Interim Report - 8 of 21

RNS Number : 3097X

HSBC Holdings PLC

14 August 2009

 



Rest of Asia-Pacific17

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

	Personal Financial Services US$m		Commercial Banking US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Total US$m
Half-year to 30 June 2009
Australia	12		9		60		–		3		84
India	(124)		(39)		244		–		120		201
Indonesia	(12)		16		77		–		(1)		80
Japan	(41)		–		38		(4)		(1)		(8)
Mainland China	188		292		258		(3)		17		752
Associates	287		255		143		–		–		685
Other mainland China	(99)		37		115		(3)		17		67
Malaysia	38		27		76		–		(2)		139
Singapore	67		43		126		54		(7)		283
South Korea	(6)		(6)		186		–		11		185
Taiwan	(7)		32		55		–		1		81
Other	20		85		119		–		1		225
	135		459		1,239		47		142		2,022
Half-year to 30 June 2008
Australia	15		34		47		–		4		100
India	(53)		75		301		2		46		371
Indonesia	(1)		19		52		–		(4)		66
Japan	(39)		–		42		1		–		4
Mainland China	277		306		357		(2)		(31)		907
Associates	321		268		159		–		–		748
Other mainland China	(44)		38		198		(2)		(31)		159
Malaysia	61		51		94		–		3		209
Singapore	63		45		185		51		(4)		340
South Korea	(10)		(2)		168		–		21		177
Taiwan	(5)		12		106		–		2		115
Other	18		113		194		–		20		345
	326		653		1,546		52		57		2,634
Half-year to 31 December 2008
Australia	4		34		55		–		(17)		76
India	(102)		43		277		–		77		295
Indonesia	(21)		(2)		74		–		4		55
Japan	(49)		(1)		46		–		4		–
Mainland China	7		316		331		(3)		47		698
Associates	72		290		176		–		–		538
Other mainland China	(65)		26		155		(3)		47		160
Malaysia	33		45		77		–		5		160
Singapore	41		38		152		59		(33)		257
South Korea	(6)		(11)		136		–		17		136
Taiwan	(36)		33		73		–		(10)		60
Other	14		87		203		1		46		351
	(115)		582		1,424		57		140		2,088

    For footnote, see page 94.

Loans and advances to customers (net) by country17

	At 30 June 2009 US$m		At 30 June 2008 US$m		At 31 December 2008 US$m
Australia	10,594		12,664		9,321
India	5,236		7,585		6,244
Indonesia	2,540		1,924		1,904
Japan	2,486		4,710		5,839
Mainland China	10,784		12,653		11,440
Malaysia	8,873		9,295		9,404
Singapore	12,956		13,724		13,441
South Korea	4,426		6,581		5,336
Taiwan	4,123		5,330		4,329
Other	12,044		14,287		13,403
	74,062		88,753		80,661

    For footnote, see page 94.

Customer accounts by country17

	At 30 June 2009 US$m		At 30 June 2008 US$m		At 31 December 2008 US$m
Australia	9,621		13,864		9,201
India	11,719		11,365		9,767
Indonesia	4,557		2,557		2,896
Japan	4,673		4,728		6,204
Mainland China	19,874		18,205		19,171
Malaysia	12,080		12,836		11,963
Singapore	32,920		32,784		32,748
South Korea	4,336		4,509		4,383
Taiwan	9,819		12,227		9,689
Other	16,984		17,464		18,172
	126,583		130,539		124,194

For footnote, see page 94.

Economic briefing

Growth in mainland China recovered during the first half of 2009 as the effect on domestic demand of the government's fiscal stimulus package and the reversal of the earlier tightening of monetary conditions helped offset the very sharp decline registered in exports. Second quarter GDP rose by 7.9 per cent in year-on-year terms, implying a substantial acceleration in growth from the 6.1 per cent year-on-year increase recorded during the first quarter of 2009. Growth in industrial production also accelerated during the first half of 2009, while expectations for a continuation of the rapid expansion in fixed asset investment were supported by very strong growth in bank lending. Consumer spending remained robust, with retail sales rising by 15 per cent over the year to June 2009. The annual rate of consumer price inflation turned negative during the early months of 2009, largely reflecting the earlier movements in food and energy prices. The renminbi was little changed against the US dollar during the period.

Economic conditions proved extremely difficult in Japan during the first half of 2009, although some signs of stabilisation did emerge towards the end of the period. First quarter GDP fell by 8.8 per cent against the comparable period in 2008, and industrial production fell by 30 per cent in year-on-year terms in May 2009 as demand within key export markets proved weak. Unemployment rose from 4.3 per cent in December 2008 to 5.2 per cent in May 2009, while the consumer price index fell by 1.1 per cent during the year to May 2009.

