The HK & Shanghai Banking Cor

RNS Number : 8082H

HSBC Holdings PLC

01 March 2010

 



1 March 2010

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED

2009 CONSOLIDATED RESULTS - HIGHLIGHTS

·    Net operating income before loan impairment charges and other credit risk provisions down 4.8 per cent to HK$118,250 million (HK$124,264 million in 2008).

·    Pre-tax profit down 7.6 per cent to HK$62,563 million (HK$67,690 million in 2008).

·    Attributable profit down 8.9 per cent to HK$45,808 million (HK$50,306 million in 2008).

·    Return on average shareholders' equity of 21.2 per cent (24.3 per cent in 2008).

·    Assets up 1.9 per cent to HK$4,342 billion (HK$4,260 billion at the end of 2008).

·    Capital adequacy ratio of 16.1 per cent; core capital ratio of 12.2 per cent. (Capital adequacy ratio of 13.4 per cent; core capital ratio of 10.3 per cent at 31 December 2008).

·    Cost efficiency ratio of 44.1 per cent (42.1 per cent for 2008).

Within this document, the Hong Kong Special Administrative Region of the People's Republic of China has been referred to as 'Hong Kong'.

Results

Comment by Michael Geoghegan, Chairman

2009 was an extremely challenging year for the world economy. Asia was not immune from the effects of global recession, and it was a year of two distinct halves. Many economies were hit hard by falling trade and investment flows in the first part of the year. During the second half, conditions began to improve. Supported by effective stimulus and healthy employment levels, exports and domestic demand both saw a rebound.

Conditions for the banking sector also remained challenging. As a deposit-rich bank, we felt the considerable impact of low interest rates on our liability spreads. Demand for loans, trade finance and investment products was lower across Asia, but picked up again during the second half as economic conditions improved. Against continued uncertainty in the global banking landscape, Asia's banks continued to benefit from sound regulation. Many remained relatively healthy throughout the financial crisis and as a result competition from local and regional banks remains intense while several international banks are targeting emerging markets as a prime source of their recovery.

The Hongkong and Shanghai Banking Corporation Limited showed considerable resilience against these economic and competitive pressures. Our broad-based business model helped to limit the impact of the downturn and our pre-tax profit was HK$62,563 million, down 7.6 per cent on 2008. Excluding our Malaysian business, which was transferred into the group at the beginning of the year, pre-tax profit was down by 10.7 per cent.

We grew deposits, excluding our acquisitions in the year, by 9.9 per cent, showing the confidence savers have in our financial strength and brand. We limited lending growth during the early part of the year in line with our cautious approach to managing risk, but the second half provided opportunities for selective growth. We increased lending in mortgages and cards overall. We successfully expanded our presence as a leading bancassurer, with total insurance premiums increasing by 16.8 per cent. Global Banking and Markets continued to perform strongly. Customer numbers increased overall, positioning us well for future revenue growth.

We managed costs tightly and operating expenses fell compared with 2008. We continued to actively manage our risks, and loan impairment charges fell by 6.4 per cent across the region, underscoring the success of our approach. In India where loan impairment charges increased significantly, we took remedial action.

We continued to expand and integrate our operations across the region. In Vietnam, we became the first locally-incorporated bank, and in January this year we increased our shareholding in Bao Viet Holdings. In Taiwan, we made strong progress in integrating the operations of The Chinese Bank. In Indonesia, we completed our acquisition of Bank Ekonomi, which has nearly doubled our presence in the world's fifth most populous country to more than 200 branches in 27 cities. In India, we continued to integrate our retail brokerage unit IL&FS Investsmart, which we successfully rebranded as HSBC InvestDirect.

In mainland China, where we are the leading international bank, we expanded our network, reaching 98 HSBC-branded outlets in 22 cities by year-end. We were the first international bank to issue an offshore renminbi bond, and the first to settle cross-border renminbi trade transactions. Developing our relationships with strategic partners remains a principal pillar of our growth strategy and the market value of our strategic investments increased by US$11.3 billion in the year to US$25.4 billion. We expect to open our new mainland China headquarters in Shanghai during the first half of this year.

In Personal Financial Services, we reinforced our leading position in the Hong Kong mortgage and deposit markets. We grew customer numbers, particularly in HSBC Premier where they increased by 28.6 per cent. We continued to build our presence across the region, including in mainland China, and we expanded our product offering in wealth management to complement our strong positions in cards and loans. Pre-tax profit was 20.2 per cent lower, mainly because of deposit spread compression in the low interest rate environment. Loan impairments increased but the book remained healthy overall, with the exception of India and Indonesia where we experienced problems in the unsecured portfolios.

In Commercial Banking, we continued to focus on meeting the financial needs of SMEs and international business customers in the region, in line with our strategy. Customer confidence began to improve as the year progressed. Commercial Banking remained solidly profitable across the region despite the challenging economic conditions, and pre-tax profit was down 20.6 per cent overall. We increased our lending commitment to smaller businesses, growing our SME loan fund in Hong Kong to HK$20 billion and launching a new SME fund in Malaysia. We continued to see deposit inflows and gains in customer numbers across the region. Despite the impact of higher corporate failures in India credit quality remained stable overall, and loan impairment charges reduced by 4.9 per cent, led by improvements in Hong Kong.

Global Banking and Markets achieved another strong performance thanks to its clear strategy and well-balanced business model.  Pre-tax profits were down 3.7 per cent on the previous year. In Global Banking, performance was ahead of expectations across our main financing and investment banking activities. In Global Markets, our core businesses continued to perform strongly and we captured market opportunities, particularly in Rates and Credit. While we expect Balance Sheet Management revenues to reduce in 2010, our customer-focused business model means we are well positioned to maintain and build revenues in the region. We won a number of key industry awards including Asiamoney's Best Domestic Debt House, and we led the 2009 Asia Debt Capital Markets league tables for market share in local currency bonds and Asia-Pacific ex-Japan bonds.

Thanks to the strength of the HSBC brand and our effective bancassurance model, our insurance business performed strongly during 2009, gaining share across the region. In Hong Kong, more than one in three people hold life insurance or a pension with HSBC. In India, our joint venture with Canara and Oriental Bank of Commerce generated market-leading premium growth for a start-up. In South Korea, we became the leading bancassurer.

2009 brought to a close one of the most momentous decades of growth and change that we have experienced in our 145 years of doing business in Asia. During these ten years, our number of outlets almost doubled to nearly 1,000, our total assets rose from HK$1,638 billion to HK$4,342 billion, and our pre-tax profit more than doubled.

It is an exciting time to be in Asia. This is why I moved my principal office to Hong Kong in February this year, to manage the HSBC Group from the heart of the world's fastest-growing region. This move reflects our deep roots here, and also underscores our commitment to Asia's future.

On 1 February this year, I succeeded Vincent Cheng as Chairman of The Hongkong and Shanghai Banking Corporation Limited upon his retirement. In a career spanning 32 years, Vincent has made a huge and extremely valuable contribution to HSBC, including leading a significant expansion of our network in mainland China. I am delighted that we will continue to draw on Vincent's vast knowledge and experience as he continues to serve the Group as a Director on the Board of HSBC Holdings plc, and also as Chairman of HSBC Bank (China) Company Limited and HSBC Bank (Taiwan) Limited.

I would also like to congratulate Sandy Flockhart who, starting 1 February, is the Global Head of Personal and Commercial Banking. Sandy will also be in charge of the Group's operations and head office functions, as well as spearheading our continued expansion into Latin America and Africa. As CEO of The Hongkong and Shanghai Banking Corporation Limited for the past three years, Sandy has led the Group to new heights in Asia. He will continue this involvement through his new role as well as a Director of this Board and HSBC Holdings plc. Peter Wong will take up the role of Chief Executive after an excellent tenure as Executive Director Hong Kong and Greater China.

Looking ahead, Asia is playing an important role in leading the world out of recession, and will play an equally significant role in driving growth in the generation ahead. Within three years, the Asia-Pacific region is expected to overtake Europe and North America as home to the largest number of high net worth individuals in the world, with a combined wealth of US$13.5 trillion.  Meanwhile, the fast-growing corporate sector will demand access to broader and more sophisticated financial services and capital markets.

There are potential risks on the horizon, not least those of asset bubbles, higher inflation and the impact of withdrawing stimulus measures. The debate on regulatory change is also intensifying, but we are confident that we are well placed to meet the challenges, thanks to a number of core strengths. These include our prudent and transparent structure based largely upon separately capitalised local subsidiaries, our capital and liquidity strength, and our well-balanced and diversified business model.

Our unrivalled network and reach, our customer focus and our deep relationships across the region position us strongly and competitively for future growth in Asia. We will continue to grow organically in our target segments and markets, and we will review carefully the opportunities for acquisition and strategic partnerships that emerge.

Finally, I would like to say thank you to all of my colleagues. Throughout the 2009 roadshow and since returning to the region, I have been greatly impressed by your professionalism, your commitment and your vision of the future. I look forward to working with you all during 2010.

