Interim Report - 7 of 21

RNS Number : 9178Q

HSBC Holdings PLC

13 August 2010

 



Geographical regions

Summary

In the analysis of profit and loss by geographical region that follows, operating income and operating expenses include intra‑HSBC items of US$1,467 million (first half of 2009: US$1,347 million; second half of 2009: US$1,409 million).

Profit/(loss) before tax

	Half-year to
	30 June 2010				30 June 2009				31 December 2009
	US$m		%		US$m		%		US$m		%
Europe ..............................................	3,521		31.7		2,976		59.3		1,033		50.2
Hong Kong ........................................	2,877		25.9		2,501		49.8		2,528		122.7
Rest of Asia-Pacific ...........................	2,985		26.9		2,022		40.3		2,178		105.7
Middle East .......................................	346		3.1		643		12.8		(188)		(9.1)
North America ..................................	492		4.4		(3,703)		(73.8)		(4,035)		(195.9)
Latin America ...................................	883		8.0		580		11.6		544		26.4
	11,104		100.0		5,019		100.0		2,060		100.0

Total assets²³

	At 30 June 2010				At 30 June 2009				At 31 December 2009
	US$m		%		US$m		%		US$m		%
Europe ..............................................	1,280,698		52.9		1,324,687		54.7		1,268,600		53.7
Hong Kong ........................................	410,991		17.0		413,107		17.1		399,243		16.9
Rest of Asia-Pacific ...........................	244,624		10.1		217,794		9.0		222,139		9.4
Middle East .......................................	49,637		2.1		48,601		2.0		48,107		2.0
North America ..................................	495,408		20.5		494,778		20.4		475,014		20.1
Latin America ...................................	121,885		5.0		107,515		4.4		115,967		4.9
Intra-HSBC items ..............................	(184,789)		(7.6)		(184,639)		(7.6)		(164,618)		(7.0)
	2,418,454		100.0		2,421,843		100.0		2,364,452		100.0

Risk-weighted assets²⁴

		At 30 June 2010				At 31 December 2009
		US$bn		%		US$bn		%
Total .............................................................................................		1,075.3				1,133.2
Europe ..........................................................................................		316.9		29.3		339.7		29.8
Hong Kong ....................................................................................		111.8		10.3		119.5		10.5
Rest of Asia-Pacific .......................................................................		189.0		17.5		173.9		15.3
Middle East ...................................................................................		53.8		5.0		54.3		4.8
North America ..............................................................................		322.4		29.8		369.2		32.4
Latin America ...............................................................................		87.5		8.1		81.7		7.2

For footnotes, see page 95.

Europe

Profit/(loss) before tax by country within customer groups and global businesses

	Personal   Financial     Services         US$m		Commercial     Banking         US$m	Global Banking &      Markets          US$m			Private     Banking         US$m		Other         US$m		Total         US$m
Half-year to 30 June 2010
UK ...............................................................	479		500		1,360		116		(366)		2,089
France36 ........................................................	73		83		415		6		157		734
Germany .......................................................	-		17		146		18		(4)		177
Malta ............................................................	20		28		8		-		-		56
Switzerland ...................................................	-		-		-		161		-		161
Turkey .........................................................	35		47		58		-		-		140
Other ............................................................	(45)		34		98		58		19		164
	562		709		2,085		359		(194)		3,521
Half-year to 30 June 2009
UK ...............................................................	205		688		1,853		124		(1,214)		1,656
France36 ........................................................	26		51		661		1		(219)		520
Germany .......................................................	-		17		129		8		(4)		150
Malta ............................................................	13		29		5		-		-		47
Switzerland ...................................................	-		-		-		233		-		233
Turkey .........................................................	21		54		87		1		-		163
Other ............................................................	(53)		13		156		80		11		207
	212		852		2,891		447		(1,426)		2,976
Half-year to 31 December 2009
UK ............................................................	159		338		1,192		128		(1,347)		470
France36 ....................................................	28		51		233		2		(210)		104
Germany ...................................................	-		4		126		24		(14)		140
Malta ........................................................	20		29		4		-		-		53
Switzerland ................................................	-		-		5		215		(3)		217
Turkey ......................................................	22		43		32		1		-		98
Other ........................................................	(129)		(25)		62		37		6		(49)
	100		440		1,654		407		(1,568)		1,033

Loans and advances to customers (net) by country

	At 30 June 2010 US$m		At 30 June 2009 US$m	At 31 December 2009 US$m
UK .....................................................................................................	309,933		342,153		329,182
France36 .............................................................................................	60,428		77,096		71,567
Germany ............................................................................................	3,913		5,201		4,131
Malta .................................................................................................	3,929		4,480		4,649
Switzerland .........................................................................................	12,022		9,566		12,072
Turkey ...............................................................................................	5,813		5,586		5,758
Other .................................................................................................	11,188		13,008		12,122
	407,226		457,090		439,481

Customer accounts by country

	At 30 June 2010 US$m		At 30 June 2009 US$m	At 31 December 2009 US$m
UK .....................................................................................................	335,493		371,675		349,162
France36 .............................................................................................	68,942		85,899		70,899
Germany ............................................................................................	7,698		10,007		8,134
Malta .................................................................................................	5,084		5,646		5,888
Switzerland .........................................................................................	41,556		41,122		45,148
Turkey ...............................................................................................	5,888		5,394		5,830
Other .................................................................................................	12,597		9,982		9,958
	477,258		529,725		495,019

For footnote, see page 95.

