2008 Interim Report Section 8

RNS Number : 6143A

HSBC Holdings PLC

04 August 2008

 



Income statement

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007 US$m
				,
Interest income	47,164		43,567		48,792
Interest expense	(25,986)		(25,337)		(29,227)
Net interest income	21,178		18,230		19,565
Fee income	13,381		12,488		13,849
Fee expense	(2,390)		(1,993)		(2,342)
Net fee income	10,991		10,495		11,507
Trading income excluding net interest income	639		3,351		1,107
Net interest income on trading activities	3,195		2,160		3,216
Net trading income	3,834		5,511		4,323
Net income/(expense) from financial instruments designated at fair value	(584)		874		3,209
Gains less losses from financial investments	817		999		957
Gains arising from dilution of interests in associates	–		1,076		16
Dividend income	88		252		72
Net earned insurance premiums	5,153		3,977		5,099
Other operating income	1,435		678		761
Total operating income	42,912		42,092		45,509
Net insurance claims incurred and movement in liabilities to policyholders	(3,437)		(3,599)		(5,009)
Net operating income before loan impairment charges and other credit risk provisions	39,475		38,493		40,500
Loan impairment charges and other credit risk provisions	(10,058)		(6,346)		(10,896)
Net operating income	29,417		32,147		29,604
Employee compensation and benefits	(10,925)		(10,430)		(10,904)
General and administrative expenses	(7,479)		(7,022)		(8,272)
Depreciation of property, plant and equipment	(863)		(817)		(897)
Amortisation and impairment of intangible assets	(346)		(342)		(358)
Goodwill impairment	(527)		–		–
Total operating expenses	(20,140)		(18,611)		(20,431)
Operating profit	9,277		13,536		9,173
Share of profit in associates and joint ventures	970		623		880
Profit before tax	10,247		14,159		10,053
Tax expense	(1,941)		(2,645)		(1,112)
Profit for the period	8,306		11,514		8,941
Profit attributable to shareholders of the parent company	7,722		10,895		8,238
Profit attributable to minority interests	584		619		703

In the first half of 2008, a period marked by significant declines in profitability throughout much of the banking industry in the most difficult financial markets for decades, HSBC produced a pre-tax profit of US$10.2 billion which, although 28 per cent lower than in the first half of 2007, demonstrated the strength and resilience of the Group's diversified business model in troubled times. On an underlying basis pre-tax profit was 25 per cent lower.

Results in the first half of 2007 benefited from US$1.1 billion of one-off dilution gains arising on shares issued by the Group's mainland China associates: Industrial Bank, Ping An Insurance and Bank of Communications. This translated into a benefit to earnings per share of US$0.09. In the first half of 2008, results incorporated a non-cash pre- and post-tax impairment charge of US$527 million in North America Personal Financial Services. This represented US$0.04 per share.

During this period, HSBC remained profitable in all customer groups, most notably considering the market turmoil, Global Banking and Markets. In Commercial Banking and Private Banking, profits reached new heights for a six-month period, as they

did in the developing markets operations of both Personal Financial Services and Global Banking and Markets. The Group also remained profitable in all geographical regions with the continuing exception of North America, where the consumer finance business remained heavily affected by the deepening housing market weakness and general economic slowdown. In addition, Global Banking and Markets suffered further credit turmoil-related write-downs on trading exposures and leveraged loans. 

These continuing areas of weakness contrasted with the very strong financial performance across most developing markets businesses, which was augmented by significant improvements in profitability in the European businesses, which achieved good revenue growth without substantially adding to costs.

Changes in the composition of the Group in this period were modest with the only major transaction being the acquisition of the assets, liabilities and operations of The Chinese Bank in Taiwan, which was completed in March. The sale of the regional bank network in France to Banque Populaire announced in February was completed on 2 July 2008 and a gain of US$2.1 billion will be recorded in second half results.

Earnings per share declined by 32 per cent to US$0.65, with return on shareholders' equity below 15 per cent. HSBC's capital ratios remained strong, with a tier one capital ratio of 8.8 per cent on a Basel II basis.

Revenues increased by US$982 million, or 3 per cent, affected significantly by the drag from the deterioration in credit quality in the US consumer finance business and write-downs in Global Banking and Markets of US$3.9 billion. Cost growth of US$1.5 billion, or 8 per cent, was slower than that reported in the first half of 2007, and primarily reflected action taken to remove costs from the underperforming US businesses. The Group's retail deposit and lending businesses, both personal and commercial, contributed strongly to revenue growth, delivering increases in net interest income and fee income of 9 per cent and 5 per cent, respectively, despite margin pressure on certain deposit products due to sharp declines in interest rates in the US and Hong Kong.

Within Global Banking and Markets' emerging markets businesses, in addition to the strong revenue growth in foreign exchange and transaction banking, Balance Sheet Management recovered strongly.

Geographically, the share of profits from Hong Kong, the Rest of Asia-Pacific region and Latin America grew to 78 per cent of total Group profits.

In Europe, profit before tax rose by 28 per cent, with strong performances in Commercial Banking, Personal Financial Services and Private Banking. These offset credit-related write-downs which held back Global Banking and Markets, despite the good performance of Balance Sheet Management, foreign exchange and the Rates business. Operating expenses benefited from the suspension of ex gratia payments for UK overdraft fees pending legal proceedings. Gains were recorded on the sale of MasterCard shares and the disposal of the UK merchant acquiring business, and from fair value gains on certain portions of the Group's own debt. Despite deterioration in the outlook for the UK economy, credit conditions remained stable with loan impairment charges declining, partly offset by a rise in Turkey.

Pre-tax profits from HSBC's operations in Hong Kong of US$3.1 billion were, however, lower than the US$3.3 billion reported in the first half of 2007, a decrease of 8 per cent due to the impairment of certain of HSBC's strategic investments in the Asian region as stock markets declined. In the opinion of HSBC management, these stakes continue to deliver the market access envisaged when they were acquired.

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

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

In North America, profitability declined by US$5.3 billion to reflect a pre-tax loss of US$2.9 billion, due to a rise in loan impairment charges in Personal Financial Services and credit-related write-downs in Global Banking and Markets which exceeded the savings in operating costs instigated by management. The ongoing restriction in credit availability in the US economy resulted in an acceleration in house price declines as refinancing opportunities remained limited. Unemployment increased and personal bankruptcies rose, resulting in a widening of the credit quality deterioration that, in 2007, had been concentrated in sub-prime mortgage portfolios. Where foreclosures could not be avoided, losses rose due to the decline in property values. The Commercial Banking business was also affected by spread compression on its deposit-taking business, and a rise in loan impairments due to provisioning for the weaker economic outlook. 

In Latin America, pre-tax profits rose by 27 per cent, driven by Commercial Banking, where HSBC continued to use its international banking connections to expand trade finance and cross-border referrals, and Global Banking and Markets, which benefited from strong growth in foreign exchange and Balance Sheet Management revenues. Personal Financial Services profit before tax increased on balance sheet expansion and from a number of one-off gains, partly offset by rising loan impairment charges on credit cards in Mexico as the portfolio matured.

Outside Asia, insurance operations, whose results are reported mainly in Personal Financial Services and Commercial Banking, continued to increase their contribution to the Group's results. In Asia, impairments booked against certain investments and declines in insurance assets due to weaker equity markets exceeded the contribution from associates. 

HSBC's strategy of using investment stakes where appropriate to increase exposure in fast growing markets, particularly mainland China, made a material contribution to Group's results as the share of profit in associates increased by 56 per cent to US$970 million. 

Net interest income

	Half-year to
	30 June     2008		30 June     2007		31 December     2007
	US$m		US$m		US$m
Net interest income	21,178		18,230		19,565
Average interest-earning assets	1,420,288		1,230,903		1,361,428
	%		%		%
Gross interest yield1	6.68		7.14		7.11
Net interest spread2	3.03		2.93		2.80
Net interest margin3	3.00		2.99		2.85

1    Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA'). 

2    Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing funds.

3    Net interest margin is net interest income expressed as an annualised percentage of AIEA.

Net interest income of US$21.2 billion was 16 per cent higher than in the first half of 2007, 12 per cent higher on an underlying basis. The commentary below is on an underlying basis. 

Movements in net interest income were particularly influenced by the following factors:

• turmoil in global credit markets and significant corrections to equity markets since August 2007 drove companies and individuals to shield their assets from the worst effects of the disruption. Consequently HSBC, with its strong capital base, succeeded in attracting US$17 billion of deposits in the period;

• lower average interest rates across many of the major economies of the world, as central banks cut base rates to mitigate the effects of the US house market correction and the related credit crisis;

• as interest rates fell, yield curves steepened and this, together with an increase in surplus funds following the rise in deposits noted above, led to higher Balance Sheet Management revenues;

• an expansion in the Group's trading activities led to a higher cost of funding this business. Net interest income includes the cost of funding trading assets, while the related external revenues are reported in trading income; and

• growth in commercial lending, in particular, to the mid-market segment with strongest growth in the Asia-Pacific region and in Latin America.

