Annual Financial Report - 35 of 44

RNS Number : 1524A

HSBC Holdings PLC

27 March 2012

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

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

· all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value, including liabilities under investment contracts;

· all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities designated at fair value; and

· interest income, interest expense and dividend income in respect of:

- financial assets and liabilities designated at fair value; and

- derivatives managed in conjunction with the above,

except for interest arising from HSBC's issued debt securities and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'.

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

HSBC

	2011	2010	2009
	US$m	US$m	US$m
Net income/(expense) arising on:
- financial assets held to meet liabilities under insurance and investment contracts ..............................................................................................	(933)	2,349	3,793
- other financial assets designated at fair value ............................................	1,050	230	2
- derivatives managed in conjunction with other financial assets designated at fair value ..........................................................................	(182)	(149)	(249)

	(65)	2,430	3,546

- liabilities to customers under investment contracts ...................................	231	(946)	(1,329)
- HSBC's long-term debt issued and related derivatives ................................	4,161	(258)	(6,247)
- changes in own credit spread on long-term debt ....................................	3,933	(63)	(6,533)
- derivatives managed in conjunction with HSBC's issued debt securities ..	3,165	(275)	(1,726)
- other changes in fair value ....................................................................	(2,937)	80	2,012
- other financial liabilities designated at fair value .......................................	(911)	(18)	492
- derivatives managed in conjunction with other financial liabilities designated at fair value ..........................................................................	23	12	7

	3,504	(1,210)	(7,077)

	3,439	1,220	(3,531)

HSBC Holdings

	2011	2010	2009
	US$m	US$m	US$m
Net income/(expense) arising on HSBC Holdings long-term debt issued and related derivatives
- changes in own credit spread on long-term debt ....................................	1,657	248	(2,612)
- derivatives managed in conjunction with HSBC Holdings issued debt securities .......................................................................................	1,368	(482)	(352)
- other changes in fair value ....................................................................	(1,113)	373	201

	1,912	139	(2,763)

4 Net earned insurance premiums

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2011
Gross earned premiums .........................................	1,144	6,238	2,801	3,155	13,338
- gross written premiums ..................................	1,175	6,207	2,804	3,155	13,341
- movement in unearned premiums ..................	(31)	31	(3)	-	(3)

Reinsurers' share of gross earned premiums ..........	(180)	(278)	(8)	-	(466)
- gross written premiums ceded to reinsurers ....	(182)	(255)	(8)	-	(445)
- reinsurers' share of movement in unearned premiums ......................................................	2	(23)	-	-	(21)


	964	5,960	2,793	3,155	12,872

2010
Gross earned premiums .........................................	1,275	5,427	1,956	2,951	11,609
- gross written premiums ..................................	1,192	5,357	1,956	2,951	11,456
- movement in unearned premiums ..................	83	70	-	-	153

Reinsurers' share of gross earned premiums ..........	(160)	(289)	(14)	-	(463)
- gross written premiums ceded to reinsurers ....	(172)	(266)	(8)	-	(446)
- reinsurers' share of movement in unearned premiums ......................................................	12	(23)	(6)	-	(17)


	1,115	5,138	1,942	2,951	11,146

2009
Gross earned premiums .........................................	1,572	5,218	1,427	2,774	10,991
- gross written premiums ..................................	1,339	5,285	1,427	2,774	10,825
- movement in unearned premiums ..................	233	(67)	-	-	166

Reinsurers' share of gross earned premiums ..........	(225)	(278)	(17)	-	(520)
- gross written premiums ceded to reinsurers ....	(215)	(280)	(11)	-	(506)
- reinsurers' share of movement in unearned premiums ......................................................	(10)	2	(6)	-	(14)


	1,347	4,940	1,410	2,774	10,471

1 Discretionary participation features.

5 Net insurance claims incurred and movement in liabilities to policyholders

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2011
Gross claims incurred and movement in liabilities .	435	5,729	2,462	3,005	11,631
- claims, benefits and surrenders paid ................	631	1,793	1,129	2,628	6,181
- movement in liabilities ..................................	(196)	3,936	1,333	377	5,450

Reinsurers' share of claims incurred and movement in liabilities ....................................	(85)	(254)	(111)	-	(450)
- claims, benefits and surrenders paid ................	(81)	(164)	(56)	-	(301)
- movement in liabilities ..................................	(4)	(90)	(55)	-	(149)


	350	5,475	2,351	3,005	11,181

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2010
Gross claims incurred and movement in liabilities .	625	5,108	2,520	3,716	11,969
- claims, benefits and surrenders paid ................	815	1,355	507	2,023	4,700
- movement in liabilities ..................................	(190)	3,753	2,013	1,693	7,269

Reinsurers' share of claims incurred and movement in liabilities ....................................	(100)	(201)	99	-	(202)
- claims, benefits and surrenders paid ................	(114)	(143)	(45)	-	(302)
- movement in liabilities ..................................	14	(58)	144	-	100


	525	4,907	2,619	3,716	11,767
2009
Gross claims incurred and movement in liabilities .	1,281	4,669	2,676	3,934	12,560
- claims, benefits and surrenders paid ................	987	2,098	325	1,818	5,228
- movement in liabilities ..................................	294	2,571	2,351	2,116	7,332

Reinsurers' share of claims incurred and movement in liabilities ....................................	(158)	(98)	146	-	(110)
- claims, benefits and surrenders paid ................	(156)	(159)	(21)	-	(336)
- movement in liabilities ..................................	(2)	61	167	-	226


	1,123	4,571	2,822	3,934	12,450

1 Discretionary participation features.

6 Operating profit

Operating profit is stated after the following items of income, expense, gains and losses:

	2011	2010	2009
	US$m	US$m	US$m
Income
Interest recognised on impaired financial assets¹ ...........................................	1,604	516	941
Fees earned on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ............................................................	11,318	11,445	12,310
Fees earned on trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ...............................................	3,072	3,074	2,735
Income from listed investments ...................................................................	8,283	7,418	9,201
Income from unlisted investments ................................................................	8,031	7,187	7,085
Losses from the fraud at Bernard L Madoff Investment Securities LLC (within net trading income) ......................................................................	-	-	(72)
Gain arising from dilution of interests in associates and joint ventures ..........	208	188	-

Expense
Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value .................................................	(20,965)	(17,549)	(19,737)
Fees payable on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ............................................................	(1,697)	(1,529)	(1,580)
Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ............................	(182)	(151)	(116)
UK bank levy ...............................................................................................	(570)	-	-
Auditors' remuneration (see Note 8) ............................................................	(51)	(51)	(51)

Gains/(losses)
Gain on disposal or settlement of loans and advances ...................................	116	121	244
Impairment of available-for-sale equity securities .........................................	(177)	(105)	(358)
Gains on disposal of property, plant and equipment, intangible assets and non-financial investments ........................................................................	57	701	1,033

Loan impairment charges and other credit risk provisions ................	(12,127)	(14,039)	(26,488)
Net impairment charge on loans and advances ..........................................	(11,505)	(13,548)	(24,942)
Impairment of available-for-sale debt securities ........................................	(631)	(472)	(1,474)
Release/(impairment) in respect of other credit risk provisions .................	9	(19)	(72)

1 During 2011 the Group adopted a more stringent treatment for impaired loans for geographical regions with significant levels of forbearance. As a result loans and advances have been classified as impaired that under the previous disclosure convention would otherwise have been classified as neither past due nor impaired or past due but not impaired. The effect of this change on 2011 reported numbers was to increase interest earned on impaired loans from US$0.3bn to US$1.5bn. Restatement of comparative data prior to 31 December 2010 is impracticable (see page 133, 'Impaired loans disclosure', for further details).

7 Employee compensation and benefits

	2011	2010	2009
	US$m	US$m	US$m

Wages and salaries ........................................................................................	18,923	17,193	16,268
Social security costs ......................................................................................	1,754	1,567	1,512
Post-employment benefits ...........................................................................	489	1,076	688

	21,166	19,836	18,468

Included in 'Wages and salaries' above is US$1,162m (2010: US$812m; 2009: US$683m) relating to share-based payment arrangements (see Note 9). Wages and salaries also includes US$88m (2010: US$15m; 2009: US$5m) in respect of deferred cash awards for current and prior performance years. The Group expects to recognise US$159m in the future in respect of deferred cash awards for current and prior performance years.

