m per share per share First interim 1.10 2,103 1.10 2,103 Second interim 1.10 2,103 1.10 2,103 Third interim 1.10 2,103 1.10 2,103 Fourth interim 1.90 3,633 1.90 3,633 5.20 9,942 5.20 9,942 Segmental analysis Segmental information is presented in respect of business and geographical segments. Business by customer group information, which is more relevant to the group in making operating and financial decisions, is chosen as the primary reporting format. For the purpose of segmental analysis, the allocation of revenue reflects the benefits of capital and other funding resources allocated to the customer groups or geographical segments by way of internal capital allocation and funds transfer pricing mechanisms. Cost allocation is based on the direct cost incurred by the respective customer groups and apportionment of management overheads. Rental charges at market rate for usage of premises are reflected as inter-segment income for the 'Other' customer group and inter-segment expenses for the respective customer groups. (a) By customer group The group's business comprises five customer groups. Personal Financial Services provides banking (including deposits, credit cards, mortgages and other retail lending) and wealth management services (including private banking, investment and insurance) to personal customers. Commercial Banking manages middle market and smaller corporate relationships and specialises in trade-related financial services. Corporate and Institutional Banking handles relationships with large corporate and institutional customers. Treasury engages in interbank and capital market activities and proprietary trading. Treasury also manages the funding and liquidity positions of the group and other market risk positions arising from banking activities. 'Other' mainly represents management of shareholders' funds and investments in premises, investment properties and equity shares. Pre-tax profit contributed by the customer groups in 2005 compared with 2004 is set out in the table below. More customer group analysis and discussions are set out the 'Customer group performance' section in page 5. Personal Corporate & Inter- Financial Commercial Institutional segment Figures in HK$m Services Banking Banking Treasury Other elimination Total Year ended 31Dec05 Profit before tax 7,686 1,078 507 1,072 3,015 - 13,358 Share of pre-tax profit 57.5% 8.1% 3.8% 8.0% 22.6% - 100.0% Year ended 31Dec04 Profit before tax 6,775 2,121 815 2,395 1,177 - 13,283 Share of pre-tax profit 51.0% 16.0% 6.1% 18.0% 8.9% - 100.0% (b) By geographical region The geographical regions in this analysis are classified by the location of the principal operations of the subsidiary companies or, in the case of the bank itself, by the location of the branches responsible for reporting the results or advancing the funds. Mainland Figures in HK$m Hong Kong Americas and other Total Year ended 31Dec05 Income and expense Total operating income 21,377 1,644 225 23,246 Profit before tax 11,253 1,614 491 13,358 At 31Dec05 Total assets 497,406 60,845 22,569 580,820 Total liabilities 520,260 9,395 7,435 537,090 Capital expenditure incurred during year 206 - 25 231 Contingent liabilities and commitments 137,536 - 3,973 141,509 Year ended 31Dec04 (restated) Income and expense Total operating income 18,105 1,594 126 19,825 Profit before tax 11,590 1,566 127 13,283 At 31Dec04 Total assets 460,612 69,675 16,660 546,947 Total liabilities 490,665 9,315 5,186 505,166 Capital expenditure incurred during year 143 - 5 148 Contingent liabilities and commitments 123,563 - 2,925 126,488 Analysis of financial assets and liabilities by accounting classification The following matrix sets out the financial assets and liabilities by type and by accounting classification on adoption of HKAS 39. The related changes in accounting policies are set out in the appendix on page 65. Designated Available Amortised Figures in HK$m Trading at fair value for sale cost Total At 31Dec05 Financial assets Cash and balances with banks and other financial institutions - - - 9,201 9,201 Placings with and advances to banks and other financial institutions - - - 69,286 69,286 Treasury bills 2,594 - 4,816 - 7,410 Certificates of deposit 538 194 25,909 1,138 27,779 Investment securities 9,468 5,833 148,448 9,593 173,342 Derivative financial instruments 1,245 16 454 - 1,715 Advances to customers - - - 260,680 260,680 Total financial assets 549,413 Other assets 31,407 Total assets 580,820 Financial liabilities Deposits by banks - - - 12,043 12,043 Customer accounts 24,422 - - 430,995 455,417 Certificates of deposit and other debt securities in issue 13,616 - - 10,023 23,639 Securities net short position 7,766 - - - 7,766 Derivative financial instruments 1,307 28 457 - 1,792 Liabilities to customers under investment contracts - - - 561 561 Subordinated liabilities - 967 - 3,511 4,478 Total financial liabilities 505,696 Liabilities to customers under insurance contracts 15,335 Other liabilities 16,059 Total liabilities 537,090 Analysis of assets and liabilities by remaining maturity The maturity analysis is based on the remaining period at the balance sheet date to the contractual maturity date, with the exception of the trading portfolios that may be sold before maturity and are accordingly recorded as 'Repayable on demand'. Three months Three One Repayable or less months year Over on but not to to five Figures in HK$m demand on demand one year five years years Undated Total Assets Cash and balances with banks and other financial institutions 9,201 - - - - - 9,201 Placings with and advances to banks and other financial institutions 11,824 52,661 4,597 204 - - 69,286 Trading assets 12,600 - - - - - 12,600 Financial assets designated at fair value - 52 113 1,601 2,262 1,999 6,027 Derivative financial instruments 1,246 106 105 233 25 - 1,715 Advances to customers 14,330 26,348 33,457 91,279 95,266 - 260,680 Financial investments - 14,214 35,010 126,831 12,528 1,321 189,904 Investments in associates - - - - - 2,929 2,929 Investment properties - - - - - 4,273 4,273 Premises, plant and equipment - - - - - 6,750 6,750 Interest in leasehold land held for own use under operating lease - - - - - 594 594 Intangible assets - - - - - 1,636 1,636 Other assets 8,589 4,589 1,360 28 6 653 15,225 At 31Dec05 57,790 97,970 74,642 220,176 110,087 20,155 580,820 At 31Dec04 37,328 108,219 75,973 209,636 99,669 16,122 546,947 Liabilities Current, savings and other deposit accounts 233,907 190,206 5,916 966 - - 430,995 Deposits from banks 1,664 10,370 9 - - - 12,043 Trading liabilities 45,804 - - - - - 45,804 Financial liabilities designated at fair value - - - - 994 (27) 967 Derivative financial instruments 1,307 22 81 346 36 - 1,792 Certificates of deposit and other debt securities in issue - 233 1,952 7,788 50 - 10,023 Other liabilities 6,706 6,661 442 48 99 182 14,138 Liabilities to customers under investment contracts - - - - - 561 561 Liabilities to customers under insurance contracts - - - - - 15,335 15,335 Deferred tax and current tax liabilities 370 2 78 - - 1,471 1,921 Subordinated liabilities - - - - 3,511 - 3,511 At 31Dec05 289,758 207,494 8,478 9,148 4,690 17,522 537,090 At 31Dec04 319,208 144,903 16,059 12,738 1,677 10,581 505,166 This information is provided by RNS The company news service from the London Stock Exchange

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