Interim Report - 17 of 21

RNS Number : 3136X

HSBC Holdings PLC

14 August 2009

 



Footnotes to Financial Statements

1    The effect of the bonus element within the rights issue has been included within the calculation of basic and diluted earnings per share for the period, through an adjustment to the weighted average number of ordinary and dilutive potential ordinary shares outstanding. Comparative data has been restated on this basis.

2    Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined without unreasonable expense.

3    Share premium includes the deduction of US$1 million (30 June 2008: US$1 million; 31 December 2008; US$2 million) in respect of issue costs incurred during the period. 

4    Retained earnings include 180,429,757 (US$2,429 million) of own shares held within HSBC's insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets (30 June 2008; 187,083,746 (US$3,235 million): 31 December 2008; 194,751,829 (US$3,094 million)). 

5    Amounts transferred to the income statement in respect of cash flow hedges include US$284 million loss (30 June 2008; US$172 million income: 31 December 2008; US$152 million loss) taken to 'Net interest income' and US$567 million (30 June 2008; US$962 million: 31 December 2008; US$1,602 million) taken to 'Net trading income'.

6    Statutory share premium relief under Section 131 of the Companies Act 1985 was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003 and the shares issued were recorded at their nominal value only. In HSBC's consolidated accounts the fair value differences of US$8,290 million in respect of HSBC France and US$12,768 million in respect of HSBC Finance Corporation were recognised in the merger reserve. At 31 December 2008, an amount of US$3,601 million was transferred from this reserve to retained earnings as a result of impairment in HSBC Holdings' investment in HSBC Overseas Holdings (UK) Limited. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and US$15,649 million was recognised in the merger reserve. The merger reserve includes the deduction of US$611 million in respect of costs relating to the rights issue and excludes the loss of US$344 million on a forward foreign exchange contract associated with hedging the proceeds of the rights issue. For further details see Note 19 on the Financial Statements.

Cumulative goodwill amounting to US$5,138 million has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including US$3,469 million charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of US$1,669 million was charged against retained earnings.

7    During April 2008, HSBC Holdings issued US$2,200 million of Perpetual Subordinated Capital Securities ('Capital Securities') of which there were US$66 million of issuance costs, which are classified as equity under IFRSs. The Capital Securities are exchangeable at HSBC Holdings' option into non-cumulative dollar preference shares on any coupon payment date. Interest on the Capital Securities is paid quarterly and may be deferred at the discretion of HSBC Holdings. The Capital Securities may only be redeemed at the option of HSBC Holdings.

Note		Page
1	Basis of preparation	207
2	Accounting policies	209
3	Dividends	210
4	Earnings per share	210
5	Post-employment benefits	211
6	Tax expense	213
7	Trading assets	214
8	Financial assets designated at fair value	215
9	Derivatives	217
10	Financial investments	219
11	Non-current assets held for sale	221
12	Trading liabilities	222

Note		Page
13	Financial liabilities designated at  fair value	222
14	Maturity analysis of assets and liabilities	223
15	Notes on the statement of cash flows	224
16	Contingent liabilities, contractual commitments and guarantees	225
17	Segmental analysis	225
18	Goodwill impairment	226
19	Rights issue	227
20	Litigation	229
21	Events after the balance sheet date	231
22	Interim Report 2009 and statutory accounts	231

1    Basis of preparation 

(a)    Compliance with International Financial Reporting Standards 

The interim consolidated financial statements of HSBC have been prepared in accordance with IAS 34 'Interim Financial Reporting' ('IAS 34') as issued by the International Accounting Standards Board ('IASB') and as endorsed by the EU. In order to present fairly the financial position, financial performance and cash flows of the Group, as required by IAS 1 'Presentation of Financial Statements', and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, as required by section 393 of the Companies Act 2006, HSBC has departed from the requirements of IAS 32 'Financial Instruments: Presentation' ('IAS 32') in so far as this standard requires the offer of rights by HSBC to its shareholders in March 2009 to be classified as a derivative financial liability. Further details of this departure including its financial effect are provided in Note 19. The Directors have concluded that the interim consolidated financial statements prepared on this basis present fairly, and give a true and fair view of, the Group's financial position, financial performance and cash flows.

The consolidated financial statements of HSBC at 31 December 2008 were prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the IASB and as endorsed by the EU. EUߛendorsed IFRSs may differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. At 31 December 2008, there were no unendorsed standards effective for the year ended 31 December 2008 affecting the consolidated financial statements at that date, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. Accordingly, HSBC's financial statements for the year ended 31 December 2008 were prepared in accordance with IFRSs as issued by the IASB. 

At 30 June 2009, there were no unendorsed standards effective for the period ended 30 June 2009 affecting these interim consolidated financial statements, and there was no difference between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to HSBC. 

IFRSs comprise accounting standards issued by the IASB and its predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee ('IFRIC') and its predecessor body. 

During the period ended 30 June 2009, HSBC adopted the following significant standards and revisions to standards: 

• On 1 January 2009, HSBC adopted IFRS 8 'Operating Segments' ('IFRS 8'), which replaced IAS 14 'Operating Segments'. IFRS 8 requires an entity to disclose information about its segments which enables users to evaluate the nature and financial effects of its business activities and the economic environments in which it operates. HSBC's operating segments are organised into six geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, Middle East, North America and Latin America. Because of the nature of the Group, HSBC's chief operating decision-maker regularly reviews operating activity on a number of bases, including by geography, by customer group, and by retail businesses and global businesses. HSBC's IFRS 8 operating segments were determined to be geographical segments because the chief operating decision-maker uses information on geographical segments in order to make decisions about allocating resources and assessing performance.

