Annual Financial Report - 32

RNS Number : 4142J

HSBC Holdings PLC

30 March 2010

 



16   Trading assets

	2009		2008
	US$m		US$m
Trading assets:
-  not subject to repledge or resale by counterparties ..........................................................	320,155		340,675
-  which may be repledged or resold by counterparties ........................................................	101,226		86,654
	421,381		427,329
Treasury and other eligible bills ..............................................................................................	22,346		32,458
Debt securities .......................................................................................................................	201,598		199,619
Equity securities .....................................................................................................................	35,311		21,878
Trading securities at fair value ...............................................................................................	259,255		253,955
Loans and advances to banks .................................................................................................	78,126		73,055
Loans and advances to customers ...........................................................................................	84,000		100,319
	421,381		427,329

Trading securities valued at fair value

	Fair value1
	2009		2008
	US$m		US$m
US Treasury and US Government agencies2 ............................................................................	17,620		26,621
UK Government ....................................................................................................................	12,113		10,586
Hong Kong Government ........................................................................................................	10,649		6,648
Other government .................................................................................................................	94,264		98,983
Asset-backed securities3 .........................................................................................................	5,308		6,566
Corporate debt and other securities ........................................................................................	83,990		82,673
Equity securities .....................................................................................................................	35,311		21,878
	259,255		253,955

1  Included within these figures are debt securities issued by banks and other financial institutions of US$41,466 million (2008: US$49,997 million), of which US$7,280 million (2008: US$3,449 million) are guaranteed by various governments.

2  Includes securities that are supported by an explicit guarantee issued by the US Government.

3  Excludes asset-backed securities included under US Treasury and US Government agencies.

Trading securities listed on a recognised exchange and unlisted

	Treasury        and other eligible bills		Debt       securities		Equity      securities		Total
	US$m		US$m		US$m		US$m
Fair value at 31 December 2009
Listed on a recognised exchange1 ....................................	3,107		159,030		33,428		195,565
Unlisted ..........................................................................	19,239		42,568		1,883		63,690
	22,346		201,598		35,311		259,255
Fair value at 31 December 2008
Listed on a recognised exchange1 ....................................	1		145,370		20,871		166,242
Unlisted ..........................................................................	32,457		54,249		1,007		87,713
	32,458		199,619		21,878		253,955

1  Included within listed investments are US$3,229 million (2008: US$3,870 million) of investments listed in Hong Kong.

Loans and advances to banks held for trading

	2009		2008
	US$m		US$m
Reverse repos ........................................................................................................................	50,357		48,188
Settlement accounts ...............................................................................................................	10,128		4,337
Stock borrowing .....................................................................................................................	4,711		1,888
Other .....................................................................................................................................	12,930		18,642
	78,126		73,055

Loans and advances to customers held for trading

	2009		2008
	US$m		US$m
Reverse repos ........................................................................................................................	42,172		58,285
Stock borrowing .....................................................................................................................	18,042		13,740
Settlement accounts ...............................................................................................................	12,134		10,116
Other .....................................................................................................................................	11,652		18,178
	84,000		100,319

17   Financial assets designated at fair value

	2009		2008
	US$m		US$m
Financial assets designated at fair value:
-  not subject to repledge or resale by counterparties ..........................................................	37,166		28,522
-  which may be repledged or resold by counterparties ........................................................	15		11
	37,181		28,533
Treasury and other eligible bills ..............................................................................................	223		235
Debt securities .......................................................................................................................	20,718		16,349
Equity securities .....................................................................................................................	14,983		10,993
Securities designated at fair value ...........................................................................................	35,924		27,577
Loans and advances to banks .................................................................................................	354		230
Loans and advances to customers ...........................................................................................	903		726
	37,181		28,533

Securities designated at fair value

	Fair value1
	2009		2008
	US$m		US$m
US Treasury and US Government agencies2 ............................................................................	78		93
UK Government ....................................................................................................................	4,799		992
Hong Kong Government ........................................................................................................	177		284
Other government .................................................................................................................	3,491		3,624
Asset-backed securities3 .........................................................................................................	6,463		6,492
Corporate debt and other securities ........................................................................................	5,933		5,099
Equities ..................................................................................................................................	14,983		10,993
	35,924		27,577

1  Included within these figures are debt securities issued by banks and other financial institutions of US$13,745 million (2008: US$10,351 million), of which US$49 million (2008: US$14 million) are guaranteed by various governments.

2  Includes securities that are supported by an explicit guarantee issued by the US Government.

3  Excludes asset-backed securities included under US Treasury and US Government agencies.

Securities listed on a recognised exchange and unlisted

	Treasury        and other eligible bills		Debt       securities		Equity      securities		Total
	US$m		US$m		US$m		US$m
Fair value at 31 December 2009
Listed on a recognised exchange1 ....................................	78		7,168		10,549		17,795
Unlisted ..........................................................................	145		13,550		4,434		18,129
	223		20,718		14,983		35,924
Fair value at 31 December 2008
Listed on a recognised exchange1 ....................................	80		3,490		8,140		11,710
Unlisted ..........................................................................	155		12,859		2,853		15,867
	235		16,349		10,993		27,577

