2008 Interim Report Section 7

RNS Number : 6136A
HSBC Holdings PLC
04 August 2008
 



    North America 

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












US     

(2,194)


167 


(1,779)


48 


277 


(3,481)

Canada     

127 


237 


119 




494 

Bermuda     

17 


26 


35 



10 


94 














(2,050)


430 


(1,625)


58 


294 


(2,893)













Half-year to 30 June 2007












US     

1,336 


215 


292 


50 


(44)


1,849 

Canada     

145 


222 


120 



2


493 

Bermuda     


40 


24 



16


93 














1,488 


477 


436 


60 


(26)


2,435 













Half-year to 31 December 2007












US     

(3,160)


162


(1,535)


106


1,512


(2,915)

Canada     

120


244


119


4


3


490

Bermuda     

6


37


15


4


18


80

Other     

-


-


-


-


1


1














(3,034)


443


(1,401)


114


1,534


(2,344)

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







US     

215,909 


233,592 


233,706

Canada     

54,346 


45,510 


53,891

Bermuda     

2,235 


2,193 


2,263








272,490 


281,295 


289,860

Customer accounts by country


    At

    30 June 
    2008
    US$m


    At

    30 June

    2007

    US$m


    At    31 December
    2007
    US$m







US     

95,763


93,325


100,034

Canada     

38,367


32,744


37,061

Bermuda     

7,870


8,328


8,078








142,000


134,397


145,173



Profit/(loss) before tax


Half-year to


30 June
2008


30 June

    2007


31 December

    2007

North America

US$m


        US$m


        US$m







Net interest income     

7,873


7,307


7,540







Net fee income     

2,822


2,904


2,906







Net trading income/(expense)     

(1,816)


622


(1,164)

Net income from financial instruments designated at fair value     

368


81


1,669

Gains less losses from financial investments     

106


53


192

Dividend income     

40


64


41

Net earned insurance premiums     

203


231


218

Other operating income     

115


342


18







Total operating income     

9,711


11,604


11,420







Net insurance claims incurred and movement in liabilities 
to policyholders     

(112)


(124)


(117)







Net operating income before loan impairment charges and other  credit risk provisions     

9,599


11,480


11,303







Loan impairment charges and other credit risk provisions     

(7,166)


(3,820)


(8,336)







Net operating income     

2,433


7,660


2,967







Total operating expenses     

(5,334)


(5,235)


(5,321)







Operating profit/(loss)     

(2,901)


2,425


(2,354)







Share of profit in associates and joint ventures     

8


10


10







Profit/(loss) before tax         

(2,893)


2,435


(2,344)








    %


    %


    %

Share of HSBC's profit before tax     

(28.2)


    17.2


    (23.3)

Cost efficiency ratio     

    55.6


    45.6


    47.1







Period-end staff numbers (full-time equivalent)     

48,069


56,693


52,722







Balance sheet data6


 






US$m


US$m


US$m







Loans and advances to customers (net)     

272,490


281,295


289,860

Loans and advances to banks (net)     

19,794


18,643


16,566

Trading assets, financial instruments designated at fair value, and 
financial investments
16   

       

133,262


149,004


133,998

Total assets     

531,607


519,693 


510,092

Deposits by banks     

11,764


13,043


16,618

Customer accounts     

142,000


134,397


145,173

For footnotes, see page 89.


Economic briefing

In the US, GDP growth was subdued during the early months of 2008, but appeared to develop some momentum in the second quarter in response to fiscal loosening. Housing activity again proved weak, with certain measures of house prices showing large declines in a number of regions, although tentative signs emerged of stability in housing sales, albeit at subdued levels. The rise in mortgage delinquencies remained of primary concern. Employment conditions weakened throughout the first half of 2008, with the unemployment rate rising from 5.0 per cent in December 2007 to 5.5 per cent in June 2008. Concerns over the labour market appeared to influence consumer confidence although, for the most part, consumer spending proved resilient. Consumer price inflation remained high throughout the first half of 2008, standing at 5.0 per cent in June 2008. This was largely due to rising energy prices; excluding food and energy, consumer price inflation averaged 2.4 per cent during the periodThe Federal Reserve lowered short-term interest rates by 225 basis points to 2 per cent in the first half of 2008, in an attempt to mitigate the worst effects of the sub-prime related credit squeeze on financial markets and economic activity. Declines in the second quarter of 2008 left Standard & Poor's S&P500 stock market index about 13 per cent below its level at the end of 2007.

Canadian GDP increased by just 1.2 per cent during the first five months of 2008 compared with the equivalent period in 2007, despite robust growth in consumer and government expenditure. Labour market conditions suffered a slight deterioration, although the unemployment rate of 6.2 per cent in June 2008 was only marginally above the historical low of 5.8 per cent recorded in October 2007. The

headline rate of consumer price inflation fluctuated at around 2 per cent during the first half of 2008 before moving to a level of 3.1 per centyear-on-year, in June, while the level of core inflation held below the 1.5 per cent mark. The Bank of Canada cut its overnight interest rate from 4.25 per cent at the end of 2007 to 3 per cent in April 2008.



Reconciliation of reported and underlying profit before tax


Half-year to 30 June 2008 ('1H08') compared with half-year to 30 June 2007 ('1H07')

North America 

    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     

7,307


-


70


7,377


-


496


7,873


8


7

Net fee income     

2,904


(52)


26


2,878


-


(56)


2,822


(3)


(2)

Other income/(expense)3    

 

1,269


-


7


1,276


-


(2,372)


(1,096)


(186)


(186)




















Net operating income4    

 

11,480


(52)


103


11,531


-


(1,932)


9,599


(16)


(17)



















Loan impairment charges and other cre risk provisions     

(3,820)


-


(3)


(3,823)


-


(3,343)


(7,166)


(88)


(87)



















Net operating income     

7,660


(52)


100


7,708


-


(5,275)


2,433


(68)


(68)



















Operating expenses     

(5,235)


50


(52)


(5,237)


-


(97)


(5,334)


(2)


(2)



















Operating profit/(loss)     

2,425


(2)


48


2,471


-


(5,372)


(2,901)


(220)


(217)



















Income from associates     

10


-


-


10


-


(2)


8


(20)


(20)



















Profit/(loss) before tax     

2,435


(2)


48


2,481


-


(5,374)


(2,893)


(219)


(217)

For footnotes, see page 89.


Review of business performance

HSBC's North America operations reported a preߛtax loss of US$2.9 billion in the first half of 2008, compared with a pre-tax profit of US$2.4 billion in the first half of 2007, a decline of 219 per cent, and 217 per cent on an underlying basis. The pre-tax loss was US$549 million more than in the second half of 2007. 

The US economwas weak in the first half of 2008, with unemployment rising despite resilience in some sectors. It is now generally believed that the deterioration in the housing market will be deeper and longer in terms of its effect on housing prices, and that it will extend into 2009Credit quality continued to deteriorate in much of the US loan book, including some increase in impairment in prime mortgage lending at the US retail bankwhich is HSBC Bank USA, excluding its consumer finance operations. The US economy continued to weaken and credit conditions deteriorated in the first half of 2008. As a result, US$527 million of goodwill carried by North America Personal Financial Services was impaired. For further information see Note 20 to the Financial Statements. Loan impairment charges rose by 88 per cent and the Personal Financial Services business recorded a preߛtax loss of US$2.1 billion. Profit before tax in Canada was broadly in line with the first half of 2007 at US$494 million, as the economy remained relatively strong.

The turmoil in the global credit markets persisted into 2008 and became more pronounced, leading to a loss before tax of US$1.6 billion in Global Banking and Markets. Further write-downs in credit trading positions, structured credit derivatives, leveraged and acquisition finance loans, and exposures to monoline insurers were only partly offset by strong performances in foreign exchange, equities, rates, metals trading, and payments and cash management. Commercial Banking profits declined by 10 per cent, as revenues fell due to tighter deposit spreads despite strong growth in balances, while loan impairment charges increased from the low levels of 2007. Pre-tax profits in Private Banking declined, as lower fee income more than offset the reduction in operating expenses driven by lower staff costs. Profit before tax in Bermuda was in line with the first half of 2007.

The following commentary is on an underlying basis.

Personal Financial Services reported a preߛtax loss of US$2.1 billion, a decline of US$3.5 billion from the first half of 2007.

 Deteriorating economic conditions led to a significant rise in loan impairment charges as credit quality worsened. This more than offset the reduction in operating costs delivered by management actions in the consumer finance business such as closing branches, reduced marketing, discontinuing certain Taxpayer Financial Services products and relationships, restricting vehicle finance business and further tightening underwriting criteria across the loan portfolio. Impairment of goodwill was the primary driver of the 3 per cent rise in operating expenses. HSBC acted to mitigate the effect of the housing market decline on customers, with more loans modified and loan modification periods extended.

In the US, pre-tax losses in the first half of 2008 of US$2.2 billion compared with a US$1.3 billion profit in the same period in 2007. Losses were driven by increased loan impairment charges, as credit quality declined due to a combination of falling house prices, rising unemployment, higher fuel and food costs and tighter credit conditions. Portfolio seasoning also contributed to higher loan impairment charges. The turmoil in credit markets continued and debt securitisation activity remained very low. This severely reduced the number of refinancing options available to customers. Historically, customers facing financial hardship from unforeseen life events such as redundancy or ill-health have used mortgage refinancing to withdraw equity from their homes to meet their financial obligations. Reduced refinancing opportunities have increased the risk that these customers may default on some or all of their loan obligations. In response, management in the consumer finance business launched intensive programmes to limit foreclosures, modifying more than 33,000 loans. Losses incurred on repossessed properties were partly offset by one-off gains of US$129 million from the Visa IPO. Interest expense fell due to lower funding costs, while staff and marketing costs were lower following management action to reposition the business.