Elsewhere in Asia, growth rates were volatile during the first half of 2009. The substantial monetary and fiscal policy measures introduced across the region helped to stabilise conditions 

Profit before tax

	Half-year to
Rest of Asia-Pacific17	30 June 2009 US$m		30 June 2008 US$m		31 December 2008 US$m
Net interest income	1,768		1,919		2,018
Net fee income	719		1,004		863
Net trading income	909		1,090		952
Changes in fair value of long-term debt issued and related derivatives	(2)		–		1
Net income/(expense) from other financial instruments designated at fair value	31		(88)		(84)
Net income/(expense) from financial instruments designated at fair value	29		(88)		(83)
Gains less losses from financial investments	(21)		24		–
Dividend income	1		1		1
Net earned insurance premiums	152		114		83
Other operating income	608		475		580
Total operating income	4,165		4,539		4,414
Net insurance claims incurred and movement in liabilities to policyholders	(156)		(4)		32
Net operating income before loan impairment charges and other credit risk provisions	4,009		4,535		4,446
Loan impairment charges and other credit risk provisions	(531)		(328)		(524)
Net operating income	3,478		4,207		3,922
Total operating expenses	(2,151)		(2,324)		(2,380)
Operating profit	1,327		1,883		1,542
Share of profit in associates and joint ventures	695		751		546
Profit before tax	2,022		2,634		2,088
	%		%		%
Share of HSBC’s profit before tax	40.3		25.7		222.1
Cost efficiency ratio	53.7		51.2		53.5
Period-end staff numbers (full-time equivalent)	87,567		85,581		89,706
Balance sheet data23
	US$m		US$m		US$m
Loans and advances to customers (net)	74,062		88,753		80,661
Loans and advances to banks (net)	34,278		40,695		28,665
Trading assets, financial instruments designated at fair value, and financial investments	55,328		59,934		53,167
Total assets	217,794		239,224		225,573
Deposits by banks	12,980		18,600		12,688
Customer accounts	126,583		130,539		124,194

For footnotes, see page 94.

The commentary on Rest of Asia-Pacific is on an underlying basis unless stated otherwise.

following very sharp contractions in economic activity during the early months of the year. Such trends were particularly evident in Singapore, where the very sharp recession continued during the first quarter as GDP fell by 9.6 per cent on the comparable period in 2008, before exports and industrial production staged a sustained recovery. Second quarter GDP fell by 3.7 per cent against the comparable period in 2008. Growth proved more durable in India, with first quarter GDP rising by 5.8 per cent on the comparable period in 2008. Declining inflationary pressures and concerns over the global economic outlook nevertheless led the Reserve Bank of India to reduce interest rates and reserve requirements during the first half of 2009.

Although growth slowed during the first quarter of the year in Indonesia, the 4.4 per cent increase in GDP against the comparable period in 2008 left the country as a major out-performer in the region. Economic conditions proved very weak during the early months of 2009 in Malaysia as first quarter GDP fell by 6.2 per cent compared with the equivalent period in 2008. The open nature of the South Korean economy and relatively high levels of household and corporate sector indebtedness proved detrimental during the early months of 2009 as first quarter GDP fell by 4.2 per cent against the comparable period in 2008. However, industrial production increased monthly during the second quarter and surveys indicated consumer confidence rebounding strongly. Deteriorating external demand and weaker capital inflows proved problematic for the Philippines' economy as first quarter GDP fell on a quarter-on-quarter basis, encouraging a further decline in interest rates. Taiwan's economy proved particularly vulnerable to the contraction in global trade in early 2009, with a record 10.2 per cent decline in GDP on the comparable period in 2008. A substantial fiscal stimulus package in Vietnam contributed to improved growth during the first half of 2009. After rising by 3.1 per cent in the year to the first quarter of 2009, year-on-year GDP growth accelerated to 3.9 per cent in the second quarter.

Review of business performance

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 (‘1H09’) compared with half-year to 30 June 2008 (‘1H08’)
Rest of Asia-Pacific17	1H08 as reported US$m	1H08 acquisitions and  disposals1 US$m			Currency translation2 US$m		1H08 at 1H09 exchange rates3 US$m	1H09 acquisitions and  disposals1 US$m			Under-lying change US$m		1H09 as reported US$m		Re-ported change4 %		Under-lying change4 %
Net interest income	1,919		–		(181)		1,738		–		30		1,768		(8)		2
Net fee income	1,004		–		(96)		908		–		(189)		719		(28)		(21)
Changes in fair value5	–		–		–		–		–		(2)		(2)		–		–
Other income6	1,612		–		(226)		1,386		–		138		1,524		(5)		10
Net operating income7	4,535		–		(503)		4,032		–		(23)		4,009		(12)		(1)
Loan impairment charges and other credit risk provisions	(328)		–		49		(279)		–		(252)		(531)		(62)		(90)
Net operating income	4,207		–		(454)		3,753		–		(275)		3,478		(17)		(7)
Operating expenses	(2,324)		–		237		(2,087)		–		(64)		(2,151)		7		(3)
Operating profit	1,883		–		(217)		1,666		–		(339)		1,327		(30)		(20)
Income from associates	751		–		26		777		–		(82)		695		(7)		(11)
Profit before tax	2,634		–		(191)		2,443		–		(421)		2,022		(23)		(17)

For footnotes, see page 94.