	Geographical Regions
								Intra-
				Hong		Rest of		segment
Figures in HK$m				Kong		Asia-Pacific		elimination			Total
		Year ended 31 December 2009
		Net interest income			30,935		27,484		13		58,432
		Net fee income			19,119		11,159		-		30,278
		Net trading income			8,427		12,112		(13	)	20,526
		Net income from financial instruments
		designated at fair value			6,391		868		-		7,259
		Gains less losses from financial investments			117		(248	)	-		(131	)
		Dividend income			245		119		-		364
		Net earned insurance premiums			28,566		2,829		-		31,395
		Other operating income			9,791		1,746		(4,279	)	7,258
		Total operating income			103,591		56,069		(4,279	)	155,381
		Net insurance claims incurred and movements in
		policyholders' liabilities			(34,070	)	(3,061	)	-		(37,131	)
		Net operating income before loan impairment
		charges and other credit risk provisions			69,521		53,008		(4,279	)	118,250
		Loan impairment charges and other credit
		risk provisions			(3,875	)	(7,360	)	-		(11,235	)
		Net operating income			65,646		45,648		(4,279	)	107,015
		Operating expenses			(28,918	)	(27,554	)	4,279		(52,193	)
		Operating profit			36,728		18,094		-		54,822
		Share of profit in associates and joint ventures			59		7,682		-		7,741
		Profit before tax			36,787		25,776		-		62,563
		Share of profit before tax			58.8	%	41.2	%	-		100	%
		Advances to customers			744,577		606,067		-		1,350,644
		Customer accounts			1,984,872		959,667		-		2,944,539

	Geographical Regions
								Intra-
				Hong		Rest of		segment
Figures in HK$m				Kong		Asia-Pacific		elimination			Total
		Year ended 31 December 2008
		Net interest income			42,679		26,374		(8	)	69,045
		Net fee income			18,458		12,309		-		30,767
		Net trading income			7,201		14,154		8		21,363
		Net loss from financial instruments
		designated at fair value			(9,607	)	(1,375	)	-		(10,982	)
		Gains less losses from financial investments			(2,848	)	(128	)	-		(2,976	)
		Dividend income			363		489		-		852
		Net earned insurance premiums			25,351		1,535		-		26,886
		Other operating income			6,525		1,222		(3,671	)	4,076
		Total operating income			88,122		54,580		(3,671	)	139,031
		Net insurance claims incurred and movements in
		policyholders' liabilities			(14,981	)	214		-		(14,767	)
		Net operating income before loan impairment
		charges and other credit risk provisions			73,141		54,794		(3,671	)	124,264
		Loan impairment charges and other credit
		risk provisions			(5,837	)	(6,163	)	-		(12,000	)
		Net operating income			67,304		48,631		(3,671	)	112,264
		Operating expenses			(28,811	)	(27,123	)	3,671		(52,263	)
		Operating profit			38,493		21,508		-		60,001
		Share of profit in associates and joint ventures			120		7,569		-		7,689
		Profit before tax			38,613		29,077		-		67,690
		Share of profit before tax			57.0	%	43.0	%	-		100	%
		Advances to customers			747,742		538,403		-		1,286,145
		Customer accounts			1,791,056		785,028		-		2,576,084

Results by Geographic Customer Group

	Hong Kong					Global
			Personal			Banking							Intra-
			Financial	Commercial		and			Private				segment
Figures in HK$m			Services	Banking		Markets			Banking		Other		elimination			Total
		Year ended 31 December 2009
		Net interest income/(expense)	20,039		7,274		8,912			-		(4,367	)	(923	)	30,935
		Net fee income	10,933		4,106		3,760			-		320		-		19,119
		Net trading income	1,091		718		6,226			-		(529	)	921		8,427
		Net income/(loss) from financial
		instruments designated at
		fair value	5,650		(359	)	1,072			-		26		2		6,391
		Gains less losses from
		financial investments	623		136		(661	)		-		19		-		117
		Dividend income	5		11		71			-		158		-		245
		Net earned insurance premiums	24,512		3,926		128			-		-		-		28,566
		Other operating income	2,680		498		439			-		8,042		(1,868	)	9,791
		Total operating income	65,533		16,310		19,947			-		3,669		(1,868	)	103,591
		Net insurance claims
		incurred and movement in
		policyholders' liabilities	(30,840	)	(3,142	)	(88	)		-		-		-		(34,070	)
		Net operating income before
		loan impairment charges and
		other credit risk provisions	34,693		13,168		19,859			-		3,669		(1,868	)	69,521
		Loan impairment charges and
		other credit risk provisions	(1,575	)	(1,301	)	(1,004	)		-		5		-		(3,875	)
		Net operating income	33,118		11,867		18,855			-		3,674		(1,868	)	65,646
		Operating expenses	(12,138	)	(4,469	)	(7,361	)		-		(6,818	)	1,868		(28,918	)
		Operating profit/(loss)	20,980		7,398		11,494			-		(3,144	)	-		36,728
		Share of profit in associates
		and joint ventures	40		10		11			-		(2	)	-		59
		Profit/(loss) before tax	21,020		7,408		11,505			-		(3,146	)	-		36,787
		Share of profit/(loss) before tax	33.6	%	11.8	%	18.4	%		-		(5.0)	%	-		58.8	%
		Advances to customers	340,177		218,808		170,527			-		15,065		-		744,577
		Customer accounts	1,290,680		481,904		206,657			-		5,631		-		1,984,872

	Hong Kong					Global
			Personal			Banking							Intra-
			Financial	Commercial		and			Private				segment
Figures in HK$m			Services	Banking		Markets			Banking		Other		elimination			Total
		Year ended 31 December 2008
		Net interest income/(expense)	26,326		11,664		11,853			2		(6,657	)	(509	)	42,679
		Net fee income	11,225		4,271		2,837			-		125		-		18,458
		Net trading income	1,193		620		4,868			-		87		433		7,201
		Net (loss)/income from financial
		instruments designated at
		fair value	(10,051	)	(79	)	300			-		147		76		(9,607	)
		Gains less losses from
		financial investments	1,220		250		(605	)		-		(3,713	)	-		(2,848	)
		Dividend income	27		17		169			-		150		-		363
		Net earned insurance premiums	23,719		1,456		159			-		17		-		25,351
		Other operating income	1,030		297		348			-		7,095		(2,245	)	6,525
		Total operating income	54,689		18,496		19,929			2		(2,749	)	(2,245	)	88,122
		Net insurance claims
		incurred and movement in
		policyholders' liabilities	(13,792	)	(1,070	)	(107	)		-		(12	)	-		(14,981	)
		Net operating income before
		loan impairment charges and
		other credit risk provisions	40,897		17,426		19,822			2		(2,761	)	(2,245	)	73,141
		Loan impairment charges and
		other credit risk provisions	(1,044	)	(2,605	)	(2,198	)		-		10		-		(5,837	)
		Net operating income	39,853		14,821		17,624			2		(2,751	)	(2,245	)	67,304
		Operating expenses	(13,131	)	(4,578	)	(7,062	)		-		(6,285	)	2,245		(28,811	)
		Operating profit/(loss)	26,722		10,243		10,562			2		(9,036	)	-		38,493
		Share of profit in associates
		and joint ventures	34		5		6			-		75		-		120
		Profit/(loss) before tax	26,756		10,248		10,568			2		(8,961	)	-		38,613
		Share of profit/(loss) before tax	39.5	%	15.1	%	15.6	%		-		(13.2)	%	-		57.0	%
		Advances to customers	321,220		235,065		177,543			-		13,914		-		747,742
		Customer accounts	1,123,789		425,237		239,212			-		2,818		-		1,791,056

 

	Rest of Asia-Pacific					Global
			Personal			Banking							Intra-
			Financial	Commercial		and			Private				segment
Figures in HK$m			Services	Banking		Markets			Banking		Other		elimination			Total
		Year ended 31 December 2009
		Net interest income/(expense)	11,568		6,248		10,213			121		171		(837	)	27,484
		Net fee income	4,296		2,569		4,388			51		(145	)	-		11,159
		Net trading income	613		1,040		9,412			98		112		837		12,112
		Net income/(loss) from
		financial instruments
		designated at fair value	851		8		(13	)		-		22				868
		Gains less losses from
		financial investments	41		18		(111	)		-		(196	)	-		(248	)
		Dividend income	1		-		1			-		117		-		119
		Net earned insurance premiums	2,613		216		-			-		-		-		2,829
		Other operating income	519		514		254			16		682		(239	)	1,746
		Total operating income	20,502		10,613		24,144			286		763		(239	)	56,069
		Net insurance claims
		incurred and movement in
		policyholders' liabilities	(2,947	)	(114	)	-			-		-		-		(3,061	)
		Net operating income before
		loan impairment charges and
		other credit risk provisions	17,555		10,499		24,144			286		763		(239	)	53,008
		Loan impairment charges and
		other credit risk provisions	(5,028	)	(2,150	)	(173	)		-		(9	)	-		(7,360	)
		Net operating income	12,527		8,349		23,971			286		754		(239	)	45,648
		Operating expenses	(14,260	)	(4,934	)	(7,334	)		(358	)	(907	)	239		(27,554	)
		Operating profit/(loss)	(1,733	)	3,415		16,637			(72	)	(153	)	-		18,094
		Share of profit in associates
		and joint ventures	1,106		4,393		2,181			-		2		-		7,682
		Profit/(loss) before tax	(627	)	7,808		18,818			(72	)	(151	)	-		25,776
		Share of profit/(loss) before tax	(1.0	)%	12.5	%	30.1	%		(0.1	)%	(0.3	)%	-		41.2	%
		Advances to customers	235,994		175,335		187,365			5,892		1,481		-		606,067
		Customer accounts	369,347		234,637		340,796			13,824		1,063		-		959,667

	Rest of Asia-Pacific					Global
			Personal			Banking							Intra-
			Financial	Commercial		and			Private				segment
Figures in HK$m			Services	Banking		Markets			Banking		Other		elimination			Total
		Year ended 31 December 2008
		Net interest income/(expense)	11,376		6,294		11,222			41		1,160		(3,719	)	26,374
		Net fee income	4,092		2,519		5,482			83		133		-		12,309
		Net trading income	377		783		9,499			165		(389	)	3,719		14,154
		Net (loss)/income from financial
		instruments designated at
		fair value	(1,343	)	2		(34	)		-		-		-		(1,375	)
		Gains less losses from
		financial investments	8		-		34			-		(170	)		-	(128	)
		Dividend income	-		-		4			-		485		-		489
		Net earned insurance premiums	1,342		193		-			-		-		-		1,535
		Other operating income	376		544		234			22		296		(250	)	1,222
		Total operating income	16,228		10,335		26,441			311		1,515		(250	)	54,580
		Net insurance claims
		incurred and movement in
		policyholders' liabilities	322		(108	)	-			-		-		-		214
		Net operating income before
		loan impairment charges and
		other credit risk provisions	16,550		10,227		26,441			311		1,515		(250	)	54,794
		Loan impairment charges and
		other credit risk provisions	(4,581	)	(1,025	)	(556	)		-		(1	)		-	(6,163	)
		Net operating income	11,969		9,202		25,885			311		1,514		(250	)	48,631
		Operating expenses	(14,111	)	(4,653	)	(7,175	)		(326	)	(1,108	)	250		(27,123	)
		Operating profit/(loss)	(2,142	)	4,549		18,710			(15	)	406		-		21,508
		Share of profit in associates
		and joint ventures	934		4,362		2,207			-		66		-		7,569
		Profit/(loss) before tax	(1,208	)	8,911		20,917			(15	)	472		-		29,077
		Share of profit/(loss) before tax	(1.8)	%	13.2	%	30.9	%		-		0.7	%	-		43.0	%
		Advances to customers	182,233		145,837		203,108			6,009		1,216		-		538,403
		Customer accounts	281,106		169,808		316,716			13,925		3,473		-		785,028

Hong Kong reported profit before tax of HK$36,787 million, a decrease of 4.7 per cent over 2008 primarily due to the fall in net interest income which was partly offset by increased trading income and lower loan impairment charges.

