HSBC Holdings plc pt 2/3

HSBC Holdings PLC
30 July 2007

UK Commercial Banking continued to perform well. Profit before tax rose 18 per
cent, our customer base expanded, and we are now the bank most recommended by
our start-up customers. Investment in technology is improving customer service
and productivity; the successful positioning of Business Direct has attracted
over 40,000 customers since its launch in September 2006, of which 60 per cent
are new to the Group.

Our Personal Financial Services business in Europe was, however, 34 per cent
down on the comparable period in 2006. This was largely due to two factors.
First, a deliberate reduction in credit exposure to sectors whose pricing, in
our view, inadequately reflects risk. Second, the impact in the UK of
unauthorised overdraft fee refunds, which increased our costs by US$236 million.
This is an industry-wide issue and the size of the refunds that we have made
demonstrate our commitment to treating our customers in a fair and transparent
manner. Indeed, we very much welcome the agreement with the OFT to take the case
to court to achieve legal clarity and a resolution for our customers and our
business. In Group terms, our Personal Financial Services business in the UK
typically represents less than 7 per cent of our worldwide profits.

Nevertheless, this remains a highly challenging operating environment. We
continue to focus on customer acquisition and retention, and we see growth
opportunities in wealth management and insurance to counterbalance the
challenges posed by competition and regulation for current account pricing.

We grew strongly in packaged fee-based accounts, in Premier accounts, and in
retail savings products, which helped to offset the reduction in lending margin.
Average savings balances increased by 14 per cent in the first half to
US$83 billion. In First Direct we have the UK's most recommended bank - for
every one of the 15 years the measure has existed - and we will learn from its
expertise as we build direct channels around the world.

Good progress in managing down the Mortgage Services portfolio in North America

Within North America, our Canadian and Bermudian businesses grew pre-tax profits
by 22 per cent and, although our US businesses were 43 per cent below the
pre-tax performance achieved in the first half of 2006, they recovered strongly
against the second half of last year, delivering pre-tax profits of
US$1.8 billion - an improvement of US$1.5 billion.

This recovery in profitability reflected the success of the steps we have taken
to manage loss exposure within the correspondent channel mortgage business.
There was no significant change to the levels of loan impairment reserves
established at the end of last year. Credit impairment charges in Mortgage
Services in the half year were US$760 million and we wrote off loans of
US$715 million against allowances already raised. As a result our impairment
allowances remained largely unchanged at US$2.1 billion. We have stopped
underwriting sub-prime mortgages within the Mortgage Services correspondent
business, centralised collection activities at one centre for the most at-risk
customers, made management changes in key accountabilities, and put in place a
proactive calling programme to reach out to customers facing interest rate
resets in the coming months. In contrast to many lenders, we are able to manage
these relationships directly because we own the loan and the servicing. This
means that we can have a more positive dialogue with customers and can actively
manage our portfolio in this challenging environment.

Since we started the contact programme at the end of 2006, we have contacted
19,000 customers, and have modified the loans for over 5,000 of them, benefiting
both our customers and our business.

With the benefit of a resilient US economy, we have managed down the Mortgage
Services exposure to US$41.4 billion, a reduction of some US$8 billion from the
beginning of the year, a trend we hope to continue in the second half. We have
also managed down the value of resets in the Mortgage Services portfolio due in
the second half by almost a quarter to US$5.3 billion.

Elsewhere in US consumer finance, the remaining US businesses continued to meet
expectations, led by branch-based consumer lending. There is growing evidence
that the reduction of capacity in the sub-prime mortgage industry, coupled with
curtailment of most of the structured 'affordability' products offered, are
leading to more disciplined underwriting and pricing across the industry. This
is reducing acquisition costs and improving customer retention. As a result, our
US consumer finance revenues were 2 per cent and 5 per cent higher compared with
the first and second halves of 2006, respectively.

In our US retail bank, we continued to expand outside of residential mortgage
lending. We are growing our branch network in California, Connecticut, New
Jersey, Florida and the Metro DC Area, and continuing to roll out HSBC Direct,
our highly successful online business.