Profit before tax

	Half-year to
Europe	30 June 2010 US$m		30 June 2009 US$m		31 December                2009              US$m
Net interest income ............................................................................	5,802		5,978		6,290
Net fee income ...................................................................................	3,177		2,843		3,424
Net trading income .............................................................................	1,604		3,429		2,030
Changes in fair value of long-term debt issued and related derivatives .	715		(788)		(1,958)
Net income/(expense) from other financial instruments designated at fair value ....................................................................................	(142)		212		1,109
Net income/(expense) from financial instruments designated at fair value .......................................................................................................	573		(576)		(849)
Gains less losses from financial investments .......................................	237		(60)		110
Dividend income ................................................................................	14		13		16
Net earned insurance premiums ..........................................................	2,137		2,134		2,089
Other operating income .....................................................................	1,141		976		1,286
Total operating income ..................................................................	14,685		14,737		14,396
Net insurance claims incurred and movement in liabilities to policyholders .............................................................................	(1,964)		(2,383)		(3,206)
Net operating income before loan impairment charges and other credit risk provisions .................................................................	12,721		12,354		11,190
Loan impairment charges and other credit risk provisions ..................	(1,501)		(2,813)		(2,755)
Net operating income......................................................................	11,220		9,541		8,435
Operating expenses ............................................................................	(7,704)		(6,587)		(7,401)
Operating profit ..............................................................................	3,516		2,954		1,034
Share of profit/(loss) in associates and joint ventures ..........................	5		22		(1)
Profit before tax ..............................................................................	3,521		2,976		1,033

	%		%		%
Share of HSBC's profit before tax ......................................................	31.7		59.3		50.2
Cost efficiency ratio ...........................................................................	60.6		53.3		66.1
Period-end staff numbers (full-time equivalent) ..................................	73,431		79,132		76,703
Balance sheet data23
	US$m		US$m		US$m
Loans and advances to customers (net) ...............................................	407,226		457,090		439,481
Loans and advances to banks (net) .....................................................	82,035		72,491		65,521
Trading assets, financial instruments designated at fair value and financial investments33 ..................................................................	420,145		449,928		450,727
Total assets ........................................................................................	1,280,698		1,324,687		1,268,600
Deposits by banks ...............................................................................	77,585		87,159		89,893
Customer accounts .............................................................................	477,258		529,725		495,019

For footnotes, see page 95.

The commentary on Europe is on an underlying basis unless stated otherwise.

Economic briefing

The UK economy experienced a modest recovery during the first half of 2010 as economic conditions stabilised following the severe weakness experienced in 2009. Having fallen 6.4 per cent during the recession, by the end of the second quarter the level of gross domestic product ('GDP') had risen by 1.9 per cent from the low in activity seen in the third quarter of 2009. Labour market conditions also showed signs of stabilisation as the headline rate of unemployment remained around 8 per cent during the half-year. Housing market activity proved subdued and, after appreciating during the early months of 2010, house prices displayed signs of softening during the second quarter. The Bank of England left interest rates unchanged at 0.5 per cent during the first half of the year, while the Asset Purchase Facility also remained steady at £200 billion (US$300 billion). Consumer Price Index ('CPI') inflation remained relatively high throughout the period, falling only marginally from 3.5 per cent in January 2010 to 3.2 per cent in June, well above the Bank of England's 2 per cent target.

The pace of economic recovery also proved lacklustre within the eurozone. In the first quarter the level of GDP rose by just 0.2 per cent on the previous quarter. There was evidence of an acceleration of growth during the second quarter, although economic performance proved increasingly disparate as concerns mounted over the health of the public finances of some member states and a number of austerity programmes were implemented. Tensions within government bond markets across the region prompted the creation of a €750 billion stabilisation fund to be used to provide loans to eurozone governments in need of financial assistance. CPI inflation rose from 0.9 per cent in December 2009 to 1.4 per cent in June 2010, while the unemployment rate increased to an 11-year high of 10 per cent in June 2010. The European Central Bank held the refi rate at 1 per cent throughout the period and, from early May, started to purchase small amounts of the government debt of several eurozone nations in the secondary market.

Review of business performance

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2010 ('1H10') compared with half-year to 30 June 2009 ('1H09')
Europe	1H09            as reported     US$m	1H09       adjust-       ments1        US$m			Currency translation2        US$m		1H09   at 1H10 exchange       rates3      US$m	1H10 as    reported        US$m			1H10     adjust-     ments1     US$m		1H10   under-     lying    US$m		Re- ported change4        %		Under-  lying change4        %
Net interest income ..	5,978		-		109		6,087		5,802		-		5,802		(3)		(5)
Net fee income...	2,843		(71)		37		2,809		3,177		-		3,177		12		13
Changes in fair value5.....	(836)		836		-		-		574		(574)		-
Other income6	4,369		(281)		4		4,092		3,168		(107)		3,061		(27)		(25)
Net operating income7 ..............	12,354		484		150		12,988		12,721		(681)		12,040		3		(7)
Loan impairment charges and other credit risk provisions ............	(2,813)		-		(66)		(2,879)		(1,501)		-		(1,501)		47		48
Net operating income	9,541		484		84		10,109		11,220		(681)		10,539		18		4
Operating expenses	(6,587)		70		(115)		(6,632)		(7,704)		-		(7,704)		(17)		(16)
Operating profit ...	2,954		554		(31)		3,477		3,516		(681)		2,835		19		(18)
Income from associates	22		(1)		(1)		20		5		-		5		(77)		(75)
Profit before tax ........	2,976		553		(32)		3,497		3,521		(681)		2,840		18		(19)

For footnotes, see page 95.

HSBC's European operations reported a pre-tax profit of US$3.5 billion, 18 per cent higher than in the comparable period in 2009 and more than trebled the second half of 2009, mainly due to favourable movements in the Group's own debt held at fair value.

Included within these results was a US$107 million gain on the disposal of the HSBC Insurance Brokers business to Marsh Inc. in April 2010. The first half of 2009 included a US$280 million gain on the sale of the remaining stake in the UK card merchant acquiring business to Global Payments Inc. There was a gain of US$0.6 billion from the widening of credit spreads on the Group's own debt held at fair value; losses of US$0.8 billion and US$2.0 billion were recorded in the first and second halves of 2009, respectively, due to the tightening of credit spreads. Management does not regard the resulting movement of US$1.4 billion compared with the first half of 2009 as part of operating performance. On an underlying basis, which excludes this movement and the gains noted above, profit before tax decreased by 19 per cent compared with the first half of 2009, due to lower income from Global Banking and Markets, where record results in the first half of 2009 were not repeated, partly offset by an overall improvement in credit experience.