In Europe, net interest income increased by 7 per cent to US$4.5 billion, notwithstanding a 28 per cent rise in the funding costs of trading activities. In Global Banking and Markets, recent interest rate reductions in the US and Europe lowered funding costs which, together with a steeper yield curve, underpinned a tripling of Balance Sheet Management revenues. Payments and cash management net interest income increased by 8 per cent as customers sought a safe haven for their sterling funds. In Switzerland, net interest income in Private Banking rose strongly as clients switched funds from investment products to deposits as equity markets weakened. Net interest income in both Personal Financial Services and Commercial Banking was broadly in line with the first half of 2007. However, branch expansion and the resulting customer acquisition in Turkey drove higher average lending and deposit balances and increased net interest income.

Net interest income in Hong Kong of US$2.8 billion was 10 per cent higher than in the first half of 2007. Higher Balance Sheet Management revenues were the primary driver of a rise in net interest income in Global Banking and Markets. Significant and deep cuts to interest rates in the US, which were followed in Hong Kong, resulted in lower funding costs and a steeper yield curve, providing increased opportunities to deploy a larger surplus pool of funds from higher deposits in the retail businesses. Net interest income in Global Banking and Markets was further boosted by a widening of lending spreads as the business took advantage of a more conservative lending environment to increase spreads. 

In Personal Financial Services, a focus on Premier and the increasing attractiveness of deposits over equity investments helped to drive a rise in savings balances and a 6 per cent increase in net interest income. In Commercial Banking, net interest income rose by 6 per cent due to higher liability balances following several targeted marketing campaigns, partly offset by lower deposit spreads in the declining rate environment.

Net interest income was 32 per cent higher in Rest of Asia-Pacific. Lower funding costs in Global Banking and Markets drove a significant increase in Balance Sheet Management revenues for the reasons noted above. Strong economic growth stimulated a strong increase in lending balances in the Middle East, generating higher net interest income. In Personal Financial Services, growth in cards and personal lending, together with higher spreads on these asset products following lower 
cost of funds, generated increased revenue. In Commercial Banking, a rise in deposit volumes was the primary cause of higher net interest income as HSBC continued to focus on organic growth in the region.

In North America, net interest income rose by 7 per cent. This was largely due to a rebound in Balance Sheet Management. 

In Personal Financial Services, net interest income was broadly in line with the first half of 2007, as the effect of lower balances as HSBC reduced the size of the consumer lending business, curtailed marketing and the ongoing running down of the mortgage services portfolio was offset by increased spreads as the cost of funds fell in the declining rate environment. In Commercial Banking, net interest income was also broadly unchanged as higher loan and deposit volumes driven by organic growth was offset by tighter deposit spreads as base rates declined.

Net interest income in Latin America of US$3.4 billion was 19 per cent higher than in the first half of 2007, largely driven by organic lending and deposit growth throughout the region, particularly in Personal Financial Services where net interest income rose by 17 per cent.

Growth in average Personal Financial Services asset balances in the region was driven by credit card sales in Mexico, albeit at a slower rate than in recent years, and by strong demand for credit in Brazil's buoyant economy. Deposit balances were boosted by competitive pricing in Mexico. The benefit of balance sheet growth was augmented by improved asset spreads. In Global Banking and Markets, higher net interest income was driven by balance sheet management in Mexico. Net interest income 
in Commercial Banking rose by 10 per cent to US$800 million, largely due to increased lending volumes in Mexico, particularly in the real estate sector, and in Brazil from sales and pricing initiatives.

Average interest-earning assets of US$1,420 billion were US$189 billion higher than in the first half of 2007, while HSBC's net interest margin was broadly unchanged. Net free funds declined as a higher proportion of assets were deployed to trading activities.

    Net fee income

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	4,223		38.4		4,144		39.5		4,287		37.3
Hong Kong	1,469		13.4		1,439		13.7		1,923		16.7
Rest of Asia-Pacific	1,338		12.1		1,010		9.6		1,236		10.7
North America	2,822		25.7		2,904		27.7		2,906		25.3
Latin America	1,139		10.4		998		9.5		1,155		10.0
Net fee income	10,991		100.0		10,495		100.0		11,507		100.0
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	4,223		38.4		4,144		39.5		4,287		37.3
Hong Kong	1,469		13.4		1,439		13.7		1,923		16.7
Rest of Asia-Pacific	1,338		12.1		1,010		9.6		1,236		10.7
North America	2,822		25.7		2,904		27.7		2,906		25.3
Latin America	1,139		10.4		998		9.5		1,155		10.0
Net fee income	10,991		100.0		10,495		100.0		11,507		100.0

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007     US$m
Cards	3,089		3,092		3,404
Account services	2,260		1,961		2,398
Funds under management	1,572		1,390		1,585
Broking income	954		928		1,084
Insurance	942		804		1,032
Global custody	757		557		847
Credit facilities	639		672		466
Imports/exports	496		407		459
Unit trusts	337		420		455
Remittances	307		273		283
Corporate finance	232		220		189
Underwriting	204		196		171
Trust income	164		146		153
Taxpayer financial services	154		234		18
Maintenance income on operating leases	70		69		70
Mortgage servicing	56		53		56
Other	1,148		1,066		1,179
Total fee income	13,381		12,488		13,849
Less: fee expense	(2,390)		(1,993)		(2,342)
Net fee income	10,991		10,495		11,507

Net fee income increased by 5 per cent to US$11.0 billion, 1 per cent on an underlying basis. The commentary that follows is on an underlying basis.

• Card fee income decreased overall due to a substantial fall in income in the consumer finance business in the US. This decline resulted from changes in fee billing arrangements implemented in the latter part of 2007 and early 2008 to improve the customer proposition. Measures included the curtailment of the over-limit fee and enhanced billing practices. The decrease more than offset increased income in other countries, mainly in Mexico and the UK.

• Although the buoyant stock market performance in Hong Kong peaked in October 2007, trading volumes in the first half of 2008 were still higher than those recorded in the comparative period in 2007. Customer appetite for investment services in Asia and the Middle East drove higher income from broking services, securities services and funds under management. Despite stock market volatility, the sale of investment products rose as customers increasingly chose structured products.

In Europe, net fee income decreased by 4 per cent. In France, fee income decreased as the regional banks were reclassified as held for sale and their income was recorded in other operating income. Fees payable increased in the UK on brokerage, stock borrowing and lending and on cards, driven by increased transaction volumes. Card-generated income increased, mainly in the UK and Turkey, on higher transaction volumes and portfolio growth. Interchange and acquiring income increased on higher transaction volumes in the UK, while a significant rise in cash advance turnover in Turkey also resulted in higher income. The benefits offered as part of the Plus account in the UK resulted in a migration from non-fee paying current accounts to the Plus account, contributing to higher income from account services. 

In Hong Kong, fee income rose by 2 per cent, mainly driven by business growth in the region. The number of cards in circulation grew over the comparable period in 2007 as the Group maintained its leadership position in Hong Kong and continued to be innovative in this category with the launch of the Green Credit Card. Stock market activity during the current period was higher than in the first half of 2007, resulting in increased income from broking services, securities services and funds under management. HSBC actively marketed its investment products through targeted programmes and incentives and introduced a portfolio wealth management sales tool in the second half of 2007. In the insurance business, sales of the Life Invest protection plan increased significantly. Higher account services fee income was generated on bundled products, mainly on PowerVantage. Unit trust income decreased due to less favourable US equity market conditions.

In Rest of Asia-Pacific, fee income increased by 26 per cent. Cards fee income rose strongly across the region driven by growth in the number of cards in circulation, balances and card usage. Income from funds under management increased, particularly in Singapore and Japan. Increased economic activity in the Middle East resulted in higher income. The region registered strong sales of investment products and higher fees from cards and trade-related lending fees. Income on insurance and securities services also grew. 

In North America, fee income fell by 2 per cent. In the consumer finance business, income fell on credit cards due to changes in fee billing arrangements implemented to improve the customer proposition. Insurance fee income rose as more customers took up the debt protection enhancement service on credit cards. Underwriting income grew on a number of transactions including the Visa IPO. The previously announced decision to stop offering pre-season funding loans based on the previous year's tax return led to lower fee income in Taxpayer Financial Services. 

In Latin America, fee income increased by 4 per cent. Card fee income rose, mainly in Mexico on a higher number of cards in force and higher collection and late payment fees, mainly due to the application of stricter guidelines and higher 
fees charged. Income from deposit accounts continued to rise, driven by an increase in membership fees. In Brazil, a ruling by the Central Bank removing certain fees, such as charges on early loan repayments and returned cheques and the discontinuation of commissions paid by the Brazilian social security agency for pension payment services negatively affected revenues.

