Interim Results - Part 1

HSBC Holdings PLC 6 August 2001 PART 1 HSBC Holdings PLC 2001 INTERIM RESULTS - HIGHLIGHTS * Operating income up 7 per cent to US$12,801 million (US$12,018 million in the first half of 2000). On a cash basis (excluding goodwill amortisation): * Operating profit before provisions up 1 per cent to US$5,652 million (US$5,614 million in the first half of 2000). * Group pre-tax profit up 9 per cent to US$5,840 million (US$5,378 million in the first half of 2000). * Attributable profit up 10 per cent to US$4,075 million (US$3,697 million in the first half of 2000). * Return on invested capital of 16.0 per cent. * Cash earnings per share US$0.44 (US$0.44 in the first half of 2000). On a reported basis (after goodwill amortisation): * Operating profit before provisions down 4 per cent to US$5,251 million (US$5,442 million in the first half of 2000). * Group pre-tax profit up 4 per cent to US$5,435 million (US$5,206 million in the first half of 2000). * Attributable profit up 4 per cent to US$3,670 million (US$3,525 million in the first half of 2000). * Return on average shareholders' funds of 15.9 per cent. * Basic earnings per share US$0.40 (US$0.42 in the first half of 2000). Dividend and capital positions: * First interim dividend of US$0.19 per share; an increase of 27 per cent over the 2000 first interim dividend (including re-balancing). * Tier 1 capital ratio of 9.4 per cent; total capital ratio of 13.7 per cent. HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$5,435 MILLION Profit before tax on a reported basis was US$5,435 million, an increase of 4 per cent compared with the first half of 2000. Profit attributable to shareholders was US$3,670 million, an increase of 4 per cent compared with the first half of 2000. HSBC made a profit before tax on a cash basis of US$5,840 million in the first six months of 2001, up US$462 million, or 9 per cent, over the same period in 2000. On the same basis, profit attributable to shareholders rose 10 per cent to US$4,075 million, and in constant currency terms grew by 15 per cent. The Directors have declared a first interim dividend for 2001 of US$0.19 per ordinary share (2000 first interim dividend of US$0.15 per ordinary share). This represents an increase of 27 per cent, which in part is to reduce the disparity between the amount of the first and second interim dividends. The dividend will be payable on 9 October 2001. Net interest income of US$7,192 million was US$508 million, or 8 per cent, higher than the same period in 2000. Other operating income rose by US$275 million, or 5 per cent, to US$5,609 million over the same period in 2000, mainly due to the contribution from CCF. Operating expenses (excluding goodwill amortisation) were US$745 million, or 12 per cent, higher than the first half of 2000 but marginally lower than in the second half. Costs included significant development expenditure on HSBC's e-commerce initiatives. HSBC's cost:income ratio (excluding goodwill amortisation) was 55.8 per cent in the first half of 2001 compared with 53.3 per cent for the same period in 2000 and 57.1 per cent for the second half of 2000. The charge for bad and doubtful debts of US$441 million was US$73 million higher than in the same period of 2000 but US$123 million lower than the second half of 2000. This was mainly as a result of lower new specific provisions and higher recoveries on previously provided debt than the second half of 2000. Both halves of 2000 included releases from the special general provision related to HSBC's Asian exposure. The US$48 million share of operating losses in joint ventures principally reflected the start-up and development costs of Merrill Lynch HSBC, now operational in the UK, Canada and Australia. Gains on disposal of investments of US$667 million included profit on the sales of HSBC's 20 per cent stake in British Interactive Broadcasting and investment in Modern Terminals Limited. In addition, disposal gains of US$145 million were realised from sales of investment debt securities to adjust to changes in interest rate conditions. The tier 1 capital and total capital ratio for the Group remained strong at 9.4 per cent and 13.7 per cent, respectively, at 30 June 2001. The Group's total assets at 30 June 2001 were US$692 billion, an increase of US$18 billion, or 3 per cent, since 31 December 2000. Geographical distribution of results Half-year Half-year Half-year Figures in to 30Jun01 to 30Jun00 to 31Dec00 US$m Profit % % % before tax - cash basis Europe 2,377 40.7 2,051 38.1 1,970 40.1 Hong Kong 2,055 35.2 1,904 35.4 1,788 36.3 Rest of 638 10.9 736 13.7 534 10.8 Asia-Pacific North 599 10.3 488 9.1 505 10.3 America Latin 171 2.9 199 3.7 125 2.5 America Group profit before tax - cash basis 