In the UK personal sector, Premier customers increased by 9 per cent in the first half of 2010, while Advance attracted 23,000 new customers to HSBC, as the business focused on building sustainable long-term relationships and wealth management revenues in these target segments. Funds under management totalled US$22.0 billion at 30 June 2010, with the World Selection Fund rising by 59 per cent to US$2.3 billion in the first half of the year. Higher revenues were primarily driven by mortgage lending growth. HSBC took an 8 per cent share of new residential mortgage lending in the UK in the first quarter of 2010, with an average new loan to value ratio of 53 per cent.

In Continental Europe, the personal sector increased investment in Premier, growing its customer base to 444,000 in the first half of 2010, particularly in France and Turkey. Advance was launched in Turkey and Poland during the period with a phased roll-out across the region planned in the second half of 2010.

In the UK commercial sector, further progress was made in achieving HSBC's strategy of becoming the leading bank for international business with the number of its UK-based customers managed through the international proposition increasing by 9 per cent during the first half of 2010. Trade and supply chain income increased by 18 per cent on the comparable period. HSBC lent US$2.0 billion to small and medium-sized enterprises ('SME's), and opened accounts for over 65,000 customers starting new businesses. 

The commercial sector in Continental Europe continued to focus on expanding relationships with international businesses. Early signs of business revival were seen in a number of markets, most notably in Germany, Turkey and Poland.

Net interest income fell by 5 per cent compared with the exceptional results reported in the first half of 2009, reflecting a decreasing trend, as forecast, in Balance Sheet Management revenues, as interest rates remained low and major yield curves flattened. In Global Banking and Markets, tighter spreads and a reduction in overall lending balances resulted in lower income in the Credit and lending businesses as corporates repaid debt in order to strengthen their balance sheets.

This reduction was partly offset by mortgage lending growth in the personal sector and wider asset spreads in the UK. This was partly offset by a reduction in deposit spreads which remained narrow in the low interest rate environment and the effects on Personal Financial Services of interest rate cap reductions on credit cards set by the central bank in Turkey.

UK Personal Financial Services maintained its strong deposit base despite fierce competition. Within this, Premier and Advance customer account balances increased by 3 per cent.

Strong underlying growth in personal and commercial banking complemented a resilient performance from Global Banking and Markets.

Net fee income increased by 13 per cent. Fee income was received for management services provided by HSBC to Structured Investment Conduits and management fees rose in Global Asset Management and the wealth management segment of the personal sector, driven by an increase in the average value of funds under management. Net inflows into Global Asset Management funds were US$8.1 billion in the first half of 2010. The Equity Capital Markets business, however, was affected by a reduction in client activity as the exceptional volumes seen in the first half of 2009 were not repeated.

Net trading income fell by 54 per cent to US$1.6 billion as increased economic uncertainty and subdued market conditions following the concerns over European sovereign debt in the second quarter of 2010 resulted in lower client activity and demand for foreign exchange, Credit and Rates products.

In credit trading, a net release of US$230 million of previous write-downs on legacy positions and monoline exposures reflected an overall improvement in asset prices; the first half of 2009 included a reported net charge of US$252 million. However, this benefit was more than offset by the non-recurrence of gains in other parts of the business that arose in the first half of 2009. Performance in the foreign exchange business remained strong but suffered from a reduction in market volatility and customer-driven volumes compared with the unprecedented levels experienced in late 2008 and early 2009, and Rates income decreased following a slowdown in client activity.

Included within 'Net trading income' was a fair value gain of US$177 million resulting from widening credit spreads on structured liabilities; a loss of US$120 million was reported in the first half of 2009. In addition, foreign exchange gains were reported on trading assets held as economic hedges of foreign currency debt designated at fair value, with the offset reported in 'Net income from financial instruments designated at fair value'. Foreign exchange losses were reported on these instruments in the first half of 2009.

Trading income also included fair value losses on non-qualifying hedges, mainly cross-currency swaps used to economically hedge fixed rate long-term debt issued by HSBC Holdings. The fair value losses, which were driven by a decline in long-term US dollar interest rates relative to sterling and euro interest rates, compared with fair value gains on these instruments in the first half of 2009. This was partly offset by the non-recurrence of a loss on a forward foreign exchange contract associated with the Group's rights issue.

Net income from financial instruments designated at fair value reduced by US$208 million. Losses on the fair value of assets held to meet liabilities under insurance and investment contracts were recognised as equity markets fell, compared with gains reported in the first half of 2009. To the extent that these losses accrued to policyholders holding unit-linked insurance policies and insurance or investment contracts with DPF, there was a corresponding decrease in net insurance claims incurred and movement in liabilities to policyholders.

In addition, foreign exchange losses on debt designated at fair value were reported in the period, with the offset reported in 'Net trading income'. This was partly offset by fair value gains from interest and exchange rate ineffectiveness in the economic hedging of long-term debt designated at fair value compared with fair value losses in the first half of 2009.

Gains less losses from financial investments increased to US$237 million as improved market conditions resulted in lower impairment charges and afforded opportunities to realise private equity investments at a profit. Gains were also realised on available-for-sale assets.

Net earned insurance premiums were broadly in line with the first half of 2009, with an increase in France driven by successful sales campaigns offset by lower premiums in the UK as the motor insurance underwriting business was placed into run-off during the second half of 2009 with no new customer business written in 2010.

Other operating income increased by 51 per cent, primarily due to the gain on the sale and leaseback of HSBC's Paris headquarters.

Net insurance claims incurred and movement in liabilities to policyholders decreased by 16 per cent. This was in line with the movement in liabilities to policyholders reported above in 'Financial instruments designated at fair value', coupled with significantly lower claims provisioning related to the now closed UK motor insurance book. An increase in reserves was recorded in the first half of 2009 to reflect the rising incidence and severity of claims at that time. No further deterioration in claims was observed in the UK motor insurance book in the first half of 2010 and, accordingly, no equivalent reserve strengthening was required.

