HSBC Fin Corp Q2 2005 10-Q P2
HSBC Holdings PLC
01 August 2005
Part 2 of 2
LIQUIDITY AND CAPITAL RESOURCES
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We continue to focus on balancing our use of affiliate and third-party funding
sources to minimize funding expense while maximizing liquidity. As discussed
below, we supplemented unsecured debt issuance during the
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six months ended June 30, 2005 with proceeds from the sale of our domestic
private label receivable portfolio to HSBC Bank USA in December 2004, debt
issued to affiliates, higher levels of commercial paper and the issuance of
Series B preferred stock.
Because we are now a subsidiary of HSBC, our credit spreads relative to
Treasuries have tightened compared to those we experienced during the months
leading up to the announcement of our acquisition by HSBC. Primarily as a result
of these tightened credit spreads, we recognized cash funding expense savings of
approximately $252 million in the six months ended June 30, 2005 ($132 million
in the three months ended June 30, 2005) and approximately $140 million in the
six months ended June 30, 2004 ($70 million in the three months ended June 30,
2004) compared to the funding costs we would have incurred using average spreads
and funding mix from the first half of 2002. It is anticipated that these
tightened credit spreads and other funding synergies including asset transfers
will eventually enable HSBC to realize annual cash funding expense savings,
including external fee savings, in excess of $1 billion per year as our existing
term debt matures over the course of the next few years. The portion of these
savings to be realized by HSBC Finance Corporation will depend in large part
upon the amount and timing of various initiatives between HSBC Finance
Corporation and other HSBC subsidiaries.
Debt due to affiliates and other HSBC related funding are summarized in the
following table:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
(IN BILLIONS)
Debt issued to HSBC subsidiaries:
Drawings on bank lines in the U.K. ....................... $ 6.9 $ 7.5
Term debt................................................. 9.2 6.0
Preferred securities issued by Household Capital Trust
VIII................................................... .3 .3
----- -----
Total debt issued to HSBC subsidiaries.................... 16.4 13.8
----- -----
Debt issued to HSBC clients:
Euro commercial paper..................................... 3.5 2.6
Term debt................................................. 1.0 .8
----- -----
Total debt issued to HSBC clients......................... 4.5 3.4
Preferred stock held by HSBC Investments (North America)
Inc. ..................................................... 1.1 1.1
Cash received on bulk and subsequent sales of domestic
private label receivables to HSBC Bank USA, net
(cumulative).............................................. 13.1 12.4
Real estate secured receivable activity with HSBC Bank USA:
Cash received on sales (cumulative)....................... 3.7 3.7
Direct purchases from correspondents (cumulative)......... 3.9 2.8
Run-off of real estate secured receivable activity with
HSBC Bank USA.......................................... (2.5) (1.5)
----- -----
Total real estate secured receivable activity with HSBC Bank
USA....................................................... 5.1 5.0
----- -----
Total HSBC related funding.................................. $40.2 $35.7
===== =====
At June 30, 2005, funding from HSBC, including debt issuances to HSBC
subsidiaries and clients and preferred stock held by HSBC Investments (North
America) Inc. ("HINO") but excluding cash received on asset sales to HSBC
subsidiaries, represented 18 percent of our total managed debt and preferred
stock funding. At December 31, 2004, funding from HSBC, including debt issuances
to HSBC subsidiaries and clients and preferred stock held by HINO but excluding
cash received on asset sales to HSBC subsidiaries, represented 15 percent of our
total managed debt and preferred stock funding.
In addition to the HSBC related funding received, we have extended lines of
credit and promissory notes to other HSBC subsidiaries at interest rates
comparable to third-party rates for notes with similar terms. At
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June 30, 2005, $1.5 billion was outstanding under these agreements compared to
$.6 billion outstanding at December 31, 2004.
Proceeds from the December 2004 domestic private label bulk receivable sale to
HSBC Bank USA of $12.4 billion were used to pay down short-term domestic
borrowings, including outstanding commercial paper balances, and to fund
operations. Excess liquidity from the sale was used to temporarily fund
available for sale investments at December 31, 2004.
As of June 30, 2005, we had revolving credit facilities of $2.5 billion from
HSBC domestically and $10.0 billion from HSBC subsidiaries in the U.K. There
have been no draws on the domestic line. At June 30, 2005, $6.9 billion was
outstanding under the U.K. lines. We had derivative contracts with a notional
value of $58.4 billion, or approximately 94 percent of total derivative
contracts, outstanding with HSBC affiliates at June 30, 2005. We had derivative
contracts with a notional value of $62.6 billion, or approximately 87 percent of
total derivative contracts, outstanding with HSBC affiliates at December 31,
2004.
SECURITIES totaled $4.0 billion at June 30, 2005 and $3.6 billion at December
31, 2004. Securities purchased under agreements to resell totaled $.4 billion at
June 30, 2005 and $2.7 billion at December 31, 2004. Interest bearing deposits
with banks totaled $.4 billion at June 30, 2005 and $.6 billion at December 31,
2004. Our total investment balances at December 31, 2004 were high as a result
of the timing of the bulk sale of the domestic private label receivable
portfolio to HSBC Bank USA on December 29, 2004.
COMMERCIAL PAPER, BANK AND OTHER BORROWINGS totaled $10.6 billion at June 30,
2005 and $9.0 billion at December 31, 2004. The increase at June 30, 2005 was a
result of higher levels of short-term notes outstanding as well as higher levels
of commercial paper as compared to the lower levels outstanding at December 31,
2004 as the proceeds from the sale of the domestic private label loan portfolio
to HSBC Bank USA were used to reduce the outstanding balances. Included in this
total was outstanding Euro commercial paper sold to customers of HSBC of $3.5
billion at June 30, 2005 and $2.6 billion at December 31, 2004.