In Canada, profit before tax declined by 18 per cent to US$127 million as higher net interest income due to growth in lending and deposits following effective marketing campaigns was more than offset by an increase in loan impairment charges in the consumer finance business. This was driven by deteriorating delinquency trends in mortgages and private label cards, as the consumer credit environment became more challenging in Western Canada. An expansion of the branch network of the Canadian retail bank, HSBC Bank Canada, and an increase in employee numbers resulted in increased administrative and staff costs. 

Net interest income was in line with the first half of 2007, notwithstanding a 3 per cent fall in average loan balances. Spreads widened due to a significant reduction in funding costs following central bank rate cuts, together with the mix effect from an increased proportion of higher yielding credit and private label cards. These factors were partly offset by a decline in US lending balances, increased impaired loans and lower prepayment volumes. 

In the US, net interest income was unchanged. US average deposit balances rose by 5 per cent, as online savings account and retail network savings and current account balances increased. At 30 June 2008, online savings account balances were US$13 billion, with customer numbers rising 
to over 860,000attracted by the effect of promotional rates. The number of Premier customers rose by 17 per cent in the twelve months since 30 June 2007 to 215,000, due to marketing campaigns and sales efficiency improvements. Deposit spreads narrowed, reflecting a significant decline in base rates and the change in product mix to higher yielding savings accounts.

Average US mortgage balances declined by 11 per cent to US$112 billion, primarily due to the winding down of the mortgage services portfolio, the tightening of credit criteria for new lending and portfolio sales at the US retail bank and consumer finance business. The slowdown in the US housing market intensified in the first half of 2008, with prices, sales and new housing construction all declining and thereby reducing loan demand

In the consumer finance business, spreads across the total mortgage loan portfolio widened as funding costs declined due to a 325 basis point reduction in US short-term interest rates compared with 30 June 2007.

Average mortgage balances in the branch-based consumer lending business increased by 5 per cent to US$50 billion due to growth in the second half of 2007. During the first six months of 2008, liquidations exceeded new originations, the latter declining sharply as a result of the closure of some 400 branches during 2007, with another 100 closed in 2008, and further tightening of underwriting standards. This was partly offset by lower run-off rates as a result of the decline in loan prepaymentsYields declined due to deteriorating credit quality as the volume of impaired loans increased and loan terms were modified downwardsA slowdown in the rate of liquidations mitigated the effect of lower originations but also led to lower prepayment penalty income and reduced revenues from amortisation of deferred loan origination fees. Yields on new lending rose despite tighter underwriting criteria which led to a change in mix towards higher quality assets that typically price at a lower level. Spreads widened as funding costs declined.

In mortgage services, average mortgage balances declined by 28 per cent to US$34 billion, largely due to liquidations in the normal course of business following the cessation of new originations in 2007. The pace of decline was partly moderated by lower loan prepayments due to fewer refinancing opportunities for customers. Spreads narrowed as lower funding costs were more than offset by a fall in yields as deteriorating credit quality led to lower levels of early repayment due to reduced prepayment penalty income.

Average mortgage balances held by the US retail bank declined by 10 per cent to US$28 billion as the bank continued to sell a majority of its new residential mortgage loan originations to government-sponsored enterprises and private investors, and allow its residential mortgage loan portfolio to run off including a US$4 billion portfolio sale in the first half of 2008. Spreads widened as yields declined by less than funding costs in the falling rate environment. 

Average credit and private label card balances at 30 June 2008 were US$49 billion. Lending growth slowed to 4 per cent as HSBC reduced marketing and tightened underwriting standards during the second half of 2007 and into 2008. Spreads widened as yields declined less than funding costs. Yields declined, driven by changes in product mix in credit and private label cards. Partly offsetting this was the effect of card balances at their contractual floor.

Vehicle finance average balances were broadly flat. Growth in the near-prime portfolio was the result of expansion in the customer direct loan programme, partly offset by lower originations in the dealer network portfolio due to action taken in the second half of 2007 to improve the credit quality of new lending. In the first quarter of 2008, HSBC discontinued dealer relationships in several states, primarily in the Northeast, and withdrew some products. Spreads widened as yields increased and cost of funds declined. Yields increased due to an increased proportion of higher yielding consumer finance loans, partly offset by changes in product mix towards lower yielding, lower risk loans. 

In late July 2008 HSBC decided to cease originating new business within a 90-day period in the North America vehicle finance business of HSBC Finance Corporation. While credit quality in the vehicle finance business had improved during the first half of 2008, management considered that the business was sub-scale and did not have sufficient market strength for it to provide an acceptable level of risk adjusted returns. HSBC will manage an orderly run-off of the portfolio of US$12.5 billion. The estimated costs associated with the decision to exit the vehicle finance business are US$25 million, a substantial portion of which are expected to be recognised in the second half of 2008.

Personal non-credit card average balances declined by US$865 million as a result of actions taken to tighten underwriting standards in 2007. Despite a fall in funding costs, spreads narrowed as yields declined.

In Canada, net interest income rose by 11 per cent, primarily due to 10 per cent increase in average lending balances, reflecting house price appreciation since the first half of 2007 and robust economic growthDeposit balances rose, primarily reflecting growth in customer numbers. Premier customer numbers increased by more than 25,000 to over 93,000. Yields fell across most lending products as falling base rates were passed on to floating rate customers, while yields on deposits rose as competition increasedSpreads tightened across the majority of the portfolio as wider credit spreads meant base rate cuts were not fully reflected in funding costs.

Average deposit balances in Canada rose by 9 per cent, driven by strong growth in the direct savings account as HSBC increased its share of the market. Average balances in the high rate and direct savings accounts more than doubled to US$2.9 billion driven by a combination of new customer acquisition and higher average balances on existing accountsDeposit spreads tightened as yields on deposits rose, despite lower base rates due to an increase in the mix of higher yielding savings accounts and as competition between deposit taking institutions intensified. Yields on surplus funds were broadly unchanged. 

Average lending balances in Canada were 10 per cent higher, driven by demand for credit in a relatively robust economyLending in consumer finance rose, due to growth in the private label card portfoliofollowing a significant new relationship in the second half of 2007. In the Canadian retail bank, lending rose driven by mortgages and other personal lending as economic growth continuedYields declined across most products as interest rate cuts were immediately passed on to floating rate borrowers while overall spreads tightened despite lower base rates as credit spreads widened.

Fee income declined by 8 per cent, mainly due to changes to fee billing practices in the credit card business and the withdrawal of some products in Taxpayer Financial Services. In the US, fees fell by 9 per cent. Fee income from credit cards declined due to changes in overlimit fee billings implemented during the fourth quarter of 2007 and first half of 2008 to improve the customer proposition. A decline in credit quality, changes to the portfolio mix and higher balances led to an increase in the level of uncollectible fees in the credit card and private label portfolios. Fees for late payment rose due to an increase in overdue balances, changes in the merchant mix and amendments to terms. Enhancement services revenue rose as higher takeߛup rates led to increased fees from debt protection products and total insurance fee income increased by 34 per cent to US$390 million. Taxpayer Financial Services revenue decreased as a result of discontinuing pre-season and pre-file loan products for the 2008 tax season and the decision to reduce the number of relationships with third parties. 

At the US retail bank, net fee income rose by 29 per cent to US$372 million, driven by higher service charges on deposits and increased credit card fees from higher transaction volume.

Fee income in Canada rose by 4 per cent. In the Canadian retail bank, the rise was driven by higher service charges, due to repricing; investment administration fees, as a result of growth in funds under management; foreign exchange fees, arising from increased client volumes resulting from volatility in the Canadian dollar to US dollar exchange rate; and Global Immigrant Investor Programme fees, due to growth in volumes. Fee income in consumer finance fell by 7 per cent from a low base in the first half of 2007.

Trading losses declined to US$16 million from US$97 million in the first half of 2007, due to the closure of the Decision One brokerage business

The Visa IPO provided a US$92 million gain on financial investments

Other operating income declined by 189 per cent, primarily due to losses on repossessed properties as volumes increased and values fell with the decline in house prices. In the consumer finance business, total foreclosed properties rose to nearly 11,000 from over 9,600 at 31 December 2007 although, following operational enhancements, the time which foreclosed assets remained on the market fell from 183 days to 171 days.

Other operating income in Canada fell, largely reflecting a net loss on the sale of a mortgage brokerage business within consumer finance. Other operating income fell in the Canadian retail bank due to the non-recurrence of a gain on the sale of shares in the Montreal stock exchange in the first half of 2007

Loan impairment charges rose by 84 per cent on the first half of 2007 to US$7.0 billion, driven by a weakening US economy, continued deterioration in the consumer finance loan portfolio and a decline in the credit quality of prime and second lien mortgages held by HSBC Bank USACharges were US$1.2 billion lower than in the second half of 2007. US loan impairment charges rose by 85 per cent as delinquencies increased across much of the loan book. Part of the increase reflected the continued seasoning of the 20052006 and early 2007 portfolios. The first half of 2008 saw a further weakening in the US economy and house price declines accelerated, reducing the amount of equity available for refinancing. Credit market turmoil meant the secondary market for securitised loans remained closed. Consequently, customers continued to experience difficulties in refinancing their loans. Bankruptcy levels increased as a rise in unemployment and increased fuel and food costs added to the financial pressures facing customers. Although the vast majority of mortgage customers continued to meet their commitments, delinquencies rose and loss severities increased.

