2008 Interim Report Section 6

RNS Number : 6130A

HSBC Holdings PLC

04 August 2008

 



Interim Management Report: Business Review (continued)

Hong Kong

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

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007     US$m
Personal Financial Services	2,036		1,898		2,314
Commercial Banking	869		760		859
Global Banking and Markets	770		697		881
Private Banking	123		161		144
Other	(725)		(186)		(189)
Profit before tax	3,073		3,330		4,009

Profit before tax

	Half-year to
	30 June 2008 US$m		30 June 2007         US$m		31 December 2007     US$m
Net interest income	2,835		2,568		2,915
Net fee income	1,469		1,439		1,923
Net trading income	314		469		773
Net income from financial instruments designated at fair value	(361)		210		466
Gains less losses from financial investments	(98)		32		62
Dividend income	20		17		14
Net earned insurance premiums	1,650		1,426		1,371
Other operating income	448		413		432
Total operating income	6,277		6,574		7,956
Net insurance claims incurred and movement in liabilities  to policyholders	(1,169)		(1,512)		(1,696)
Net operating income before loan impairment charges and other  credit risk provisions	5,108		5,062		6,260
Loan impairment charges and other credit risk provisions	(81)		(80)		(151)
Net operating income	5,027		4,982		6,109
Total operating expenses	(1,975)		(1,665)		(2,115)
Operating profit	3,052		3,317		3,994
Share of profit in associates and joint ventures	21		13		15
Profit before tax	3,073		3,330		4,009
	%		%		%
Share of HSBC's profit before tax	30.0		23.5		39.9
Cost efficiency ratio	38.7		32.9		33.8
Period-end staff numbers (full-time equivalent)	29,467		27,066		27,655
Balance sheet data6
	US$m		US$m		US$m
Loans and advances to customers (net)	99,741		89,918		89,638
Loans and advances to banks (net)	73,461		68,162		63,737
Trading assets, financial instruments designated at fair value, and  financial investments	78,735		98,998		102,180
Total assets	325,692		300,681		332,691
Deposits by banks	5,063		10,383		6,420
Customer accounts	231,709		205,219		234,488

For footnote, see page 89.

Economic briefing

Hong Kong's economy proved robust during the first months of 2008, with year-on-year GDP growth accelerating to 7.1 per cent in the first quarter from 6.9 per cent in the final quarter of 2007. Domestic demand was the major driver of this growth, with both private consumption and fixed asset investment rising sharply. Exports also rose during the first half of 2008, adding further impetus to the economy. Labour markets remained very tight and the unemployment rate maintained a 10-year low of 3.3 per cent in the second quarter, supporting consumer spending. Investment demand was also strong in the first quarter in the falling interest environment. However, inflation accelerated during the first half of 2008 and while this largely reflected rising food and energy prices, increased rental and wage costs also contributed. The Government's budget measures also supported domestic demand. Interest rates fell in line with US rates.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2008 ('1H08') compared with half-year to 30 June 2007 ('1H07')
Hong Kong	1H07     as     reported     US$m		Disposals     and      dilution      gains1     US$m		Currency     translation2     US$m		1H07         at 1H08    exchange    rates     US$m		Acqui-     sitions1     US$m		Under-    lying     change     US$m		1H08     as     reported     US$m		Re-    ported    change    %		Under-    lying     change     %
Net interest income	2,568		-		7		2,575		-		260		2,835		10		10
Net fee income	1,439		-		4		1,443		-		26		1,469		2		2
Other income3	1,055		-		(1)		1,054		-		(250)		804		(24)		(24)
Net operating income4	5,062		-		10		5,072		-		36		5,108		1		1
Loan impairment charges and other credit risk provisions	(80)		-		(1)		(81)		-		-		(81)		(1)		-
Net operating income	4,982		-		9		4,991		-		36		5,027		1		1
Operating expenses	(1,665)		-		(4)		(1,669)		-		(306)		(1,975)		(19)		(18)
Operating profit	3,317		-		5		3,322		-		(270)		3,052		(8)		(8)
Income from associates	13		-		-		13		-		8		21		62		62
Profit before tax	3,330		-		5		3,335		-		(262)		3,073		(8)		(8)

For footnotes, see page 89.

Review of business performance

HSBC's operations in Hong Kong reported a preߛtax profit of US$3.1 billion, compared with US$3.3 billion in the first half of 2007, a decrease of 8 per cent on both a reported and an underlying basis. The decrease was due to the impairment of certain HSBC strategic investments, which were necessary as a consequence of significant falls in equity market prices. These impairments more than offset profit growth in Personal Financial Services, Commercial Banking and Global Banking and Markets. Underlying net operating income was largely in line with the first half of 2007, while operating expenses grew by 18 per cent, causing a worsening in the cost efficiency ratio to 38.7 per cent.

Pre-tax profits grew in Commercial Banking and Personal Financial Services despite the adverse effects of lower interest rates, driven by strong balance sheet growth through customer acquisition and new product offerings. Strong performance in Global Banking and Markets was driven by increased income from Balance Sheet Management, as falling interest rates led to a lower cost of funds and a steeper yield curve partially offset by a write-down on an exposure to a monoline insurer. In Private Banking, pre-tax profits fell, largely due to a decline in the value of equities on the Hong Kong stock market, compared with the first half of 2007.

The following commentary is on an underlying basis. 

Personal Financial Services reported pre-tax profits of US$2.0 billion, 7 per cent higher than in the first half of 2007. Revenues rose by 7 per cent due to growth in both net interest income and fee income. Higher cost incurred in generating increased business volumes led the cost efficiency ratio to worsen by 1.6 percentage points compared with the first half of 2007 to 29.1 per cent.

Net interest income rose by 6 per cent to US$1.7 billion, driven by deposit volume growth from higher savings balances and by wider margins on most products apart from mortgages, following interest rate cuts. 

Average customer deposits were 10 per cent higher than in the first half of 2007. Continued emphasis on Premier helped to increase balances, the number of Premier customers increasing by 7 per cent in the first half of 2008 to over 311,000. Clients raised deposits in response to weaker investment sentiment following falls in local stock markets while, following the launch of campaigns offering preferential time deposit rates and the enhancement of HSBC's Smart Picks platform, HSBC also attracted new deposits. Deposit spreads widened, benefiting from pricing changes made to increase yields.

The property market in Hong Kong remained resilient, buoyed by the low interest rate environment and strong economic fundamentals, though the rate of property transactions and price growth slowed during the period. HSBC selectively reintroduced fixed-rate mortgages, boosting the volume of new mortgages, which rose by 82 per cent. Mortgage offerings to Premier customers continued to be well received, and the proportion of new HSBC home mortgage loans drawn down by Premier customers reached 43 per cent at 30 June 2008. Although yields on new lending increased, strong competition in the residential mortgage market resulted in narrower spreads on the portfolio.

HSBC's leadership in credit cards continued with the launch of the Green Credit Card. A percentage of cardholder spending on this card is directed by the Group to environmental initiatives. This campaign, and a separate acquisition campaign, contributed to the 630,000 new cards issued during the period to bring the total number of cards in circulation to 5.2 million at 30 June 2008. Strong momentum in cardholder spending continued in the first half of the year with an 11 per cent increase. The cards portfolio continued to perform well in the highly competitive environment and is ranked first for market share by multiple measures. Spreads increased due to lower funding costs following declines in market interest rates. This drove a 21 per cent increase in interest income from cards.

Fee income was 8 per cent higher than in the first half of 2007, due to increased sales of investment products and higher income from current account sales, particularly Premier and PowerVantage, a wealth management account package designed for the mid-market customer. Although the volume of transactions on the Hong Kong stock exchange peaked in October 2007, volumes in the first half of 2008 remained above the levels recorded in the same period in 2007. 

Income from retail securities and investment products grew by 4 per cent, as customers increasingly utilised online channels to complete transactions. HSBC protected its market share in investment products through programmes and incentives, including preferential brokerage and margin interest offers, and campaigns to sustain awareness of the range of HSBC funds, as well as the promotion of a series of unit trusts that have no subscription fee.