Net trading income

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	3,649		95.2		3,338		60.5		3,605		83.4
Hong Kong	314		8.2		469		8.5		773		17.9
Rest of Asia-Pacific	1,329		34.7		797		14.5		846		19.5
North America	(1,816)		(47.4)		622		11.3		(1,164)		(26.9)
Latin America	358		9.3		285		5.2		263		6.1
Net trading income1	3,834		100.0		5,511		100.0		4,323		100.0
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	3,649		95.2		3,338		60.5		3,605		83.4
Hong Kong	314		8.2		469		8.5		773		17.9
Rest of Asia-Pacific	1,329		34.7		797		14.5		846		19.5
North America	(1,816)		(47.4)		622		11.3		(1,164)		(26.9)
Latin America	358		9.3		285		5.2		263		6.1
Net trading income1	3,834		100.0		5,511		100.0		4,323		100.0

	Half-year to
	30 June     2008     US$m		30 June     2007     US$m		31 December     2007     US$m
Trading activities	559		3,266		1,255
Net interest income on trading activities	3,195		2,160		3,216
Other trading income
Hedge ineffectiveness:
-    on cash flow hedges	(15)		(49)		(28)
-    on fair value hedges	(20)		21		(2)
Non-qualifying hedges	115		113		(118)
Net trading income1	3,834		5,511		4,323

1    The cost of internal funding of trading assets increased by US$0.8 million compared with 30 June 2007 (decreased by US$0.3 million compared with 31 December 2007) and is excluded from the reported net trading income line and included in net interest income. However, this cost is reinstated in net trading income in HSBC's customer group and global business reporting. 

Net trading income includes US$262 million associated with changes in the fair value of issued structured notes and other hybrid instrument liabilities derived from movements in HSBC issuance spreads. 

Net trading income fell by 30 per cent to US$3.8 billion due to US$3.9 billion of write-downs on credit trading, leveraged and acquisition finance, and monoline exposures, largely in the US and the UK. More information on these write-downs and the underlying assets is available on page 113. On an underlying basis the decline was 33 per cent. The following commentary is on an underlying basis.

In the prevailing conditions, the market value of certain credit instruments, most notably sub-prime residential mortgage-backed loans and structured credit instruments, deteriorated. The credit and liquidity disruption that began in the US sub-prime market spread into other mortgage and mortgage-related products. HSBC had mitigated its risk to some extent against such declines by transacting with monoline insurers to buy protection against losses from defaults. As the market turmoil worsened, the market value of this protection initially increased significantly, reflecting the market view that it was more likely that defaults would occur. The sudden increase in the potential liabilities of the monoline insurers resulted in their credit ratings being downgraded as the scale of the liabilities incurred cast significant doubt on the ability of many monoline insurers to pay. Accordingly, a credit risk write-down was taken against the market value of the exposure to monoline insurers. HSBC also originated certain leveraged and acquisition finance loans for the purpose of syndicating or selling down to generate a trading profit. The market value of some of these loans fell due to general credit and liquidity disruption, and the loss of value is reflected in trading results. 

Other than products affected by credit markets, trading performance was strong across all regions.

Foreign exchange trading maintained its excellent performance, with record trading revenues 61 per cent higher, driven by market volatility, US dollar weakness and increased customer volumes across all regions. Growth in metals revenues were achieved on the back of record commodity prices and increased investor demand, particularly for precious metals.

Credit losses of US$3.1 billion compared with income of US$658 million in the first half of 2007, due to the write-downs noted above. This included losses from structured credit derivatives. Trading in new US mortgages and related products was discontinued in late 2007.

Rates generated record trading revenues up 104 per cent, due to favourable positioning against movements in interest rate yield curves as central banks' responses to the credit turmoil drove short-term interest rates lower. Rates revenues were also boosted by new deals and the widening of spreads, due to increased customer demand.

Excluding the effect of the gain on the sale of HSBC's investments in Euronext N.V. and the Montreal Exchange in the first half of 2007, equities trading income doubled due to increased commission and equity financing revenues.

Net trading income in Europe rose by 5 per cent, despite US$1.4 billion of write-downs in the UK, as discussed above. The effect of the write-downs in the UK was offset by increased Rates revenue as short-term interest rates fell and the yield curve steepened, and by increased foreign exchange revenue as exchange rate volatility drove higher customer volumes. In France, trading income grew significantly as the Rates business saw high customer demand for inflation protection products.

In Hong Kong, a net trading income decline of 33 per cent was caused by write-downs on exposures to monoline insurers, partly offset by higher foreign exchange revenues and significantly increased sales of equity-linked investment products to retail customers.

Strong growth in Rest of Asia-Pacific came from foreign exchange and Rates trading, reflecting increased customer volumes and favourable positioning against market movements. Significant contributions to revenue growth were made in South Korea, Middle East, mainland China and India, in particular.

A net trading loss of US$1.8 billion in North America was due to the US$2.3 billion of write-downs in the US from the factors noted above. Other product areas performed well, notably foreign exchange and Rates. Foreign exchange benefited from the volatility in the US dollar exchange rate against most currencies, and Rates benefited from positioning correctly for the Federal Reserve's sudden and deep cuts to US interest rates, and the consequent steepening of the yield curve.

Net trading income grew by 12 per cent in Latin America, primarily in Brazil and Mexico, as customer demand drove higher foreign exchange volumes.

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

	Half-year to  30 June 2008				At  30 June 2008
	Net income/(expense)				Assets		Liabilities
	US$m		%		US$m		US$m
By geographical region
Europe	(659)		112.8		28,283		50,366
Hong Kong	(361)		61.8		7,075		4,218
Rest of Asia-Pacific	(88)		15.1		849		349
North America	368		(63.0)		-		34,825
Latin America	156		(26.7)		4,579		-
	(584)		100.0		40,786		89,758

	Half-year to  30 June 2007				At  30 June 2007
	Net income				Assets		Liabilities
	US$m		%		US$m		US$m
By geographical region
Europe	348		39.8		24,936		36,749
Hong Kong	210		24.0		5,507		4,393
Rest of Asia-Pacific	78		8.9		1,836		480
North America	81		9.3		-		34,344
Latin America	157		18.0		2,570		-
	874		100.0		34,849		75,966

	Half-year to 31 December 2007				At  31 December 2007
	Net income				Assets		Liabilities
	US$m		%		US$m		US$m
By geographical region
Europe	878		27.4		30,058		50,077
Hong Kong	466		14.5		7,253		4,412
Rest of Asia-Pacific	33		1.0		886		501
North America	1,669		52.0		-		34,949
Latin America	163		5.1		3,367		-
	3,209		100.0		41,564		89,939

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007 US$m
Net income/(expense) arising from:
-    financial assets held to meet liabilities under insurance and  investment contracts	(2,023)		1,348		708
-    liabilities to customers under investment contracts	745		(620)		(320)
-    HSBC's long-term debt issued and related derivatives	577		284		2,528
-        change in own credit spread on long-term debt	824		172		2,883
-        other changes in fair value1	(247)		112		(355)
-    other instruments designated at fair value and related derivatives	117		(138)		293
Net income/(expense) from financial instruments designated at fair value	(584)		874		3,209

1    Includes gains and losses arising from changes in the fair value of derivatives that are managed in conjunction with HSBC's long-term debt issued.

HSBC may designate financial instruments at fair value in order to remove or reduce accounting mismatches in measurement or recognition, or where financial instruments are managed and their performance is evaluated together on a fair value basis. All income and expense on financial instruments for which the fair value option was taken were included in this line except for issued debt securities and related derivatives, where the interest components were shown in interest expense.

HSBC has principally used the fair value designation in the following instances:

• for certain fixed-rate long-term debt issues whose interest rate characteristic has been changed to floating using interest rate swaps as part of a documented interest rate management strategy. Approximately US$67.0 billion (31 December 2007: US$66.2 billion) of the Group's debt issues have been accounted for using the fair value option. The movement in fair value of these debt issues includes the effect of own credit spread changes and any ineffectiveness in the economic relationship between the related swaps and own debt. As credit spreads widen, accounting gains are booked, and the reverse is true in the event of spreads narrowing. Ineffectiveness arises from the different credit characteristics of the swap and own debt coupled with the sensitivity of the floating leg of the swap to changes in short-term interest rates. In addition, the economic relationship between the swap and own debt can be affected by relative movements in market factors, such as bond and swap rates at inception. The size and direction of the accounting consequences of changes in own credit spread and ineffectiveness can be volatile from period to period, but do not alter the cash flows envisaged as part of the documented interest rate management strategy;

• for certain financial assets held by insurance operations and managed at fair value to meet liabilities under insurance contracts and certain liabilities under investment contracts with discretionary participation features ('DPF') approximately US$16.3 billion (31 December 2007: US$16.7 billion), and

• for financial assets held by insurance operations and managed at fair value to meet liabilities under unit-linked and other investment contracts, approximately US$13.3 billion of assets (31 December 2007: US$14.0 billion).

