Interim Report - 22 of 25

RNS Number : 6332J

HSBC Holdings PLC

10 August 2012

Footnotes to Financial Statements

1 The tables: 'Maximum exposure to credit risk' (page 114), 'Gross loans and advances by industry sector' (page 115), 'Gross loans and advances to customers by industry sector and by geographical region' (page 116), 'Movement in impairment allowances on loans and advances to customers and banks' (page 149), the Composition of regulatory capital within 'Capital structure' (page 198), 'Impaired loans' (page 146), and the table 'Impaired loans and advances to customers' (page 147) also form an integral part of these financial statements.

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 nil in respect of issuance costs incurred during the period (30 June 2011: nil; 31 December 2011: US$2m).

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

5 Retained earnings include 83,578,031 (US$5,719m) 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 2011: 77,926,453 (US$968m); 31 December 2011: 98,498,019 (US$1,320m)).

6 Amounts transferred to the income statement in respect of cash flow hedges for the half-year to 30 June 2012 include US$12m loss (30 June 2011: US$345m gain; 31 December 2011: US$241m loss) taken to 'Net interest income' and US$232m loss (30 June 2011: US$149m loss; 31 December 2011: US$744m loss) taken to 'Net trading income'.

7 Statutory share premium relief under Section 131 of the Companies Act 1985 (the 'Act') was taken in respect of the acquisition of HSBC Bank in 1992, HSBC France in 2000 and HSBC Finance in 2003 and the shares issued were recorded at their nominal value only. In HSBC's consolidated financial statements the fair value differences of US$8,290m in respect of HSBC France and US$12,768m in respect of HSBC Finance were recognised in the merger reserve. The merger reserve created on the acquisition of HSBC Finance subsequently became attached to HSBC Overseas Holdings (UK) Limited ('HOHU'), following a number of intra-Group reorganisations. 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$15,796m was recognised in the merger reserve. The merger reserve includes the deduction of US$614m in respect of costs relating to the rights issue, of which US$149m was subsequently transferred to the income statement. Of this US$149m, US$121m was a loss arising from accounting for the agreement with the underwriters as a contingent forward contract. The merger reserve excludes the loss of US$344m on a forward foreign exchange contract associated with hedging the proceeds of the rights issue.

8 Including distributions paid on preference shares and capital securities classified as equity.

Note
1	Basis of preparation ...................................	219
2	Accounting policies ....................................	222
3	Dividends ...................................................	222
4	Earnings per share ......................................	223
5	Post-employment benefits .........................	223
6	Tax ............................................................	225
7	Trading assets ............................................	228
8	Fair values of financial instruments carried at fair value ............................................	229
9	Fair values of financial instruments not carried at fair value .................................	237
10	Reclassification of financial assets ..............	238
11	Financial assets designated at fair value ......	239
12	Derivatives ................................................	240
13	Financial investments ................................	243
14	Assets held for sale .....................................	245

Note
15	Trading liabilities .......................................	247
16	Financial liabilities designated at fair value .	247
17	Provisions ..................................................	248
18	Maturity analysis of assets and liabilities ....	249
19	Assets charged as security for liabilities and collateral accepted as security for assets .	250
20	Notes on the statement of cash flows .........	251
21	Contingent liabilities, contractual commitments and guarantees ..................	253
22	Special purpose entities ..............................	253
23	Segmental analysis .....................................	258
24	Goodwill impairment ..................................	258
25	Legal proceedings and regulatory matters ...	258
26	Events after the balance sheet date.............	263
27	Interim Report 2012 and statutory accounts ...............................................................	263

1 Basis of preparation

(a) Compliance with International Financial Reporting Standards

The interim consolidated financial statements of HSBC have been prepared in accordance with the Disclosure Rules and Transparency Rules of the Financial Services Authority and IAS 34 'Interim Financial Reporting' ('IAS 34') as issued by the International Accounting Standards Board ('IASB') and as endorsed by the EU.

The consolidated financial statements of HSBC at 31 December 2011 were prepared in accordance with International Financial Reporting Standards ('IFRSs') as issued by the IASB and as endorsed by the EU. EU‑endorsed 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 2011, there were no unendorsed standards effective for the year ended 31 December 2011 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 2011 were prepared in accordance with IFRSs as issued by the IASB.

On 20 December 2010, the IASB issued 'Deferred tax: Recovery of Underlying Assets (amendments to IAS 12)' which is effective for periods beginning on or after 1 January 2012 but has not yet been endorsed by the EU. The effect of the application of the amendment is not significant to HSBC.

At 30 June 2012, there were no other unendorsed standards effective for the period ended 30 June 2012 affecting these interim consolidated financial statements, and there was no significant 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 IFRS Interpretations Committee ('IFRIC') and its predecessor body.

During the half-year ended 30 June 2012, HSBC also adopted amendments to standards which had an insignificant effect on these interim consolidated financial statements.

(b) Presentation of information

In accordance with HSBC's policy to provide meaningful disclosures that help investors and other stakeholders understand the Group's performance, financial position and changes thereto, the information provided in the Notes on the Financial Statements and the Interim Management Report goes beyond the minimum levels required by accounting standards, statutory and regulatory requirements and listing rules. In particular, HSBC has adopted the British Bankers' Association Code for Financial Reporting Disclosure ('the BBA Code'). The BBA Code aims to increase the quality and comparability of banks' disclosures and sets out five disclosure principles together with supporting guidance. In line with the principles of the BBA Code, HSBC assesses the applicability and relevance of good practice recommendations issued from time to time by relevant regulators and standard setters, enhancing disclosures where appropriate.

HSBC's consolidated financial statements are presented in US dollars. HSBC Holdings' functional currency is also the US dollar because the US dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events and conditions of its subsidiaries, as well as representing a significant proportion of its funds generated from financing activities. HSBC uses the US dollar as its presentation currency in its consolidated financial statements because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts and funds its business.

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, deferred tax assets and provisions for liabilities. These critical accounting policies are described on pages 38 to 42 of the Annual Report and Accounts 2011.

(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 pages 292 to 293 of the Annual Report and Accounts 2011.

(e) Future accounting developments

At 30 June 2012, a number of standards and amendments to standards had been issued by the IASB, which are not effective for these consolidated financial statements. Most of these new requirements have not yet been endorsed for use in the EU. In addition to the projects to complete financial instrument accounting, the IASB is continuing to work on projects on insurance, revenue recognition and lease accounting which, together with the standards described below, will represent significant changes to accounting requirements from 2013.

Amendments issued by the IASB and endorsed by the EU

In June 2011, the IASB issued amendments to IAS 19 'Employee Benefits' ('IAS 19 revised'). The revised standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IAS 19 revised is required to be applied retrospectively.

The most significant amendment for HSBC is the replacement of interest cost and expected return on plan assets by a finance cost component comprising the net interest on the net defined benefit liability or asset. This finance cost component is determined by applying the same discount rate used to measure the defined benefit obligation to the net defined benefit liability or asset. The difference between the actual return on plan assets and the return included in the finance cost component in the income statement will be presented in other comprehensive income. The effect of this change is to increase the pension expense by the difference between the current expected return on plan assets and the return calculated by applying the relevant discount rate.

Based on our estimate of the impact of this particular amendment on the 2011 consolidated financial statements, the change would decrease pre-tax profit, with no effect on the pension liability. The effect on total operating expenses and pre-tax profit is not expected to be material. The effect at the date of adoption will depend on market interest rates, rates of return and the actual mix of scheme assets at that time.

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

Standards applicable in 2013

In May 2011, the IASB issued IFRS 10 'Consolidated Financial Statements' ('IFRS 10'), IFRS 11 'Joint Arrangements' ('IFRS 11') and IFRS 12 'Disclosure of Interests in Other Entities' ('IFRS 12'). The standards are effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IFRSs 10 and 11 are required to be applied retrospectively.

Under IFRS 10, there will be one approach for determining consolidation for all entities, based on the concept of power, variability of returns and their linkage. This will replace the current approach which emphasises legal control or exposure to risks and rewards, depending on the nature of the entity. IFRS 11 places more focus on the investors' rights and obligations than on the structure of the arrangement, and introduces the concept of a joint operation. IFRS 12 includes the disclosure requirements for subsidiaries, joint arrangements and associates and introduces new requirements for unconsolidated structured entities for which comparative information need not be provided for periods prior to initial application.

Based on our assessment to date, while the consolidation status of some entities may change because HSBC has control but not the majority of risks and rewards, or vice versa, we do not expect the overall impact of IFRS 10 and IFRS 11 on the financial statements to be material.

In May 2011, the IASB also issued IFRS 13 'Fair Value Measurement' ('IFRS 13'). This standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IFRS 13 is required to be applied prospectively from the beginning of the first annual period in which it is applied. The disclosure requirements of IFRS 13 do not require comparative information to be provided for periods prior to initial application.

IFRS 13 establishes a single source of guidance for all fair value measurements required or permitted by IFRSs. The standard clarifies the definition of fair value as an exit price, which is defined as a price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions, and enhances disclosures about fair value measurement.

HSBC is currently assessing IFRS 13 and it is not practicable to quantify the effect as at the date of the publication of these financial statements, which will depend on final interpretations of the standard, market conditions and HSBC's holdings of financial instruments at 1 January 2013. However, based on the analysis performed to date, the main effect of applying IFRS 13 is considered to be an adjustment to derivative liabilities for HSBC's own credit risk which is often referred to as 'debit valuation adjustment'. This adjustment would be made on a symmetrical basis to credit valuation adjustments applied in valuing derivative assets. The magnitude of this impact will depend on the credit valuation adjustment methodology at the point of initial application of IFRS 13. See Note 8 for further information on credit valuation adjustment methodologies.

In December 2011, the IASB issued amendments to IFRS 7 'Disclosures - Offsetting Financial Assets and Financial Liabilities' which requires the disclosures about the effect or potential effects of offsetting financial assets and financial liabilities and related arrangements on an entity's financial position. The amendments are effective for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods. The amendments are required to be applied retrospectively.

Standards applicable in 2014

In December 2011, the IASB issued amendments to IAS 32 'Offsetting Financial Assets and Financial Liabilities' which clarified the requirements for offsetting financial instruments and addressed inconsistencies in current practice when applying the offsetting criteria in IAS 32 'Financial Instruments: Presentation'. The amendments are effective for annual periods beginning on or after 1 January 2014 with early adoption permitted and are required to be applied retrospectively.

HSBC is currently assessing the impact of these clarifications but it is not practicable to quantify the effect as at the date of the publication of these financial statements.