Notwithstanding the launch of new funds in 2007 and the introduction of WealthMaster (a portfolio wealth management sales tool also launched in 2007), funds under management were adversely affected by stock market performance, declining by 9 per cent to US$52 billion, compared with 31 December 2007.

Due to an increased number of cards in circulation and a rise in cardholder balances, credit card fee income rose by 16 per cent. 

Though partially offset by lower net claims, income from securities held by the insurance business was adversely affected by the decline in global equity markets. However, net earned insurance premiums of US$1.6 billion were 14 per cent higher than in the first half of 2007, driven by increased sales of endowment products in Hang Seng Bank. Of the non-life policies, 81 per cent are now sold through low-cost channels, including the Refundable Protection Plan launched in March through the telesales distribution channel. 

Other operating income included a gain of US$159 million from the redemption of shares in the Visa Inc. ('Visa') initial public offering ('IPO') and the disposal of MasterCard shares. 

Credit quality in Hong Kong remained benign, and loan impairment charges decreased by 55 per cent, partly as a result of better performance in the cards portfolio. The ratio of non-performing loans to gross advances fell by 7 basis points. Loan impairment charges in the credit card portfolio were lower due to improved delinquency, reflecting bankruptcy trends that were largely in line with the first half of 2007.

Inflation continued to affect wage and premises costs, with operating expenses 13 per cent higher. Additional staff were added to frontline roles in the branch network and a programme of branch and self-service banking upgrades was initiated to maintain customer service levels. Marketing costs were largely in line with the first half of 2007, notwithstanding new campaigns including the Green Credit Card launch and further emphasis of Premier. IT costs rose in support of business growth and the expansion of self-service banking coverage. Notwithstanding these investments, the cost efficiency ratio remained low, in part due to the use of direct channels. For example, 83 per cent of retail securities transactions were completed online, a 2.9 percentage point improvement.

Commercial Banking recorded a pre-tax profit of US$869 million, 14 per cent higher than in the first half of 2007. Increased revenues were driven by asset and liability growth, along with a rise in fee income from trade and investment products. The credit environment showed mild deterioration; loan impairment charges rose by US$27 million compared with US$1 million in the first half 
of 2007. The growth in revenue exceeded the 
growth in costs resulting in a 0.7 percentage point improvement to the cost efficiency ratio. 

Customer numbers grew by 8 per cent as 
HSBC continued to expand its product offerings. 16,000 new Business Vantage accounts were opened during the period, bringing the total to 139,000. HSBC continued successfully to serve the borrowing needs of small businesses through the launch of new products and pre-approved lending offers to existing customers. 

Strategic ties with the Hong Kong Trade Development and Productivity Councils were forged to reinforce the small business segment brand and to aid in the acquisition of new lending customers. In addition, HSBC continued to benefit from trade flows between Hong Kong and mainland China, and took various steps to capture cross-border business, leveraging HSBC's customer base and strong presence in the Greater China region. This included the opening of a new centre for small businesses in Sheung Shui in Hong Kong. 

Although net interest income rose by 6 per cent, strong growth in liability volumes was significantly offset by the effect of narrowing spreads due to lower interest rates. 

Net interest income from deposits rose, due to higher deposit balances. Balance growth was due to a series of savings and time deposit campaigns and strong market liquidity. Spreads were lower, as base rates were reduced and market competition remained intense. 

Total lending balances rose by 23 per cent, buoyed by customer business activity related to mainland China. Asset spreads contracted during the period, due to significantly lower lending yields than in 2007 across all customer segments due to lower interest rates and market competition. To encourage further growth in trade finance and factoring, a series of trade promotion programmes was held and a product was launched by Hang Seng Bank to provide customers with a means of benefiting from renminbi appreciation. This contributed to the rise in receivables finance net interest income of 33 per cent compared with the first half of 2007.

HSBC continued to serve a significant number of clients, particularly manufacturers, who received financing to expand their operations in mainland China. Lending to small businesses rose as a result of strong economic growth in Hong Kong. In addition, trade-related lending increased, spurred partly by system enhancements to better capture cross-border business referrals. Trade and supply chain offerings were successful in attracting customers from different segments.

Credit card balances rose by US$22 million, while higher yields caused spreads to increase. The total number of new credit cards in the period reached over 9,400 and there was a 15 per cent increase in income from merchant acquiring compared with the first half of 2007.

Fee income rose by 11 per cent to US$278 million. Trade and supply chain products had strong growth in income and average transaction size. In addition, volumes of remittance transactions and remittance income both rose by 18 per cent. A decline in the sale of interest and foreign exchange linked products, which was partly offset by an increase in demand for equity-linked products, resulted in a fall in overall sales of structured products. The sale of wealth management products to mid-market customers rose, however, and HSBC launched 63 new funds. 

Trading income increased by 19 per cent compared with the first half of 2007. Exchange rate volatility continued into the first half of 2008 and the level of trading between US and Hong Kong dollars rose. 

Net earned insurance premiums rose by 53 per cent, driven by life products. The composite sales teams introduced in 2007 and the launch in June 2008 of a corporate wealth management branding campaign were used to enhance customer awareness of investment, key person and group medical insurance products. 

Loan impairment charges of US$28 million were recorded, an increase from previously low levels. The credit environment proved more volatile than in the first half of 2007, particularly for small and medium businesses with operations in mainland China. Impaired customer loans were 0.52 per cent of total loans and advances at 30 June 2008, a further 17 basis point improvement on its previously low level.

Operating expenses rose by 13 per cent, due to a combination of higher staff numbers, wage inflation and increased premises costs. Nearly 200 frontline staff were added since 30 June 2007, to provide additional capacity for business growth. IT costs rose as the number of IT-related projects, including the upgrade of internet systems, increased. The number of transactions through direct channels rose to 42 per cent of the total volume. 200,000 customers were registered as internet users at 30 June 2008, compared with 176,000 at the end of 2007. Call centres were also increasingly utilised to generate lower cost sales.

Global Banking and Markets reported a preߛtax profit of US$770 million, an increase of 10 per cent over the first half of 2007. This growth was mainly due to an increase in net interest income in Balance Sheet Management, partly offset by a decline in trading income, driven by a write-down on an exposure to a monoline insurer. 

Total operating income rose by 13 per cent to US$1.3 billion. The fall in short-term US and Hong Kong dollar interest rates supported the strong results of Balance Sheet Management and Rates trading. Income from foreign exchange trading benefited from exchange rate volatility. The securities services business earned increased fees, principally in funds services. Partly offsetting this was a monoline exposure write-down in structured credit of US$0.2 billion.

Net interest income grew by 91 per cent to US$801 million, driven mainly by Balance Sheet Management, which increased by US$389 million due to a steepening of the US dollar and Hong Kong dollar yield curves. Net interest income from Global Banking increased by 13 per cent due to an improvement in lending spreads in a more conservative lending environment.

Net fee income decreased, mainly due to higher customer referral fees paid in respect of increased sales of equity-linked investments to retail banking customers; these sales drove a corresponding rise in trading income. Net fee income also decreased due to a decline in initial public offering ('IPO') success fees. This was partly offset by a rise in securities services revenues, particularly in funds services. Increased activity by fund managers and greater than expected cash balances contributed to this revenue growth. Higher fees in Global Asset Management were driven by a number of successful product launches which contributed to US$4.2 billion net new money.

Trading income declined by 43 per cent to US$217 million, due to a write-down in a monoline exposure. For a description of the background to monoline write-downs, see page 36. Performance in Credit also weakened as spreads widened. These declines were mitigated in part by a 72 per cent growth in foreign exchange trading revenues, which were driven by volatile currency markets, increased investment flows and a greater focus on cross-sales to other customer groups. Equities increased by 39 per cent as a result of higher issuance of equity-linked products, in response to market demand from retail customers. Rates income grew by 28 per cent as market conditions drove clients to hedge interest rate risk exposure.

Operating expenses rose by 13 per cent, mainly due to an increase in performance costs resulting from improved revenues in certain businesses, and a rise in staff numbers to support the growth of product areas such as structured equities, securities services and corporate lending. IT costs increased, mainly due to systems development associated with the growth of the Global Markets.