HSBC continued to act to mitigate, where appropriate, the effects of the housing market decline on customers. In the first half of 2008, in the consumer finance business some 33,000 loans with an aggregate balance of approximately US$5.1 billion were modified. On a selective basis, longer term modifications were offered, typically for either two or five years.

Loan impairment charges in the mortgage services business more than doubled to US$1.9 billion. Rising delinquencies were partly offset by a decline in lending balances as the portfolio moved further into run-off.

In the consumer lending business, loan impairment charges rose by 69 per cent to US$2.1 billion as market conditions deteriorated. The decline was most severe in first lien loans in those states most affected by the housing market downturn. In addition, in the first half of 2008 delinquencies increased markedly in those states experiencing significant rises in unemployment. In response, credit criteria were tightened and an additional 100 branches were closed in the first half of 2008.

At HSBC Bank USA, the credit quality of residential mortgages deteriorated in the Home Equity Line of Credit and Home Equity Loan portfolios, while prime first lien mortgages also experienced higher levels of delinquency. 

Credit and private label card loan impairment charges rose by 58 per cent to US$2.3 billion due to higher levels of non-prime balances, portfolio seasoning, increased bankruptcy filings, and the deterioration in the economy. Strategic initiatives were implemented to mitigate deteriorating credit trends on cards, including increased collection capacity, closure of inactive accounts, reductions in credit limits, a tightened approval process and restricted balance transfer volumes. 

Impairment charges on the personal non-credit card portfolio rose by 40 per cent to US$1.2 billion. The deterioration in credit quality was more pronounced in some regions driven by the weakening US economy, rising unemployment rates and higher levels of bankruptcy filings. Loan impairment charges at the vehicle finance business rose by 44 per cent to US$335 million as economic deterioration led to higher loan defaults, while reduced demand for used cars, particularly larger vehicles, led to higher losses when repossessed vehicles were sold at auction.

In Canada, loan impairment charges rose by 52 per cent to US$125 million due to deteriorating delinquency rates in private label cards and mortgages, within the consumer finance business particularly in Western Canada, as the credit environment became more challenging. Loan impairment charges in the Canadian retail bank rose by US$9 million, largely driven by the vehicle finance business as a result of portfolio seasoning and higher fuel prices.

Operating expenses increased by 3 per cent to US$3.9 billion because of the goodwill impairment. Excluding this, costs declined. In the US, the management actions in 2007 to close the Decision One mortgage brokerage unit, cease correspondent acquisitions and reduce the consumer lending branch network led to a decline in staff costs. In addition, costs fell due to staff cuts from the reduction in sizof the vehicle finance business and ongoing global cost reduction campaigns in processing and support functions. Other operating expenses declined as marketing on credit and private label cards was curtailed to limit growth in loan balances. Branch closures in the consumer finance business and reduced mortgage services activity also led to lower operating costs. At the US retail banka rise in staff and other operating costs reflected increased investment in branch expansion and higher federal deposit insurance expenses. These costs were more than offset by the release of a litigation provision relating to a legal settlement prior to the Visa IPO in the second half of 2007.

Operating expenses rose by 5 per cent in Canada. Staff costs rose by a percentage point due to increased headcount in the Canadian retail bank following expansion in the branch network, which was partly offset by lower costs in consumer finance as a result of reduced headcount following branch closures in 2007 and the sale of a mortgage brokerage business in 2008. Other administrative and support costs roseas investments made in the business, including expanding the branch network and online banking resulted in higher premises and depreciation costs.

Commercial Banking pre-tax profit declined by 15 per cent to US$430 million as loan impairment charges rose in the deteriorating economic environment. 

Revenue increased, lifted by asset sales from HSBC Finance and fee income in Canada, partly offset by a fall in net interest income due to tighter spreads on deposits.

In the US, profit before tax fell by 22 per cent, with performance driven by tighter deposit spreads and increased loan impairment charges.

In Canada, profit before tax fell by 6 per cent to US$237 million as increased fee income was more than offset by higher loan impairment charges due to increased delinquency rates in the export and manufacturing sectors as a result of the slowing US economy, higher energy costs and a stronger Canadian dollar. 

In Bermuda, profit before tax declined by 29 per cent due to lower net interest income as deposit spreads tightened following base rate cuts, and higher costs.

Net interest income declined by 2 per cent. In the US, net interest income fell by 3 per cent, as tighter deposit spreads in the declining rate environment more than offset a rise in deposit and loan volumesThe US retail bank continued its strategy of balancing growth between its established business in New York State and its expansion in the West Coast, Chicago and the Southeast. Average deposit balances rose by 11 per cent and loan balances increased by 11 per cent.

In the US, average loan balances to the middle market segment rose by 29 per cent to US$8.1 billion, outpacing the small business segment, where loans rose by 4 per cent in the face of increased competitive pressures. Management action led to a 3 per cent decline in commercial real estate activity compared with the first half of 2007, with increased repayments and reduced replacement business as the US retail bank took the opportunity to manage down lending exposures due to lower risk appetite and a deterioration in market conditions. Lending spreads widened on small business loans due to lower funding costs, but this was more than offset by tighter spreads on middle market and commercial real estate loans as yields declined due to a move towards higher credit quality customers, although spreads improved markedly in the second quarter.

Average deposit balances with small businesses in the US rose by 8 per cent to US$13 billion, due to strong growth in markets outside New York. Middle market deposits rose 23 per cent while commercial real estate deposit growth was subdued due to the exiting from selected associated lending relationships. The rise in balances was more than offset by narrower deposit spreads in the declining rate environment and competitive pricing pressures.

In Canada, net interest income was broadly in line with the first half of 2007 at US$337 million, as balance sheet growth offset tightening lending spreadsAverage deposit balances rose by 8 per cent due to higher cash management balances, driven 
by an increase in account numbers following an expansion of the product offeringDeposit spreads remained constant as deposit rates and yields on surplus funds were unchanged despite lower base rates as credit spreads widened

Average lending balances rose by 13 per cent, driven by lending growth, particularly in floating rate productsin the buoyant Western Canada region. Elsewhere, lending growth was experienced across all regions as the economy remained robustLending spreads tightened as interest rate cuts were immediately passed on to floating rate borrowers, in contrast to the wholesale cost of funding, which was adversely affected by wider credit spreads.

In Bermuda, net interest income decreased by 19 per cent, driven by tighter deposit spreads on current accounts as base rates declined. Average deposit balances rose by 23 per cent, reflecting continued strong demand from the insurance and construction sectors.

Net fee income rose by 20 per cent. In the US, fees increased by 7 per cent due to higher deposit service charges as a result of the successful expansion of cash management product offerings, higher debit card fees and increased loan syndication and agency fees for commercial real estate. In Canada, fee income rose by 36 per cent, driven by an increase in revenue as volumes of trade related money market instruments rose and higher fund transfer commissions as client activity increased.

Other operating income was higher due to increased gains from sales of assets in the legacy HSBC Finance commercial portfolio. 

In the US, loan impairment charges more than doubled to US$106 million as the deteriorating economic outlook and customer downgrades prompted an increase in impairment allowances in the middle market and commercial real estate portfolios, as well as higher impairment charges for small business loans. While impairment allowances in middle market and commercial real estate increased, the level of write-offs on these portfolios improved, resulting in a small level of recoveries .

Loan impairment charges in Canada rose by US$38 million from the low levels reported in 2007 due to asset growth and higher delinquency rates in the manufacturing and export sectors, the result of the slowing US economy, higher energy costs and stronger Canadian dollar.

Operating expenses in the US were broadly unchanged as a decline in staff costs was offset by a rise in branch network-related costs. Staff costs fell due to lower incentive compensation and a decrease in headcount due to the consolidation of lending support functions. Administrative expenses rose by 9 per cent, mainly due to marketing spend. 

Operating expenses in Canada were in line with the first half of 2007Staff costs were broadly unchanged as higher salaries and benefits from growth in headcount due to continued investment in the business were offset by lower performance related payOther operating expenses fell due to lower capital taxes.

Global Banking and Markets reported a loss before tax of US$1.6 billion, compared with a profit of US$436 million in the first half of 2007The disruption in global credit markets led to US$2.3 billion of write-downs in Credit and structured credit trading exposures and in monoline exposures and leveraged loans. Aside from these write-downs, pre-tax profit grew compared with the first half of 2007, as the performance of other trading businesses improved and net interest income and net fee income increased.

Total operating losses of US$843 million were driven by the write-downs noted above. These losses were partly mitigated by increased income in other trading product areas, and in Balance Sheet Management.

Net interest income increased by 58 per cent as Balance Sheet Management benefited from the falling short-term US interest rates. Strong deposit balance growth in payments and cash management also contributed.

Net fee income rose by 31 per centGlobal Asset Management benefited from the market turmoil as institutional clients moved assets into less volatile cash fundsAdvisory fee income also rose in capital markets, chiefly due to earnings from the Visa IPO.

Trading losses of US$1.7 billion were primarily driven by the write-downs noted aboveDue to the credit market turmoil, the fair value of credit instruments such as mortgage loans and structured credit instruments deteriorated as the credit and liquidity disruption that began in the US sub-prime market spread into other mortgage and mortgage-related products. Trading in new US mortgages and related products was discontinued in late 2007HSBC transacts with monoline insurers to buy protection against losses from defaults, primarily on credit productsFor a description of the background to monoline write-downs, see page 36. The market turmoil also caused the market value of some leveraged and acquisition finance loans to fall due to general credit and liquidity disruption. More information on these write-downs and the underlying assets is available on page 113

Other trading product areas continued to perform strongly, including foreign exchange and Rates, up by 99 per cent and 355 per cent, respectively, compared with the same period in 2007. Rates trading benefited from reduced market liquidity, which provided opportunities for wider spreads, and from increased market volatilityForeign exchange trading income increased on higher customer trading and a strengthening of major currencies against the US dollarMetals trading revenues benefited from higher prices in gold and platinumIncome from the equities business grew from increased customer trading volumes, which were driven by equity market volatility, and through capital markets fees.