Average number of persons employed by HSBC during the year

	2011	2010	2009

Europe .........................................................................................................	81,263	79,902	84,056
Hong Kong ...................................................................................................	30,323	29,105	28,894
Rest of Asia-Pacific ......................................................................................	92,685	89,737	88,122
Middle East and North Africa .......................................................................	8,816	8,983	8,468
North America .............................................................................................	34,871	36,822	42,202
Latin America ..............................................................................................	58,026	57,778	57,774

Total ............................................................................................................	305,984	302,327	309,516

Post-employment benefit plans

Income statement charge

	2011	2010	2009
	US$m	US$m	US$m

Defined benefit pension plans .......................................................................	(172)	468	161
- HSBC Bank (UK) Pension Scheme .....................................................	(428)	308	(179)
- Other plans ........................................................................................	256	160	340

Defined contribution pension plans ..............................................................	626	545	492

	454	1,013	653
Defined benefit healthcare plans ...................................................................	32	58	31
Defined contribution healthcare plans ..........................................................	3	5	4

	489	1,076	688

Net assets/(liabilities) recognised on balance sheet in respect of defined benefit plans

	2011	2010
	US$m	US$m

Defined benefit pension plans .................................................................................................	(208)	(2,867)

HSBC Bank (UK) Pension Scheme ......................................................................................	2,237	(622)
- fair value of plan assets ...............................................................................................	26,604	22,236
- present value of defined benefit obligations .................................................................	(24,367)	(22,858)

Other plans .........................................................................................................................	(2,445)	(2,245)
- fair value of plan assets ...............................................................................................	8,232	7,559
- present value of defined benefit obligations .................................................................	(10,680)	(9,785)
- effect of limit on plan surpluses ...................................................................................	(18)	(47)
- unrecognised past service cost .....................................................................................	21	28

Defined benefit healthcare plans ..........................................................................................	(961)	(946)
- fair value of plan assets ...............................................................................................	151	165
- present value of defined benefit obligations .................................................................	(1,091)	(1,087)
- unrecognised past service cost .....................................................................................	(21)	(24)

Fair value of plan assets ..........................................................................................................	34,987	29,960
Present value of defined benefit obligations .............................................................................	(36,138)	(33,730)
Effect of limit on plan surpluses ..............................................................................................	(18)	(47)
Unrecognised past service cost ................................................................................................	-	4

	(1,169)	(3,813)

Retirement benefit liabilities ...................................................................................................	(3,666)	(3,856)
Retirement benefit assets ........................................................................................................	2,497	43

Cumulative actuarial gains/(losses) recognised in other comprehensive income

	2011	2010
	US$m	US$m

At 1 January ............................................................................................................................	(4,720)	(4,660)

HSBC Bank (UK) Pension Scheme ..........................................................................................	1,945	321
Other plans .............................................................................................................................	(642)	(275)
Healthcare plans ......................................................................................................................	(61)	(112)
Change in the effect of limit on plan surpluses¹ .......................................................................	25	6

Total actuarial gains/(losses) recognised in other comprehensive income .................................	1,267	(60)

At 31 December² .....................................................................................................................	(3,453)	(4,720)

1 Excludes exchange loss of US$4m (2010: US$6m gain).

2 Includes cumulative movements related to the limit on plan surpluses. This limit is US$18m at 31 December 2011 (2010: US$47m).

HSBC pension plans

	2011	2010	2009

Number of plans worldwide ...........................................................................	230	218	211

	%	%	%
Percentage of HSBC employees:
- enrolled in defined contribution plans .................................................	64	63	59
- enrolled in defined benefit plans .........................................................	25	27	29

- covered by HSBC pension plans .........................................................	89	90	88

HSBC has been progressively offering all new employees membership of defined contribution plans.

The majority of the Group's defined benefit plans are funded plans. The assets of most of the larger plans are held in trusts or similar funds separate from HSBC. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligations and related current service costs vary according to the economic conditions of the countries in which the plans are situated.

Pension plans in the UK

The largest plan exists in the UK, where the HSBC Bank (UK) Pension Scheme ('the Scheme') covers employees of HSBC Bank plc and certain other employees of HSBC. This comprises a funded defined benefit plan ('the principal plan'), which is closed to new entrants, and a defined contribution plan which was established in July 1996 for new employees.

The latest actuarial valuation of the principal plan was made as at 31 December 2008 by C G Singer, Fellow of the Institute of Actuaries, of Towers Watson Limited. At that date, the market value of the HSBC Bank (UK) Pension Scheme's assets was £10.6bn (US$15.5bn) (including assets relating to the defined benefit plan, the defined contribution plan and additional voluntary contributions). The market value of the plan assets represented 77% of the amount expected to be required, on the basis of the assumptions adopted, to provide the benefits accrued to members after allowing for expected future increases in earnings, and the resulting deficit amounted to £3.2bn (US$4.7bn). The method adopted for this investigation was the projected unit method.

The expected cash flows from the principal plan were projected by reference to the Retail Price Index ('RPI') swap break-even curve at 31 December 2008. Salary increases were assumed to be 0.5% per annum above RPI and inflationary pension increases, subject to a minimum of zero per cent and a maximum of 5% (maximum of 3% per annum in respect of service accrued since 1 July 2009), were assumed to be in line with RPI. The projected cash flows were discounted at the LIBOR swap curve at 31 December 2008 plus a margin for the expected return on the investment strategy of 190 basis points per annum. The mortality experience of the principal plan's pensioners over the three year period since the previous valuation was analysed and, on the basis of this analysis, the mortality assumptions were set based on the SAPS S1 series of tables adjusted to best fit the pensioner experience. Allowance was made for future improvements to mortality rates in line with the medium cohort projections with a minimum improvement rate set at 1.75% for males and 1.25% for females. The benefits payable from the defined benefit plan are forecast to be as shown in the chart below.

Benefit payments (US$m)

The expected cash flows of the principal plan were historically projected by reference to the RPI swap curve in calculating the liability recognised. The Occupational Pensions (Revaluation) Order 2010 confirmed the UK government's intention to move to using the Consumer Prices Index ('CPI') rather than RPI as the inflation measure for determining the minimum pension increases to be applied to the statutory index-linked features of retirement benefits. Historical annual CPI increases have generally been lower than annual RPI increases. The rules of the principal plan prescribe that annual increases for pensions in payment are in line with RPI, but for deferred pensions, i.e. pensions for members of the scheme who have left HSBC employment but whose pensions are yet to commence, are linked to the statutory index prior to retirement. However, consistent with communications to scheme members, HSBC has historically used RPI in calculating the pension liability for deferred pensions.

In May 2011, the trustee of the principal plan communicated to scheme members the impact on scheme benefits of the UK government's announcement. At 30 June 2011, HSBC used CPI for increases to deferred pensions before retirement in calculating the pension liability recognised, which resulted in a reduction of the principal plan's liabilities in respect of deferred pensioners of US$587m. A corresponding gain was recognised as a credit to past service cost and is included within 'Employee compensation and benefits' in the income statement.

As part of the 31 December 2008 valuation, calculations were also carried out as to the amount of assets that might be needed to meet the liabilities if the Scheme was discontinued and the members' benefits bought out with an insurance company (although in practice this may not be possible for a plan of this size) or the Trustee continued to run the plan without the support of HSBC. The amount required under this approach is estimated to be £19.8bn (US$28.9bn) as at 31 December 2008. In arriving at this estimation, a more prudent assumption about future mortality was made than for the assessment of the ongoing position and it was assumed that the Trustee would alter the investment strategy to be an appropriately matched portfolio of UK government bonds. An explicit allowance for expenses was also included.

In February 2010, HSBC Bank plc agreed with the Trustee of the Scheme to reduce the deficit of the plan by meeting a schedule of future funding payments. On 17 June 2010, HSBC Bank plc agreed with the Trustee to accelerate the reduction of the deficit of the plan with a special contribution of £1,760m (US$2,638m) in 2010 followed by a revised payment schedule in the following years, as shown below:

Additional future funding payments to the principal plan

	Original plan	Original plan	Revised plan	Revised plan
	US$m¹	£m	US$m¹	£m

2012 .....................................................	720	465	-	-
2013 .....................................................	720	465	-	-
2014 .....................................................	720	465	-	-
2015 .....................................................	975	630	-	-
2016 .....................................................	975	630	766	495
2017 .....................................................	975	630	975	630
2018 .....................................................	975	630	975	630

1 The payment schedule was agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the exchange rate effective as at 31 December 2011.