HSBC's operations in the Rest of Asia-Pacific region reported a pre-tax profit of US$2.0 billion compared with US$2.6 billion in the first half of 2008, a decline of 23 per cent or 17 per cent on an underlying basis. Global Banking and Markets performance remained robust, delivering US$1.2 billion or 61 per cent of the regional preߛtax profit compared with US$1.5 billion or 59 per cent in the first half of 2008. The decline in regional performance was primarily attributable to the Personal Financial Services and Commercial Banking customer groups, which were adversely affected by the impact of sustained low interest rates, reduced economic activities and trade flows and the consequential deterioration in credit quality. 

HSBC continued to demonstrate its commitment to the region through the purchase of Bank Ekonomi in Indonesia in May 2009, and by becoming the first foreign bank to incorporate locally in Vietnam, in January 2009. Organic expansion continued in mainland China with the opening of eight new HSBC branded outlets in the first half of 2009 in addition to two more rural banks, consolidating HSBC's position as the largest foreign international bank in the country. In insurance, HSBC expanded its joint ventures with Canara Bank and Oriental Bank of Commerce in India and National Trust in mainland China. The operations of The Chinese Bank in Taiwan and IL&FS Investsmart ('Investsmart') in India were successfully integrated during the period; the former is proceeding ahead of expectations: the latter added 77 outlets to the existing branch network to enhance wealth management product distribution. 

Net interest income increased by 2 per cent, driven by lower interest rates, particularly related to the cost of funding the trading book. This benefit was partly offset by lower deposit spreads in the low interest rate environment and strong price competition for core deposit acquisition.

Asset balances declined as demand for financing reduced and the rate of increase in personal unsecured lending origination, which had contributed to lending growth in previous years, was curtailed in order to manage asset quality. This was particularly evident in India, where the decline in lending reflected measures to improve the quality of the asset portfolio, including eliminating the use of third-party agents in the credit card origination process as experience highlighted areas of relative weakness. The effect was readily discernible, with credit card lending balances in India falling to US$539 million at 30 June 2009 from US$647 million at the beginning of the year. As credit availability was constrained in certain sectors, HSBC was able to undertake a series of repricing initiatives throughout the region which, along with the reduced funding costs in the low interest rate environment, resulted in wider spreads being achieved on lending products. This was particularly notable in respect of corporate loans and, in India, trade advances. 

HSBC remained highly successful in attracting deposits, particularly through Premier, where customer numbers increased by 14 per cent to almost half a million in the region. Balances grew in most countries, most notably India, Indonesia and mainland China. Deposit growth in India was attributable to a 12 per cent increase in the number of Premier customers and, in mainland China, to branch network expansion. 

Net fee income was 21 per cent lower than in the first half of 2008, and reflected a decline in sales of investment and wealth management products. Sales of investment products, notably unit trusts, fell, particularly in Taiwan and India as investor sentiment remained risk averse and equity markets continued to have little momentum for much of the period. Similarly, in Singapore reduced demand for managed funds and depressed market values led to a decline in funds under management and lower performance fees, partly mitigated by higher sales of structured products. 

Notwithstanding the decline in trade flows, fees from trade and supply chain products rose due to revised pricing strategies, most significantly in India.

Net trading income declined by 2 per cent, as the fall in interest rates reduced net interest income from trading activities.

Trading performance in Global Banking and Markets was strong as market volatility continued across the region, encouraging increased corporate hedging activity and delivering increased margins on market-making activity as investors demonstrated heightened risk aversion. Trading income growth was largely attributable to Rates trading and Credit. Revenues from Rates rose, most notably in South Korea, Indonesia and Japan, driven by increased customer demand and volatile markets. Credit related revenues rose, particularly in India, as credit spreads tightened significantly.

HSBC continued to expand in the Rest of Asia-Pacific region despite a fall of 17 per cent in underlying pre-tax profit.

Net income from financial instruments designated at fair value of US$29 million was recorded compared with a net expense of US$88 million in the first half of 2008. This was primarily attributable to equity market-related gains on unit-linked insurance products, particularly in Singapore, and was largely offset by a corresponding increase in liabilities to policyholders reflected in net insurance claims incurred and movement in liabilities to policyholders.

Net earned insurance premiums increased by 45 per cent to US$152 million, largely in Singapore due to increased sales of a new Guaranteed Saver life product.

Loan impairment charges nearly doubled, reflecting a deterioration in the credit environment across the region, but remained low in absolute terms at US$531 million. 

In Personal Financial Services, loan impairment charges rose by 43 per cent, primarily in India and, to a lesser extent, in Indonesia. In India, higher loan impairment charges were driven by increased delinquency across the unsecured lending portfolio, notably credit cards and personal lending, following strong growth ahead of the economic slowdown. HSBC took specific action to mitigate loan losses, including discontinuing consumer finance loan origination towards the end of 2008, and tightening lending criteria on other unsecured lending products. In Indonesia, loan impairment charges rose due to higher delinquencies on credit cards and personal lending. 

In Commercial Banking, the rise in loan impairment charges reflected an increase in corporate failures as economic growth slowed, notably in certain export sectors. Loan impairment charges also increased from the low level recorded 

in 2008, notably in India where there were a few individually significant charges recorded. Other countries in the region were also affected but to a lesser degree. 