During the second quarter of 2005, all three major domestic rating agencies
approved a plan which allows us to increase our commercial paper issuances as a
result of lowering the coverage ratio of bank credit facilities to outstanding
commercial paper from 100% to 80%. This plan also assumes that the combination
of bank credit facilities and undrawn conduit facilities will, at all times,
exceed 115% of outstanding commercial paper. This approved plan will result in
an increase in our maximum outstanding commercial paper balance to in excess of
$12.0 billion.
LONG TERM DEBT (with original maturities over one year) increased to $87.0
billion at June 30, 2005 from $85.4 billion at December 31, 2004. Significant
third party issuance during the six months ended June 30, 2005 included the
following:
- $6.7 billion of domestic and foreign medium-term notes
- $1.2 billion of foreign currency-denominated bonds
- $.7 billion of InterNotes(SM) (retail-oriented medium-term notes)
- $5.5 billion of global debt
- $2.4 billion of securities backed by real estate secured, auto finance,
and MasterCard/Visa receivables. For accounting purposes, these
transactions were structured as secured financings.
In June 2005, we redeemed the junior subordinated notes issued to the Household
Capital Trust V with an outstanding principal balance of $309 million.
PREFERRED SHARES In June 2005, we issued 575,000 shares of Series B Preferred
Stock for $575 million. Dividends on the Series B Preferred Stock are
non-cumulative and payable quarterly at a rate of 6.36 percent commencing
September 15, 2005. The Series B Preferred Stock may be redeemed at our option
after June 23, 2005.
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HSBC Finance Corporation
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SELECTED CAPITAL RATIOS are summarized in the following table:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
TETMA(1).................................................... 7.52% 6.68%
TETMA + Owned Reserves(1)................................... 10.29 9.45
Tangible common equity to tangible managed assets(1)........ 5.38 4.67
Common and preferred equity to owned assets................. 13.42 13.01
Excluding purchase accounting adjustments:
TETMA(1).................................................. 8.78 8.38
TETMA + Owned Reserves(1)................................. 11.55 11.16
Tangible common equity to tangible managed assets(1)...... 6.64 6.38
---------------
(1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed
assets represent non-GAAP financial ratios that are used by HSBC Finance
Corporation management and certain rating agencies to evaluate capital
adequacy and may differ from similarly named measures presented by other
companies. See "Basis of Reporting" for additional discussion on the use of
non-GAAP financial measures and "Reconciliations to GAAP Financial Measures"
for quantitative reconciliations to the equivalent GAAP basis financial
measure.
SECURITIZATIONS AND SECURED FINANCINGS Securitizations (collateralized funding
transactions structured to receive sale treatment under Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a Replacement of FASB
Statement No. 125," ("SFAS No. 140")) and secured financings (collateralized
funding transactions which do not receive sale treatment under SFAS No. 140) of
consumer receivables have been used to limit our reliance on the unsecured debt
markets.
In a securitization, a designated pool of non-real estate consumer receivables
is removed from the balance sheet and transferred through a limited purpose
financing subsidiary to an unaffiliated trust. This unaffiliated trust is a
qualifying special purpose entity ("QSPE") as defined by SFAS No. 140 and,
therefore, is not consolidated. The QSPE funds its receivable purchase through
the issuance of securities to investors, entitling them to receive specified
cash flows during the life of the securities. The receivables transferred to the
QSPE serve as collateral for the securities. At the time of sale, an
interest-only strip receivable is recorded, representing the present value of
the cash flows we expect to receive over the life of the securitized
receivables, net of estimated credit losses and debt service. Under the terms of
the securitizations, we receive annual servicing fees on the outstanding balance
of the securitized receivables and the rights to future residual cash flows on
the sold receivables after the investors receive their contractual return. Cash
flows related to the interest-only strip receivables and servicing the
receivables are collected over the life of the underlying securitized
receivables.
In a secured financing, a designated pool of receivables are conveyed to a
wholly owned limited purpose subsidiary, which in turn transfers the receivables
to a trust that sells interests to investors. Repayment of the debt issued by
the trust is secured by the receivables transferred. The transactions are
structured as secured financings under SFAS No. 140. Therefore, the receivables
and the underlying debt of the trust remain on our balance sheet. We do not
recognize a gain in a secured financing transaction. Because the receivables and
the debt remain on our balance sheet, revenues and expenses are reported
consistently with our owned balance sheet portfolio. Using this source of
funding results in similar cash flows as issuing debt through alternative
funding sources.
Under IFRS and prior to 2005 under U.K. GAAP, our securitizations are treated as
secured financings. In order to align our accounting treatment with that of
HSBC, starting in the third quarter of 2004 we began to structure all new
collateralized funding transactions as secured financings. However, because
existing public MasterCard and Visa credit card transactions were structured as
sales to revolving trusts that require replenishments of receivables to support
previously issued securities, receivables will continue to be sold to
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these trusts until the revolving periods end, the last of which is expected to
occur in 2008 based on current projections. Private label trusts that publicly
issued securities are now replenished by HSBC Bank USA as a result of the daily
sale of new domestic private label credit card originations to HSBC Bank USA. We
will continue to replenish at reduced levels certain non-public personal
non-credit card and MasterCard and Visa securities issued to conduits and record
the resulting replenishment gains for a period of time in order to manage
liquidity. Since our securitized receivables have varying lives, it will take
several years for these receivables to pay-off and the related interest-only
strip receivables to be reduced to zero. The termination of sale treatment on
new collateralized funding activity reduced our reported net income under U.S.