1  Included within listed investments are US$506 million of investments listed in Hong Kong (2008: US$576 million).

18   Derivatives

Fair values of derivatives by product contract type held by HSBC

	Assets						Liabilities
	Trading		Hedging		Total		Trading		Hedging		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 31 December 2009
Foreign exchange ........................................	55,036		1,695		56,731		54,502		300		54,802
Interest rate ................................................	212,102		3,506		215,608		209,351		3,274		212,625
Equity .........................................................	15,729		-		15,729		19,013		-		19,013
Credit ..........................................................	28,479		-		28,479		27,042		-		27,042
Commodity and other .................................	1,135		-		1,135		960		-		960
Gross total fair values ..................................	312,481		5,201		317,682		310,868		3,574		314,442
Netting ........................................................					(66,796)						(66,796)
Total ...........................................................					250,886						247,646
At 31 December 2008
Foreign exchange ........................................	115,803		2,010		117,813		115,311		826		116,137
Interest rate ................................................	317,796		4,481		322,277		310,255		4,435		314,690
Equity .........................................................	18,660		-		18,660		21,913		-		21,913
Credit ..........................................................	91,271		-		91,271		89,715		-		89,715
Commodity and other .................................	2,979		-		2,979		2,729		-		2,729
Gross total fair values ..................................	546,509		6,491		553,000		539,923		5,261		545,184
Netting ........................................................					(58,124)						(58,124)
Total ...........................................................					494,876						487,060

The 49 per cent decrease in the fair value of derivative assets during 2009 was driven by steepening yield curves in major currencies, narrowing credit spreads and reduced market volatility. The 5 per cent increase in the notional contract amounts of HSBC's derivative assets in the year was primarily driven by increased trading volumes on interest rate contracts.

Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries

	2009				2008
	Trading		Trading		Trading		Trading
	assets		liabilities		assets		liabilities
	US$m		US$m		US$m		US$m
Foreign exchange ...........................................................	2,250		362		1,772		1,324
Interest rate ...................................................................	731		-		1,910		-
Total fair values .............................................................	2,981		362		3,682		1,324

Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign exchange, credit spreads, commodities and equity or other indices. Derivatives enable users to increase, reduce or alter exposure to credit or market risks. HSBC makes markets in derivatives for its customers and uses derivatives to manage its exposure to credit and market risks.

Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. A description of how the fair value of derivatives is derived is set out on page 171. Derivative assets and liabilities on different transactions are only set off if the transactions are with the same counterparty, a legal right of set-off exists and the cash flows are intended to be settled on a net basis.

Use of derivatives

HSBC transacts derivatives for three primary purposes: to create risk management solutions for clients, for proprietary trading purposes, and to manage and hedge HSBC's own risks. Derivatives (except for derivatives which are designated as effective hedging instruments as defined in IAS 39) are held for trading. The held for trading classification includes two types of derivatives: those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The second category includes derivatives managed in conjunction with financial instruments designated at fair value. These activities are described more fully below.

HSBC's derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to ensure that they remain within acceptable risk levels, with matching deals being utilised to achieve this where necessary. When entering into derivative transactions, HSBC employs the same credit risk management procedures to assess and approve potential credit exposures that are used for traditional lending.

Trading derivatives

Most of HSBC's derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities in derivatives are entered into principally for the purpose of generating profits from short-term fluctuations in price or margin. Positions may be traded actively or be held over a period of time to benefit from expected changes in exchange rates, interest rates, equity prices or other market parameters. Trading includes market-making, positioning and arbitrage activities. Market-making entails quoting bid and offer prices to other market participants for the purpose of generating revenues based on spread and volume; positioning means managing market risk positions in the expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and profiting from price differentials between markets and products.

As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives, ineffective hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the criteria for hedge accounting. These include derivatives managed in conjunction with financial instruments designated at fair value.

Gains and losses from changes in the fair value of derivatives, including the contractual interest, that do not qualify for hedge accounting are reported in 'Net trading income', except for derivatives managed in conjunction with financial instruments designated at fair value, where gains and losses are reported in 'Net income from financial instruments designated at fair value', together with the gains and losses on the hedged items. Where the derivatives are managed with debt securities in issue, the contractual interest is shown in 'interest expense' together with the interest payable on the issued debt. Substantially all of HSBC Holdings' derivatives entered into with HSBC undertakings are managed in conjunction with financial liabilities designated at fair value.

The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Notional contract amounts of derivatives held for trading purposes by product type

	HSBC				HSBC Holdings
	2009		2008		2009		2008
	US$m		US$m		US$m		US$m
Foreign exchange ...........................................................	2,883,201		3,045,017		17,150		14,312
Interest rate ...................................................................	13,874,355		12,435,965		6,804		7,804
Equity ............................................................................	217,828		221,053		-		-
Credit .............................................................................	1,237,055		1,583,337		-		-
Commodity and other ....................................................	53,720		63,103		-		-
	18,266,159		17,348,475		23,954		22,116

Credit derivatives

HSBC trades credit derivatives through its principal dealing operations and acts as a principal counterparty to a broad range of users, structuring deals to produce risk management products for its customers, or making markets in certain products. Risk is typically controlled through entering into offsetting credit derivative contracts with other counterparties.

HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. Trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products.

Credit derivatives are also deployed to a limited extent for the risk management of the Group's loan portfolios.

The notional contract amount of credit derivatives of US$1,237,055 million (2008: US$1,583,337 million) consisted of protection bought of US$614,690 million (2008: US$777,556 million) and protection sold of US$622,365 million (2008: US$805,781 million).

The difference between the notional amounts bought and sold is attributable to HSBC selling protection on large, diversified, predominantly investment grade portfolios (including the most senior tranches) and then offsetting risk on these positions by buying protection on the more subordinated tranches of the same portfolios. In addition, HSBC uses securities to mitigate risks on certain derivative positions and credit derivative contracts to reduce counterparty exposures. Consequently, while there is a mismatch in notional amounts of credit derivatives bought and sold this should not be interpreted as representing the open risk position. The credit derivative business operates within the market risk management framework described on pages 250 to 261.