IFRS 8 requires segment financial information to be reported using the same measures reported to the chief operating decision-maker for the purpose of making decisions about allocating resources to the operating segments and assessing their performance. Information provided to the chief operating decision-maker of HSBC to make decisions about allocating resources and assessing performance of operating segments is measured in accordance with IFRSs.

• On 1 January 2009, HSBC adopted the revised IAS 1 'Presentation of Financial Statements' ('IAS 1'). The revised standard aims to improve users' ability to analyse and compare information given in financial statements. The adoption of the revised standard has no effect on the results reported in HSBC's consolidated financial statements. It does, however, result in certain presentational changes in HSBC's financial statements, including:

• the presentation of all items of income and expenditure in two financial statements, the 'Consolidated income statement' and the 'Consolidated statement of comprehensive income'; and

• the presentation of the 'Consolidated statement of changes in equity' as a financial statement, which replaces the 'Equity' note on the financial statements.

During the period ended 30 June 2009, HSBC adopted a number of amendments to standards and interpretations which had an insignificant effect on the consolidated financial statements. These are described on pages 342 to 344 of the Annual Report and Accounts 2008.

(b)    Comparative information 

These interim consolidated financial statements include comparative information as required by IAS 34, the UK Disclosure and Transparency Rules and the Hong Kong listing rules. 

(c)    Use of estimates and assumptions 

The preparation of financial information requires the use of estimates and assumptions about future conditions. The use of available information and the application of judgement are inherent in the formation of estimates; actual results in the future may differ from those reported. Management believes that HSBC's critical accounting policies where judgement is necessarily applied are those which relate to impairment of loans and advances, goodwill impairment, the valuation of financial instruments, the impairment of available-for-sale financial assets and deferred tax assets. These critical accounting policies are described on pages 61 to 66 of the Annual Report and Accounts 2008.

(d)    Consolidation 

The interim consolidated financial statements of HSBC comprise the financial statements of HSBC Holdings and its subsidiaries. The method adopted by HSBC to consolidate its subsidiaries is described on page 341 of the Annual Report and Accounts 2008.

(e)    Future accounting developments 

Standards and Interpretations issued by the IASB and endorsed by the EU

A revised IFRS 3 'Business Combinations' and an amended IAS 27 'Consolidated and Separate Financial Statements', were issued on 10 January 2008. The revisions and amendments to the standards apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual financial reporting period beginning on or after 1 July 2009. The main changes under the standards are that:

• acquisition-related costs are recognised as expenses in the income statement in the period they are incurred;

• equity interests held prior to control being obtained are remeasured to fair value at the time control is obtained, and any gain or loss is recognised in the income statement;

• changes in a parent's ownership interest in a subsidiary that do not result in a change of control are treated as transactions between equity holders and reported in equity; and

• an option is available, on a transaction-by-transaction basis, to measure any non-controlling (previously referred to as minority) interests in the entity acquired either at fair value, or at the non-controlling interests' proportionate share of the net identifiable assets of the entity acquired.

The effect that the changes will have on HSBC's consolidated financial statements will depend on the incidence and timing of business combinations occurring on or after 1 January 2010. 

Standards and Interpretations issued by the IASB but not endorsed by the EU

At 30 June 2009, a number of amendments to standards and interpretations, effective for these consolidated financial statements, had been issued by the IASB but not endorsed by the EU, none of which would have had a significant effect on HSBC's consolidated financial statements. These amendments include:

• an amendment to IFRIC 9 and IAS 39 - 'Embedded Derivatives' was issued on 12 March 2009 and is effective for annual periods ending on or after 30 June 2009. The amendment clarifies the accounting treatment of embedded derivatives for entities that make use of the amendment to IAS 39 'Financial Instruments: Recognition and Measurement' and to IFRS 7 'Financial Instruments: Disclosures' - 'Reclassification of Financial Assets' (the 'Reclassification Amendment') which was adopted by HSBC during 2008. Adoption of the amendment will not have a significant effect on the consolidated financial statements; and  

• an amendment to IAS 39 and to IFRS 7 - 'Reclassification of Financial Assets - Effective Date and Transition' was issued on 27 November 2008. The amendment clarifies the effective date of the Reclassification Amendment which was adopted by HSBC during 2008. Adoption of the amendment will have no effect on the consolidated financial statements.

At 30 June 2009, a number of amendments to standards and interpretations, not yet effective for these consolidated financial statements, had been issued by the IASB but not endorsed by the EU. HSBC does not expect adoption of any of these amendments to have a significant effect on the consolidated financial statements.

(f)    Changes in composition of the Group

Acquisition of PT Bank Ekonomi Raharja Tbk ('Bank Ekonomi')

In May 2009, HSBC completed the acquisition of 88.89 per cent of Bank Ekonomi, in Indonesia, for cash consideration of US$608 million. Following acquisition of the initial stake, HSBC was required under Indonesian law to make a mandatory tender offer for a further holding of up to 10.11 per cent. HSBC completed the mandatory tender offer in July 2009.

2    Accounting policies

The accounting policies adopted by HSBC for these interim consolidated financial statements are consistent with those described on pages 344 to 359 of the Annual Report and Accounts 2008, except as discussed in Note 1, Basis of preparation. The methods of computation applied by HSBC for these interim consolidated financial statements are consistent with those applied for the Annual Report and Accounts 2008.