Record results in CIBM reflecting focus on emerging markets and financing

Our strategy of positioning our CIBM business as emerging markets-led and
financing-focused is paying off, with profits growing by 32 per cent to a new
high of US$4 billion. Asian (including Middle Eastern) and Latin American
operations contributed 49 per cent of CIBM's pre-tax profits in the first half
of 2007.

In Asia, success in financing and providing structuring and hedging solutions
for the growing investment flows into and from the region, together with growth
in traditional foreign exchange and securities activities, delivered an
additional US$479 million of pre-tax profits, a rise of 36 per cent. Europe also
achieved strong growth as CIBM's product hubs in London and Paris delivered a
full spectrum of products both within Europe and to the global HSBC network.

Especially encouraging was the growing number of notable mandates in sizeable
cross-border financing transactions which leveraged HSBC's presence in both
countries. These included: Saudi Basic Industries Corp.'s US$11.6 billion
acquisition of GE Plastics; Singapore Telecommunications Ltd.'s US$758 million
acquisition of 30 per cent of Warid Telecom (Pvt) Ltd. of Pakistan; National
Titanium Dioxide Co. of Saudi Arabia's US$1.2 billion acquisition of Lyondell
Chemical Co.'s inorganic chemicals business in the US; and Dubai Drydocks' S$650
million acquisition of Pan-United Marine Ltd. of Singapore.

HSBC also acted as lead arranger of financing facilities for Macquarie of £1.8
billion for the acquisition of O2 Airwave and £3.4 billion for the acquisition
of National Grid Wireless.

We were pleased to be recognised in industry awards: HSBC was named global 'Best
Risk Management House' in the Euromoney magazine 2007 Awards for Excellence. We
also won global 'Best Cash Management House' in the Euromoney awards. In debt
capital markets HSBC ranked first in the Asian local currency Bloomberg bond
league table, first in the sterling bond league table and sixth in the
international bond league table.

Developing our income stream in Insurance

Less than 15 per cent of HSBC customers currently take an insurance product from
us. Our insurance operations across our customer groups are making an important
contribution to the Group and we believe that insurance has the potential over
time to represent a fifth of Group pre-tax profits.

We have started our work towards this by strengthening the management team and
launching the 'HSBC Insurance' brand, repositioning for growth and aiming to be
a top-10 player. We are committed to the life pensions and investments business
and to working with preferred strategic partners in general insurance, and to
raising the Group's retention levels.

We announced three insurance deals in three months. In France, where we are
building our life, pensions, investments and retirement services business, we
acquired the remaining 50 per cent of Erisa, the life, property and casualty
insurer, from our former joint venture partner, Swiss Life, for a consideration
of €229 million.

In the UK, HSBC Bank plans to partner with Aviva to create a joint venture under
the 'HSBC Insurance' brand.

In India, we plan to create a joint venture life insurance company - Canara HSBC
Life Insurance - with Canara Bank and the Oriental Bank of Commerce. The new
company will have access to the customers of both banks - 40 million people in
total - and provides a platform for growth in India's growing life insurance
market.

Global wealth creation supporting strong growth in private banking

Given the strong economic background and buoyant property and stock markets in
many parts of the world, increasing wealth accumulation drove strong growth in
client assets and sales of structured investment products within our private
banking operations. Client assets grew by 11 per cent to reach US$370 billion.
Fee revenues within the private bank were up by 15 per cent to a record
US$811 million. In part, this reflected improved cooperation between our
commercial bank and the private bank in terms of customer referral, and the use
of our in-house structuring capabilities in CIBM to build the products demanded
by the private bank's customers.

Global credit environment

Apart from US sub-prime mortgages, the credit environment generally remained
favourable globally in the first half of the year, with continuing low levels of
impairment emerging across our corporate and commercial lending books. 
Encouragingly, the more recent underwriting of unsecured personal lending in the
UK has performed better, although credit impairment has remained at the elevated 
levels experienced in the past two years.