Standards applicable in 2015

In November 2009, the IASB issued IFRS 9 'Financial Instruments' ('IFRS 9') which introduced new requirements for the classification and measurement of financial assets. In October 2010, the IASB issued an amendment to IFRS 9 incorporating requirements for financial liabilities. Together, these changes represent the first phase in the IASB's planned replacement of IAS 39 'Financial Instruments: Recognition and Measurement' ('IAS 39') with a less complex and improved standard for financial instruments.

Following the IASB's decision in December 2011 to defer the effective date, the standard is effective for annual periods beginning on or after 1 January 2015 with early adoption permitted. IFRS 9 is required to be applied retrospectively but prior periods need not be restated.

The second and third phases in the IASB's project to replace IAS 39 will address the impairment of financial assets measured at amortised cost and hedge accounting.

The IASB re-opened the requirements for classification and measurement in IFRS 9 in 2012 to address practice and other issues, with an exposure draft of revised proposals expected in the second half of 2012. Therefore, HSBC remains unable to provide a date by which it will apply IFRS 9 and it remains impracticable to quantify the effect of IFRS 9 as at the date of the publication of these financial statements.

(f) Changes in composition of the Group

Except as discussed in Note 14 there were no material changes in the composition of the Group.

2 Accounting policies

The accounting policies adopted by HSBC for these interim consolidated financial statements are consistent with those described on pages 294 to 312 of the Annual Report and Accounts 2011. The methods of computation applied by HSBC for these interim consolidated financial statements are consistent with those applied for the Annual Report and Accounts 2011.

3 Dividends

The Directors declared after the end of the period a second interim dividend in respect of the financial year ending 31 December 2012 of US$0.09 per ordinary share, a distribution of approximately US$1,643m which will be payable on 4 October 2012. No liability is recorded in the financial statements in respect of this dividend.

Dividends to shareholders of the parent company

	Half-year to
	30 June 2012			30 June 2011			31 December 2011
	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 .....................	0.14	2,535	259	0.12	2,119	1,130	-	-	-
In respect of current year:
- first interim dividend ........................	0.09	1,633	748	0.09	1,601	204	-	-	-
- second interim dividend ....................	-	-	-	-	-	-	0.09	1,603	178
- third interim dividend .......................	-	-	-	-	-	-	0.09	1,605	720

	0.23	4,168	1,007	0.21	3,720	1,334	0.18	3,208	898

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 equity¹
January coupon ....................................	0.508	44		0.508	44		-	-
March coupon .....................................	0.500	76		0.500	76		-	-
April coupon .......................................	0.508	45		0.508	45		-	-
June coupon .........................................	0.500	76		0.500	76		-	-
July coupon .........................................	-	-		-	-		0.508	45
September coupon ...............................	-	-		-	-		0.500	76
October coupon ...................................	-	-		-	-		0.508	45
December coupon ................................	-	-		-	-		0.500	76

	2.016	241		2.016	241		2.016	242

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

On 16 July 2012, HSBC paid a further coupon on the capital securities of US$0.508 per security, a distribution of US$45m. No liability is recorded in the financial statements in respect of this coupon payment.

4 Earnings per share

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

Profit attributable to ordinary shareholders of the parent company

	Half-year to
	30 June	30 June	31 December
	2012	2011	2011
	US$m	US$m	US$m

Profit attributable to shareholders of the parent company ............................	8,438	9,215	7,582
Dividend payable on preference shares classified as equity ............................	(45)	(45)	(45)
Coupon payable on capital securities classified as equity ...............................	(241)	(241)	(242)

Profit attributable to ordinary shareholders of the parent company ..............	8,152	8,929	7,295

Basic and diluted earnings per share

	Half-year to 30 June 2012			Half-year to 30 June 2011			Half-year to 31 December 2011
	Profit US$m	Number of shares (millions)	Amount per share US$	Profit US$m	Number of shares (millions)	Amount per share US$	Profit US$m	Number of shares (millions)	Amount per share US$

Basic¹ ........................	8,152	17,983	0.45	8,929	17,631	0.51	7,295	17,768	0.41
Effect of dilutive potential ordinary shares .....................		158			266			179


Diluted² .....................	8,152	18,141	0.45	8,929	17,897	0.50	7,295	17,947	0.41

1 Weighted average number of ordinary shares outstanding.

2 Weighted average number of ordinary shares outstanding assuming dilution.

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 2012	30 June 2011	2005	31 December 2011
	US$m	US$m		US$m
Defined benefit pension plans
Current service cost ..................................................................................	276	279		271
Interest cost .............................................................................................	792	859		830
Expected return on plan assets ..................................................................	(858)	(911)		(895)
Past service cost .......................................................................................	3	(579)		37
Gains on curtailments ...............................................................................	-	-		(59)
Gains on settlements .................................................................................	-	-		(4)

	213	(352)		180
Defined benefit healthcare plans ...................................................................	20	31		1

Total (income)/expense ...............................................................................	233	(321)		181

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. 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.

Retirement benefit liabilities for the Group have increased from US$3.7bn at 31 December 2011 to US$4.0bn at 30 June 2012. Retirement benefit assets for the Group were US$2.5bn at 30 June 2012, unchanged from the amount at 31 December 2011. Retirement benefit assets are reported as part of other assets in the consolidated balance sheet and are primarily in respect of a surplus in the HSBC Bank (UK) Pension Scheme funded defined benefit plan ('the principal plan'). At 30 June 2012 the principal plan was in surplus by US$2.2bn as a result of the special contribution made in 2010 and the changes in fair value of the derivative swaps entered into with HSBC Bank plc noted below.

In the first half of 2012, there was a reduction in the average yields of high quality (AA rated or equivalent) debt instruments in the UK, together with a decrease in inflation expectations. The change in these and other actuarial assumptions resulted in a US$489m decrease in the defined benefit obligation for the principal plan. This decrease was recognised directly in equity as an actuarial gain.

This gain has been offset by actuarial losses in the US and Hong Kong schemes due to decreasing discount rates noted in the table below. The fall in the Hong Kong discount rate is mainly due to a fall in yields on longer-dated government bonds, which are referenced due to the lack of a deep corporate bond market in Hong Kong.

In the US, the fall in the discount rate used is a result of the fall in the yields of long-term, high grade corporate bonds.

The discount rates used to calculate the Group's obligations to the largest defined benefit pension plans were as follows:

Discount rates

	At 30 June 2012	At 30 June 2011	2005	At 31 December 2011
	%	%		%

UK ...............................................................................................................	4.70	5.60		4.80
Hong Kong ...................................................................................................	0.96	2.28		1.47
US ................................................................................................................	4.05	5.35		4.60

The inflation rate used to calculate the principal plan obligation at 30 June 2012 was 3.0% (30 June 2011: 3.8%; 31 December 2011: 3.2%). Other than described above, there were no material changes to other assumptions.

The actual return on plan assets of the principal plan was approximately US$572m below the expected return. This difference was recognised directly in equity as an actuarial loss.

Actuarial gains and losses

	Half-year to
	30 June 2012	30 June 2011	2005	31 December 2011
	US$m	US$m		US$m
Defined benefit pension plans
Experience gains/(losses) on plan liabilities ...............................................	37	(36)		(425)
Experience gains/(losses) on plan assets ....................................................	(495)	166		3,460
Losses from changes in actuarial assumptions ...........................................	(136)	(139)		(1,723)
Other movements¹ ...................................................................................	(3)	(16)		41

	(597)	(25)		1,353

Defined benefit healthcare plans ...................................................................	(22)	7		(68)

Total net actuarial gains/(losses) ...................................................................	(619)	(18)		1,285

1 Other movements include changes in the effect of the limit on plan surpluses.

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, including the cumulative effect of the limit on plan surpluses recognised in equity at 30 June 2012, were US$4,002m (30 June 2011: US$4,738m cumulative losses; 31 December 2011: US$3,453m cumulative losses). Of this the cumulative effect of the limit on plan surpluses was US$20m (30 June 2011: US$65m; 31 December 2011: US$18m).

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

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

Additional future funding payments to the principal plan

	US$m¹	£m

2016 .......................................................................................................................................	776	495
2017 .......................................................................................................................................	988	630
2018 .......................................................................................................................................	988	630

1 The payment schedule was agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the exchange rate effective as at 30 June 2012.

The triennial valuation applicable to the HSBC Bank (UK) Pension Scheme as at 31 December 2011 is currently being performed and is due to be completed no later than 31 March 2013.

As disclosed in 'Related party transactions' on page 411 in the Annual Report and Accounts 2011, the principal plan entered into collateralised swap transactions with HSBC to manage the inflation and interest rate sensitivity of the Scheme's pension obligations. At 30 June 2012, the swaps had a positive fair value of US$4,896m to the Scheme (30 June 2011: US$2,457m positive to the Scheme; 31 December 2011: US$5,560m positive to the Scheme). All swaps were executed at prevailing market rates and within standard market bid-offer spreads.

6 Tax

	Half-year to
	30 June	30 June	31 December
	2012	2011	2011
	US$m	US$m	US$m
Current tax
UK corporation tax charge .......................................................................	100	230	590
Overseas tax¹ ............................................................................................	3,549	1,694	2,561

	3,649	1,924	3,151
Deferred tax
Origination and reversal of temporary differences ....................................	(20)	(212)	(935)

Tax expense .................................................................................................	3,629	1,712	2,216

Effective tax rate .........................................................................................	28.5%	14.9%	21.3%

1 Overseas tax included Hong Kong profits tax of US$476m (first half of 2011: US$453m; second half of 2011: US$544m). Subsidiaries in Hong Kong provided for Hong Kong profits tax at the rate of 16.5% (2011: 16.5%) 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.

