HSBC Holdings plc PT2

HSBC Holdings PLC
31 July 2006



Real momentum in Corporate, Investment Banking and Markets

In the first half of 2006 we moved from the build phase in this business into
full execution mode. Our overall investment spend was considerably lower and,
most encouragingly, cost growth was largely in performance-related expenses as
revenue growth accelerated.

The results are clear. Pre-tax profit rose 37 per cent, compared to the first
half of 2005. In the first half of 2005 net operating income was broadly
unchanged on the first half of 2004 while costs rose by some US$650 million. In
the first half of 2006 net operating revenues grew by US$1,368 million, while
cost growth, largely in performance-related pay and the volume-driven businesses
in Global Transaction Banking, was US$429 million. This translated into a
positive gap between revenue growth and cost growth of 12 per cent.

Under the leadership of Stuart Gulliver, we restructured the business into four
principal product lines: Global Markets, Global Banking, Group Investment
Businesses and Global Transaction Banking.

Whilst financial performance remains somewhat constrained, due to the continuing
impact on balance sheet management revenues of the flat interest rate yield
curves in major currencies, this is more than offset by strong growth in sales
and trading revenues and in transactional banking revenues.

All elements of the Global Markets business developed strongly in 2006 and past
investment in structured derivatives, asset-backed securities, equity and equity
derivative products and fixed income capabilities paid off. Our share of
international bond issuance rose, placing HSBC fourth in global market share.

We captured a growing number of headline investment banking deal positions,
including four of the five largest deals announced during the period in Europe,
where our ability to offer a combination of financing, structuring, hedging and
advice gave a strong competitive edge.

Group Investment Businesses also delivered a record result across its broad
range of activities, boosted by exceptional performance fees in emerging market
funds and higher assets under management in emerging markets.

Global Transaction Banking had another record period, primarily driven by strong
growth in emerging markets, and the beneficial effect of the higher interest
rate environment on larger balances.

Building one of the world's leading Private Banks

The transformation of our Private Banking business has been one of the great
successes in HSBC. In just a few years, the private banking arms of the various
Group entities have been knitted together into one global proposition for our
high net worth customers.

We rebranded as HSBC Private Bank in 2004 and a measure of our success is that
pre-tax profits of US$600 million in the first half of 2006 have more than
doubled over the past three years.

We have succeeded by extending the product range available to customers, in
particular in the area of alternative investments, and by adding capabilities
relevant to our wealthiest customers in the areas of residential property
advice, trust and tax advice.

Client assets increased by 22 per cent to US$305 billion, benefiting from net
new money of US$18.6 billion in the first half of 2006. Again we are managing
the business in a more joined-up way, with increasing cross-referrals from the
wider Group contributing some US$2.9 billion of net new money. Regional
expansion within the UK and France, as well as a good start from the recently
launched onshore operations in Dubai and India, have established a solid
foundation for further growth.

The credit environment

The generally benign credit environment has been driven by continuing strong
global growth, stable employment patterns in major economies, modest
inflationary pressures and good liquidity, which have kept asset prices - most
importantly residential real estate values - high.

There is now evidence of slowing residential housing markets, particularly in
the US. The consequent effect on future price appreciation, together with the
impact of higher interest rates on adjustable rate mortgages that reach reset
dates, will put pressure on some borrowers. Although overall retail credit
experience in the US has been favourable in the first half of 2006, we began to
see some deterioration in certain segments amongst recent mortgage originations.
We are taking action to mitigate the potential effects.

In the UK, the unsecured personal sector again contributed the major portion of
the impairment charge in the period, largely as a result of rising bankruptcy
filings and individual voluntary arrangements. Although the charge was
considerably higher than the first half of 2005, it was in line with that
incurred in the second half of last year. We are seeing an improvement in the
credit quality of more recent originations.

Excessive consumer indebtedness is increasingly an issue in the public domain.
Banks have an obligation here. We were the first major UK bank to share positive
credit information, and we have deliberately reduced our market share of
unsecured lending in the UK.

In the first half of 2006, we have seen public policy interventions in a number
of countries, both emerging and developed. It is clearly in everyone's interest
to ensure regulation targets individuals who need support and does so without
causing unintended consequences, as we have seen in several countries.

Outlook

The world economy remains fundamentally strong. China continues to grow at an
intense pace, attracting huge investment flows and providing a massive
opportunity for the world's exporters.

During the first half of 2006, the Federal Reserve in the US continued to
increase interest rates and was followed by many other central banks. Consumers
are experiencing significantly higher energy prices. Concerns about inflation
persist although there is little evidence of any significant pick-up in either
wages or inflationary expectations. We remain alert, however, to the possibility
that these factors, together with slowing housing markets, may constrain
economic growth.