Market conditions led to lower Principal Investments activity, resulting in a decline in Other operating income, and Gains less losses from financial investments fell as income from the disposal of securities declined. 

Loan impairment charges rose because of weaker credit fundamentals which have resulted in a higher number of downgrades, particularly in comparison with the releases in the first half of 2007.

Operating expenses fell due to a 7 per cent reduction in staff numbers following the restructuring of a number of businesses during the second half of 2007 and first half of 2008 in response to market conditions. This included the closure of the mortgage-backed securities business in the USThe financial performance also led to lower performance-related costs, which further reduced operating expenses.

Private Banking reported a pre-tax profit of US$58 million in line with the first half of 2007, as unchanged revenues were offset by increased operating expenses. The cost efficiency ratio worsened by 4.8 percentage points to 74.2 per cent, with a number of new hires in the US and Canada.

Net interest income decreased by 5 per cent to US$112 million. Higher volumes of domestic savings and foreign time deposit accounts were driven by clients moving their assets under management to safer cash products, and new client relationships. However, this was offset by compressed spreads in the US due to a reduction in short-term US dollar interest rates.

Other revenues grew 5 per cent to US$117 million, driven mainly by an 11 per cenincrease in net fee income. In the USimproved revenue sharing between customer groups led to increased asset management and custody fees and higher brokerage incomeIn BermudaHSBC also reported a rise in fee income, benefiting from improved brokerage and trust income fees, with the introduction of new tariffs.

Client assets increased by 1 per cent to US$58.8 billion compared with 31 December 2007, primarily in domestic custody and trust accounts, with net new money of US$1.4 billion offset by negative market movements.

Operating expenses were 7 per cent higher at US$170 million. A 7 per cent rise in staff costs was due to increased headcount relating to business expansion.

Within Other, profit before tax of US$294 million was reported compared with a loss of US$26 million in the first half of 2007.

Fair value movements on HSBC's own debt resulted in gains of US$354 million, primarily due to the widening credit spreads in the first quarter. Costs at HSBC.com and HSBC Technology USA Inc, the providers of technology services in North America, decreased by 3 per cent to US$696 million. Related recharges are reported in 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')

North America 

    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     

7,540


-


3


7,543


-


330


7,873


4


4

Net fee income     

2,906


(52)


1


2,855


-


(33)


2,822


(3)


(1) 

Other income/(expense)3     

 

857


(18)


1


840


-


(1,936)


(1,096)


(228)


(230)




















Net operating income4    

 

11,303


(70)


5


11,238


-


(1,639)


9,599


(15)


(15)



















Loan impairment charges and other credit risk provisions     

(8,336)


-


2


(8,334)


-


1,168


(7,166)


14


14



















Net operating income     

2,967


(70)


7


2,904


-


(471)


2,433


(18)


(16)



















Operating expenses     

(5,321)


48


(3)


(5,276)


-


(58)


(5,334)


-


(1)



















Operating loss     

(2,354)


(22)


4


(2,372)


-


(529)


(2,901)


(23)


(22)



















Income from associates     

10


-


-


10


-


(2)


8


(20)


(20)



















Loss before tax     

(2,344)


(22)


4


(2,362)


-


(531)


(2,893)


(23)


(22)

For footnotes, see page 89.

Analysis by customer group and global business 

Profit/(loss) before tax 


Half-year to 30 June 2008

North America

    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         

6,609 


758 


330 


112 


209 


(145)


7,873 















Net fee income/(expense)                 

2,145 


192 


426 


98 


(39)


-


2,822 















Trading income/(expense) excluding net interest income     

(51)



(2,001)


11 


(154)


-


(2,191)

Net interest income/ (expense) on trading activities     

35 


-


292 


-


(97)


145 


375 















Net trading income

(expense)7     

(16)



(1,709)


11 


(251)


145 


(1,816)

Net income from financial instruments designated 
at fair value     





354 


-


368 

Gains less losses from financial investments     

105 



(4)


-



-


106 

Dividend income     


-


31 


-



-


40 

Net earned insurance premiums     

203 


-


-


-


-


-


203 

Other operating income/ (expense)     

(100)


88 


76 



715 


(671)


115 















Total operating income/(expense)     

8,958 


1,047 


(843)


229 


991 


(671)


9,711 















Net insurance claims8   

  

 

(112)


-


-


-


-


-


(112)















Net operating

income4/

(expense)     

8,846 


1,047 


(843)


229 


991 


(671)


9,599 















Loan impairment charges and other credit risk provisions     

(6,952)


(156)


(57)


(1)


-


-


(7,166)















Net operating income/(expense)     

1,894 


891 


(900)


228 


991 


(671)


2,433 















Total operating expenses     

(3,944)


(468)


(725)


(170)


(698)


671 


(5,334)















Operating profit/(loss)     

(2,050)  


423 


(1,625)


58 


293 


-


(2,901)















Share of profit in associates and joint ventures     

-



-


-



-
















Profit/(loss) before tax     

(2,050)


430 


(1,625)


58 


294 


-


(2,893)
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit before tax     

    (20.0)


    4.2 


    (15.9)


    0.6 


    2.9 




    (28.2)

Cost efficiency ratio     

    44.6 


    44.7 


    (86.0)


    74.2 


    70.4 




    55.6 















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net) 
    

201,941 


37,756 


27,137 


5,656 


-




272,490 

Total assets     

236,672 


44,023 


243,132 


6,846 


934 




531,607 

Customer accounts     

66,281 


36,881 


23,709 


15,020 


109 




142,000 

Loans and advances to
banks (net)
12     





18,624 









Trading assets12,13     





158,218 









Financial instruments designated at fair value12         





-









Financial investments12     





35,902 









Deposits by banks12     





10,909 









Trading liabilities12,13     





152,093 









For footnotes, see page 89.



Profit/(loss) before tax


Half-year to 30 June 2007

North America

    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)         

6,545 


740 


202 


117 


(18)


(279)


7,307 















Net fee income/(expense)                 

2,332 


152 


320 


140 


(40)




2,904 















Trading income/(expense) excluding net interest income     

(184)



483 



(62)




246 

Net interest income on trading activities     

87 




10 






279 


376 















Net trading income/ (expense)7      

 

   

(97)



493 



(62)


279 


622 

Net income from financial instruments designated at fair value     

-


-


3 


-


78 


-


81 

Gains less losses from financial investments     


-


42 



-


-


53 

Dividend income     

35 



28 


-


-


-


64 

Net earned insurance premiums     

231 


-


-


-


-


-


231 

Other operating income     

114 


58 


109 


14 


735 


(688)


342 















Total operating income     

9,169 


954 


1,197 


279 


693 


(688)


11,604 















Net insurance claims8 

 

  

(124)


-


-


-


-


-


(124)















Net operating income4    

 

 

9,045 


954 


1,197 


279 


693 


(688)


11,480 















Loan impairment (charges)/ recoveries and other credit risk provisions     

(3,774)


(46)


12 


(12)


-


-


(3,820)















Net operating income     

5,271 


908 


1,209 


267 


693 


(688)


7,660 















Total operating expenses     

(3,783)


(443)


(771)


(207)


(719)


688 


(5,235)















Operating profit/(loss)     

1,488 


465 


438 


60 


(26)


-


2,425 















Share of profit/(loss) in associates and joint ventures     

-


12 


(2)


-


-


-


10 















Profit/(loss) before tax     

1,488 


477 


436 


60 


(26)


-


2,435 
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit before tax     

    10.5 


    3.4 


    3.1 

    

    0.4 


    (0.2)




    17.2 

Cost efficiency ratio     

    41.8 


    46.4 


    64.4 


    74.2 


    103.8 




    45.6 















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to customers (net)     

219,735 


34,831 


21,462 


5,267 


-




281,295 

Total assets     

246,117 


41,227 


223,435 


6,386 


2,528 




519,693 

Customer accounts     

58,724 


33,513 


27,661 


14,392 


107 




134,397 

Loans and advances to banks (net)12     





16,289 









Trading assets12,13     





146,387









Financial instruments designated at fair value12         





-









Financial investments12     





33,790









Deposits by banks12     





10,927 









Trading liabilities12,13     





131,111









For footnotes, see page 89.