GAAP. There is no impact, however, on cash received from operations. Because we
believe the market for securities backed by receivables is a reliable, efficient
and cost-effective source of funds, we will continue to use secured financings
of consumer receivables as a source of our funding and liquidity.
As previously discussed, securitization levels were much lower in the six months
ended June 30, 2005 as a result of the use of alternate funding sources,
including funding from HSBC subsidiaries, and our decision to structure all new
collateralized funding transactions as secured financings beginning in the third
quarter of 2004.
Securitizations (excluding replenishments of certificateholder interests) and
secured financings are summarized in the following table:
THREE MONTHS ENDED JUNE 30, 2005 2004
------------------------------------------------------------------------------
(IN MILLIONS)
INITIAL SECURITIZATIONS:
Auto finance................................................ $ - $ 300
MasterCard/Visa............................................. - 500
Private label............................................... - 190
Personal non-credit card.................................... - -
------ ------
Total....................................................... $ - $ 990
====== ======
SECURED FINANCINGS:
Real estate secured......................................... $ 919 $1,750
Auto finance................................................ 998 -
MasterCard/Visa............................................. 500 -
------ ------
Total....................................................... $2.417 $1,750
====== ======
SIX MONTHS ENDED JUNE 30, 2005 2004
------------------------------------------------------------------------------
(IN MILLIONS)
INITIAL SECURITIZATIONS:
Auto finance................................................ $ - $ 300
MasterCard/Visa............................................. - 550
Private label............................................... - 190
Personal non-credit card.................................... - -
------ ------
Total....................................................... $ - $1,040
====== ======
SECURED FINANCINGS:
Real estate secured......................................... $ 919 $1,750
Auto finance................................................ 998 -
MasterCard/Visa............................................. 500 -
------ ------
Total....................................................... $2,417 $1,750
====== ======
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HSBC Finance Corporation
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Our securitized receivables totaled $9.0 billion at June 30, 2005 compared to
$14.2 billion at December 31, 2004. As of June 30, 2005, secured financings of
$5.6 billion are secured by $10.8 billion of real estate secured, auto finance
and MasterCard/Visa receivables. Secured financings of $7.3 billion at December
31, 2004 are secured by $10.3 billion of real estate secured and auto finance
receivables. At June 30, 2005, securitizations structured as sales represented 7
percent and secured financings represented 5 percent of the funding associated
with our managed funding portfolio. At December 31, 2004, securitizations
structured as sales represented 12 percent and secured financings represented 6
percent of the funding associated with our managed funding portfolio.
2005 FUNDING STRATEGY As discussed previously, the acquisition by HSBC has
improved our access to the capital markets as well as expanded our access to a
worldwide pool of potential investors. Our current estimated domestic funding
needs and sources for 2005 are summarized in the table that follows:
ACTUAL ESTIMATED
JANUARY 1 JULY 1
THROUGH THROUGH ESTIMATED
JUNE 30, DECEMBER 31, FULL YEAR
2005 2005 2005
--------------------------------------------------------------------------------------------------
(IN BILLIONS)
FUNDING NEEDS:
Net asset growth.......................................... $ 8 $ 8 - 11 $16 - 19
Commercial paper, term debt and securitization
maturities............................................. 18 10 - 15 28 - 33
Other..................................................... 1 1 - 3 2 - 4
--- -------- --------
Total funding needs, including growth..................... $27 $19 - 29 $46 - 56
=== ======== ========
FUNDING SOURCES:
External funding, including HSBC clients.................. $24 $18 - 26 $42 - 50
HSBC and HSBC subsidiaries................................ 3 1 - 3 4 - 6
--- -------- --------
Total funding sources..................................... $27 $19 - 29 $46 - 56
=== ======== ========
RISK MANAGEMENT
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CREDIT RISK There have been no significant changes in our approach to credit
risk management since December 31, 2004.
At June 30, 2005, we had derivative contracts with a notional value of
approximately $62.0 billion, including $58.4 billion outstanding with HSBC
affiliates. Most swap agreements, both with unaffiliated and affiliated third
parties, require that payments be made to, or received from, the counterparty
when the fair value of the agreement reaches a certain level. Generally,
third-party swap counterparties provide collateral in the form of cash which is
recorded in our balance sheet as other assets or derivative related liabilities
and totaled $347 million at June 30, 2005. Affiliate swap counterparties
generally provide collateral in the form of securities which are not recorded on
our balance sheet. At June 30, 2005, the fair value of our agreements with
affiliate counterparties was below the level requiring payment of collateral. As
such at June, 30, 2005, we were not holding any swap collateral from HSBC
affiliates in the form of securities.
LIQUIDITY RISK There have been no significant changes in our approach to
liquidity risk since December 31, 2004.
MARKET RISK HSBC has certain limits and benchmarks that serve as guidelines in
determining appropriate levels of interest rate risk. One such limit is
expressed in terms of the Present Value of a Basis Point ("PVBP"), which
reflects the change in value of the balance sheet for a one basis point movement
in all interest rates. Our total PVBP limit as of June 30, 2005 was $2 million,
which includes risk associated with hedging instruments. Thus, for a one basis
point change in interest rates, the policy dictates that the value of
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the balance sheet shall not increase or decrease by more than $2 million. Our
PVBP position at both June 30, 2005 and December 31, 2004 was less than $1
million.
While the total PVBP position was not impacted by the loss of hedge accounting
for certain derivative financial instruments at the time of our acquisition by
HSBC, the portfolio of ineffective hedges remaining at June 30, 2005 represent
PVBP risk of ($4.7) million. The interest rate risk remaining for all other
assets and liabilities, including effective hedges, results in an offsetting
PVBP risk of $5.0 million. Therefore, at June 30, 2005 we had a net PVBP
position of less than $1 million, which is within our PVBP limit of $2 million.