Net income from financial assets designated at fair value which are held to support liabilities for both insurance and investment contracts, is presented as 'Net income from financial instruments designated at fair value'. For liabilities under unit-linked and other investment contracts designated at fair value, changes are taken to the same income statement line to match the net income on the related assets. There is, however, a mismatch in presentation for insurance contracts and investment contracts with DPF, where the change in the value of the insurance contract liabilities is included within 'Net insurance claims incurred and movement in liabilities to policyholders', whereas any related asset returns are included within 'Net income from financial instruments designated at fair value'.

A negative movement in the fair value of financial instruments designated at fair value of US$584 million compared with a positive movement of US$874 million in the first half of 2007. 

Net income from financial instruments designated at fair value relating to the change in credit spread on certain long-term debt issued by HSBC Holdings and its subsidiaries increased significantly compared with the first half of 2007. Credit spreads widened significantly during the first quarter of 2008, leading to substantial positive fair value movements. However, this effect was partly reversed in the second quarter as credit spreads narrowed, leading to an overall gain of US$824 million compared with US$172 million in the first half of 2007. Over the life of this debt, these fair value movements will fully reverse. The cumulative fair value adjustment since this policy was first applied is US$2.4 billion.

A negative movement in the fair value of assets held to meet insurance and investment contracts of US$2.0 billion compared with a positive movement US$1.3 billion in the first half of 2007. The negative movement was mainly driven by declining equity market performance in Hong Kong, France and the UK compared with strong performance in the first half of 2007, which affected the value of investments held in equity portfolios within the insurance operations. To the extent that these assets are utilised to meet liabilities held under insurance and investment contracts with DPF, the above movement is wholly or partially offset by a corresponding reduction in 'Net insurance claims and movement in liabilities to policyholders'.

The reduction in the fair value of liabilities held under investment contracts of US$745 million compared with an increase of US$620 million in the first half of 2007, as the fall in the value of assets backing unit-linked investment contracts noted above led to a corresponding reduction in the liability to customers. 

Gains less losses from financial investments

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	608		74.4		790		79.1		536		56.0
Hong Kong	(98)		(12.0)		32		3.2		62		6.5
Rest of Asia-Pacific	33		4.0		26		2.6		12		1.3
North America	106		13.0		53		5.3		192		20.0
Latin America	168		20.6		98		9.8		155		16.2
Gains less losses from financial  investments	817		100.0		999		100.0		957		100.0
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	608		74.4		790		79.1		536		56.0
Hong Kong	(98)		(12.0)		32		3.2		62		6.5
Rest of Asia-Pacific	33		4.0		26		2.6		12		1.3
North America	106		13.0		53		5.3		192		20.0
Latin America	168		20.6		98		9.8		155		16.2
Gains less losses from financial  investments	817		100.0		999		100.0		957		100.0

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007 US$m
Net gains from disposal of:
-    debt securities	38		133		(13)
-    equity securities	1,107		852		1,009
-    other financial investments	(11)		14		-
Impairment of equity securities	(317)		-		(39)
Gains less losses from financial investments	817		999		957

HSBC reported net gains of US$817 million during the first half of 2008 from the sale of financial investments, 18 per cent lower than in the first half of 2007 and 23 per cent lower on an underlying basis.

The following commentary is on an underlying basis.

In the first half of 2008, US$332 million of gains were attributable to the redemption of Visa shares following its IPO. These gains were regionally dispersed across Hong Kong, North America, Latin America and the Rest of Asia-Pacific regions as shares in Visa were allocated in the IPO to member banks and subsequently redeemed. Similarly, gains were realised on the sale of MasterCard shares, following its IPO.

In Europe, gains of US$608 million were 27 per cent less than in the first half of 2007. Profit on the disposal of MasterCard shares was more than offset by lower gains from the sale of equity holdings in the UK and France. In Private Banking, a gain of US$73 million was derived from the sale of HSBC's residual holding in the Hermitage Fund, which compared with US$23 million in the first half of 2007. 

In Hong Kong, a loss of US$98 million in the first half of 2008 compared with a gain of US$32 million in the first half of 2007. The redemption of MasterCard shares, along with the gains from Visa referred to above, were more than offset by impairments booked against certain of HSBC's strategic investments in the region. These investments were made as part of the strategic positioning of HSBC's businesses in Asia, and the write-downs were required following significant falls in equity market prices. 

In North America, gains of US$106 million were 89 per cent higher than in the first half of 2007, largely due to the Visa share redemption. This increase was marginally offset by lower gains from the sale of debt securities due to less favourable market conditions compared with the first half of 2007.

Gains of US$168 million in Latin America were 50 per cent higher than in the first half of 2007, principally due to Visa gains in Mexico, Central America and Brazil. In the latter, gains were lower than in the first half of 2007, which included the gain on sale of an equity holding related to a credit bureau.

Net earned insurance premiums

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	2,286		44.4		1,480		37.2		2,530		49.6
Hong Kong	1,650		32.0		1,426		35.9		1,371		26.9
Rest of Asia-Pacific	114		2.2		109		2.7		117		2.3
North America	203		3.9		231		5.8		218		4.3
Latin America	900		17.5		731		18.4		863		16.9
Net earned insurance premiums	5,153		100.0		3,977		100.0		5,099		100.0
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	2,286		44.4		1,480		37.2		2,530		49.6
Hong Kong	1,650		32.0		1,426		35.9		1,371		26.9
Rest of Asia-Pacific	114		2.2		109		2.7		117		2.3
North America	203		3.9		231		5.8		218		4.3
Latin America	900		17.5		731		18.4		863		16.9
Net earned insurance premiums	5,153		100.0		3,977		100.0		5,099		100.0

	Half-year to
	30 June 2007 US$m		30 June 2007 US$m		31 December 2007     US$m
Gross insurance premium income	6,591		4,532		6,469
Reinsurance premiums	(1,438)		(555)		(1,370)
Net earned insurance premiums	5,153		3,977		5,099

Net earned insurance premiums increased by 30 per cent to US$5.2 billion. HSBC acquired the remaining 51 per cent interest in HSBC Assurances in France in March 2007 and sold the Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited in the UK in October 2007. On an underlying basis, net earned insurance premiums increased by 11 per cent.

The commentary that follows is on an underlying basis.

In Europe, net earned insurance premiums increased by 10 per cent, primarily driven by the UK business, which launched the new Guaranteed Income Bond in June 2007 within the life insurance business. UK net insurance premiums were also boosted by a reclassification of certain pension contracts as 'insurance' rather than 'investment' products following the addition of enhanced life insurance benefits. In France, net insurance premiums in the first half of 2008 were reduced by a reinsurance transaction which passed insurance premiums to a third party reinsurance provider. Excluding this, gross premiums in France increased as a result of promotional offers during the first half of 2008. 

In Hong Kong, net earned insurance premiums of US$1.7 billion were 15 per cent higher than in the first half of 2007. Higher premium income from the life insurance business was driven by increased sales of endowment savings products in Hang Seng Life, which was the leading writer of life insurance new business in Hong Kong in the first quarter of 2008, with a market share of 16 per cent. The fluctuating investment market and lower interest rate environment helped the growth of the life insurance business as customers sought more secure, steady growth products.

In the Rest of Asia-Pacific region, net insurance premiums were 4 per cent lower than in the first half of 2007. Increased life insurance business in Singapore, mainly due to growth of the Life Manager Plus product, which was launched in March 2007, was offset by a decline in Malaysia, due to the non-recurrence of income from a closed-end fund, sold for a one month period in the first half of 2007.

In North America, net insurance premiums decreased by 13 per cent. Life insurance premiums fell as credit life products in North America declined due to falling loan volumes within HSBC Finance, which led to a reduction in income from associated credit protection products. These declines were partially offset by increased sales of a simplified issue term life product, which was launched in 2007 and rolled out across all states in the second half of the year. Non-life insurance premiums also fell, due to lower loan origination.

In Latin America, net earned insurance premiums rose to US$900 million, an increase of 11 per cent. This was mainly driven by an increase in Brazil in the level of voluntary pension fund contributions. The number of pension fund contracts in force in Brazil increased by 7 per cent, as a result of sales initiatives designed to attract new customers. In Mexico, growth reflected an increase in life, personal accident and vehicle products. An increased focus on life insurance sales through HSBC and other distribution channels, made a significant contribution to growth. Vehicle insurance premiums also increased in Argentina as prices rose in response to underlying vehicle price inflation. Life insurance premium income decreased in Argentina due to the cessation of part of the pension business as a consequence of a change in government legislation.