Net interest income decreased by HK$11,744 million, or 27.5 per cent, compared with 2008 as falling interest rates in the second half of 2008 impacted all business lines throughout 2009. In Personal Financial Services and Commercial Banking the relatively lower funding cost of the asset book and the increase in customer deposits of 14.4 per cent was more than offset by the year-on-year narrowing of interest rate spreads which impacted the overall margin.

In Personal Financial Services the mortgage book continued to perform strongly, with HSBC maintaining the number one position in Hong Kong for new business in 2009. The average loan-to-value ratio was 58.3 per cent in respect of new business. In Commercial Banking customer loans and advances fell by 6.9 per cent as market demand reduced and trade fell. However, there was an increase in trade volumes and lending activities in the second half of the year. Despite the challenging environment, HSBC continued to support local businesses. The group provided access to funds and launched a HK$4 billion SME fund in December 2008. This was increased a number of times during 2009 and now stands at HK$20 billion. The take-up of the fund was 100 per cent at 31 December, benefiting some 8,600 customers. HSBC also launched Green Financing, the first product in Hong Kong to specifically target the financing of capital investments which have a positive environmental impact, offering an interest rebate and principal repayment flexibility. 

Global Banking and Markets net interest income decreased as falling interest rates impacted the Payments and Cash Management business. This was partly offset by improved spread in the Credit and Lending businesses.

Net fee income increased by HK$661 million, or 3.6 per cent, over 2008 as the improvement in the equity markets in the second half of 2009 was reflected in increased demand for services and confidence in wealth management products strengthened. Income from retail brokerage was significantly higher than 2008 with increased IPO activity in the second half of 2009 reflecting improved sentiment and a market rally. In addition, income in the primary debt markets was very strong and HSBC was ranked number one in Asia's local currency markets and in total issuance in Asia-Pacific excluding Japan. A decline in trade-related fee income reflected lower volumes in response to the challenging global environment. However, there was a recovery in trade activity in the second half of the year.

Net trading income increased by HK$1,226 million, or 17.0 per cent compared to 2008 as a result of increased volatility and risk adversity in the first half of 2009. This led to better margins on market-making activities across all asset classes primarily Rates and Credit. In addition, the non-recurrence of the write-down of a monoline exposure in 2008 contributed to the year-on-year improvement. However, in 2009 there was a reduction in foreign exchange trading contribution compared to a record high in 2008 and a change in the fair value movement in own credit spread. 

Gains less losses from financial investments increased by HK$2,965 million mainly due to the non-recurrence of impairments against available-for-sale equity investments in 2008 following declines in market valuations. 

Income from insurance business (included within 'Net interest income', 'Net fee income', 'Net income from financial instruments designated at fair value', 'Net earned insurance premiums', the change in present value of in-force business within 'Other operating income', and after deducting 'Net insurance claims incurred and movement in policyholders' liabilities') increased by 98.1 per cent compared with 2008. The increase was largely driven by strong new business growth and positive investment returns. Active management of the investment portfolio, shifted the mix from equities into bonds (excluding unit-linked) and resulted in higher net interest income and more stable returns in 2009. The positive movement in fair value which was primarily driven by equity market-related gains in unit-linked insurance products was largely offset by a corresponding increase in 'Net insurance claims incurred and movement in policyholders' liabilities' to reflect the extent to which unit-linked policyholders participate in the investment performance experienced on the linked investment portfolio.

Insurance premiums increased by 12.7 per cent due to strong sales of regular premium insurance products, notably annuity based retirement products and unit-linked products, together with the launch of a high net worth life insurance product. In Hong Kong, the group (including Hang Seng Bank) became market leaders with a 30.8 per cent market share at the end of the third quarter of 2009 (up from 23.8 per cent in 2008) in individual life new business (regular premiums).

Loan impairment charges and other credit risk provisions decreased by HK$1,962 million during the year as a result of an improved credit environment following a significant downturn in the second half of 2008. The levels of corporate default experienced in 2008 were not repeated in 2009, contributing to improvement in loan impairment charges and credit risk provisions in both Global Banking and Markets and Commercial Banking. There was also a reduction of impairment charges against available-for-sale debt securities. In Personal Financial Services, loan impairment charges increased by HK$531 million, due to an increase in the collective impairment charges on the credit card portfolio. The mortgage book is well secured with a loan to value ratio of 38.4 per cent which has resulted in very low impairment charges.

Operating expenses were HK$107 million, or 0.4 per cent higher than 2008 as a result of a marginal increase in staff costs within Global Banking and Markets due to an increase in performance-related pay reflecting improved performance. In Personal Financial Services and Commercial Banking, staff costs were lower as a result of a reduction in staff numbers and reduced performance-related pay. Non-staff costs fell as marketing expenditure was reduced, although this started to rise in the second half of the year. The group's move towards increased online transactions also contributed to sales generation at a lower cost which is reflected in the reduced expenses.

During the year the group won a number of awards. Personal Financial Services awards included 21 from the various card schemes including the most prestigious Bank of the Year Awards from both Visa and MasterCard. In respect of Commercial Banking, HSBC's position as a leading commercial bank has been recognised by various awards, including The Best Trade Finance Bank from FinanceAsia for 12 consecutive years, Best Bank for Cash Management in Asia from Global Finance for seven consecutive years, and the SME's Best Partner Award from the Hong Kong Chamber of Small and Medium Business Ltd for four consecutive years. The group's direct channel market leading capability contributed to being awarded Best Corporate Internet bank for Asia-Pacific from Global Finance in 2009.

Rest of Asia-Pacific reported profit before tax of HK$25,776 million which was 11.4 per cent lower than 2008. This was primarily as a result of a fall in net fee income and net trading income and an increase in loan impairment charges.

Net interest income increased by HK$1,110 million, or 4.2 per cent. Excluding HSBC Bank Malaysia which was transferred into the group in January, and PT Bank Ekonomi Raharja Tbk ('Bank Ekonomi') which was acquired in May, net interest income fell by HK$2,161 million, or 8.2 per cent.

Most countries within Asia-Pacific saw a fall in net interest income compared to last year but this was offset by increases in Australia and South Korea as a result of improvements in local market positions. There were significant decreases in India, Taiwan, mainland China and Singapore as the low interest rate environment affected all customer groups.

Despite the challenging economic environment, HSBC continued to expand in the region positioning itself for a change in the external market conditions. In mainland China, 19 HSBC outlets, eight Rural bank outlets and four Hang Seng outlets were opened during the year, resulting in 98 HSBC branded outlets, 11 Rural bank outlets and 38 Hang Seng Bank outlets. In Indonesia, the acquisition of Bank Ekonomi increased our branch presence to over 200 outlets in 27 cities.

Customer deposits remained strong. Personal Financial Services was successful in attracting deposits and the acquisition of Premier customers within the region was notable, with a 35 per cent increase in customer numbers to over 580,000 in total. In Commercial Banking, customer deposit balances grew following the acquisitions of Bank Ekonomi in Indonesia and the transfer of HSBC Bank Malaysia Berhad into the group in the first half of the year.

Net fee income was HK$1,150 million, or 9.3 per cent, lower than 2008 reflecting a reduction in fees earned by Securities Services and Asset Management, a result of a drop in assets under custody and administration, notably in Singapore. However, this was partly offset by increases within Personal Financial Services and Commercial Banking. In Personal Financial Services, the increased sales focus on wealth management products and improved sentiment in equity markets in the second half of the year contributed to the 5.0 per cent rise in fee income.  Commercial Banking net fee income was comparable to last year due to an increase in trade services in Malaysia (due to the transfer in of HSBC Bank Malaysia Berhad), Singapore and Bangladesh; cash management in Vietnam and Indonesia; and returning confidence in wealth management products towards the end of the year. In addition, Commercial Banking took various steps to capture cross-border business and continued to benefit from HSBC's international business reach and Amanah branches in Asia. Significant referral growth was seen in Greater China where cross border referral numbers doubled compared to the previous year.

Net trading income decreased by HK$2,042 million, or 14.4 per cent, as a result of a fall in net interest income on trading activities. In addition, income trends within the region diverged. In mainland China, trading income fell as expectation of an improvement in the economy impacted long-term bond yields. However, in South Korea trading income increased as opportunities arose from market-making and client hedging activities. Foreign exchange and Rates revenues declined across most of the region, reflecting low market volatility, though Credit trading performance was strong, particularly in mainland China, Japan and Singapore.

Net insurance income increased by 54.7 per cent primarily as a result of increased insurance premiums. Sales growth was particularly strong in Singapore following the launch of new products, including a high net worth life insurance product and a single premium guaranteed saver product.