Private Banking reported a pre-tax profit of US$123 million, a decrease of 24 per cent on the first half of 2007. With the decline in the value of equities on the Hong Kong stock market in the first half of 2008, demand for equity-linked structured products diminished, resulting in lower revenue than the strong results in 2007. The cost efficiency ratio worsened by 10.4 percentage points to 50.8 per cent. 

Net interest income grew by 96 per cent to US$96 million, with a 33 per cent increase in customer deposits. The growth in customer deposits was driven by customers switching from investment securities to cash deposits, due to market turbulence and poor equity market performance. 

Fee income rose by 19 per cent to US$95 million, owing largely to performance fees related to Asian discretionary portfolios and growth of the trust business. Partially offsetting this were lower fees from mutual funds, as funds under management decreased.

Trading income fell by 56 per cent to US$57 million, attributable to the downturn in the Hong Kong stock market. In particular, there was a decline in demand for equity-linked structured products, which were the primary driver of trading income in 2007.

Client assets decreased by 9 per cent to US$66.4 billion, compared with 31 December 2007 because of the lower market values of funds. Despite this, the growth in cross-referrals continued, with inward referrals from other customer groups contributing US$613 million to total client assets compared with US$190 million the first half of 2007.

Operating expenses increased by 17 per cent to US$127 million, primarily due to a rise in staff costs, which were driven by increased salaries in a competitive labour market and higher numbers of staff recruited in response to a greater number of clients.

Within Other, a loss of US$725 million was reported, compared with a loss of US$186 million in the first half of 2007. The decrease was driven by equity market declines, which resulted in total impairments of US$296 million in the value of several of HSBC's strategic investments in the region. 

The fall in net interest income was partly due to lower yields on core liquidity partly as a result of a switch to shorter maturities for these investments. Hong Kong head office and central IT costs rose by 22 per cent, reflecting increased activity in supporting business expansion. These costs were substantially offset by recoveries from Group entities. 

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2008 ('1H08') compared with half-year to 31 December 2007 ('2H07')
Hong Kong	2H07     as     reported     US$m		Disposals     and      dilution      gains1     US$m		Currency     translation2     US$m		2H07         at 1H08    exchange    rates     US$m		Acqui-     sitions1     US$m		Under-    lying     change     US$m		1H08     as     reported     US$m		Re-    ported    change    %		Under-    lying     change     %
Net interest income	2,915		-		(2)		2,913		-		(78)		2,835		(3)		(3)
Net fee income	1,923		-		(1)		1,922		-		(453)		1,469		(24)		(24)
Other income3	1,422		-		(2)		1,420		-		(616)		804		(43)		(43)
Net operating income4	6,260		-		(5)		6,255		-		(1,147)		5,108		(18)		(18)
Loan impairment charges and other credit risk provisions	(151)		-		-		(151)		-		70		(81)		46		46
Net operating income	6,109		-		(5)		6,104		-		(1,077)		5,027		(18)		(18)
Operating expenses	(2,115)		-		3		(2,112)		-		137		(1,975)		7		6
Operating profit	3,994		-		(2)		3,992		-		(940)		3,052		(24)		(24)
Income from associates	15		-		-		15		-		6		21		40		40
Profit before tax	4,009		-		(2)		4,007		-		(934)		3,073		(23)		(23)

For footnotes, see page 89.

Analysis by customer group and global business

Profit/(loss) before tax 

	Half-year to 30 June 2008
Hong Kong	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination9     US$m		Total     US$m
Net interest income/(expense) ..	1,693		770		801		96		(514)		(11)		2,835
Net fee income	856		278		238		95		2		-		1,469
Trading income/(expense) excluding net interest income	90		37		40		57		(121)		-		103
Net interest income on trading activities	6		1		177		-		16		11		211
Net trading income/(expense)7	96		38		217		57		(105)		11		314
Net income/(expense) from financial instruments designated at fair value	(455)		15		8		-		71		-		(361)
Gains less losses from  financial investments	159		34		12		-		(303)		-		(98)
Dividend income	2		1		3		-		14		-		20
Net earned insurance  premiums	1,559		84		6		-		1		-		1,650
Other operating income	110		17		47		2		448		(176)		448
Total operating income/(expense)	4,020		1,237		1,332		250		(386)		(176)		6,277
Net insurance claims8	(1,104)		(61)		(4)		-		-		-		(1,169)
Net operating income/(expense)4	2,916		1,176		1,328		250		(386)		(176)		5,108
Loan impairment (charges)/ recoveries and other credit risk provisions	(34)		(28)		(20)		-		1		-		(81)
Net operating income/(expense)	2,882		1,148		1,308		250		(385)		(176)		5,027
Total operating expenses	(848)		(279)		(538)		(127)		(359)		176		(1,975)
Operating profit/(loss)	2,034		869		770		123		(744)		-		3,052
Share of profit in associates  and joint ventures	2		-		-		-		19		-		21
Profit/(loss) before tax	2,036		869		770		123		(725)		-		3,073
	%		%		%		%		%				%
Share of HSBC's profit  before tax	19.9		8.5		7.5		1.2		(7.1)				30.0
Cost efficiency ratio	29.1		23.7		40.5		50.8		(93.0)				38.7
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	40,608		32,112		20,257		4,912		1,852				99,741
Total assets	74,967		41,800		162,571		15,072		31,282				325,692
Customer accounts	133,454		49,700		31,577		16,602		376				231,709
Loans and advances to  banks (net)12					64,186
Trading assets12,13					28,334
Financial instruments  designated at fair value12					422
Financial investments12					34,455
Deposits by banks12					4,417
Trading liabilities12,13					25,895

For footnotes, see page 89.

Profit/(loss) before tax 

	Half-year to 30 June 2007
Hong Kong	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination9     US$m		Total     US$m
Net interest income/(expense) ..	1,588		726		418		49		(372)		159		2,568
Net fee income	791		250		318		80		-		-		1,439
Trading income/(expense) excluding net interest  income	74		32		302		130		(13)		-		525
Net interest income on trading activities	2		-		80		-		21		(159)		(56)
Net trading income7	76		32		382		130		8		(159)		469
Net income/(expense) from financial instruments designated at fair value	273		(36)		1		-		(28)		-		210
Gains less losses from  financial investments	-		-		1		1		30		-		32
Dividend income	1		-		1		-		15		-		17
Net earned insurance  premiums	1,366		55		5		-		-		-		1,426
Other operating income	97		13		55		10		390		(152)		413
Total operating income	4,192		1,040		1,181		270		43		(152)		6,574
Net insurance claims8	(1,473)		(34)		(5)		-		-		-		(1,512)
Net operating income4	2,719		1,006		1,176		270		43		(152)		5,062
Loan impairment charges and other credit risk provisions	(74)		(1)		(5)		-		-		-		(80)
Net operating income	2,645		1,005		1,171		270		43		(152)		4,982
Total operating expenses	(750)		(246)		(474)		(109)		(238)		152		(1,665)
Operating profit/(loss)	1,895		759		697		161		(195)		-		3,317
Share of profit in associates  and joint ventures	3		1		-		-		9		-		13
Profit/(loss) before tax	1,898		760		697		161		(186)		-		3,330
	%		%		%		%		%				%
Share of HSBC's profit  before tax	13.4		5.4		4.9		1.1		(1.3)				23.5
Cost efficiency ratio	27.6		24.5		40.3		40.4		553.5				32.9
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	39,375		25,105		19,231		4,309		1,898				89,918
Total assets	62,199		31,043		163,766		12,553		31,120				300,681
Customer accounts	120,638		44,719		26,978		12,340		544				205,219
Loans and advances to  banks (net)12					61,850
Trading assets12,13					29,224
Financial instruments  designated at fair value12					691
Financial investments12					50,099
Deposits by banks12					9,991
Trading liabilities12,13					24,045

For footnotes, see page 89.

