HSBC Holdings plc pt 2/4

HSBC Holdings PLC
03 March 2008


Our continued focus for 2008 is on strengthening the HSBC Finance business,
paying particular attention to the core consumer lending and cards businesses in
order to preserve the long term value of the platform. We will continue to
evaluate our product set and make adjustments in product type and qualification
criteria, consistent with our desired risk profile. We will position the
business so that when the environment improves we will be well positioned,
particularly as many players have exited the market.

Strong Global Banking and Markets performance

Despite severe disruption in global credit markets, pre-tax profits for Global
Banking and Markets rose by 5 per cent to US$6.1 billion. Performance was driven
by strong revenue growth in equities, foreign exchange, securities services,
payments and cash management, and asset management.

In 2007, we absorbed a total of US$2.1 billion of write-downs on asset-backed
securities and credit trading positions, leveraged and acquisition financing
positions, and monoline credit exposures resulting from unprecedented disruption
and deterioration in the credit market. In North America, the mortgage-backed
securities operation was closed to new business and downsized.

Strong growth from Asia-Pacific and the Middle East contributed over half of
Global Banking and Markets' 2007 pre-tax profits. Our outstanding performance in
Asia reflected continued success in providing our clients with financing,
structuring and hedging solutions. We maintained a solid position in mature
markets as well, with robust financing and advisory revenues in Europe and
strong growth in Global Banking deposits and fee income.

The strength of Global Banking and Markets' emerging markets-led and
financing-focused strategy was illustrated by HSBC's senior role in large,
cross-border transactions. We advised Borse Dubai on its acquisition of OMX of
Sweden and related share exchange agreement with Nasdaq. HSBC was lead arranger
of US$9.2 billion of facilities for Saudi Basic Industries' acquisition of GE
Plastics. In early 2008 HSBC was mandated as financial adviser and lead arranger
to BHP Billiton on its US$174 billion offer for Rio Tinto, the largest mining
sector deal announced to date. HSBC also advised on high-profile cross-border
transactions that illustrated the growing linkages between emerging markets
regions, including Singapore Telecommunications on its US$758 million
acquisition of a 30 per cent stake in Warid Telecom of Pakistan, and Dubai
Drydocks' S$650 million acquisition of Pan-United Marine of Singapore.

HSBC won numerous industry awards for its emerging markets and financing
strength. These included Acquisitions Monthly's 'Middle East Mergers and
Acquisitions Adviser of the Year' and International Financing Review's 'Middle
East Loan House of the Year'.

HSBC was designated global 'Best Risk Management House', 'Best Foreign Exchange
House in Asia' and, for the 10th consecutive year, 'Best Risk Management House
in Asia' in the Euromoney 2007 Awards for Excellence. HSBC was named in five of
LatinFinance's Deals of the Year, including 'Best Syndicated Loan', 'Best
Financing Innovation', and 'Best Local Currency Deal'. In debt capital markets,
HSBC ranked first in the Bloomberg Asian local currency bond league table, first
in sterling bonds and fifth in international bonds.

Global Banking and Markets continued to refine its IT development strategy,
delivering a cost-effective system platform to support HSBC's global product
reach. Barracuda is our award-winning, front-end trading system that enhances
straight through processing, by automating trade bookings and back-to-back
trades. Barracuda has processed over one million trades and 240 million
transactions since its launch and won the 2007 Banking Technology award for
'Best Trading System in Europe' and the 2007 American Financial Technology award
for 'Best Cross-Asset Trading System in the US'.


Using Group relationships to grow our Private Bank

In Private Banking, our fastest growing business, profit before tax increased by
24 per cent over 2006 to US$1.5 billion, with exceptional performance in Asia
and record results in Switzerland, among others. HSBC Private Bank retained its
number three ranking in the Euromoney Annual Private Banking Survey which covers
excellence across its business model, client segment, geography, product focus
and consistency of investments in growth.

Our ability to match developed market expertise with developing market insights
helped generate US$36 billion in net new client assets. Of that, US$6 billion
was directly referred from other HSBC customer groups. As a result, client
assets grew by 26 per cent to US$421 billion. We saw a sharp increase in client
demand for alternative assets and emerging market investments, aided by the
growth in our hedge funds, and several new private equity and emerging market
funds. These included new private client offerings in mainland China and Latin
America. Our Global Wealth Solutions business, providing trust and family office
services, also benefited from relatively buoyant markets with client assets
increasing by 38 per cent to US$79 billion.