We also monitor the impact that a hypothetical increase or decrease in interest
rates of 25 basis points applied at the beginning of each quarter over a 12
month period would have on our net interest income. The following table
summarizes such estimated impact:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
(IN MILLIONS)
Decrease in net interest income following a hypothetical 25
basis points rise in interest rates applied on a quarterly
basis over the next 12 months............................. $ 149 $ 176
Increase in net interest income following a hypothetical 25
basis points fall in interest rates applied on a quarterly
basis over the next 12 months............................. $ 88 $ 169
These estimates include both the net interest income impact of the derivative
positions we have entered into which are considered to be effective hedges under
SFAS 133 and the impact of economic hedges of certain underlying debt
instruments which do not qualify for hedge accounting as if they were effective
hedges under SFAS 133. These estimates also assume we would not take any
corrective actions in response to interest rate movements and, therefore, exceed
what most likely would occur if rates were to change by the amount indicated.
Net interest income at risk has changed as a result of the loss of hedge
accounting on a portfolio of economic hedges. At June 30, 2005, our net interest
income sensitivity to a hypothetical 25 basis point rise in rates applied on a
quarterly basis over the next 12 months is a decrease of $139 million as opposed
to the amount reported above, and the sensitivity to a hypothetical 25 basis
point fall in rates applied on a quarterly basis over the next 12 months is an
increase of $78 million as opposed to the amount reported above. At December 31,
2004, our net interest income sensitivity to a hypothetical 25 basis point rise
in rates applied on a quarterly basis over the next 12 months is a decrease of
$190 million as opposed to the amount reported above, and the sensitivity to a
hypothetical 25 basis point fall in rates applied on a quarterly basis over the
next 12 months is an increase of $186 million as opposed to the amount reported
above. This sensitivity only considers changes in interest rates and does not
consider changes from other variables, such as exchange rates that may impact
margin. The decrease in exposure to rising interest rates results primarily from
the reclassification of the pay fixed/receive floating interest rate swaps,
which do not qualify for hedge accounting under SFAS 133. We have reduced our
exposure during the second quarter of 2005 by regaining hedge accounting
treatment for a significant number of our cash flow hedges as well as
terminating other derivative instruments. We continue to evaluate the steps
required to regain hedge accounting treatment under SFAS 133 for the remaining
cash flow hedges which do not qualify for hedge accounting under SFAS 133 where
possible. We will continue to manage our total interest rate risk on a basis
consistent with the risk management process employed since the acquisition.
OPERATIONAL RISK There has been no significant change in our approach to
operational risk management since December 31, 2004.
49
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
RETURN ON AVERAGE ASSETS:
Net income......................................... $ 472 $ 433 $ 1,098 $ 903
======== ======== ======== ========
Average assets:
Owned basis...................................... $134,834 $117,467 $133,394 $118,428
Serviced with limited recourse................... 10,203 23,568 11,543 24,422
-------- -------- -------- --------
Managed basis.................................... $145,037 $141,035 $144,937 $142,850
======== ======== ======== ========
Return on average owned assets..................... 1.40% 1.47% 1.65% 1.52%
Return on average managed assets................... 1.30 1.23 1.52 1.26
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY:
Net income......................................... $ 472 $ 433 $ 1,098 $ 903
Dividends on preferred stock....................... (19) (18) (37) (36)
-------- -------- -------- --------
Net income available to common shareholders........ $ 453 $ 415 $ 1,061 $ 867
======== ======== ======== ========
Average common shareholder's equity................ $ 16,671 $ 17,160 $ 16,421 $ 16,903
Return on average common shareholder's equity...... 10.87% 9.67% 12.92% 10.26%
NET INTEREST INCOME:
Net interest income:
Owned basis...................................... $ 2,035 $ 1,930 $ 3,923 $ 3,750
Serviced with limited recourse................... 249 652 581 1,406
-------- -------- -------- --------
Managed basis.................................... $ 2,284 $ 2,582 $ 4,504 $ 5,156
======== ======== ======== ========
Average interest-earning assets:
Owned basis...................................... $119,523 $101,238 $116,254 $100,457
Serviced with limited recourse................... 10,203 23,568 11,543 24,422
-------- -------- -------- --------
Managed basis.................................... $129,726 $124,806 $127,797 $124,879
======== ======== ======== ========
Owned basis net interest margin.................... 6.81% 7.63% 6.75% 7.47%
Managed basis net interest margin.................. 7.04 8.28 7.05 8.26
MANAGED BASIS RISK ADJUSTED REVENUE:
Net interest income................................ $ 2,284 $ 2,582 $ 4,504 $ 5,156
Other revenues, excluding securitization revenue
and derivative income............................ 1,068 860 2,276 1,879
Less: Net charge-offs.............................. (1,028) (1,367) (2,146) (2,809)
-------- -------- -------- --------
Risk adjusted revenue.............................. $ 2,324 $ 2,075 $ 4,634 $ 4,226
======== ======== ======== ========
Average interest-earning assets.................... $129,726 $124,806 $127,797 $124,879
Managed basis risk adjusted revenue................ 7.17% 6.65% 7.25% 6.77%
50
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- -------------------------
JUNE 30, MARCH 31, JUNE 30, JUNE 30, JUNE 30,
2005 2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
CONSUMER NET CHARGE-OFF RATIO:
Consumer net charge-offs:
Owned basis........................... $ 844 $ 856 $ 966 $ 1,700 $ 1,936
Serviced with limited recourse........ 184 255 401 439 873
-------- -------- -------- -------- --------
Managed basis......................... $ 1,028 $ 1,111 $ 1,367 $ 2,139 $ 2,809
======== ======== ======== ======== ========
Average consumer receivables:
Owned basis........................... $115,354 $108,928 $ 96,189 $112,141 $ 94,581
Serviced with limited recourse........ 10,203 12,884 23,568 11,543 24,422
-------- -------- -------- -------- --------