Loan impairment charges and other credit risk provisions decreased by 48 per cent to US$1.5 billion, reflecting an overall improvement in the credit environment in the region and the Group's success in mitigating risk. In Global Banking and Markets, loan impairment charges fell compared with both halves of 2009, reflecting the improved credit quality of the portfolio. The significant impairments taken in relation to a small number of clients in both halves of 2009 did not recur. Credit risk provisions on certain ABSs held on the available-for-sale portfolio decreased as asset prices rose and default rates declined.

Lower loan impairment charges in the personal sector were driven by an improvement in delinquencies across both the secured and unsecured lending portfolios, in part due to enhanced credit risk management practices and improved collections, falling by US$239 million in the UK and US$61 million in Turkey. In the commercial sector, loan impairment charges reduced by US$205 million. The commercial property sector in the UK experienced the most significant improvement with impairments. Continuation of the positive loan impairment trend experienced in the first half of 2010 in the commercial and personal sectors remains highly sensitive to general economic activity, employment, interest rates and house prices. 

Operating expenses, excluding the impact of two unusual items, were marginally higher in the first half of 2009: Global Banking and Markets' costs included one-off payroll taxes on certain bonuses paid in the second quarter of 2010 in respect of 2009 of US$308 million in the UK and US$42 million in France; and a US$480 million pension accounting gain (US$499 million as reported) in the first half of 2009 related to a change in the delivery of certain staff benefits in the main UK pension scheme which did not recur.

Employee compensation and benefits increased by 19 per cent to US$4.1 billion as a result of these unusual items, partly offset by the Group's continued efforts to leverage global scale and technology platforms to re-engineer the business and make sustainable reductions in its cost base. General and administrative expenses increased by 13 per cent to US$3.1 billion, driven by higher services contracted out and IT costs along with increased rental expenses following the sale and leaseback of 8 Canada Square in London.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2010 ('1H10') compared with half-year to 31 December 2009 ('2H09')
Europe	2H09            as reported     US$m	2H09         adjust-         ments1         US$m			Currency translation2         US$m		2H09    at 1H10 exchange        rates8      US$m	1H10               as     reported         US$m			1H10      adjust-      ments1      US$m		1H10     under-       lying     US$m		Re- ported change4         %		Under-   lying change4         %
Net interest income .....	6,290		-		(424)		5,866		5,802		-		5,802		(8)		(1)
Net fee income......	3,424		(105)		(219)		3,100		3,177		-		3,177		(7)		2
Changes in fair value5..	(2,005)		2,005		-		-		574		(574)		-
Other income6 ..................	3,481		(2)		(138)		3,341		3,168		(107)		3,061		(9)		(8)
Net operating income7 ....	11,190		1,898		(781)		12,307		12,721		(681)		12,040		14		(2)
Loan impairment charges and other credit risk provisions .	(2,755)		-		184		(2,571)		(1,501)		-		(1,501)		46		42
Net operating income .....	8,435		1,898		(597)		9,736		11,220		(681)		10,539		33		8
Operating expenses ...	(7,401)		99		432		(6,870)		(7,704)		-		(7,704)		(4)		(12)
Operating profit ........	1,034		1,997		(165)		2,866		3,516		(681)		2,835		240		(1)
Income from associates	(1)		-		-		(1)		5		-		5
Profit before tax ............	1,033		1,997		(165)		2,865		3,521		(681)		2,840		241		(1)

For footnotes, see page 95.

Analysis by customer group and global business

Profit/(loss) before tax

	Half-year to 30 June 2010
Europe	Personal   Financial     Services         US$m		Commercial     Banking         US$m		Global Banking &     Markets         US$m		Private    Banking         US$m		Other         US$m		Inter-     segment elimination35         US$m		Total         US$m
Net interest income/ (expense) ...... ......................	2,711		1,324		1,643		424		(292)		(8)		5,802
Net fee income/ (expense) ...... ......................	965		796		975		444		(3)		-		3,177
Trading income/(expense) excluding net interest income ..........	(19)		14		1,342		105		(570)		-		872
Net interest income on trading activities .......	-		7		700		10		7		8		732
Net trading income/ (expense)25 ....	(19)		21		2,042		115		(563)		8		1,604
Net income/(expense) from financial instruments designated at fair value .......	(121)		(26)		(31)		-		751		-		573
Gains less losses from financial investments ...	-		-		240		1		(4)		-		237
Dividend income ......................	-		-		12		2		-		-		14
Net earned insurance premiums ......	2,012		130		-		-		(5)		-		2,137
Other operating income...........	93		125		314		4		479		126		1,141
Total operating income..........	5,641		2,370		5,195		990		363		126		14,685
Net insurance claims26 .........	(1,882)		(81)		-		-		(1)		-		(1,964)
Net operating income7 .......	3,759		2,289		5,195		990		362		126		12,721
Loan impairment charges and other credit risk provisions .....	(685)		(410)		(395)		(11)		-		-		(1,501)
Net operating income .........	3,074		1,879		4,800		979		362		126		11,220
Operating expenses ........	(2,514)		(1,171)		(2,717)		(620)		(556)		(126)		(7,704)
Operating profit/(loss) .	560		708		2,083		359		(194)		-		3,516
Share of profit in associates and joint ventures	2		1		2		-		-		-		5
Profit/(loss) before tax ....	562		709		2,085		359		(194)		-		3,521
	%		%		%		%		%				%
Share of HSBC's profit before tax ................	5.1		6.3		18.8		3.2		(1.7)				31.7
Cost efficiency ratio ..............	66.9		51.2		52.3		62.6		153.6				60.6
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..............	135,735		82,822		163,031		24,717		921				407,226
Total assets .......	190,549		105,134		1,021,875		70,116		74,744		(181,720)		1,280,698
Customer accounts ........	156,579		95,558		170,697		54,423		1				477,258

Profit/(loss) before tax (continued)