Operating expenses increased by 3 per cent to US$2.2 billion to support the ongoing expansion of infrastructure in the region. Operating expenses rose in mainland China as the branch network grew and staff numbers increased accordingly. In India, operating expenses rose by 10 per cent, driven by expansion of the branch network following the integration of Investsmart and an increase in staff numbers. In Taiwan, a fifth Commercial Banking Centre was opened in Neihu, a prominent science and technology zone, and six branch renovations were completed as part of the integration of the operations of The Chinese Bank. Infrastructure investment growth was partly offset by a reduction in marketing costs, notably in respect of unsecured lending products.

The number of transactions completed through direct channels, including internet banking, telephone services and self-service machines increased and represented more than 60 per cent of commercial banking transactions.

Operating expenses within the Group Service and Software Development Centres rose by 10 per cent as the number of migrated activities and processes increased in accordance with the Group's global resourcing strategy to develop 'Centres of Excellence'. All related costs are recharged to other Group entities and the income from these recharges is reported within other operating income. 

Profit from associates and joint ventures in the region was 11 per cent lower, driven by a reduction in contribution from Ping An Insurance due to the non-recurrence of favourable changes in investment assumptions in the first half of 2008. The profit contribution from the Bank of Communications was unchanged as the combination of increased fee income from cards, advisory services and cost savings were offset by reduced income from narrowing deposit spreads. The contribution from Industrial Bank declined due to a fall in net interest income as deposit spreads narrowed.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 (‘1H09’) compared with half-year to 31 December 2008 (‘2H08’)
Rest of Asia-Pacific17	2H08 as reported US$m	2H08 acquisitions and  disposals1 US$m			Currency translation2 US$m		2H08 at 1H09exchange rates8 US$m	1H09 acquisitions and  disposals1 US$m			Under-lying change US$m		1H09 as reported US$m		Re-ported change4 %		Under-lying change4 %
Net interest income	2,018		–		(75)		1,943		–		(175)		1,768		(12)		(9)
Net fee income	863		–		(32)		831		–		(112)		719		(17)		(13)
Changes in fair value5	1		–		–		1		–		(3)		(2)		(300)		(300)
Other income6	1,564		–		(74)		1,490		–		34		1,524		(3)		2
Net operating income7	4,446		–		(181)		4,265		–		(256)		4,009		(10)		(6)
Loan impairment charges and other credit risk provisions	(524)		–		16		(508)		–		(23)		(531)		(1)		(5)
Net operating income	3,922		–		(165)		3,757		–		(279)		3,478		(11)		(7)
Operating expenses	(2,380)		–		92		(2,288)		–		137		(2,151)		10		6
Operating profit	1,542		–		(73)		1,469		–		(142)		1,327		(14)		(10)
Income from associates	546		–		–		546		–		149		695		27		27
Profit before tax	2,088		–		(73)		2,015		–		7		2,022		(3)		–

For footnotes, see page 94.

Analysis by customer group and global business 

Profit before tax

	Half-year to 30 June 2009
Rest of Asia-Pacific17	Personal Financial Services US$m		Commercial Banking US$m	Global Banking and Markets US$m			Private Banking US$m		Other US$m		Inter-segment elimination29 US$m		Total US$m
Net interest income	730		380		626		55		63		(86)		1,768
Net fee income	254		154		294		25		(8)		–		719
Trading income/(expense) excluding net interest income	40		71		609		35		(15)		–		740
Net interest income/(expense) on trading activities	(1)		–		82		–		2		86		169
Net trading income/ (expense)24	39		71		691		35		(13)		86		909
Changes in fair value of long-term debt issued and related derivatives	–		–		–		–		(2)		–		(2)
Net income/(expense) from other financial instruments designated at fair value	34		–		(3)		–		–		–		31
Net income/(expense) from financial instruments designated at fair value	34		–		(3)		–		(2)		–		29
Gains less losses from financial investments	5		3		(10)		–		(19)		–		(21)
Dividend income	–		–		1		–		–		–		1
Net earned insurance premiums	136		16		–		–		–		–		152
Other operating income	36		28		17		–		590		(63)		608
Total operating income	1,234		652		1,616		115		611		(63)		4,165
Net insurance claims25	(145)		(11)		–		–		–		–		(156)
Net operating income7	1,089		641		1,616		115		611		(63)		4,009
Loan impairment charges and other credit risk provisions	(375)		(151)		(5)		–		–		–		(531)
Net operating income	714		490		1,611		115		611		(63)		3,478
Total operating expenses	(870)		(291)		(517)		(68)		(468)		63		(2,151)
Operating profit	(156)		199		1,094		47		143		–		1,327
Share of profit/(loss) in associates and joint ventures	291		260		145		–		(1)		–		695
Profit before tax	135		459		1,239		47		142		–		2,022
	%		%		%		%		%				%
Share of HSBC’s profit before tax	2.7		9.1		24.7		0.9		2.9				40.3
Cost efficiency ratio	79.9		45.4		32.0		59.1		76.6				53.7
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	27,780		21,693		21,682		2,739		168				74,062
Total assets	36,761		29,760		138,266		13,068		5,958		(6,019)		217,794
Customer accounts	45,179		26,031		42,712		12,624		37				126,583

For footnotes, see page 94.