Building our insurance business

Our insurance business is spread across our customer groups and in 2007
generated profit before tax of US$3.1 billion, a contribution of 13 per cent of
the Group pre-tax profit. We believe there is an opportunity to increase
insurance's contribution to the Group to 20 per cent over time.

Insurance is now an integral part of the new Global Premier proposition and we
are using the world-class Future of Retirement research we commissioned to
design innovative new products and services.

We launched HSBC's first environmentally friendly motor and house insurance in
Brazil and, in Mexico, we developed an innovative new motor insurance product.
We consolidated our position in Hong Kong as the leading provider of Mandatory
Provident Funds, with a 33 per cent share of funds under management. In France,
sales of life-wrapped investment products increased by 9 per cent. In Saudi
Arabia, a joint venture with SABB established a Takaful business. In the UK, M&S
Money was voted 'Life Insurance Provider of the Year' and, due to the success of
the Sterling Reserve Bond, HSBC Life in the UK is becoming one of the market's
leading providers of life investment products. In 2007, we launched credit
protection products and product enhancements in 12 new markets.

Our new insurance brand, HSBC Insurance, which was launched in 2007, will
increase customer awareness of our growing insurance capability.

To meet growing customer demand for insurance products, we are strengthening our
underwriting, broking and agency businesses with proposed strategic investments
in mainland China, India, South Korea and Vietnam. To complement growth in our
own businesses, we launched a Preferred Strategic Partner programme to provide
products in markets where we decide not to manufacture.

Customer access to products has been made easier and more efficient through
direct distribution channels and, in 2007, we sold 2.9 million policies over the
telephone, online and through other direct channels.


Strong liquidity and capital strength

HSBC has maintained its traditional financial strength in terms of capital,
liquidity and breadth of earnings. This is reflected in the Group's tier 1
capital ratio of 9.3 per cent and total capital ratio of 13.6 per cent as at the
year end compared with 9.4 per cent and 13.5 per cent, respectively, at the end
of 2006. Our strong capital position provides comfort for customers placing
deposits with HSBC, and attracts institutional balances, which means that we
benefit from a strong and well diversified funding base. It also means that we
are well-positioned to fund our growth plans and selectively to take advantage
of opportunities at a time when many others are unable to do so.

Since volatility in the financial markets began in August 2007, there has been a
movement of deposits to well-capitalised financial institutions such as HSBC.


Joining Up the Company

The results announced today are a reflection of the rolling out of our 'Joining
Up the Company' strategy. Put simply, 'Joining Up' is about using common
products and common systems to deliver an increasingly cohesive service to our
customers. This is more than business as usual: HSBC is transforming its
business through this strategy, be it the relaunch of Premier in 35 countries,
the rollout of Global Links for Commercial Banking, the move to the One HSBC
suite of Group Systems or the consolidation of our banking systems to HSBC's
Universal Banking system.

'Joined Up' resonates with our customers and our staff, and demonstrating its
impact will add value to our shareholders. Our brand recognition is rising in
line with our progress: in February 2008, The Banker Magazine named HSBC as the
world's most valuable banking brand. This follows Interbrand's 2007 ranking of
HSBC's brand as the 23rd most valuable in the world, up from 27th in 2006.

As our brand value increases, so we must ensure we deliver our global brand
promise to our customers and employees through continued investment in Joining
Up. For example, we shall continue to launch Premier in our target markets. We
shall significantly grow our Global Transaction Banking business, continuing our
investment in global talent, infrastructure expansion and product development.
Our success in developing HSBC Amanah was recognised by the Euromoney award for
'Best International Islamic Bank'.

We are also connecting the Group by moving to a common HR platform, continuing
our common Group-wide employee engagement surveys, and aligning objectives,
performance and pay globally. Our people will always be our most important
asset. The 330,000 people who work for HSBC across the world demonstrate the
shared values, the strength and the resilience of the HSBC Group which will
sustain our business in the long term. I would like to record my strong
appreciation and thanks for their energy and commitment to our business
throughout 2007.

We will continue to measure and report on our progress on key financial,
customer and employee metrics, available in our Annual Report and Accounts.