Managed basis......................... $125,557 $121,812 $119,757 $123,684 $119,003
======== ======== ======== ======== ========
Owned basis consumer net charge-off
ratio................................. 2.93% 3.15% 4.02% 3.03% 4.09%
Managed basis consumer net charge-off
ratio................................. 3.28 3.65 4.57 3.46 4.72
======== ======== ======== ======== ========
RESERVES AS A PERCENT OF NET CHARGE-OFFS
Loss reserves:
Owned basis........................... $ 3,756 $ 3,581 $ 3,795 $ 3,756 $ 3,795
Serviced with limited recourse........ 525 661 1,904 525 1,904
-------- -------- -------- -------- --------
Managed basis......................... $ 4,281 $ 4,242 $ 5,699 $ 4,281 $ 5,699
======== ======== ======== ======== ========
Net charge-offs:
Owned basis........................... $ 844 $ 863 $ 966 $ 1,707 $ 1,936
Serviced with limited recourse........ 184 255 401 439 873
-------- -------- -------- -------- --------
Managed basis......................... $ 1,028 $ 1,118 $ 1,367 $ 2,146 $ 2,809
======== ======== ======== ======== ========
Owned basis reserves as a percent of net
charge-offs........................... 111.3% 103.7% 98.2% 110.0% 98.0%
Managed basis reserves as a percent of
net charge-offs....................... 104.1 94.9 104.2 99.7 101.4
EFFICIENCY RATIO:
Total costs and expenses less
policyholders' benefits............... $ 1,326 $ 1,420 $ 1,228 $ 2,746 $ 2,525
======== ======== ======== ======== ========
Net interest income and other revenues
less policyholders' benefits:
Owned basis........................... $ 3,043 $ 3,228 $ 2,889 $ 6,271 $ 5,819
Serviced with limited recourse........ 52 30 148 82 401
-------- -------- -------- -------- --------
Managed basis......................... $ 3,095 $ 3,258 $ 3,037 $ 6,353 $ 6,220
======== ======== ======== ======== ========
Owned basis efficiency ratio............ 43.58% 43.99% 42.51% 43.79% 43.39%
Managed basis efficiency ratio.......... 42.84 43.59 40.43 43.22 40.59
51
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
JUNE 30, MARCH 31, JUNE 30,
2005 2005 2004
------------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
TWO-MONTHS-AND-OVER-CONTRACTUAL DELINQUENCY:
Consumer two-months-and-over-contractual delinquency:
Owned basis............................................... $ 4,419 $ 4,229 $ 4,534
Serviced with limited recourse............................ 484 626 1,194
-------- -------- --------
Managed basis............................................. $ 4,903 $ 4,855 $ 5,728
======== ======== ========
Consumer receivables:
Owned basis............................................... $118,532 $111,911 $ 99,115
Serviced with limited recourse............................ 8,980 11,486 22,836
-------- -------- --------
Managed basis............................................. $127,512 $123,397 $121,951
======== ======== ========
Consumer two-months-and-over-contractual delinquency:
Owned basis............................................... 3.73% 3.78% 4.57%
Managed basis............................................. 3.85 3.93 4.70
RESERVES AS A PERCENT OF RECEIVABLES:
Loss reserves:
Owned basis............................................... $ 3,756 $ 3,581 $ 3,795
Serviced with limited recourse............................ 525 661 1,904
-------- -------- --------
Managed basis............................................. $ 4,281 $ 4,242 $ 5,699
======== ======== ========
Receivables:
Owned basis............................................... $118,761 $112,161 $ 99,432
Serviced with limited recourse............................ 8,980 11,486 22,836
-------- -------- --------
Managed basis............................................. $127,741 $123,647 $122,268
======== ======== ========
Reserves as a percent of receivables:
Owned basis............................................... 3.16% 3.19% 3.82%
Managed basis............................................. 3.35 3.43 4.66
RESERVES AS A PERCENT OF NONPERFORMING LOANS:
Loss reserves:
Owned basis............................................... $ 3,756 $ 3,581 $ 3,795
Serviced with limited recourse............................ 525 661 1,904
-------- -------- --------
Managed basis............................................. $ 4,281 $ 4,242 $ 5,699
======== ======== ========
Nonperforming loans:
Owned basis............................................... $ 3,491 $ 3,456 $ 3,684
Serviced with limited recourse............................ 395 511 958
-------- -------- --------
Managed basis............................................. $ 3,886 $ 3,967 $ 4,642
======== ======== ========
Reserves as a percent of nonperforming loans:
Owned basis............................................... 107.6% 103.6% 103.0%
Managed basis............................................. 110.2 106.9 122.8
52
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
TANGIBLE COMMON EQUITY:
Common shareholder's equity................................. $ 16,814 $ 15,841
Exclude:
Unrealized (gains) losses on cash flow hedging
instruments............................................ (163) (119)
Minimum pension liability................................. 4 4
Unrealized gains on investments and interest-only strip
receivables............................................ (69) (53)
Intangible assets......................................... (2,491) (2,705)
Goodwill.................................................. (6,799) (6,856)
-------- --------
Tangible common equity...................................... 7,296 6,112
Purchase accounting adjustments............................. 1,706 2,227
-------- --------
Tangible common equity, excluding purchase accounting
adjustments............................................... $ 9,002 $ 8,339
======== ========
TANGIBLE SHAREHOLDERS' EQUITY:
Tangible common equity...................................... $ 7,296 $ 6,112
Preferred stock............................................. 1,675 1,100
Mandatorily redeemable preferred securities of Household
Capital Trusts............................................ 704 994
Adjustable Conversion-Rate Equity Security Units............ 535 530
-------- --------
Tangible shareholder's equity............................... 10,210 8,736
Purchase accounting adjustments............................. 1,698 2,208
-------- --------
Tangible shareholders' equity, excluding purchase accounting
adjustments............................................... $ 11,908 $ 10,944
======== ========
TANGIBLE SHAREHOLDERS' EQUITY PLUS OWNED LOSS RESERVES:
Tangible shareholders' equity............................... $ 10,210 $ 8,736
Owned loss reserves......................................... 3,756 3,625
-------- --------