Other operating income

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	1,427		54.8		262		17.1		931		49.2
Hong Kong	448		17.2		413		27.0		432		22.8
Rest of Asia-Pacific	484		18.6		360		23.5		438		23.1
North America	115		4.4		342		22.4		18		0.9
Latin America	130		5.0		153		10.0		75		4.0
	2,604		100.0		1,530		100.0		1,894		100.0
Intra-HSBC elimination	(1,169)				(852)				(1,133)
Other operating income	1,435				678				761
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	1,427		54.8		262		17.1		931		49.2
Hong Kong	448		17.2		413		27.0		432		22.8
Rest of Asia-Pacific	484		18.6		360		23.5		438		23.1
North America	115		4.4		342		22.4		18		0.9
Latin America	130		5.0		153		10.0		75		4.0
	2,604		100.0		1,530		100.0		1,894		100.0
Intra-HSBC elimination	(1,169)				(852)				(1,133)
Other operating income	1,435				678				761

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007     US$m
Rent received	326		315		315
Gain/(loss) on assets held for sale	(16)		(37)		42
Valuation gains on investment properties	27		48		104
Gain on disposal of property, plant and equipment, intangible assets and non-financial investments	412		152		61
Change in present value of in-force long-term insurance business	324		(155)		10
Other	362		355		229
Other operating income	1,435		678		761

Other operating income of US$1.4 billion was US$757 million, or 112 per cent, higher than in the first half of 2007, an 84 per cent increase on an underlying basis. 

The commentary that follows is on an underlying basis.

In Europe, other operating income increased significantly. In the UK, other operating income included a gain on the sale of a merchant acquiring business to a joint venture with Global Payments Inc. This income line also benefited from a non-recurring reduction in the PVIF in 2007 following a change in FSA regulations. In 2008, a pension product was enhanced with life insurance features and reclassified as an insurance product, resulting in an uplift to PVIF. Gain on sale and leaseback of branches increased as 140 branches were sold in the first half of 2008 compared with 12 in the comparative period in 2007. In France, the regional banks were reclassified as held for sale following a decision to sell them, resulting in their profits of US$32 million for the half-year being reported in other operating income.

In Hong Kong, other operating income remained broadly unchanged.

Other operating income in Rest of Asia-Pacific rose by 13 per cent, mostly driven by recharges from increased business volumes at the Group Service Centres. 

In North America, other operating income decreased due to higher losses on repossessed properties driven by an increase in foreclosures and continuing falls in house prices. Further losses were incurred on the sale of investment in two funds due to adverse market conditions. A loss was registered on the sale of a brokerage business which was not considered to be part of the strategic operations of the group. Gains in the first half of 2007 were boosted by the sale and leaseback of an HSBC building. 

In Latin America, other operating income declined due to the non-recurrence of the gain recorded in Mexico in the first half of 2007, following a refinement of the income recognition methodology in respect of long-term insurance products. This was partially offset by a similar gain of US$45 million in Brazil in the current period. Further gains were registered on expired investment contracts and on the disposal of property.

Net insurance claims incurred and movement in liabilities to policyholders

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	1,388		40.4		1,146		31.8		2,333		46.6
Hong Kong	1,169		34.0		1,512		42.1		1,696		33.9
Rest of Asia-Pacific	4		0.1		141		3.9		112		2.2
North America	112		3.3		124		3.4		117		2.3
Latin America	764		22.2		676		18.8		751		15.0
Net insurance claims incurred  and movement in liabilities  to policyholders1	3,437		100.0		3,599		100.0		5,009		100.0
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	1,388		40.4		1,146		31.8		2,333		46.6
Hong Kong	1,169		34.0		1,512		42.1		1,696		33.9
Rest of Asia-Pacific	4		0.1		141		3.9		112		2.2
North America	112		3.3		124		3.4		117		2.3
Latin America	764		22.2		676		18.8		751		15.0
Net insurance claims incurred  and movement in liabilities  to policyholders1	3,437		100.0		3,599		100.0		5,009		100.0

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007     US$m
Gross insurance claims and movement in liabilities to policyholders	4,769		3,428		6,122
Reinsurers' share of claims incurred and movement in liabilities  to policyholders	(1,332)		171		(1,113)
Net insurance claims incurred and movement in liabilities to policyholders1	3,437		3,599		5,009

1    Net insurance claims incurred and movement in liabilities to policyholders arise from both life and non-life insurance business. For non-life business, amounts reported represent the cost of claims paid during the year and the estimated cost of notified claims. For life business, the main element of claims is the liability to policyholders created on the initial underwriting of the policy and any subsequent movement in the liability that arises, primarily from the attribution of investment performance to savings-related policies. Consequently, claims rise in line with increases in sales of savings-related business and with investment market growth.

Net insurance claims incurred and movement in liabilities to policyholders decreased by 5 per cent compared with the first half of 2007, to US$3.4 billion. HSBC acquired the remaining shares in HSBC Assurances in France in March 2007 and sold the Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited in the UK in October 2007. Net insurance claims incurred and movement in liabilities to policyholders decreased by 14 per cent on an underlying basis.

The commentary that follows is on an underlying basis.

In Europe, net insurance claims incurred and movement in liabilities to policyholders rose by 1 per cent to US$1.4 billion. This was mainly due to a release of policyholder liabilities in the UK in the first half of 2007 following revised regulatory guidance issued by the FSA and by the rise in new liabilities associated with the launch of the Guaranteed Income Bond by HSBC Life in June 2007. This was offset by a reduction in policyholder provisions in France which reflected the creation of a reinsurance asset with a third party insurer on a portion of the life insurance business. Falling values of assets within the investment portfolio flowed through to lower liabilities on associated policies. 

In Hong Kong, reductions in net insurance claims incurred and in liabilities to policyholders of 23 per cent reflected lower stock market values in Hong Kong, which fed through to a decrease in the value of unit-linked and participating funds. 

In Rest of Asia-Pacific, similarly, a reduction in net insurance claims incurred and movement in liabilities to policyholders of 97 per cent was due to falling equity markets affecting unit-linked and participating life insurance products.

In North America, net insurance claims incurred and movement in liabilities to policyholders fell by 10 per cent. Life insurance claims fell, mostly due to a fall in credit life payments in the consumer lending business, in line with the fall in premiums. This was partly offset by an increase in provisions from the new simplified issue term life insurance product, due to an increase in sales. 

In Latin America, net insurance claims incurred and movement in liabilities to policyholders were in line with the first half of 2007. In the life insurance business, the benefit of a higher level voluntary pension fund contributions in Brazil was largely offset by the cessation of part of the pension business in Argentina. An increase in non-life insurance claims was driven by the vehicle insurance business in Argentina, which experienced a higher frequency of vehicle related claims in line with greater sales of vehicle contracts, combined with an increase in the value of claims due to rising levels of inflation. 

Loan impairment charges and other credit risk provisions

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	1,272		12.6		1,363		21.5		1,179		10.8
Hong Kong	81		0.8		80		1.3		151		1.4
Rest of Asia-Pacific	369		3.7		308		4.8		308		2.8
North America	7,166		71.3		3,820		60.2		8,336		76.5
Latin America	1,170		11.6		775		12.2		922		8.5
Loan impairment charges and other  credit risk provisions	10,058		100.0		6,346		100.0		10,896		100.0
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	1,272		12.6		1,363		21.5		1,179		10.8
Hong Kong	81		0.8		80		1.3		151		1.4
Rest of Asia-Pacific	369		3.7		308		4.8		308		2.8
North America	7,166		71.3		3,820		60.2		8,336		76.5
Latin America	1,170		11.6		775		12.2		922		8.5
Loan impairment charges and other  credit risk provisions	10,058		100.0		6,346		100.0		10,896		100.0

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007 US$m
Loan impairment charges
New allowances net of allowance releases	10,436		6,635		11,547
Recoveries of amounts previously written off	(479)		(307)		(698)
	9,957		6,328		10,849
Individually assessed allowances	332		385		411
Collectively assessed allowances	9,625		5,943		10,438
Impairment of available-for-sale debt securities	67		-		44
Other credit risk provisions	34		18		3
Loan impairment charges and other credit risk provisions	10,058		6,346		10,896
Customer impaired loans	19,029		14,555		18,304
Customer loan impairment allowances	20,580		14,323		19,205

Loan impairment charges and other credit risk provisions were US$10.1 billion, a 58 per cent increase compared with the first half of 2007, 55 per cent on an underlying basis. The analysis that follows is on an underlying basis.

Loan impairment charges rose by 55 per cent, primarily due to: 

• significant increases in US Personal Financial Services. Delinquency levels rose as US consumers continued to be affected by continuing falling house prices, tighter credit conditions which reduced their options for refinancing, a weakening economy with rising unemployment and higher food and fuel costs;

• sharp increases in loan impairment charges in the high growth regions of Turkey, India and Mexico as personal lending rose. This reflected higher delinquency rates as the deterioration in credit quality coincided with balances maturing in a weaker economic environment following strong organic growth.