	Half-year to 30 June 2009
Europe	Personal     Financial       Services          US$m		Commercial       Banking          US$m		Global Banking &       Markets          US$m		Private       Banking          US$m		Other          US$m		Inter-       segment elimination35          US$m		Total          US$m
Net interest income/ (expense) ...... ......................	2,507		1,295		2,376		506		(265)		(441)		5,978
Net fee income . ......................	875		789		706		438		35		-		2,843
Trading income excluding net interest income ..........	78		4		1,678		72		167		-		1,999
Net interest income on trading activities .......	(1)		7		966		9		8		441		1,430
Net trading income25 .......	77		11		2,644		81		175		441		3,429
Net income/(expense) from financial instruments designated at fair value .......	170		5		358		-		(1,109)		-		(576)
Gains less losses from financial investments ...	5		2		(47)		(2)		(18)		-		(60)
Dividend income ......................	-		1		11		1		-		-		13
Net earned insurance premiums ......	2,002		135		-		-		(3)		-		2,134
Other operating income...........	89		323		303		26		162		73		976
Total operating income/ (expense) ......	5,725		2,561		6,351		1,050		(1,023)		73		14,737
Net insurance claims26 .........	(2,249)		(134)		-		-		-		-		(2,383)
Net operating income/ (expense)7 .....	3,476		2,427		6,351		1,050		(1,023)		73		12,354
Loan impairment charges and other credit risk provisions .....	(982)		(606)		(1,212)		(10)		(3)		-		(2,813)
Net operating income/ (expense) ......	2,494		1,821		5,139		1,040		(1,026)		73		9,541
Operating expenses ........	(2,283)		(987)		(2,251)		(593)		(400)		(73)		(6,587)
Operating profit/(loss) ...	211		834		2,888		447		(1,426)		-		2,954
Share of profit in associates and joint ventures	1		18		3		-		-		-		22
Profit/(loss) before tax ......	212		852		2,891		447		(1,426)		-		2,976
	%		%		%		%		%				%
Share of HSBC's profit before tax ................	4.2		17.0		57.6		8.9		(28.4)				59.3
Cost efficiency ratio ..............	65.7		40.7		35.4		56.5		(39.1)				53.3
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..............	143,886		89,788		198,290		23,774		1,352				457,090
Total assets .......	205,023		112,749		1,060,344		74,469		86,649		(214,547)		1,324,687
Customer accounts ........	166,295		95,132		208,792		59,503		3				529,725

	Half-year to 31 December 2009
Europe	Personal     Financial       Services          US$m		Commercial       Banking          US$m		Global    Banking &       Markets          US$m		Private       Banking          US$m		Other          US$m		Inter-       segment elimination35          US$m		Total          US$m
Net interest income/ (expense) ...... ......................	2,906		1,444		1,991		443		(260)		(234)		6,290
Net fee income . ......................	1,074		890		964		445		51		-		3,424
Trading income/(expense) excluding net interest income ..........	(44)		(1)		589		103		215		-		862
Net interest income on trading activities .......	-		10		903		14		7		234		1,168
Net trading income25 .......	(44)		9		1,492		117		222		234		2,030
Net income/(expense) from financial instruments designated at fair value........	842		128		17		-		(1,836)		-		(849)
Gains less losses from financial investments ...	15		-		72		7		16		-		110
Dividend income ......................	2		-		15		2		(3)		-		16
Net earned insurance premiums ......	1,973		118		(2)		-		-		-		2,089
Other operating income ..........	93		50		367		2		752		22		1,286
Total operating income/ (expense) ......	6,861		2,639		4,916		1,016		(1,058)		22		14,396
Net insurance claims26 .........	(2,972)		(231)		-		-		(3)		-		(3,206)
Net operating income/ (expense)7 .....	3,889		2,408		4,916		1,016		(1,061)		22		11,190
Loan impairment charges and other credit risk provisions ......................	(1,010)		(661)		(1,065)		(19)		-		-		(2,755)
Net operating income/ (expense) ......	2,879		1,747		3,851		997		(1,061)		22		8,435
Operating expenses ........	(2,779)		(1,307)		(2,196)		(590)		(507)		(22)		(7,401)
Operating profit/(loss) ...	100		440		1,655		407		(1,568)		-		1,034
Share of loss in associates and joint ventures	-		-		(1)		-		-		-		(1)
Profit/(loss) before tax ......	100		440		1,654		407		(1,568)		-		1,033
	%		%		%		%		%				%
Share of HSBC's profit before tax ......	4.9		21.4		80.2		19.8		(76.1)				50.2
Cost efficiency ratio...............	71.5		54.3		44.7		58.1		47.8				66.1
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ..............	147,760		89,084		176,123		25,541		973				439,481
Total assets .......	208,669		111,874		981,831		76,871		84,010		(194,655)		1,268,600
Customer accounts ........	165,161		102,249		169,390		58,213		6				495,019

For footnotes, see page 95.

Hong Kong

Profit/(loss) before tax by customer group and global business

	Half-year to
	30 June 2010 US$m		30 June 2009 US$m		31 December 2009 US$m
Personal Financial Services .................................................................	1,422		1,337		1,391
Commercial Banking ..........................................................................	672		424		532
Global Banking and Markets ...............................................................	730		907		600
Private Banking .................................................................................	119		106		91
Other .................................................................................................	(66)		(273)		(86)
Profit before tax ................................................................................	2,877		2,501		2,528