In December 2011, HSBC Bank plc made a £184m (US$286m) special contribution to the Scheme. The additional contribution did not result in an amendment to the future funding payments to the principal plan, set out in the table above.

HSBC considers that the contributions set out above, together with investment returns at an expected level of 240 basis points above the LIBOR swap curve, would be sufficient to meet the deficit as at 31 December 2008 over the agreed period. At each subsequent actuarial valuation, HSBC has agreed with the Trustee that any shortfall in investment returns relative to this expected level, subject to a maximum of 50 basis points per annum, will be eliminated by payment of equal cash instalments over the remaining years to the end of this recovery plan period.

HSBC Bank plc also agreed to make ongoing contributions to the principal plan in respect of the accrual of benefits of defined benefit section members at the rate of 34% of pensionable salaries (less member contributions) payable from 1 April 2010 until the completion of the next actuarial valuation, due as at 31 December 2011. During 2009, HSBC paid contributions at the rate of 38% of pensionable salaries (less member contributions) and continued contributions at this rate until 31 March 2010.

On 1 July 2009, changes to the design of the principal plan were made. This included the introduction of employee contributions, optionality concerning future benefit accrual and, with effect from 1 April 2010, an increased normal retirement age of 65 years. In addition, enhancements to the defined contribution section were also introduced.

Pension plans in Hong Kong

In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The Hongkong and Shanghai Banking Corporation and certain other employees of HSBC. The scheme comprises a funded defined benefit scheme (which provides a lump sum on retirement but is now closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees. The latest actuarial valuation of the defined benefit scheme was made at 31 December 2010 by Wing Lui, Fellow of the Society of Actuaries, of Towers Watson Hong Kong Limited. At that valuation date, the market value of the defined benefit scheme's assets was US$1,109m. On an ongoing basis, the actuarial value of the defined benefit scheme's assets represented 104% of the actuarial present value of the benefits accrued to members, after allowing for expected future increases in salaries, and the resulting surplus amounted to US$41m. On a wind-up basis, the defined benefit scheme's assets represented 110% of the members' vested benefits, based on current salaries, and the resulting surplus amounted to US$105m. The attained age method has been adopted for the valuation and the major assumptions used in this valuation were a discount rate of 6% per annum and long-term salary increases of 5% per annum.

Pension plans in North America

The HSBC North America (US) Retirement Income Plan covers all employees of HSBC Bank USA, HSBC Finance and other HSBC entities in the US who have reached the age of 21 and met the one year of service participation requirement. The Retirement Income Plan is a funded defined benefit plan which provides final average pay benefits to legacy participants and cash balance benefits to all other participants. All new employees participate in the cash balance section of the plan. In November 2009, the Board of Directors of HSBC North America Holdings, Inc. ('HNAH') approved actions to cease all future benefit accruals for legacy participants under the final average pay formula components of the HSBC North America Retirement Income Plan with effect from 1 January 2011.

The most recent actuarial valuation of the plan to determine compliance with US statutory funding requirements was made at 1 January 2011 by Jennifer Jakubowski, Fellow of the Society of Actuaries, Enrolled Actuary, member of the American Academy of Actuaries, of Mercer. At that date, the market value of the plan's assets was US$2,673m. The assets represented 90% of the benefits accrued to members as valued under the provisions of the Pension Protection Act of 2006 that was effective for the plan year beginning 1 January 2008. The resulting deficit amounted to US$283m. The method employed for this valuation was the traditional unit credit method and the discount rate was determined using a segment rate method as selected by HSBC under the relevant regulations, which resulted in an effective interest rate of 6.36% per annum.

These determinations described above for actuarial funding valuation purposes are based on different methods and assumptions than those used for financial reporting purposes, and as a result should neither be compared nor related to other determinations included in these financial statements.

At 31 December 2011, the present values of the defined benefit obligations of The HSBC Bank (UK) Pension Scheme was US$24,367m (2010: US$22,858m), The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme was US$1,523m (2010:US$1,371m) and the HSBC North America (US) Retirement Income Plan was US$3,895m (2010: US$3,384m). These defined benefit pension plans covered 33% of HSBC's employees and represented 82% of the Group's present value of defined benefit obligations.

HSBC healthcare benefits plans

HSBC also provides post-employment healthcare benefits under plans in the UK, the US, Bermuda, Canada, Mexico and Brazil, the majority of which are unfunded. The majority of post-employment healthcare benefits plans are defined benefit plans and are accounted for in the same manner as defined benefit pension plans. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligation and related current service cost vary according to the economic conditions of the countries in which they are situated.

At 31 December 2011, the present value of the defined benefit obligation of HSBC's healthcare benefit plans was US$1,091m (2010: US$1,087m). In aggregate, healthcare benefit plans comprised 3% of HSBC's present value of defined benefit obligations.

Defined benefit pension plans

Net asset/(liability) under defined benefit pension plans

	HSBC Bank (UK) Pension Scheme		Other plans
	2011	2010	2011	2010
	US$m	US$m	US$m	US$m
Fair value of plan assets
At 1 January ......................................................................	22,236	17,701	7,559	6,822
Expected return on plan assets ...........................................	1,325	1,092	481	437
Contributions by HSBC ......................................................	600	2,890	565	422
- normal ........................................................................	314	252	176	194
- special .........................................................................	286	2,638	389	228

Contributions by employees ...............................................	34	23	22	17
Experience gains ................................................................	3,426	1,772	200	394
Benefits paid ......................................................................	(803)	(744)	(495)	(440)
Transfers ...........................................................................	-	136	-	(136)
Assets distributed on curtailments .......................................	-	-	-	(7)
Assets distributed on settlements ........................................	-	-	(25)	(10)
Exchange differences .........................................................	(214)	(634)	(75)	60

At 31 December .................................................................	26,604	22,236	8,232	7,559

Present value of defined benefit obligations
At 1 January ......................................................................	(22,858)	(21,523)	(9,785)	(9,109)
Current service cost ...........................................................	(251)	(252)	(299)	(300)
Interest cost .......................................................................	(1,233)	(1,148)	(456)	(438)
Contributions by employees ...............................................	(34)	(23)	(22)	(17)
Actuarial losses ..................................................................	(1,481)	(1,451)	(842)	(669)
Benefits paid ......................................................................	804	744	569	518
Past service cost - vested immediately ...............................	587	-	(40)	(11)
Past service cost - unvested benefits ..................................	-	-	2	(20)
Transfers ...........................................................................	-	(136)	-	136
Reduction in liabilities resulting from curtailments .............	-	-	59	158
Liabilities extinguished on settlements ...............................	-	-	29	12
Exchange differences .........................................................	99	931	105	(45)

At 31 December .................................................................	(24,367)	(22,858)	(10,680)	(9,785)
Funded ............................................................................	(24,367)	(22,858)	(10,074)	(9,241)
Unfunded ........................................................................	-	-	(606)	(544)

Effect of limit on plan surpluses .........................................	-	-	(18)	(47)
Unrecognised past service cost ...........................................	-	-	21	28

Net asset/(liability) .............................................................	2,237	(622)	(2,445)	(2,245)

Retirement benefit liabilities recognised in the balance sheet ...........................................................................................	-	(622)	(2,705)	(2,288)
Retirement benefit assets recognised in the balance sheet (within 'Other assets') ....................................................	2,237	-	260	43

Plan assets of the Group's pension schemes included US$45m (2010: US$57m) of equities and no bonds (2010: US$1m) issued by HSBC and US$1,228m (2010: US$1,592m) of other assets placed or transacted with HSBC. The fair value of plan assets included derivatives entered into with HSBC Bank plc by the HSBC Bank (UK) Pension Scheme with a positive fair value of US$5,560m at 31 December 2011 (2010: US$2,173m positive fair value) and US$297m positive fair value (2010: US$77m positive fair value) in respect of the HSBC International Staff Retirement Benefits Scheme. Further details of these swap arrangements are included in Note 45.

On 17 June 2010, HSBC Bank plc made a £1,760m (US$2,638m) special contribution to accelerate the reduction of the deficit of the HSBC Bank (UK) Pension Scheme. On the same day the Scheme used the contribution to acquire debt securities with a fair value of £1,760m (US$2,638m) from HSBC in a transaction at an arm's length value determined by the Scheme's independent third-party advisers. The debt securities sold comprised supra-national, agency and government-guaranteed securities, asset-backed securities, corporate subordinated debt and auction rate securities.