Derivatives valued using models with unobservable inputs

The difference between the fair value at initial recognition (the transaction price) and the value that would have been derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

Unamortised balance of derivatives valued using models with unobservable inputs

	2009		2008
	US$m		US$m
Unamortised balance at 1 January ..........................................................................................	204		306
Deferral on new transactions .................................................................................................	192		326
Recognised in the income statement during the period:
- amortisation ...................................................................................................................	(86)		(168)
- subsequent to unobservable inputs becoming observable ...................................................	(19)		(118)
- maturity, termination or offsetting derivative .................................................................	(42)		(99)
Exchange differences .............................................................................................................	11		(38)
Risk hedged ............................................................................................................................	-		(5)
Unamortised balance at 31 December1 ...................................................................................	260		204

1  This amount is yet to be recognised in the consolidated income statement.

Hedging instruments

HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities.

The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges, or hedges in net investment of foreign operations. These are described under the relevant headings below.

The notional contract amounts of derivatives held for hedging purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Notional contract amounts of derivatives held for hedging purposes by product type

	At 31 December 2009				At 31 December 2008
	Cash flow              hedge		Fair value              hedge		Cash flow                hedge		Fair value                hedge
	US$m		US$m		US$m		US$m
Foreign exchange ...........................................................	12,359		2,469		14,931		2,602
Interest rate ...................................................................	236,388		42,224		229,785		27,305
	248,747		44,693		244,716		29,907

Fair value hedges

HSBC's fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are recognised in the income statement. If the hedge relationship is terminated, the fair value adjustment to the hedged item continues to be reported as part of the basis of the item and is amortised to the income statement as a yield adjustment over the remainder of the hedging period.

Fair value of derivatives designated as fair value hedges

	At 31 December 2009				At 31 December 2008
	Fair value				Fair value
	Assets		Liabilities		Assets		Liabilities
	US$m		US$m		US$m		US$m
Foreign exchange ...........................................................	342		-		265		10
Interest rate ...................................................................	242		1,085		574		1,257
	584		1,085		839		1,267

Gains or losses arising from fair value hedges

	2009		2008		2007
	US$m		US$m		US$m
Gains/(losses):
- on hedging instruments ...........................................................................	114		(296)		(186)
- on the hedged items attributable to the hedged risk .................................	(159)		301		205
	(45)		5		19

The gains and losses on ineffective portions of fair value hedges are recognised immediately in 'Net trading income'.

Cash flow hedges

HSBC's cash flow hedges consist principally of interest rate and cross-currency swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions. Gains and losses are initially recognised in other comprehensive income, and accumulated in the cash flow hedging reserve, and are transferred to the income statement when the forecast cash flows affect the income statement.

Fair value of derivatives designated as cash flow hedges

	At 31 December 2009				At 31 December 2008
	Fair value				Fair value
	Assets		Liabilities		Assets		Liabilities
	US$m		US$m		US$m		US$m
Foreign exchange ...........................................................	1,353		300		1,745		816
Interest rate ...................................................................	3,264		2,189		3,907		3,178
	4,617		2,489		5,652		3,994

Forecast principal balances on which interest cash flows are expected to arise

	3 months             or less		More than 3 months but less     than 1 year		5 years or less but more than              1 year		More than            5 years
	US$m		US$m		US$m		US$m
At 31 December 2009
Assets .............................................................................	120,915		111,456		53,184		476
Liabilities .......................................................................	(71,143)		(78,841)		(39,377)		(6,559)
Net cash inflows/(outflows) exposure ..............................	49,772		32,615		13,807		(6,083)
At 31 December 2008
Assets .............................................................................	99,426		71,491		52,988		2,081
Liabilities .......................................................................	(83,019)		(77,656)		(62,633)		(7,817)
Net cash inflows/(outflows) exposure ..............................	16,407		(6,165)		(9,645)		(5,736)

This table reflects the interest rate repricing profile of the underlying hedged items.

The gains and losses on ineffective portions of such derivatives are recognised immediately in 'Net trading income'. During the year to 31 December 2009 a gain of US$90 million (2008 loss of US$40 million; 2007: loss of US$77 million) was recognised due to hedge ineffectiveness.

Hedges of net investments in foreign operations

HSBC's consolidated balance sheet is affected by exchange differences between the US dollar and all the non‑US dollar functional currencies of subsidiaries. HSBC hedges structural foreign exchange exposures only in limited circumstances. Hedging is undertaken using forward foreign exchange contracts which are accounted for as hedges of a net investment in a foreign operation, or by financing with borrowings in the same currencies as the functional currencies involved.

At 31 December 2009, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were liabilities of US$28 million (2008: US$52 million) and notional contract values of US$566 million (2008: US$161 million).

The ineffectiveness recognised in 'Net trading income' in the year ended 31 December 2009 that arose from hedges in foreign operations was nil (2008 and 2007: nil).

19   Financial investments

	2009		2008
	US$m		US$m
Financial investments:
- not subject to repledge or resale by counterparties ..........................................................	356,864		287,479
- which may be repledged or resold by counterparties ........................................................	12,294		12,756
	369,158		300,235

	2009				2008
	Carrying amount		Fair value		Carrying amount		Fair value
	US$m		US$m		US$m		US$m
Treasury and other eligible bills ......................................	58,434		58,434		41,027		41,027
-. available for sale .....................................................	58,333		58,333		41,027		41,027
-. held to maturity ......................................................	101		101		-		-
Debt securities ................................................................	301,600		302,171		251,957		253,001
-. available for sale .....................................................	284,074		284,074		237,944		237,944
-. held to maturity ......................................................	17,526		18,097		14,013		15,057
Equity securities .............................................................	9,124		9,124		7,251		7,251
-. available for sale .....................................................	9,124		9,124		7,251		7,251
Total financial investments ............................................	369,158		369,729		300,235		301,279