Profit before tax

	Half-year to
	30 June 2010 US$m		30 June 2009 US$m		31 December 2009 US$m
Net interest income ............................................................................	1,994		2,232		1,963
Net fee income ...................................................................................	1,395		1,200		1,469
Net trading income .............................................................................	688		704		521
Changes in fair value of long-term debt and related derivatives ...........	(2)		(3)		-
Net income/(expense) from other financial instruments designated at fair value ...............................................................................................	(28)		348		440
Net income/(expense) from financial instruments designated at fair value ........................................................................................................	(30)		345		440
Gains less losses from financial investments .......................................	111		2		7
Dividend income ................................................................................	13		14		14
Net earned insurance premiums...........................................................	2,248		1,838		1,836
Other operating income .....................................................................	644		505		769
Total operating income ..................................................................	7,063		6,840		7,019
Net insurance claims incurred and movement in liabilities to policyholders ..................................................................................	(2,167)		(2,126)		(2,266)
Net operating income before loan impairment charges and other credit risk provisions ..................................................................	4,896		4,714		4,753
Loan impairment charges and other credit risk provisions ..................	(63)		(273)		(227)
Net operating income .....................................................................	4,833		4,441		4,526
Operating expenses ............................................................................	(1,968)		(1,935)		(2,011)
Operating profit ..............................................................................	2,865		2,506		2,515
Share of profit/(loss) in associates and joint ventures ..........................	12		(5)		13
Profit before tax ..............................................................................	2,877		2,501		2,528
	%		%		%
Share of HSBC's profit before tax ......................................................	25.9		49.8		122.7
Cost efficiency ratio ...........................................................................	40.2		41.0		42.3
Period-end staff numbers (full-time equivalent) ..................................	28,397		28,259		27,614
Balance sheet data23
	US$m		US$m		US$m
Loans and advances to customers (net) ...............................................	114,075		97,486		99,381
Loans and advances to banks (net) .....................................................	31,633		41,197		36,197
Trading assets, financial instruments designated at fair value, and financial investments ......................................................................	151,332		135,916		154,418
Total assets ........................................................................................	410,991		413,107		399,243
Deposits by banks ...............................................................................	10,552		10,299		6,023
Customer accounts .............................................................................	274,112		267,532		275,441

For footnote, see page 95.

The commentary on Hong Kong is on an underlying basis unless stated otherwise.

Economic briefing

Hong Kong's economy expanded steadily during the first half of 2010 following the very volatile conditions that developed during 2009. In the first quarter the level of GDP rose by 2.4 per cent on the previous quarter, with manufacturing activity, investment expenditure and external demand all showing substantial improvement on the comparable period in 2009. Labour market conditions improved more modestly, with the unemployment rate falling from 4.9 per cent in December 2009 to 4.6 per cent in June 2010. CPI inflation accelerated from 1.3 per cent in December 2009 to 2.8 per cent in June 2010, although this movement largely reflected rises in food and energy prices. The Hong Kong Monetary Authority held the base rate steady at 0.5 per cent during the first half of 2010. Asset price performance again proved volatile during the period, with the Hang Seng Index falling by about 8 per cent.

Review of business performance

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2010 ('1H10') compared with half-year to 30 June 2009 ('1H09')
Hong Kong	1H09            as reported     US$m	1H09       adjust-       ments1        US$m			Currency translation2        US$m		1H09   at 1H10 exchange       rates3      US$m	1H10              as    reported        US$m			1H10     adjust-     ments1     US$m		1H10   under-     lying    US$m		Re- ported change4        %		Under-  lying change4        %
Net interest income ..	2,232		-		(4)		2,228		1,994		-		1,994		(11)		(11)
Net fee income ..	1,200		-		(2)		1,198		1,395		-		1,395		16		16
Changes in fair value5 ....	(2)		2		-		-		(6)		6		-		(200)
Other income6	1,284		-		(3)		1,281		1,513		(62)		1,451		18		13
Net operating income7 ..............	4,714		2		(9)		4,707		4,896		(56)		4,840		4		3
Loan impairment charges and other credit risk provisions ............	(273)		-		1		(272)		(63)		-		(63)		77		77
Net operating income	4,441		2		(8)		4,435		4,833		(56)		4,777		9		8
Operating expenses	(1,935)		-		4		(1,931)		(1,968)		-		(1,968)		(2)		(2)
Operating profit ...	2,506		2		(4)		2,504		2,865		(56)		2,809		14		12
Income from associates	(5)		-		-		(5)		12		-		12
Profit before tax ........	2,501		2		(4)		2,499		2,877		(56)		2,821		15		13

For footnotes, see page 95.

HSBC's operations in Hong Kong reported pre-tax profits of US$2.9 billion compared with US$2.5 billion in the first half of 2009, an increase of 15 per cent. On an underlying basis, excluding the accounting gains of US$62 million arising from the reclassification of Bao Viet as an associate following the purchase of additional shares, profit before tax increased by 13 per cent. HSBC took advantage of the improved economic environment and better market sentiment in the region to build its revenue base in its investment and insurance businesses. Lending increased, particularly in Commercial Banking, as a result of higher trade activity and a stronger property market. Deposit inflows in both Personal Financial Services and Commercial Banking were supported by increased market liquidity and targeted marketing campaigns, though the higher revenues from volume growth were partly offset by continued deposit spread compression. The improved economic conditions also resulted in a marked decrease in loan impairment charges from what was already a low level.

HSBC maintained its market leadership in deposits, mortgages, life insurance and credit cards through product innovation and enhancing its brand proposition, particularly for higher value segments. The Premier customer base increased by 14 per cent compared with 31 December 2009 to almost 440,000, supported by the launch of a real-time online financial consultancy service, the first in Hong Kong. Advance was successfully launched in January as a branded proposition to capture the mid-market customer segment that will in due course feed into Premier. Commercial Banking's successful inward cross-border referrals increased more than threefold as the strategy to prioritise international connectivity to grow the business was implemented. HSBC also actively participated in the Hong Kong Government Special Loan Guarantee Scheme which helps SMEs secure funding. Following continued support for Business Banking customers, HSBC was awarded the Best SME's Partner award for the fifth consecutive year by The Hong Kong Chamber of Small and Medium Business.

Net interest income declined by 11 per cent, primarily due to lower Balance Sheet Management income.

Personal lending balances were 6 per cent higher, driven by targeted growth in residential mortgage lending. HSBC continued to lead the mortgage market with a 30 per cent market share of new loan drawdowns in the first half of 2010, primarily driven by the introduction of HIBOR-linked mortgages which have become the dominant product type in the Hong Kong mortgage market. Commercial lending growth reflected a recovery in business and trade activity and ongoing credit support to customers. Growth was noted particularly in commercial real estate and other property-related sectors, and commercial, industrial and international trade. Commercial Banking further developed its renminbi business and launched a number of renminbi-related products in the first half of 2010.