In December 2011, HSBC Bank plc made a £184m (US$286m) special contribution to the HSBC Bank (UK) Pension Scheme. Following the contribution the Scheme purchased asset-backed securities from HSBC at an arm's length value, determined by the Scheme's independent third-party advisers.

The special contributions of US$389m to other plans include an additional contribution of US$357m to the HSBC North America (US) Retirement Income Plan which was made to maintain a minimum funding level.

The actual return on plan assets for the year ended 31 December 2011 was a positive return of US$5,432m (2010: positive US$3,695m).

HSBC expects to make US$571m of contributions to defined benefit pension plans during 2012. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as follows:

Benefits expected to be paid from plans

	2012	2013	2014	2015	2016	2017-2021
	US$m	US$m	US$m	US$m	US$m	US$m

HSBC Bank (UK) Pension Scheme ..................................................	787	828	873	938	997	6,174
Other plans ..................................	524	532	561	579	611	3,839

Total (income)/expense recognised in the income statement in 'Employee compensation and benefits'

	HSBC Bank (UK) Pension Scheme			Other plans
	2011	2010	2009	2011	2010	2009
	US$m	US$m	US$m	US$m	US$m	US$m

Current service cost ......................	251	252	260	299	300	334
Interest cost .................................	1,233	1,148	1,019	456	438	397
Expected return on plan assets .....	(1,325)	(1,092)	(959)	(481)	(437)	(381)
Past service cost ...........................	(587)	-	-	45	12	21
Gains on curtailments ...................	-	-	-	(59)	(151)	(36)
(Gains)/losses on settlements ........	-	-	(499)	(4)	(2)	5

Total (income)/expense ...............	(428)	308	(179)	256	160	340

The US$499m settlement gain in 2009 relates to an accounting benefit following a restructuring of the basis of delivery of death in service and ill health early retirement benefits to certain UK employees.

Summary

	HSBC Bank (UK) Pension Scheme
	2011	2010	2009	2008	2007
	US$m	US$m	US$m	US$m	US$m

Present value of defined benefit obligation ...........	(24,367)	(22,858)	(21,523)	(15,257)	(23,512)
Fair value of plan assets .......................................	26,604	22,236	17,701	14,865	22,704

Net surplus/(deficit) ..............................................	2,237	(622)	(3,822)	(392)	(808)

Experience losses on plan liabilities ......................	(383)	(327)	(234)	(49)	(64)
Experience gains/(losses) on plan assets ...............	3,426	1,772	871	(2,861)	29
Gains/(losses) from changes in actuarial assumptions ......................................................	(1,098)	(1,124)	(4,329)	3,081	2,459

Total net actuarial gains/(losses) ..........................	1,945	321	(3,692)	171	2,424

	Other plans
	2011	2010	2009	2008	2007
	US$m	US$m	US$m	US$m	US$m

Present value of defined benefit obligation ...........	(10,680)	(9,785)	(9,109)	(8,787)	(8,873)
Fair value of plan assets .......................................	8,232	7,559	6,822	6,024	7,768

Net deficit ............................................................	(2,448)	(2,226)	(2,287)	(2,763)	(1,105)

Experience gains/(losses) on plan liabilities ..........	(78)	(73)	20	(52)	(354)
Experience gains/(losses) on plan assets ...............	200	394	65	(1,452)	157
Gains/(losses) from changes in actuarial assumptions ......................................................	(764)	(596)	94	(306)	(121)

Total net actuarial gains/(losses) ..........................	(642)	(275)	179	(1,810)	(318)

Post-employment defined benefit plans' principal actuarial financial assumptions

The principal actuarial financial assumptions used to calculate the Group's obligations for the largest defined benefit pension plans at 31 December for each period, and used as the basis for measuring periodic costs under the plans in the following periods, were as follows.

Principal actuarial assumptions

	Discount rate	Inflation rate	Rate of increase for pensions	Rate of pay increase
	%	%	%	%
At 31 December 2011
UK¹ ...................................................................................	4.80	3.20	3.10	3.70
Hong Kong ........................................................................	1.47	n/a	n/a	5.00
US ......................................................................................	4.60	2.50	n/a	2.75

At 31 December 2010
UK¹ ...................................................................................	5.40	3.70	3.50	4.20
Hong Kong ........................................................................	2.85	n/a	n/a	5.00
US ......................................................................................	5.41	2.50	n/a	2.75

At 31 December 2009
UK¹ ...................................................................................	5.70	3.70	3.50	4.20
Hong Kong ........................................................................	2.58	n/a	n/a	5.00
US ......................................................................................	5.92	2.50	n/a	3.50

1 Rate of increase for pensions in the UK is for pensions in payment only, capped at 5%. Deferred pensions are projected to increase in line with the CPI, capped at 5%. In prior periods deferred pensions were projected to increase in line with the RPI, capped at 5%.

HSBC determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA rated or equivalent) debt instruments, with maturities consistent with those of the defined benefit obligations. In countries where there is not a deep market in corporate bonds, government bond yields have been used. The yield curve has been extrapolated where the term of the liabilities is longer than the duration of available bonds and the discount rate used then takes into account the term of the liabilities and the shape of the yield curve. When determining the discount rate with reference to a bond index, an appropriate index for the specific region has been used.

Mortality tables and average life expectancy at age 65

	Mortality table	Life expectancy at age 65 for a male member currently:		Life expectancy at age 65 for a female member currently:
		Aged 65	Aged 45	Aged 65	Aged 45
At 31 December 2011
UK .............................................................	SAPS MC¹	22.5	24.4	23.5	25.4
Hong Kong² ...............................................	n/a	n/a	n/a	n/a	n/a
US ..............................................................	RP 2000 fully generational	19.4	20.9	21.3	22.2

At 31 December 2010
UK .............................................................	SAPS MC¹	22.4	24.3	23.4	25.3
Hong Kong² ...............................................	n/a	n/a	n/a	n/a	n/a
US ..............................................................	RP 2000 fully generational	19.3	20.8	21.2	22.1

1 SAPS MC projections with 1% minimum improvement beyond 2002. Light table with 1.08 rating for male and standard table with 1.06 rating for female.

2 The significant plans in Hong Kong are lump sum plans which do not use a post-retirement mortality table.

Expected rates of return

	2011		2010
	Expected rates of return¹	Value	Expected rates of return¹	Value
	%	US$m	%	US$m
HSBC Bank (UK) Pension Scheme
Fair value of plan assets .....................................................		26,604		22,236
Equities ..........................................................................	7.2	3,190	8.4	3,415
Bonds .............................................................................	4.1	20,737	5.3	15,638
Property ........................................................................	6.7	1,524	7.6	1,438
Other .............................................................................	2.8	1,153	4.0	1,745

Other plans
Fair value of plan assets .....................................................		8,232		7,559
Equities ..........................................................................	7.7	2,184	8.2	2,617
Bonds .............................................................................	4.7	4,659	5.0	4,073
Property ........................................................................	4.6	106	6.1	98
Other .............................................................................	4.0	1,283	6.2	771

1 The expected rates of return are used to measure the net defined benefit pension costs in each subsequent year, and weighted on the basis of the fair value of the plan assets.

The expected return on plan assets represents the best estimate of long-term future asset returns, which takes into account historical market returns plus additional factors such as the current rate of inflation and interest rates.