In Europe, loan impairment charges fell by 7 per cent. Charges in the UK consumer finance business declined following a methodology change which resulted in a one-off increase in charges in the first half of 2007 and reduced balances. In the UK bank, loan impairment charges were broadly in line with the first half of 2007 as lower charges in Personal Financial Services, following the sale of part of the cards portfolio in October 2007, were offset by higher charges in Global Banking and Markets, which although still reflecting low levels of corporate defaults, compared with net recoveries in the first half of 2007. Impairment charges for residential mortgage loans remained low despite the progressive weakening in the housing market. In Turkey, loan impairment charges more than trebled, primarily within Personal Financial Services. Higher lending and increased delinquency rates in credit cards and personal lending drove charges higher as consumers found it more difficult to repay their existing debts in the current economic environment.

In Hong Kong, loan impairment charges were in line with the first half of 2007 despite modest balance growth, due to lower charges on credit cards and mortgages within Personal Financial Services. Credit quality remained sound.

In Rest of Asia-Pacific, loan impairment charges rose by 15 per cent, primarily due to lending growth across the Middle East and India. Charges in India rose due to volume growth in the personal loans, consumer finance, and cards portfolios, and a more challenging credit environment for personal customers in which debt repayment was adversely affected by high inflation and interest rates. Loan impairment charges rose in the Middle East, driven by balance growth and higher delinquency rates in the UAE as HSBC broadened its offerings in the credit card market by extending into customer groups with a higher probability of default but which are attractive on a risk adjusted basis. This was partly offset by higher recoveries from commercial customers. In Asia, loan impairment charges in Taiwan fell due to the continued recovery from the 2006 credit crisis, which had previously resulted in substantial loan impairment charges following regulatory intervention in the card market. In Thailand, loan impairment charges fell as higher-risk commercial banking relationships were closed in order to reduce credit risk in the loan portfolio. 

In North America, loan impairment charges were significantly higher than in the first half of 2007 driven by the US, where delinquency rates increased as a result of a deteriorating economy, higher unemployment, an accelerated decline in house prices and increased bankruptcy filings. Credit quality, led by sub-prime lending, declined across the portfolio, while prime and near-prime portfolios also showed some increased delinquency. In the mortgage services business, credit quality continued to deteriorate as house price falls accelerated and refinancing remained difficult. Further credit quality deterioration was also apparent in consumer lending, due to the factors discussed above. In the US retail bank, loan impairment charges rose, primarily due to a decline in credit quality within the Home Equity Line of Credit and Home Equity Loan portfolios of second lien mortgages. Although the prime residential mortgage portfolio also demonstrated some signs of increasing delinquency, credit impairment charges remained very low in dollar terms. Loan impairment charges rose most in states with higher unemployment rates and where house price appreciation had been the greatest. In the credit card business, increased loan impairment charges reflected higher levels of non-prime balances, portfolio seasoning, increased unemployment and bankruptcy filings, and the general effect of weakening in the economy. In Canada, the increase in loan impairment charges in Personal Financial Services was driven by balance growth and portfolio seasoning in the unsecured personal lending and mortgage portfolios within the consumer finance businesses. Loan impairment charges in Commercial Banking in North America more than tripled. In the US retail bank, charges rose due to worsening economic conditions, leading to customer downgrades across all business segments. In Canada, charges increased as delinquency rates rose in the manufacturing and export sectors as a result of the slowing US economy, higher energy costs and the weaker US dollar. 

In Latin America, the combination of growth in unsecured lending, particularly credit cards, and higher delinquency rates in Mexico led to a 34 per cent rise in loan impairment charges. The majority of the increase arose in Mexico due to balance growth and higher delinquency rates in the credit card and personal loan portfolios as balances matured. This increase in loan impairment charges was, in part, a planned cost of building strong market share through organic growth in an area where HSBC was previously under-represented. Management actions in the second half of 2007 and in 2008, taken in response to rising delinquencies, slowed growth in card numbers significantly and also reduced sales of lending products to lower credit quality customers. In Brazil, loan impairment charges rose from the first half of 2007, driven by deterioration in credit quality in vehicle finance and store loans, partly offset by the sale of an impaired loan portfolio in Personal Financial Services in March 2008. 

The aggregate outstanding customer loan impairment allowances at 30 June 2008 of US$20.6 billion represented 2.0 per cent of gross customer advances (net of reverse repos and settlement accounts) compared with 1.6 per cent at 30 June 2007.

Impaired loans to customers were US$19.0 billion at 30 June 2008, compared with US$18.3 billion at 31 December 2007. At constant exchange rates, impaired loans increased by 2 per cent compared with 30 June 2007, while underlying lending growth (excluding lending to the financial sector and settlement accounts) was 5 per cent. 

Operating expenses

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	8,193		38.4		7,972		40.9		8,553		39.7
Hong Kong	1,975		9.3		1,665		8.6		2,115		9.8
Rest of Asia-Pacific	2,784		13.1		2,075		10.7		2,689		12.5
North America	5,334		25.0		5,235		26.9		5,321		24.7
Latin America	3,023		14.2		2,516		12.9		2,886		13.3
	21,309		100.0		19,463		100.0		21,564		100.0
Intra-HSBC elimination	(1,169)				(852)				(1,133)
Operating expenses	20,140				18,611				20,431
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	8,193		38.4		7,972		40.9		8,553		39.7
Hong Kong	1,975		9.3		1,665		8.6		2,115		9.8
Rest of Asia-Pacific	2,784		13.1		2,075		10.7		2,689		12.5
North America	5,334		25.0		5,235		26.9		5,321		24.7
Latin America	3,023		14.2		2,516		12.9		2,886		13.3
	21,309		100.0		19,463		100.0		21,564		100.0
Intra-HSBC elimination	(1,169)				(852)				(1,133)
Operating expenses	20,140				18,611				20,431

	Half-year to
	30 June 2008		30 June 2007		31 December 2007
	US$m		US$m		US$m
By expense category
Employee compensation and benefits	10,925		10,430		10,904
Premises and equipment (excluding depreciation)	2,137		1,848		2,118
General and administrative expenses	5,342		5,174		6,154
Administrative expenses	18,404		17,452		19,176
Depreciation of property, plant and equipment	863		817		897
Amortisation and impairment of intangible assets	346		342		358
Goodwill impairment	527		-		-
Operating expenses	20,140		18,611		20,431

	At          30 June  2008		At  30 June 2007		At         31 December 2007
Staff numbers (full-time equivalent)
Europe	84,457		80,912		82,166
Hong Kong	29,467		27,066		27,655
Rest of Asia-Pacific	93,747		81,031		88,573
North America	48,069		56,693		52,722
Latin America	63,851		66,875		64,404
	319,591		312,577		315,520

Operating expenses increased by US$1.5 billion to US$20.1 billion. On an underlying basis, cost growth was 4 per cent, the main drivers being:

• in Rest of Asia-Pacific, HSBC continued to invest in India and mainland China through increased staff numbers to support growth in business volumes. In the Middle East, staff numbers also increased, predominantly in customer facing roles. Similarly, costs rose in Hong Kong. In Europe, headcount and administrative costs in Turkey grew as the branch network was extended; and

• management's decision in the US in 2007 to close the Decision One mortgage brokerage business, cease the acquisition of mortgages from correspondent banks and brokers and reduce the consumer lending branch network in the US helped control costs. Marketing expenditure on credit card origination was curtailed to limit growth in loan balances. 

In Europe, costs decreased by 1 per cent, compared with an increase of 6 per cent in net operating income before loan impairment charges. The main drivers of this decrease were businesses in the UK and France, partially offset by higher costs in Turkey and Switzerland. In the UK, costs declined, in part due to the non-recurrence of ex gratia payments in respect of overdraft fees applied in previous years which were expensed in 2007. A reduction in defined benefit pension costs, the result of an updated actuarial assessment, also decreased costs. Lower performance bonuses in Global Banking and Markets reflected the lower profits being earned in the current conditions. In France, reported costs decreased as the regional banks were classified as held for sale and all relevant income and costs were therefore reported in other operating income. Business expansion in Turkey was reflected in an increase of 84 branches and 220 ATMs over the first half of 2007. Staff numbers increased by 35 per cent resulting in higher staff, premises and marketing costs. Higher business transaction volumes arising from organic growth strategy and inflation, also pushed costs up. In Private Banking, costs rose, mainly due to a non-recurring saving in pension costs in 2007, and general business expansion. 

In Hong Kong, operating expenses increased by 18 per cent, compared with growth of 1 per cent in net operating income before loan impairment charges. Inflation and business growth were the main drivers behind the increase in costs. Staff numbers increased as additional capacity was required to meet growing business needs, contributing to a 9 per cent increase in staff costs. Rental costs increased under inflationary pressures. IT cost growth reflected business growth and the expansion of self-service banking coverage. Call centres were increasingly used to generate sales at lower costs.