Analysis by customer group and global business (continued)

Profit/(loss) before tax 

	Half-year to 31 December 2007
Hong Kong	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination9     US$m		Total     US$m
Net interest income/(expense) ..	1,754		814		568		21		(395)		153		2,915
Net fee income	1,182		276		364		99		2		-		1,923
Trading income excluding  net interest income	114		31		251		150		199		-		745
Net interest income on  trading activities	3		-		161		-		17		(153)		28
Net trading income7	117		31		412		150		216		(153)		773
Net income/(expense) from financial instruments designated at fair value	547		23		6		-		(110)		-		466
Gains less losses from  financial investments	-		-		37		-		25		-		62
Dividend income	1		1		5		-		7		-		14
Net earned insurance  premiums	1,288		75		8		-		-		-		1,371
Other operating income/ (expense)	56		15		59		(4)		491		(185)		432
Total operating income	4,945		1,235		1,459		266		236		(185)		7,956
Net insurance claims8	(1,643)		(48)		(5)		-		-		-		(1,696)
Net operating income4	3,302		1,187		1,454		266		236		(185)		6,260
Loan impairment charges and other credit risk provisions	(101)		(27)		(23)		-		-		-		(151)
Net operating income	3,201		1,160		1,431		266		236		(185)		6,109
Total operating expenses	(889)		(301)		(551)		(122)		(437)		185		(2,115)
Operating profit/(loss)	2,312		859		880		144		(201)		-		3,994
Share of profit in associates  and joint ventures	2		-		1		-		12		-		15
Profit/(loss) before tax	2,314		859		881		144		(189)		-		4,009
	%		%		%		%		%				%
Share of HSBC's profit  before tax	23.0		8.5		8.8		1.4		(1.9)				39.9
Cost efficiency ratio	26.9		25.4		37.9		45.9		185.2				33.8
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	38,197		25,890		19,171		4,329		2,051				89,638
Total assets	72,386		35,366		185,933		14,138		24,868				332,691
Customer accounts	129,159		51,562		37,364		15,649		754				234,488
Loans and advances to  banks (net)12					53,725
Trading assets12,13					38,369
Financial instruments  designated at fair value12					546
Financial investments12					46,765
Deposits by banks12					6,251
Trading liabilities12,13					26,804

For footnotes, see page 89.

Rest of Asia-Pacific (including the Middle East)

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 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
Middle East	209		308		426		2		45		990
Egypt	11		37		45		-		22		115
United Arab Emirates	106		184		229		2		1		522
Other Middle East	44		69		65		-		-		178
Middle East (excluding Saudi Arabia)	161		290		339		2		23		815
Saudi Arabia	48		18		87		-		22		175
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
	535		961		1,972		54		102		3,624
Half-year to 30 June 2007
Australia	19		16		16		-		-		51
India	(13)		49		211		-		52		299
Indonesia	2		15		46		-		(5)		58
Japan	(8)		(1)		26		1		-		18
Mainland China	168		171		126		-		1,084		1,549
Associates	171		147		67		-		1,078		1,463
Other mainland China	(3)		24		59		-		6		86
Malaysia	40		28		70		1		6		145
Middle East	125		220		216		1		44		606
Egypt	7		22		24		-		19		72
United Arab Emirates	62		139		93		1		-		295
Other Middle East	37		41		53		-		(3)		128
Middle East (excluding Saudi Arabia)	106		202		170		1		16		495
Saudi Arabia	19		18		46		-		28		111
Singapore	50		60		105		51		1		267
South Korea	(15)		(8)		66		-		15		58
Taiwan	(35)		13		64		-		1		43
Other	18		34		152		2		44		250
	351		597		1,098		56		1,242		3,344

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

	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 31 December 2007
Australia	22		21		26		-		4		73
India	(57)		39		218		(1)		31		230
Indonesia	(9)		14		40		-		1		46
Japan	(26)		(2)		49		(1)		5		25
Mainland China	326		226		243		-		17		812
Associates	345		204		153		-		15		717
Other mainland China	(19)		22		90		-		2		95
Malaysia	41		62		76		(1)		7		185
Middle East	120		262		279		2		38		701
Egypt	3		24		41		-		13		81
United Arab Emirates	46		123		149		2		2		322
Other Middle East	46		60		63		-		3		172
Middle East (excluding Saudi Arabia)	95		207		253		2		18		575
Saudi Arabia	25		55		26		-		20		126
Singapore	51		52		135		39		6		283
South Korea	(29)		(12)		93		-		13		65
Taiwan	(17)		14		80		-		3		80
Other	(13)		77		127		(2)		(24)		165
	409		753		1,366		36		101		2,665

    Loans and advances to customers (net) by country

	At     30 June      2008     US$m		At      30 June    2007     US$m		At     31 December     2007     US$m
Australia	12,664		9,845		11,339
India	7,585		6,216		7,220
Indonesia	1,924		1,296		1,642
Japan	4,710		3,580		4,258
Mainland China	12,653		6,787		11,647
Malaysia	9,295		8,003		8,856
Middle East (excluding Saudi Arabia)	25,004		17,047		21,607
Egypt	2,265		1,196		1,853
United Arab Emirates	16,416		10,928		14,103
Other Middle East	6,323		4,923		5,651
Singapore	13,724		10,768		11,505
South Korea	6,581		6,458		7,124
Taiwan	5,330		3,834		3,658
Other	14,287		14,340		12,996
	113,757		88,174		101,852

Customer accounts by country

	At     30 June      2008     US$m		At      30 June    2007     US$m		At     31 December     2007     US$m
Australia	13,864		10,345		11,418
India	11,365		8,827		12,021
Indonesia	2,557		2,082		2,574
Japan	4,728		3,944		4,657
Mainland China	18,205		9,229		14,537
Malaysia	12,836		10,629		11,701
Middle East (excluding Saudi Arabia)	36,256		26,277		30,937
Egypt	5,359		3,358		4,056
United Arab Emirates	20,658		15,362		18,455
Other Middle East	10,239		7,557		8,426
Singapore	32,784		25,885		28,962
South Korea	4,509		4,705		5,760
Taiwan	12,227		9,208		9,426
Other	17,464		16,328		18,240
	166,795		127,459		150,233

Economic briefing

Mainland China maintained a robust level of growth during the first half of 2008, although some mild deceleration was evident as the year-on-year rate of GDP growth slowed from 11.3 per cent in the final quarter of 2007 to 10.1 per cent in the second quarter of 2008. This reflected both a slowing of overseas demand for Chinese exports and the effect of unusual weather patterns and natural disaster. Consumer spending continued to advance at a rapid pace with retail spending increasing by 23 per cent over the year to June 2008, reflecting strong income growth and, in part, rising inflationary pressures. The annual rate of consumer price inflation rose to 7.1 per cent in June 2008, mainly due to higher food prices. Intense price pressures led to a further tightening of economic policy during the first half of 2008. The renminbi continued its gradual appreciation against the US dollar, rising at a slightly higher rate than that of recent years.

Japan's economy, the largest in the region, proved unexpectedly strong during the first quarter of 2008 with GDP rising by 1.3 per cent year-on-year, driven in large part by a rebound in household expenditure and strong external demand. However, most indicators of growth deteriorated during the second quarter of the year. The annual rate of industrial production growth slowed to just 0.2  per cent in June 2008, household expenditure remained subdued and business confidence deteriorated during the second quarter. Inflationary pressures increased during 2008 and the headline rate of consumer price inflation hit a ten-year high of 2.0 per cent in June 2008.

The economies of the Middle East continued to perform strongly during the first half of 2008, although inflationary pressures grew as the year progressed. Sharply higher oil prices once again proved the catalyst for expansion, facilitating continued growth in public and private investment. Consumption rose as employment levels increased and low interest rates supported an ongoing expansion in credit. High oil revenues continued to boost fiscal and current account surpluses throughout the Middle East, supporting in turn increases in the holdings of foreign assets.