Tax reconciliation

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

	Half-year to
	30 June 2012		30 June 2011		31 December 2011
	US$m	%	US$m	%	US$m	%

Profit before tax .....................................................	12,737		11,474		10,398

Taxation at 24.5% (2011: 26.5%) ..........................	3,122	24.5	3,041	26.5	2,755	26.5
Effect of differently taxed overseas profits .............	265	2.1	(275)	(2.4)	(217)	(2.1)
Adjustments in respect of prior period liabilities .....	479	3.7	522	4.6	(27)	(0.3)
Deferred tax temporary differences not recognised/ (previously not recognised) .................................	2	-	(1,008)	(8.8)	85	0.8
Effect of profit in associates and joint ventures ......	(459)	(3.6)	(412)	(3.6)	(453)	(4.4)
Non-taxable income and gains ...............................	(280)	(2.2)	(184)	(1.6)	(359)	(3.4)
Permanent disallowables .........................................	405	3.2	95	0.8	372	3.6
Change in tax rates .................................................	(18)	(0.1)	2	-	(5)	-
Local taxes and overseas withholding tax ................	205	1.6	117	1.0	150	1.4
Other items (including low income housing tax credits) ................................................................	(92)	(0.7)	(186)	(1.6)	(85)	(0.8)

Total tax charged to the income statement ............	3,629	28.5	1,712	14.9	2,216	21.3

The effective tax rate for the first half of 2012 was 28.5% compared with 14.9% for the first half of 2011. The higher effective tax rate in the first half of 2012 reflects the impact of higher taxed profits arising on the disposal of the US branch network and cards business combined with the non-deductible provision in respect of certain US regulatory matters. The lower effective tax rate in the first half of 2011 included the benefit of deferred tax of US$0.9bn eligible to be recognised in respect of foreign tax credits in the US.

The UK Government announced that the main rate of corporation tax for the year beginning 1 April 2012 will reduce from 26% to 24% to be followed by further 1% reductions per annum to 22% for the year beginning 1 April 2014. The reduction in the corporate tax rate to 24% was substantively enacted in the first half of 2012 and this results in a weighted average of 24.5% for 2012 (2011: 26.5%). The reduction to 23% was enacted through the 2012 Finance Act in July and the reduction to 22% is expected to be enacted through the 2013 Finance Act. It is not expected that the future rate reductions will have a significant effect on the net UK deferred tax liability at 30 June 2012 of US$327m.

For the period ended 30 June 2012, HSBC's share of associates' tax on profit was US$476m (30 June 2011: US$418m; 31 December 2011: US$472m), which is included within share of profit in associates and joint ventures in the income statement.

The Group's legal entities are subject to routine review and audit by tax authorities in the territories in which the Group operates. The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of open issues. A substantial proportion of the material open issues relate to the UK of which the principal matter concerns the application of the UK Controlled Foreign Company ('CFC') rules. Following further discussion with Her Majesty's Revenue and Customs, the CFC and certain other open UK issues have now been resolved.

Deferred taxation

United States

Of the total net deferred tax assets of US$6.1bn at 30 June 2012 (30 June 2011: US$6.8bn; 31 December 2011: US$6.2bn) the net deferred tax asset relating to HSBC's operations in the US is US$5.0bn (30 June 2011: US$5.1bn; 31 December 2011: US$5.2bn). The deferred tax assets included in this total reflect the carry forward of tax losses and tax credits (US$0.2bn; 30 June 2011: US$1.0bn; 31 December 2011: US$1.2bn), deductible temporary differences in respect of loan impairment allowances (US$2.5bn; 30 June 2011: US$2.8bn; 31 December 2011: US$2.7bn) and other temporary differences (US$2.3bn; 30 June 2011: US$1.3bn; 31 December 2011: US$1.3bn).

Deductions for loan impairments for US tax purposes generally occur when the impaired loan is charged off, often in the period subsequent to that in which the impairment is recognised for accounting purposes. As a result, the amount of the associated deferred tax asset should generally move in line with the impairment allowance balance.

The taxable gains on the disposal of the US branch network and cards business has resulted in a reduction in the amount of deferred tax assets related to carried forward tax losses and tax credits. This was offset in part by the reversal of deferred tax liabilities as a result of these disposals.

On the evidence available, including historical levels of profitability, management projections of future income and HSBC Holdings' commitment to continue to invest sufficient capital in North America to recover the deferred tax asset, it is expected there will be sufficient taxable income generated by the business to realise these assets. Management projections of profits from the US operations are prepared for a 10 year period and include assumptions about future house prices and US economic conditions, including unemployment levels.

Management projections of profits from the US operations currently indicate that the existing carry forward tax losses and tax credits will be fully recovered by 2015. The current level of the deferred tax asset in respect of loan impairment allowances is projected to reduce over the 10-year period in line with the reduction of the consumer lending portfolio.

As there has been a recent history of losses in HSBC's US operations, management's analysis of the recognition of these deferred tax assets significantly discounts any future expected profits from the US operations and relies to a greater extent on capital support from HSBC Holdings, including tax planning strategies implemented in relation to such support. The principal strategy involves generating future taxable profits through the retention of capital in the US in excess of normal regulatory requirements in order to reduce deductible funding expenses or otherwise deploy such capital to increase levels of taxable income.

Brazil

The net deferred tax asset relating to HSBC's operations in Brazil is US$0.7bn at 30 June 2012 (30 June 2011: US$0.8bn; 31 December 2011: US$0.7bn). The deferred tax assets included in this total arise primarily in relation to deductible temporary differences in respect of loan impairment allowances. Deductions for loan impairments for Brazilian tax purposes generally occur in periods subsequent to those in which they are recognised for accounting purposes and, as a result, the amount of the associated deferred tax assets will move in line with the impairment allowance balance.

Loan impairment deductions are recognised for tax purposes typically within 24 months of accounting recognition. On the evidence available, including historical levels of profitability, management projections of income and the state of the Brazilian economy, it is anticipated there will be sufficient taxable income generated by the business to realise these assets when deductible for tax purposes. There are no material carried forward tax losses or tax credits recognised within the Group's deferred tax assets in Brazil.

Mexico

The net deferred tax asset relating to HSBC's operations in Mexico is US$0.5bn at 30 June 2012 (30 June 2011: US$0.6bn; 31 December 2011: US$0.5bn). The deferred tax assets included in this total relate primarily to deductible temporary differences in respect of accounting provisions for impaired loans, including losses realised on sales of impaired loans. The annual deduction for loan impairments is capped under Mexican legislation at 2.5% of the average qualifying loan portfolio. The balance is carried forward to future years without expiry but with annual deduction subject to the 2.5% cap.

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

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

7 Trading assets

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m
Trading assets:
-. not subject to repledge or resale by counterparties ................................	296,042	338,455	235,916
-. which may be repledged or resold by counterparties ..............................	95,329	136,495	94,535

	391,371	474,950	330,451

Treasury and other eligible bills ....................................................................	30,098	23,899	34,309
Debt securities ..............................................................................................	131,563	208,805	130,487
Equity securities ...........................................................................................	30,019	36,718	21,002

Trading securities valued at fair value ...........................................................	191,680	269,422	185,798
Loans and advances to banks ........................................................................	94,830	100,134	75,525
Loans and advances to customers .................................................................	104,861	105,394	69,128

	391,371	474,950	330,451

Trading securities valued at fair value¹

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

US Treasury and US Government agencies² ..................................................	21,369	23,849	15,686
UK Government ...........................................................................................	11,043	30,535	12,917
Hong Kong Government ..............................................................................	6,684	7,228	8,844
Other government ........................................................................................	87,798	110,691	90,816
Asset-backed securities³ ................................................................................	2,805	3,742	2,913
Corporate debt and other securities ...............................................................	31,962	56,659	33,620
Equity securities ...........................................................................................	30,019	36,718	21,002

	191,680	269,422	185,798

1 Included within these figures are debt securities issued by banks and other financial institutions of US$22,285m (30 June 2011: US$40,033m; 31 December 2011: US$24,956m), of which US$3,981m (30 June 2011: US$8,311m; 31 December 2011: US$5,269m) are guaranteed by various governments.

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

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

Trading securities listed on a recognised exchange and unlisted

	Treasury and other eligible bills	Debt securities	Equity securities	Total
	US$m	US$m	US$m	US$m
Fair value at 30 June 2012
Listed on a recognised exchange¹ .......................................	1,055	75,928	29,295	106,278
Unlisted² ............................................................................	29,043	55,635	724	85,402

	30,098	131,563	30,019	191,680

Fair value at 30 June 2011
Listed on a recognised exchange¹ .......................................	205	149,912	35,944	186,061
Unlisted² ............................................................................	23,694	58,893	774	83,361

	23,899	208,805	36,718	269,422

Fair value at 31 December 2011
Listed on a recognised exchange¹ .........................................	789	78,760	19,994	99,543
Unlisted² .............................................................................	33,520	51,727	1,008	86,255

	34,309	130,487	21,002	185,798

1 Included within listed securities are US$2,648m (30 June 2011: US$3,080m; 31 December 2011: US$2,836m) of investments listed in Hong Kong.

2 Unlisted treasury and other eligible bills primarily comprise treasury bills not listed on a recognised exchange but for which there is a liquid market.

Loans and advances to banks held for trading

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Reverse repos ...............................................................................................	54,590	60,833	45,490
Settlement accounts .....................................................................................	14,067	19,465	7,555
Stock borrowing ...........................................................................................	5,191	7,374	5,531
Other ...........................................................................................................	20,982	12,462	16,949

	94,830	100,134	75,525

Loans and advances to customers held for trading

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Reverse repos ...............................................................................................	49,743	50,540	34,358
Settlement accounts .....................................................................................	18,480	28,274	5,804
Stock borrowing ...........................................................................................	11,318	12,452	3,928
Other ...........................................................................................................	25,320	14,128	25,038

	104,861	105,394	69,128

8 Fair values of financial instruments carried at fair value

The accounting policies which determine the classification of financial instruments and the use of assumptions and estimation in valuing them are described on pages 294 to 312 and page 40, respectively, of the Annual Report and Accounts 2011.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.

The following table sets out the financial instruments carried at fair value.