Analysis by customer group and global business (continued)

Profit/(loss) before tax 


Half-year to 31 December 2007

North America

    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         

6,630


818


176


156


1


(241)


7,540















Net fee income/(expense)                 

2,239


186


381


139


(39)


-


2,906















Trading income/(expense) excluding net interest income     

(165)


(5)


(1,354)


5


(16)


-


(1,535)

Net interest income/ (expense) on trading activities     

47


-


127


-


(44)


241


371















Net trading income/ (expense)7    

     

(118)


(5)


(1,227)


5


(60)


241


(1,164)

Net expense from financial instruments designated 
at fair value     

-


-


8


-


1,661


-


1,669

Gains less losses from financial investments     

167


(1)


23


-


3


-


192

Dividend income     

12


-


29


-


-


-


41

Net earned insurance premiums     

218


-


-


-


-


-


218

Other operating income/ (expense)     

(119)


30


58


20


745


(716)


18















Total operating income     

9,029


1,028


(552)


320


2,311


(716)


11,420















Net insurance claims8  

   

(117)


-


-


-


-


-


(117)















Net operating income/ (expense)4 

    

8,912


1,028


(552)


320


2,311


(716)


11,303















Loan impairment (charges)/ recoveries and other credit risk provisions     

(8,135)


(145)


(58)


2


-


-


(8,336)















Net operating income     

777


883


(610)


322


2,311


(716)


2,967















Total operating expenses     

(3,811)


(450)


(791)


(208)


(777)


716


(5,321)















Operating profit/(loss)     

(3,034)


433


(1,401)


114


1,534


-


(2,354)















Share of profit in associates and joint ventures     

-


10


-


-


-


-


10















Profit/(loss) before tax     

(3,034)


443


(1,401)


114


1,534


-


(2,344)
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit before tax     

    (30.2)


    4.4


    (13.9)


    1.1


    15.3




    (23.3)

Cost efficiency ratio     

    42.8


    43.8


    143.3


    65.0


    33.6




    47.1















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net) 
    

218,676


38,930


26,186


6,068


-




289,860

Total assets     

240,734


43,920


217,808


6,541


1,089




510,092

Customer accounts     

61,824


36,306


30,732


16,187


124




145,173

Loans and advances to
banks (net)
12     





14,938 









Trading assets12,13     





149,926









Financial instruments designated at fair value12         





-









Financial investments12     





33,273









Deposits by banks12     





14,825









Trading liabilities12,13     





126,139









For footnotes, see page 89.


Latin America

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












Brazil     

262 


200 


193 



(1)


660 

Mexico     

151 


127 


106 



-


385 

Argentina     

21 


43 


55 


-


-


119 

Panama     

31 


18 


13 



-


63 

Other     


23 


16 


-


(3)


39 














468 


411 


383 



(4)


1,266 













Half-year to 30 June 2007












Brazil     

101 


116 


141 



(2)


360 

Mexico     

251 


169 


50 



-


475 

Argentina     

10 


33 


49 


-


3


95 

Panama     

17


11


10


1


-


39

Other     

9


23


3


-


(4)


31














388 


352 


253 


10 


(3)


1,000 













Half-year to 31 December 2007












Brazil     

192


170


156


5


(4)


519

Mexico     

263


164


63


6


9


505

Argentina     

26


42


41


-


(3)


106

Panama     

28


7


6


6


-


47

Other     

(4)


5


(2)


(2)


4


1














505


388


264


15


6


1,178

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







Brazil     

23,721 


14,104 


18,491

Mexico     

18,557 


16,063 


18,059

Argentina     

2,704 


2,026 


2,485

Panama     

4,294 


4,059


4,158

Other     

4,976 


4,354


4,730








54,252 


40,606 


47,923

Customer accounts by country


    At

    30 June 
    2008
    US$m


    At

    30 June

    2007

    US$m


    At

    31 December
    2007
    US$m







Brazil     

35,285


23,660


26,231

Mexico     

22,562


19,916


22,307

Argentina     

3,300


2,659


2,779

Panama     

5,338


4,678


5,062

Other     

5,294


4,336


4,913








71,779


55,249


61,292



Profit before tax


Half-year to


30 June
2008


    30 June

    2007


    31 December

    2007

Latin America

US$m


US$m


US$m







Net interest income     

3,362


2,534


3,042







Net fee income     

1,139


998


1,155







Net trading income     

358


285


263

Net income from financial instruments designated at fair value     

156


157


163

Gains less losses from financial investments     

168


98


155

Gains arising from dilution of interests in associates     

-


-


11

Dividend income     

6


6


3

Net earned insurance premiums     

900


731


863

Other operating income     

130


153


75







Total operating income     

6,219


4,962


5,730







Net insurance claims incurred and movement in liabilities 
to policyholders     

(764)


(676)


(751)







Net operating income before loan impairment charges and other 
credit risk provisions 
    

5,455


4,286


4,979







Loan impairment charges and other credit risk provisions     

(1,170)


(775)


(922)







Net operating income     

4,285


3,511


4,057







Total operating expenses     

(3,023)


(2,516)


(2,886)







Operating profit     

1,262


995


1,171







Share of profit in associates and joint ventures     

4


5


7







Profit before tax         

1,266


1,000


1,178








    %


    %


    %

Share of HSBC's profit before tax     

    12.3


    7.1


    11.7

Cost efficiency ratio     

    55.4


    58.7


    58.0







Period-end staff numbers (full-time equivalent)     

63,851


66,875


64,404







Balance sheet data6







US$m


US$m


US$m







Loans and advances to customers (net)     

54,252


40,606


47,923

Loans and advances to banks (net)     

17,192


13,345


12,675

Trading assets, financial instruments designated at fair value, and 
financial investments 
    

27,929


22,107


24,715

Total assets     

117,019


88,925


99,056

Deposits by banks     

4,705


4,727


4,092

Customer accounts     

71,779


55,249


61,292

For footnote, see page 89.

      Economic briefing

Economic growth in Mexico moderated during the first half of 2008partly in response to the slowdown in activity within the US. GDP rose by 2.6 per cent in the first quarter of the year on the equivalent period in 2007, compared with 3.3 per cent for the whole of 2007. Inflationary pressures intensified, with the headline rate of consumer price inflation experiencing sharp gains, rising from an annual rate of 3.8 per cent in December 2007 to 5.3 per cent in June 2008, mostly from higher food and energy prices. In response to these inflationary pressures, the Bank of Mexico raised its overnight interest rate by 25 basis points in June 2008.

The Brazilian economy continued to expand strongly with first quarter GDP rising by 5.8 per cent year-on-year, driven by strong domestic demand and consumer spending. Conditions within the labour market continued to improve, supporting consumer confidence, with the rate of unemployment well below levels observed a year earlier. Inflation continued to accelerate, with the headline annual rate of consumer price inflation rising to 6.1 per cent in June 2008 from 4.5 per cent in December 2007. Rising food prices were the most prominent cause, but core inflation (excluding food and energy) also rose, reflecting buoyant domestic conditions. Rising import demand was also expected to trigger a deterioration in the current account position during 2008 as a whole. With inflation near the upper limit of the Central Bank of Brazil's tolerance range, a modest tightening of monetary policy was initiated and the Selic target rate was increased from 11.25 per cent in April 2008 to 12.25 per cent in June 2008.

Argentina's growth continued at a high level during the first quarter of the year, with overall GDP 

rising by 8.4 per cent year-on-year compared with an average of 8.6 per cent for 2007 as a whole, even though industrial action within the agricultural sector is believed to have adversely affected activity levels during the period. Some further slowing of activity is expected to occur during the remainder of 2008 while inflationary pressures remain of concern. The reported headline rate of consumer price inflation rose from 8.5 per cent in December 2007 to 9.3 per cent in June 2008, although changes in methodologies make comparisons between the periods difficult.




Reconciliation of reported and underlying profit before tax


Half-year to 30 June 2008 ('1H08') compared with half-year to 30 June 2007 ('1H07')

Latin America

    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     

2,534


-


286


2,820


-


542


3,362


33


19

Net fee income     

998


-


102


1,100


-


39


1,139


14


4

Other income3  

   

754


-


82


836


-


118


954


27


14




















Net operating income4   

  

4,286


-


470


4,756


-


699


5,455


27


15



















Loan impairment charges and other credit risk provisions     

(775)


-


(97)


(872)


-


(298)


(1,170)


(51)


(34)



















Net operating income     

3,511


-


373


3,884


-


401


4,285


22


10



















Operating expenses     

(2,516)


-


(283)


(2,799)


-


(224)


(3,023) 


(20)


(8)



















Operating profit     

995


-


90


1,085


-


177


1,262


27


16



















Income from associates     

5


-


-


5


-


(1)


4


(20) 


(20)



















Profit before tax     

1,000


-


90


1,090


-


176


1,266


27


16

For footnotes, see page 89.


Review of business performance

HSBC's operations in Latin America reported a preߛtax profit of US$1.3 billion compared with US$1.0 billion in the first half of 2007, representing an increase of 27 per cent

During the first half of 2008, HSBC continued in its efforts to grow the business organically in Mexico and Brazil while integrating recently acquired businesses in Argentina and Central America. The Visa IPO resulted in gains on the redemption of shares held by the Group. Credit quality in maturing portfolios continued to be an area of focus for management, especially in the Personal Financial Services credit card business in MexicoThe Premier relaunch in 2007 resulted in an increase in customer numbers and income in the first six months of 2008. The insurance business's contribution to the performance of the region increased in the first half of 2008, largely due to growth in premiums, mainly on term life and motor products, which exceeded expense growth. In Commercial Banking, HSBC continued in its strategy to be the leading international bank through its extended network of International Banking Centres, increased focus on trade finance and growth in referrals of international business opportunities. As part of HSBC'strategy to be the best bank for small businesses, Brazil introduced an initiative in the second half of 2007, called Empreendedor Direto with the aim of providing more focus on micro businesses. Global Banking and Markets benefited from favourable market conditions which increased revenues and from foreign exchange rate volatility which drove higher trading revenues. 

On an underlying basis, pre-tax profits rose b16 per cent. Increased revenues were partly offset by higher loan impairment charges, mainly driven by the cards business in Mexico, and increased operating costs across the region. The cost efficiency ratio improved by 3.4 percentage points to 55.4 per cent.

The following commentary is on an underlying basis.

Personal Financial Services reported a pre-tax profit of US$468 million, an 11 per cent increase on the first half of 2007. Growth in revenue was driven by continued organic balance sheet growth, especially in cards and personal loans in Mexico and vehicle finance and payrolls in Brazil. This was augmented by gains from the redemption of shares in the Visa IPO and interest on the recovery of transactional taxes paid in previous years in Brazil. Following the global relaunch of Premier in a number of countries in 2007, there were increases in both the number of Premier customers and the average income per customer in the region. The growth in balance sheet volumes in Mexico and Brazil, coupled with higher delinquency rates, drove an increase in loan impairment charges. Increased operating expenditure was partially offset by a recovery of transactional taxes in Brazil following a court ruling. The cost efficiency ratio improved by 4.7 percentage points as revenues grew faster than costs.