High levels of liquidity and demand for higher yielding debt, combined with
investor appetite for higher leverage, have historically supported the
restructuring of corporate balance sheets. We remain alert, however, to the
probability of a change in sentiment, in particular as risk premia are rising
and interest rates move on an upward trend across much of the world.

A clear way forward

The management team has a clear strategy to execute and we have produced strong
results for the half-year. We will build on these results during the rest of the
year. We are focused on growing revenues by joining up the company for the
benefit of our customers. We are intent on slowing cost growth by using
technology to re-engineer our processes in a meaningful way. We believe there is
great potential to unlock further value from HSBC and we aim to do precisely
that.

Financial Overview

       Half-year to                                                 Half-year to                
         30Jun07                                           30Jun07       30Jun06       31Dec06  
       £m         HK$m                                        US$m          US$m          US$m  
                           For the period
    7,188      110,611     Profit before tax                14,159        12,517         9,569  
                           Profit attributable to                                               
                             shareholders of the parent                                         
    5,531       85,112       company                        10,895         8,729         7,060  
    3,143       48,372     Dividends                         6,192         5,270         3,499  

                           At the period-end
   59,738      936,374     Total shareholders' equity      119,780       101,381       108,352  
   68,347    1,071,319     Capital resources               137,042       116,636       127,074  
  489,168    7,667,605     Customer accounts               980,832       833,742       896,834  
1,072,485   16,810,965     Total assets                  2,150,441     1,738,138     1,860,758  
  519,445    8,142,187     Risk-weighted assets          1,041,540       872,893       938,678  

        £          HK$                                         US$           US$           US$  
                           Per ordinary share
     0.48         7.42     Basic earnings                     0.95          0.78          0.62  
     0.48         7.34     Diluted earnings                   0.94          0.77          0.62  
     0.27         4.13     Dividends^                         0.53          0.46          0.30  
     5.04        79.05     Net asset value                   10.10          8.71          9.24  

                           Share information                                                    
                           US$0.50 ordinary shares                                              
                             in issue                      11,713m       11,481m       11,572m  
                           Market capitalisation          US$215bn      US$202bn      US$212bn  
                           Closing market price per share    £9.15         £9.52         £9.31  

                                                            Over 1        Over 3        Over 5  
                                                              year         years         years  
                           Total shareholder return to
                             30Jun07^^                       101.2         129.1         156.6  
                           Benchmarks: FTSE 100              117.1         163.8         168.5  
                           MSCI World                        124.2         161.4         197.2  


^ The second interim dividend for 2007 of US$0.17 per ordinary share is
  translated at the closing rate on 30 June 2007 (see note 7 on page 25). Where
  required, this dividend will be converted into sterling or Hong Kong dollars at
  the exchange rates on 24 September 2007 (see note 7 on page 25).

^^ Total shareholder return ('TSR') is as defined on page 282 of the Annual
   Report and Accounts 2006.

                                                    Half-year to              
                                                30Jun07  30Jun06    31Dec06  
                                                      %        %          %  
Performance ratios
Return on average invested capital^                18.4     17.2       12.8  
Return on average total shareholders' equity       19.1     18.1       13.4  
Post-tax return on average total assets            1.19     1.12       0.88  
Post-tax return on average risk-weighted assets    2.30     2.21       1.65  

Efficiency and revenue mix ratios
Cost efficiency ratio                              48.3     50.1       52.5  

As a percentage of total operating income:
- Net interest income                              43.3     48.7       49.7  
- Net fee income                                   24.9     24.4       24.6  
- Net trading income                               13.1     12.4       11.1  

Capital ratios
- Tier 1 capital                                    9.3      9.4        9.4  
- Total capital                                    13.2     13.4       13.5  

^ Average invested capital is measured as average total shareholders' equity
  after adding back goodwill previously written-off directly to reserves,
  deducting average equity preference shares issued by HSBC Holdings and deducting
  average reserves for unrealised gains/(losses) on effective cash flow hedges and
  available-for-sale securities. This measure reflects capital initially invested
  and subsequent profit.