Financial instruments carried at fair value and bases of valuation

		Valuation techniques
	Quoted market price Level 1	Using observable inputs Level 2	With significant unobservable inputs Level 3	Total
	US$m	US$m	US$m	US$m
At 30 June 2012
Assets
Trading assets .................................................................	212,386	174,428	4,557	391,371
Financial assets designated at fair value ...........................	24,844	6,814	652	32,310
Derivatives .....................................................................	1,530	350,142	4,262	355,934
Financial investments: available for sale .........................	229,863	132,894	8,494	371,251

Liabilities
Trading liabilities ............................................................	136,437	164,455	7,672	308,564
Financial liabilities designated at fair value ......................	30,257	57,336	-	87,593
Derivatives .....................................................................	1,724	351,058	3,170	355,952

At 30 June 2011
Assets
Trading assets .................................................................	303,025	165,224	6,701	474,950
Financial assets designated at fair value ...........................	24,805	14,118	642	39,565
Derivatives .....................................................................	1,337	255,511	3,824	260,672
Financial investments: available for sale .........................	225,469	162,711	8,592	396,772

Liabilities
Trading liabilities ............................................................	165,552	207,126	13,146	385,824
Financial liabilities designated at fair value ......................	27,570	70,110	600	98,280
Derivatives .....................................................................	1,521	252,154	3,350	257,025

Financial instruments carried at fair value and bases of valuation (continued)

		Valuation techniques
	Quoted market price Level 1	Using observable inputs Level 2	With significant unobservable inputs Level 3	Total
	US$m	US$m	US$m	US$m
At 31 December 2011
Assets
Trading assets .................................................................	180,043	145,628	4,780	330,451
Financial assets designated at fair value ...........................	22,496	7,644	716	30,856
Derivatives .....................................................................	1,262	340,668	4,449	346,379
Financial investments: available for sale .........................	217,788	151,936	9,121	378,845

Liabilities
Trading liabilities ............................................................	98,208	159,157	7,827	265,192
Financial liabilities designated at fair value ......................	27,461	57,696	567	85,724
Derivatives .....................................................................	1,991	340,260	3,129	345,380

The increase in Level 1 trading assets and liabilities reflects an increase in equity securities and settlement account balances, the latter varying considerably in proportion with the level of trading activity. The increase in Level 2 assets reflects higher reverse repo balances used to cover short positions and an increase in repo balances contributed to the growth in Level 2 liabilities.

There were no material transfers between Level 1 and Level 2 in the period. An analysis of the movements of Level 3 financial instruments is provided on page 234.

Control framework

Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function independent of the risk-taker. To this end, ultimate responsibility for the determination of fair values lies with Finance, which reports functionally to the Group Finance Director. Finance establishes the accounting policies and procedures governing valuation, and is responsible for ensuring compliance with all relevant accounting standards.

Further details of the control framework are included on pages 346 to 347 of the Annual Report and Accounts 2011.

Determination of fair value

Fair values are determined according to the following hierarchy:

· Level 1 - quoted market price: financial instruments with quoted prices for identical instruments in active markets.

· Level 2 - valuation technique using observable inputs:financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

· Level 3 - valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable.

The best evidence of fair value is a quoted price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. Further details on fair values determined using valuation techniques are included on pages 347 to 348 of the Annual Report and Accounts 2011.

For swaps with collateralised counterparties and in significant currencies, HSBC applies a discounting curve that reflects the overnight interest rate ('OIS discounting').

Fair value adjustments

Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a market participant that are not incorporated within the valuation model. The magnitude of fair value adjustments depends upon many entity-specific factors, and therefore fair value adjustments may not be comparable across the banking industry.

HSBC classifies fair value adjustments as either 'risk-related' or 'model-related'. The majority of these adjustments relate to Global Banking and Markets.

Movements in the level of fair value adjustments do not necessarily result in the recognition of profits or losses within the income statement. For example, as models are enhanced, fair value adjustments may no longer be required. Similarly, fair value adjustments will decrease when the related positions are unwound, but this may not result in profit or loss.

Global Banking and Markets fair value adjustments

	At	At	At
	30 June	30 June	31 December
	2012	2011	2011
	US$m	US$m	US$m
Type of adjustment
Risk-related ..................................................................................................	1,777	1,934	1,899
Bid-offer ...................................................................................................	646	623	695
Uncertainty ..............................................................................................	151	110	154
Credit valuation adjustment ......................................................................	980	1,192	1,050
Other ........................................................................................................	-	9	-

Model-related ...............................................................................................	282	351	567
Model limitation .......................................................................................	286	344	567
Other ........................................................................................................	(4)	7	-

Inception profit (Day 1 P&L reserves) (Note 12) ........................................	184	279	200

	2,243	2,564	2,666

Fair value adjustments declined by US$423m during the period. The most significant movement was a reduction of US$281m in respect of model limitation adjustments driven by a reduction in the adjustment for OIS due to the narrowing of the OIS-LIBOR basis.

Detailed descriptions of risk-related and model-related adjustments are provided on pages 348 to 350 of the Annual Report and Accounts 2011.

Credit valuation adjustment methodology

HSBC calculates a separate credit valuation adjustment for each HSBC legal entity, and within each entity for each counterparty to which the entity has exposure. The calculation of the monoline credit valuation adjustment and sensitivity to different methodologies that could be applied is described on page 159. Of the total credit valuation adjustment at 30 June 2012 of US$980m (30 June 2011: US$1,192m; 31 December 2011: US$1,050m), US$646m (30 June 2011: US$735m; 31 December 2011: US$746m) relates to the credit valuation adjustment taken against non-monoline counterparties. The methodology for calculating the credit valuation adjustment for non‑monoline counterparties is described below.

HSBC calculates the credit valuation adjustment by applying the probability of default ('PD') of the counterparty to the expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. The calculation is performed over the life of the potential exposure.

The PD is based on HSBC's internal credit rating for the counterparty, taking into account how credit ratings may deteriorate over the duration of the exposure based on historical rating transition matrices. For most products, to calculate the expected positive exposure to a counterparty HSBC uses a simulation methodology to incorporate the range of potential exposures across the portfolio of transactions with the counterparty over the life of an instrument. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral agreements with the counterparty. A standard loss given default ('LGD') assumption of 60% is generally adopted. In respect of own credit risk, HSBC considers that a zero spread is appropriate and consequently does not adjust derivative liabilities for HSBC's own credit risk; such an adjustment is often referred to as a 'debit valuation adjustment'.

For certain types of exotic derivatives where the products are not currently supported by the simulation, or for derivative exposures in smaller trading locations where the simulation tool is not yet available, HSBC adopts alternative methodologies. These may involve mapping to the results for similar products from the simulation tool or, where the mapping approach is not appropriate, using a simplified methodology which generally follows the same principles as the simulation methodology. The calculation is applied at a trade level, with more limited recognition of credit mitigants such as netting or collateral agreements than is used in the simulation methodology.

The methodologies do not, in general, account for 'wrong-way risk'. Wrong-way risk arises when the underlying value of the derivative prior to any credit valuation adjustment is positively correlated to the probability of default by the counterparty. When there is significant wrong-way risk, a trade-specific approach is applied to reflect the wrong-way risk within the valuation.

HSBC includes all third-party counterparties in the credit valuation adjustment calculation and does not net credit valuation adjustments across HSBC Group entities. During the period, HSBC made no material changes to the methodologies used to calculate the credit valuation adjustment for non-monoline counterparties.

Consideration of other methodologies for calculation of credit valuation adjustments

HSBC's credit valuation adjustment methodology, in the opinion of management, appropriately quantifies its exposure to counterparty risk on its OTC derivative portfolio and appropriately reflects the risk management strategy of the business.

HSBC recognises that a variety of credit valuation adjustment methodologies are adopted within the banking industry and it reviews on a regular basis the appropriateness of its credit valuation methodology in light of the Group's risk management strategy as well as industry practice.

Some of the key attributes that may differ between these methodologies are:

· the PD may be calculated from historical market data or implied from current market levels for certain transaction types such as credit default swaps, either with or without an adjusting factor;

· some entities adopt a non-zero 'debit valuation adjustment', which has the effect of reducing the overall adjustment;

· differing loss assumptions in setting the level of LGD, which may utilise market recovery rates or levels set by regulators for capital calculation purposes; and

· counterparty exclusions, whereby certain counterparty types (for example collateralised counterparties) are excluded from the calculation.

The effect of adopting two alternative methodologies on the level of HSBC's credit and debit valuation adjustments (excluding the monoline credit valuation adjustment) was estimated as follows:

· adapting the Group's existing methodology to utilise PDs implied from credit default swaps, with no adjustment factor applied, and also including an adjustment to take into account HSBC's own PD implied from credit default swaps, would result in an overall adverse adjustment of US$0.7bn (30 June 2011: US$0.4bn; 31 December 2011: US$1.4bn);

· the reduction in estimated impact reflects model refinement and reduction in exposure to certain counterparties; and

· adapting HSBC's existing debit valuation adjustment methodology to include its own PD on a basis symmetric with the current calculation of credit valuation adjustment would result in a favourable reduction of the credit risk charge of US$0.1bn (30 June 2011: US$0.1bn; 31 December 2011: US$0.1bn).

Fair value valuation bases

Financial instruments measured at fair value using a valuation technique with significant unobservable inputs - Level 3

	Assets					Liabilities
	Available for sale	Held for trading	Designated at fair value through profit or loss		Derivatives	Held for trading	Designated at fair value through profit or loss		Derivatives
	US$m	US$m		US$m	US$m	US$m		US$m	US$m
At 30 June 2012
Private equity including strategic investments ....................	4,367	88		433	-	-		-	-
Asset-backed securities ........	2,362	966		-	-	-		-	-
Leveraged finance ...............	-	-		-	-	-		-	-
Loans held for securitisation ............................................	-	618		-	-	-		-	-
Structured notes ..................	-	17		-	-	7,208		-	-
Derivatives with monolines	-	-		-	799	-		-	-
Other derivatives ................	-	-		-	3,463	-		-	3,170
Other portfolios .................	1,765	2,868		219	-	464		-	-

	8,494	4,557		652	4,262	7,672		-	3,170

At 30 June 2011
Private equity including strategic investments ......	3,915	88		178	-	-		-	-
Asset-backed securities ........	1,711	1,093		-	-	-		-	-
Leveraged finance ...............	-	-		-	-	-		-	10
Loans held for securitisation ........................................	-	806		-	-	-		-	-
Structured notes ..................	-	74		-	-	12,453		-	-
Derivatives with monolines	-	-		-	930	-		-	-
Other derivatives ................	-	-		-	2,894	-		-	3,340
Other portfolios .................	2,966	4,640		464	-	693		600	-

	8,592	6,701		642	3,824	13,146		600	3,350

At 31 December 2011
Private equity including strategic investments ......	4,565	88		432	-	-		-	-
Asset-backed securities ........	2,584	710		-	-	-		-	-
Loans held for securitisation ............................................	-	682		-	-	-		-	7
Structured notes ..................	-	92		-	-	7,340		-	-
Derivatives with monolines	-	-		-	940	-		-	-
Other derivatives ................	-	-		-	3,509	-		-	3,122
Other portfolios .................	1,972	3,208		284	-	487		567	-

	9,121	4,780		716	4,449	7,827		567	3,129

The basis for determining the fair value of the financial instruments in the table above is explained on pages 351 to 352 of the Annual Report and Accounts 2011.