3    Dividends

Dividends to shareholders of the parent company were as follows:

	Half-year to
	30 June 2009						30 June 2008						31 December 2008
	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	0.10		1,210		624		0.39		4,620		2,233		-		-		-
In respect of current year:
- first interim dividend	0.08		1,384		190		0.18		2,158		256		-		-		-
- second interim dividend	-		-		-		-		-		-		0.18		2,166		727
- third interim dividend	-		-		-		-		-		-		0.18		2,175		380
	0.18		2,594		814		0.57		6,778		2,489		0.36		4,341		1,107
Quarterly dividends on preference  shares classified as equity
March dividend	15.50		22				15.50		22				-		-
June dividend	15.50		23				15.50		23				-		-
September dividend	-		-				-		-				15.50		22
December dividend	-		-				-		-				15.50		23
	31.00		45				31.00		45				31.00		45
Quarterly coupons on capital  securities classified as equity
July coupon	-		-										0.541		47
October coupon	-		-										0.508		45
January coupon	0.508		44										-		-
April coupon	0.508		45										-		-
	1.016		89										1.049		92

The Directors have declared a second interim dividend in respect of the financial year ending 31 December 2009 of US$0.08 per ordinary share, a distribution of approximately US$1,386 million. The second interim dividend will be payable on 7 October 2009 to holders of ordinary shares on the Register at the close of business on 21 August 2009. Further details are contained in item 7 of Additional Information on page 243. No liability is recorded in the financial statements in respect of the second interim dividend for 2009. 

On 15 July 2009, HSBC paid a further coupon on the Capital Securities of US$0.508 per security, a distribution of US$45 million. No liability is recorded in the balance sheet at 30 June 2009 in respect of this coupon payment. 

4    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.

In April 2009, HSBC Holdings completed a rights issue, details of which are provided in Note 19. The effect of the bonus element included within the rights issue has been included within the calculation of basic and diluted earnings per share. The effect of the rights issue was to increase the weighted average number of ordinary shares by 3,359 million (first half of 2008: 1,732 million; second half of 2008: 1,754 million) and dilutive potential ordinary shares by 12 million (first half of 2008: 10 million; second half of 2008: 20 million).

Profit attributable to ordinary shareholders of the parent company

	Half-year to
	30 June		30 June		31 December
	2009		2008		2008
	US$m		US$m		US$m
Profit/(loss) attributable to shareholders of the parent company	3,347		7,722		(1,994)
Dividend payable on preference shares classified as equity	(45)		(45)		(45)
Coupon payable on capital securities classified as equity	(89)		-		(92)
Profit/(loss) attributable to ordinary shareholders of the parent company	3,213		7,677		(2,131)

Basic and diluted earnings per share

	Half-year to 30 June 2009						Half-year to 30 June 2008						Half-year to 31 December 2008
	Profit     US$m		Number     of shares     (millions)		Amount     per share     US$		Profit     US$m		Number      of shares     (millions)		Amount     per share     US$		Loss     US$m		Number      of shares     (millions)		Amount     per share     US$
Basic	3,213		15,353		0.21		7,677		13,469		0.57		(2,131)		13,640		(0.16)
Effect of dilutive potential ordinary shares			52						79						155
Diluted	3,213		15,405		0.21		7,677		13,548		0.57		(2,131)		13,795		(0.15)

5    Post-employment benefits 

Included within 'Employee compensation and benefits' are components of net periodic benefit cost related to HSBC's defined benefit pension plans and other post-employment benefits, as follows:

	Half-year to
	30 June     2009		30 June     2008	2005	31 December     2008
	US$m		US$m		US$m
Current service cost	335		404		359
Interest cost	711		928		830
Expected return on plan assets	(647)		(1,012)		(908)
Past service cost	3		3		4
Gains on curtailments	(53)		(16)		(35)
(Gains)/losses on settlements	-		(73)		6
Other gains	(499)		-		-
Net defined benefit cost	(150)		234		256

HSBC revalues its defined benefit post-employment plans each year at 31 December, in consultation with the plans' local actuaries. The assumptions underlying the calculations are used to determine the expected income statement charge for the year going forward.

The triennial valuation applicable to the HSBC Bank (UK) Pension Scheme as at 31 December 2008 is currently underway and is due to be completed no later than 31 March 2010. 

At 30 June each year, HSBC revalues all plan assets to current market prices. HSBC also reviews the assumptions used to calculate the defined benefit obligations (the liabilities of the plans) and updates the carrying amount of the obligations if there have been significant changes as a consequence of changes in assumptions.

In the first half of 2009, there was a decrease in the average yields of high quality (AA rated or equivalent) debt instruments in the UK, together with a rise in inflation expectations. As a result, the defined benefit obligation for the HSBC Bank (UK) Pension Scheme increased by US$2,340 million in respect of changes to discount and inflation rate assumptions. For other plans, the average discount rates used generally increased after 31 December 2008 resulting in a decrease in the defined benefit obligations of US$382 million. All differences from changes in the assumptions used were recognised directly in equity as actuarial gains or losses.

The US$53 million curtailment gain reported in the above table results primarily from the reduction in the number of employees covered by three defined benefit plans as a result of restructuring.

The US$499 million other gains relate 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.

The discount rates used to calculate HSBC's obligations under its defined benefit pension and post-employment healthcare plans were as follows:

	At      30 June      2009		At     30 June      2008	2005	At     31 December     2008
	%		%		%
UK	6.20		6.60		6.50
Hong Kong	2.65		3.45		1.19
US	6.50		7.05		6.05
Jersey	6.20		6.50		6.50
Mexico	8.50		8.50		8.10
Brazil	11.25		10.75		10.75
France	5.75		6.25		5.75
Canada	6.50		6.00		7.19
Switzerland	3.00		3.30		2.60
Germany	5.75		6.25		5.75

The inflation rate used to calculate the HSBC Bank (UK) Pension Scheme obligation at 30 June 2009 was 3.6 per cent (30 June 2008: 4.0 per cent; 31 December 2008: 2.9 per cent). Rates of pay and pension increases were adjusted in line with this inflation assumption. There were no changes to other assumptions.