Elsewhere in Asia, most economies continued to perform reasonably strongly in the first half of 2008, although growing concerns arising from the inflationary outlook prompted a number of central banks across the region to tighten their policies. The Indian economy proved resilient, helped by the strength of activity within the service sector and a sharp rise in government investment expenditure. A sustained rise in inflation during the first half of 2008 prompted the Reserve Bank of India to tighten policy. Economic activity in Singapore was uneven during the first half of the year, with volatility in certain specific industrial sectors. Overall, high levels of loan demand boosted strong growth during the first quarter before activity slowed. The annual rate of inflation continued to advance, hitting a 26ߛyear high of 7.5 per cent in June 2008. Inflation was also the predominant concern in Vietnam as the annual rate of consumer price inflation doubled to 27 per cent during the first half of 2008, prompting the State Bank of Vietnam to sanction substantial interest rate increases. The external trade position 

Profit before tax

	Half-year to
Rest of Asia-Pacific (including the Middle East)	30 June 2008 US$m		30 June 2007         US$m		31 December 2007     US$m
Net interest income	2,633		1,901		2,242
Net fee income	1,338		1,010		1,236
Net trading income	1,329		797		846
Net income/(expense) from financial instruments designated at fair value	(88)		78		33
Gains less losses from financial investments	33		26		12
Gains arising from dilution of interests in associates	-		1,076		5
Dividend income	2		4		4
Net earned insurance premiums	114		109		117
Other operating income	484		360		438
Total operating income	5,845		5,361		4,933
Net insurance claims incurred and movement in liabilities  to policyholders	(4)		(141)		(112)
Net operating income before loan impairment charges and other  credit risk provisions	5,841		5,220		4,821
Loan impairment charges and other credit risk provisions	(369)		(308)		(308)
Net operating income	5,472		4,912		4,513
Total operating expenses	(2,784)		(2,075)		(2,689)
Operating profit	2,688		2,837		1,824
Share of profit in associates and joint ventures	936		507		841
Profit before tax	3,624		3,344		2,665
	%		%		%
Share of HSBC's profit before tax	35.4		23.6		26.5
Cost efficiency ratio	47.7		39.8		55.8
Period-end staff numbers (full-time equivalent)	93,747		81,031		88,573
Balance sheet data6
	US$m		US$m		US$m
Loans and advances to customers (net)	113,757		88,174		101,852
Loans and advances to banks (net)	51,739		34,678		39,861
Trading assets, financial instruments designated at fair value, and  financial investments	68,132		52,189		64,381
Total assets	259,041		201,123		228,112
Deposits by banks	20,539		13,709		17,560
Customer accounts	166,795		127,459		150,233

For footnotes, see page 89.

deteriorated considerably, raising concerns over the sustainability of the currency. First quarter growth in year-on-year terms remained at about 7 per cent in Malaysia, driven by rising food and energy exports. In Indonesia, further strong growth in the first quarter of the year was driven by robust business investment expenditure. However, rising inflationary pressures eventually led Bank Indonesia into a modest tightening of policy. South Korea's economy suffered from its position as one of the most energy intensive economies of the region, with both the outlook for growth and inflation deteriorating during the first half of 2008. Rising food prices proved particularly problematic for the Philippines' economy, with inflation moving well above the central bank's targeted range. Export growth in Taiwan was generally resilient in the face of deteriorating conditions overseas, while robust economic performance in Thailand and Pakistan in the first half of 2008 was overshadowed to varying degrees by lingering domestic uncertainty.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2008 ('1H08') compared with half-year to 30 June 2007 ('1H07')
Rest of Asia-Pacific (including the Middle East)	1H07     as     reported     US$m		Disposals     and      dilution      gains1     US$m		Currency     translation2     US$m		1H07         at 1H08    exchange    rates     US$m		Acqui-     sitions1     US$m		Under-    lying     change     US$m		1H08     as     reported     US$m		Re-    ported    change    %		Under-    lying     change     %
Net interest income	1,901		-		95		1,996		8		629		2,633		39		32
Net fee income	1,010		-		50		1,060		1		277		1,338		32		26
Other income3	2,309		(1,076)		108		1,341		4		525		1,870		(19)		39
Net operating income4	5,220		(1,076)		253		4,397		13		1,431		5,841		12		33
Loan impairment charges and other credit risk provisions	(308)		-		(12)		(320)		-		(49)		(369)		(20)		(15)
Net operating income	4,912		(1,076)		241		4,077		13		1,382		5,472		11		34
Operating expenses	(2,075)		-		(116)		(2,191)		(11)		(582)		(2,784)		(34)		(27)
Operating profit	2,837		(1,076)		125		1,886		2		800		2,688		(5)		42
Income from associates	507		-		32		539		-		397		936		85		74
Profit before tax	3,344		(1,076)		157		2,425		2		1,197		3,624		8		49

For footnotes, see page 89.

Review of business performance

Operations in the Rest of Asia-Pacific region reported a pre-tax profit of US$3.6 billion compared with US$3.3 billion in the first half of 2007, an increase of 8 per cent. In the first half of 2007, HSBC recognised non-recurring gains of US$1.1 billion following share offerings made by HSBC's associates Ping An Insurance, Bank of Communications and Industrial Bank. Excluding these dilution gains, profit before tax increased by 49 per cent on an underlying basis.

In the first half of 2008, HSBC acquired the assets, liabilities and operations of The Chinese Bank in Taiwan, increasing the branch network there from eight to 44 and providing a presence in all major cities in Asia's fourth biggest banking market. 

Global Banking and Markets performed well, notably in the Middle East, mainland China and South Korea, driven by strong revenue growth from Balance Sheet Management, foreign exchange trading and securities services. Increased profit before tax in Commercial Banking was largely volume driven following customer acquisition, particularly in the mid-market and small business segments. In Personal Financial Services, higher contributions from HSBC associates and increased revenues from personal lending were largely offset by larger loan impairment charges, particularly in India following portfolio growth and increased delinquencies, and investment in business expansion. Pre-tax profits were broadly in line with the first half of 2007 in Private Banking as strong revenue only partially funded costs associated with expansion in Japan and mainland China.

The following commentary is on an underlying basis and excludes dilution gains.

Pre-tax profits in Personal Financial Services were US$535 million, 42 per cent higher than in the first half of 2007. Operating income and the contribution from HSBC's associates increased by 23 per cent and 79 per cent, respectively. Revenue growth across the region was driven by increased fee income and net interest income, with the latter predominantly attributable to the growth of personal lending. Loan impairment charges increased, partly as a result of the deteriorating credit environment and the effects of higher food and energy prices on consumers in India. Notwithstanding significant investment in the key markets of mainland China, the Middle East, India and Japan, the cost efficiency ratio remained in line with the first half of 2007.

Key initiatives in the region included an increased emphasis on offerings to Premier customers and growth of the wealth management business. The number of Premier customers increased by 23 per cent compared with 31 December 2007. Growth was particularly strong in the United Arab Emirates ('UAE'), India, Singapore, Australia and mainland China, assisted by the expansion of renminbi-denominated services following local incorporation in 2007. In the Middle East, several HSBC One World products for non-residents were introduced to increase cross-border business.

Branches were added during the last 12 months in mainland China, Indonesia, Pakistan, Japan, Sri Lanka and Jordan. Including 32 Hang Seng Bank outlets in Mainland China, the total number of branches in the region was 462, a 24 per cent rise from 30 June 2007. In mainland China, HSBC added 8 new outlets in the period, maintaining its leading position among foreign banks for own-branded branches. Operating expenses rose to support expansion, including more than 1,100 additional staff. HSBC now has over 10,000 frontline staff across the region.

Pre-tax profits rose by 52 per cent in mainland China, with a significant rise in revenues from the locally incorporated bank along with profits from associates which nearly doubled. Net interest income grew strongly, benefiting from substantial volume growth of mortgages and renminbi deposits following branch expansion into the important economic zones of the Pearl River Delta, the Yangtze River Delta and the Bohai Rim. Business expansion was curtailed slightly due to regulatory restrictions on lending growth for banks operating in mainland China, which took effect from the second half of 2007. Fees related to products offered through the Qualified Domestic Institutional Investors ('QDII') scheme contributed to a doubling of net fee income.