Movement in Level 3 financial instruments

	Assets					Liabilities
	Available for sale	Held for trading	Designated at fair value through profit or loss		Derivatives	Held for trading	Designated at fair value through profit or loss		Derivatives
	US$m	US$m		US$m	US$m	US$m		US$m	US$m

At 1 January 2012 ..................	9,121	4,780		716	4,449	7,827		567	3,129
Total gains/(losses) recognised in profit or loss ...................	(146)	73		5	(225)	158		2	(36)
Total gains/(losses) recognised in other comprehensive income¹ ..............................	177	23		1	32	33		-	26
Purchases ................................	503	291		64	-	(202)		-	-
New issuances .........................	-	-		-	-	1,658		-	-
Sales .......................................	(282)	(663)		(33)	-	-		-	-
Settlements .............................	(163)	(95)		(1)	36	(1,011)		-	78
Transfers out ..........................	(1,542)	(47)		(150)	(73)	(889)		(569)	(69)
Transfers in ............................	826	195		50	43	98		-	42

At 30 June 2012 ...................	8,494	4,557		652	4,262	7,672		-	3,170

Total gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2012 ......................	10	(137)		4	(29)	63		-	127

At 1 January 2011 ..................	8,237	5,689		587	3,961	11,393		570	3,806
Total gains/(losses) recognised in profit or loss ...................	187	(112)		12	(43)	71		12	298
Total gains/(losses) recognised in other comprehensive income¹ ..............................	182	68		(4)	47	199		18	92
Purchases ................................	1,277	908		132	-	(89)		-	-
New issuances .........................	-	-		-	-	3,401		-	-
Sales .......................................	(417)	(323)		(16)	-	-		-	-
Settlements .............................	(815)	(104)		(4)	(145)	(1,561)		-	(736)
Transfers out ..........................	(885)	(273)		(75)	(139)	(565)		-	(362)
Transfers in ............................	826	848		10	143	297		-	252
	-	-		-	-	-		-	-
At 30 June 2011 .....................	8,592	6,701		642	3,824	13,146		600	3,350

Total gains/(losses) recognised in profit or loss relating to assets and liabilities held at 30 June 2011 ......................	54	(146)		12	131	103		12	382

At 1 July 2011 ........................	8,592	6,701		642	3,824	13,146		600	3,350
Total gains/(losses) recognised in profit or loss ...................	35	(218)		(1)	810	(35)		(4)	330
Total gains/(losses) recognised in other comprehensive income¹ ..............................	(361)	(80)		(11)	(63)	(188)		(29)	(92)
Purchases ................................	581	575		110	-	(1,754)		-	-
New issuances .........................	-	-		-	-	1,168		-	-
Sales .......................................	(339)	(2,255)		(53)	-	-		-	-
Settlements .............................	(273)	(95)		(3)	112	33		-	(347)
Transfers out ..........................	(1,006)	(296)		(98)	(271)	(4,701)		-	(246)
Transfers in ............................	1,892	448		130	37	158		-	134

At 31 December 2011 ............	9,121	4,780		716	4,449	7,827		567	3,129

Total gains/(losses) recognised in profit or loss relating to assets and liabilities held at 31 December 2011 ..............	95	(218)		1	810	(60)		(2)	331

1 Included in 'Available-for-sale investments: Fair value gains/(losses)' and 'Exchange differences' in the consolidated statement of comprehensive income.

Transfers out of Level 3 in respect of available-for-sale securities reflects increased confidence in the pricing of certain ABS assets. In respect of trading liabilities, new issuances of trading liabilities reflects structured note issuances, and settlements of trading liabilities reflected structured note redemptions during the period. Transfers out of Level 3 principally reflect equity volatilities and correlations becoming observable as the residual maturity of the liabilities declines.

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data. The following table shows the sensitivity of these fair values to reasonably possible alternative assumptions:

Sensitivity of fair values to reasonably possible alternative assumptions

	Reflected in profit or loss		Reflected in other comprehensive income
	Favourable changes	Unfavourable changes	Favourable changes	Unfavourable changes
	US$m	US$m	US$m	US$m
At 30 June 2012
Derivatives, trading assets and trading liabilities¹ ................	366	(335)	-	-
Financial assets and liabilities designated at fair value .........	70	(70)	-	-
Financial investments: available for sale .............................	-	-	782	(784)

	436	(405)	782	(784)

At 30 June 2011
Derivatives, trading assets and trading liabilities¹ ................	414	(310)	-	-
Financial assets and liabilities designated at fair value ..........	72	(64)	-	-
Financial investments: available for sale .............................	-	-	673	(711)

	486	(374)	673	(711)

At 31 December 2011
Derivatives, trading assets and trading liabilities¹ ................	369	(436)	-	-
Financial assets and liabilities designated at fair value ..........	72	(72)	-	-
Financial investments: available for sale .............................	-	-	814	(818)

	441	(508)	814	(818)

1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial instruments are risk-managed.

The decrease in the effect of unfavourable changes in significant unobservable inputs in relation to derivatives, trading assets and trading liabilities during the period primarily reflects an increase in the credit valuation adjustment taken against monoline exposures.

Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type

	Reflected in profit or loss		Reflected in other comprehensive income
	Favourable changes	Unfavourable changes	Favourable changes	Unfavourable changes
	US$m	US$m	US$m	US$m
At 30 June 2012
Private equity investments .................................................	69	(69)	448	(448)
Asset-backed securities .......................................................	57	(52)	192	(180)
Loans held for securitisation ..............................................	9	(9)	-	-
Structured notes .................................................................	5	(5)	-	-
Derivatives with monolines ................................................	71	(52)	-	-
Other derivatives ...............................................................	171	(162)	-	-
Other portfolios .................................................................	54	(56)	142	(156)

	436	(405)	782	(784)

At 30 June 2011
Private equity investments .................................................	103	(57)	368	(368)
Asset-backed securities .......................................................	3	(3)	130	(124)
Loans held for securitisation ..............................................	5	(5)	-	-
Structured notes .................................................................	16	(16)	-	-
Derivatives with monolines ................................................	117	-	-	-
Other derivatives ...............................................................	126	(169)	-	-
Other portfolios .................................................................	116	(124)	175	(219)

	486	(374)	673	(711)

At 31 December 2011
Private equity investments .................................................	123	(83)	451	(451)
Asset-backed securities .......................................................	3	(3)	183	(175)
Loans held for securitisation ..............................................	4	(4)	-	-
Structured notes .................................................................	6	(6)	-	-
Derivatives with monolines ................................................	76	(178)	-	-
Other derivatives ...............................................................	145	(154)	-	-
Other portfolios .................................................................	84	(80)	180	(192)

	441	(508)	814	(818)

Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable parameters using statistical techniques. When parameters are not amenable to statistical analysis, the quantification of uncertainty is judgemental.

When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the most favourable or the most unfavourable change from varying the assumptions individually.

In respect of private equity investments, in many of the methodologies the principal assumption is the valuation multiple to be applied to the main financial indicators. This may be determined with reference to multiples for comparable listed companies and includes discounts for marketability.

For ABSs, the principal assumptions in the models are based on benchmark information about prepayment speeds, default rates, loss severities and the historical performance of the underlying assets.

For leveraged finance, loans held for securitisation and derivatives with monolines, the principal assumption concerns the appropriate value to be attributed to the counterparty credit risk. This requires an estimation of exposure at default, PD and recovery in the event of default. For loan transactions, assessment of exposure at default is straightforward. For derivative transactions, a future exposure profile is generated on the basis of current market data. Probabilities of default and recovery levels are estimated using available evidence, which may include financial information, historical experience, credit default swap spreads and consensus recovery levels.

For structured notes and other derivatives, principal assumptions concern the value to be attributed to the future volatility of asset values and the future correlation between asset values. These principal assumptions include credit volatilities and correlations used in the valuation of structured credit derivatives (including leveraged credit derivatives). For such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy method to derive a volatility or a correlation from comparable assets for which market data is more readily available, and/or an examination of historical levels.

9 Fair values of financial instruments not carried at fair value

Fair values of financial instruments which are not carried at fair value on the balance sheet

	At 30 June 2012		At 30 June 2011		At 31 December 2011
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$m	US$m
Assets
Loans and advances to banks .........................	182,191	182,266	226,043	226,150	180,987	181,302
Loans and advances to customers ...................	974,985	950,935	1,037,888	1,011,319	940,429	914,485
Financial investments:
- debt securities ..........................................	22,485	24,202	19,883	21,320	21,018	22,500
- treasury and other eligible bills ................	-	-	202	202	181	181

Liabilities
Deposits by banks ..........................................	123,553	123,576	125,479	125,492	112,822	112,848
Customer accounts .........................................	1,278,489	1,278,801	1,318,987	1,318,873	1,253,925	1,254,313
Debt securities in issue ...................................	125,543	125,664	149,803	149,947	131,013	130,914
Subordinated liabilities ....................................	29,696	29,357	32,753	32,931	30,606	29,351

Fair values of financial instruments held for sale which are not carried at fair value on the balance sheet

	At 30 June 2012		At 30 June 2011		At 31 December 2011
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$m	US$m
Assets classified as held for sale¹
Loans and advances to banks and customers ...................................................................	6,772	6,816	62	62	35,720	37,832

Liabilities of disposal groups held for sale
Deposits by banks ......................................	326	326	-	-	206	206
Customer accounts .....................................	9,668	9,433	-	-	20,138	19,130

1 Including financial instruments within disposal groups held for sale.

The following is a list of financial instruments whose carrying amount is a reasonable approximation of fair value because, for example, they are short-term in nature or reprice to current market rates frequently:

Assets

Cash and balances at central banks

Items in the course of collection from other banks

Hong Kong Government certificates of indebtedness

Endorsements and acceptances

Short-term receivables within 'Other assets'

Accrued income

Liabilities

Hong Kong currency notes in circulation

Items in the course of transmission to other banks

Investment contracts with discretionary participation features within 'Liabilities under insurance contracts'

Endorsements and acceptances

Short-term payables within 'Other liabilities'

Accruals

Analysis of loans and advances to customers by geographical segment

	At 30 June 2012		At 30 June 2011		At 31 December 2011
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$m	US$m
Loans and advances to customers
Europe ...........................................................	445,445	436,921	486,331	478,660	434,336	426,039
Hong Kong ....................................................	165,204	163,139	159,370	157,859	157,665	154,054
Rest of Asia-Pacific .......................................	129,489	129,175	121,429	121,069	123,868	123,662
Middle East and North Africa ........................	27,896	27,889	25,694	25,781	25,875	25,758
North America ..............................................	153,991	141,094	179,262	162,704	142,747	128,608
Latin America ...............................................	52,960	52,717	65,802	65,246	55,938	56,364

	974,985	950,935	1,037,888	1,011,319	940,429	914,485

Valuation

The calculation of fair value incorporates HSBC's estimate of the amount at which financial assets could be exchanged, or financial liabilities settled, between knowledgeable, willing parties in an arm's length transaction. It does not reflect the economic benefits and costs that HSBC expects to flow from the instruments' cash flows over their expected future lives. Other reporting entities may use different valuation methodologies and assumptions in determining fair values for which no observable market prices are available, so comparisons of fair values between entities may not be meaningful and users are advised to exercise caution when using this data.