5,840 100.0 5,378 100.0 4,922 100.0 Goodwill (405) (172) (353) amortisation Group profit 5,435 5,206 4,569 before tax Tax on profit on ordinary activities (1,229) (1,263) (975) Profit on ordinary activities after tax 4,206 3,943 3,594 Minority (536) (418) (491) interests Profit 3,670 3,525 3,103 attributable Profit 4,075 3,697 3,456 attributable - cash basis Distribution of results by line of business Half-year to Half-year to Half-year to Figures in 30Jun01 30Jun00 31Dec00 US$m Profit % % % before tax - cash basis Commercial 5,398 92.4 4,754 88.4 4,442 90.2 banking Investment 442 7.6 624 11.6 480 9.8 banking Group profit before tax - cash 5,840 100.0 5,378 100.0 4,922 100.0 basis Goodwill (405) (172) (353) amortisation Group profit 5,435 5,206 4,569 before tax Comment by Sir John Bond, Group Chairman When we announced last year's results in February, we said that the outlook for 2001 was challenging. This has proved to be the case. Nevertheless, HSBC has increased its attributable profit, raised its first interim dividend and made good progress in developing its businesses, particularly its wealth management services. We maintained cash operating profits before provisions at just over US$5.6 billion, the same as in the first half of 2000 which was our best half ever. The contribution of CCF's businesses offset lower revenues from the marked decline in the volume and value of shares traded, and from investment banking. The impact of a stronger US dollar reduced the value of revenues and costs arising in other currencies and masked underlying growth. In constant currency terms, cash basis operating profit before provisions grew by 5 per cent. As a percentage of average risk-weighted assets our operating margin improved from 2.9 per cent in the second half of 2000 to 3.0 per cent. With provisions for bad and doubtful debts lower than in the second half of last year, and with the benefit of significant gains on the disposal of investments, cash profit attributable to shareholders grew by 15 per cent in constant currency terms to US$4,075 million. The Board has declared a first interim dividend of US$0.19. This represents an increase of 27 per cent which in part is to reduce the disparity between the amount of the first and second interim dividends. Economic environment The first six months of 2001 were characterised by a lower rate of growth in most of the world's economies, volatile and falling equity markets and declining confidence in the ability of certain emerging economies to maintain stability. As corporate activity slowed, the demand for financial services also declined. A large proportion of lending activity was confined to refinancing as businesses took advantage of falling interest rates to reduce their borrowing costs. Similar trends were seen in the personal sector with refinancing at lower interest rates accounting for a significant part of the mortgage business in the US and virtually all of the market in Hong Kong. Conservative positioning In such an environment short-term revenue growth can only be achieved organically by increasing risk. We did not consider it prudent to follow this route. Indeed, in expectation of a world economic downturn, we positioned our business more conservatively. At 30 June, only 44 per cent of HSBC's total assets were in loans. We strengthened our capital position and maintained strong liquidity. In a period which called for consolidation rather than expansion, HSBC focused on initiatives to improve its operating margins. Investment and progress The increase in operating costs reflects continued investment in building our brand and developing the new distribution channels and fee-based services important to our future. The underlying strength of HSBC allows us to press ahead with our investment plans in weaker markets. The difficult market conditions underscored the advantage of having deposit-led businesses and we were able to improve the management of those resources. * In Hong Kong, the structural changes we announced to take effect after the final phase of interest rate deregulation led to a consolidation within the account base. However, the amount of money deposited with us in savings accounts grew by 8 per cent. Current account balances were stable. * In the UK, over the last year we have increased our personal savings account balances by 30 per cent to US$20.5 billion and added a further US$1.2 billion in personal current accounts. * In the US, since the acquisition of Republic, we have grown private banking deposits by 16 per cent. * In France, we grew interest-free balances by 5 per cent. These examples show our progress in building a stable base of customers to whom we can offer an increased range of products and services, in line