The Middle East reported profit before tax of US$209 million, an increase of 65 per cent. Revenues rose by 52 per cent, driven by higher net interest income from balance sheet growth and wider spreads in a falling interest rate environment, particularly for personal loans, cards and mortgages. Mortgage balances more than doubled in the UAE, with growth driven by customer demand. Fee income also rose as a result of strong sales of investment and insurance products and higher fees from cards, as both cards in force and cardholder spending increased. New structured products and mutual funds were introduced to match client appetite in the volatile stock market conditions. Trading income rose due to stronger than anticipated foreign exchange income, in part due to higher volatility fuelled by expectations that currencies in the region may be unpegged from the US dollar or revalued. 

In Singapore, pre-tax profits grew by 17 per cent, largely attributable to higher net interest income from an increase in deposit balances. Fees rose strongly due to higher sales of investment products and the growth of the credit card business. 

In India, a pre-tax loss of US$53 million was recorded, compared with a loss of US$13 million in the first half of 2007. Investment in the business continued and drove higher asset balances and income growth. Loan impairment charges increased by 181 per cent, driven by volume growth in an adverse credit and collections environment as a result of high interest rates and inflation which inhibited customer repayment capabilities. Operating expenses increased due to higher business volumes and a rise in staff costs combined with a rise in fees paid to collection agencies.

A pre-tax loss in Taiwan was significantly lower than in the first half of 2007, due to reduced loan impairment charges. 

Profit before tax in Malaysia rose by 42 per cent following strong revenue growth as a result of higher deposit balances and a rise in card and mortgage balances. In addition, there were gains from the redemption of Visa shares and sale of MasterCard shares. Growth was moderated by reduced consumer interest in investment products and competition in the mortgage sector which resulted in lower spreads.

Net interest income increased by 20 per cent to US$1.2 billion, driven mainly by wider spreads on credit cards and personal lending. Income was substantially higher in the Middle East, India, Indonesia and mainland China. Higher pricing resulted in a widening of asset spreads.

A 14 per cent increase in average deposit balances was largely driven by mainland China and Singapore. The success of Premier was also instrumental in deposit growth in mainland China and India. HSBC Direct balances rose by 58 per cent. Spreads contracted during the period due to falling interest rates.

The mortgage portfolio grew by 9 per cent, excluding New Zealand, where there had been the sale of a mortgage portfolio in the second half of 2007. Growth was recorded in the UAE, Singapore, Australia and mainland China. Mortgage spreads improved, due to lower base rates.

Average card balances increased by 29 per cent, and interest income related to credit cards rose significantly in the Middle East, India and Australia. In the Middle East, credit card balances rose following the success of efforts to increase cardholder spending and the number of cards 
in circulation. The latter rose by 12 per cent in the first half of 2008 to over 1.3 million. Total cards in 
issue in the Rest of Asia-Pacific region exceeded 9.3 million. Spreads on credit card lending widened, driven by the Middle East and India, where base rate cuts led to lower funding costs while asset pricing was maintained.

In Indonesia and India, lending growth, including personal instalment loans and cards, continued following the expansion of the consumer finance business begun in 2007 which continued in Indonesia with the addition of 24 branches. Spreads in each of these countries improved due to higher lending rates combined with stable base rates.

Net fee income increased by 23 per cent to US$434 million, with growth in cards and the sale of investment products. Credit card fee income increased by 33 per cent, driven by higher balances, cardholder spending and new cards in the Middle East and India. Funds under management continued to grow, reaching US$13.1 billion. Sales of investment products increased despite stock market volatility, as customers increasingly chose structured products over market-led unit trusts. HSBC increased fees from the sale of insurance products by 41 per cent as a result of new product launches, including credit enhancement insurance. 

Declines in global equity markets resulted in lower net claims, however this was offset by a corresponding net loss on investments held by the insurance business.

Loan impairment charges rose by 43 per cent, driven by higher charges in India, the Middle East and, to a lesser extent, Australia. The main contributing factors in India were volume growth, seasoning of the personal lending portfolio, higher delinquency on credit cards and personal loans and a challenging collections environment. In the Middle East, volume growth of the credit card portfolio led to a rise in delinquency, notably in the UAE. Loan impairment charges increased by 83 per cent in Australia due to increased delinquencies on cards.

In Taiwan, loan impairment charges decreased by 67 per cent, due to an improvement in asset quality and increased collection efforts in the high risk segments. 

HSBC continued to invest substantially in the region, particularly in India and mainland China. The number of staff increased in key markets including mainland China and the Middle East. Further branches in mainland China led to the hiring of over 800 additional staff. Deteriorating credit performance and increased loan delinquencies in the consumer finance business drove a rise in fees paid to collection agencies in India and Indonesia. In Japan, operating expenses increased, primarily due to the launch of Premier and branch expansion. Cost increases were controlled in part by customer use of low-cost channels. In the UAE, the number of 
e-Saver accounts increased by 204 per cent, along with a 96 per cent rise in internet transactions.

Income from associates rose substantially and was 79 per cent higher than in the first half of 2007. HSBC's associate, Ping An Insurance, continued to be successful in increasing life insurance premiums, which, combined with an increase to long-term 
yield assumptions led to increased embedded 
value. In addition, contributions from Bank of Communications and The Saudi British Bank rose by 95 per cent and 146 per cent, respectively. The increase in the latter was primarily attributable to strong asset growth and limited loan impairment charges. The Saudi British Bank also launched three Premier centres. 

Commercial Banking reported a pre-tax profit of US$961 million, 52 per cent higher than in the first half of 2007. Growth was largely attributable to mid-market and small business customer acquisition, and increased associates' income from the Bank of Communications and Industrial Bank in mainland China. Revenue growth across the region was largely volume driven and the credit environment remained relatively benign. Asian intra-regional trade and investment flows continued to strengthen, mitigating the effects of the global economic slowdown. Notwithstanding the expansion of the network to 'second tier' cities in India, Taiwan and mainland China and an increase in staff numbers, the cost efficiency ratio remained broadly in line with the first half of 2007.

In the Middle East, profit before tax rose by 41 per cent, as buoyant economic conditions across the region contributed to notable customer and revenue growth. Additional staff were recruited to increase sales of trade services and actively manage relationships with customers of trade and supply-chain products. 

In mainland China, operating profit grew by 46 per cent as HSBC continued to strengthen the local distribution network, adding a further branch in the first half of 2008 to supplement volume growth in deposits. The Greater China regional model continued to show strong results, demonstrated by a 163 per cent growth in the number of referrals from mainland China through Global Links, the cross-border referral system. Though hindered by restrictions on local currency lending imposed by the People's Bank of China, HSBC continued to grow revenues by repricing assets and fee-based business.

Profit before tax in Singapore declined by 32 per cent, largely due to reduced net interest income as lower interest rates resulted in compressed margins on current accounts. This was partially offset by an increased focus on income generation from fund and ancillary services, augmented by net recoveries of loan impairment charges.

In India, profit before tax rose by 47 per cent to US$75 million. Strong revenue growth in the country was driven by increased customer acquisition, particularly in 'second tier' cities. This growth was supplemented by stronger bilateral business flows with Mauritius and higher deposit balances. 

In Malaysia, profit before tax increased by 68 per cent, as loan impairment charges improved in comparison with the first half of 2007. Revenues increased by 12 per cent, due to growth in deposit and asset balances which more than offset the effect of narrower spreads for foreign currency deposits.

Profit before tax in Australia increased by 86 per cent. Revenue growth was broad-based with interest income growth of 36 per cent attributable to increased deposit balances. 

HSBC further enhanced its cross-border business capabilities with the opening of a new International Banking Centre in Japan, taking coverage to 27 countries and territories in the region. Successful referral volumes originating within the Asia-Pacific region from Global Links, the cross-border referral system, more than doubled compared with the first half of 2007. 

Net interest income increased by 25 per cent, due largely to growth in deposit volumes from enhanced focus on generating both local and foreign currency balances. Lower interest rates contributed to the contraction of liability and asset spreads, and to lower earnings from free funds. 