Loan impairment charges increased by HK$1,197 million, or 19.4 per cent, compared to 2008 as the credit conditions continued to deteriorate in parts of the region, notably in India.

In Personal Financial Services, loan impairment charges rose by 9.8 per cent to HK$5,028 million primarily in India and Indonesia where the unsecured portfolios continued to incur high delinquencies. However, through a number of risk management initiatives, the loan impairment charges related to the unsecured portfolios in India reduced in the second half of the year. With the exception of India and Indonesia, loan impairment charges in the region remained relatively low indicating that the early credit risk measures taken in 2008 were effective.

In Commercial Banking the increase in loan impairment charges of HK$1,125 million reflected a rise in corporate default as the economic downturn took effect. While significant deterioration was experienced in India in the first half of the year, the charge in the second half of the year was much lower. Overall credit quality in the region is relatively stable as a result of governments' economic stimulus packages feeding through into the real economy, together with liquidity improvements and actions taken by customers to adapt to the difficult circumstances.

Operating expenses have increased slightly by HK$431 million. The increase includes additional costs as a result of including HSBC Bank Malaysia and Bank Ekonomi for the first time. However, cautious cost management has resulted in lower administrative costs and marketing expenditure. These were broadly offset by investment to support the ongoing development of infrastructure in the region including branch expansion in mainland China, Vietnam and Malaysia, the integration of Bank Ekonomi and a full year's cost associated with The Chinese Bank in Taiwan and HSBC InvestDirect in India.

In an effort to improve operational efficiencies and reduce costs, the number of transactions completed through direct channels, including internet banking, telephone services and self-service machines is now more than 55 per cent.

Profit from associates and joint ventures includes results from Bank of Communications and Industrial Bank.

Consolidated Income Statement

			Year ended			Year ended
			31 December			31 December
Figures in HK$m			2009			2008
Interest income					82,550			125,864
Interest expense					(24,118	)		(56,819	)
Net interest income					58,432			69,045
Fee income					35,583			37,751
Fee expense					(5,305	)		(6,984	)
Net fee income					30,278			30,767
Net trading income					20,526			21,363
Net income/ (loss) from financial instruments
designated at fair value					7,259			(10,982	)
Gains less losses from financial investments					(131	)		(2,976	)
Dividend income					364			852
Net earned insurance premiums					31,395			26,886
Other operating income					7,258			4,076
Total operating income					155,381			139,031
Net insurance claims incurred and
movement in policyholders' liabilities					(37,131	)		(14,767	)
Net operating income before loan
impairment charges and other credit
risk provisions					118,250			124,264
Loan impairment charges and other
credit risk provisions					(11,235	)		(12,000	)
Net operating income					107,015			112,264
Employee compensation and benefits					(28,585	)		(28,132	)
General and administrative expenses					(19,527	)		(20,690	)
Depreciation of property, plant and
equipment					(2,904	)		(2,609	)
Amortisation of intangible assets					(1,177	)		(832	)
Total operating expenses					(52,193	)		(52,263	)
Operating profit					54,822			60,001
Share of profit in associates and
joint ventures					7,741			7,689
Profit before tax					62,563			67,690
Tax expense					(11,919	)		(12,710	)
Profit for the year					50,644			54,980
Profit attributable to shareholders					45,808			50,306
Profit attributable to minority interests					4,836			4,674

Consolidated Statement of Comprehensive Income

			Year ended			Year ended
			31 December			31 December
Figures in HK$m			2009			2008
Profit for the year					50,644			54,980
Available-for-sale investments:
- fair value changes taken to equity					31,250			(46,506	)
- fair value changes transferred to the income statement
on disposal					(1,174	)		(1,709	)
- fair value changes transferred to the income statement
on impairment					472			2,682
- fair value changes transferred to the income statement
on hedged items due to hedged risk					483			(1,973	)
- income taxes					(1,241	)		587
Cash flow hedges:
- fair value changes taken to equity					1,650			4,182
- fair value changes transferred to the income statement					(3,026	)		(2,652	)
- income taxes					204			(210	)
Property revaluation:
- fair value changes taken to equity					808			1,946
- income taxes					(59	)		(214	)
Share of changes in equity of associates and joint ventures					212			97
Exchange differences					5,344			(6,996	)
Actuarial losses on post-employment benefits
- before income taxes					3,606			(6,194	)
- income taxes					(559	)		953
					37,970			(56,007	)
Total comprehensive income for the year, net of tax					88,614			(1,027	)
Total comprehensive income for the year
attributable to:
- shareholders					81,588			(1,968	)
- minority interests					7,026			941
					88,614			(1,027	)

Consolidated Statement of Financial Position

		At 31 December			At 31 December
Figures in HK$m		2009			2008
ASSETS
Cash and short-term funds				892,175			597,572
Items in the course of collection from other
banks				15,528			13,949
Placings with banks maturing after one month				107,070			55,569
Certificates of deposit				37,388			57,078
Hong Kong SAR Government certificates
of indebtedness				135,414			119,024
Trading assets				322,731			493,670
Financial assets designated at fair value				48,087			40,553
Derivatives				235,171			453,923
Advances to customers				1,350,644			1,286,145
Financial investments				882,689			586,161
Amounts due from Group companies				134,511			378,662
Investments in associates and joint ventures				53,683			48,270
Goodwill and intangible assets				25,069			16,181
Property, plant and equipment				36,327			35,885
Deferred tax assets				2,668			1,699
Retirement benefit assets				292			84
Other assets				62,256			75,931
Total assets				4,341,703			4,260,356
LIABILITIES
Hong Kong SAR currency notes in circulation				135,414			119,024
Items in the course of transmission to other
banks				22,960			31,334
Deposits by banks				111,206			196,674
Customer accounts				2,944,539			2,576,084
Trading liabilities				154,366			210,587
Financial liabilities designated at fair value				36,709			39,926
Derivatives				232,846			466,204
Debt securities in issue				43,396			48,800
Retirement benefit liabilities				3,922			7,486
Amounts due to Group companies				50,842			51,244
Other liabilities and provisions				55,982			63,319
Liabilities under insurance contracts issued				144,928			113,431
Current tax liabilities				4,119			3,270
Deferred tax liabilities				7,358			4,433
Subordinated liabilities				21,181			19,184
Preference shares				101,208			92,870
Total liabilities				4,070,976			4,043,870

		At 31 December			At 31 December
Figures in HK$m		2009			2008
EQUITY
Share capital				22,494			22,494
Other reserves				75,213			36,863
Retained profits				139,231			123,085
Proposed fourth interim dividend				8,850			11,170
Total shareholders’ equity				245,788			193,612
Minority interests				24,939			22,874
				270,727			216,486
Total equity and liabilities				4,341,703			4,260,356

Consolidated Statement of Changes in Equity

 

 

	At 31 December					At 31 December
Figures in HK$m			2009					2008
Share capital
At beginning and end of year			22,494					22,494
Retained profits
At beginning of year			123,085					107,908
Dividends to shareholders			(26,520		)			(31,170		)
Other movements			257					17
Transfers			(8,539		)			(302		)
Total comprehensive income for the year			50,948					46,632
			139,231					123,085
Other reserves
Property revaluation reserve
At beginning of year			8,578					6,995
Other movements			(16		)			-­
Transfers			(542		)			(430		)
Total comprehensive income for the year			573					2,013
			8,593					8,578
Available-for-sale investment reserve
At beginning of year			15,103					58,757
Other movements			(11		)			29
Transfers			73					(158		)
Total comprehensive income/(expense) for the    year			28,220					(43,525		)
			43,385					15,103
Cash flow hedging reserve
At beginning of year			1,833					677
Other movements			-­					-­
Transfers			7					(10		)
Total comprehensive (expense)/income for the    year			(992		)			1,166
			848					1,833
Foreign exchange reserve
At beginning of year			1,666					8,887
Transfers			2,673					1,279
Total comprehensive income/(expense) for the    year			2,659					(8,500		)
			6,998					1,666
		At 31 December					At 31 December
Figures in HK$m			2009						2008
Other reserves
At beginning of year			9,683						8,636
Movement in respect of share-based payment  arrangements			586						629
Transfers			6,328						(379	)
Other movements			(1,388		)				551
Total comprehensive income for the year			180						246
			15,389						9,683
Total shareholders equity
At beginning of year			182,442						214,354
Dividends to shareholders			(26,520		)				(31,170	)
Movement in respect of share-based payment  arrangements			586						629
Other movements			(1,158		)				597
Total comprehensive income/(expense) for the   year			81,588						(1,968	)
			236,938						182,442
Minority interests
At beginning of year			22,874						25,080
Dividends to shareholders			(4,830		)				(4,664	)
Movement in respect of share-based payment  arrangements			37						40
Other movements			(168		)				1,477
Total comprehensive income for the year			7,026						941
			24,939						22,874
Total equity
At beginning of year			205,316						239,434
Dividends to shareholders			(31,350		)				(35,834	)
Movement in respect of share-based payment  arrangements			623						669
Other movements			(1,326		)				2,074
Total comprehensive income/(expense) for the  year			88,614						(1,027	)
			261,877						205,316