Actuarial assumption sensitivities

The discount rate is sensitive to changes in market conditions arising during the reporting period. The mortality rates used are sensitive to experience from the plan member profile. The following table shows the effect of changes in these and the other key assumptions on the principal defined benefit pension plan:

The effect of changes in key assumptions on the principal plan

	HSBC Bank (UK) Pension Scheme
	2011	2010
	US$m	US$m
Discount rate
Change in pension obligation at year end from a 25bps increase ..........................................	(980)	(941)
Change in pension obligation at year end from a 25bps decrease ..........................................	1,045	1,003
Change in 2012 pension cost from a 25bps increase ............................................................	2	(9)
Change in 2012 pension cost from a 25bps decrease ............................................................	(2)	9

Rate of inflation
Change in pension obligation at year end from a 25bps increase ..........................................	1,026	1,029
Change in pension obligation at year end from a 25bps decrease ..........................................	(978)	(978)
Change in 2012 pension cost from a 25bps increase ............................................................	57	67
Change in 2012 pension cost from a 25bps decrease ............................................................	(54)	(64)

Rate of increase for pensions in payment and deferred pensions
Change in pension obligation at year end from a 25bps increase ..........................................	876	813
Change in pension obligation at year end from a 25bps decrease ..........................................	(841)	(775)
Change in 2012 pension cost from a 25bps increase ............................................................	43	48
Change in 2012 pension cost from a 25bps decrease ............................................................	(42)	(45)

Rate of pay increase
Change in pension obligation at year end from a 25bps increase ..........................................	248	216
Change in pension obligation at year end from a 25bps decrease ..........................................	(240)	(203)
Change in 2012 pension cost from a 25bps increase ............................................................	19	20
Change in 2012 pension cost from a 25bps decrease ............................................................	(15)	(17)

Investment return
Change in 2012 pension cost from a 25bps increase ............................................................	(65)	(54)
Change in 2012 pension cost from a 25bps decrease ............................................................	67	54

Mortality
Change in pension obligation from each additional year of longevity assumed .....................	619	497

The effect of changes in the discount rate and in mortality rates on plans other than the principal plan

	Other plans
	2011	2010
	US$m	US$m

Change in defined benefit obligation at year end from a 25bps increase in discount rate ..........	(325)	(290)
Change in 2012 pension cost from a 25bps increase in discount rate .......................................	-	(1)
Increase in defined benefit obligation from each additional year of longevity assumed .............	144	131

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2011 amounted to US$413m (2010: US$244m). The average number of persons employed by HSBC Holdings during 2011 was 1,212 (2010: 1,015).

Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings pays contributions to such plans for its own employees in accordance with the schedules of contributions determined by the Trustees of the plan.

Directors' emoluments

The aggregate emoluments of the Directors of HSBC Holdings, computed in accordance with the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 were:

	2011	2010	2009
	US$000	US$000	US$000

Fees ..............................................................................................................	5,108	3,597	3,756
Salaries and other emoluments ......................................................................	12,906	12,841	11,835
Bonuses ........................................................................................................	12,516	14,294	-
		-
	30,530	30,732	15,591
		-
Vesting of long-term incentive awards ..........................................................	2,596	8,523	1,579

In addition, there were payments under retirement benefit agreements with former Directors of US$1,166,580 (2010: US$1,016,089). The provision at 31 December 2011 in respect of unfunded pension obligations to former Directors amounted to US$18,006,894 (2010: US$17,628,508).

During the year, aggregate contributions to pension schemes in respect of Directors were US$373,310 (2010: US$1,055,582). Discretionary bonuses for Directors are based on a combination of individual and corporate performance and are determined by the Group Remuneration Committee. Details of Directors' remuneration, share options and awards under the HSBC Share Plan and HSBC Share Plan 2011 are included in the 'Directors' Remuneration Report' on pages 256 and 274.

8 Auditors' remuneration

	2011	2010	2009
	US$m	US$m	US$m

Audit fees payable to KPMG¹ .......................................................................	48.8	49.1	48.2
Audit fees payable to non-KPMG entities .....................................................	1.9	2.3	2.5

Total auditors' remuneration ........................................................................	50.7	51.4	50.7

1 Fees payable to KPMG for HSBC Holdings' statutory audit and audit of HSBC's subsidiaries, pursuant to legislation.

The following fees were payable by HSBC to the Group's principal auditor, KPMG Audit Plc and its associates (together 'KPMG'):

Fees payable by HSBC to KPMG

	2011	2010	2009
	US$m	US$m	US$m

Fees for HSBC Holdings' statutory audit¹ ......................................................	2.2	2.4	2.3
-. relating to current year .........................................................................	2.1	2.4	2.1
-. relating to prior year ............................................................................	0.1	-	0.2

Fees for other services provided to HSBC .....................................................	84.9	75.9	77.1
Audit-related services:
-. audit of HSBC's subsidiaries, pursuant to legislation² ..........................	46.6	46.7	45.9
-. other services pursuant to legislation³ ...............................................	25.7	20.8	24.2
Tax services⁴ ............................................................................................	4.3	2.4	2.6
Other services:
-. services relating to information technology⁵ .....................................	0.1	0.1	0.3
-. services related to corporate finance transactions⁶ ............................	-	-	0.1
-. all other services⁷ ..............................................................................	8.2	5.9	4.0


Total fees payable ........................................................................................	87.1	78.3	79.4

1 Fees payable to KPMG Audit Plc for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They exclude amounts payable for the statutory audit of HSBC Holdings' subsidiaries which have been included in 'Fees payable to KPMG for other services provided to HSBC'.

2 Including fees payable to KPMG for the statutory audit of HSBC's subsidiaries.

3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews.

4 Including tax compliance services and tax advisory services.

5 Including advice on IT security and business continuity and performing agreed-upon IT testing procedures.

6 Including fees payable to KPMG for transaction-related work, including US debt issuances.

7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of financial models, and services related to recruitment and remuneration.

No fees were payable by HSBC to KPMG for the following types of services: internal audit services, valuation and actuarial services, and services related to litigation.

Fees payable by HSBC's associated pension schemes to KPMG

	2011	2010	2009
	US$000	US$000	US$000

Audit fees .....................................................................................................	248	384	670
Tax services .................................................................................................	11	-	-
All other services .........................................................................................	-	-	260

Total fees payable ........................................................................................	259	384	930

No fees were payable by HSBC's associated pension schemes to KPMG for the following types of services: other services pursuant to legislation, services relating to information technology, internal audit services, valuation and actuarial services, services related to litigation, services related to recruitment and remuneration, and services related to corporate finance transactions.

In addition to the above, KPMG estimate they have been paid fees of US$8.6m (2010: US$14.9m; 2009: US$8.1m) by parties other than HSBC but where HSBC is connected with the contracting party and therefore may be involved in appointing KPMG. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.

Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for HSBC Group.

9 Share-based payments

Income statement charge

	2011	2010	2009
	US$m	US$m	US$m

Restricted and performance share awards¹ .....................................................	1,041	685	539
Savings-related and other share option plans ................................................	121	127	144

	1,162	812	683

Equity-settled share-based payments .............................................................	1,154	812	683
Cash-settled share-based payments ................................................................	8	-	-

1 Restricted share awards include awards granted under the Group Performance Share Plan ('GPSP'), which was approved by shareholders in May 2011.

The share-based payment income statement charge above includes US$974m (2010: US$610m; 2009: US$539m) relating to deferred share awards (see below). These charges are recognised in 'Wages and salaries' (see Note 7).

Deferred share awards

These awards are generally granted to employees early in the year following the year to which the award relates. The charge for these awards is recognised from the start of the period to which the service relates to the end of the vesting period. The vesting period is the period over which the employee satisfies certain service conditions in order to become entitled to the award. Due to the staggered vesting profile of certain deferred share awards, the employee becomes entitled to a portion of the award at the end of each year during the vesting period. The income statement charge reflects this vesting profile. The following table identifies the charge recognised in the current year, or expected to be recognised in future years, and the performance year to which the deferred share awards relate.

Income statement impact of deferred share awards on current and future years

	Charge recognised in 2011 in respect of performance year:			Charge expected to be recognised in 2012 or later in respect of performance year:
	2011¹	Pre-2011	Total	2011¹	Pre-2011	Total
	US$m	US$m	US$m	US$m	US$m	US$m

HSBC deferred share awards ...........	131	843	974	289	652	941

	Charge recognised in 2010 in respect of performance year:			Charge expected to be recognised in 2011 or later in respect of performance year:
	2010¹	Pre-2010	Total	2010¹	Pre-2010	Total
	US$m	US$m	US$m	US$m	US$m	US$m

HSBC deferred share awards ...........	-	610	610	759	801	1,560

	Charge recognised in 2009 in respect of performance year:			Charge expected to be recognised in 2010 or later in respect of performance year:
	2009¹	Pre-2009	Total	2009¹	Pre-2009	Total
	US$m	US$m	US$m	US$m	US$m	US$m

HSBC deferred share awards ...........	-	539	539	816	719	1,535

1 Regulatory and best practice guidance has clarified the required structure and terms of deferred bonus arrangements awarded to employees, who now have a better understanding of the nature of the awards they may be granted. As a result, the vesting period for deferred share awards expected to be granted in 2012 in respect of the 2011 performance year was determined to have started on 1 January 2011 and a charge was recognised from that date. Previously, the charge was recognised from the grant date.