Lending volumes rose by 22 per cent, particularly in India and the Middle East. In India, growth was spurred by an increase in customer numbers across all segments and product groups, along with higher spreads on customer advances. Receivables finance also reported increased income in India. Favourable economic conditions in the Middle East contributed to increased lending volumes, and spreads increased on corporate lending products, as pricing resulted in higher yields. Branch expansion in mainland China succeeded in increasing customer numbers by 29 per cent and driving lending growth.

Average deposit balances increased by 16 per cent, notwithstanding lower margins. In India, deposit volumes benefited from increased customer numbers. Customer numbers also rose in the Middle East and, with HSBC's focus on payments and cash management, contributed to a 37 per cent rise in deposit balances. Lower interest rates caused spreads on deposits to reduce in India, the Middle East and mainland China.

Net fee income rose by 37 per cent to US$290 million, predominantly driven by growth in fees from trade services products, notably in the Middle East and mainland China.

Trade-related lending fees rose by 36 per cent, largely in the Middle East as international and trading activity in the region remained strong, but also in India, Malaysia, South Korea and Australia. In the Middle East, volume growth was enhanced by inflation-induced increases in commodity prices, notably on materials vital to the booming construction industry. HSBC's distribution capabilities in the region also contributed to growth. HSBC's positioning in Dubai, a key trading market and international hub, resulted in over 65 per cent growth in import and export trading volumes in the UAE, along with similar growth in fees from trade and supply chain activities. In mainland China, growth in forfaiting led to a 32 per cent increase in trade-related fees. Customer acquisition in India drove significant volume increases in fees from trade services and payments and cash management. 

Trading income grew by 70 per cent, mainly due to growth in volumes of transactions in the Middle East and in India, attributable to increased volatility in the foreign exchange markets. Within the Middle East, higher trading income also reflected growth in the total value of transactions due to the effects of inflation and increased remittances. 

Loan impairment recoveries of US$16 million were largely due to the non-recurrence of downgrades to certain customers in Thailand and Malaysia. In addition benign credit conditions continued in the Middle East with net releases more than doubling. 

Total operating expenses rose by 33 per cent, driven by rising staff costs across the majority of the region. Investment was undertaken to expand HSBC's presence, notably in mainland China. Customer facing staff numbers increased across the region by 30 per cent to support business expansion. In the Middle East, increased staff numbers, wage inflation driven by competitive labour market conditions and higher performance related pay as a consequence of improved profits caused a 30 per cent rise in staff costs. Cost growth in India was principally due to geographical expansion into second tier cities and growth in the number of relationship managers.

The percentage of total transactions completed using lower-cost channels increased compared with the first half of 2007. Over 3.5 million transactions were completed using these channels and the number of customers registered for business internet banking rose by 43 per cent. 

HSBC's associate, Bank of Communications, increased its contribution by 67 per cent, driving a 63 per cent increase in income from associates. Bank of Communications continued to expand its operations in mainland China. The contribution from Industrial Bank also increased compared with the first half of 2007 due to growth and rising margins.

Global Banking and Markets profit before tax rose by 71 per cent to US$2.0 billion, with growth in all major countries, with notable improvements in the Middle East, South Korea, mainland China and India.

In the Middle East, pre-tax profit doubled due to a combination of strong growth in foreign exchange trading and a robust contribution from Global Banking and Balance Sheet Management. Securities services profit also grew, reflecting the importance of the region for the securities services strategy. Global Banking increased lending, taking advantage of strong economic growth in the region and wider spreads. Balance Sheet Management profit was higher due to a lower cost of funds as local central banks reduced interest rates in line with the US.

In India, higher pre-tax profit was attributable to foreign exchange trading and securities services. Foreign exchange profits were driven by high customer demand and market volatility. The increased securities services profit was due to growth in deposit account balances and in the derivatives clearing business. 

Pre-tax profit in mainland China rose substantially, driven by Balance Sheet Management, which earned higher revenues due to an increase in surplus funds as the People's Bank of China restricted lending, combined with a steepening yield curve. Rates and foreign exchange trading also performed strongly, as did income from associates as Ping An Insurance and Bank of Communications expanded. Ping An Insurance continued to grow its asset management business, while Bank of Communications earned increased fees for asset custody and advisory work.

Balance Sheet Management was the main reason for increased profits in Singapore, benefiting from the reduction in short-term US and Singapore dollar interest rates.

In South Korea, pre-tax profits grew as Rates performed strongly, driven by increased client demand for hedging products linked to financing activity.

In Malaysia, Rates and foreign exchange were the main contributors to profit growth. Significant client activity was driven by market volatility as inflationary expectations triggered a sharp upward move in interest rates, leading clients to demand products which protected them from interest and exchange rate risks.

The region's total operating income grew by 55 per cent to US$2.4 billion. Foreign exchange trading delivered strong revenues throughout the region. During the first half of 2008 there was significant volatility in the foreign exchange markets contributing to increased trading and strong customer demand for foreign exchange products, while HSBC's broad distribution network helped to attract clients. Balance Sheet Management benefited in most countries from the steepening of the yield curve as central banks responded to the credit market turmoil.

Net interest income increased by 58 per cent due to the strong performance of Balance Sheet Management, described above, and also growth in the Middle East as average customer lending rose by more than 40 per cent due to overall investment in infrastructure and business expansion in the region, and widening spreads.

Net fee income grew by 29 per cent, driven by the ongoing strength of the securities services and payments and cash management businesses. Transaction volumes and growing client balances drove the increase in payments and cash management. In securities services, higher client trading volumes increased the level of transactions which led to higher fees in the custody and clearing business. Global Asset Management also reported an increase in fees, as funds under management benefited from inflows of new funds and new product launches, despite declining local stock markets.

Trading income rose significantly, driven by foreign exchange products, as noted above. Foreign exchange trading income increased by 68 per cent, continuing its strong upward momentum. Rates trading in South Korea also contributed, in response to increased client activity in local rates markets and hedging relating to financing activity.

Gains less losses from financial investments were lower due to the non-recurrence of significant disposals in 2007 in the Philippines.

The corporate credit environment remained benign, with a very low loan impairment charge. Nonetheless, this compared unfavourably with the first half of 2007 due to releases in Singapore and South Korea.

Operating expenses rose as the business invested to support growth across the region, driving an increase in staff numbers, with rises in most countries. Salary levels also rose, in line with inflation. Higher profits across the region also led to increased performance-related costs.

Private Banking reported a pre-tax profit of US$54 million, a decrease of 4 per cent when compared with the first half of 2007. Strong revenue growth continued in Singapore with a large rise in deposits. Higher profits were also recorded in India, notwithstanding further investment. Overall, the cost efficiency ratio worsened by 8.4 percentage points to 57.5 per cent, as a result of investment in domestic operations in a number of countries. 

A 33 per cent rise in customer deposits in Singapore to US$9.4 billion was the main reason for a 68 per cent increase in net interest income. This trend was due to customers switching from investment securities to cash deposits in response to the turbulence in the equity markets. 

Other revenues decreased by 2 per cent to US$80 million, as the demand for equity-linked structured products declined as the Hong Kong equity market underperformed in the first half of the year. However, this was partly offset by a US$6 million growth in trading income in Japan from clients active in foreign exchange trading.

Client assets increased by 3 per cent to US$20.9 billion, with net new money of US$1.6 billion partly offset by a lower market valuation compared with 31 December 2007. The growth in cross-referrals continued, with inward referrals from other customer groups contributing US$168 million to total client assets, compared with US$66 million in the first half of 2007.

Operating expenses rose by 35 per cent to US$73 million, driven by market related pressures in Singapore. Business expansion, particularly in Japan and the new Private Banking offices in mainland China, also contributed to the rise in staff, property and IT costs.