Actuarial gains and losses

	Half-year to
	30 June     2009		30 June     2008	2005	31 December     2008
	US$m		US$m		US$m
Experience gains/(losses) on plan liabilities	42		(231)		96
Experience losses on plan assets	(1,620)		(1,361)		(2,966)
Gains/(losses) from changes in actuarial assumptions	(2,000)		682		2,125
Other movements	-		-		46
Total net actuarial losses	(3,578)		(910)		(699)

Actuarial gains and losses comprise experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. The experience gains and losses on plan assets arise as a result of the difference between the expected returns on the plan assets and the actual movement in the value of the plan assets during the period. The changes in actuarial assumptions arise as a result of changes in the plan assumptions, primarily discount rates and inflation rates, as previously described. 

Total cumulative net actuarial losses recognised in equity at 30 June 2009 were US$4,639 million (30 June 2008: US$362 million cumulative losses; 31 December 2008: US$1,061 million cumulative losses).

As disclosed in 'Related party transactions' in the Annual Report and Accounts 2008, HSBC Bank (UK) Pension Scheme entered into collateralised swap transactions with HSBC to manage the inflation and interest rate sensitivity of the Scheme's pension obligations. At 30 June 2009, the swaps had a positive fair value of US$609 million to the scheme (30 June 2008: US$979 million positive to the scheme; 31 December 2008: US$1,779 million positive to the scheme). All swaps were executed at prevailing market rates and within standard market bid-offer spreads.

6    Tax expense 

	Half-year to
	30 June		30 June		31 December
	2009		2008		2008
	US$m		US$m		US$m
Current tax
UK corporation tax charge	60		991		680
Overseas tax	1,472		1,306		397
	1,532		2,297		1,077
Deferred tax
Origination and reversal of temporary differences	(246)		(356)		(209)
Tax expense	1,286		1,941		868
Effective tax rate	25.6%		18.9%		(92.3)%

The UK corporation tax rate applying to HSBC was 28 per cent (2008: 30 per cent to 1 April 2008 and 28 per cent thereafter). Overseas tax included Hong Kong profits tax of US$416 million (first half of 2008: US$529 million; second half of 2008: US$317 million). Subsidiaries in Hong Kong provided for Hong Kong profits tax at the rate of 16.5 per cent (2008: 16.5 per cent) on the profits for the period assessable in Hong Kong. Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate. The following table reconciles the overall tax expense which would apply if all profits had been taxed at the UK corporation tax rate:

	Half-year to
	30 June 2009				30 June 2008				31 December 2008
	US$m		%		US$m		%		US$m		%
Analysis of overall tax expense1
Taxation at UK corporation tax rate of  28 per cent (2008: 28.5 per cent)2	1,405		28.0		2,920		28.5		(268)		28.5
Goodwill impairment	-		-		150		1.5		2,860		(304.1)
Effect of taxing overseas profits in principal  locations at different rates	(598)		(11.9)		(560)		(5.5)		(779)		82.9
Tax-free gains	(34)		(0.7)		(267)		(2.6)		(749)		79.7
Adjustments in respect of prior period  liabilities	(5)		(0.1)		2		-		(69)		7.3
Low income housing tax credits3	(49)		(1.0)		(51)		(0.5)		(52)		5.5
Effect of profit in associates and joint  ventures	(243)		(4.8)		(263)		(2.6)		(210)		22.3
Effect of previously unrecognised temporary differences4	(60)		(1.2)		(80)		(0.8)		(18)		1.9
Deferred tax temporary differences  not provided	852		17.0		-		-		225		(23.9)
Other items	18		0.3		90		0.9		(72)		7.7
Overall tax expense	1,286		25.6		1,941		18.9		868		(92.3)

1    Interim period income tax expense is accrued using the estimated average annual effective income tax rates, which have been substantively enacted by 30 June 2009, and which will be applicable to expected total annual earnings.

2    The change in the UK corporation tax rate from 30 per cent to 28 per cent with effect from 1 April 2008 gave rise to a blended tax rate for 2008 of 28.5 per cent.

3    Low income housing tax credits are designed to encourage the provision of rental housing for low income households in the US. 

4    The effect of previously unrecognised temporary differences principally relates to the recognition of trading losses.

In March 2009, the UK Government announced its intention to propose to Parliament that gains or losses on transactions designed to hedge foreign exchange exposures connected to rights issues should be disregarded for tax purposes. The tax expense would have increased by US$96 million if this legislation had been substantively enacted by 30 June 2009. It is expected that this legislation will be enacted by the end of 2009 and the tax charge for the full year will reflect this. 

For the period ended 30 June 2009, HSBC's share of associates' tax on profit was US$203 million (30 June 2008: US$298 million; 31 December 2008: US$217 million), which is included within share of profit in associates and joint ventures in the income statement.