	Amortised                 cost		Fair               value1
	US$m		US$m
At 31 December 2009
US Treasury ...........................................................................................................................	17,650		17,635
US Government agencies2 ......................................................................................................	12,539		12,804
US Government sponsored entities2 .......................................................................................	4,885		4,924
UK Government ....................................................................................................................	9,653		9,782
Hong Kong Government ........................................................................................................	37,747		37,763
Other government .................................................................................................................	87,122		87,881
Asset-backed securities3 .........................................................................................................	48,500		34,914
Corporate debt and other securities ........................................................................................	153,639		154,902
Equities ..................................................................................................................................	7,051		9,124
	378,786		369,729
At 31 December 2008
US Treasury ...........................................................................................................................	11,528		11,755
US Government agencies2 ......................................................................................................	8,131		8,307
US Government sponsored entities2 .......................................................................................	15,109		15,240
UK Government ....................................................................................................................	16,077		16,217
Hong Kong Government ........................................................................................................	966		989
Other government .................................................................................................................	60,755		61,528
Asset-backed securities3 .........................................................................................................	55,685		36,052
Corporate debt and other securities ........................................................................................	145,269		143,940
Equities ..................................................................................................................................	5,901		7,251
	319,421		301,279
At 31 December 2007
US Treasury ...........................................................................................................................	6,799		6,831
US Government agencies2 ......................................................................................................	5,709		5,732
US Government sponsored entities2 .......................................................................................	14,732		14,533
UK Government ....................................................................................................................	757		749
Hong Kong Government ........................................................................................................	3,941		3,942
Other government .................................................................................................................	60,109		60,320
Asset-backed securities3 .........................................................................................................	64,186		63,976
Corporate debt and other securities ........................................................................................	114,955		114,709
Equities ..................................................................................................................................	8,405		12,594
	279,593		283,386

1  Included within the above figures are debt securities issued by banks and other financial institutions of US$133,256 million (2008: US$140,878 million; 2007: US$142,863 million), of which US$55,324 million (2008: US$39,213 million; 2007: US$2,490 million) are guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions was US$133,461 million (2008: US$141,526 million; 2007: US$143,023 million).

2  Includes securities that are supported by an explicit guarantee issued by the US Government.

3  Excludes asset-backed securities included under US Government agencies and sponsored entities.

Financial investments listed on a recognised exchange and unlisted

	Treasury   and other      eligible bills    available     for sale		Treasury   and other      eligible bills       held to    maturity		Debt securities    available      for sale		Debt securities       held to    maturity		Equity securities    available      for sale		Total
	US$m		US$m		US$m		US$m		US$m		US$m
Carrying amount at 31 December 2009
Listed on a recognised exchange1 ..................	2,334		-		135,653		2,743		911		141,641
Unlisted ........................................................	55,999		101		148,421		14,783		8,213		227,517
	58,333		101		284,074		17,526		9,124		369,158
Carrying amount at 31 December 2008
Listed on a recognised exchange1 ..................	3,539		-		108,972		2,332		471		115,314
Unlisted ........................................................	37,488		-		128,972		11,681		6,780		184,921
	41,027		-		237,944		14,013		7,251		300,235

1  The fair value of listed held-to-maturity debt securities as at 31 December 2009 was US$2,769 million (2008: US$2,345 million). Included within listed investments were US$1,670 million (2008: US$1,475 million) of investments listed in Hong Kong.

Maturities of investments in debt securities at their carrying amount

	At 31 December
	2009		2008
	US$m		US$m
Remaining contractual maturity of total debt securities:
1 year or less ......................................................................................................................	75,782		72,551
5 years or less but over 1 year ............................................................................................	141,683		93,824
10 years or less but over 5 years .........................................................................................	31,934		28,141
Over 10 years ....................................................................................................................	52,201		57,441
	301,600		251,957
Remaining contractual maturity of debt securities available for sale:
1 year or less ......................................................................................................................	75,160		71,967
5 years or less but over 1 year ............................................................................................	135,187		89,931
10 years or less but over 5 years .........................................................................................	26,105		22,402
Over 10 years ....................................................................................................................	47,622		53,644
	284,074		237,944
Remaining contractual maturity of debt securities held to maturity:
1 year or less ......................................................................................................................	622		584
5 years or less but over 1 year ............................................................................................	6,496		3,893
10 years or less but over 5 years .........................................................................................	5,829		5,739
Over 10 years ....................................................................................................................	4,579		3,797
	17,526		14,013

Contractual maturities and weighted average yields of investment debt securities at 31 December 2009

	Within one year				After one year but within five years				After five years but within ten years				After ten years
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	US$m		%		US$m		%		US$m		%		US$m		%
Available-for-sale
US Treasury ..................................	13,816		1.72		2,450		1.02		170		1.37		700		4.47
US Government agencies ...............	4		4.44		6		2.76		297		4.71		11,777		3.56
US Government-sponsored agencies ...................................................	521		1.15		176		2.59		1,567		3.84		743		3.99
UK Government ............................	33		0.79		6,532		1.95		-		-		1,683		3.15
Hong Kong Government ...............	99		0.37		573		2.24		-		-		-		-
Other governments .......................	25,772		3.08		33,895		4.24		5,482		4.19		2,384		3.97
Asset-backed securities ..................	616		0.61		3,004		0.69		6,471		0.39		38,217		0.91
Corporate debt and other securities	34,239		2.18		89,120		2.16		11,816		2.64		3,603		3.46
Total amortised cost .....................	75,100				135,756				25,803				59,107
Total carrying value ......................	75,160				135,187				26,105				47,622
Held-to-maturity
US Treasury ..................................	-		-		31		4.71		57		7.56		56		9.64
US Government agencies ...............	-		-		-		-		6		7.59		447		6.58
US Government-sponsored agencies ...................................................	1		4.56		56		6.70		5		7.12		1,817		6.14
Hong Kong Government ...............	-		-		2		3.30		8		5.03		-		-
Other governments .......................	36		3.36		389		3.56		330		4.28		582		6.88
Asset-backed securities ..................	-		-		-		-		-		-		192		6.13
Corporate debt and other securities	585		3.91		6,018		4.29		5,423		4.67		1,485		5.93
Total amortised cost .....................	622				6,496				5,829				4,579
Total carrying value ......................	622				6,496				5,829				4,579