Profit before tax reported within the Other segment was US$102 million. The costs and related recharges of HSBC's 15 GSCs, located primarily in mainland China and India, are reported in Other. Costs at GSCs increased by 9 per cent to US$286 million, due to increased volumes of activities undertaken and the opening of 4 new centres in the second half of 2007. This growth was supported by a 14 per cent rise in staff numbers. Costs are recovered from Group entities and recorded as other operating income.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2008 ('1H08') compared with half-year to 31 December 2007 ('2H07')
Rest of Asia-Pacific (including the Middle East)	2H07     as     reported     US$m		Disposals     and      dilution      gains1     US$m		Currency     translation2     US$m		2H07         at 1H08    exchange    rates     US$m		Acqui-     sitions1     US$m		Under-    lying     change     US$m		1H08     as     reported     US$m		Re-    ported    change    %		Under-    lying     change     %
Net interest income	2,242		-		53		2,295		8		330		2,633		17		14
Net fee income	1,236		-		32		1,268		1		69		1,338		8		5
Other income3	1,343		(5)		14		1,352		4		514		1,870		39		38
Net operating income4	4,821		(5)		99		4,915		13		913		5,841		21		19
Loan impairment charges and other credit risk provisions	(308)		-		(1)		(309)		-		(60)		(369)		(20)		(19)
Net operating income	4,513		(5)		98		4,606		13		853		5,472		21		19
Operating expenses	(2,689)		-		(57)		(2,746)		(11)		(27)		(2,784)		(4)		(1)
Operating profit	1,824		(5)		41		1,860		2		826		2,688		47		44
Income from associates	841		-		37		878		-		58		936		11		7
Profit before tax	2,665		(5)		78		2,738		2		884		3,624		36		32

For footnotes, see page 89.

Analysis by customer group and global business 

Profit before tax 

	Half-year to 30 June 2008
Rest of Asia-Pacific (including the Middle East)	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination9     US$m		Total     US$m
Net interest income	1,166		680		918		47		88		(266)		2,633
Net fee income	434		290		560		43		11		-		1,338
Trading income/(expense) excluding net interest income	53		104		829		36		(30)		-		992
Net interest income/(expense)  on trading activities	(2)		-		82		-		(9)		266		337
Net trading income/(expense)7	51		104		911		36		(39)		266		1,329
Net expense from financial instruments designated at fair value	(85)		(1)		(2)		-		-		-		(88)
Gains less losses from  financial investments	28		3		1		-		1		-		33
Gains arising from dilution of  interests in associates	-		-		-		-		-		-		-
Dividend income	-		-		2		-		-		-		2
Net earned insurance  premiums	98		16		-		-		-		-		114
Other operating income	30		12		42		1		522		(123)		484
Total operating income	1,722		1,104		2,432		127		583		(123)		5,845
Net insurance claims8	6		(9)		-		-		(1)		-		(4)
Net operating income4	1,728		1,095		2,432		127		582		(123)		5,841
Loan impairment (charges)/ recoveries and other credit risk provisions	(375)		16		(11)		-		1		-		(369)
Net operating income	1,353		1,111		2,421		127		583		(123)		5,472
Total operating expenses	(1,187)		(441)		(701)		(73)		(505)		123		(2,784)
Operating profit	166		670		1,720		54		78		-		2,688
Share of profit in associates  and joint ventures	369		291		252		-		24		-		936
Profit before tax	535		961		1,972		54		102		-		3,624
	%		%		%		%		%				%
Share of HSBC's profit  before tax	5.2		9.4		19.2		0.5		1.1				35.4
Cost efficiency ratio	68.7		40.3		28.8		57.5		86.8				47.7
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	37,861		37,384		35,001		3,350		161				113,757
Total assets	43,684		42,833		153,733		8,413		10,378				259,041
Customer accounts	56,552		38,968		58,162		12,594		519				166,795
Loans and advances to banks (net)12					39,583
Trading assets12,13					40,477
Financial instruments  designated at fair value12					27
Financial investments12					40,631
Deposits by banks12					20,113
Trading liabilities12,13					25,659

For footnotes, see page 89.

Analysis by customer group and global business (continued) 

Profit before tax 

	Half-year to 30 June 2007
Rest of Asia-Pacific (including the Middle East)	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination9     US$m		Total     US$m
Net interest income	914		517		551		28		66		(175)		1,901
Net fee income	336		202		409		52		11		-		1,010
Trading income excluding net interest income	34		58		475		35		4		-		606
Net interest income/(expense)  on trading activities	(1)		-		14		-		3		175		191
Net trading income7	33		58		489		35		7		175		797
Net income from financial instruments designated  at fair value	55		3		5		-		15		-		78
Gains less losses from  financial investments	2		4		19		-		1		-		26
Gains arising from dilution of  interests in associates	-		-		-		-		1,076		-		1,076
Dividend income	-		-		1		-		3		-		4
Net earned insurance  premiums	100		9		-		-		-		-		109
Other operating income/ (expense)	20		8		20		(6)		387		(69)		360
Total operating income	1,460		801		1,494		109		1,566		(69)		5,361
Net insurance claims8	(137)		(4)		-		-		-		-		(141)
Net operating income4	1,323		797		1,494		109		1,566		(69)		5,220
Loan impairment charges and other credit risk provisions	(252)		(54)		(2)		-		-		-		(308)
Net operating income	1,071		743		1,492		109		1,566		(69)		4,912
Total operating expenses	(911)		(313)		(510)		(53)		(357)		69		(2,075)
Operating profit	160		430		982		56		1,209		-		2,837
Share of profit in associates  and joint ventures	191		167		116		-		33		-		507
Profit before tax	351		597		1,098		56		1,242		-		3,344
	%		%		%		%		%				%
Share of HSBC's profit  before tax	2.5		4.2		7.8		0.4		8.8				23.6
Cost efficiency ratio	68.9		39.3		34.1		48.6		22.8				39.8
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	31,768		25,996		27,575		2,716		119				88,174
Total assets	38,544		31,553		116,396		6,791		7,839				201,123
Customer accounts	44,686		28,803		44,126		9,092		752				127,459
Loans and advances to  banks (net)12					28,663
Trading assets12,13					27,699
Financial instruments  designated at fair value12					979
Financial investments12					27,269
Deposits by banks12					12,860
Trading liabilities12,13					16,810

For footnotes, see page 89.

Profit before tax 

	Half-year to 31 December 2007
Rest of Asia-Pacific (including the Middle East)	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination9     US$m		Total     US$m
Net interest income	1,051		614		744		32		87		(286)		2,242
Net fee income	430		227		543		33		3		-		1,236
Trading income/(expense) excluding net interest  income	38		71		525		36		(74)		-		596
Net interest income/(expense)  on trading activities	(1)		-		(36)		-		1		286		250
Net trading income/(expense)7	37		71		489		36		(73)		286		846
Net income/(expense) from financial instruments designated at fair value	18		1		(8)		(1)		23		-		33
Gains less losses from  financial investments	3		-		9		-		-		-		12
Gains arising from dilution of interests in associates	-		-		-		-		5		-		5
Dividend income	-		-		1		-		3		-		4
Net earned insurance  premiums	109		7		-		-		1		-		117
Other operating income	20		7		33		8		462		(92)		438
Total operating income	1,668		927		1,811		108		511		(92)		4,933
Net insurance claims8	(109)		(3)		-		-		-		-		(112)
Net operating income4	1,559		924		1,811		108		511		(92)		4,821
Loan impairment charges and other credit risk provisions	(300)		(7)		(1)		-		-		-		(308)
Net operating income	1,259		917		1,810		108		511		(92)		4,513
Total operating expenses	(1,220)		(426)		(630)		(72)		(433)		92		(2,689)
Operating profit	39		491		1,180		36		78		-		1,824
Share of profit in associates  and joint ventures	370		262		186		-		23		-		841
Profit before tax	409		753		1,366		36		101		-		2,665
	%		%		%		%		%				%
Share of HSBC's profit  before tax	4.1		7.5		13.6		0.4		1.0				26.5
Cost efficiency ratio	78.3		46.1		34.8		66.7		84.7				55.8
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	34,486		32,159		32,106		2,955		146				101,852
Total assets	40,092		37,215		133,814		7,561		9,430				228,112
Customer accounts	49,703		34,891		54,120		11,116		403				150,233
Loans and advances to  banks (net)12					30,853
Trading assets12,13					29,966
Financial instruments  designated at fair value12					43
Financial investments12					39,448
Deposits by banks12					17,174
Trading liabilities12,13					18,257

For footnotes, see page 89.

 

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