HSBC Share Awards

Award

Policy

Purpose

Restricted share awards (including GPSP awards)

· Vesting of awards generally subject to continued employment with HSBC

· Vesting often staggered over three years. GPSP awards vest after five years

· Certain shares subject to a retention requirement post-vesting. In the case of GPSP awards retention applies until cessation of employment

· Awards generally not subject to performance conditions

· Awards granted from 2010 onwards are subject to clawback provision prior to vesting

· Rewards employee performance and potential and retention of key employees

· To defer variable pay

Movement on HSBC share awards

	Restricted share awards		Performance share awards¹
	2011	2010	2011	2010
	Number (000s)	Number (000s)	Number (000s)	Number (000s)

Outstanding at 1 January ....................................................	229,092	184,318	4,425	7,360
Additions during the year ...................................................	100,819	110,711	154	351
Released in the year ...........................................................	(56,301)	(55,419)	(883)	(1,181)
Forfeited in the year ..........................................................	(11,369)	(10,518)	(3,696)	(2,105)

Outstanding at 31 December ..............................................	262,241	229,092	-	4,425

Weighted average fair value of awards granted (US$) ..........	10.11	10.50	-	-

1 Additions during the year comprised reinvested dividend equivalents. The last award of performance shares was made in 2008, and shares under the plan were released in March 2011.

HSBC Share Option Plans

Main plans

Policy

Purpose

Savings-related share option plans

· Exercisable within three months following the first anniversary of the commencement of a one-year savings contract or within six months following either the third or fifth anniversaries of the commencement of three-year or five-year contracts, respectively

· The exercise price is set at a 20% (2010: 20%) discount to the market value immediately preceding the date of invitation (except for the one-year options granted under the US sub-plan where a 15% discount is applied)

· Eligible employees save up to £250 per month (or its equivalent in US dollars, Hong Kong dollars or euros), with the option to use the savings to acquire shares

· To align the interests of all employees with the creation of shareholder value

HSBC Holdings Group share option plan

· Plan ceased in May 2005

· Exercisable between third and tenth anniversaries of the date of grant

· Long-term incentive plan between 2000 and 2005 during which certain HSBC employees were awarded share options

The table on page 329 shows the movement on HSBC share option plans during the year.

Calculation of fair values

Fair values of share options, measured at the date of grant of the option, are calculated using a Black-Scholes model. The fair values of share awards are based on the share price at the date of the grant. The fair values of share options calculated are inherently subjective and uncertain due to the assumptions made and the limitations of the model used.

Significant weighted average assumptions used to estimate the fair value of options granted

	Savings-related share option plans
	1-year plan	3-year plans	5-year plans
2011
Risk-free interest rate¹ (%) ...........................................................................	0.8	1.7	2.5
Expected life (years) ....................................................................................	1	3	5
Expected volatility² (%) ...............................................................................	25	25	25
Share price at grant date (£) .........................................................................	6.37	6.37	6.37

2010
Risk-free interest rate¹ (%) ...........................................................................	0.7	1.9	2.9
Expected life (years) ....................................................................................	1	3	5
Expected volatility² (%) ...............................................................................	30	30	30
Share price at grant date (£) .........................................................................	6.82	6.82	6.82

2009
Risk-free interest rate¹ (%) ...........................................................................	0.7	2.1	2.4
Expected life (years) ....................................................................................	1	3	5
Expected volatility² (%) ...............................................................................	50	35	30
Share price at grant date (£) .........................................................................	4.65	4.65	4.65

1 The risk-free rate was determined from the UK gilts yield curve. A similar yield curve was used for the International Savings-Related Share Option Plans.

2 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded options over HSBC shares of similar maturity to those of the employee options.

The expected US dollar denominated dividend yield was determined to be 4.5% per annum in line with consensus analyst forecasts (2010: 4.5%; 2009: 4.5%).

HSBC subsidiary company share option plans

There are a number of employee share option plans relating to HSBC France, HSBC Finance and HSBC Bank Bermuda as a result of the acquisition of these entities.

Options granted prior to public announcement of the acquisitions, vested on acquisition and are not included in the table below. HSBC France and HSBC Finance granted share options after announcement of the acquisition which vested in subsequent years. Of these, as at 31 December 2011, only 2.4m HSBC Finance options (2010: 2.4m) remained outstanding and are included in the table below. Full details of all options outstanding under these plans can be found in Note 39.

Movement on HSBC share option plans

	Savings-related share option plans		HSBC Holdings Group share option plan		HSBC Finance share option plan
	Number (000s)	WAEP¹ £	Number (000s)	WAEP¹ £	Number (000s)	WAEP¹ US$
2011
Outstanding at 1 January ...........................................	157,855	3.87	152,758	7.12	2,429	9.29
Granted during the year² ............................................	23,199	5.11	-	-	-	-
Exercised during the year³ .........................................	(7,439)	5.27	(646)	6.06	-	-
Expired during the year .............................................	(20,150)	4.71	(31,320)	7.56	-	-

Outstanding at 31 December ......................................	153,465	3.80	120,792	7.02	2,429	9.29

At 31 December 2011
Exercise price range (£):
... 3.00 - 4.50 ............................................................	117,387		-		-
... 4.51 - 6.00 ............................................................	32,778		-		-
... 6.01 - 7.50 ............................................................	2,341		115,901		-
... 7.51 - 9.29 ............................................................	959		4,891		2,429
Of which exercisable ..................................................	3,209		120,792		2,429
Weighted average remaining contractual life (years) ..	2.04		1.66		0.89

	Savings-related share option plans		HSBC Holdings Group share option plan		HSBC Finance share option plan
	Number (000s)	WAEP¹ £	Number (000s)	WAEP¹ £	Number (000s)	WAEP¹ US$
2010
Outstanding at 1 January .........................	172,526	3.69	157,719	7.12	2,736	9.29
Granted during the year² ..........................	22,017	5.39	-	-	-	-
Exercised during the year³ .......................	(16,830)	4.18	(1,015)	6.08	(307)	9.29
Expired during the year ...........................	(19,858)	4.44	(3,946)	7.36	-	-

Outstanding at 31 December ....................	157,855	3.87	152,758	7.12	2,429	9.29

At 31 December 2010
Exercise price range (£):
.. 3.00 - 4.50 ...........................................	126,198		-		-
.. 4.51 - 6.00 ...........................................	26,036		-		-
.. 6.01 - 7.50 ...........................................	3,864		119,439		-
.. 7.51 - 9.29 ...........................................	1,757		33,319		2,429
Of which exercisable ................................	1,883		152,758		2,429
Weighted average remaining contractual life (years) ............................................	2.76		2.33		1.89

1 Weighted Average Exercise Price.

2 The weighted average fair value of options granted during the year was US$2.11 (2010: US$2.41).

3 The weighted average share price at the date the options were exercised was US$8.65 (2010: US$10.08) and US$9.51 (2010: US$10.26) for the Savings-related share option plans and HSBC Holdings Group share option plan respectively.

10 Tax

Tax charged to the income statement

	2011	2010	2009
	US$m	US$m	US$m
Current tax
UK corporation tax ......................................................................................	820	383	206
- for this year ...........................................................................................	462	404	280
- adjustments in respect of prior years ......................................................	358	(21)	(74)

Overseas tax¹ ...............................................................................................	4,255	3,328	1,847
- for this year ...........................................................................................	4,155	3,235	1,826
- adjustments in respect of prior years ......................................................	100	93	21


	5,075	3,711	2,053

Deferred tax .................................................................................................	(1,147)	1,135	(1,668)
Origination and reversal of temporary differences .....................................	(1,178)	1,176	(1,672)
Effect of changes in tax rates ....................................................................	(3)	31	(10)
Adjustments in respect of prior years ........................................................	34	(72)	14


Total tax charged to the income statement...................................................	3,928	4,846	385

1 Overseas tax included Hong Kong profits tax of US$997m (2010: US$962m; 2009 US$783m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2010: 16.5%; 2009: 16.5%). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

Tax reconciliation

The tax charged to the income statement differs to the tax charge that would apply if all profits had been taxed at the UK corporation tax rate as follows:

	2011		2010		2009
	US$m	%	US$m	%	US$m	%

Profit before tax......................................................	21,872		19,037		7,079