The maturity distributions of asset-backed securities are presented in the above table on the basis of contractual maturity dates. The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended 31 December 2009 by the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.

20   Transfers of financial assets not qualifying for de-recognition

HSBC enters into transactions in the normal course of business by which it transfers recognised financial assets directly to third parties or to SPEs. These transfers may give rise to the full or partial derecognition of the financial assets concerned.

-      Full derecognition occurs when HSBC transfers its contractual right to receive cash flows from the financial assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, and transfers substantially all the risks and rewards of ownership. The risks include credit, interest rate, currency, prepayment and other price risks.

-      Partial derecognition occurs when HSBC sells or otherwise transfers financial assets in such a way that some but not substantially all of the risks and rewards of ownership are transferred but control is retained. These financial assets are recognised on the balance sheet to the extent of HSBC's continuing involvement. 

The majority of financial assets that do not qualify for derecognition are (i) debt securities held by counterparties as collateral under repurchase agreements or (ii) equity securities lent under securities lending agreements. The following table analyses the carrying amount of financial assets that did not qualify for derecognition and their associated financial liabilities:

Financial assets and associated financial liabilities not qualifying for derecognition

	2009				2008
	Carrying       amount of     transferred              assets		Carrying       amount of       associated       liabilities		Carrying        amount of        transferred                assets		Carrying        amount of         associated           liabilities
	US$m		US$m		US$m		US$m
Nature of transaction
Repurchase agreements ...................................................	108,518		107,525		94,154		91,139
Securities lending agreements ..........................................	7,363		7,264		4,497		4,096
	115,881		114,789		98,651		95,235

A small proportion of financial assets that do not qualify for derecognition relate to loans, credit cards, debt securities and trade receivables that have been securitised under arrangements by which HSBC retains a continuing involvement in such transferred assets. Continuing involvement may entail retaining the rights to future cash flows arising from the assets after investors have received their contractual terms (for example, interest rate strips); providing subordinated interest; liquidity support; continuing to service the underlying asset; or entering into derivative transactions with the securitisation vehicles. As such, HSBC continues to be exposed to risks associated with these transactions.

The rights and obligations that HSBC retains from its continuing involvement in securitisations are initially recorded as an allocation of the fair value of the financial asset between the part that is derecognised and the part that continues to be recognised on the date of transfer. The following analyses the carrying amount of financial assets to the extent of HSBC's continuing involvement that qualified for partial derecognition during the year, and their associated liabilities:

HSBC's continuing involvement in financial assets qualifying for partial derecognition

	Securitisations at 31 December
	2009		2008
	US$m		US$m
Carrying amount of assets (original) ......................................................................................	17,427		17,427
Carrying amount of assets (currently recognised) ...................................................................	139		299
Carrying amount of associated liabilities (currently recognised) ..............................................	69		149

21   Interests in associates and joint ventures

Associates

Principal associates of HSBC

	At 31 December 2009				At 31 December 2008
	Carrying           amount		Fair               value		Carrying             amount		Fair                 value
	US$m		US$m		US$m		US$m
Listed
Bank of Communications Co., Limited ...........................	5,110		10,820		4,612		6,717
Industrial Bank Co., Limited ...........................................	1,084		3,774		913		1,368
Ping An Insurance (Group) Company of China, Limited .	4,391		10,803		3,727		5,965
SABB Takaful Company ................................................	29		99		4		29
The Saudi British Bank ...................................................	1,376		3,472		1,214		3,453
	11,990		28,968		10,470		17,532

	At 31 December 2009
	Country of  incorporation		HSBC's        interest in   equity capital		Issued                equity               capital
Listed
Bank of Communications Co., Limited ...............................................	PRC1		19.01%		RMB48,994m
Industrial Bank Co., Limited2 .............................................................	PRC1		12.78%		RMB5,000m
Ping An Insurance (Group) Company of China, Limited .....................	PRC1		16.78%		RMB7,345m
SABB Takaful Company ....................................................................	Saudi Arabia		32.50%		SR340m
The Saudi British Bank .......................................................................	Saudi Arabia		40.00%		SR7,500m
Unlisted
Barrowgate Limited2,3 .........................................................................	Hong Kong		24.64%		-
British Arab Commercial Public Limited Company .............................	England		48.92%	US$77m fully paid
					£30m fully paid
					£5m nil paid
Vietnam Technological and Commercial Joint Stock Bank .................	Vietnam		19.91%		VND5,400,417m
Yantai City Commercial Bank2 ...........................................................	PRC		20.00%		RMB2,000m
Wells Fargo HSBC Trade Bank, N.A.4 .................................................	United States		20.00%		-

1  People's Republic of China.

2  Investment held through Hang Seng Bank Limited, a 62.14 per cent owned subsidiary of HSBC.

3  Issued equity capital is less than HK$1 million.

4  Issued equity capital is less than US$1 million. HSBC disposed of its equity interest on 12 February 2010.

All the above investments in associates are owned by subsidiaries of HSBC Holdings.