Consolidated Cash Flow Statement

			Year ended		Year ended
			31December			31December
Figures in HK$m			2009			2008
Operating activities
Cash generated from/(used in) operations			123,789		(75,489)
Interest received on financial investments			15,420		17,548
Dividends received on financial investments			306		697
Dividends received from associates			2,565		3,005
Taxation paid			(10,239)		(14,586)
Net cash (outflow)/ inflow from operating activities			131,841		(68,825)
Investing activities
Purchase of financial investments			(533,217)		(632,954)
Proceeds from sale or redemption of financial
investments			423,421		570,372
Purchase of property, plant and equipment			(1,984)		(3,269)
Proceeds from sale of property, plant and equipment and assets held for sale			1,848		218
Purchase of other intangible assets			(1,271)		(1,757)
Net cash inflow/(outflow) in respect of the acquisition
of and increased shareholding in subsidiary companies			15,271		(1,240)
Net cash inflow in respect of the purchase of
interests in business portfolios			-		13,992
Net cash outflow in respect of the purchase of
interests in associates and joint ventures			(43)		(2,643)
Net cash inflow/(outflow) from the sale of interests in business portfolios			251		(33)
Proceeds from the sale of interests in associates			20		-
Net cash outflow from investing activities			(95,704)		(57,314)
Net cash inflow/(outflow) before financing			36,137		(126,139)
Financing
Issue of preference share capital			8,282		3,113
Change in minority interests			(160)		1,893
Repayment of subordinated liabilities			(659)		-
Issue of subordinated liabilities			-		296
Ordinary dividends paid			(28,840)		(26,500)
Dividends paid to minority interests			(4,830)		(4,664)
Interest paid on preference shares			(4,034		(5,752)
Interest paid on subordinated liabilities			(741)		(1,039)
Net cash outflow from financing			(30,982)		(32,653)
Increase/(decrease) in cash and cash equivalents			5,155		(158,792)

Additional Information

1. Net interest income

				Year ended			Year ended
				31 December			31 December
Figures in HK$m					2009			2008
Net interest income					58,432			69,045
Average interest-earning assets					3,047,570			2,926,332
Net interest spread					1.86	%		2.21	%
Net interest margin					1.92	%		2.36	%

Net interest income declined by HK$10,613 million or 15.4 per cent compared to 2008 primarily as a result of a decline in interest rates.  Net interest income was affected by the continuous compression of deposit spreads, repricing of assets at lower rates and a change in asset mix with deployment of funds to high quality but lower yielding assets.

Average interest-earning assets increased by HK$121,238 million or 4.1 per cent compared to 2008. Excluding HSBC Bank Malaysia Berhad which was transferred into the group at the start of 2009 and the acquisition of Bank Ekonomi in the first half of 2009, interest earning assets increased by HK$2,546 million. Financial investments increased as the commercial surplus was redeployed from interbank placements to lower risk treasury bills, government bonds and debt securities.

Net interest margin decreased to 1.92 per cent, a reduction of 44 basis points when compared to 2008. The decline in interest margin is in line with the overall fall in interest rates, which resulted in the repricing of assets off lower yield curves. Net interest spread declined by 35 basis points to 1.86 per cent, while the contribution of net free funds decreased by nine basis points to six basis points.

In Hong Kong, the bank recorded a drop in net interest margin of 75 basis points to 1.52 per cent.  Net interest spread decreased by 77 basis points to 1.53 per cent on the back of declining HIBOR and LIBOR resulting in a further compression of deposit spreads. The adverse impact was moderated by a growth in customer accounts, an increase in residential mortgages on the back of a strong property market and improved lending spreads from lower cost of funds and repricing of portfolios.

At Hang Seng Bank, the net interest margin declined by 48 basis points to 2.11 per cent while the net interest spread declined by 28 basis points to 2.06 per cent. Net interest spread declined due to narrowing deposit spreads and the repricing of assets as interest rates fell. While average interest-earning assets increased, funds were deployed to high quality but low yield liquid assets to reduce risk. The benefit of net free funds decreased by 20 basis points to 0.05 per cent as a consequence of a low interest rate environment.

In the Rest of Asia-Pacific, net interest margin was 2.19 per cent, 10 basis points higher than 2008.  Net interest spread widened by 21 basis points to 1.99 per cent. Excluding HSBC Bank Malaysia Berhad and Bank Ekonomi, net interest margin increased by three basis points. In Australia, net interest margin increased benefiting from a rising interest rate environment, repricing initiatives and growth in banking book assets, in particular residential mortgages. South Korea also reported a higher margin primarily due to lower cost of funds.

2. Net fee income

Figures in HK$m					2009			2008
Account services					2,181			2,027
Credit facilities					2,025			1,767
Trade finance					3,744			3,970
Remittances					2,059			1,900
Securities/stockbroking					8,628			9,734
Cards					5,673			5,308
Insurance					478			617
Unit trusts					1,719			2,374
Funds under management					3,327			3,969
Other					5,749			6,085
Fee income					35,583			37,751
Fee expense					(5,305	)		(6,984	)
					30,278			30,767

Net fee income was HK$489 million or 1.6 per cent lower than in 2008.

Unit trusts income declined 27.6 per cent, as cautious investment sentiment in 2009 led to lower demand for wealth management products. Falling sales in new unit trusts and investment funds, particularly in Hong Kong, resulted in a drop in subscription fees and commissions, although this moderated in the second half of the year.

Income from funds under management decreased 16.2 per cent as a result of lower sales in new funds and declining returns amidst market volatility during 2009, notably in Hong Kong. As a result, a reduction in the value of assets under management held by the group led to lower fees received.

Similarly, securities and stockbroking income fell as lower income was generated from securities services due to unfavourable conditions in 2009, particularly in Hong Kong, Japan, South Korea and Taiwan. However, the stockbroking business reported higher commissions from increased trading in Hong Kong, along with increased IPO opportunities in the second half of 2009.

3. Net trading income

Figures in HK$m					2009			2008
Dealing profits					16,275			13,462
Net loss from hedging activities					(23	)		(73	)
Net interest income on trading assets and liabilities					3,853			7,215
Dividend income from trading securities					421			759
					20,526			21,363

Net trading income decreased HK$837 million or 3.9 per cent in 2009.

Interest on trading assets and liabilities declined 46.6 per cent from reduced holdings of trading debt securities, notably in Hong Kong and Australia. The reduction also reflected the low interest rate environment experienced throughout 2009.

Dealing profits increased 20.9 per cent, partially due to the non-recurrance of a write-down recognised last year and a revaluation gain on certain held-for-trading equity investments in 2009. Excluding these, improved market positions and trading opportunities led to higher trading revenues in Hong Kong especially on bonds, partially offset by lower foreign exchange trading income. In the Rest of Asia-Pacific, lower profits in India mainly reflected fewer trading opportunities as market volatility subsided in the latter part of 2009, coupled with a decline in client trading volume. Mainland China was affected by rising bond yields as the market anticipated a fast economic recovery and future inflation which led to higher revaluation losses on renminbi trading bonds.

4. Gains less losses from financial investments

Figures in HK$m					2009			2008
Gains on disposal of available-for-sale securities					1,191			1,807
Impairment of available-for-sale equity investments					(1,322	)		(4,783	)
					(131	)		(2,976	)

Impairment of available-for-sale equity investments decreased HK$3,461 million in 2009, which was attributable to the non-recurrence of the write-downs of strategic investments in 2008 and improving market conditions more generally.

During the year, the group realised gains on the disposal of certain investments including Visa shares.  However, this was less than the gain recognised in 2008, which included income on the sale of MasterCard shares.

5. Other operating income

Figures in HK$m					2009			2008
Rental income from investment properties					169			153
Movement in present value of in-force
insurance business					2,888			823
Gains on investment properties					262			11
Profit/(loss) on disposal of property, plant
and equipment, and assets held for sale					696			(63	)
Loss on disposal of subsidiaries,
associates and business portfolios					(6	)		(96	)
(Deficit)/surplus arising on property revaluation					(143	)		60
Other					3,392			3,188
					7,258			4,076

The movement in the present value of in-force insurance business increased substantially in 2009, primarily due to a growth in new business, including the launch of a new high net worth product and higher projected fee income on unit-linked funds.

'Other' mainly consisted of recoveries of IT and other operating costs that were incurred on behalf of fellow HSBC Group companies.  It also included gains on acquired loans from The Chinese Bank and Bank Ekonomi.

The profit on disposal of property, plant and equipment mainly represented a gain realised from the sale of property in Hong Kong in late 2009.

6. Insurance income 

Included in the consolidated income statement are the following revenues earned by the insurance business:

Figures in HK$m		2009		2008
Net interest income		4,691		3,369
Net fee income		768		1,159
Net trading loss		(8)		(126)
Net income/(loss) from financial instruments
designated at fair value		6,150		(11,471)
Gains less losses from financial investments		(7)		(1,468)
Dividend income		29		1
Net earned insurance premiums		31,395		26,886
Movement in present value of in-force business		2,888		823
Other operating income		29		307
		45,935		19,480
Net insurance claims incurred and movement
in policyholders' liabilities		(37,131)		(14,767)
Net operating income		8,804		4,713

Net interest income increased 39.2 per cent as a result of a change in the portfolio mix towards bond investments and a growth in funds under management. Net fee income declined 33.7 per cent due to increased fee expenses through higher commissions paid in respect of higher sales in life and non-life insurance products during the year, together with higher investment management fees as fund sizes increased.

Gains less losses from financial investments in the insurance business included a non-recurring significant write-down of a strategic investment in 2008. Changes in the fair value of assets supporting linked insurance contracts are reported in 'Net income from financial instruments designated at fair value', but with offsetting movements in the value of those contracts in 'Net insurance claims incurred and movement in policyholders' liabilities'.

Net earned insurance premiums rose 16.8 per cent, reflecting growing demand for deferred annuity and unit-linked products, combined with the launch of new high net worth products in 2009. Non-life premiums also increased through improved sales on medical, accident and health, and general liability products. 

Movement in present value of in-force business increased as a result of higher new business production and growth in projected fee income on unit-linked funds.

7. Loan impairment charges and other credit risk provisions

Figures in HK$m					2009			2008
Net charge for impairment of customer advances
- Individually assessed impairment allowances:
New allowances					5,504			4,243
Releases					(1,135	)		(523	)
Recoveries					(188	)		(169	)
					4,181			3,551
- Net charge for collectively assessed
impairment allowances					6,498			6,542
					10,679			10,093
Net charge for other credit risk provisions					556			1,907
Net charge for loan impairment and
other credit risk provisions					11,235			12,000

The net charge for loan impairment and other credit risk provisions decreased by HK$765 million, or
6.4 per cent comparing to 2008.