Of the total net deferred tax assets of US$7.9 billion at 30 June 2009 (30 June 2008: US$6.5 billion; 31 December 2008: US$7.0 billion), US$4.9 billion (30 June 2008: US$4.5 billion; 31 December 2008: US$5.0 billion) arose in respect of HSBC's US operations where there has been a recent history of losses. Management's analysis of the recognition of these deferred tax assets significantly discounts the income expected from future US operations and relies to a greater extent on continued liquidity and capital support to the US operations from HSBC, including tax planning strategies implemented in relation to such support. During the second quarter of 2009, HSBC decided to limit the level and duration of excess capital it expects to invest in its US operations as part of these tax planning strategies and, as a result, US$0.9 billion of the potential increase in the deferred tax assets up to 30 June 2009 has not been recognised. However, management's analysis continues to support the assumption that it is probable that there will be sufficient taxable income to utilise the deferred tax assets that have been recognised in respect of the US operations as at 30 June 2009.

7    Trading assets 

	At     30 June      2009		At     30 June      2008		At     31 December     2008
	US$m		US$m		US$m
Trading assets:
-    not subject to repledge or resale by counterparties	313,641		319,672		340,675
-    which may be repledged or resold by counterparties	100,717		153,865		86,654
	414,358		473,537		427,329
Treasury and other eligible bills	22,990		7,417		32,458
Debt securities	190,870		191,482		199,619
Equity securities	25,484		42,608		21,878
	239,344		241,507		253,955
Loans and advances to banks	73,636		95,359		73,055
Loans and advances to customers	101,378		136,671		100,319
	414,358		473,537		427,329

Trading securities valued at fair value

	At      30 June      2009		At      30 June      2008		At      31 December     2008
	US$m		US$m		US$m
US Treasury and US Government agencies1	22,586		17,851		26,621
UK Government	8,936		7,620		10,586
Hong Kong Government	6,637		5,001		6,648
Other government	95,672		92,452		98,983
Asset-backed securities2	4,769		19,122		6,566
Corporate debt and other securities	75,260		56,853		82,673
Equity securities	25,484		42,608		21,878
	239,344		241,507		253,955

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

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

Included within the above figures are debt securities issued by banks and other financial institutions of US$41,590 million (30 June 2008: US$61,528 million; 31 December 2008: US$49,997 million), of which US$4,129 million (30 June 2008: US$1,586 million; 31 December 2008: US$3,449 million) are guaranteed by various governments.

Trading securities listed on a recognised exchange and unlisted

	Treasury     and other     eligible bills		Debt     securities		Equity     securities		Total
	US$m		US$m		US$m		US$m
Fair value at 30 June 2009
Listed on a recognised exchange1	50		146,939		24,798		171,787
Unlisted	22,940		43,931		686		67,557
	22,990		190,870		25,484		239,344
Fair value at 30 June 2008
Listed on a recognised exchange1	120		111,143		41,433		152,696
Unlisted	7,297		80,339		1,175		88,811
	7,417		191,482		42,608		241,507
Fair value at 31 December 2008
Listed on a recognised exchange1	1		145,370		20,871		166,242
Unlisted	32,457		54,249		1,007		87,713
	32,458		199,619		21,878		253,955

1    Included within listed securities are US$3,552 million (30 June 2008: US$4,217 million; 31 December 2008: US$3,870 million) of investments listed in Hong Kong.

Loans and advances to banks held for trading

	At      30 June      2009		At      30 June      2008		At      31 December     2008
	US$m		US$m		US$m
Reverse repos	42,085		76,487		48,188
Settlement accounts	18,040		11,547		4,337
Stock borrowing	2,017		3,400		1,888
Other	11,494		3,925		18,642
	73,636		95,359		73,055

Loans and advances to customers held for trading

	At      30 June      2009		At      30 June      2008		At      31 December     2008
	US$m		US$m		US$m
Reverse repos	47,168		59,083		58,285
Settlement accounts	20,933		36,137		10,116
Stock borrowing	18,778		25,829		13,740
Other	14,499		15,622		18,178
	101,378		136,671		100,319

8    Financial assets designated at fair value

	At     30 June     2009		At     30 June      2008		At     31 December     2008
	US$m		US$m		US$m
Treasury and other eligible bills	495		240		235
Debt securities	19,825		23,356		16,349
Equity securities	12,060		16,768		10,993
Securities designated at fair value	32,380		40,364		27,577
Loans and advances to banks	204		421		230
Loans and advances to customers	777		1		726
	33,361		40,786		28,533

Securities designated at fair value

	At     30 June     2009		At     30 June      2008		At     31 December     2008
	US$m		US$m		US$m
US Treasury and US Government agencies1	88		334		93
UK Government	4,995		683		992
Hong Kong Government	244		353		284
Other government	3,153		4,507		3,624
Asset-backed securities2	6,598		7,478		6,492
Corporate debt and other securities	5,242		10,241		5,099
Equity securities	12,060		16,768		10,993
	32,380		40,364		27,577

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

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

Included within the above figures are debt securities issued by banks and other financial institutions of US$13,391 million (30 June 2008: US$14,255 million; 31 December 2008: US$10,351 million), of which US$47 million (30 June 2008: nil; 31 December 2008: US$14 million) are guaranteed by various governments.

	Treasury     and other     eligible bills		Debt     securities		Equity     securities		Total
	US$m		US$m		US$m		US$m
Fair value at 30 June 2009
Listed on a recognised exchange1	69		7,126		8,684		15,879
Unlisted	426		12,699		3,376		16,501
	495		19,825		12,060		32,380
Fair value at 30 June 2008
Listed on a recognised exchange1	85		4,877		12,492		17,454
Unlisted	155		18,479		4,276		22,910
	240		23,356		16,768		40,364
Fair value at 31 December 2008
Listed on a recognised exchange1	80		3,490		8,140		11,710
Unlisted	155		12,859		2,853		15,867
	235		16,349		10,993		27,577

1    Included within listed securities are US$608 million (30 June 2008: US$1,201 million; 31 December 2008: US$576 million) of investments listed in Hong Kong.