The secondary market demand for US consumer lending assets has been heavily influenced by the challenging economic conditions during the past few years, including house price depreciation, elevated unemployment, and the lack of financing options available to support the purchase of assets. The estimated fair value of these loans was determined by developing an approximate range of values from various sources as appropriate for the respective pools of assets. These sources include, internal value estimates based on over-the-counter trading activity, forward looking discounted cash flow models using assumptions we believe are consistent with those which would be used by market participants in valuing such loans, trading input from market participants and general discussions held with potential investors. The fair values of loans and advances to customers in the US are substantially lower than their carrying amount, reflecting the market conditions at the balance sheet date. The fair values reported do not reflect HSBC's estimate of the underlying long-term value of the assets.

The basis for estimating the fair values of loans and advances to banks and customers, financial investments, deposits by banks, customer accounts, debt securities in issue and subordinated liabilities is explained on pages 358 to 359 of the Annual Report and Accounts 2011.

10 Reclassification of financial assets

During the second half of 2008, HSBC reclassified US$15.3bn and US$2.6bn of financial assets from the held-for-trading category to the loans and receivables and available-for-sale classifications, respectively, as permitted by the relevant amendment to IAS 39. The accounting policy for reclassifications is set out on page 296 of the Annual Report and Accounts 2011. No further reclassifications were undertaken by HSBC.

Reclassification of HSBC's financial assets

	At 30 June 2012		At 30 June 2011		At 31 December 2011
	Carrying amount	Fair value	Carrying amount	Fair value	Carrying amount	Fair value
	US$m	US$m	US$m	US$m	US$	US$m

Reclassified to loans and receivables .........	7,253	6,166	8,560	7,544	7,867	6,651
Reclassified to available for sale ...................	25	25	64	62	33	33

	7,278	6,191	8,624	7,606	7,900	6,684

The following table shows the fair value gains and losses, income and expense recognised in the income statement in respect of reclassified assets and the gains and losses that would have been recognised if no reclassification had taken place.

Effect of reclassifying and not reclassifying financial assets

	Half-year to
	30 June	30 June	31 December
	2012	2011	2011
	US$m	US$m	US$m
Reclassification to loans and receivables
Recorded in the income statement¹ ............................................................	69	225	93
Assuming no reclassification² .....................................................................	202	548	(231)

Net income statement effect of reclassification ............................................	(133)	(323)	324

Reclassification to available for sale
Recorded in the income statement¹ ............................................................	1	8	(7)
Assuming no reclassification² .....................................................................	(3)	(10)	8

Net income statement effect of reclassification ............................................	4	18	(15)

1 'Income and expense' recorded in the income statement represents the accrual of the effective interest rate and, for the first half of 2012, includes US$81m in respect of impairment (first half of 2011: impairment of US$15m; second half of 2011: impairment US$54m).

2 Effect on the income statement during the period had the reclassification not occurred.

11 Financial assets designated at fair value

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Financial assets designated at fair value:
- not subject to repledge or resale by counterparties .................................	32,298	39,526	30,738
- which may be repledged or resold by counterparties ...............................	12	39	118

	32,310	39,565	30,856

Treasury and other eligible bills ....................................................................	91	207	123
Debt securities ..............................................................................................	14,238	18,496	11,834
Equity securities ...........................................................................................	17,775	19,588	17,930

Securities designated at fair value ..................................................................	32,104	38,291	29,887
Loans and advances to banks ........................................................................	127	355	119
Loans and advances to customers .................................................................	79	919	850

	32,310	39,565	30,856

Securities designated at fair value¹

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

US Treasury and US Government agencies² ..................................................	32	87	35
UK Government ...........................................................................................	654	739	812
Hong Kong Government ..............................................................................	145	152	151
Other government ........................................................................................	5,148	4,762	3,964
Asset-backed securities³ ................................................................................	172	6,164	201
Corporate debt and other securities ...............................................................	8,178	6,799	6,794
Equity securities ...........................................................................................	17,775	19,588	17,930

	32,104	38,291	29,887

1 Included within these figures are debt securities issued by banks and other financial institutions of US$3,311m (30 June 2011: US$9,746m; 31 December 2011: US$3,497m), of which none (30 June 2011: US$46m; 31 December 2011: US$40m) are guaranteed by various governments.

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

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

Securities listed on a recognised exchange and unlisted

	Treasury and other eligible bills	Debt securities	Equity securities	Total
	US$m	US$m	US$m	US$m
Fair value at 30 June 2012
Listed on a recognised exchange¹ .......................................	17	4,440	11,606	16,063
Unlisted .............................................................................	74	9,798	6,169	16,041

	91	14,238	17,775	32,104

Fair value at 30 June 2011
Listed on a recognised exchange¹ .......................................	6	3,605	13,521	17,132
Unlisted .............................................................................	201	14,891	6,067	21,159

	207	18,496	19,588	38,291

Fair value at 31 December 2011
Listed on a recognised exchange¹ .......................................	4	3,607	11,859	15,470
Unlisted .............................................................................	119	8,227	6,071	14,417

	123	11,834	17,930	29,887

1 Included within listed securities are US$831m (30 June 2011: US$668m; 31 December 2011: US$631m) of investments listed in Hong Kong.

12 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 2012
Foreign exchange .........................	68,314	915	69,229	71,393	391	71,784
Interest rate .................................	561,439	2,465	563,904	551,245	6,511	557,756
Equities ........................................	17,550	-	17,550	20,629	-	20,629
Credit ...........................................	20,193	-	20,193	20,847	-	20,847
Commodity and other ..................	1,732	-	1,732	1,610	-	1,610

Gross total fair values ...................	669,228	3,380	672,608	665,724	6,902	672,626

Netting .........................................			(316,674)			(316,674)

			355,934			355,952

At 30 June 2011
Foreign exchange .........................	71,280	1,550	72,830	71,621	175	71,796
Interest rate .................................	283,315	2,236	285,551	277,545	3,577	281,122
Equities ........................................	15,348	-	15,348	17,416	-	17,416
Credit ...........................................	19,284	-	19,284	18,613	-	18,613
Commodity and other ..................	1,084	-	1,084	1,503	-	1,503

Gross total fair values ...................	390,311	3,786	394,097	386,698	3,752	390,450

Netting .........................................			(133,425)			(133,425)

			260,672			257,025

At 31 December 2011
Foreign exchange .........................	74,958	1,026	75,984	75,077	371	75,448
Interest rate .................................	510,652	2,439	513,091	502,906	6,221	509,127
Equities ........................................	15,262	-	15,262	19,363	-	19,363
Credit ...........................................	25,694	-	25,694	25,800	-	25,800
Commodity and other ..................	2,198	-	2,198	1,492	-	1,492

Gross total fair values ...................	628,764	3,465	632,229	624,638	6,592	631,230

Netting .........................................			(285,850)			(285,850)

			346,379			345,380

Derivative assets increased during the first half of 2012, driven by an increase in the fair value of interest rate derivatives as yield curves in major currencies continued to decline. This resulted in the increase in gross fair values and the increase in the netting adjustment.

A description of HSBC's determination of the fair values of financial instruments, including derivatives, is provided on pages 347 to 348 of the Annual Report and Accounts 2011.

Trading derivatives

The notional contract amounts of derivatives held for trading purposes indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. The 2% rise in the notional amounts of HSBC's derivative contracts during the first half of 2012 was primarily driven by an increase in trading volumes in the period.

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

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Foreign exchange .........................................................................................	4,630,298	4,440,515	3,945,774
Interest rate .................................................................................................	19,427,340	21,305,123	19,788,710
Equities ........................................................................................................	471,380	400,877	265,577
Credit ...........................................................................................................	985,945	1,091,052	1,049,147
Commodity and other ..................................................................................	96,975	97,825	76,487

	25,611,938	27,335,392	25,125,695

Credit derivatives

The notional contract amount of credit derivatives of US$986bn (30 June 2011: US$1,091bn; 31 December 2011: US$1,049bn) consisted of protection bought of US$481bn (30 June 2011: US$539bn; 31 December 2011: US$518bn) and protection sold of US$505bn (30 June 2011: US$552bn; 31 December 2011: US$531bn).

HSBC manages the credit risk arising on buying and selling credit derivative protection by including the related credit exposures within its overall credit limit structure for the relevant counterparty. The trading of credit derivatives is restricted to a small number of offices within the major centres which have the control infrastructure and market skills to manage effectively the credit risk inherent in the products. The credit derivative business operates within the market risk management framework described on page 168.

Derivatives valued using models with unobservable inputs

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

Unamortised balance of derivatives valued using models with significant unobservable inputs

	Half-year to
	30 June 2012	30 June 2011	31 December 2011
	US$m	US$m	US$m

Unamortised balance at beginning of period ..................................................	200	250	279
Deferral on new transactions ........................................................................	71	161	73
Recognised in the income statement during the period:
- amortisation .........................................................................................	(61)	(74)	(69)
- subsequent to unobservable inputs becoming observable .........................	-	(38)	(33)
- maturity or termination, or offsetting derivative ..................................	(20)	(25)	(35)
Exchange differences ....................................................................................	1	9	(11)
Risk hedged ..................................................................................................	(7)	(4)	(4)

Unamortised balance at end of period¹ ..........................................................	184	279	200

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 2012		At 30 June 2011		At 31 December 2011
	Cash flow hedges	Fair value hedges	Cash flow hedges	Fair value hedges	Cash flow hedges	Fair value hedges
	US$m	US$m	US$m	US$m	US$m	US$m

Foreign exchange ........................................	15,219	102	11,476	1,403	12,078	1,363
Interest rate ................................................	210,362	69,605	340,773	74,434	228,052	76,950

	225,581	69,707	352,249	75,837	240,130	78,313

Fair value hedges

Fair value of derivatives designated as fair value hedges

	At 30 June 2012		At 30 June 2011		At 31 December 2011
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	US$m	US$m	US$m	US$m	US$m	US$m

Foreign exchange ........................................	-	15	236	-	77	1
Interest rate ................................................	332	4,525	427	2,351	369	4,331

	332	4,540	663	2,351	446	4,332

Gains/(losses) arising from fair value hedges

	Half-year to
	30 June 2012	30 June 2011	31 December 2011
	US$m	US$m	US$m
Gains/(losses):
- on hedging instruments .........................................................................	(706)	(794)	(3,288)
- on the hedged items attributable to the hedged risk ...............................	674	722	3,136

	(32)	(72)	(152)

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 2012		At 30 June 2011		At 31 December 2011
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	US$m	US$m	US$m	US$m	US$m	US$m

Foreign exchange ........................................	764	376	1,314	175	949	370
Interest rate ................................................	2,133	1,986	1,809	1,226	2,070	1,890

	2,897	2,362	3,123	1,401	3,019	2,260

The gains and losses on ineffective portions of derivatives designated as cash flow hedges are recognised immediately in 'Net trading income'. During the period to 30 June 2012, a gain of US$3m was recognised due to hedge ineffectiveness (first half of 2011: gain of US$2m; second half of 2011: gain of US$24m).