Tangible shareholders' equity plus owned loss reserves...... 13,966 12,361
Purchase accounting adjustments............................. 1,698 2,208
-------- --------
Tangible shareholders' equity plus owned loss reserves,
excluding purchase accounting adjustments................. $ 15,664 $ 14,569
======== ========
TANGIBLE MANAGED ASSETS:
Owned assets................................................ $137,743 $130,190
Receivables serviced with limited recourse.................. 8,980 14,225
-------- --------
Managed assets.............................................. 146,723 144,415
Exclude:
Intangible assets......................................... (2,491) (2,705)
Goodwill.................................................. (6,799) (6,856)
Derivative financial assets............................... (1,698) (4,049)
-------- --------
Tangible managed assets..................................... 135,735 130,805
Purchase accounting adjustments............................. (131) (202)
-------- --------
Tangible managed assets, excluding purchase accounting
adjustments............................................... $135,604 $130,603
======== ========
EQUITY RATIOS:
Common and preferred equity to owned assets................. 13.42% 13.01%
Tangible common equity to tangible managed assets........... 5.38 4.67
Tangible shareholders' equity to tangible managed assets
("TETMA")................................................. 7.52 6.68
Tangible shareholders' equity plus owned loss reserves to
tangible managed assets ("TETMA + Owned Reserves")........ 10.29 9.45
Excluding purchase accounting adjustments: Tangible common
equity to tangible managed assets......................... 6.64 6.38
TETMA..................................................... 8.78 8.38
TETMA + Owned Reserves.................................... 11.55 11.16
======== ========
53
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
DISCLOSURE CONTROLS We conducted an evaluation, with the participation of the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Our disclosure controls and procedures are designed to ensure that
information required to be disclosed by HSBC Finance Corporation in the reports
we file under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported on a timely basis. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report so as to alert them in a timely fashion
to material information required to be disclosed in reports we file under the
Exchange Act.
INTERNAL CONTROLS There have not been any changes in our internal control over
financial reporting during the fiscal quarter to which this report relates that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
GENERAL
We are parties to various legal proceedings resulting from ordinary business
activities relating to our current and/or former operations. Certain of these
actions are or purport to be class actions seeking damages in very large
amounts. These actions assert violations of laws and/or unfair treatment of
consumers. Due to the uncertainties in litigation and other factors, we cannot
be certain that we will ultimately prevail in each instance. We believe that our
defenses to these actions have merit and any adverse decision should not
materially affect our consolidated financial condition.
CONSUMER LENDING LITIGATION
During the past several years, the press has widely reported certain industry
related concerns that may impact us. Some of these involve the amount of
litigation instituted against finance and insurance companies operating in
certain states and the large awards obtained from juries in those states. Like
other companies in this industry, some of our subsidiaries are involved in a
number of lawsuits pending against them in these states. The cases, in
particular, generally allege inadequate disclosure or misrepresentation of
financing terms. In some suits, other parties are also named as defendants.
Unspecified compensatory and punitive damages are sought. Several of these suits
purport to be class actions or have multiple plaintiffs. The judicial climate in
these states is such that the outcome of all of these cases is unpredictable.
Although our subsidiaries believe they have substantive legal defenses to these
claims and are prepared to defend each case vigorously, a number of such cases
have been settled or otherwise resolved for amounts that in the aggregate are
not material to our operations. Appropriate insurance carriers have been
notified of each claim, and a number of reservations of rights letters have been
received. Certain of the financing of merchandise claims have been partially
covered by insurance.
In a case decided on March 31, 2004 and published on May 13, the Appellate Court
of Illinois, First District (Cook County), ruled in U.S. Bank National
Association v. Clark, et al., that certain lenders (which did not include any
subsidiaries of HSBC Finance Corporation) violated the Illinois Interest Act by
imposing points and finance charge fees in excess of 3% of the principal amount
on loans with an interest rate in excess of 8%. The Appellate Court held for the
first time that when the Illinois legislature made amendments to the late fee
provisions of the Interest Act in 1992, Illinois opted out of the Federal
Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDMCA")
and, in "certain instances," the Federal Alternative Mortgage Transaction Parity
Act of 1982 ("AMTPA"). DIDMCA and AMTPA each contain provisions that preempt
certain state laws unless state legislatures took affirmative action to
"opt-out" of the federal preemptions within specified time frames. The Court
found that as a result of 1992 legislative action, the State's 3% restriction on
points and finance charge fees are now enforceable in Illinois. The Appellate
Court's
54
ruling reversed the trial court's decision, which had relied on previous
opinions of the Illinois Attorney General, the Illinois Office of Banks and Real
Estate, and other courts. Should the decision stand and be applied retroactively
throughout Illinois, lenders would be required to make refunds to customers who
had a closed-end real estate secured first mortgage loan of double the interest
paid or contracted for, whichever is greater. The plaintiffs in the Clark case
filed a notice of appeal with the Illinois Supreme Court which the court
accepted. Briefing in the Illinois Supreme Court is underway. We reported
previously that three cases and one counterclaim were filed against subsidiaries
of HSBC Finance Corporation based upon the Clark decision: Wilkes v. Household
Finance Corporation III, et al., Circuit Court of Cook County, Illinois,
Chancery Division, filed on June 18, 2004 (purported class action); Aslam v.