9    Derivatives

Fair values of derivatives by product contract type 

	Assets						Liabilities
	Trading		Hedging		Total		Trading		Hedging		Total
	US$m		US$m		US$m		US$m		US$m		US$m
At 30 June 2009
Foreign exchange	66,117		1,408		67,525		61,436		303		61,739
Interest rate	172,811		4,051		176,862		167,607		3,539		171,146
Equities	17,216		-		17,216		18,815		-		18,815
Credit derivatives	47,828		-		47,828		45,775		-		45,775
Commodity and other	1,365		-		1,365		1,401		-		1,401
Total fair values	305,337		5,459		310,796		295,034		3,842		298,876
At 30 June 2008
Foreign exchange	67,045		4,161		71,206		62,982		288		63,270
Interest rate	117,874		2,466		120,340		116,985		2,656		119,641
Equities	19,999		-		19,999		19,385		-		19,385
Credit derivatives	46,090		-		46,090		45,687		-		45,687
Commodity and other	3,029		-		3,029		3,374		-		3,374
Total fair values	254,037		6,627		260,664		248,413		2,944		251,357
At 31 December 2008
Foreign exchange	115,803		2,010		117,813		115,311		826		116,137
Interest rate	259,672		4,481		264,153		252,131		4,435		256,566
Equities	18,660		-		18,660		21,913		-		21,913
Credit derivatives	91,271		-		91,271		89,715		-		89,715
Commodity and other	2,979		-		2,979		2,729		-		2,729
Total fair values	488,385		6,491		494,876		481,799		5,261		487,060

The 37 per cent decrease in the fair value of derivative assets during the first half of 2009 was driven by steepening yield curves of major currencies and narrowing of credit spreads. The decrease in the notional contract amounts of HSBC's derivatives in the same period was only 4 per cent. However, IFRSs only permit netting of assets and liabilities with the same counterparty in very limited circumstances, even when there are contractually agreed netting arrangements in place.

A description of HSBC's determination of the fair values of financial instruments, including derivatives, is provided on pages 114 to 124.

Trading derivatives

The notional contract amounts of these instruments indicate the nominal value of transactions outstanding at the reporting date; they do not represent amounts at risk.

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

	At     30 June     2009		At     30 June     2008		At     31 December     2008
	US$m		US$m		US$m
Foreign exchange	2,849,035		3,704,399		3,045,017
Interest rate	12,148,712		13,143,237		12,435,965
Equities	226,043		343,343		221,053
Credit derivatives	1,377,155		2,075,700		1,583,337
Commodity and other	46,577		96,985		63,103
	16,647,522		19,363,664		17,348,475

Credit derivatives

The notional contract amount of credit derivatives of US$1,377 billion (30 June 2008: US$2,076 billion; 31 December 2008: US$1,583 billion) consisted of protection bought of US$680 billion (30 June 2008: US$1,020 billion; 31 December 2008: US$778 billion) and protection sold of US$697 billion (30 June 2008: US$1,056 billion; 31 December 2008: US$806 billion).

The difference between the notional amounts bought and sold is attributable to HSBC selling protection on large, diversified, predominantly investment-grade portfolios (including the most senior tranches) and then offsetting risk on these positions by buying protection on the more subordinated tranches of the same portfolios. In addition, HSBC uses securities to mitigate risks on certain derivative positions and credit derivative contracts to reduce counterparty exposures. Consequently, while there is a mismatch in notional amounts of credit derivatives bought and sold, this should not be interpreted as representing the open risk position. The credit derivative business operates within the market risk management framework described on page 173.

Derivatives valued using models with unobservable inputs

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

	Half-year to
	30 June     2009		30 June     2008		31 December     2008
	US$m		US$m		US$m
Unamortised balance at beginning of period	204		306		278
Deferral on new transactions	71		239		87
Recognised in the income statement during the period:
- amortisation	(44)		(117)		(51)
- subsequent to unobservable inputs becoming observable	(4)		(85)		(33)
- maturity or termination, or offsetting derivative	(19)		(68)		(31)
Exchange differences	10		5		(43)
Risk hedged	-		(2)		(3)
Unamortised balance at end of period1	218		278		204

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

Hedging instruments 

The notional contract amounts of these instruments indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

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

	At 30 June 2009				At 30 June 2008				At 31 December 2008
	Cash flow hedge		Fair value hedge		Cash flow hedge		Fair value hedge		Cash flow hedge		Fair value hedge
	US$m		US$m		US$m		US$m		US$m		US$m
Foreign exchange	12,943		2,453		16,518		3,190		14,931		2,602
Interest rate	212,673		44,346		288,721		29,736		229,785		27,305
Equities	-		-		-		41		-		-
	225,616		46,799		305,239		32,967		244,716		29,907

Fair value hedges

Fair value of derivatives designated as fair value hedges

	At 30 June 2009				At 30 June 2008				At 31 December 2008
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
	US$m		US$m		US$m		US$m		US$m		US$m
Foreign exchange	263		-		274		53		265		10
Interest rate	300		926		338		346		574		1,257
	563		926		612		399		839		1,267

Gains or losses arising from fair value hedges

	Half-year to
	30 June     2009		30 June     2008		31 December     2008
	US$m		US$m		US$m
Gains/(losses):
- on hedging instruments	72		113		(409)
- on the hedged items attributable to the hedged risk	(75)		(133)		434
	(3)		(20)		25

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

Cash flow hedges 

Fair value of derivatives designated as cash flow hedges

	At 30 June 2009				At 30 June 2008				At 31 December 2008
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
	US$m		US$m		US$m		US$m		US$m		US$m
Foreign exchange	1,145		303		3,887		235		1,745		816
Interest rate	3,751		2,613		2,128		2,310		3,907		3,178
	4,896		2,916		6,015		2,545		5,652		3,994

The gains and losses on ineffective portions of such derivatives are recognised immediately in 'Net trading income'. During the period to 30 June 2009, a gain of US$33 million was recognised due to hedge ineffectiveness (first half of 2008: loss of US$15 million; second half of 2008: loss of US$25 million). 