Operating costs increased by 27 per cent in Rest of Asia-Pacific compared with a 33 per cent growth in net operating income before loan impairment charges. The main driver of cost growth remained the significant organic business expansion in the region, most notably in the Middle East, mainland China and India. Staff costs rose on increases in headcount and performance-related bonuses due to higher revenue. Growth in IT and premises and equipment costs were driven by the opening of 10 additional branches in the Middle East and 29 outlets in mainland China where Hang Seng Bank also opened 14. Marketing costs increased in the Middle East. Costs in India also rose on higher fees paid to collection agencies.

In North America, operating expenses increased by 2 per cent, compared with lower net operating income before loan impairment charges of 17 per cent. The increase in costs was driven by an impairment charge of US$527 million in the goodwill carried by Personal Financial Services in North America. For further information see Note 20 to the Financial Statements. Excluding this impairment charge, operating expenses declined by 8 per cent. Consumer finance continued to implement its business rationalisation programme commenced in 2007, with staff numbers decreasing due to the reduction in the number of branches, the closure of Decision One and the correspondent channel, and the transfer of certain operations and support for card and retail services to Group Service Centres. Also as part of this strategy, marketing expenditure was curtailed in an effort to restrict lending growth. In the retail bank, litigation expenses recorded in the latter part of 2007, arising from an indemnification agreement with Visa, were released following redemption of the company's shares in the IPO. In Global Banking and Markets, discretionary bonuses decreased due to lower performance in the Global Markets business. Operating expenses rose in Canada on higher staff costs driven by increased staff numbers in the retail bank and a rise in support costs. This 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. 

In Latin America, operating expenses grew by 8 per cent compared with growth in net operating income before loan impairment charges of 15 per cent. In Mexico, staff costs rose, even though headcount numbers decreased. Salary costs grew following the annual salary review at the start of the year. Costs on the Tu Cuenta cashback facility rose as usage increased. Ongoing upgrading work on the branch and ATM retail network resulted in higher property rental costs and software maintenance and development. Inflationary pressures in Argentina resulted in higher operating expenditure, particularly staff costs, following a union agreement. Cost growth in Brazil was mitigated by a recovery of transactional taxes paid in earlier years, following a court ruling. An agreement reached with the employees' unions in the second half of 2007 resulted in higher salaries and wages partially offset by lower headcount. Non-staff expenses increased with higher outsourcing costs on phone services and collections, and improvement of operational processes for debit and credit cards.

	Half-year to
Cost efficiency ratios	30 June 2008 %		30 June 2007 %		31 December 2007 %
HSBC	51.0		48.3		50.4
Personal Financial Services	49.5		50.0		50.6
Europe	57.3		65.4		64.2
Hong Kong	29.1		27.6		26.9
Rest of Asia-Pacific	68.7		68.9		78.3
North America	44.6		41.8		42.8
Latin America	57.4		61.9		60.7
Commercial Banking	40.2		44.2		45.4
Europe	39.4		48.1		50.3
Hong Kong	23.7		24.5		25.4
Rest of Asia-Pacific	40.3		39.3		46.1
North America	44.7		46.4		43.8
Latin America	55.2		55.1		53.7

Share of profit in associates and joint ventures

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	1		0.1		88		14.1		7		0.8
Hong Kong	21		2.2		13		2.1		15		1.7
Rest of Asia-Pacific	936		96.5		507		81.4		841		95.6
North America	8		0.8		10		1.6		10		1.1
Latin America	4		0.4		5		0.8		7		0.8
Share of profit in associates  and joint ventures	970		100.0		623		100.0		880		100.0
	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%		US$m		%		US$m		%
By geographical region
Europe	1		0.1		88		14.1		7		0.8
Hong Kong	21		2.2		13		2.1		15		1.7
Rest of Asia-Pacific	936		96.5		507		81.4		841		95.6
North America	8		0.8		10		1.6		10		1.1
Latin America	4		0.4		5		0.8		7		0.8
Share of profit in associates  and joint ventures	970		100.0		623		100.0		880		100.0

	Half-year to
	30 June 2008 US$m		30 June 2007 US$m		31 December 2007     US$m
Bank of Communications	349		190		255
Ping An Insurance	297		144		374
Industrial Bank	102		50		78
The Saudi British Bank	146		101		115
Other	47		122		37
Share of profit in:
- associates	941		607		859
- joint ventures	29		16		21
Share of profit in associates and joint ventures	970		623		880

Share of profit in associates and joint ventures was US$970 million, an increase of 56 per cent compared with the first half of 2007, and 46 per cent on an underlying basis. The commentary that follows is on an underlying basis.

Higher share of profit from associates and joint ventures was driven by Rest of Asia-Pacific, as contributions from Ping An Insurance, Bank of Communications, Industrial Bank, and The Saudi British Bank rose due to strong economic growth in the region since the first half of 2007. 

• HSBC's share of profit from the Bank of Communications rose by 68 per cent, primarily due to higher net interest income driven by wider spreads as the base rate rose in mainland China, and balance sheet growth as a result of the rapid growth of the mainland China economy. Fee income rose strongly, driven by the asset custody business, financial advisory services and higher fees from bank card transactions. 

• HSBC's share of profits from Ping An Insurance increased by 87 per cent following strong growth in the life insurance business, reflecting the strength of the mainland Chinese economy. 

• Profits from Industrial Bank rose due to balance sheet growth, and a higher net interest margin as a result of loan repricing.

  • Profits from the Saudi British Bank rose by 25 per cent due to strong balance sheet growth, particularly in the lending portfolio, as a result of the buoyant Saudi economy, and an increase in demand for project financing in the corporate sector.

Asset deployment

	At 30 June 2008				At 30 June 2007				At 31 December 2007
	US$m		%		US$m		%		US$m		%
Loans and advances to customers	1,049,200		41.2		928,101		43.2		981,548		41.7
Loans and advances to banks	256,981		10.1		214,645		10.0		237,366		10.1
Trading assets	473,537		18.6		424,645		19.7		445,968		18.9
Financial investments	274,750		10.8		233,001		10.8		283,000		12.0
Derivatives	260,664		10.2		149,181		6.9		187,854		8.0
Goodwill and intangible assets	40,814		1.6		38,445		1.8		39,689		1.7
Other	190,732		7.5		162,423		7.6		178,841		7.6
	2,546,678		100.0		2,150,441		100.0		2,354,266		100.0
Loans and advances to customers include:
-  reverse repos	55,489				38,023				44,898
-  settlement accounts	3,787				3,948				2,367
Loans and advances to banks include:
-  reverse repos	59,869				49,990				59,141
-  settlement accounts	5,083				3,769				2,222

HSBC's total assets at 30 June 2008 were US$2,547 billion, an increase of US$192 billion or 8 per cent since 31 December 2007, mainly due to Global Banking and Markets.

At 30 June 2008, HSBC's balance sheet remained highly liquid. The proportion of assets deployed in loans and advances to customers declined to 41 per cent, while derivative assets increased to 10 per cent. Financial investments declined to 11 per cent of total assets. These changes are discussed below.

Acquisitions added US$2.1 billion to total assets. On an underlying basis, total assets grew by 7 per cent.

The commentary that follows is on an underlying basis.

Customer advances rose by 6 per cent compared with the position at 31 December 2007. There was growth in most regions, particularly Europe. In the UK, increased overdrafts with certain key customers together with growth in the reverse repo business drove higher loans and advances. This was partly offset by a decline in the US, due to the investment of a greater proportion of surplus funds in bank securities and a reduction in personal lending as a result of decisions taken to cease new originations for certain loan portfolios and tighten underwriting criteria to match risk appetite.

Loans and advances to banks increased by 6 per cent particularly in Hong Kong, Rest of Asia-Pacific and North America, as funds were increasingly invested in lower risk investments, including US treasury bills.

Trading assets, financial investments and derivatives

Trading assets principally consist of debt and equity instruments acquired for the purpose of market making or to benefit from short-term price movements. Securities classified as held for trading are carried in the balance sheet at fair value, with movements in fair value recognised in the income statement.

Trading assets of US$474 billion at 30 June 2008 were 4 per cent higher than at 31 December 2007. The increase was mainly due to the growth of the collateralised lending business in Europe, though the rate of growth slowed over the reporting period. Debt securities rose in line with the strong performance in the Rates business as a result of the higher trading activity and demand for Rates products. Holdings in equity securities fell in the first half of 2008 due to a reduction in trading positions since year end following the considerable growth in many key equity products areas in 2007.