	Half-year to 30 June 2008
Rest of Asia-Pacific17	Personal     Financial     Services     US$m		Commercial Banking US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income	864		446		759		45		68		(263)		1,919
Net fee income	320		175		456		41		12		-		1,004
Trading income/(expense) excluding net interest  income	32		72		674		36		(49)		-		765
Net interest income/(expense)  on trading activities	(2)		-		59		-		5		263		325
Net trading income/ (expense)24	30		72		733		36		(44)		263		1,090
Changes in fair value of long-term debt issued and related derivatives	-		-		-		-		-		-		-
Net expense from other  financial instruments designated at fair value	(85)		(1)		(2)		-		-		-		(88)
Net expense from financial instruments designated at  fair value	(85)		(1)		(2)		-		-		-		(88)
Gains less losses from  financial investments	14		3		6		-		1		-		24
Dividend income	-		-		1		-		-		-		1
Net earned insurance  premiums	98		16		-		-		-		-		114
Other operating income	18		7		37		1		516		(104)		475
Total operating income	1,259		718		1,990		123		553		(104)		4,539
Net insurance claims25	6		(9)		-		-		(1)		-		(4)
Net operating income7	1,265		709		1,990		123		552		(104)		4,535
Loan impairment (charges)/ recoveries and other credit  risk provisions	(310)		(7)		(11)		-		-		-		(328)
Net operating income	955		702		1,979		123		552		(104)		4,207
Total operating expenses	(949)		(318)		(591)		(71)		(499)		104		(2,324)
Operating profit	6		384		1,388		52		53		-		1,883
Share of profit in associates  and joint ventures	320		269		158		-		4		-		751
Profit before tax	326		653		1,546		52		57		-		2,634
	%		%		%		%		%				%
Share of HSBC's profit  before tax	3.2		6.4		15.0		0.5		0.6				25.7
Cost efficiency ratio	75.0		44.9		29.7		57.7		90.3				51.2
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	31,402		25,285		28,609		3,297		160				88,753
Total assets	39,336		32,012		151,490		10,798		10,498		(4,910)		239,224
Customer accounts	43,479		27,540		48,625		10,830		65				130,539

For footnotes, see page 94.

Analysis by customer group and global business (continued) 

Profit before tax 

	Half-year to 31 December 2008
Rest of Asia-Pacific17	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income	844		488		765		58		71		(208)		2,018
Net fee income	272		180		375		30		6		-		863
Trading income/(expense) excluding net interest  income	33		50		559		41		(3)		-		680
Net interest income/(expense)  on trading activities	(3)		-		64		-		3		208		272
Net trading income24	30		50		623		41		-		208		952
Changes in fair value of long-term debt issued and related derivatives	-		-		-		-		1		-		1
Net income/(expense) from other financial instruments designated at fair value	(87)		1		(2)		-		4		-		(84)
Net income/(expense) from financial instruments designated at fair value	(87)		1		(2)		-		5		-		(83)
Dividend income	-		-		-		-		1		-		1
Net earned insurance  premiums	74		9		-		-		-		-		83
Other operating income/(expense)	41		70		42		(2)		558		(129)		580
Total operating income	1,174		798		1,803		127		641		(129)		4,414
Net insurance claims25	36		(4)		-		-		-		-		32
Net operating income7	1,210		794		1,803		127		641		(129)		4,446
Loan impairment charges and other credit risk provisions	(330)		(131)		(62)		(1)		-		-		(524)
Net operating income	880		663		1,741		126		641		(129)		3,922
Total operating expenses	(1,067)		(371)		(494)		(69)		(508)		129		(2,380)
Operating profit	(187)		292		1,247		57		133		-		1,542
Share of profit/(loss) in associates and joint  ventures	72		290		177		-		7		-		546
Profit/(loss) before tax	(115)		582		1,424		57		140		-		2,088
	%		%		%		%		%				%
Share of HSBC's loss  before tax	(12.2)		61.9		151.5		6.1		14.9				222.1
Cost efficiency ratio	88.2		46.7		27.4		54.3		79.3				53.5
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	27,634		21,967		27,941		2,960		159				80,661
Total assets	36,310		29,030		147,714		12,440		5,528		(5,449)		225,573
Customer accounts	42,778		25,372		42,977		12,713		354				124,194

For footnotes, see page 94.