Consolidated Income Statement

     Half-year to                                               Half-year to  
       30Jun07                                       30Jun07     30Jun06     31Dec06   
     £m         HK$m                                    US$m        US$m        US$m   

 22,116      340,348     Interest income              43,567      35,785      40,094   
(12,862)    (197,934)    Interest expense            (25,337)    (19,054)    (22,339)  
  9,254      142,414     Net interest income          18,230      16,731      17,755   
  6,339       97,557     Fee income                   12,488      10,441      10,639   
 (1,012)     (15,569)    Fee expense                  (1,993)     (2,061)     (1,837) 
  5,327       81,988     Net fee income               10,495       8,380       8,802  
                         Trading income excluding                                     
  1,701       26,178       net interest income         3,351       3,112       2,507  
                         Net interest income on                                       
  1,097       16,874       trading activities          2,160       1,149       1,454  
  2,798       43,052     Net trading income            5,511       4,261       3,961  
                         Net income from financial                                    
                           instruments designated at                                  
    444        6,828       fair value                    874         260         397  
                         Gains less losses from
    507        7,804       financial investments         999         493         476  
                         Gains arising from dilution                                  
    546        8,406       of interests in associates  1,076           -           -  
    128        1,969     Dividend income                 252         222         118  
                         Net earned insurance                                         
  2,019       31,069       premiums                    3,977       2,834       2,834  
    344        5,297     Other operating income          678       1,153       1,393  
 21,367      328,827     Total operating income       42,092      34,334      35,736  
                         Net insurance claims                                         
                           incurred and movement in                                   
 (1,826)     (28,117)      policyholders' liabilities (3,599)     (2,149)     (2,555) 
                         Net operating income before                                  
                           loan impairment charges                                    
                           and other credit                                           
 19,541      300,710       risk provisions            38,493      32,185      33,181  
                         Loan impairment charges and                                  
                           other credit risk                                          
 (3,222)     (49,576)      provisions                 (6,346)     (3,890)     (6,683) 
 16,319      251,134     Net operating income         32,147      28,295      26,498  
                         Employee compensation and                                    
 (5,295)     (81,480)      benefits                  (10,430)     (8,992)     (9,508) 
                         General and administrative                                   
 (3,565)     (54,856)      expenses                   (7,022)     (6,065)     (6,758) 
                         Depreciation of property,                                    
   (415)      (6,382)      plant and equipment          (817)       (748)       (766) 
                         Amortisation of intangible
   (173)      (2,672)      assets                       (342)       (334)       (382) 
 (9,448)    (145,390)    Total operating expenses    (18,611)    (16,139)    (17,414) 
  6,871      105,744     Operating profit             13,536      12,156       9,084  
                         Share of profit in                                           
                           associates and joint                                       
    317        4,867       ventures                      623         361         485  
  7,188      110,611     Profit before tax            14,159      12,517       9,569  
 (1,343)     (20,663)    Tax expense                  (2,645)     (3,272)     (1,943) 
  5,845       89,948     Profit for the period        11,514       9,245       7,626  
                         Profit attributable to                                       
                           shareholders of the                                        
  5,531       85,112       parent company             10,895       8,729       7,060  
                         Profit attributable to
    314        4,836       minority interests            619         516         566  
 
Consolidated Balance Sheet

        At 30Jun07                                At 30Jun07  At 30Jun06    At 31Dec06  
       £m         HK$m                                  US$m        US$m          US$m  
                           ASSETS                                                       

                           Cash and balances at
    8,304      130,168       central banks            16,651      24,343        12,732  
                           Items in the course of 
                             collection from other  
   11,547      180,990       banks                    23,152      12,425        14,144  
                           Hong Kong Government
                             certificates of
    6,457      101,214       indebtedness             12,947      12,588        13,165  
  211,782    3,319,641     Trading assets            424,645     299,295       328,147  
                           Financial assets                                             
                             designated at fair                                         
   17,380      272,430       value                    34,849      16,855        20,573  
   74,401    1,166,215     Derivatives               149,181     104,665       103,702  
                           Loans and advances to
  107,049    1,677,977       banks                   214,645     162,482       185,205  
                           Loans and advances to
  462,870    7,255,383       customers               928,101     814,209       868,133  
  116,204    1,821,473     Financial investments     233,001     192,334       204,806  
                           Interests in associates                                      
    4,281       67,097       and joint ventures        8,583       7,795         8,396  
                           Goodwill and intangible                                      
   19,174      300,542       assets                   38,445      34,544        37,335  
                           Property, plant and                                          
    7,472      117,121       equipment                14,982      15,277        16,424  
   17,040      267,088     Other assets               34,166      27,542        33,444  
                           Prepayments and accrued
    8,525      133,624       income                   17,093      13,784        14,552  
1,072,486   16,810,963     Total assets            2,150,441   1,738,138     1,860,758  