Our strategy gives us a clear roadmap for progress. It highlights the
competitive advantages in each of our customer groups, our emerging markets
strength and our international connectivity which so benefits our customers. We
will continue to build on our strengths and position HSBC for future growth.



M F Geoghegan, Group Chief Executive
3Mar2008


Financial Overview                                             

   Year ended 31Dec                                    Year ended 31Dec
         2007                                            2007         2006
        £m        HK$m                                   US$m          US$m
                          For the year
    12,106     188,878    Profit before tax            24,212        22,086
                          Profit attributable to
                            shareholders of the
     9,567     149,257      parent company             19,133        15,789
     5,121      79,890     Dividends                   10,241         8,769

                          At the year-end
    63,824     999,392     Total shareholders' equity  128,160       108,352
                                 
    76,015   1,190,287     Capital resources          152,640       127,074
                           Customer accounts and      
   611,704   9,578,447       deposits by banks      1,228,321       996,528
 1,172,425  18,358,566     Total assets             2,354,266     1,860,758
   559,643   8,763,252     Risk-weighted assets     1,123,782       938,678

         £         HK$                                    US$           US$
                           Per ordinary share
      0.83       12.87     Basic earnings                1.65          1.40
      0.82       12.72     Diluted earnings              1.63          1.39
      0.44        6.79     Dividends ^                   0.87          0.76
      5.34       83.59     Net asset value              10.72          9.24

                           Share information
                           US$0.50 ordinary shares in   
                             issue                    11,829m       11,572m
                           Market capitalisation     US$198bn      US$212bn
                           Closing market price per       
                             share                      £8.42         £9.31

                                               Over 1  Over 3        Over 5
                                                 year   years         years
                         Total shareholder
                           return to 31Dec07^^   95.6   111.3         158.8
                         Benchmarks: FTSE 100   107.4   148.4         194.6
                                     MSCI World 108.1   140.8         182.0

^ Under IFRSs accounting rules, the dividend per share of US$0.87 shown in the
accounts is the total of the dividends declared during 2007. This represents the
fourth interim dividend for 2006 and the first, second and third interim
dividends for 2007. As the fourth interim dividend for 2007 was declared in 2008
it will be reflected in the accounts for 2008.

^^ Total shareholder return ('TSR') is as defined in the Annual Report and
Accounts 2007.

                                                        Year ended 31Dec
                                                         2007          2006
                                                            %             %
Performance ratios
Return on average invested capital^                      15.3          14.9
Return on average total shareholders' equity             15.9          15.7
Post-tax return on average total assets                  0.97          1.00
Post-tax return on average risk-weighted assets          1.95          1.93

Efficiency and revenue mix ratios
Cost efficiency ratio                                    49.4          51.3

As a percentage of total operating income:
  - Net interest income                                  43.1          49.2
  - Net fee income                                       25.1          24.5
  - Net trading income                                   11.2          11.7

Capital ratios
  - Tier 1 capital                                        9.3           9.4
  - Total capital                                        13.6          13.5

^ Return on invested capital is based on the profit attributable to ordinary
shareholders. 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/(adding) 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

 Year ended 31Dec                                           Year ended 31Dec
       2007                                                  2007       2006
     £m          HK$m                                        US$m       US$m

 46,180       720,493       Interest income               92,359     75,879
(27,282)     (425,654)      Interest expense             (54,564)   (41,393)

 18,898       294,839       Net interest income           37,795     34,486

 13,169       205,455       Fee income                    26,337     21,080
 (2,168)      (33,817)      Fee expense                   (4,335)    (3,898)

 11,001       171,638       Net fee income                22,002     17,182

                            Trading income excluding    
  2,229        34,777         net interest income          4,458      5,619
                            Net interest income on      
  2,688        41,938         trading activities           5,376      2,603

  4,917        76,715       Net trading income             9,834      8,222

                           Net income from financial
                             instruments designated at
  2,042        31,851        fair value                    4,083        657
                           Gains less losses from          
    978        15,259        financial investments         1,956        969
                           Gains arising from dilution 
    546         8,519        of interests in associates    1,092          -
    162         2,528      Dividend income                   324          340
  4,538        70,802      Net earned insurance premiums   9,076        5,668
    719        11,224      Other operating income          1,439        2,546