Higher income from volume growth was partly offset as asset spreads narrowed, largely from competitive pricing due to high levels of liquidity in the market.

Underlying pre-tax profit in Hong Kong grew by 13 per cent as lending increased and HSBC maintained its market leadership in deposits, mortgages, life insurance and credit cards.

Growth in average deposit balances was reported against 30 June 2009 as HSBC expanded its market share through targeted marketing campaigns and customers of both Personal Financial Services and Commercial Banking displayed a preference for liquid deposits. The benefit of this increase was partly offset by liability spreads remaining under pressure in the low interest rate environment.

In Balance Sheet Management, net interest income declined from the exceptional results achieved in the first half of 2009 as higher yielding positions matured, interest rates remained low and yield curves flattened.

Net fee income increased by 16 per cent, primarily from higher income on unit trusts and assets under management. This was driven by improved investor sentiment and the launch of attractive product offerings such as FundMax which, for a monthly fee, offers retail investors unlimited unit trust transactions and switching between over 300 funds.

The recovery in regional trade, and consequent rise in the value of Hong Kong's total exports and imports, boosted remittances and trade-related facilities fees. Underwriting fees also increased due to the number of significant initial public offerings ('IPO's) that were concluded in the first half of 2010.

Net trading income was 2 per cent lower than in the first half of 2009. Income in Rates decreased following a fall in client activity and compressed margins as a result of increased competition. Foreign exchange revenues declined due to lower market volatility, while credit trading revenues fell, reflecting reduced customer demand and a relative widening of credit spreads.

A net expense of US$24 million on financial instruments designated at fair value was recorded compared with income of US$346 million in the first half of 2009. The movement reflected revaluation losses in the first half of 2010 on assets linked to the insurance business compared with gains in the comparable period. To the extent that these losses were attributed to policyholders, there was an offsetting change innet insurance claims incurred and movement in liabilities to policyholders.

Net earned insurance premiums grew by 23 per cent to US$2.2 billion, as strong new business growth, particularly in whole life, deferred annuity and unit-linked products, was driven by successful sales campaigns and additional sales staff. A life insurance product designed for high net worth individuals introduced in the first half of 2009 also performed well. There was a corresponding increase in net insurance claims incurred and movement in liabilities to policyholders.

Gains less losses from financial investments were US$47 million higher, mainly due to gains from disposal of available-for-sale investments in Balance Sheet Management in the first half of 2010.

Other operating income increased by 28 per cent to US$644 million, largely due to an increase in PVIF, reflecting strong life insurance sales. Also, the improvement in the property market in Hong Kong generated a revaluation gain on investment properties.

Loan impairment charges and other credit risk provisions decreased by 77 per cent to US$63 million, reflecting the economic recovery which took shape in the second half of 2009. Commercial Banking drove the fall in loan impairment charges with fewer large specific impairments as credit conditions improved. Loan impairment charges also fell in Personal Financial Services, mainly on unsecured lending as unemployment and bankruptcy levels fell. HSBC's mortgage portfolio in Hong Kong continued to be well secured with an average loan-to-value ratio of almost 38 per cent.

Operating expenses rose by 2 per cent as technology and marketing expenditure was increased to position HSBC's business advantageously to support the growth of customers' businesses in the continuing economic recovery. These cost increases were partially offset by efficiency improvements, which were reflected in lower average staff numbers as the shift of transactions to non-branch channels continued, and a decrease in performance-related pay in Global Banking and Markets.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2010 ('1H10') compared with half-year to 31 December 2009 ('2H09')
Hong Kong	2H09            as reported     US$m	2H09         adjust-         ments1         US$m			Currency translation2         US$m		2H09    at 1H10 exchange        rates8      US$m	1H10               as     reported         US$m			1H10      adjust-      ments1      US$m		1H10     under-       lying     US$m		Re- ported change4         %		Under-   lying change4         %
Net interest income .....	1,963		-		(4)		1,959		1,994		-		1,994		2		2
Net fee income .....	1,469		-		(4)		1,465		1,395		-		1,395		(5)		(5)
Changes in fair value5 .	1		(1)		-		-		(6)		6		-
Other income6 ..................	1,320		-		(5)		1,315		1,513		(62)		1,451		15		10
Net operating income7 ....	4,753		(1)		(13)		4,739		4,896		(56)		4,840		3		2
Loan impairment charges and other credit risk provisions .	(227)		-		-		(227)		(63)		-		(63)		72		72
Net operating income .....	4,526		(1)		(13)		4,512		4,833		(56)		4,777		7		6
Operating expenses ...	(2,011)		-		4		(2,007)		(1,968)		-		(1,968)		2		2
Operating profit ........	2,515		(1)		(9)		2,505		2,865		(56)		2,809		14		12
Income from associates	13		-		-		13		12		-		12		(8)		(8)
Profit before tax ............	2,528		(1)		(9)		2,518		2,877		(56)		2,821		14		12

For footnotes, see page 95.