The apparent collapse of the Doha round of the WTO is disappointing. Overall, we
believe that trade liberalisation is a force for good in terms of economic
development, which is intimately related to people's wellbeing. We are concerned
by signs that the world is heading towards a more protectionist trading system,
when in fact we should be moving in the other direction.

In any event, we will continue to position HSBC to take best advantage of the
changing nature of the world's economy. We have a unique set of franchises
around the world: well over 100 million customers in more than 200 countries and
operations in 76 economies. Our diversification combined with our strong capital
position is a crucial strength.

We believe that we are well positioned to take advantage of opportunities as
they arise. Indeed, earlier this month we announced an agreement to acquire
Grupo Banistmo, the leading banking group in Central America. This will improve
our franchise in Panama and extend it to Costa Rica, Honduras, Colombia,
Nicaragua and El Salvador.

We aspire to be the number one brand in financial services. Customer experience
will remain a key driver of our success in achieving this, so we will focus
relentlessly on improving the quality of that experience. Technology will play
an increasingly important role in this.

However, at its heart, banking is a people business, and our people will be at
the forefront of our success. Engaging our 280,000 colleagues is critical to the
delivery of our strategy, and with well over 100,000 participants, we believe
that HSBC has one of the largest employee bases in the world with an interest in
their company's shares. It is the talent and dedication of the HSBC team around
the world that will secure success for our people, our customers and our
shareholders.

Financial Overview


  30Jun05     31Dec05           Half-year to                      30Jun06

     US$m        US$m                                      US$m        £m         HK$m


                        For the half-year
   10,640      10,326   Profit before tax                12,517     6,997       97,107
                        Profit attributable to            
                          shareholders of the parent
    7,596       7,485     company                         8,729     4,880       67,720
    4,575       3,175   Dividends                         5,263     2,942       40,830
                        At period-end
   86,713      92,432   Total shareholders' equity      101,381    54,949      787,426
  101,722     105,449   Capital resources               116,636    63,217      905,912
                        Customer accounts and           
  812,211     809,146     deposits by banks             916,881   496,949    7,121,415
1,466,810   1,501,970   Total assets                  1,738,138   942,071   13,500,118
  794,834     827,164   Risk-weighted assets            872,893   473,108    6,779,760

      US$         US$   Per ordinary share                  US$         £          HK$
     0.69        0.67   Basic earnings                     0.78      0.44         6.05
     0.68        0.67   Diluted earnings                   0.77      0.43         5.97
     0.41        0.28   Dividends^                         0.46      0.26         3.57
                        Net asset value at the
     7.73        8.03     period-end                       8.71      4.72        67.65

                        Share information
                        US$0.50 ordinary shares in       
   11,222m     11,334m    issue                         11,481m
 US$179bn      US$182bn Market capitalisation          US$202bn
                        Closing market price per          
    £8.90       £9.33     ordinary share                  £9.52
                                                         Over 1    Over 3       Over 5
                                                           year     years        years
                        Total shareholder return to       
                          30Jun06^^                       112.2     154.7        145.0
                        Benchmarks: FTSE 100              118.0     160.3        122.0
                        MSCI World                        117.5     161.9        135.2

^ The second interim dividend for 2006 of US$0.15 per share is translated at the
closing rate on 30 June 2006 (see Note 7 on page 20). Where required, this
dividend will be converted into sterling or Hong Kong dollars at the exchange
rates on 25 September 2006 (see Note 7 on page 20).

^^ Total shareholder return ('TSR') is as defined in the Annual Report and
Accounts 2005 on page 220.

  30Jun05     31Dec05                  Half-year to                   30Jun06

                        Performance ratios (%)

     16.5        15.3   Return on average invested capital^              17.2

     17.6        16.1   Return on average total shareholders' equity     18.1
                      
     1.18        0.95   Post-tax return on average total assets          1.12

     2.09        1.93   Post-tax return on average risk-weighted assets  2.21

                        Efficiency and revenue mix ratios (%)

     51.4        51.0   Cost efficiency ratio                            50.1

                        As a percentage of total operating income:

     51.4        50.2   - Net interest income                            48.7

     23.6        23.2   - Net fee income                                 24.4

      9.7         9.3   - Net trading income                             12.4

                        Capital ratios (%)

      8.7         9.0   - Tier 1 capital                                  9.4

     12.8        12.8   - Total capital                                  13.4

^ 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.









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