In Mexico, pre-tax profits decreased by 42 per cent, largely driven by higher loan impairment charges on credit cards and personal loans following balance sheet growth and increased delinquencyNet operating income before loan impairment charges rose by 17 per cent on higher interest generated by the growth in credit card balances and a gain on the redemption of Visa shares. Operating costs grew by 12 per cent. 

In Brazil, profit before tax grew by 111 per cent on higher income driven by balance sheet growth, partially offset by a decrease in fee income due to regulatory changes. Profit before tax also benefited from the refinement of the income recognition methodology in respect of long-term insurance contracts and a gain on redemption of Visa shares. A recovery of transactional taxes paid in earlier years and interest thereon increased interest income and resulted in lower operating expenses.

In Argentina, profit before tax grew by 116 per cent. Balance sheet growth drove an increase in net interest income which was partly offset by higher costs and loan impairment charges. 

Net interest income rose by 17 per cent to US$2,376 million.

In Mexico, net interest income rose by 26 per cent, driven by higher balance sheet volumes and improved spreads. Despite a slowdown in credit card sales, average loan balances continued to grow. Average total loans grew by 12 percentage points. Spreads widened by 417 basis points on personal loans and by 316 basis points on credit cards due to re-pricing initiatives implemented during the second half of 2007.

Average demand deposit balances rose by 7 per cent. Average balances of time deposits grew by 14 per cent, driven by competitive pricingHSBC's market share for deposits remained stable.

In Brazil, net interest rose by 9 per cent. A favourable economic scenario and increased household income drove higher consumption and demand for credit. As a result, vehicle finance loans increased by 39 per cent and payroll loans by 57 per cent. Average card balances grew by 25 per cent, following market growth and new deals on co-branded cards combined with marketing promotions to improve card usage. This was partially offset by a decrease of 3 per cent in personal instalment loans due to increased competition in the market.

Spreads widened on cards and overdrafts as a result of lower funding costs and repricing initiatives, in line with market trends, but narrowed on vehicle finance and payroll loans due to increased competitionOverall, spreads were lower, reflecting the business strategy of seeking reduced credit risk by focusing on secured loans.

Net interest income also increased as a result of favourable court decision, which granted HSBC the right to recover transactional taxes paid in excess on insurance transactions, and interest accrued thereon

In Argentina, net interest income grew by 69 per cent. Average loan volumes increased by 39 per cent as personal loans, credit cards and car loan balances all rose. These increases resulted from higher sales of pre-approved facilities, supported by a new credit policy for personal loans, and marketing campaigns. Spreads improved on car loans and overdrafts as a result of repricing initiatives. The overall spread on lending products narrowed by 28 basis points. The average term deposit portfolio increased by 11 per cent following several initiatives including improved incentives for staff in the branch network, the appointment of a number of Premier executives and the implementation of campaigns to support growth through the internet. The number of Premier customers increased by 30 per centThe overall spread increased by 94 basis points.

Net fee income increased by 2 per cent to US$712 millionmainly in Mexico where fee income rose by 14 per cent. Credit card annual fees increased by 29 per cent, reflecting an increase of almost 35,000 in the number of cards in force. Collection fees and late-payment fees increased following the application of stricter guidelines in June 2007. Income from deposit accounts continued to rise, as result of an increase in membership fees and the introduction of a flexible pricing option. Income from eߛchannels rose by 6 per cent on higher usage. 

In Brazil, fee income fell by 15 per centfollowing a ruling by the Brazilian Central Bank removing certain fees, such as charges on early loan repayments and returned cheques. The effect was compounded by a lower number of transactions, which reduced current account fees, and the discontinuation of commission paid by the Brazilian social security agency for pension payment services. This was partly offset by a rise in pension administration fees and higher cards income driven by growth in cards in force. 

In Argentina, net fee income decreased by 18 per cent, mainly because lower commissions were earned from the pension fund business following pension-related reform introduced by the government. Higher general insurance sales resulted in increased commissions paid. This was partially offset by higher commission income on vehicle loans and credit cards, reflecting volume growth

Gains from financial investments increased by US$74 million, mainly because of a gain on redemption of Visa shares following the global IPO. Gains were recorded in Mexico (US$55 million), Panama (US$12 million), Brazil (US$11 million) and other Central American countries (US$million). Brazil also recorded a gain of US$16 million on the sale of shares in a local stock exchange. A gain of US$33 million on a similar sale of shares was registered in the first half of 2007

Other operating income fell, mainly because, in the first half of 2007, results benefited from a oneߛoff refinement of the income recognition methodology used in respect of long-term insurance contracts in Mexico. This was partially offset by a similar adjustment in Brazil in the first half of 2008 which resulted in a non-recurrent gain of US$45 million

Net insurance premiums rose by 8 per cent to US$802 millionIn Mexico, growth of 20 per cent was mainly driven by higher gross premiums on life and motor products. Sales of life products grew faster than non-life products due to an increased focus by HSBC on life insurance sales through the branch network and other distribution channels, in particular, the telemarketing of personal accident insurance. In Brazil, net insurance premiums rose by 9 per cent. Pension-related business grew, driven by sales initiatives which generated organic growth in both regular and additional contributions

In Argentinainsurance premium growth was driven by the general insurance business from a mixture of higher premiums and increased sales. Vehicle insurance products generated the largest increases, mainly because of higher prices. Overall, premium income on life insurance decreased due to the cessation of part of the business related to the pension fund portfolio as a consequence of changes in government legislation.

Loan impairment charges rose by 35 per centto US$1.1 billion. In Mexico, loan impairment charges rose by 76 per cent, largely from portfolio growth and higher delinquency in the credit card portfolio following HSBC's targeted expansion in the market in previous years. The increase in loan impairment charges is cost of building higher market share through organic growth in an area where HSBC was previously under-represented. Personal instalment loans also contributed to the increase in loan impairment charges. 

Loan impairment charges in Brazil rose by 8 per cent, reflecting strong asset growth and higher delinquency levels in vehicle finance, and store loans which were partly offset by the gain on sale of an impaired loan portfolio. The impaired loan to total customer loans ratio, improved by 1.2 percentage pointsCredit models were updated during the first half of 2008 to reflect recent underwriting experience and were supplemented by improved collection strategies.

In Argentina, growth in loan impairment charges of 68 per cent was driven by increased customer advances and higher delinquency levels on the consumer finance portfolio.

Operating expenses increased by 5 per cent to US$2.1 billion.

In Mexico, operating expenses grew by 12 per centStaff costs rose as a result of the annual salary review in earlier 2008, partly offset by lower staff numbersNon-staff costs rose on the increased use of the cash-back facility on the Tu Cuenta product. This was partly offset by a decrease in contract personnel as a result of a refinement in asset growth strategy in the latter part of 2007.

In Brazil, expenses decreased by 5 per cent, as a result of the recognition of a tax credit related to a court decision granting the right to recover excess taxes paid on insurance transactions. Transactional taxes reduced further, due to the removal of tax on withdrawals in 2008. Additional costs were incurred in support of growth in the credit card business and improved operational processes for both debit and credit cards. Staff costs increased marginally, mainly driven by increased performance-related incentives, in line with profit growth and union-agreed pay rises. This increase was partially offset by a restructuring exercise initiated in the first half of 2007 which reduced staff numbers.

In Argentina, expenses grew by 29 per cent. Staff costs rose on higher salaries following pay reviews. Non-staff costs increased in the form of utility and general administration costs due to higher prices following inflation adjustments by suppliers. 

Commercial Banking reported pre-tax profits of US$411 million, an increase of 8 per cent over the first half of 2007. Revenues grew as the business continued to expand in the region in line with HSBC's objective to be the leading international bank and the best bank for small businesses. The regional network of International Banking Centres based in ArgentinaBrazil and Mexico significantly increased their number of successful international referrals. Loan impairment charges rose by 26 per cent. Operating expenses increased by 11 per centThe cost efficiency ratio improved by 0.2 percentage points

In Mexicoa decline in profit before tax of 27 per cent was mainly the result of a one-off writeback of loan impairment charges in 2007, following a review of credit models. 

In Brazil, pre-tax profits rose by 44 per cent, driven by higher net interest income on strong balance sheet growth and lower loan impairment charges as delinquency levels improved

In Argentina, profit before tax rose by 33 per cent, as net interest and fee income rose on business growth. 

Net interest income increased by 10 per cent to US$800 million, mainly as a result of balance sheet growth

In Mexico, net interest income rose by 2 per cent on increased volumes in medium-sized business loans, in both local currency and US dollars, and real estate loans, which were driven by market growth in the construction sectorLoans denominated in US dollars rose due to higher demand as a result of the lower dollar rates. The spread for small and medium business loans widened following a repricing strategyUS dollar denominated loan spreads narrowed by 137 basis points due to higher funding costs. 

Average balances on total deposits increased by 18 per cent as customers held higher balances for longer periods. Regulations prohibiting government treasuries from holding balances in non-interest bearing accounts resulted in a shift in commercial balances from demand to term deposits, putting pressure on the overall yieldSpreads on deposits denominated in US dollars narrowed in a falling rate environment.