Analysis by customer group and global business

Profit/(loss) before tax

	Half-year to 30 June 2010
Hong Kong	Personal  Financial    Services        US$m		Commercial     Banking         US$m		Global Banking &     Markets        US$m		Private    Banking        US$m		Other        US$m		Inter-     segment elimination35         US$m		Total        US$m
Net interest income/(expense) .........................................	1,279		504		437		77		(247)		(56)		1,994
Net fee income ....................	698		305		305		78		9		-		1,395
Trading income excluding net interest income ................	107		53		368		59		4		-		591
Net interest income on trading activities ..........................	1		-		34		-		6		56		97
Net trading income25 ...........	108		53		402		59		10		56		688
Net income/(expense) from financial instruments designated at fair value .....	(110)		23		42		-		15		-		(30)
Gains less losses from financial investments .......	-		-		63		8		40		-		111
Dividend income .................	-		-		-		-		13		-		13
Net earned insurance premiums .........................	1,874		369		5		-		-		-		2,248
Other operating income ......	222		27		30		5		499		(139)		644
Total operating income ...	4,071		1,281		1,284		227		339		(139)		7,063
Net insurance claims26 .........	(1,853)		(309)		(5)		-		-		-		(2,167)
Net operating income7 .....	2,218		972		1,279		227		339		(139)		4,896
Loan impairment (charges)/ recoveries and other credit risk provisions .................	(42)		(2)		(20)		-		1		-		(63)
Net operating income ......	2,176		970		1,259		227		340		(139)		4,833
Operating expenses .............	(756)		(298)		(529)		(108)		(416)		139		(1,968)
Operating profit/(loss) ....	1,420		672		730		119		(76)		-		2,865
Share of profit in associates and joint ventures ............	2		-		-		-		10		-		12
Profit/(loss) before tax .....	1,422		672		730		119		(66)		-		2,877
	%		%		%		%		%				%
Share of HSBC's profit before tax ........................	12.8		6.1		6.6		1.1		(0.7)				25.9
Cost efficiency ratio ............	34.1		30.7		41.4		47.6		122.7				40.2
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ................	45,121		37,184		25,501		4,353		1,916				114,075
Total assets37 ......................	69,052		44,409		214,091		19,919		92,165		(28,645)		410,991
Customer accounts ..............	165,238		63,562		26,142		18,559		611				274,112

	Half-year to 30 June 2009
Hong Kong	Personal      Financial       Services          US$m		Commercial       Banking          US$m		Global   Banking &       Markets          US$m		Private       Banking          US$m		Other          US$m		Inter-       segment elimination35          US$m		Total          US$m
Net interest income/(expense) .........................................	1,294		480		713		122		(313)		(64)		2,232
Net fee income ....................	643		244		230		57		26		-		1,200
Trading income/(expense) excluding net interest income ............................	69		41		555		42		(70)		-		637
Net interest income/(expense) on trading activities .........	2		-		(7)		-		8		64		67
Net trading income/ (expense)25 ......................	71		41		548		42		(62)		64		704
Net income/(expense) from financial instruments designated at fair value .....	319		(22)		28		-		20		-		345
Gains less losses from financial investments .......	81		17		(76)		-		(20)		-		2
Dividend income .................	4		-		1		-		9		-		14
Net earned insurance premiums .........................	1,622		211		5		-		-		-		1,838
Other operating income ......	146		39		18		5		440		(143)		505
Total operating income .......	4,180		1,010		1,467		226		100		(143)		6,840
Net insurance claims26 .........	(1,953)		(168)		(5)		-		-		-		(2,126)
Net operating income7 ........	2,227		842		1,462		226		100		(143)		4,714
Loan impairment charges and other credit risk provisions	(122)		(137)		(14)		-		-		-		(273)
Net operating income ..........	2,105		705		1,448		226		100		(143)		4,441
Operating expenses .............	(770)		(281)		(541)		(120)		(366)		143		(1,935)
Operating profit/(loss) .........	1,335		424		907		106		(266)		-		2,506
Share of profit/(loss) in associates and joint ventures ...........................	2		-		-		-		(7)		-		(5)
Profit/(loss) before tax ........	1,337		424		907		106		(273)		-		2,501
	%		%		%		%		%				%
Share of HSBC's profit before tax ........................	26.6		8.4		18.1		2.1		(5.4)				49.8
Cost efficiency ratio ............	34.6		33.4		37.0		53.1		366.0				41.0
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ................	42,665		26,682		23,182		3,054		1,903				97,486
Total assets .........................	79,113		33,209		221,196		23,000		67,820		(11,231)		413,107
Customer accounts ..............	157,437		54,730		34,875		19,919		571				267,532

Profit/(loss) before tax (continued)

	Half-year to 31 December 2009
Hong Kong	Personal     Financial       Services          US$m		Commercial       Banking          US$m		Global   Banking &       Markets          US$m		Private       Banking          US$m		Other          US$m		Inter-       segment elimination35          US$m		Total          US$m
Net interest income/(expense) .........................................	1,283		458		437		90		(245)		(60)		1,963
Net fee income ....................	767		286		333		68		15		-		1,469
Trading income/(expense) excluding net interest income ............................	117		51		237		49		(23)		-		431
Net interest income on trading activities ..............	1		-		23		-		6		60		90
Net trading income/ (expense)25 ......................	118		51		260		49		(17)		60		521
Net income/(expense) from financial instruments designated at fair value .....	388		(24)		110		-		(34)		-		440
Gains less losses from financial investments .......	(1)		1		(32)		-		39		-		7
Dividend income .................	(3)		1		9		-		7		-		14
Net earned insurance premiums .........................	1,539		289		8		-		-		-		1,836
Other operating income ......	200		25		41		5		622		(124)		769
Total operating income .......	4,291		1,087		1,166		212		387		(124)		7,019
Net insurance claims26 .........	(2,026)		(236)		(4)		-		-		-		(2,266)
Net operating income7 ........	2,265		851		1,162		212		387		(124)		4,753
Loan impairment (charges)/ recoveries and other credit risk provisions .................	(81)		(31)		(117)		1		1		-		(227)
Net operating income ..........	2,184		820		1,045		213		388		(124)		4,526
Operating expenses .............	(796)		(289)		(446)		(122)		(482)		124		(2,011)
Operating profit/(loss) .........	1,388		531		599		91		(94)		-		2,515
Share of profit in associates and joint ventures ............	3		1		1		-		8		-		13
Profit/(loss) before tax ........	1,391		532		600		91		(86)		-		2,528
	%		%		%		%		%				%
Share of HSBC's profit before tax ........................	67.5		25.8		29.1		4.4		(4.1)				122.7
Cost efficiency ratio ............	35.1		34.0		38.4		57.5		124.5				42.3
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net) ................	43,869		28,217		21,991		3,361		1,943				99,381
Total assets .........................	83,497		34,743		217,146		20,353		52,508		(9,004)		399,243
Customer accounts ..............	166,445		62,146		26,650		19,474		726				275,441

For footnotes, see page 95.

 

END

 

 

IR UAAURRUAWAAR