Middle East17

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

	Personal     Financial     Services     US$m		Commercial     Banking     US$m	Global     Banking and     Markets     US$m			Private     Banking     US$m		Other     US$m		Total     US$m
Half-year to 30 June 2009
Egypt	10		27		49		-		34		120
United Arab Emirates	(14)		141		182		(1)		3		311
Other	19		35		20		-		(4)		70
Middle East (excluding Saudi Arabia)	15		203		251		(1)		33		501
Saudi Arabia	20		49		53		6		14		142
	35		252		304		5		47		643
Half-year to 30 June 2008
Egypt	11		37		45		-		22		115
United Arab Emirates	106		184		229		2		1		522
Other	44		69		65		-		-		178
Middle East (excluding Saudi Arabia)	161		290		339		2		23		815
Saudi Arabia	48		18		87		-		22		175
	209		308		426		2		45		990
Half-year to 31 December 2008
Egypt	5		31		45		-		27		108
United Arab Emirates	27		146		159		2		5		339
Other	36		56		96		-		1		189
Middle East (excluding Saudi Arabia)	68		233		300		2		33		636
Saudi Arabia	12		17		90		-		1		120
	80		250		390		2		34		756

    Loans and advances to customers (net) by country17

	At     30 June      2009     US$m		At      30 June    2008     US$m		At     31 December     2008     US$m
Egypt	2,503		2,265		2,473
United Arab Emirates	15,906		16,416		17,537
Other	6,688		6,323		7,285
	25,097		25,004		27,295

    Customer accounts by country17

	At     30 June      2009     US$m		At      30 June    2008     US$m		At     31 December     2008     US$m
Egypt	5,642		5,359		5,363
United Arab Emirates	19,284		20,658		19,808
Other	9,355		10,239		9,994
	34,281		36,256		35,165

For footnote, see page 94.

Profit before tax

	Half-year to
Middle East17	30 June 2009 US$m		30 June 2008         US$m		31 December 2008     US$m
Net interest income	763		714		842
Net fee income	308		334		357
Net trading income	220		239		163
Gains less losses from financial investments	13		9		(1)
Dividend income	2		1		1
Net earned insurance premiums	-		-		-
Other operating income	63		9		-
Total operating income	1,369		1,306		1,362
Net insurance claims incurred and movement in liabilities  to policyholders	-		-		-
Net operating income before loan impairment charges and other  credit risk provisions	1,369		1,306		1,362
Loan impairment charges and other credit risk provisions	(391)		(41)		(238)
Net operating income	978		1,265		1,124
Total operating expenses	(482)		(460)		(499)
Operating profit	496		805		625
Share of profit in associates and joint ventures	147		185		131
Profit before tax	643		990		756
	%		%		%
Share of HSBC's profit before tax	12.8		9.7		80.4
Cost efficiency ratio	35.2		35.2		36.6
Period-end staff numbers (full-time equivalent)	8,819		8,166		8,453
Balance sheet data23
	US$m		US$m		US$m
Loans and advances to customers (net)	25,097		25,004		27,295
Loans and advances to banks (net)	6,556		11,044		7,476
Trading assets, financial instruments designated at fair value, and  financial investments	10,064		8,198		8,056
Total assets	48,601		51,777		50,952
Deposits by banks	991		1,939		1,001
Customer accounts	34,281		36,256		35,165

For footnotes, see page 94.

The commentary on Middle East is on an underlying basis unless stated otherwise.

Economic briefing

After a period of very rapid expansion, the economies of the Middle East slowed sharply during the first half of 2009 as oil prices fell and access to regional and international funding was compromised. Government spending growth was maintained despite sharply reduced oil revenues, which offered some support to domestic demand. Private consumption and private investment 

spending, however, moderated after several years of rapid growth. Previous inflationary pressures subsided, allowing policymakers to track the exceptionally low level of interest rates in the US without reigniting consumer or asset price growth. The large surpluses accumulated during recent years of high oil prices are likely to ensure that funding for fiscal or external account shortfalls remains accessible.

Review of business performance

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 ('1H09') compared with half-year to 30 June 2008 ('1H08')
Middle East17	1H08     as     reported     US$m	1H08 acquisitions     and      disposals1     US$m			Currency     translation2     US$m		1H08         at 1H09    exchange     rates3     US$m	1H09     acquisitions     and      disposals1     US$m			Under-    lying     change     US$m		1H09     as     reported     US$m		Re-    ported     change4     %		Under-    lying     change4     %
Net interest income	714		-		(5)		709		-		54		763		7		8
Net fee income	334		-		(2)		332		-		(24)		308		(8)		(7)
Other income6	258		-		(1)		257		-		41		298		16		16
Net operating income7	1,306		-		(8)		1,298		-		71		1,369		5		5
Loan impairment charges and other credit risk provisions	(41)		-		(1)		(42)		-		(349)		(391)		(854)		(831)
Net operating income	1,265		-		(9)		1,256		-		(278)		978		(23)		(22)
Operating expenses	(460)		-		4		(456)		-		(26)		(482)		(5)		(6)
Operating profit	805		-		(5)		800		-		(304)		496		(38)		(38)
Income from associates	185		-		1		186		-		(39)		147		(21)		(21)
Profit before tax	990		-		(4)		986		-		(343)		643		(35)		(35)

For footnotes, see page 94.

HSBC reported profit before tax in the Middle East of US$643 million, a decrease of 35 per cent compared with the first half of 2008 on both reported and underlying bases. This decrease was largely driven by the decline in economic activity, predominantly infrastructure development, following the dramatic fall in the price of oil, the adverse effect of lower regional and global equity markets on individual wealth and the depressed real estate sector. These factors contributed to a marked increase, albeit from a low base, in loan impairment charges in the United Arab Emirates ('UAE'). While new lending was constrained during the period, personal lending balances were higher than at 30 June 2008 and drove an increase in revenues of 6 per cent, partly offset by lower trading income as the first half of 2009 experienced lower levels of currency-related trading. 