Included in the net charge for other credit risk provisions was an impairment charge of HK$365 million against available-for-sale debt securities in 2009 (2008: HK$2,006 million). There were no impairment losses or provisions against held-to-maturity investments.

The charge for individually assessed allowances increased HK$630 million, with higher impairment charges from the Private Equity business, India and Bahrain, where corporate customers were adversely affected by deteriorating economic conditions. Hong Kong reported lower impairment charges and higher releases in 2009, mainly driven by a gradual improvement in the credit environment.

The net charge for collectively assessed impairment allowances declined marginally (HK$44 million), through lower provision charges against commercial customers and higher allowance releases, offset by rising impairment against credit cards and other unsecured personal lending. In Hong Kong, lower provisions were a result of a gradual improvement in local credit conditions, supported by ongoing recovery efforts throughout the year. Conversely, India experienced increases in loss rates in both personal and commercial portfolios, with some improvements in the latter part of 2009.

8. Employee compensation and benefits

Figures in HK$m						2009			2008
Wages, salaries and other costs						20,367			20,117
Performance-related pay						6,147			6,126
Social security costs						698			549
Retirement benefit costs						1,373			1,340
						28,585			28,132
Staff numbers by regionW
				At 31 December			At 31 December
						2009			2008
Hong Kong						26,192			27,755
Rest of Asia-Pacific						42,582			37,816
Total						68,774			65,571
W Full-time equivalent

Employee compensation and benefits are slightly increased as compared with 2008, up HK$453 million, or 1.6 per cent.

Wages, salaries and other costs increased HK$250 million due to higher staff numbers acquired through acquisition and organic investment across the region. 2009 included the first full year for IL&FS Investsmart (now HSBC InvestDirect India) which was acquired in late 2008, HSBC Malaysia Berhad which transferred into the group at the start of 2009 and Bank Ekonomi which was acquired in the first half of 2009. In addition, mainland China continued to hire new staff to support ongoing branch expansion. However, staff numbers in a number of countries and territories reduced in 2009.

Performance-related pay rose marginally by HK$21 million, reflecting a favourable business performance by Global Banking and Markets especially in Hong Kong, partially offset by lower performance-related pay in Personal Finance Services and Commercial Banking in 2009.

9. General and administrative expenses

Figures in HK$m					2009			2008
Premises and equipment
- Rental expenses					2,747			2,432
- Amortisation of prepaid operating lease
payments					58			59
- Other premises and equipment					3,192			3,068
					5,997			5,559
Marketing and advertising expenses					3,168			3,579
Other administrative expenses					10,368			11,128
Litigation and other provisions					(6	)		424
					19,527			20,690

General and administrative expenses decreased year on year by HK$1,163 million, or 5.6 per cent.

Charges in respect of premises and equipment rose by HK$438 million, particularly in Hong Kong due to tenancy agreements being renewed at higher rates, more refurbishment projects and higher technology costs. Costs in mainland China also increased to support an expanding branch network.

Other administrative expenses declined HK$760 million, reflecting ongoing controls on overhead costs across the region, notably in Hong Kong and India. Marketing and advertising expenses decreased by HK$411 million primarily as a result of fewer promotional campaigns in 2009, although marketing activities increased in late 2009 as market sentiment improved. Litigation expenses reduced by HK$430 million due to lower charges in Australia and Singapore, together with a provision release in Hong Kong during 2009.

10. Share of profit in associates and joint ventures

Share of profit in associates and joint ventures principally included the group's share of post-tax profits from Bank of Communications and Industrial Bank, less the amortisation of intangible assets arising on acquisition.

11. Tax expense

The tax expense in the consolidated income statement comprises:

Figures in HK$m					2009			2008
Current income tax
- Hong Kong profits tax					5,839			6,244
- Overseas taxation					6,175			6,194
Deferred taxation					(95	)		272
					11,919			12,710

The effective rate of tax for 2009 was 19.1 per cent compared with 18.8 per cent in 2008.

12. Dividends

						2009				2008
						HK$		HK$m		HK$		HK$m
						per share				per share
Dividends paid on ordinary share capital
- In respect of the previous financial year,
approved and paid during the year						1.24		11,170		0.72		6,500
- In respect of the current financial year						1.95		17,670		2.22		20,000
						3.19		28,840		2.94		26,500

The Directors have declared a fourth interim dividend in respect of the financial year ended 31 December 2009 of HK$8,850 million (HK$0.98 per ordinary share).

13. Advances to customers

		At 31 December			At 31 December
Figures in HK$m				2009			2008
Gross advances to customers				1,364,924			1,297,103
Impairment allowances
- Individually assessed				(8,088	)		(5,033	)
- Collectively assessed				(6,192	)		(5,925	)
				(14,280	)		(10,958	)
Net loans and advances to customers				1,350,644			1,286,145
Allowances as a percentage of gross advances
to customers:
- Individually assessed				0.59	%		0.39	%
- Collectively assessed				0.46	%		0.46	%
Total allowances				1.05	%		0.85	%

14. Impairment allowances against advances to customers

			Individually		Collectively
			assessed		assessed
Figures in HK$m			allowances		allowances		Total
At 1 January 2009			5,033		5,925		10,958
Amounts written off			(1,610	)	(7,761	)	(9,371	)
Recoveries of advances written off in
previous years			188		1,102		1,290
Net charge to income statement (Note 7)			4,181		6,498		10,679
Unwinding of discount on loan impairment			(82	)	(215	)	(297	)
Exchange and other adjustments			378		643		1,021
At 31 December 2009			8,088		6,192		14,280

15. Impaired advances to customers and allowances

The geographical information shown below, and in notes 16, 17 and 18, has been classified by location of the principal operations of the subsidiary company or, in the case of the bank, by location of the branch responsible for advancing the funds.

			Rest of
Figures in HK$m	Hong Kong		Asia-Pacific		Total
Year ended 31 December 2009
Impairment allowance charge	3,487		7,192		10,679

At 31 December 2009
Advances to customers that are considered to be impaired are as follows:
Gross impaired advances	6,358		9,838		16,196
Individually assessed allowances	(3,724	)	(4,364	)	(8,088	)
	2,634		5,474		8,108
Individually assessed allowances as a
percentage of gross impaired advances	58.6	%	44.4	%	49.9	%
Gross impaired advances as a percentage
of gross advances to customers	0.8	%	1.6	%	1.2	%

			Rest of
Figures in HK$m	Hong Kong		Asia-Pacific		Total
Year ended 31 December 2008
Impairment allowance charge	4,210		5,883		10,093

At 31 December 2008
Advances to customers that are considered to be impaired are as follows:
Gross impaired advances	6,601		6,479		13,080
Individually assessed allowances	(3,108	)	(1,925	)	(5,033	)
	3,493		4,554		8,047
Individually assessed allowances as a
percentage of gross impaired advances	47.1	%	29.7	%	38.5	%
Gross impaired advances as a percentage
of gross advances to customers	0.9	%	1.2	%	1.0	%

Impaired advances to customers are those advances where objective evidence exists that full repayment of principal or interest is considered unlikely.

The individually assessed allowances are made after taking into account the value of collateral in respect of such advances.

16. Overdue advances to customers
						Rest of
Figures in HK$m			Hong Kong		Asia-Pacific				Total
At 31 December 2009
Gross advances to customers that have
been overdue with respect to either
principal or interest for periods of:
- more than three months but not more than six months				583			2,728		3,311
- more than six months but not more than one year				1,206			1,888		3,094
- more than one year				1,963			2,865		4,828
				3,752			7,481		11,233
Overdue advances to customers as a
percentage of gross advances to
customers:
- more than three months but not more than six months				0.1	%		0.4	%	0.2	%
- more than six months but not more than one year				0.1	%		0.3	%	0.2	%
- more than one year				0.3	%		0.5	%	0.4	%
				0.5	%		1.2	%	0.8	%

						Rest of
Figures in HK$m			Hong Kong		Asia-Pacific				Total
At 31 December 2008
Gross advances to customers that have
been overdue with respect to either
principal or interest for periods of:
- more than three months but not more than six months				1,059			2,559		3,618
- more than six months but not more than one year				603			859		1,462
- more than one year				881			1,613		2,494
				2,543			5,031		7,574
Overdue advances to customers as a
percentage of gross advances to
customers:
- more than three months but not more than six months				0.1	%		0.5	%	0.3	%
- more than six months but not more than one year				0.1	%		0.2	%	0.1	%
- more than one year				0.1	%		0.3	%	0.2	%
				0.3	%		1.0	%	0.6	%

As at 31 December 2009 and 31 December 2008, there were no advances to banks and other financial institutions that were overdue for more than three months.

17. Rescheduled advances to customers
						Rest of
Figures in HK$m				Hong Kong		Asia-Pacific			Total
At 31 December 2009
Rescheduled advances to customers					2,379		2,671		5,050
Rescheduled advances to customers as a
percentage of gross advances to
customers					0.3		0.4		0.4	%
At 31 December 2008
Rescheduled advances to customers					1,688		1,472		3,160
Rescheduled advances to customers as a
percentage of gross advances to
customers					0.2	%	0.3	%	0.2	%

As at 31 December 2009 and 31 December 2008, there were no rescheduled advances to banks and other financial institutions.

Rescheduled advances to customers are those advances that have been restructured or renegotiated because of deterioration in the financial position of the borrower or the inability of the borrower to meet the original repayment schedule.

Rescheduled advances to customers are stated net of any advances which have subsequently become overdue for more than three months and which are included in 'Overdue advances to customers' (Note 16).