Tax at 26.5% (2010: 28%; 2009: 28%) ..................	5,796	26.5	5,330	28.0	1,982	28.0
Impact of differently taxed overseas profits ...........	(492)	(2.2)	(744)	(3.9)	(1,345)	(19.0)
Adjustments in respect of prior period liabilities .....	495	2.3	-	-	(39)	(0.6)
Deferred tax temporary differences not recognised/ (previously not recognised) .................................	(923)	(4.2)	(6)	-	360	5.1
Effect of profits in associates and joint ventures .....	(865)	(4.0)	(758)	(4.0)	(499)	(7.1)
Tax impact of intra-group transfer of subsidiary .....	-	-	1,216	6.4	-	-
Non taxable income and gains .................................	(613)	(2.8)	(700)	(3.7)	(603)	(8.6)
Permanent disallowables .........................................	467	2.1	355	1.9	223	3.2
Change in tax rates .................................................	(3)	-	31	0.2	(10)	(0.1)
Local taxes and overseas withholding taxes .............	267	1.2	224	1.2	353	4.9
Other items (including low income housing tax credits) ................................................................	(201)	(0.9)	(102)	(0.6)	(37)	(0.4)

Total tax charged to the income statement ............	3,928	18.0	4,846	25.5	385	5.4

The effective tax rate for the year was 18.0% compared with 25.5% for 2010. Although the reported profit before tax was higher in 2011, the tax charge for the year was US$0.9bn lower than in 2010. The tax charge in 2011 included the benefit of deferred tax of US$0.9bn now eligible to be recognised in respect of foreign tax credits, while the tax charge in 2010 included US$1.2bn attributable to a gain arising from an internal reorganisation of our North American operations.

The UK corporation tax rate applying to HSBC Holdings and its subsidiaries was 26.5% (2010: 28%; 2009: 28%).

The UK Government announced that the main rate of corporation tax for the year beginning 1 April 2011 will reduce from 28% to 26% to be followed by further 1% reductions per annum to 23% for the year beginning 1 April 2014. While the reductions in the corporate tax rate to 25% have already been enacted, the further announced reductions are expected to be enacted through the 2012 and 2013 Finance Acts. The reduction in the main rate of corporation tax in 2011 results in a weighted average rate of 26.5% (2010: 28%). It is not expected that the proposed future rate reductions will have a significant effect on the net UK deferred tax liability at 31 December 2011 of US$239m.

The Group's legal entities are subject to routine review and audit by tax authorities in the territories in which the Group operates. The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters. A substantial proportion of the material open issues relate to the UK of which the principal matter concerns the application of the UK Controlled Foreign Company ('CFC') rules. Since it moved its holding company to the UK, HSBC has held the shares in its Asian and certain European subsidiaries under Dutch resident and incorporated holding companies. HSBC considers that the holding companies' income (principally dividends received from the subsidiaries) should not be subject to UK tax. Her Majesty's Revenue and Customs ('HMRC') interpret UK CFC and established EU law in a manner which would result in tax being due for the period 2002-2009. In the event of an adverse outcome from our ongoing discussions with HMRC on the CFC and other open UK issues the tax payable and financial impact could be as high as US$4.9bn, plus related interest expense. HSBC continues to discuss these matters with HMRC.

Deferred taxation

The table overleaf shows the gross deferred tax assets and liabilities recognised in the balance sheet and the related amounts recognised in the income statement, other comprehensive income and directly in equity.

The amounts presented in the balance sheet are different from the amounts disclosed in the table overleaf as they are presented after offsetting asset and liability balances where HSBC has the legal right to set-off and intends to settle on a net basis.

Movement of deferred tax assets and liabilities before offsetting balances within countries

	Retirement benefits	Loan impairment provisions	Unused tax losses and tax credits	Accelerated capital allowances	Available- for-sale investments	Cash flow hedges	Share- based payments	Assets leased to customers	Revaluation of property		Fee income	Other	Total
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m		US$m	US$m	US$m	US$m
2011

Assets .................................................	1,538	4,799	351	109	11	352	241	-		-	-	957	8,358
Liabilities ...........................................	-	-	(3)	(126)	(135)	(88)	-	(707)		(225)	(756)	(400)	(2,440)

At 1 January 2011 ..............................	1,538	4,799	348	(17)	(124)	264	241	(707)		(225)	(756)	557	5,918
Acquisitions and disposals ...................	3	-	11	-	(3)	(5)	1	-		22	-	(6)	23
Income statement ..............................	(437)	(224)	945	137	10	14	1	93		(36)	17	627	1,147
Other comprehensive income .............	(322)	-	-	-	(533)	53	-	-		-	-	-	(802)
Equity ................................................	-	-	-	-	-	-	27	-		-	-	-	27
Foreign exchange and other adjustments ........................................................	(147)	(127)	24	(3)	93	24	16	33		12	2	(32)	(105)

At 31 December 2011 ......................	635	4,448	1,328	117	(557)	350	286	(581)		(227)	(737)	1,146	6,208

Assets .................................................	742	4,448	1,328	117	-	487	286	14		-	-	1,709	9,131
Liabilities ...........................................	(107)	-	-	-	(557)	(137)	-	(595)		(227)	(737)	(563)	(2,923)

2010

Assets .................................................	1,772	6,363	407	215	68	229	196	-		-	-	1,535	10,785
Liabilities ...........................................	-	-	-	(129)	(340)	(91)	-	(1,121)		(399)	(1,080)	(842)	(4,002)

At 1 January 2010 ..............................	1,772	6,363	407	86	(272)	138	196	(1,121)		(399)	(1,080)	693	6,783
Acquisitions and disposals ...................	-	8	-	-	12	(2)	-	-		-	-	(16)	2
Income statement ..............................	(468)	(1,702)	(70)	14	(16)	3	50	250		75	386	343	(1,135)
Other comprehensive income .............	(1)	-	-	-	(73)	70	-	-		-	-	-	(4)
Equity ................................................	-	-	-	-	-	-	(14)	-		-	-	-	(14)
Foreign exchange and other adjustments ........................................................	235	130	11	(117)	225	55	9	164		99	(62)	(463)	286

At 31 December 2010 ........................	1,538	4,799	348	(17)	(124)	264	241	(707)		(225)	(756)	557	5,918

Assets .................................................	1,538	4,799	351	109	11	352	241	-		-	-	957	8,358
Liabilities ...........................................	-	-	(3)	(126)	(135)	(88)	-	(707)		(225)	(756)	(400)	(2,440)

Of the total net deferred tax assets of US$6.2bn at 31 December 2011 (2010: US$5.9bn), the net deferred tax asset relating to HSBC's operations in the US is US$5.2bn (2010: US$4.0bn). The deferred tax assets included in this total reflect the carry forward of tax losses and tax credits (US$1.2bn; 2010: US$0.2bn), deductible temporary differences in respect of loan impairment allowances (US$2.7bn; 2010: US$3.0bn) and other temporary differences (US$1.3bn; 2010: US$0.8bn).

Deductions for loan impairments for US tax purposes generally occur when the impaired loan is charged off, often in the period subsequent to that in which the impairment is recognised for accounting purposes. As a result, the amount of the associated deferred tax asset should generally move in line with the impairment allowance balance. On the evidence available, including historical levels of profitability, management projections of future income and HSBC Holdings' commitment to continue to invest sufficient capital in North America to recover the deferred tax asset, it is expected there will be sufficient taxable income generated by the business to realise these assets. Management projections of profits from the US operations are prepared for a 10 year period and include assumptions about future house prices and US economic conditions, including unemployment levels. The proposed sale of both the Group's US credit card and private label credit card business and upstate New York branches announced in the second half of 2011 has been taken into account but even if the transactions failed to complete, this would not change management's view that the business will generate sufficient profits to realise these assets.

Management projections of profits from the US operations currently indicate that the existing carry forward tax losses and tax credits will be fully recovered by 2014. The current level of the deferred tax asset in respect of loan impairment allowances is projected to reduce over the 10 year period in line with the reduction of the Consumer Lending portfolio.

As there has been a recent history of losses in HSBC's US operations, management's analysis of the recognition of these deferred tax assets significantly discounts any future expected profits from the US operations and relies to a greater extent on capital support from HSBC Holdings, including tax planning strategies implemented in relation to such support. The principal strategy is the retention of capital in the US in excess of normal regulatory requirements.

Brazil

The net deferred tax asset relating to HSBC's operations in Brazil is US$0.7bn (2010: US$0.8bn). The deferred tax assets included in this total arise primarily in relation to deductible temporary differences in respect of loan impairment allowances. Deductions for loan impairments for Brazilian tax purposes generally occur in periods subsequent to those in which they are recognised for accounting purposes and, as a result, the amount of the associated deferred tax assets will move in line with the impairment allowance balance.