with our strategic plan. Apart from equity market-related activity, we grew fees and commission income in all geographical regions. * Wealth management product sales grew strongly as customers sought more conservative investment opportunities, particularly guaranteed income funds and unit trusts. * Our credit card businesses in Hong Kong and the rest of Asia, which we had expanded by some one million cards in 2000, generated significantly higher revenues. * The Mandatory Provident Fund in Hong Kong generated revenues for the first time. * In the US, domestic wealth management and insurance fee revenues grew 13 per cent to US$103 million. We added US$5 million to banking fees and commissions following harmonisation of the charges structure of the former Republic National Bank with HSBC's. * On the wholesale side of our business, the continuing closer alignment between our corporate and investment banking colleagues is yielding benefits in terms of revenue growth; our markets and treasury businesses produced an exceptional performance in the first half of 2001. The integration of Republic into HSBC is essentially complete. The focus now is on development and progress has been encouraging. In April 2001, HSBC Mortgage Corporation (USA) was named a 'Premier lender' by Freddie Mac, one of only six banks in the US to enjoy such recognition. The combination of the former Republic and HSBC treasury and capital markets businesses in New York has given us critical mass and a reputation which has enabled us to attract a number of key executives to build on our success. Revenues and gains in the US from Investment Banking and Markets activities in the first half of 2001 were US$475 million, 53 per cent higher than the first half of 2000. Expansion and integration We have continued to invest in expanding our distribution channels. During the first half of 2001, we opened additional branches in several countries, including eight in France. Through CCF, we acquired Banque Hervet, a Paris-based specialist commercial and consumer bank with 86 branches and over 100,000 customers. We completed acquisitions in Taiwan and Brunei. We acquired the branches of Barclays in Greece, doubling our network in that country. The number of our registered internet and other online users grew from 1.5 million at the end of 2000 to 2.2 million by the end of June 2001. Our Premier customer base grew by 31 per cent to 365,000 during the same period. Merrill Lynch HSBC opened for business in May in the UK and continues to win international recognition for the quality and value of its services. In July 2001, HSBC received confirmation from the Banking Regulatory and Supervisory Agency of Turkey (BDDK) that its offer for Demirbank TAS had been successful. HSBC has now entered into final and exclusive discussions over a Sale and Purchase agreement. The sale completion and transfer of ownership is expected to take place before 30 September 2001. The integration of CCF into HSBC has proceeded smoothly. Reorganisation has allowed a new focus which is enabling us to achieve the revenue synergies we forecast at the time of the acquisition. Additionally, virtually all of CCF's international network, including its operations in Brazil and in international private banking, have been merged with the larger HSBC operations, generating some significant cost savings. The combination of corporate and investment banking skills within HSBC and CCF has been very well received by customers leading to additional revenues. * HSBC-CCF was ranked seventh in the Eurocorporate Bonds league table for the first half of 2001 against a pro forma 16th position in 2000. * New business has been won in syndicated lending, in advisory and in capital markets activities. We have also increased revenues outside France from major French institutions requiring payments and cash management services, credit support and trade finance. Credit quality The slowdown in the world economy and its impact on corporate borrowers has not yet had a significant impact on our levels of provisioning for bad and doubtful debts. Low interest rates, low inflation and resilient consumer spending in the developed markets have offset the effects of lower levels of corporate investment and weaker profitability. Outlook The outlook for the financial services industry is unclear. There is evidence of increasingly fragile economic conditions in certain emerging markets. The performance of the US economy remains pivotal and the Federal Reserve indicated last month that there are as yet few signs of it rebounding. It has yet to be seen what the full effect of the corporate slowdown will be on employment and, in turn, how that will affect the consumer demand which currently sustains some major