18. Analysis of advances to customers based on categories used by the HSBC Group

The following analysis of advances to customers is based on categories used by the HSBC Group, including The Hongkong and Shanghai Banking Corporation Limited and its subsidiary companies, to manage associated risks

						Rest of
Figures in HK$m	Hong Kong					Asia-Pacific				Total
At 31 December 2009
Residential mortgages	244,328					169,016				413,344
Hong Kong SAR Government’s Home
Ownership Scheme, Private Sector
Participation Scheme and Tenants
Purchase Scheme mortgages	26,801					-­				26,801
Credit card advances	35,545					31,654				67,199
Other personal	41,384					35,550				76,934
Total personal	348,058					236,220				584,278
Commercial, industrial and
international trade	137,461					219,631				357,092
Commercial real estate	105,404					50,131				155,535
Other property-related lending	78,028					30,030				108,058
Government	3,416					4,615				8,031
Other commercial	56,821					55,312				112,133
Total corporate and commercial	381,130					359,719				740,849
Non-bank financial institutions	19,088					17,976				37,064
Settlement accounts	2,437					296				2,733
Total financial	21,525					18,272				39,797
Gross advances to customers	750,713					614,211				1,364,924
Impairment allowances	(6,136			)		(8,144			)	(14,280		)
Net advances to customers	744,577					606,067				1,350,644
			Rest of
Figures in HK$m		Hong Kong	Asia-Pacific					Total
At 31 December 2008
Residential mortgages		223,066			118,737			341,803
Hong Kong SAR Government’s Home
Ownership Scheme, Private Sector
Participation Scheme and Tenants
Purchase Scheme mortgages		30,086			-­			30,086
Credit card advances		36,255			25,120			61,375
Other personal		41,267			37,255			78,522
Total personal		330,674			181,112			511,786
Commercial, industrial and
international trade		156,438			203,259			359,697
Commercial real estate		109,266			50,787			160,053
Other property-related lending		78,757			21,653			100,410
Government		7,367			4,386			11,753
Other commercial		50,540			52,607			103,147
Total corporate and commercial		402,368			332,692			735,060
Non-bank financial institutions		18,617			29,870			48,487
Settlement accounts		1,651			119			1,770
Total financial		20,268			29,989			50,257
Gross advances to customers		753,310			543,793			1,297,103
Impairment allowances		(5,568	)		(5,390		)	(10,958			)
Net advances to customers		747,742			538,403			1,286,145

Net advances in Hong Kong decreased by HK$3.2 billion, or 0.4 per cent, since the end of 2008. The decline was largely attributable to a drop in corporate and commercial lending (down HK$21.2 billion), with decreases noted in commercial, industrial and international trade and commercial real estate sectors. The decrease was partly offset by an increase in advances to personal customers, which increased by HK$17.4 billion, or 5.3 per cent, largely attributable to an increase in residential mortgages as the property market became more active in 2009.

In the Rest of Asia-Pacific, net advances to customers increased by HK$67.7 billion, or 12.6 per cent, mainly due to the inclusion of HSBC Bank Malaysia Berhad and the acquisition of Bank Ekonomi in Indonesia. Excluding these new subsidiaries, net advances to customers dropped by HK$4.4 billion, or 0.8 per cent. Decreases were noted in corporate and commercial lending (down HK$9.3 billion), financials (down HK$12.2 billion), and other personal lending (down HK$8.9 billion), partly offset by an increase in residential mortgages (up HK$27.5 billion), notably in Australia (with strong underlying growth, coupled with appreciation in underlying currency) and Singapore.

19. Analysis of advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority ('HKMA')

The following analysis of advances to customers is based on the categories contained in the 'Quarterly Analysis of Loans and Advances and Provisions' return required to be submitted to the HKMA by branches of the bank and by banking subsidiary companies in Hong Kong.

	At 31 December		At 31 December
Figures in HK$m		2009		2008
Gross advances to customers for use in
Hong Kong
Industrial, commercial and financial
Property development		50,034		55,646
Property investment		144,396		139,174
Financial concerns		9,442		9,417
Stockbrokers		1,155		744
Wholesale and retail trade		46,145		51,580
Manufacturing		27,318		31,811
Transport and transport equipment		21,543		29,026
Recreational activities		330		55
Information technology		5,336		4,189
Others		49,963		49,562
		355,662		371,204
Individuals
Advances for the purchase of flats under the
Hong Kong SAR Government's Home
Ownership Scheme, Private Sector
Participation Scheme and Tenants
Purchase Scheme		26,801		30,086
Advances for the purchase of other
residential properties		217,626		198,982
Credit card advances		35,545		36,255
Others		32,641		34,232
		312,613		299,555

19. Analysis of advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority ('HKMA') (continued)

	At 31 December			At 31 December
Figures in HK$m			2009		2008
Gross advances to customers for use in
Hong Kong		668,275			670,759
Trade finance		54,015			64,758
Gross advances to customers for use outside Hong
Kong made by branches of the Bank and subsidiary
companies in Hong Kong		28,423			17,793
Gross advances to customers made by branches of
the Bank and subsidiary companies in Hong Kong		750,713			753,310
Gross advances to customers made by branches of
the Bank and subsidiary companies outside Hong Kong		614,211			543,793
Gross advances to customers		1,364,924			1,297,103

20. Cross-border exposure

The country risk exposures in the tables below are prepared in accordance with the HKMA Return of External Positions Part II: Cross-Border Claims (MA(BS)9) guidelines.

Cross-border claims are on-balance sheet exposures to counterparties based on the location of the counterparties after taking into account the transfer of risk.

The tables show claims on individual countries and territories or areas, after risk transfer, amounting to 10 per cent or more of the aggregate cross-border claims.

Cross-border risk is controlled centrally through a well-developed system of country limits and is frequently reviewed to avoid concentration of transfer, economic or political risk.

	Banks and
	other			Public
	financial			sector
Figures in HK$m	institutions			entities		Other		Total
At 31 December 2009
Americas
United States		124,438		89,352		48,777		262,567
Other		20,249		10,595		45,805		76,649
		144,687		99,947		94,582		339,216
Europe
United Kingdom		228,935		854		13,247		243,036
Other		182,577		50,833		19,040		252,450
		411,512		51,687		32,287		495,486
Asia-Pacific excluding Hong Kong		197,633		92,634		178,339		468,606
At 31 December 2008
Americas
United States		96,870		122,594		48,225		267,689
Other		24,459		4,171		82,817		111,447
		121,329		126,765		131,042		379,136
Europe
United Kingdom		349,284		575		28,651		378,510
Other		221,598		8,571		62,754		292,923
		570,882		9,146		91,405		671,433
Asia-Pacific excluding Hong Kong		158,481		168,458		167,597		494,536

21. Customer accounts

		At 31 December		At 31 December
Figures in HK$m			2009		2008
Current accounts			536,350		408,891
Savings accounts			1,591,351		1,172,406
Other deposit accounts			816,838		994,787
			2,944,539		2,576,084

Customer accounts increased by HK$368.5 billion (14.3 per cent) compared with the end of 2008.

In Hong Kong, customer accounts increased by HK$193.8 billion, or 10.8 per cent, through growth in current accounts, partially offset by lower savings and deposit accounts. Despite the low interest rate environment, customer accounts continued to grow, reflecting a preference for holding liquid deposits for future investment opportunities.

In the Rest of Asia-Pacific, customer accounts were HK$177.1 billion (22.6 per cent) higher, with increased balances in all customer groups. Excluding HSBC Bank Malaysia Berhad and Bank Ekonomi, customer accounts increased 7.8 per cent. In India, the increase was attributable to rising current account balances from foreign institutional investors and higher foreign currency deposits. Meanwhile, ongoing branch expansion in mainland China contributed to growing deposits.

The group's advances-to-deposits ratio decreased to 45.9 per cent at 31 December 2009, from 49.9 per cent at 31 December 2008.

22. Business combinations

HSBC made the following acquisitions of subsidiaries or business operations in 2009, which were accounted for using the purchase method:

On 2 January 2009, HSBC Bank Malaysia Berhad was transferred to The Hongkong and Shanghai Banking Corporation Limited from another Group entity. The transfer was made at net asset value with no resulting goodwill. HSBC Bank Malaysia Berhad contributed HK$1,601 million to the net profit of the group during 2009.

On 22 May 2009, the group completed the acquisition of 88.9 per cent of PT Bank Ekonomi Raharja Tbk ('Bank Ekonomi') in Indonesia for a cash consideration of US$608 million, paid in US dollars and directly attributable cost of US$4 million. Goodwill was measured at HK$3,671 million.

Following acquisition of the initial stake, the group was required under Indonesian law to make a mandatory tender offer for a further holding of up to 10.1 per cent. The group completed the mandatory tender offer on 23 July 2009 resulting in an additional 10.1 per cent being acquired for a cash consideration of approximately US$71.6 million taking the group's shareholding in Bank Ekonomi to 99.0 per cent. Goodwill was increased by HK$468 million. As a result of the outcome of the mandatory tender offer, the cash consideration for the acquisition of the 88.9 per cent was subsequently adjusted to US$602 million in accordance with the mandatory tender offer agreement.

At the date of acquisition, the group recognised the following assets and liabilities: Cash and short-term funds and placings with banks HK$4,865 million; Advances to customers HK$5,913 million; Amounts due from HSBC Group companies HK$1,786 million; Financial investments HK$1,129 million; Other assets HK$521 million; Customer deposits HK$13,214 million; Other liabilities HK$297 million; and Intangible assets of HK$451 million. As Bank Ekonomi did not prepare financial statements under HKFRSs, it is impracticable to determine what the carrying amounts of the assets and liabilities would have been under HKFRSs immediately prior to the acquisition. Since the date of acquisition, Bank Ekonomi has contributed HK$265 million to the net profit of the group.

23. Disclosure for selected exposures

a          Holdings of asset-backed securities

The group has holdings of asset-backed securities (ABSs), including those represented by mortgage-backed securities (MBSs) and by collateralised debt obligations (CDOs). The table below shows the group's exposure to ABSs issued by entities that are not consolidated by any HSBC Group entities. The carrying amounts of these exposures are measured at fair value.