        At 30Jun07                                         At 30Jun07  At 30Jun06    At 31Dec06  
       £m         HK$m                                           US$m        US$m          US$m  
                           LIABILITIES AND EQUITY

                           Liabilities
                           Hong Kong currency notes in
    6,457      101,213       circulation                       12,947      12,588        13,165  
   64,223    1,006,676     Deposits by banks                  128,773      83,139        99,694  
  489,168    7,667,605     Customer accounts                  980,832     833,742       896,834  
                           Items in the course of
                             transmission to other
   10,144      158,999       banks                             20,339       9,532        12,625
  156,198    2,448,371     Trading liabilities                313,193     228,116       226,608
                           Financial liabilities designated
   37,886      593,860       at fair value                     75,966      64,354        70,211
   71,958    1,127,933     Derivatives                        144,284     103,660       101,478
  114,328    1,792,064     Debt securities in issue           229,239     209,309       230,325
    1,488       23,327     Retirement benefit liabilities       2,984       3,722         5,555
   17,206      269,702     Other liabilities                   34,500      31,669        29,824
                           Liabilities under insurance
   18,418      288,691       contracts issued                  36,929      15,663        17,670
    8,407      131,779     Accruals and deferred income        16,857      12,584        16,310
    1,797       28,166     Provisions                           3,603       2,286         2,859
   11,722      183,741     Subordinated liabilities            23,504      20,404        22,672
1,009,400   15,822,127     Total liabilities                2,023,950   1,630,768     1,745,830

                           Equity
    2,921       45,787     Called up share premium              5,857       5,741         5,786
    3,907       61,242     Share premium account                7,834       7,236         7,789
   15,879      248,892     Other reserves                      31,838      26,394        29,380
   37,031      580,453     Retained earnings                   74,251      62,010        65,397
   59,738      936,374     Total shareholders' equity         119,780     101,381       108,352
    3,348       52,462     Minority interests                   6,711       5,989         6,576
   63,086      988,836     Total equity                       126,491     107,370       114,928
1,072,486   16,810,963     Total liabilities and equity     2,150,441   1,738,138     1,860,758

Consolidated Statement of Recognised Income and Expense

                                                                          Half-year to           
                                                                30Jun07     30Jun06     31Dec06  
                                                                   US$m        US$m        US$m  

Available-for-sale investments:
- fair value gains/(losses) taken to equity                       1,162        (476)      2,058  
- fair value gains transferred to income statement on 
  disposal or impairment                                           (783)       (319)       (325)  
Cash flow hedges:
- fair value gains taken to equity                                  395         147       1,407  
- fair value changes transferred to income statement               (568)       (177)     (2,021)  
Share of changes in equity of associates and joint ventures         186         (44)         64  
Exchange differences                                              2,293       3,203       1,472  
Actuarial gains/(losses) on defined benefit plans                 2,028       1,477      (1,555)  
                                                                  4,713       3,811       1,100  
Tax on items taken directly to equity                              (455)       (196)        152  

Total income and expenses taken directly to equity 
  during the period                                               4,258       3,615       1,252  

Profit for the period                                            11,514       9,245       7,626  

Total recognised income and expense for the period               15,772      12,860       8,878  

Total recognised income and expense for the period 
  attributable to:
- shareholders of the parent company                             14,950      12,292       8,235  
- minority interests                                                822         568         643  
                                                                 15,772      12,860       8,878  






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