economies. While the economic environment will remain challenging, we have positioned our business conservatively. The strength of our liquidity, our capital base and our loan loss reserves enable us to respond robustly to any events which may arise. Our international reach, combined with the quality of our staff and the strength of our customer base, gives grounds for confidence that we will continue to create value for our shareholders as opportunities arise. Financial Overview 30Jun00 31Dec00 Half-year to 30Jun01 US$m US$m US$m £m HK$m For the half-year Cash basis ^ 5,378 4,922 Profit before tax 5,840 4,053 45,552 3,697 3,456 Profit attributable 4,075 2,828 31,785 Reported basis 5,206 4,569 Profit before tax 5,435 3,772 42,393 3,525 3,103 Profit attributable 3,670 2,547 28,626 1,280 2,730 Dividends 1,764 1,224 13,759 At period-end 35,319 45,570 Shareholders' funds 46,035 32,777 359,073 47,935 50,964 Capital resources 52,732 37,545 411,310 426,122 487,122 Customer accounts 506,141 360,372 3,947,900 and deposits by banks 580,280 673,814 Total assets 691,840 492,590 5,396,352 339,444 383,687 Risk-weighted assets 386,054 274,870 3,011,221 US$ US$ Per share US$ £ HK$ 0.44 0.38 Cash earnings ^ 0.44 0.31 3.43 0.42 0.34 Basic earnings 0.40 0.28 3.12 0.41 0.34 Diluted earnings 0.39 0.27 3.04 0.15 0.285 Dividends ^ ^ 0.19 0.13 1.48 4.14 4.92 Net asset value 4.93 3.51 38.45 Share information 8,532 m 9,268 m US$0.50 ordinary shares in 9,333 m issue US$98 bn US$136 bn Market capitalisation US$110 bn £7.56 £9.85 Closing market price per share £8.43 Total shareholder return HSBC Benchmark against peer index ^ ^ ^ - over 1 year 116 111 - since 1 January 1999 178 138 ^ Cash based measurements are after excluding the impact of goodwill amortisation. ^ ^ The first interim dividend of US$0.19 per share is translated at the closing rate on 30 June 2001 (see page 14). ^ ^ ^ Total shareholder return (TSR) is as defined on Page 116 of the Annual Report and Accounts 2000. HSBC's governing objective is to beat the TSR of its defined benchmark, with a minimum objective to achieve double TSR over a five-year period beginning on 1 January 1999. 30Jun00 31Dec00 Half-year to 30Jun01 % % Performance ratios % On a cash basis ^ 19.1 14.2 Return on invested capital ^ ^ 16.0 26.1 22.1 Return on net tangible equity ^ ^ ^ 26.3 1.45 1.22 Post-tax return on average tangible 1.38 assets 2.43 2.11 Post-tax return on average 2.42 risk-weighted assets On a reported basis 20.2 13.7 Return on average shareholders' funds 15.9 1.37 1.09 Post-tax return on average assets 1.23 2.33 1.92 Post-tax return on average 2.21 risk-weighted assets Efficiency and revenue mix ratios 53.3 57.1 Cost:income ratio (excluding goodwill 55.8 amortisation) As a percentage of total operating income: 55.6 56.1 - net interest income 56.2 44.4 43.9 - other operating income 43.8 29.6 29.9 - net fees and commissions 29.4 7.3 6.0 - dealing profits 6.8 Capital ratios 9.6 9.0 - tier 1 capital 9.4 14.1 13.3 - total capital 13.7 ^ Cash based measurements are after excluding the impact of goodwill amortisation. ^ ^ Return on invested capital is based on cash-based attributable profit adjusted for depreciation attributable to revaluation surpluses. Average invested capital is measured as shareholders' funds after adding back goodwill amortised and goodwill previously written-off directly to reserves and deducting property revaluation reserves. This measure broadly reflects invested capital. ^ ^ ^ Cash basis attributable profit divided by average shareholders' funds after deduction of average purchased goodwill. Within this document, the Hong Kong Special Administrative Region of the People's Republic of China has been referred to as 'Hong Kong'. Consolidated Profit and Loss Account 30Jun00 31Dec00 Half-year to 30Jun01 US$m US$m US$m £m HK$m 17,431 20,315 Interest receivable 19,219 13,338 149,908 (10,747) (13,276) Interest payable (12,027) (8,347) (93,810) 6,684 7,039 Net interest income 7,192 4,991 56,098 5,334 5,516 Other operating income 5,609 3,893 43,750 12,018 12,555 Operating income 12,801 8,884 99,848 (6,404) (7,173) Operating expenses (7,149) (4,962) (55,762) excluding goodwill (172) (338) Goodwill amortisation (401) (278) (3,128) Operating profit before 5,442 5,044 provisions 5,251 3,644 40,958 Provisions for bad and doubtful (368) (564) debts (441) (306) (3,440) Provisions for contingent (40) (31) liabilities and commitments (42) (29) (328) Amounts written off fixed (14) (22) asset investments (53) (37) (413) 5,020 4,427 Operating profit 4,715 3,272 36,777 (2) (49) Share of operating loss in (48) (33) (375) joint ventures 27 48 Share of operating profit in 92 64 718 associates Gains/(losses) on disposal of: 162 140 - investments 667 463 5,203 (1) 3 - tangible fixed assets 9 6 70 5,206 4,569 Profit on ordinary 5,435 3,772 42,393 activities before tax (1,263) (975) Tax on profit on ordinary (1,229) (853) (9,586) activities 3,943 3,594 Profit on ordinary 4,206 2,919 32,807 activities after tax Minority interests: (290) (268) - equity (314) (218) (2,449) (128) (223) - non-equity (222) (154) (1,732) 3,525 3,103 Profit attributable to 3,670 2,547 28,626 shareholders (1,280) (2,730) Dividends (1,764) (1,224) (13,759) 2,245 373 Retained profit for the 1,906 1,323 14,867 period Consolidated Balance Sheet At At At 30Jun01 30Jun00 30Dec00 US$m US$m US$m £m HK$m ASSETS 3,494 5,006 Cash and 4,464 3,178 34,819 balances at central banks Items in the course of collection 8,126 6,668 from other 7,519 5,354 58,648 banks 21,380 23,131 Treasury 20,896 14,878 162,989 bills and other eligible bills Hong Kong SAR Government 7,910 8,193 certificates 8,274 5,891 64,534 of indebtedness 112,667 126,032 Loans and 121,791 86,715 949,970 advances to banks 261,593 289,837 Loans and 299,471 213,223 2,335,874 advances to customers 104,143 132,818 Debt 149,046 106,121 1,162,559 securities 5,503 8,104 Equity shares 7,656 5,451 59,717 4 283 Interests in 258 184 2,012 joint ventures 3,538 1,085 Interests in 1,072 763 8,362 associates 128 126 Other 135 96 1,053 participating interests 6,372 15,089 Intangible 13,926 9,915 108,623 fixed assets 12,505 14,021 Tangible 13,600 9,683 106,080 fixed assets 26,967 35,562 Other assets 36,404 25,920 283,954 5,950 7,859 Prepayments and 7,328 5,218 57,158 accrued income 580,280 673,814 Total assets 691,840 492,590 5,396,352 LIABILITIES Hong Kong SAR currency 7,910 8,193 notes in 8,274 5,891 64,534 circulation 37,026 60,053 Deposits by 64,313 45,791 501,641 banks 389,096 427,069 Customer 441,828 314,581 3,446,259 accounts Items in the course of transmission to 5,922 4,475 other banks 5,903 4,203 46,043 20,680 27,956 Debt 25,962 18,485 202,504 securities in issue 51,237 63,114 Other 65,284 46,482 509,218 liabilities 5,959 9,270 Accruals and 7,036 5,010 54,881 deferred income Provisions for liabilities and charges 1,362 1,251 - deferred 1,161 827 9,056 taxation 2,991 3,332 - other 3,225 2,296 25,155 provisions Subordinated liabilities 3,337 3,546 - undated loan 3,475 2,474 27,105 capital 12,091 12,676 - dated loan 11,993 8,539 93,545 capital Minority interests 2,148 2,138 - equity 2,281 1,624 17,792 5,202 5,171 - non-equity 5,070 3,610 39,546 4,266 4,634 Called up share 4,667 3,323 36,403 capital 31,053 40,936 Reserves 41,368 29,454 322,670 35,319 45,570 Shareholders' 46,035 32,777 359,073 funds 580,280 673,814 Total 691,840 492,590 5,396,352 liabilities Consolidated Cash Flow Statement Half-year to Half-year to Half-year to Figures in US$m 30Jun01 30Jun00 31Dec00 Net cash inflow/(outflow) 5,261 17,896 (2,673) from operating activities Dividends received from 76 67 21 associated undertakings Returns on investments and servicing of finance: Interest paid on finance leases and similar hire purchase contracts (12) (13) (13) Interest paid on (525) (533) (684) subordinated loan capital Dividends paid to (274) (245) (198) minority interests - equity - non-equity (209) (42) (63) Net cash (outflow) from returns on investments and servicing of finance (1,020) (833) (958) Taxation paid (954) (994) (1,296) Capital expenditure and financial investments: Purchase of investment (79,212) (58,517) (116,659) securities Proceeds from sale and 81,918 62,501 117,543 maturities of investment securities Purchase of tangible (809) (631) (1,032) fixed assets Proceeds from sale of 235 102 281 tangible fixed assets Net cash inflow from capital expenditure and financial 2,132 3,455 133 investments Acquisitions and disposals: Net cash (outflow)/ inflow from acquisition of and increase in stake (72) (31) 3,290 in subsidiary undertakings Net cash inflow from 28 - 333 disposal of subsidiary undertakings Payment to Republic and - (9,733) - Safra Republic shareholders Purchase of interest in associated undertakings and other participating (101) (2,626) - interests Proceeds from disposal of associated undertakings and other 70 140 (2) participating interests Net cash (outflow)/inflow from acquisitions and disposals (75) (12,250) 3,621 Equity dividends paid (1,890) (1,286) (907) Net cash inflow/(outflow) 3,530 6,055 (2,059) before financing Financing: Issue of ordinary share 19 17 147 capital Issue of perpetual - 3,614 12 preferred securities Own shares acquired by - - (556) employee share ownership trust Subordinated loan 251 481 467 capital issued Subordinated loan (583) (245) (463) capital repaid Net cash (outflow)/inflow (313) 3,867 (393) from financing Increase/(decrease) in 3,217 9,922 (2,452) cash MORE TO FOLLOW

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