In Brazil, the favourable economic scenario led to an increase in the demand for credit. Sales and repricing initiatives, combined with longer loan maturity periods and improved geographical coverage, contributed to robust growth in lending balances and an increase in net interest income of 15 per centThe strong growth was mostly in working capital, receivables-backed loans and trade financeSpreads were slightly lower in the overall portfolio as a consequence of market competition and HSBC's business strategy of seeking reduced credit risk and focusing on secured loans and trade products. Spreads on overdrafts increased driven by a decline in base rates.

Sales through direct channels grew by 76 per cent, mostly in guaranteed accounts, discounted trade notes and investments. This was primarily driven by the launch of Empreendedor Direto in the second half of 2007.

In Argentina, net interest income grew by 49 per cent. Growth in both assets and liabilities was mainly driven by customer acquisitions following wider geographical coverage from the integration of Banca Nazionale's commercial network. Overdraft balances grew on increased economic activity. Higher volumes of receivables finance were driven by focused marketing campaigns. The leasing portfolio grew by 40 per cent. Spreads on overdrafts widened, while spreads on receivables finance and leasing decreased.

Demand deposits grew by 22 per cent and term deposits grew by 9 per cent following a three month marketing campaign in 2008. Spreads in demand deposits widened on higher base rates but were partially offset by slightly lower spreads on term deposits due to a more competitive market environment. Overall, spreads on customer deposits widened by 133 basis points. 

Net fee income was 5 per cent higher at US$271 million. In Brazil, this largely arose from increases in collection bill fees, mainly due to higher transaction volumes and repricing initiatives to align with local market prices. Standby letters of credit, bank guarantees and assets under management also contributed to this increase, driven by higher volumes as the business focused on cross-sales using customer relationship management tools. These tools enabled relationship managers to offer suitable products to customers which were more in line with their particular banking preferences

In Mexico, fee income decreased by 3 per cent. Increased usage by non-HSBC customers following the recent extension of the network drove an increase of 76 per cent in automated teller machine ('ATM') fees. Higher prices resulted in income growth on payments and cash management. These factors were offset by lower income on remittances, which fell in line with decreased volumes in the more competitive environment, coupled with the effects of the weakening US economy.

Higher fee income in Argentina was mainly due to increased account services commissions on greater customer activity and repricing of fees.

Trading income rose by 85 per cent to US$37 million, mainly in Brazil due to higher volumes of treasury products and spot foreign exchange deals which benefited from increased demand in the favourable economic conditions.

Loan impairment charges increased by 26 per cent to US$110 million due to higher loan impairment charges in Mexico, partially offset by lower ones Brazil. 

In Mexicohigher loan impairment charges on commercial and real estate loans were mainly driven by organic growth in the portfolio. In 2007, net releases of loan allowances were reported in Mexico due to changes made to the credit models to more accurately represent the most recent behaviour in the underlying commercial loan portfolios. The risk profile of the loan portfolio remained stable during the first half of 2008.

In Brazil, loan impairment charges decreased by 18 per cent despite a 38 per cent growth in average lending balances. This was driven by improved delinquency levels in the small and medium enterprises segment and the absence of any new significant individual loan impairment charges in the current period.

Operating expenses increased by 11 per cent to US$643 million.

In Mexico, operating expenses increased by 10 per cent. Staff costs decreased as the effects of the annual salary review and higher performance-related compensation were offset by refinements in the allocation of statutory profit sharing compensation. Other operating expenses increased, primarily driven by higher operational losses.

Operating expenses in Brazil rose by 9 per cent. Staff costs grew as a result of higher remuneration and performance-related incentives aligned with business growth, and union-agreed pay rises. These factors were partly offset by lower headcount following business restructuring, resulting in increased efficiency. Other operating costs also grew due to higher litigation expenses, mainly driven by civil claims, and transactional taxes increased on higher volumes. 

In Argentina, expenses increased by 65 per cent, mainly driven by higher indirect costs. Staff costs rose on following pay reviews in line with labour union agreements. Other costs also grew in the inflationary environment. 

Global Banking and Markets reported a pre-tax profit of US$38million, representing an increase of 36 per cent compared with the first half of 2007. In Mexico, pre-tax profits increased by 100 per cent, mainly as a result of higher net interest income. In Brazil, pre-tax profits grew by 12 per cent due to higher foreign exchange trading revenues. In Argentina, growth was driven by an increase in net interest income and foreign exchange trading incomeThe cost efficiency ratio for the region improved by 0.5 percentage points. 

Total operating income rose by 33 per cent to US$726 million, mainly due to growth in foreign exchange trading in Brazilreflecting the success of HSBC's strategy to provide a wider product range with a focus on structured derivatives, particularly to Commercial Banking customers, and due to an increase in income earned in Balance Sheet Management.

In Mexico, pre-tax profits increased due to strong growth in net interest income as favourable market conditions led to a robust performance from Balance Sheet Management. Trading income declined, despite growth in foreign exchange, as the Mexican financial markets continued to exhibit low levels of volatility. 

In Brazil, pre-tax profits were 12 per cent higher, due to strong growth in foreign exchange trading and an increase in securities services deposits as clients moved funds into Brazil for investment. A significant increase in operating expenses was due to an investment in new IT systems to support volume growth as well as growth in staff numbers as HSBC enhanced its capabilities, including the establishment of a new global research team. 

In Argentina, pre-tax profits improved by 14 per cent. Higher revenues were driven by growth in net interest income and an increase in foreign exchange trading income due to market volatility. This was partly offset by higher operating expenses, driven by high levels of inflation, an increase in staff costs following labour union agreements.

Net interest income rose by 68 per cent to US$337 million, predominantly from growth in MexicoBalance Sheet Management performed well, driven by favourable market conditions in Mexico and Argentina, due to an increase in balance sheet volumes and wider spreads. In addition, the strong equity markets in Brazil led to an increase in securities services deposits as clients moved funds into the country for investment. 

Net fee income grew by 5 per cent to US$131 million, largely in Mexico where increased loan facility fees were driven by higher lending volumesFee income increased in securities services, partly in Brazil, as a result of the increase in deposits discussed above. The development of the retail equity trading platform in Brazil also contributed to the increase in fee income. 

Trading income was 29 per cent higher at US$137 million, driven by solid growth in foreign exchange trading in Brazil, due to a wider product offering which was particularly targeted at Commercial Banking customers. In Mexico, trading income declined, despite growth in foreign exchange, as the Mexican financial markets continued to exhibit low volatility, resulting in challenging trading conditionsTrading income in Argentina increased as a result of strong performance in foreign exchange in the volatile markets.

Gains less losses from financial investments decreased by 25 per cent to US$45 million, due to a lower value of disposals in MexicoBrazil and Argentina compared with the first half of 2007.

small release of loan impairment charges was in line with the first half of 2007.

Operating expenses increased by 33 per cent to US$309 million. A significant rise in operating expenses in Brazil was partly caused by higher IT costs due to investment in new systems to support volume growth and automate processes on complex products. Staff numbers increased in Global Markets, as HSBC enhanced its customer proposition, including the establishment of a new global research teamPerformance costs also rose in line with improved performance in Global Markets. Operating expenses in Argentina increased, mainly driven by an increase in staff costs following labour union pay agreement. Other costs grew in the inflationary environment.

Private Banking reported a pre-tax profit of US$8 million, a decrease of 20 per cent. An improved performance in Brazil was offset by higher expenditure in the region. As a result, the cost efficiency ratio worsened by 9.6 percentage points to 78.4 per cent.

Revenues grew by 16 per cent to US$37 million, with improvements in both net interest income and fee income. Balance sheet growth across the region drove the 44 per cent increase in net interest income, while improvements in securities trading in Brazil underpinned the rise in net fee incomeThis was offset by lower brokerage fees in Mexico, however, due to a general slowdown in the market.

Client assets were US$12.6 billion, compared with US$11.6 billion at 31 December 2007, due to new product offerings in BrazilInward referrals from other customer groups contributed US$444 million to total client assets, flat when compared with the first half of 2007.

Operating expenses grew by 32 per cent to US$29 million, driven by a rise in staff costs to support business expansion and increased bonuses.

Amounts reported in Other were largely in line with the first half of 2007.




Reconciliation of reported and underlying profit before tax


Half-year to 30 June 2008 ('1H08') compared with half-year to 31 December 2007 ('2H07')

Latin America

    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     

3,042


-


170


3,212


-


150


3,362


11


5

Net fee income     

1,155


-


60


1,215


-


(76)


1,139


(1)


(6)

Other income3    

 

782


(11)


43


814


-


140


954


22


17




















Net operating income4  

   

4,979


(11)


273


5,241


-


214


5,455


10


4



















Loan impairment charges and other credit risk provisions     

(922)


-


(49)


(971)


-


(199)


(1,170)


(27)


(20)



















Net operating income     

4,057


(11)


224


4,270


-


15


4,285


6


0



















Operating expenses     

(2,886)


-


(164)


(3,050)


-


27


(3,023)


(5)


1



















Operating profit     

1,171


(11)


60


1,220


-


42


1,262


8


3



















Income from associates     

7


-


(1)


6


-


(2)


4


(43)


(33)



















Profit before tax     

1,178


(11)


59


1,226


-


40


1,266


7


3

For footnotes, see page 89.