 43,801       683,375      Total operating income         87,601       70,070

                           Net insurance claims incurred
                             and movement in liabilities                        
 (4,304)      (67,151)       to policyholders             (8,608)      (4,704)

                           Net operating income before
                             loan impairment charges
                             and other credit risk        
 39,497       616,224        provisions                   78,993       65,366

                           Loan impairment charges and 
                             other credit risk           
 (8,621)     (134,504)       provisions                  (17,242)     (10,573)

 30,876       481,720      Net operating income           61,751       54,793
                           Employee compensation and     
(10,667)     (166,427)       benefits                    (21,334)     (18,500)
                           General and administrative    
 (7,647)     (119,308)       expenses                    (15,294)     (12,823)
                           Depreciation and impairment
                             of property, plant and 
   (857)      (13,371)       equipment                    (1,714)      (1,514)
                           Amortisation and impairment of        
   (350)       (5,461)       intangible assets              (700)        (716)                 

(19,521)     (304,567)     Total operating expenses      (39,042)     (33,553)

 11,355       177,153      Operating profit               22,709       21,240

                           Share of profit in associates    
    751        11,725        and joint ventures            1,503          846

 12,106       188,878      Profit before tax              24,212       22,086

 (1,878)      (29,309)     Tax expense                    (3,757)      (5,215)

 10,228       159,569      Profit for the year            20,455       16,871

                           Profit attributable to
                             shareholders of the
  9,567       149,257        parent company               19,133       15,789
 
                           Profit attributable to      
    661        10,312        minority interests            1,322        1,082

Consolidated Balance Sheet
  
         At 31Dec                                               At 31Dec
          2007                                              2007          2006
     £m        HK$m                                         US$m          US$m
                           ASSETS

                           Cash and balances at central   
   10,839      169,723       banks                        21,765        12,732
                           Items in the course of          
    4,869       76,241       collection from other banks   9,777        14,144
                           
                           Hong Kong Government 
    6,919      108,339       certificates of indebtedness 13,893        13,165
  222,092    3,477,658     Trading assets                445,968       328,147
                           Financial assets designated
   20,699      324,116       at fair value                41,564        20,573
   93,551    1,464,885     Derivatives                   187,854       103,702
  118,208    1,850,980     Loans and advances to banks   237,366       185,205
                           Loans and advances to     
  488,811    7,654,111       customers                   981,548       868,133
  140,934    2,206,834     Financial investments         283,000       204,806
                           Interests in associates and     
    5,171       80,974       joint ventures               10,384         8,396
   19,765      309,495     Goodwill and intangible assets 39,689        37,335
    7,816      122,382     Property, plant and equipment  15,694        16,424
   19,668      307,969     Other assets                   39,493        29,823
      446        6,984     Current tax asset                 896           380
    2,632       41,205     Deferred tax asset              5,284         3,241
   10,005      156,670     Prepayments and accrued income 20,091        14,552

1,172,425   18,358,566     Total assets                2,354,266     1,860,758

         At 31Dec                                            At 31Dec
          2007                                              2007          2006
       £m          HK$m                                     US$m          US$m

                           LIABILITIES AND EQUITY

                           Liabilities
                           Hong Kong currency notes  
    6,919       108,338      in circulation               13,893        13,165
   65,826     1,030,747    Deposits by banks             132,181        99,694
  545,878     8,547,700    Customer accounts           1,096,140       896,834
                           Items in the course of          
                             transmission to other
    4,319        67,624      banks                         8,672        12,625
  156,661     2,453,095    Trading liabilities           314,580       226,608
                           Financial liabilities          
   44,790       701,344     designated at fair value      89,939        70,211
   91,330     1,430,099    Derivatives                   183,393       101,478
  122,796     1,922,823    Debt securities in issue      246,579       230,325
    1,441        22,560    Retirement benefit liabilities  2,893         5,555
   17,436       273,031    Other liabilities              35,013        28,019
    1,274        19,955    Current tax liability           2,559         1,805
                           Liabilities under insurance    
   21,218       332,242      contracts                    42,606        17,670
   10,839       169,731    Accruals and deferred income   21,766        16,310
      975        15,268    Provisions                      1,958         1,763
      926        14,496    Deferred tax liability          1,859         1,096
   12,360       193,539    Subordinated liabilities       24,819        22,672