Accredited Home Lenders, Inc., et al., Circuit Court of Cook County, Illinois,
Chancery Division, filed on June 11, 2004 (purported class action); MERS Inc. as
nominee for HFC v. Gloss, Circuit Court of DuPage County, Illinois (filed as a
foreclosure counterclaim in September, 2004); and Morris, et al. v. Household
Mortgage Services, Inc., U.S. District Court for the Northern District of
Illinois, filed on June 22, 2004. These matters have all been settled for
immaterial amounts and have been dismissed.
CREDIT CARD LITIGATION
On November 15, 2004, a matter entitled American Express Travel Related Services
Company, Inc. v. Visa U.S.A. Inc., et al. was filed in the U.S. District Court
for the Southern District of New York. This case alleges that HSBC Finance
Corporation, Household Bank (SB), N.A. and others violated Sections 1 and 2 of
the Sherman Act by conspiring to monopolize and unreasonably restrain trade by
allegedly implementing and enforcing an agreement requiring any United States
bank that issues Visa or MasterCard general cards to refuse to issue such cards
from competitors, such as American Express and Discover. Plaintiff seeks a
declaration that defendants in this action (including Visa, MasterCard and other
banks belonging to those associations), have violated the antitrust laws, and
requests an injunction restraining the defendants, their directors, officers,
employees, agents, successors, owners and members from "continuing or
maintaining in any manner, directly or indirectly, the rules, policies, and
agreements at issue," and seeks "full compensation for damages it has sustained,
from each Defendant, jointly, severally," for each of plaintiff's claims, in an
amount "to be trebled according to law, plus interest, attorneys' fees and costs
of suit". On February 18, 2005, the Defendants filed a motion to dismiss the
complaint for failure to state a cause of action. At this time, we are unable to
quantify the potential impact from this action, if any.
On June 22, 2005, a matter entitled Photos Etc. Corporation, et al. v. VISA
U.S.A. Inc., et al. was filed in the U.S. District Court for the District of
Connecticut as case number 305CV1007. This purported class action named as
defendants VISA, MasterCard and a number of alleged members of those
associations, including HSBC Finance Corporation and two of its affiliates. The
case seeks certification of a class of retail merchants that operate commercial
businesses throughout the United States and alleges the defendants engage in an
anti-competitive conspiracy to fix the level of "interchange fees" charged by
the associations. At this time, we are unable to quantify the potential impact
from this action, if any.
SECURITIES LITIGATION
In August 2002, we restated previously reported consolidated financial
statements. The restatement related to certain MasterCard and Visa co-branding
and affinity credit card relationships and a third party marketing agreement,
which were entered into between 1992 and 1999. All were part of our Credit Card
Services segment. In consultation with our prior auditors, Arthur Andersen LLP,
we treated payments made in connection with these agreements as prepaid assets
and amortized them in accordance with the underlying economics of the
agreements. Our current auditor, KPMG LLP, advised us that, in its view, these
payments should have either been charged against earnings at the time they were
made or amortized over a shorter period of time. The restatement resulted in a
$155.8 million, after-tax, retroactive reduction to retained earnings at
December 31, 1998. As a result of the restatement, and other corporate events,
including, e.g., the 2002 settlement with 50 states and the District of Columbia
relating to real estate lending practices, HSBC Finance Corporation, and its
directors, certain officers and former auditors, have been involved in various
legal proceedings, some of which purport to be class actions. A number of these
actions allege violations of federal
55
securities laws, were filed between August and October 2002, and seek to recover
damages in respect of allegedly false and misleading statements about our common
stock. These legal actions have been consolidated into a single purported class
action, Jaffe v. Household International, Inc., et al., No. 02 C 5893 (N.D.
Ill., filed August 19, 2002), and a consolidated and amended complaint was filed
on March 7, 2003. On December 3, 2004, the court signed the parties' stipulation
to certify a class with respect to the claims brought under sec.10 and sec.20 of
the Securities Exchange Act of 1934. The parties stipulated that plaintiffs will
not seek to certify a class with respect to the claims brought under sec.11 and
sec.15 of the Securities Act of 1933 in this action or otherwise.
The amended complaint purports to assert claims under the federal securities
laws, on behalf of all persons who purchased or otherwise acquired our
securities between October 23, 1997 and October 11, 2002, arising out of alleged
false and misleading statements in connection with our sales and lending
practices, the 2002 state settlement agreement referred to above, the
restatement and the HSBC merger. The amended complaint, which also names as
defendants Arthur Andersen LLP, Goldman, Sachs & Co., and Merrill Lynch, Pierce,
Fenner & Smith, Inc., fails to specify the amount of damages sought. In May
2003, we, and other defendants, filed a motion to dismiss the complaint. On
March 19, 2004, the Court granted in part, and denied in part the defendants'
motion to dismiss the complaint. The Court dismissed all claims against Merrill
Lynch, Pierce, Fenner & Smith, Inc. and Goldman Sachs & Co. The Court also
dismissed certain claims alleging strict liability for alleged misrepresentation
of material facts based on statute of limitations grounds. The claims that
remain against some or all of the defendants essentially allege the defendants
knowingly made a false statement of a material fact in conjunction with the
purchase or sale of securities, that the plaintiffs justifiably relied on such
statement, the false statement(s) caused the plaintiffs' damages, and that some
or all of the defendants should be liable for those alleged statements. The
Court has ordered that all factual discovery must be completed by January 13,
2006 and expert witness discovery must be completed by July 24, 2006.