Analysis by customer group and global business 

Profit/(loss) before tax 


Half-year to 30 June 2008

Latin America

    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)         

2,376 


800 


337 


13 


(2)


(162)


3,362 















Net fee income                 

712 


271 


131 


19 



-


1,139 















Trading income excluding 
net interest income     

16 


34 


130 




-


182 

Net interest income on 
trading activities     

    

        

    



-


-


162 


176 















Net trading income7     

20 


37 


137 




162 


358 

Net income/(expense) from financial instruments designated at fair value     

162 


-


(6)


-


-


-


156 

Gains less losses from financial investments     

111 


11 


45 



(1)


-


168 

Dividend income     


-



-


-


-


Net earned insurance premiums     

802 


47 


56 


-


(5)


-


900 

Other operating income     

98 


20 


24 




(21)


130 















Total operating income     

4,285 


1,186 


726 


37 



(21)


6,219 















Net insurance claims8      

(706)


(22)


(36)


-


-


-


(764)















Net operating income4     

3,579 


1,164 


690 


37 



(21)


5,455 















Loan impairment (charges)/ recoveries and other credit risk provisions     

(1,060)


(110)



-


(2)


-


(1,170)















Net operating income    

2,519 


1,054 


692 


37 



(21)


4,285 















Total operating expenses     

(2,055)


(643)


(309)


(29)


(8)


21 


(3,023)















Operating profit/(loss)     

464 


411 


383 



(4)


-


1,262 















Share of profit in associates and joint ventures     


-


-


-


-


-
















Profit/(loss) before tax     

468 


411 


383 



(4)


-


1,266 
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit 

before tax     

4.6 


4.0 


3.7 


0.1 


        (0.1)




12.3 

Cost efficiency ratio     

57.4 


55.2 


44.8 


78.4 


133.3 




55.4 















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net) 
    

24,431 


19,073 


10,704 


44 


-




54,252 

Total assets     

39,883 


24,505 


52,290 


300 


41 




117,019 

Customer accounts     

34,368 


17,021 


19,072 


1,318 


-




71,779 

Loans and advances to
banks (net)
12     





13,812 









Trading assets12,13     





12,303 









Financial instruments designated at fair value12         





106 









Financial investments12     





11,781 









Deposits by banks12     





2,812 









Trading liabilities12,13     





7,878 









For footnotes, see page 89.



Profit/(loss) before tax 


Half-year to 30 June 2007

Latin America

    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        

1,821 


656 


181 




(133)


2,534 















Net fee income                 

636 


234 


109 


16 



-


998 















Trading income/(expense) excluding net interest income     

32 


17 


83 



(1)


-


132 

Net interest income on 
trading activities 
    



13 


-


-


133 


153 















Net trading income/
(expense)7     

38 


18 


96 



(1)


133 


285 

Net income from financial instruments designated 
at fair value 
    

153 


-



-


-


-


157 

Gains less losses from financial investments     

30 


13 


55 


-


-


-


98 

Dividend income     




-


-


-


Net earned insurance premiums     

658 


32 


41 


-


-


-


731 

Other operating income     

134 


12 





(13)


153 















Total operating income     

3,474 


966 


495 


29 


11 


(13)


4,962 















Net insurance claims8      

(626)


(17)


(33)


-


-


-


(676)















Net operating income4     

2,848 


949 


462 


29 


11 


(13)


4,286 















Loan impairment (charges)/ recoveries and other credit risk provisions     

(701)


(74)



-


(2)


-


(775)















Net operating income     

2,147 


875 


464 


29 



(13)


3,511 















Total operating expenses     

(1,764)


(523)


(211)


(19)


(12)


13 


(2,516)















Operating profit/(loss)     

383 


352 


253 


10 


(3)


-


995 















Share of profit in associates and joint ventures     


-


-


-


-


-
















Profit/(loss) before tax     

388 


352 


253 


10 


(3)


-


1,000 
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit 

before tax     

    2.7 


    2.5 


    1.8 


    0.1 


    -


    


    7.1 

Cost efficiency ratio     

    61.9 


    55.1 


    45.7 


    65.5 


    109.1 


    


    58.7 















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net) 
    

19,529 


12,744 


8,306 


27 


-




40,606 

Total assets     

32,024 


17,520 


39,260 


96 


25 




88,925 

Customer accounts     

26,195 


14,546 


13,778 


511 


219 




55,249 

Loans and advances to
banks (net)
12     





10,625 









Trading assets12,13     





9,541









Financial instruments designated at fair value12         





199









Financial investments12     





9,163









Deposits by banks12     





2,862 









Trading liabilities12,13     





6,609









For footnotes, see page 89.  Analysis by customer group and global business (continued) 

Profit/(loss) before tax 


Half-year to 31 December 2007

Latin America

    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         

2,162


751


229


12


2


(114)


3,042















Net fee income ..                

736


251


141


24


3


-


1,155















Trading income excluding 
net interest income     

35


22


81


1


1


-


140

Net interest income on 
trading activities     

4


-


5


-


-


114


123















Net trading income7     

39


22


86


1


1


114


263

Net income from financial instruments designated 
at fair value     

161


-


2


-


-


-


163

Gains less losses from financial investments     

90


38


27


1


(1)


-


155

Gains arising from dilution 
of interests in associates 
    

-


-


-


-


11


-


11

Dividend income     

1


1


1


-


-


-


3

Net earned insurance premiums     

790


34


39


-


-


-


863

Other operating income    

11


57


23


4


4


(24)


75















Total operating income     

3,990


1,154


548


42


20


(24)


5,730















Net insurance claims8      

(704)


(20)


(27)


-


-


-


(751)















Net operating income4     

3,286


1,134


521


42


20


(24)


4,979















Loan impairment (charges)/ recoveries and other credit risk provisions     

(791)


(138)


11


-


(4)


-


(922)















Net operating income     

2,495


996


532


42


16


(24)


4,057















Total operating expenses     

(1,994)


(609)


(270)


(27)


(10)


24


(2,886)















Operating profit     

501


387


262


15


6


-


1,171















Share of profit in associates and joint ventures     

4


1


2


-


-


-


7















Profit before tax     

505


388


264


15


6


-


1,178
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit 
before tax     

    5.0


    3.9


    2.6


    0.1


    0.1




    11.7

Cost efficiency ratio     

    60.7


    53.7


    51.8


    64.3


    50.0




    58.0















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net) 
    

21,680 


16,243 


9,935 


65 


-




47,923 

Total assets     

34,829 


20,928 


43,012 


260 


27 




99,056 

Customer accounts     

30,628 


15,524 


13,950 


1,190 


-




61,292 

Loans and advances to
banks (net)
12     





10,339 









Trading assets12,13     





10,384









Financial instruments designated at fair value12         





225









Financial investments12     





10,155









Deposits by banks12     





2,830 









Trading liabilities12,13     





6,984









For footnotes, see page 89. 

Footnotes to the Business Review

The footnotes below refer to the reconciliations of reported and underlying profit before tax, and the analyses of customer groups and global businesses on pages 13 to 27 and the geographical regions on pages 28 to 89.

1    Columns headed 'Acquisitions' and, in 2007, 'Disposals and dilution gains', comprise the net increment or decrement in profits in the current half-year (compared with the previous half-years) which are attributable to acquisitions or disposals of subsidiaries made, or dilution gains, in the relevant periods. Acquisitions and disposals are determined based on the review and analysis of the events in each period.

2    'Currency translation' is the effect of translating the results of subsidiaries and associates for the previous half-years at the average rates of exchange applicable in the current half-year.

3    Other income in this context comprises net trading income (see 7 below), net income from financial instruments designated at fair value, gains less losses from financial investments, gains arising from dilution of interests in associates, dividend income, net earned insurance premiums and other operating income less net insurance claims incurred and investment in liabilities to policyholders.

4    Net operating income before loan impairment charges and other credit risk provisions.

5    The main items reported under 'Other' are certain property activities, unallocated investment activities including hsbc.com, centrally held investment companies, gains arising from the dilution of interests in associates, movements in the fair value of own debt designated at fair value (the rest of the Group's debt is included in Global Banking and Markets), and HSBC's holding company and financing operations. The results also include net interest earned on free capital held centrally, operating costs incurred by the head office operations in providing stewardship and central management services to HSBC, and costs incurred by the Group Service Centres and Shared Service Organisations and associated recoveries. At 30 June 2008, gains arising from the dilution of interests in associates were nil (first half of 2007: US$1.076 million; second half of 2007: US$16 million) and fair value gains on HSBC's debt designated at fair value were US$749 million (first half of 2007: US$2,909 million; second half of 2007: US$84 million).

6    Third party only.

7    In the customer group analyses, net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities classified as held for trading, together with related external and internal interest income and interest expense, and dividends received; in the statutory presentation internal interest income and expense are eliminated.

8    Net insurance claims incurred and movement in liabilities to policyholders.

9    Inter-segment elimination comprises (i) the costs of shared services and Group Service Centres included within 'Other' which are recovered from customer groups, and (ii) the intra-segment funding costs of trading activities undertaken within Global Banking and Markets. HSBC's balance sheet management business reported within Global Banking and Markets, provides funding to the trading businesses. To report Global Banking and Markets' net trading income on a fully funded basis, net interest income and net interest income/(expense) on trading activities are grossed up to reflect internal funding transactions prior to their elimination in the inter-segment column.

10    Equities includes a total gain of US$107 million in the first half of 2007 from the disposal of HSBC's investments in Euronext N.V. and the Montreal Exchange.

11    'Other' in Global Banking and Markets includes net interest earned on free capital held in the global business not assigned to products.

12        Assets and liabilities which were significant to Global Banking and Markets.

13    Trading assets and trading liabilities include derivatives.

14    Global Banking and Markets in Europe includes venture capital gains of US$187 million in the first half of 2008 (US$548 million in the first half of 2007: US$443 million in the second half of 2007).

15    France primarily comprises the domestic operations of HSBC France and the Paris branch of HSBC Bank plc.

16    Trading assets, financial instruments designated at fair value and financial investments held in Europe, and by Global Banking and Markets in North America, include financial assets which may be repledged or resold by counterparties.



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