Hedges of net investments in foreign operations

The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with currency borrowings.

At 30 June 2012, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of US$151m (30 June 2011: nil; 31 December 2011: US$121m) and liabilities of US$7m (30 June 2011: US$30m; 31 December 2011: US$36m), and notional contract values of US$2,637m (30 June 2011: US$1,251m; 31 December 2011: US$3,920m).

Ineffectiveness recognised in 'Net trading income' during the period to 30 June 2012 was nil (both halves of 2011: nil).

13 Financial investments

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m
Financial investments:
-. not subject to repledge or resale by counterparties ................................	369,879	385,126	364,906
-. which may be repledged or resold by counterparties ..............................	23,857	31,731	35,138

	393,736	416,857	400,044

Carrying amounts and fair values of financial investments

	At 30 June 2012		At 30 June 2011		At 31 December 2011
	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 ...................	71,552	71,552	61,664	61,664	65,223	65,223
-. available for sale ..................................	71,552	71,552	61,462	61,462	65,042	65,042
-. held to maturity ...................................	-	-	202	202	181	181

Debt securities .............................................	315,498	317,215	346,986	348,423	327,611	329,093
-. available for sale ..................................	293,013	293,013	327,103	327,103	306,593	306,593
-. held to maturity ...................................	22,485	24,202	19,883	21,320	21,018	22,500

Equity securities
-. available for sale ..................................	6,686	6,686	8,207	8,207	7,210	7,210

	393,736	395,453	416,857	418,294	400,044	401,526

Financial investments at amortised cost and fair value¹

	Amortised cost	Fair value
	US$m	US$m
At 30 June 2012
US Treasury ........................................................................................................................	49,944	51,271
US Government agencies² ...................................................................................................	22,264	23,283
US Government sponsored entities² ....................................................................................	4,581	5,262
UK Government .................................................................................................................	19,860	20,335
Hong Kong Government .....................................................................................................	36,993	37,018
Other government ..............................................................................................................	133,375	135,540
Asset-backed securities³ ......................................................................................................	32,628	27,387
Corporate debt and other securities .....................................................................................	86,456	88,671
Equities ...............................................................................................................................	4,806	6,686

	390,907	395,453

At 30 June 2011
US Treasury ........................................................................................................................	37,584	37,697
US Government agencies² ...................................................................................................	21,910	22,500
US Government sponsored entities² ....................................................................................	4,669	4,958
UK Government .................................................................................................................	30,034	30,787
Hong Kong Government .....................................................................................................	31,700	31,734
Other government ..............................................................................................................	125,452	126,088
Asset-backed securities³ ......................................................................................................	37,835	32,292
Corporate debt and other securities .....................................................................................	122,521	124,031
Equities ...............................................................................................................................	5,849	8,207

	417,554	418,294

Financial investments at amortised cost and fair value³ (continued)

	Amortised cost	Fair value
	US$m	US$m
At 31 December 2011
US Treasury .......................................................................................................................	43,848	45,283
US Government agencies² ...................................................................................................	25,079	26,093
US Government sponsored entities² ....................................................................................	4,425	5,056
UK Government .................................................................................................................	32,165	33,603
Hong Kong Government ....................................................................................................	33,359	33,374
Other government ..............................................................................................................	125,623	127,049
Asset-backed securities³ ......................................................................................................	35,096	28,625
Corporate debt and other securities .....................................................................................	94,110	95,233
Equities ..............................................................................................................................	5,122	7,210

	398,827	401,526

1 Included within these figures are debt securities issued by banks and other financial institutions with a carrying amount of US$60,043m (30 June 2011: US$98,472m; 31 December 2011: US$68,334m), of which US$11,680m (30 June 2011: US$37,929m; 31 December 2011: US$17,079m) are guaranteed by various governments. The fair value of the debt securities issued by banks and other financial institutions at 30 June 2012 was US$60,583m (30 June 2011: US$98,939m; 31 December 2011: US$68,765m).

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

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

Financial investments listed on a recognised exchange and unlisted

	Treasury and other eligible bills available for sale	Treasury and other eligible bills held to maturity	Debt securities available for sale	Debt securities held to maturity	Equity securities available for sale	Total
	US$m	US$m	US$m	US$m	US$m	US$m
Carrying amount at 30 June 2012
Listed on a recognised exchange¹ .................	1,938	-	113,083	4,975	509	120,505
Unlisted² .....................................................	69,614	-	179,930	17,510	6,177	273,231

	71,552	-	293,013	22,485	6,686	393,736

Carrying amount at 30 June 2011
Listed on a recognised exchange¹ .................	2,049	-	152,844	4,237	690	159,820
Unlisted² .....................................................	59,413	202	174,259	15,646	7,517	257,037

	61,462	202	327,103	19,883	8,207	416,857

Carrying amount at 31 December 2011
Listed on a recognised exchange¹ .................	4,077	-	121,303	4,370	535	130,285
Unlisted² .....................................................	60,965	181	185,290	16,648	6,675	269,759

	65,042	181	306,593	21,018	7,210	400,044

1 The fair value of listed held-to-maturity debt securities at 30 June 2012 was US$5,374m (30 June 2011: US$4,483m; 31 December 2011: US$4,641m). Included within listed investments were US$3,507m (30 June 2011: US$3,125m; 31 December 2011: US$3,544m) of investments listed in Hong Kong.

2 Unlisted treasury and other eligible bills available for sale primarily comprise treasury bills not listed on a recognised exchange but for which there is a liquid market.

Maturities of investments in debt securities at their carrying amounts

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m
Remaining contractual maturities of total debt securities:
1 year or less ............................................................................................	60,079	110,240	87,080
5 years or less but over 1 year ...................................................................	147,920	116,145	128,192
10 years or less but over 5 years ...............................................................	50,603	56,531	52,251
over 10 years ............................................................................................	56,896	64,070	60,088

	315,498	346,986	327,611

Remaining contractual maturities of debt securities available for sale:
1 year or less ............................................................................................	58,985	108,930	85,821
5 years or less but over 1 year ...................................................................	139,967	109,498	120,763
10 years or less but over 5 years ...............................................................	42,609	49,501	44,946
over 10 years ............................................................................................	51,452	59,174	55,063

	293,013	327,103	306,593

Remaining contractual maturities of debt securities held to maturity:
1 year or less ............................................................................................	1,094	1,310	1,259
5 years or less but over 1 year ...................................................................	7,953	6,647	7,429
10 years or less but over 5 years ...............................................................	7,994	7,030	7,305
over 10 years ............................................................................................	5,444	4,896	5,025

	22,485	19,883	21,018

14 Assets held for sale

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Disposal groups ............................................................................................	11,695	445	38,903
Non-current assets held for sale ....................................................................	688	1,154	655
- property, plant and equipment ..................................................................	519	1,055	589
- other .........................................................................................................	169	99	66

Total assets held for sale ..............................................................................	12,383	1,599	39,558

Disposal groups

The major classes of assets and associated liabilities of disposal groups held for sale were as follows:

	30 June 2012
	Central America businesses	South America businesses	US branches	US life insurance businesses	Other	Total
	US$m	US$m	US$m	US$m	US$m	US$m
Assets of disposal groups held for sale
Trading assets ..............................................	18	126	-	-	311	455
Loans and advances to banks .......................	611	273	-	-	235	1,119
Loans and advances to customers ................	2,534	2,027	528	-	407	5,496
Financial investments ..................................	441	297	-	1,702	280	2,720
Prepayments and accrued income ................	31	29	2	16	13	91
Goodwill and intangible assets ......................	220	35	2	62	15	334
Other assets of disposal groups ....................	507	458	19	204	292	1,480

Total assets .................................................	4,362	3,245	551	1,984	1,553	11,695

Liabilities of disposal groups held for sale
Deposits by banks ........................................	211	113	-	-	2	326
Customer accounts ......................................	2,832	2,007	3,633	-	1,196	9,668
Debt securities in issue .................................	162	463	-	-	3	628
Liabilities under insurance contracts.............	51	-	-	1,021	446	1,518
Other liabilities of disposal groups ...............	155	166	2	14	122	459

Total liabilities ............................................	3,411	2,749	3,635	1,035	1,769	12,599

Net unrealised losses recognised in 'other operating income' as a result of reclassification to held for sale .................	(34)	(92)	-	-	(11)	(137)

Expected date of completion .......................	Q4 2012	Q1 2013	Q3 2012	Q1 2013
Operating segment.......................................	Latin America	Latin America	North America	North America

At 30 June 2012, the following businesses represented the majority of disposal groups held for sale:

· Central America businesses, which include banking operations in Costa Rica, El Salvador and Honduras. These were also classified as held for sale at 31 December 2011.

· South America businesses, which include banking operations in Peru, Colombia and Paraguay.

· 57 of the 195 US branches that were held for sale at 31 December 2011. 138 branches were sold on 18 May 2012, recognising a gain of US$661m. Subsequent to 30 June 2012, 53 branches were sold in July 2012 with a gain of approximately US$200m and the remaining four branches are expected to be sold in August 2012 with no significant effect on the financial statements.

· US life insurance businesses.

The sale of the US Card and Retail Services business that was held for sale at 31 December 2011 was completed on 1 May 2012 with a gain on disposal of US$3.1bn.

Property, plant and equipment

Property, plant and equipment classified as held for sale principally 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. The majority arose within the geographical segment, North America.