Details of all HSBC associates and joint ventures, as required under S.409 Companies Act 2006, will be annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.

HSBC had US$9,501 million (2008: US$8,339 million) of investments in associates and joint ventures listed in Hong Kong.

For the year ended 31 December 2009, HSBC's share of associates and joint ventures' tax on profit was US$491 million (2008: US$515 million), which is included within share of profit in associates and joint ventures in the income statement.

Summarised aggregate financial information on associates

	2009		2008
	US$m		US$m
HSBC's share of:
- assets ..............................................................................................................................	157,366		123,283
- liabilities .........................................................................................................................	147,501		114,578
- revenues ..........................................................................................................................	7,514		5,939
- profit after tax ................................................................................................................	1,722		1,600

HSBC's investment in Industrial Bank Co., Limited was equity accounted with effect from May 2004, reflecting HSBC's significant influence over this associate. HSBC's significant influence was established as a result of representation on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is assisting in the development of financial and operating policies.

HSBC's investment in Ping An Insurance (Group) Company of China, Limited was equity accounted with effect from 31 August 2005, reflecting HSBC's significant influence over this associate. HSBC's significant influence was established as a result of representation on the Board of Directors.

HSBC's significant influence in Bank of Communications Co., Limited was established as a result of representation on the Board of Directors, and in accordance with the Technical Support and Assistance Agreements, HSBC is assisting in the development of financial and operating policies and a number of staff have been seconded to assist in this process.

The statutory accounting reference date of Bank of Communications Co., Limited, Ping An Insurance (Group) Company of China, Limited and Industrial Bank Company Limited is 31 December. For the year ended 31 December 2009, these companies were included on the basis of financial statements made up for the twelve months to 30 September 2009, taking into account changes in the subsequent period from 1 October 2009 to 31 December 2009 that would have materially affected their results.

HSBC also had a 100 per cent interest in the issued preferred stock (less than US$1 million) of Wells Fargo HSBC Trade Bank, N.A. HSBC held a 40 per cent economic interest in Wells Fargo HSBC Trade Bank, N.A. by virtue of the joint agreement under which HSBC's equity capital and preferred stock interests were being held. HSBC disposed of its equity interest in Wells Fargo HSBC Trade Bank, N.A. on 12 February 2010. As at 31 December 2009, this interest in associate was classified as held for sale.

HSBC acquired 15 per cent of Vietnam Technological & Commercial Joint Stock Bank in October 2007. This investment was equity accounted from that date due to HSBC's representation on the Board of Directors and involvement in the Technical Support and Assistance Agreement. In December 2007, as a result of a rights issue in which HSBC did not participate, HSBC's equity interest was diluted to 14.44 per cent. In September 2008, HSBC increased its equity interest to 20 per cent. HSBC's equity interest was diluted to 19.91 per cent in June 2009, following an issue of shares by the associate to its own employees.

Joint ventures

Principal interests in joint ventures

	At 31 December 2009
	Country of incorporation		Principal                        activity	HSBC's interest        in equity   capital			Issued             equity             capital
HSBC Saudi Arabia Limited ................................	Saudi Arabia		Investment banking		60.00%		SR50m
Vaultex UK Limited ...........................................	England		Cash management		50.00%		£10m
Hana HSBC Life Insurance Co., Ltd ...................	South Korea		Insurance manufacturing		49.99%		KRW60,201m
Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited ...................	India		Insurance manufacturing		26.00%		INR5,000m

Summarised aggregate financial information on joint ventures

	2009		2008
	US$m		US$m
HSBC's share of:
- current assets ..................................................................................................................	700		594
- non-current assets ...........................................................................................................	513		281
- current liabilities .............................................................................................................	621		260
- non-current liabilities ......................................................................................................	416		449
- income ............................................................................................................................	370		301
- expenses .........................................................................................................................	324		240

Goodwill included in carrying amount of associates and joint ventures

	2009		2008
	US$m		US$m
Gross amount
At 1 January ..........................................................................................................................	1,453		1,308
Additions ...............................................................................................................................	5		88
Disposals ...............................................................................................................................	-		(46)
Exchange differences .............................................................................................................	(12)		86
Other changes ........................................................................................................................	-		17
At 31 December1 ...................................................................................................................	1,446		1,453

1  Includes the carrying amount of goodwill arising from joint ventures of US$32 million (2008: US$39 million).

22   Goodwill and intangible assets

Goodwill and intangible assets includes goodwill arising on business combinations, the present value of in-force long-term insurance business, and other intangible assets.

Goodwill

Reconciliation of goodwill

	Europe		Hong         Kong		Rest of         Asia-      Pacific1		Middle           East1		North   America		Latin   America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
Gross amount
At 1 January 2009 ..............	15,511		122		364		69		12,487		3,866		32,419
Additions ............................	-		-		570		-		-		10		580
Disposals ............................	(3)		-		-		-		-		-		(3)
Exchange differences ..........	460		1		119		-		-		294		874
Other changes .....................	(53)		-		-		-		(4)		(8)		(65)
At 31 December 2009 ........	15,915		123		1,053		69		12,483		4,162		33,805
Accumulated impairment losses
At 1 January 2009 ..............	-		-		-		-		(10,564)		-		(10,564)
Impairment losses ...............	-		-		-		-		-		-		-
At 31 December 2009 ........	-		-		-		-		(10,564)		-		(10,564)
Net carrying amount at 31 December 2009 ..........	15,915		123		1,053		69		1,919		4,162		23,241