Hedges of net investments in foreign operations

At 30 June 2009, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were liabilities of US$25 million (30 June 2008: liabilities of US$238 million; 31 December 2008: liabilities of US$52 million), and contract notional values of US$517 million (30 June 2008: US$238 million; 31 December 2008: US$161 million).

The ineffectiveness recognised in 'Net trading income' for the period ended 30 June 2009 was nil (first and second halves of 2008: nil).

10    Financial investments

	At     30 June    2009		At     30 June      2008		At      31 December     2008
	US$m		US$m		US$m
Financial investments:
-    not subject to repledge or resale by counterparties	346,877		270,098		287,479
-    which may be repledged or resold by counterparties	6,567		4,652		12,756
	353,444		274,750		300,235

	At 30 June 2009				At 30 June 2008				At 31 December 2008
	Carrying     amount		Fair     value		Carrying     amount		Fair     value		Carrying     amount		Fair     value
	US$m		US$m		US$m		US$m		US$m		US$m
Treasury and other eligible bills:
-    available for sale	54,262		54,262		27,928		27,928		41,027		41,027
Debt securities:	290,382		290,663		237,341		237,477		251,957		253,001
-    available for sale	274,092		274,092		226,318		226,318		237,944		237,944
-    held to maturity	16,290		16,571		11,023		11,159		14,013		15,057
Equity securities:
-    available for sale	8,800		8,800		9,481		9,481		7,251		7,251
Total financial investments	353,444		353,725		274,750		274,886		300,235		301,279

Financial investments at amortised cost and fair value

	Amortised      cost		Fair     value
	US$m		US$m
At 30 June 2009
US Treasury	20,936		20,963
US Government agencies1	14,105		14,266
US Government sponsored entities1	3,511		3,605
UK Government	9,028		9,138
Hong Kong Government	19,692		19,703
Other government	76,048		76,720
Asset-backed securities2	52,242		33,131
Corporate debt and other securities	168,644		167,399
Equities	6,874		8,800
	371,080		353,725
At 30 June 2008
US Treasury	7,197		7,195
US Government agencies1	6,646		6,630
US Government sponsored entities1	17,340		17,072
UK Government	142		140
Hong Kong Government	3,260		3,262
Other government	60,806		60,485
Asset-backed securities2	61,321		52,695
Corporate debt and other securities	119,355		117,926
Equities	7,048		9,481
	283,115		274,886
At 31 December 2008
US Treasury	11,528		11,755
US Government agencies1	8,131		8,307
US Government sponsored entities1	15,109		15,240
UK Government	16,077		16,217
Hong Kong Government	966		989
Other government	60,755		61,528
Asset-backed securities2	55,685		36,052
Corporate debt and other securities	145,269		143,940
Equities	5,901		7,251
	319,421		301,279

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

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

Included within the above figures are debt securities issued by banks and other financial institutions of US$170,277 million (30 June 2008: US$135,576 million; 31 December 2008: US$140,878 million), of which US$70,398 million (30 June 2008: US$2,456 million; 31 December 2008: US$39,213 million) are guaranteed by various governments.

The fair value of the debt securities issued by banks and other financial instruments at 30 June 2009 was US$170,483 million (30 June 2008: US$135,477 million; 31 December 2008: US$141,526 million).

Financial investments listed on a recognised exchange and unlisted

	Treasury     and other     eligible bills     available    for sale		Debt     securities     available     for sale		Debt     securities     held to     maturity		Equity     securities		Total
	US$m		US$m		US$m		US$m		US$m
Carrying amount at 30 June 2009
Listed on a recognised exchange	7,834		134,312		2,143		712		145,001
Unlisted	46,428		139,780		14,147		8,088		208,443
	54,262		274,092		16,290		8,800		353,444
Carrying amount at 30 June 2008
Listed on a recognised exchange	1,299		96,030		2,094		2,264		101,687
Unlisted	26,629		130,288		8,929		7,217		173,063
	27,928		226,318		11,023		9,481		274,750
Carrying amount at 31 December 2008
Listed on a recognised exchange	3,539		108,972		2,332		471		115,314
Unlisted	37,488		128,972		11,681		6,780		184,921
	41,027		237,944		14,013		7,251		300,235

The fair value of listed held-to-maturity debt securities at 30 June 2009 was US$5,067 million (30 June 2008: US$4,696 million; 31 December 2008: US$4,926 million). Included within listed investments were US$1,481 million (30 June 2008: US$1,640 million; 31 December 2008: US$1,475 million) of investments listed in Hong Kong.