Loan impairment deductions are recognised for tax purposes typically within 24 months of accounting recognition. On the evidence available, including historic levels of profitability, management projections of income and the state of the Brazilian economy, it is anticipated there will be sufficient taxable income generated by the business to realise these assets when deductible for tax purposes.

There are no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in Brazil.

Mexico

The net deferred tax asset relating to HSBC's operations in Mexico is US$0.5bn (2010: US$0.6bn). The deferred tax assets included in this total relate primarily to deductible temporary differences in respect of accounting provisions for impaired loans, including losses realised on sales of impaired loans. The annual deduction for loan impairments is capped under Mexican legislation at 2.5% of the average qualifying loan portfolio. The balance is carried forward to future years without expiry but with annual deduction subject to the 2.5% cap.

On the evidence available, including historic and projected levels of loan portfolio growth, loan impairment rates and profitability, it is anticipated that the business will realise these assets within the next 15 years. The projections assume that loan impairment rates will, over the medium term, return to and remain at levels consistently below the annual 2.5% cap.

There are no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in Mexico.

Unrecognised deferred tax

The amount of temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the balance sheet is US$14.7bn (2010: US$15.3bn). These amounts include unused state losses arising in our US operations of US$12.5bn (2010 US$12.5bn).

Of the total amounts unrecognised, US$2.4bn (2010: US$2.6bn) has no expiry date, US$0.1bn (2010: US$0.1bn) is scheduled to expire within 10 years (2010: 10 years) and the remaining will expire after 10 years.

Deferred tax is not recognised in respect of the Group's investments in subsidiaries and branches where remittance or other realisation is not probable, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise. No amount is disclosed for the unrecognised deferred tax or the 2011 and 2010 temporary differences associated with such investments as it is impracticable to determine the amount of income taxes that would be payable when any temporary differences reverse. Deferred tax of US$0.2bn (2010: US$0.1bn) has however been provided in respect of distributable reserves of associates that, on distribution, would attract withholding tax.

HSBC Holdings

	Deferred tax assets/(liabilities)
	2011	2010
	US$m	US$m
Temporary differences:
- short-term timing differences ...........................................................................................	-	1
- available-for-sale investments ..........................................................................................	(4)	(21)
- fair valued assets and liabilities ..........................................................................................	46	61
- share-based payments .......................................................................................................	9	16
- unused tax losses ...............................................................................................................	40	-

	91	57

It is expected that the unused tax losses of HSBC Holdings will be recovered against other taxable profits arising in the UK within 12 months.

11 Dividends

Dividends to shareholders of the parent company

	2011			2010			2009
	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m

Dividends declared on ordinary shares
In respect of previous year:
- fourth interim dividend ...........	0.12	2,119	1,130	0.10	1,733	838	0.10	1,210	624
In respect of current year:
- first interim dividend ...............	0.09	1,601	204	0.08	1,394	746	0.08	1,384	190
- second interim dividend ...........	0.09	1,603	178	0.08	1,402	735	0.08	1,385	696
- third interim dividend ..............	0.09	1,605	720	0.08	1,408	205	0.08	1,391	160

	0.39	6,928	2,232	0.34	5,937	2,524	0.34	5,370	1,670

Quarterly dividends on preference shares classified as equity
March dividend ..............................	15.50	22		15.50	22		15.50	22
June dividend .................................	15.50	23		15.50	23		15.50	23
September dividend ........................	15.50	22		15.50	22		15.50	22
December dividend .........................	15.50	23		15.50	23		15.50	23

	62.00	90		62.00	90		62.00	90

Quarterly coupons on capital securities classified as equity¹

	2011		2010		2009
	Per share	Total	Per share	Total	Per share	Total
	US$	US$m	US$	US$m	US$	US$m

January coupon ............................	0.508	44	0.508	44	0.508	44
March coupon ..............................	0.500	76	-	-	-	-
April coupon ................................	0.508	45	0.508	45	0.508	45
June coupon .................................	0.500	76	-	-	-	-
July coupon ..................................	0.508	45	0.508	45	0.508	45
September coupon ........................	0.500	76	0.450	68	-	-
October coupon ............................	0.508	45	0.508	45	0.508	45
December coupon .........................	0.500	76	0.500	76	-	-

	4.032	483	2.982	323	2.032	179

1 HSBC Holdings issued Perpetual Subordinated Capital Securities of US$3,800m in June 2010 and US$2,200m in April 2008, which are classified as equity under IFRSs.

The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended 31 December 2011 of US$0.14 per ordinary share, a distribution of approximately US$2,515m. The fourth interim dividend will be payable on 2 May 2012 to holders of record on 15 March 2012 on the Hong Kong Overseas Branch Register and 16 March 2012 on the Principal Register in the UK or the Bermuda Overseas Branch Register. No liability is recorded in the financial statements in respect of the fourth interim dividend for 2011.

On 17 January 2012, HSBC paid a further coupon on the capital securities of US$0.508 per security, a distribution of US$44m. No liability is recorded in the balance sheet at 31 December 2011 in respect of this coupon payment.

12 Earnings per share

Basic earnings per ordinary share was calculated by dividing the profit attributable to ordinary shareholders of the parent company by the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share was calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary shares.

Profit attributable to the ordinary shareholders of the parent company

	2011	2010	2009
	US$m	US$m	US$m

Profit attributable to shareholders of the parent company ............................	16,797	13,159	5,834
Dividend payable on preference shares classified as equity ............................	(90)	(90)	(90)
Coupon payable on capital securities classified as equity ...............................	(483)	(323)	(179)

Profit attributable to the ordinary shareholders of the parent company ........	16,224	12,746	5,565

Basic and diluted earnings per share

	2011				2010				2009
	Profit US$m	Number of shares (millions)		Per share US$	Profit US$m	Number of shares (millions)		Per share US$	Profit US$m	Number of shares (millions)		Per share US$

Basic¹ ........................................	16,224		17,700	0.92	12,746		17,404	0.73	5,565		16,277	0.34
Effect of dilutive potential ordinary shares ......................			222				229				143
- Savings-related Share Option Plan ......................			45				55				26
-. Other plans .......................			177				174				117


Diluted¹ .....................................	16,224		17,922	0.91	12,746		17,633	0.72	5,565		16,420	0.34

1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).

The weighted average number of dilutive potential ordinary shares excludes 151m employee share options that were anti-dilutive (2010: 150m; 2009: 214m).

13 Segmental analysis

HSBC's operating segments are organised into six geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North Africa ('MENA'), North America and Latin America.

Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by the location of the branch responsible for reporting the results or advancing the funds.

HSBC's chief operating decision-maker is the Group Management Board ('GMB') which operates as a general management committee under the direct authority of the Board. Information provided to HSBC's chief operating decision-maker to make decisions about allocating resources to, and assessing the performance of, operating segments is measured in accordance with IFRSs. The financial information shown below includes the effects of intra-HSBC transactions between operating segments which are conducted on an arm's length basis and eliminated in a separate column. Shared costs are included in operating segments on the basis of the actual recharges made.

Products and services

HSBC provides a comprehensive range of banking and related financial services to its customers in its six geographical regions. The products and services offered to customers are organised by global business.

· Retail Banking and Wealth Management ('RBWM') offers a broad range of products and services to meet the personal banking, consumer finance and wealth management needs of individual customers. Typically, customer offerings include personal banking products (current and savings accounts, mortgages and personal loans, credit cards, debit cards and local and international payment services) and wealth management services (insurance and investment products, global asset management services and financial planning services).

· Commercial Banking ('CMB') product offerings include the provision of receivables financing services, payments and cash management, international trade finance, treasury and capital markets, commercial cards, insurance, cash and derivatives in foreign exchange and rates, and online and direct banking offerings.

· Global Banking and Markets ('GB&M') provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide. The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services; a markets business that provides services in credit, rates, foreign exchange, money markets and securities services; and principal investment activities.

· Global Private Banking ('GPB') provides a range of services to high net worth individuals and families with complex and international needs.

With effect from 1 March 2011, our Global Asset Management business was moved from Global Banking and Markets to Retail Banking and Wealth Management.

Financial information

In the following segmental analysis, the benefit of shareholders' funds impacts the analysis only to the extent that these funds are actually allocated to businesses in the segment by way of intra-HSBC capital and funding structures.

This information is provided by RNS

The company news service from the London Stock Exchange

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