15 Trading liabilities

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Deposits by banks .........................................................................................	65,894	54,651	47,506
Customer accounts .......................................................................................	149,556	166,974	123,344
Other debt securities in issue .........................................................................	30,808	37,746	29,987
Other liabilities - net short positions in securities .........................................	62,306	126,453	64,355

	308,564	385,824	265,192

Deposits by banks held for trading

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Repos ...........................................................................................................	23,088	17,718	16,687
Settlement accounts .....................................................................................	17,086	16,067	7,221
Stock lending ................................................................................................	4,029	5,652	2,821
Other ...........................................................................................................	21,691	15,214	20,777

	65,894	54,651	47,506

Customer accounts held for trading

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Repos ...........................................................................................................	89,540	102,065	70,151
Settlement accounts .....................................................................................	18,076	23,970	6,909
Stock lending ................................................................................................	1,984	2,827	1,774
Other ...........................................................................................................	39,956	38,112	44,510

	149,556	166,974	123,344

At 30 June 2012, the cumulative amount of change in fair value attributable to changes in credit risk was a gain of US$270m (30 June 2011: gain of US$202m; 31 December 2011: gain of US$599m).

16 Financial liabilities designated at fair value

	At 30 June 2012	At 30 June 2011	At 31 December 2011
	US$m	US$m	US$m

Deposits by banks and customer accounts .....................................................	500	6,515	517
Liabilities to customers under investment contracts ......................................	11,736	12,191	11,399
Debt securities in issue ..................................................................................	53,459	55,885	52,197
Subordinated liabilities ..................................................................................	17,700	18,920	17,503
Preferred securities .......................................................................................	4,198	4,769	4,108

	87,593	98,280	85,724

The carrying amount at 30 June 2012 of financial liabilities designated at fair value was US$3,190m more than the contractual amount at maturity (30 June 2011: US$2,144m more; 31 December 2011: US$1,377m more). At 30 June 2012, the cumulative amount of the change in fair value attributable to changes in credit risk was a gain of US$2,959m (30 June 2011: gain of US$1,114m; 31 December 2011: gain of US$5,118m).

17 Provisions

	Restruc- turing costs	Contingent liabilities and contractual commitments	Legal proceedings and regulatory matters	Customer remediation	Other provisions	Total
	US$m	US$m	US$m	US$m	US$m	US$m

At 1 January 2012 ........................	169	206	1,473	1,067	409	3,324
Additional provisions/increase in provisions .............................	276	62	972	1,439	94	2,843
Provisions utilised ........................	(155)	(1)	(105)	(476)	(97)	(834)
Amounts reversed .........................	(50)	(34)	(47)	(1)	(29)	(161)
Unwinding of discounts .................	-	-	20	-	1	21
Exchange differences and other movements ...............................	36	154	(127)	(71)	74	66

At 30 June 2012 .........................	276	387	2,186	1,958	452	5,259

At 1 January 2011 ........................	21	405	969	442	301	2,138
Additional provisions/increase in provisions .............................	54	-	303	659	43	1,059
Provisions utilised ........................	(37)	(12)	(36)	(76)	(46)	(207)
Amounts reversed .........................	(8)	(27)	(11)	(81)	(26)	(153)
Unwinding of discounts .................	-	-	28	-	3	31
Exchange differences and other movements ...............................	4	60	(26)	91	30	159

At 30 June 2011 ...........................	34	426	1,227	1,035	305	3,027

At 1 July 2011 .............................	34	426	1,227	1,035	305	3,027
Additional provisions/increase in provisions .............................	167	14	593	419	141	1,334
Provisions utilised ........................	(21)	7	(331)	(310)	(25)	(680)
Amounts reversed .........................	(6)	(14)	(17)	(6)	(60)	(103)
Unwinding of discounts .................	-	1	28	-	2	31
Exchange differences and other movements ...............................	(5)	(228)	(27)	(71)	46	(285)

At 31 December 2011 ..................	169	206	1,473	1,067	409	3,324

Further details of legal proceedings and regulatory matters are set out in Note 25. Legal proceedings include civil court, arbitration or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC. Additional provisions recognised at 30 June 2012 include a provision of US$700m, which reflects HSBC's best estimate of the aggregate amount of fines and penalties that are likely to be imposed in connection with US anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control investigations. There is a high degree of uncertainty in making this estimate, and it is possible that the amounts when finally determined could be higher, possibly significantly higher.

Customer remediation refers to activities carried out by HSBC to compensate customers for losses or damages associated with a failure to comply with regulations or to treat customers fairly. Customer remediation is initiated by HSBC in response to customer complaints and/or industry developments in sales practices, and not necessarily initiated by regulatory action.

Payment Protection Insurance

An increase in provisions of US$1,005m was recognised during the half-year ended 30 June 2012 in respect of the estimated liability for redress in respect of the possible mis-selling of payment protection insurance ('PPI') policies in previous years. Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amount to US$1,721m of which US$751m has been paid. Provisions amounted to US$1,060m at 30 June 2012 (30 June 2011: US$509m; 31 December 2011: US$506m).

The main assumptions are the number of customer complaints expected to be received, and for how long a period; the number of non-complainant customers who will have to be contacted if systemic issues are identified following root cause analysis; the response rate from customers who are contacted proactively; and the expected uphold rate for complaints and the amount of redress payable in upheld cases. The main assumptions are likely to evolve over time as root cause analysis is completed and more experience is available regarding actual complaint volumes received.

In addition to these factors and assumptions, the extent of the required redress will also depend on the facts and circumstances of each individual customer's case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress for this matter.

During the first half of 2012, we increased the estimate of the total number of policies to be ultimately redressed, as the level of complaints received was higher in volume and for a longer period than previously assumed. This change in assumptions contributed approximately US$0.8bn to the increased provision for the period.

Interest rate derivatives

A provision of US$237m was recognised relating to the estimated liability for redress in respect of the possible mis-selling of interest rate derivatives in the UK.

Following an FSA review of the sale of interest rate derivatives, HSBC agreed with the FSA to pay redress to customers where mis-selling of more complex derivatives has occurred. HSBC will contact customers who have been sold certain interest rate derivatives, explaining the scope of the contact exercise, and either advising that their product sale will be automatically reviewed, or seeking confirmation from the customer that they wish to have their derivative sale reviewed and requesting further details of the sale.

The extent to which HSBC is required to pay redress depends on the responses of contacted and other customers during the review period and the facts and circumstances of each individual case. For these reasons, there is currently a high degree of uncertainty as to the eventual costs of redress related to this programme.

18 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 combine amounts due 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 2012
Assets
Financial assets designated at fair value .........................................................	4,503	27,807	32,310
Loans and advances to banks ........................................................................	168,861	13,330	182,191
Loans and advances to customers .................................................................	434,555	540,430	974,985
Financial investments ...................................................................................	131,374	262,362	393,736
Assets held for sale .......................................................................................	4,007	5,916	9,923
Other financial assets ...................................................................................	23,798	6,039	29,837

	767,098	855,884	1,622,982
Liabilities
Deposits by banks .........................................................................................	111,165	12,388	123,553
Customer accounts .......................................................................................	1,247,130	31,359	1,278,489
Financial liabilities designated at fair value ....................................................	8,968	78,625	87,593
Debt securities in issue ..................................................................................	71,079	54,464	125,543
Liabilities of disposal groups held for sale .....................................................	10,225	611	10,836
Other financial liabilities ..............................................................................	32,599	7,354	39,953
Subordinated liabilities ..................................................................................	712	28,984	29,696

	1,481,878	213,785	1,695,663

Maturity analysis of assets and liabilities (continued)

	Due within one year	Due after more than one year	Total
	US$m	US$m	US$m
At 30 June 2011
Assets
Financial assets designated at fair value .........................................................	3,064	36,501	39,565
Loans and advances to banks ........................................................................	216,034	10,009	226,043
Loans and advances to customers .................................................................	482,370	555,518	1,037,888
Financial investments ...................................................................................	172,407	244,450	416,857
Other financial assets ...................................................................................	24,822	5,692	30,514

	898,697	852,170	1,750,867
Liabilities
Deposits by banks .........................................................................................	118,505	6,974	125,479
Customer accounts .......................................................................................	1,272,152	46,835	1,318,987
Financial liabilities designated at fair value ....................................................	9,670	88,610	98,280
Debt securities in issue ..................................................................................	82,747	67,056	149,803
Other financial liabilities ..............................................................................	27,494	4,606	32,100
Subordinated liabilities ..................................................................................	575	32,178	32,753

	1,511,143	246,259	1,757,402

At 31 December 2011
Assets
Financial assets designated at fair value .........................................................	2,581	28,275	30,856
Loans and advances to banks ........................................................................	171,132	9,855	180,987
Loans and advances to customers .................................................................	409,935	530,494	940,429
Financial investments ...................................................................................	152,095	247,949	400,044
Assets held for sale .......................................................................................	20,936	15,919	36,855
Other financial assets ...................................................................................	22,878	5,557	28,435

	779,557	838,049	1,617,606
Liabilities
Deposits by banks .........................................................................................	101,371	11,451	112,822
Customer accounts .......................................................................................	1,214,190	39,735	1,253,925
Financial liabilities designated at fair value ....................................................	9,260	76,464	85,724
Debt securities in issue ..................................................................................	74,129	56,884	131,013
Liabilities of disposal groups held for sale .....................................................	20,063	1,033	21,096
Other financial liabilities ..............................................................................	25,177	6,304	31,481
Subordinated liabilities ..................................................................................	810	29,796	30,606

	1,445,000	221,667	1,666,667

19 Assets charged as security for liabilities and collateral accepted as security for assets

Financial assets pledged to secure liabilities

	Assets pledged at
	30 June	30 June	31 December
	2012	2011	2011
	US$m	US$m	US$m

Treasury bills and other eligible securities .....................................................	4,454	7,078	5,185
Loans and advances to banks ........................................................................	24,652	26,634	19,247
Loans and advances to customers .................................................................	86,419	77,039	81,570
Debt securities ..............................................................................................	195,290	261,808	210,255
Equity shares ................................................................................................	10,828	7,612	6,916
Other ...........................................................................................................	1,025	1,312	1,003

	322,668	381,483	324,176

% of total assets encumbered ........................................................................	12.2%	14.2%	12.7%

The financial assets above represent the Group's encumbered assets on an IFRSs basis. Of the financial assets pledged to secure liabilities, the most significant amounts are located in the following geographical regions:

This information is provided by RNS

The company news service from the London Stock Exchange

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