On June 27, 2003, a case entitled, West Virginia Laborers Pension Trust Fund v.
Caspersen, et al., was filed in the Chancery Division of the Circuit Court of
Cook County, Illinois as case number 03CH10808. This purported class action
named as defendants the directors of Beneficial Corporation at the time of the
1998 merger of Beneficial Corporation into a subsidiary of HSBC Finance
Corporation, and claimed that those directors' due diligence of HSBC Finance
Corporation at the time they considered the merger was inadequate. The Complaint
claimed that as a result of some of the securities law and other violations
alleged in the Jaffe case, HSBC Finance Corporation common shares lost value.
Pursuant to the merger agreement with Beneficial Corporation, we assumed the
defense of this litigation. In September of 2003, the defendants filed a motion
to dismiss which was granted on June 15, 2004 based upon a lack of personal
jurisdiction over the defendants. The plaintiffs appealed that decision. On May
11, 2005, the appellate court affirmed the trial court's ruling. The time for
any further appeals has expired. In addition, on June 30, 2004, a case entitled,
Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Caspersen, et al.,
was filed in the Superior Court of New Jersey, Law Division, Somerset County as
Case Number L9479-04. Other than the change in plaintiff, the suit is
substantially identical to the foregoing West Virginia Laborer's Pension Trust
Fund case, and is brought by the same principal law firm that brought that suit.
The defendants' motion to dismiss was granted on February 10, 2005 and the
plaintiffs have appealed that ruling.
With respect to these securities litigation matters, we believe that we have
not, and our officers and directors have not, committed any wrongdoing and in
each instance there will be no finding of improper activities that may result in
a material liability to us or any of our officers or directors.
ITEM 5. OTHER INFORMATION
--------------------------------------------------------------------------------
As approved by the Audit Committee of the Board of Directors, we have engaged
KPMG to perform certain non-audit services during the year. Those services
include language translation services relating to debt offerings of
subsidiaries, preparation of SAS 70 reports relating to services performed for
contractual counterparties and certain tax services including account analysis,
advice regarding certain transactions and preparation of returns for
securitization trusts.
56
ITEM 6. EXHIBITS
--------------------------------------------------------------------------------
Exhibits included in this Report:
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Debt and Preferred Stock Securities Ratings.
57
SIGNATURE
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HSBC FINANCE CORPORATION
(Registrant)
/s/ Simon C. Penney
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
Date: August 1, 2005
58
EXHIBIT INDEX
--------------------------------------------------------------------------------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Debt and Preferred Stock Securities Ratings.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
SIX MONTHS ENDED
JUNE 30,
-----------------
2005 2004
-------------------------------------------------------------------------------
(DOLLARS ARE IN
MILLIONS)
Net income.................................................. $1,098 $ 903
Income tax expense.......................................... 555 466
------ ------
Income before income tax expense............................ 1,653 1,369
------ ------
Fixed charges:
Interest expense.......................................... 2,166 1,415
Interest portion of rentals(1)............................ 30 27
------ ------
Total fixed charges......................................... 2,196 1,442
------ ------
Total earnings as defined................................... $3,849 $2,811
====== ======
Ratio of earnings to fixed charges.......................... 1.75 1.95
Preferred stock dividends(2)................................ 55 54
Ratio of earnings to combined fixed charges and preferred
stock dividends........................................... 1.71 1.88
---------------
(1) Represents one-third of rentals, which approximates the portion representing
interest.
(2) Preferred stock dividends are grossed up to their pretax equivalents.
EXHIBIT 31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Siddharth N. Mehta, Chairman and Chief Executive Officer of HSBC Finance
Corporation, certify that:
1. I have reviewed this report on Form 10-Q of HSBC Finance
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 1, 2005
/s/ SIDDHARTH N. MEHTA
--------------------------------------
Siddharth N. Mehta
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Simon C. Penney, Senior Executive Vice President and Chief Financial Officer
of HSBC Finance Corporation, certify that:
1. I have reviewed this report on Form 10-Q of HSBC Finance
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 1, 2005
/s/ SIMON C. PENNEY
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Q
for the period ending June 30, 2005 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Siddharth N. Mehta, Chairman
and Chief Executive Officer of HSBC Finance Corporation, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ SIDDHARTH N. MEHTA
--------------------------------------
Siddharth N. Mehta
Chairman and Chief Executive Officer
August 1, 2005
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Q
for the period ending June 30, 2005 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Simon C. Penney, Senior
Executive Vice President and Chief Financial Officer of HSBC Finance
Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ SIMON C. PENNEY
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
August 1, 2005
This certification accompanies each Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Signed originals of these written statements required by Section 906 of the
Sarbanes-Oxley Act of 2002 have been provided to HSBC Finance Corporation and
will be retained by HSBC Finance Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
EXHIBIT 99.1
DEBT AND PREFERRED STOCK SECURITIES RATINGS
STANDARD & MOODY'S
POOR'S INVESTORS
CORPORATION SERVICE FITCH, INC.
---------------------------------------------------------------------------------------------------
AT JUNE 30, 2005
HSBC Finance Corporation
Senior debt............................................... A A1 AA-
Senior subordinated debt.................................. A- A2 A+
Commercial Paper.......................................... A-1 P-1 F-1+
Series B preferred stock.................................. BBB+ A3 A+
HFC Bank Limited
Senior debt............................................... A A1 AA-
Commercial paper.......................................... A-1 P-1 F-1+
HSBC Bank Nevada, National Association
Senior debt............................................... A A1 AA-
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