Maturities of investment securities at carrying amount

	At     30 June     2009		At     30 June     2008		At     31 December     2008
	US$m		US$m		US$m
Remaining contractual maturities of total debt securities:
- 1 year or less	70,497		92,110		72,551
- 5 years or less but over 1 year	140,343		64,692		93,824
- 10 years or less but over 5 years	28,412		20,316		28,141
- over 10 years	51,130		60,223		57,441
	290,382		237,341		251,957
Remaining contractual maturities of debt securities available for sale:
- 1 year or less	69,762		91,682		71,967
- 5 years or less but over 1 year	134,976		62,157		89,931
- 10 years or less but over 5 years	22,345		15,993		22,402
- over 10 years	47,009		56,486		53,644
	274,092		226,318		237,944
Remaining contractual maturities of debt securities held to maturity:
- 1 year or less	735		428		584
- 5 years or less but over 1 year	5,367		2,535		3,893
- 10 years or less but over 5 years	6,067		4,323		5,739
- over 10 years	4,121		3,737		3,797
	16,290		11,023		14,013

11    Non-current assets held for sale

	At     30 June     2009		At     30 June      2008		At     31 December     2008
	US$m		US$m		US$m
Interest in associates	-		2		2
Property, plant and equipment	1,099		2,599		2,007
Investment properties	1		118		2
Financial assets	846		11,454		62
Other	9		990		2
Total assets classified as held for sale	1,955		15,163		2,075

Property, plant and equipment

Property, plant and equipment classified as held for sale results from the repossession of property that had been pledged as collateral by customers. These assets are expected to be disposed of within 12 months of acquisition. Neither a gain nor a loss was recognised on reclassifying these assets as held for sale. The majority arose within the geographical segment, North America.

During the third quarter of 2008, 8 Canada Square was reclassified out of non-current assets held for sale as described on page 414 of the Annual Report and Accounts 2008.

Financial assets

At 30 June 2009, financial assets classified as held for sale of US$805 million consisted of vehicle finance loans. Neither a gain nor a loss was recognised on reclassifying these assets as held for sale. These assets are presented in the geographical segment, North America.

12    Trading liabilities

	At     30 June     2009		At     30 June     2008		At     31 December     2008
	US$m		US$m		US$m
Deposits by banks	44,036		45,091		36,537
Customer accounts	116,227		147,000		113,053
Other debt securities in issue	30,746		44,363		31,288
Other liabilities - net short positions	73,553		104,157		66,774
	264,562		340,611		247,652

At 30 June 2009, the cumulative amount of change in fair value attributable to changes in credit risk was a gain of US$415 million (30 June 2008: gain of US$300 million; 31 December 2008: gain of US$563 million).

13    Financial liabilities designated at fair value 

	At     30 June     2009		At     30 June     2008		At     31 December     2008
	US$m		US$m		US$m
Deposits by banks and customer accounts	6,535		7,306		6,618
Liabilities to customers under investment contracts	9,485		15,407		9,283
Debt securities in issue	34,576		39,704		34,969
Subordinated liabilities	23,416		22,706		20,316
Preference shares	3,302		4,635		3,401
	77,314		89,758		74,587

The carrying amount at 30 June 2009 of financial liabilities designated at fair value was US$2,777 million less than the contractual amount at maturity (30 June 2008: US$2,397 million less; 31 December 2008: US$1,851 million less). At 30 June 2009, the cumulative amount of the change in fair value attributable to changes in credit risk was a gain of US$5,451 million (30 June 2008: gain of US$2,443 million; 31 December 2008: gain of US$7,978 million).

14    Maturity analysis of assets and liabilities 

The following is an analysis, by remaining contractual maturities at the reporting date, of asset and liability line items that represent amounts expected to be recovered or settled within one year, and after one year. 

Trading assets and liabilities are excluded because they are not held for collection or settlement over the period of contractual maturity. 

	Due within      one year		Due after      more than     one year		Total
	US$m		US$m		US$m
At 30 June 2009
Assets
Financial assets designated at fair value	3,953		29,408		33,361
Loans and advances to banks	172,881		9,385		182,266
Loans and advances to customers	399,211		525,472		924,683
Financial investments	123,481		229,963		353,444
Other financial assets	23,041		6,537		29,578
	722,567		800,765		1,523,332
Liabilities
Deposits by banks	116,379		12,772		129,151
Customer accounts	1,123,792		39,551		1,163,343
Financial liabilities designated at fair value	5,540		71,774		77,314
Debt securities in issue	87,564		68,635		156,199
Other financial liabilities	69,204		3,463		72,667
Subordinated liabilities	392		29,742		30,134
	1,402,871		225,937		1,628,808

At 30 June 2008
Assets
Financial assets designated at fair value	8,590		32,196		40,786
Loans and advances to banks	245,718		11,263		256,981
Loans and advances to customers	495,856		553,344		1,049,200
Financial investments	99,446		175,304		274,750
Other financial assets	28,723		6,436		35,159
	878,333		778,543		1,656,876
Liabilities
Deposits by banks	145,597		8,555		154,152
Customer accounts	1,128,991		32,932		1,161,923
Financial liabilities designated at fair value	6,350		83,408		89,758
Debt securities in issue	134,198		96,069		230,267
Other financial liabilities	35,301		5,039		40,340
Subordinated liabilities	1,333		30,184		31,517
	1,451,770		256,187		1,707,957

At 31 December 2008
Assets
Financial assets designated at fair value	4,735		23,798		28,533
Loans and advances to banks	146,268		7,498		153,766
Loans and advances to customers	407,582		525,286		932,868
Financial investments	111,027		189,208		300,235
Other financial assets	27,642		6,308		33,950
	697,254		752,098		1,449,352
Liabilities
Deposits by banks	123,835		6,249		130,084
Customer accounts	1,083,426		31,901		1,115,327
Financial liabilities designated at fair value	7,368		67,219		74,587
Debt securities in issue	107,094		72,599		179,693
Other financial liabilities	70,898		4,860		75,758
Subordinated liabilities	745		28,688		29,433
	1,393,366		211,516		1,604,882

 

END

 

 

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