	Europe		Hong          Kong		Rest of          Asia-       Pacific1		Middle           East1		North     America		Latin     America		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
Gross amount
At 1 January 2008 ..........	16,744		124		281		69		12,561		4,474		34,253
Additions ........................	12		-		142		-		-		1		155
Disposals .........................	(415)		-		-		-		(13)		-		(428)
Exchange differences ......	(775)		(2)		(59)		-		(61)		(609)		(1,506)
Other changes .................	(55)		-		-		-		-		-		(55)
At 31 December 2008 .....	15,511		122		364		69		12,487		3,866		32,419
Accumulated impairment losses
At 1 January 2008 ..........	-		-	-	-		-	-	-		-	-	-
Impairment losses ...........	-		-	-	-		-	-	(10,564)		-	-	(10,564)
At 31 December 2008 .....	-		-	-	-		-	-	(10,564)		-	-	(10,564)
Net carrying amount at 31 December 2008 ......	15,511		122		364		69		1,923		3,866		21,855

1  The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of Asia-Pacific. Comparative data have been restated accordingly.

During 2009, there was no impairment of goodwill (2008: US$10.6 billion; 2007: nil).

Impairment testing

Timing of impairment testing

HSBC's impairment test in respect of goodwill allocated to each cash-generating unit ('CGU') is performed as at 1 July each year. In line with the accounting policy set out in Note 2, goodwill is also retested for impairment whenever there is an indication that goodwill may be impaired. There was no indication of impairment in the period to 31 December 2009 and therefore goodwill has not been retested since 1 July 2009. In 2008, an additional impairment test was performed on all CGUs within the Group as at 31 December due to the extraordinary market events experienced globally during the year. For the purpose of impairment testing, the Group's CGUs are based on customer groups and global business separated by geographical region. The CGUs represent the lowest level at which goodwill is monitored for internal management purposes.

Basis of the recoverable amount - value in use or fair value less costs to sell

The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use ('VIU') at each respective testing date for 2008 and 2009.

For each significant CGU, the VIU is calculated by discounting management's two year cash flow projections for each CGU. The discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the CGU operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term perspective within the Group of the business units making up the CGUs. However, due to the current economic conditions in Personal Financial Services - Latin America, a 10 year cash flow projection was used.

Key assumptions in VIU calculation and management's approach to determining the values assigned to each key assumption

	2009						2008
Cash-generating unit	Goodwill at 3 1 July 2   2009		Discount            rate		Nominal growth rate       beyond        initial   cash flow projections		Goodwill at 31 December           2008		Discount             rate		Nominal growth rate        beyond          initial     cash flow projections
	US$m		%		%		US$m		%		%
Personal Financial Services - Europe .......	4,507		11.0		3.1		4,422		10.0		3.5
Commercial Banking - Europe .................	3,480		11.0		3.1		3,427		10.0		3.5
Private Banking - Europe ........................	4,483		11.0		3.1		4,470		9.0		3.5
Global Banking and Markets - Europe ......	3,489		11.0		3.1		3,451		11.0		3.5
Personal Financial Services - North America ...............................................	-		-		-		-		13.6		3.9
Personal Financial Services - Latin America ...............................................	2,350		15.0		8.0		2,189		16.8		8.8
Total goodwill in the CGUs listed above ...	18,309						17,959

At 1 July 2009, aggregate goodwill of US$4,475 million (31 December 2008: US$3,896 million) had been allocated to CGUs that were not considered individually significant. These CGUs do not carry on their balance sheets any significant intangible assets with indefinite useful lives, other than goodwill.

Nominal long-term growth rate: external data that reflects the market's assessment of GDP and inflation for the countries within which the CGU operates. The rates used for 2008 and 2009 are taken as an average of the last 10 years.

Discount rate: the discount rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived using a Capital Asset Pricing Model ('CAPM'). The CAPM depends on inputs reflecting a number of financial and economic variables including the risk-free rate in the country concerned and a premium to reflect the inherent risk of the business being evaluated. These variables are based on the market's assessment of the economic variables and management's judgement. In addition, for the purposes of testing goodwill for impairment, management supplements this process by comparing the discount rates derived using the internally generated CAPM with cost of capital rates produced by external sources. HSBC uses externally-sourced cost of capital rates where, in management's judgement, those rates reflect more accurately the current market and economic conditions. In 2008, the rates used in the impairment test for Personal Financial Services - Latin America were based on externally sourced rates.

Management's judgement in estimating the cash flows of a CGU: the cash flow projections for each CGU are based on plans approved by the Group Management Board. The key assumptions in addition to the discount rate and nominal long-term growth rate for each significant CGU are discussed below.

Personal Financial Services - Europe and Commercial Banking - Europe: the assumptions included in the cash flow projections for Personal Financial Services - Europe and Commercial Banking - Europe reflect the economic environment and financial outlook of the European countries within these two segments. Key assumptions include the level of interest rates and the level and change in unemployment rates, particularly in the UK. While current economic conditions in Europe continue to be challenging, management's cash flow projections are based primarily on these prevailing conditions. Although the prospects for near term economic growth are uncertain, management does not expect these conditions to continue over the longer term. The downside risks to this assessment include the risk of a prolonged economic downturn and the continuation of base rates at their current record low levels. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Personal Financial Services - Europe or Commercial Banking - Europe.

Private Banking - Europe: the revenues in Private Banking - Europe are predominately generated through HSBC's client relationships. For 2010, a modest recovery in client risk appetite is expected, reducing the pressure on brokerage and portfolio management fees. Thereafter, the nominal long-term growth rates described in the table above have been used. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Private Banking - Europe.

Global Banking and Markets - Europe: the cash flows generated by Global Banking and Markets - Europe are diversified and there is no one key assumption that drives the cash flow projection of this CGU.