Financial investments primarily include debt and equity instruments that are classified as held for sale or, to a lesser extent, held to maturity. The held for sale investments generally represent a core element of the Group's liquidity and may be disposed of either to manage that liquidity or in response to investment opportunities arising from favourable movements in economic indicators, such as interest rates, foreign exchange rates and equity prices. In addition, financial investments include a portfolio of ABSs held by securities investment conduits ('SICs') that are consolidated into the Group balance sheet. More information on these SICs and the underlying assets is available on pages 137 to 151. All financial investments are carried at fair value with unrealised gains and losses from movements thereon reported in equity until disposal. On disposal, the accumulated unrealised gain or loss is recognised through the income statement and reported as 'Gains less losses from financial investments'.

Financial investments fell by 4 per cent compared with the reported figures at 31 December 2007. Investors in Cullinan Finance Ltd and Asscher Finance Ltd, two SIVs managed by HSBC and consolidated in 2007, were offered the opportunity to exchange their investments for notes in new SIVs, and during the first half of 2008 most of them accepted. In total, holdings in ABSs decreased due to a combination of asset sales, amortisations and write-downs. Net unrealised gains from the valuation of equities amounted to US$2.4 billion.

Derivatives are financial instruments that derive their value from the price of an underlying item. HSBC transacts derivatives for three primary purposes: to create risk management solutions for clients, for proprietary trading purposes, and to manage and mitigate HSBC's own risks.

Derivative assets of US$261 billion rose by 36 per cent from 31 December 2007, primarily across foreign exchange, interest rate and credit derivatives. The main drivers of growth were mark-to-market movement across the entire portfolio arising from volatility and movements in interest rates and credit spreads, as well as new transactions during the period. Interest rate derivatives increased in value in the UK and France, particularly in the first quarter, as customers reacted to the fall in central bank interest rates and the consequent steepening of the yield curve. Widening credit spreads in the US, caused by the general turmoil in the credit markets, led to a significant mark-to-market increase in the value of credit derivative assets and liabilities. Again, this effect was substantially seen in the first quarter. Further growth in the US and much of the growth in the UK came from foreign exchange derivatives, as continuing currency volatility and, in particular, the declining US dollar drove customer demand. 

Funds under management

Funds under management at 30 June 2008 were US$857 billion, an increase of 2 per cent when compared with 31 December 2007. Both Global Asset Management and Private Banking fund holdings increased, despite both businesses being negatively affected by poor equity market performance.

Global Asset Management funds increased to US$389 billion. Net new money, driven by clients moving their funds to money market investments, and favourable foreign exchange movements were partly offset by a weaker investment performance caused by turbulent markets. Notwithstanding a decrease in emerging markets funds during the first half of 2008, Global Asset Management remains one of the world's largest emerging market asset managers, with US$86 billion of funds under management, an increase of 18 per cent since 30 June 2007.

Private Banking funds increased by 5 per cent to US$289 billion, driven primarily by foreign exchange movements and net new money of US$5 billion, offset by a poor equity market performance.

Client assets, which provide an indicator of overall Private Banking volumes and include funds under management, were broadly unchanged at US$421 billion, with net new money of US$15 billion offset by negative market performance. Other funds under management, of which the main element is a corporate trust business in Asia, decreased to US$174 billion.

	Half-year to
	30 June      2008		30 June     2007		31 December     2007
	US$bn		US$bn		US$bn
Funds under management
At beginning of period	844		695		787
Net new money	23		15		21
Value change	(49)		36		17
Exchange and other	39		41		19
At end of period	857		787		844
Funds under management by business
HSBC Global Asset Management	389		343		380
Private Banking	289		274		275
Affiliates	5		2		3
Other	174		168		186
	857		787		844

Assets held in custody and under administration

Custody is the safekeeping and servicing of securities and other financial assets on behalf of clients. At 30 June 2008, assets held by HSBC as custodian amounted to US$5.1 trillion, compared with US$5.3 trillion held at 31 December 2007. 

Administration includes the provision of various support function activities including the valuation of portfolios of securities and other financial assets on behalf of clients. At 30 June 2008, the value of assets held under administration by the Group amounted to US$3.5 trillion, compared with US$3.3 trillion held at 31 December 2007. 

Review of transactions with related parties

As required by the FSA's Disclosure and Transparency Rules, the Board has undertaken a fair review of related party transactions that have taken place in the first six months of the current financial year; and any changes in the related parties transactions described in the Annual Report and Accounts 2007. Pursuant to this review, where transactions and balances with related parties have a material effect on the financial position or performance of HSBC they have been disclosed in the Notes on the Financial Statements. 

Economic profit

HSBC's internal performance measures include economic profit, a calculation which compares the return on financial capital invested in HSBC by its shareholders with the cost of that capital. HSBC prices its cost of capital internally and the difference between that cost and post-tax profit attributable to ordinary shareholders (adding back goodwill impaired) represents the amount of economic profit generated. Economic profit is used by management as a means of deciding where to allocate resources so that they will be most productive. 

In order to concentrate on external factors rather than measurement bases, HSBC emphasises the trend in economic profit ahead of absolute amounts within business units. In light of the current levels of world interest rates, and taking into account its geographical and customer group diversification, HSBC believes that its true cost of capital on a consolidated basis remains 10 per cent. HSBC plans to continue using this rate until the end of the current five-year strategic plan in 2008 in order to ensure consistency and comparability.

Economic profit decreased by US$3.7 billion, or 74 per cent, compared with the first half of 2007. Profit attributable decreased, while average shareholders' equity grew. The decline in profits was mainly driven by an increase of US$3.7 billion in loan impairment charges, led by the consumer finance business in the US, and by US$3.9 billion of write-downs on credit trading, leveraged and acquisition finance, and monoline exposures. The comparative period included dilution gains of US$1.1 billion which did not recur. The decrease in economic profit was also reflected in a lower return on average invested capital and, in consequence, economic spread, which decreased by 6.5 percentage points compared with the first half of 2007.

Economic profit

	Half-year to
	30 June 2008				30 June 2007				31 December 2007
	US$m		%1		US$m		%1		US$m		%1
Average total shareholders' equity	128,409				114,776				125,825
Adjusted by:
Goodwill previously amortised or  written off	8,304				8,172				8,172
Property revaluation reserves	(847)				(917)				(879)
Reserves representing unrealised gains  on effective cash flow hedges	1,069				215				632
Reserves representing unrealised (gains)/ losses on available-for-sale securities	3,989				(2,214)				(1,627)
Preference shares and other equity instruments	(1,939)				(1,405)				(1,405)
Average invested capital2	138,985				118,627				130,718
Return on invested capital3	8,204		11.9		10,850		18.4		8,193		12.4
Benchmark cost of capital	(6,911)		(10.0)		(5,883)		(10.0)		(6,589)		(10.0)
Economic profit/spread	1,293		1.9		4,967		8.4		1,604		2.4

1    Expressed as a percentage of average invested capital.

2    Average invested capital is measured as average total shareholders' equity after:

-    adding back the average balance of goodwill impaired, amortised or previously written-off directly to reserves;

-    deducting the average balance of HSBC's revaluation surplus relating to property held for own use. This reserve was generated when determining the deemed carrying cost of such properties on transition to IFRSs and will run down as the properties are sold;

-    deducting average preference shares issued by HSBC Holdings, and;

-    deducting average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities. 

3    Return on invested capital is based on the profit attributable to ordinary shareholders of the parent company adding back goodwill impaired.

Ratios of earnings to combined fixed charges (and preference share dividends)

	Half-year to 30 June		Year ended 31 December
	2008		2007		2006		2005		2004		2003
Ratios of earnings to combined fixed charges
Ratios in accordance with IFRSs
- excluding interest on deposits	6.11		7.52		7.93		9.60		8.64		-
- including interest on deposits	1.30		1.34		1.41		1.59		1.86		-
Ratios in accordance with UK GAAP
- excluding interest on deposits	-		-		-		-		8.07		7.41
- including interest on deposits	-		-		-		-		1.81		1.80
Ratios of earnings to combined fixed charges and  preference share dividends
Ratios in accordance with IFRSs:
- excluding interest on deposits	5.93		6.96		7.22		9.16		8.64		-
- including interest on deposits	1.30		1.34		1.40		1.59		1.86		-
Ratios in accordance with UK GAAP
- excluding interest on deposits	-		-		-		-		8.07		7.41
- including interest on deposits	-		-		-		-		1.81		1.80

For the purpose of calculating the ratios, earnings consist of income from continuing operations before taxation and minority interests, plus fixed charges, and after deduction of the unremitted pre-tax income of associated undertakings. Fixed charges consist of total interest expense, including or excluding interest on deposits, as appropriate, preference share dividends, as applicable, and the proportion of rental expense deemed representative of the interest factor.

The above table contains ratios based on UK GAAP, HSBC's previous primary GAAP, which is not comparable to financial information based upon IFRSs, as explained in HSBC's 2004 IFRSs Comparative Financial Information published on 5 July 2004.

 

END

 

 

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