1,104,988    17,302,592    Total liabilities           2,218,850     1,745,830

                           Equity
    2,946        46,125    Called up share capital         5,915         5,786
    4,051        63,429    Share premium account           8,134         7,789
   16,441       257,443    Other reserves                 33,014        29,380
   40,386       632,395    Retained earnings              81,097        65,397

   63,824       999,392    Total shareholders' equity    128,160       108,352
    3,613        56,582    Minority interests              7,256         6,576

   67,437     1,055,974    Total equity                  135,416       114,928

                           Total equity and 
1,172,425    18,358,566      liabilities               2,354,266     1,860,758
                                         

Consolidated Statement of Recognised Income and Expense

                                                          Year ended 31Dec
                                                            2007          2006
                                                            US$m          US$m
Available-for-sale investments:
  - fair value gains taken to equity                         756         1,582
  - fair value losses transferred to income statement on
      disposal or impairment                              (1,740)         (644)
Cash flow hedges:
 - fair value gains taken to equity                          625         1,554
 - fair value losses transferred to income statement      (1,886)       (2,198)
Share of changes in equity of associates and joint 
  ventures                                                   372            20
Exchange differences                                       5,946         4,675
Actuarial gains/(losses) on defined benefit plans          2,167           (78)

                                                           6,240         4,911
Tax on items taken directly to equity                       (226)          (44)
Profit for the year                                       20,455        16,871
                                                       
Total recognised income and expense for the year          26,469        21,738

Total recognised income and expense for the year
  attributable to:
    - shareholders of the parent company                  24,801        20,527
    - minority interests                                   1,668         1,211

                                                          26,469        21,738

Consolidated Cash Flow Statement 

                                                          Year ended 31Dec
                                                            2007          2006
                                                            US$m          US$m
Cash flows from operating activities
Profit before tax                                         24,212        22,086

Adjustments for:
Non-cash items included in profit before tax              21,662        14,956
Change in operating assets                              (176,538)     (175,317)
Change in operating liabilities                          250,095       237,378
Elimination of exchange differences                      (18,563)      (12,114)
Net gain from investing activities                        (2,209)       (2,014)
Share of profits in associates and joint ventures         (1,503)         (846)
Dividends received from associates                           363            97
Contribution paid to defined benefit plans                (1,393)         (547)
Tax paid                                                  (5,088)       (4,946)

Net cash from operating activities                        91,038        78,733
                                                 
Cash flows from investing activities
Purchase of financial investments                       (260,980)     (286,316)
Proceeds from the sale and maturity of financial 
  investments                                            238,647       273,774
Purchase of property, plant and equipment                 (2,720)       (2,400)
Proceeds from the sale of property, plant and equipment    3,178         2,504
Proceeds from the sale of loan portfolio                   1,665         2,048
Net Purchase of intangible assets                           (950)         (852)
Net cash outflow from acquisition of and increase
  in stake of subsidiaries                                  (623)       (1,185)
Net cash inflow from disposal of subsidiaries                187            62
Net cash outflow from acquisition of and increase
  in stake of associates                                    (351)         (585)
Net cash inflow from the consolidation of funds            1,600             -
Proceeds from disposal of associates                          69            874
                                                  
Net cash used in investing activities                    (20,278)       (12,076)
                                                 
Cash flows from financing activities
Issue of ordinary share capital                              474          1,010
Issuance of preference shares                                  -            374
Net purchases and sales of own shares for
  market-making and investment purposes                      126             46
Purchases of own shares to meet share awards and
  share option awards                                       (636)          (575)
On exercise of share options                                 104            173
Subordinated loan capital issued                           5,705          5,948
Subordinated loan capital repaid                            (689)          (903)
Dividends paid to shareholders of the parent company      (6,003)        (5,927)
Dividends paid to minority interests                        (718)          (710)
                                                  
Net cash used in financing activities                     (1,637)          (564)

Net increase in cash and cash equivalents                 69,123         66,093

Cash and cash equivalents at 1 January                   215,486        141,307
Exchange differences in respect of cash and cash
  equivalents                                             12,400          8,086
                                                 
Cash and cash equivalents at 31 December                 297,009        215,486
                                                   








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