The forecast cash flows in the 2010 plan reflect the effect of current flatter yield curves, more stable risk positions and lower volumes offset by increased transaction and management revenue as client risk appetite recovers. One of the key factors which may impact the carrying value of this CGU is the level of impairment charges which may emerge in the future, particularly in respect of holdings of available-for-sale sub-prime and Alt-A Residential MBSs. Based on management's current assessment of the credit quality of these securities, which includes stressed scenarios for collateral defaults and house prices, and the level of credit support available, management determined that a reasonably possible change in key assumptions would not cause an impairment to be recognised in respect of Global Banking and Markets - Europe.

Personal Financial Services - Latin America: the assumptions included in the cash flow projections for Personal Financial Services - Latin America reflect the economic environment and financial outlook of the countries within this segment, with Brazil and Mexico being two of the largest countries included within this segment. Key assumptions include the growth in lending and deposit volumes, the credit quality of the loan portfolios and operational efficiency improvements. Based on the conditions at the balance sheet date, management determined that a reasonably possible change in any of the key assumptions described above would not cause an impairment to be recognised in respect of Personal Financial Services - Latin America.

The present value of in-force long-term insurance business

Movement on the PVIF

	2009		2008
	US$m		US$m
At 1 January ...............................................................................................................................	2,033		1,965
Value of new business written during the year ..............................................................................	600		452
Movement from in-force business (including investment return variances and changes in investment assumptions) .........................................................................................................	(84)		(311)
Exchange differences and other movements ...............................................................................	231		(73)
At 31 December .........................................................................................................................	2,780		2,033

PVIF-specific assumptions

The key assumptions used in the computation of PVIF for HSBC's main life insurance operations were:

	2009						2008
	UK		Hong Kong		France		UK		Hong Kong		France
	%		%		%		%		%		%
Risk free rate .........................	3.50		2.58		3.46		4.30		1.14		4.03
Risk discount rate ...................	7.00		11.00		8.00		8.00		11.00		8.00
Expenses inflation .................	3.50		3.00		2.00		3.50		3.00		2.00

The PVIF represents the value of the shareholder's interest in the in-force business of the life insurance operations. The calculation of the PVIF is based upon assumptions that take into account risk and uncertainty. To project these cash flows, a variety of assumptions regarding future experience is made by each insurance operation which reflects local market conditions and management's judgement of local future trends. Some of the Group's insurance operations incorporate risk margins separately in the projection assumptions for each product, while others incorporate risk margins into the overall discount rate. Both factors are reflected in the wide range of risk discount rates applied.

Other intangible assets

Movement of intangible assets excluding goodwill and the PVIF

	Trade       names		Mortgage servicing        rights		Internally generated   software		Purchased   software		Customer/ merchant   relation-         ships		Other		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m
Cost
At 1 January 2009 ..................	67		1,360		3,429		867		1,749		421		7,893
Additions1 ...............................	-		116		763		65		20		10		974
Acquisition of subsidiaries ........	-		-		-		-		58		-		58
Disposals .................................	-		(29)		(14)		(18)		(25)		-		(86)
Amount written off .................	-		(757)		(45)		(1)		(15)		-		(818)
Exchange differences ..............	1		-		247		53		201		9		511
Other changes .........................	-		(1)		20		(12)		-		62		69
At 31 December 2009 .............	68		689		4,400		954		1,988		502		8,601
Accumulated amortisation
At 1 January 2009 ..................	(45)		(1,023)		(1,992)		(631)		(681)		(52)		(4,424)
Charge for the year2 ................	(4)		(3)		(433)		(98)		(228)		(30)		(796)
Impairment .............................	-		-		(6)		(5)		(6)		-		(17)
Disposals .................................	-		29		6		18		15		-		68
Amount written off .................	-		757		45		1		15		-		818
Exchange differences ..............	(1)		-		(131)		(32)		(72)		(1)		(237)
Other changes .........................	-		-		-		-		2		(42)		(40)
At 31 December 2009 .............	(50)		(240)		(2,511)		(747)		(955)		(125)		(4,628)
Net carrying amount at 31 December 2009 ..............	18		449		1,889		207		1,033		377		3,973
Cost
At 1 January 2008 ..................	63		1,202		3,473		760		1,866		165		7,529
Additions1 ...............................	-		158		764		118		169		23		1,232
Acquisition of subsidiaries ........	10		-		-		68		4		267		349
Disposals .................................	-		-		(43)		(26)		(25)		(3)		(97)
Exchange differences ..............	(8)		-		(561)		(59)		(264)		(24)		(916)
Other changes .........................	2		-		(204)		6		(1)		(7)		(204)
At 31 December 2008 .............	67		1,360		3,429		867		1,749		421		7,893
Accumulated amortisation
At 1 January 2008 ..................	(44)		(724)		(2,167)		(549)		(541)		(33)		(4,058)
Charge for the year2 ................	(6)		(299)		(365)		(114)		(227)		(20)		(1,031)
Impairment .............................	-		-		-		(1)		-		-		(1)
Disposals .................................	-		-		18		6		10		-		34
Exchange differences ..............	5		-		311		36		80		1		433
Other changes .........................	-		-		211		(9)		(3)		-		199
At 31 December 2008 .............	(45)		(1,023)		(1,992)		(631)		(681)		(52)		(4,424)
Net carrying amount at 31 December 2008 ..............	22		337		1,437		236		1,068		369		3,469

1  At 31 December 2009, HSBC had US$0.2 million (2008: US$2 million) of contractual commitments to acquire intangible assets.

2  The amortisation charge for the year is recognised within the income statement under 'Amortisation and impairment of intangible assets', with the exception of the amortisation of mortgage servicing rights that is charged to net fee income.

 

END

 

 

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