HSBC continued to expand its presence in the region, opening eight new branches in Egypt over the last 12 months. The priority given to building the Premier business across the region continued with the number of customers increasing by 14 per cent since 31 December 2008.

The Middle East is disclosed as a separate segment for the first time. Its underlying profit before tax declined by 35 per cent.

Net interest income increased by 8 per cent due to higher average interest earning balances compared with the first half of 2008 and asset repricing in Personal Financial Services. 

Mortgage balances were higher than in the first half of 2008, reflecting mortgage approvals early in 2008 which were not drawn until later in the year; new approvals were significantly lower in the first half of 2009 as a result of the changed market circumstances. Credit card and trade balances also increased due to higher utilisation of facilities. Asset spreads widened, benefiting from repricing activity.

HSBC increasingly focused on liability products, and customer accounts in Personal Financial Services rose due to a combination of attractive rates offered in the last quarter of 2008 and ongoing marketing campaigns. The growth in Personal Financial Services balances was partly masked by a contraction in Global Banking and Markets balances following an outflow of funds in the second half of 2008 as currency trading abated. The revenue benefit from the limited growth in the balance sheet was partly offset by deposit spread compression in the low interest rate environment.

Net fee income fell by 7 per cent to US$308 million as reduced activity led to a fall in transaction fees on credit cards and a decrease in origination fees for personal loans. Additionally, custody fees decreased in line with declining asset values.

Net trading income fell by 8 per cent, to US$220 million. This was largely attributable to lower foreign exchange revenue as Middle Eastern currency markets attracted lower volumes and became less volatile than in 2008 as currency trading declined. Gains related to favourable credit spread movements were offset by the non-recurrence of private equity gains.

Other operating income included gains of US$55 million arising from the buy-back and extinguishing of HSBC's own debt issued locally.

Loan impairment charges rose sharply, increasing from US$41 million to US$391 million as credit quality across the region deteriorated as a consequence of weaker economic conditions.

Loan impairment charges within Personal Financial Services rose most significantly in the UAE as a result of increased default rates on Consumer Lending, notably credit cards and personal lending. Management actions, such as reducing credit lines and tightening lending criteria to the portfolio segments most at risk, served to limit the level of these charges. There was very little impairment recognised on mortgage lending which reflected HSBC's disciplined risk appetite, which targeted primary developments. The global economic slowdown, together with the decline in oil prices, placed intense pressure on the UAE's economy which suffered a significant fall in property and equity prices. Unemployment steadily increased, triggered mainly by the impact of the real estate downturn on new construction which precipitated the departure of growing numbers of expatriate workers, some of whom left debts unpaid.

For commercial and corporate banking customers, loan impairment charges rose with the deterioration in the economy, as some local businesses faced a sudden drop in operating activity. In addition, there were a few individually significant loan impairment charges recorded on exposures to large business groups in the region in financial difficulty.

Operating expenses increased by 5 per cent to US$482 million, mostly due to the full effect of business growth in 2008. Staff numbers reflected this growth, but further increases were restricted across most of the region in response to the current economic environment. Expansion of the retail network continued in Egypt, with the opening of eight branches since 30 June 2008.

Profit from associates and joint ventures in the region fell by 21 per cent, mainly from lower investment banking activity through IBSA. HSBC's share of IBSA's pre-tax profit fell by 77 per cent to US$7 million as advisory fees from debt capital markets declined. The Group's share of income from The Saudi British Bank was lower than in the comparable period in 2008 at US$136 million as higher loan impairment charges and marginally higher operating expenses were only partly offset by strong foreign exchange and trade-related income.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 ('1H09') compared with half-year to 31 December 2008 ('2H08')
Middle East17	2H08     as     reported     US$m	2H08     acquisitions     and      disposals1     US$m			Currency     translation2     US$m		2H08         at 1H09    exchange     rates8     US$m	1H09     acquisitions     and      disposals1     US$m			Under-    lying     change     US$m		1H09     as     reported     US$m		Re-    ported     change4     %		Under-    lying     change4     %
Net interest income	842		-		(5)		837		-		(74)		763		(9)		(9)
Net fee income	357		-		(3)		354		-		(46)		308		(14)		(13)
Other income6	163		-		(4)		159		-		139		298		83		87
Net operating income7	1,362		-		(12)		1,350		-		19		1,369		1		1
Loan impairment charges and other credit risk provisions	(238)		-		2		(236)		-		(155)		(391)		(64)		(66)
Net operating income	1,124		-		(10)		1,114		-		(136)		978		(13)		(12)
Operating expenses	(499)		-		7		(492)		-		10		(482)		3		2
Operating profit	625		-		(3)		622		-		(126)		496		(21)		(20)
Income from associates	131		-		-		131		-		16		147		12		12
Profit before tax	756		-		(3)		753		-		(110)		643		(15)		(15)

For footnotes, see page 94.

Analysis by customer group and global business 

Profit before tax 

	Half-year to 30 June 2009
Middle East17	Personal     Financial     Services     US$m		Commercial     Banking     US$m	Global     Banking and     Markets     US$m			Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income	343		243		149		1		27		-		763
Net fee income	99		109		98		1		1		-		308
Trading income excluding net interest income	26		37		146		-		1		-		210
Net interest income on trading activities	-		-		10		-		-		-		10
Net trading income24	26		37		156		-		1		-		220
Gains less losses from  financial investments	11		(2)		(1)		-		5		-		13
Dividend income	-		-		2		-		-		-		2
Other operating income	24		33		25		2		19		(40)		63
Total operating income	503		420		429		4		53		(40)		1,369
Net insurance claims25	-		-		-		-		-		-		-
Net operating income7	503		420		429		4		53		(40)		1,369
Loan impairment charges and other credit risk provisions	(244)		(83)		(64)		-		-		-		(391)
Net operating income	259		337		365		4		53		(40)		978
Total operating expenses	(245)		(135)		(117)		(5)		(20)		40		(482)
Operating profit/(loss)	14		202		248		(1)		33		-		496
Share of profit in associates  and joint ventures	21		50		56		6		14		-		147
Profit before tax	35		252		304		5		47		-		643
	%		%		%		%		%				%
Share of HSBC's profit  before tax	0.7		5.0		6.1		0.1		0.9				12.8
Cost efficiency ratio	48.7		32.1		27.3		125.0		37.7				35.2
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	6,645		11,567		6,799		31		55				25,097
Total assets	7,578		13,040		27,423		95		5,285		(4,820)		48,601
Customer accounts	14,967		9,844		7,312		1,645		513				34,281

For footnotes, see page 94.

Analysis by customer group and global business (continued) 

Profit before tax 

	Half-year to 30 June 2008
Middle East17	Personal     Financial     Services     US$m		Commercial Banking US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income	302		234		159		2		20		(3)		714
Net fee income	114		114		104		2		-		-		334
Trading income excluding net interest income	21		32		155		-		19		-		227
Net interest income/(expense)  on trading activities	-		-		23		-		(14)		3		12
Net trading income24	21		32		178		-		5		3		239
Gains less losses from  financial investments	14		-		(5)		-		-		-		9
Dividend income	-		-		1		-		-		-		1
Other operating income	12		6		5		-		11		(25)		9
Total operating income	463		386		442		4		36		(25)		1,306
Net insurance claims25	-		-		-		-		-		-		-
Net operating income7	463		386		442		4		36		(25)		1,306
Loan impairment (charges)/ recoveries and other credit risk provisions	(65)		23		-		-		1		-		(41)
Net operating income	398		409		442		4		37		(25)		1,265
Total operating expenses	(238)		(123)		(110)		(2)		(12)		25		(460)
Operating profit	160		286		332		2		25		-		805
Share of profit in associates  and joint ventures	49		22		94		-		20		-		185
Profit before tax	209		308		426		2		45		-		990
	%		%		%		%		%				%
Share of HSBC's profit  before tax	2.1		3.0		4.2		-		0.4				9.7
Cost efficiency ratio	51.4		31.9		24.9		50.0		33.3				35.2
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	6,459		12,099		6,392		53		1				25,004
Total assets	7,361		13,774		28,966		63		5,436		(3,823)		51,777
Customer accounts	13,073		11,428		9,537		1,764		454				36,256

For footnotes, see page 94.

	Half-year to 31 December 2008
Middle East17	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income	350		276		203		1		26		(14)		842
Net fee income	113		127		113		4		-		-		357
Trading income excluding net interest income	26		33		89		-		5		-		153
Net interest expense on  trading activities	-		-		(3)		-		(1)		14		10
Net trading income24	26		33		86		-		4		14		163
Gains less losses from  financial investments	-		-		(1)		-		-		-		(1)
Dividend income	-		-		1		-		-		-		1
Other operating income	9		2		6		3		15		(35)		-
Total operating income	498		438		408		8		45		(35)		1,362
Net insurance claims25	-		-		-		-		-		-		-
Net operating income7	498		438		408		8		45		(35)		1,362
Loan impairment charges and other credit risk provisions	(158)		(68)		(12)		-		-		-		(238)
Net operating income	340		370		396		8		45		(35)		1,124
Total operating expenses	(273)		(141)		(102)		(6)		(12)		35		(499)
Operating profit	67		229		294		2		33		-		625
Share of profit in associates  and joint ventures	13		21		96		-		1		-		131
Profit before tax	80		250		390		2		34		-		756
	%		%		%		%		%				%
Share of HSBC's loss  before tax	8.5		26.6		41.5		0.2		3.6				80.4
Cost efficiency ratio	54.8		32.2		25.0		75.0		26.7				36.6
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	7,226		13,221		6,649		29		170				27,295
Total assets	8,168		14,672		27,975		46		5,754		(5,663)		50,952
Customer accounts	13,753		10,978		7,628		1,762		1,044				35,165

For footnotes, see page 94.

 

END

 

 

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