Figures in HK$m	Gross principalW		CDS gross protectionWW		Net principal exposureWWW		Carrying amountWWWW
At 31 December 2009
Sub-prime residential mortgage-   related assets:
MBSs and MBS CDOs
- high grade (AA or AAA rated)	54		-		54		45
- rated C to A	562		-		562		74
	616		-		616		119
US government-sponsored   enterprises' mortgage-  related assets:
MBSs
- high grade (AA or AAA rated)	4,071		-		4,071		4,071
Other residential mortgage-related   assets :
MBSs
- high grade (AA or AAA rated)	3,366		-		3,366		3,142
- rated C to A	1		-		1		1
- not publicly rated	8		-		8		8
	3,375		-		3,375		3,151
Commercial property    mortgage-related assets:
MBSs
- high grade (AA or AAA rated)	705		-		705		636
- rated C to A	785		-		785		140
	1,490		-		1,490		776
Leveraged finance-related assets:
ABSs and ABS CDOs
- high grade (AA or AAA rated)	145		-		145		127
Student loan-related assets:
ABSs and ABS CDOs
- high grade (AA or AAA rated)	1,515		-		1,515		1,508
Other assets:
ABSs and ABS CDOs
- high grade (AA or AAA rated)	955		-		955		935
- rated C to A	249		(190)		59		18
	1,204		(190)		1,014		953
	12,416		(190)		12,226		10,705

Figures in HK$m	Gross principalW		CDS gross protectionWW		Net principal exposureWWW		Carrying amountWWWW
At 31 December 2008
Sub-prime residential mortgage-   related assets:
MBSs and MBS CDOs
- high grade (AA or AAA rated)	1,192		-		1,192		411
- rated C to A	2,439		-		2,439		36
	3,631		-		3,631		447
US government-sponsored   enterprises' mortgage-  related assets:
MBSs
- high grade (AA or AAA rated)	6,092		-		6,092		6,116
Other residential mortgage-related   assets:
MBSs
- high grade (AA or AAA rated)	4,770		-		4,770		4,266
- not publicly rated	13		-		13		-
	4,783		-		4,783		4,266
Commercial property   mortgage-related assets:
MBSs
- high grade (AA or AAA rated)	603		-		603		595
- rated C to A	25		-		25		25
- not publicly rated	3		-		3		-
	631		-		631		620
Leveraged finance-related assets:
ABSs and ABS CDOs
- high grade (AA or AAA rated)	152		-		152		91
Student loan-related assets:
ABSs and ABS CDOs
- high grade (AA or AAA rated)	2,037		-		2,037		1,934
- not publicly rated	7		-		7		-
	2,044		-		2,044		1,934
Other assets:
ABS and ABS CDOs
- high grade (AA or AAA rated)	1,168		-		1,168		1,116
- rated C to A	1,360		(1,352)		8		1
- not publicly rated	280		(232)		48		-
	2,808		(1,584)		1,224		1,117
	20,141		(1,584)		18,557		14,591

The table below shows the geographical distribution of the group's exposures to ABSs shown above.

	At 31 December 2009
Figures in HK$m	Gross principalW		CDS gross protectionWW		Net principal exposureWWW		Carrying amountWWWW
US	7,249		-		7,249		5,982
UK	1,105		-		1,105		918
Rest of the world	4,062		(190)		3,872		3,805
	12,416		(190)		12,226		10,705

	At 31 December 2008
Figures in HK$m	Gross principalW		CDS gross protectionWW		Net principal exposureWWW		Carrying amountWWWW
US	11,962		-		11,962		8,539
UK	1,463		-		1,463		1,022
Rest of the world	6,716		(1,584)		5,132		5,030
	20,141		(1,584)		18,557		14,591

^W             The gross principal is the redemption amount on maturity or, in the case of an amortising instrument, the sum of the future redemption amounts through the residual life of the security.

^WW          A CDS is a credit default swap. CDS protection principal is the gross principal of the underlying instrument that is protected by CDSs.

^WWW      Net principal exposure is the gross principal amount of assets that are not protected by CDSs. It includes assets that benefit from monoline protection, except where this protection is purchased with a CDS.

^WWWW    Carrying amount of the net principal exposure.

b          Exposure to derivative transactions entered into with monoline insurers

The group's principal exposure to monoline insurers is through a number of derivative transactions, primarily CDSs.

The table below sets out the fair value of the monoline derivative contracts at 31 December 2009, and hence the amount at risk, based on 31 December 2009 security prices, if the protection purchased were to be wholly ineffective because, for example, the monoline insurer was unable to meet its obligations. The 'credit risk adjustment' column indicates the valuation adjustment taken against the mark-to-market exposures, and reflects the estimated deterioration in creditworthiness of a monoline insurer during 2008. This adjustment was charged to the income statement in 2008.

Figures in HK$m		Notional amount		Net exposure before credit risk adjustmentW		Credit risk adjustmentWW		Net exposure after credit risk adjustment
At 31 December 2009
Derivative transactions   with monoline insurers
- Investment grade		190		-		-		-
At 31 December 2008
Derivative transactions   with monoline insurers
- Investment grade		1,352		31		(3	)	28

^W            Net exposure after legal netting and any other relevant credit mitigation prior to deduction of credit risk adjustment.

^WW         Fair value adjustment recorded against over-the-counter derivative counterparty exposures to reflect the creditworthiness of the counterparty.

c          Special purpose entities (SPEs) consolidated by fellow HSBC Group companies.

The group holds commercial paper and medium-term notes issued by SPEs that have been established and are consolidated by other entities within the HSBC Group. The table below shows the group's holdings of such instruments. The carrying amounts of these instruments are measured at fair value.

	At 31 December 2009				At 31 December 2008
Figures in HK$m	Gross principal		Carrying amount		Gross principal		Carrying amount
Medium-term notes
- AAA rated	-		-		16,085		15,423
Commercial paper
- A1 / A1+ rated	-		-		57,137		57,129
	-		-		73,222		72,552

d          Leveraged finance transactions

Leveraged finance commitments held by the group were HK$712 million at 31 December 2009 (2008: HK$287 million), of which HK$545 million (2008: HK$190 million) was funded.

e          Other involvement with SPEs

The group enters into certain transactions with customers in the ordinary course of business that involve the establishment of SPEs. The purposes for which the SPEs are established include facilitating the raising of funding for customers' business activities or to effect a lease. The use of SPEs is not a significant part of the group's activities and the group is not reliant on SPEs for any material part of its business operations or profitability.

24. Contingent liabilities, commitments and derivatives

a          Off-balance sheet contingent liabilities and commitments

	At 31 December		At 31 December
Figures in HK$m		2009		2008
Contingent liabilities and financial guarantee contracts
- Guarantees and irrevocable letters of credit pledged as collateral security		142,469			143,797
- Other contingent liabilities		191			165
		142,660			143,962
Commitments
- Documentary credits and short-term trade-related transactions		32,079			30,874
- Forward asset purchases and forward forward deposits placed		1,308			1,369
- Undrawn formal standby facilities, credit lines and other commitments to lend		1,102,088			1,118,360
		1,135,475			1,150,603

The above table discloses the nominal principal amounts of third-party off-balance sheet transactions, the amounts relating to other contingent liabilities and the nominal principal amounts relating to financial guarantee contracts. Contingent liabilities and commitments are mainly credit-related instruments that include non-financial guarantees and commitments to extend credit. Contractual amounts represent the amounts at risk should contracts be fully drawn upon and clients default. Since a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the contractual amounts is not representative of future liquidity requirements.

b          Guarantees (including financial guarantee contracts)

The group provides guarantees and similar undertakings on behalf of both third-party customers and other entities within the group. These guarantees are generally provided in the normal course of the banking business. The principal types of guarantees provided, and the maximum potential amount of future payments that the group could be required to make at 31 December 2009, were as follows:

		At 31 December 2009				At 31 December 2008
Figures in HK$m		Guarantees in favour of third parties		Guarantees by the group in favour of other HSBC group entities		Guarantees in favour of third parties		Guarantees by the group in favour of other HSBC group entities
Guarantee type
Financial guarantee contractsW		20,561		1,213		21,093		1,952
Standby letters of credit that are       financial guarantee contractsWW		15,670		44		21,424		28
Other direct credit substitutesWWW		27,260		8		26,565		20
Performance bondsWWWW		41,105		4,384		40,440		3,585
Bid bondsWWWW		1,454		233		1,207		157
Standby letters of credit related to particular transactionsWWWW		3,699		7		2,481		37
Other transaction-related guaranteesWWWW		25,521		4,055		23,438		3,494
		135,270		9,944		136,648		9,273

^W         Financial guarantees are contracts that require the issuer to make specified payments to reimburse the holder for a loss incurred because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. The amounts in the above table are nominal principal amounts.

^WW      Standby letters of credit that are financial guarantee contracts are irrevocable obligations on the part of the group to pay third parties when customers fail to make payments when due.

^WWW   Other direct credit substitutes include re-insurance letters of credit and trade-related letters of credit issued without provision for the issuing entity to retain title to the underlying shipment.

^WWWW  Performance bonds, bid bonds, standby letters of credit and other transaction-related guarantees are undertakings by which the obligation on the group to make payment depends on the outcome of a future event.

The amounts disclosed in the above table reflect the group's maximum exposure under a large number of individual guarantee undertakings. The risks and exposures from guarantees are captured and managed in accordance with HSBC's overall credit risk management policies and procedures. Approximately half of the above guarantees have a term of less than one year. Guarantees with terms of more than one year are subject to HSBC's annual credit review process.

c          Contingencies

The group is named in and defending legal actions in a number of jurisdictions, including Hong Kong, arising out of its normal business operations. None of the actions is regarded as material litigation, and none is expected to result in a significant adverse effect on the financial position of the group, either collectively or individually. Management believes that adequate provisions have been made in respect of such litigation.

25. Foreign exchange exposure

Foreign exchange exposures may be divided broadly into two categories: structural and non-structural. Structural exposures are normally long-term in nature and include those arising from investments in overseas subsidiaries, branches, associates and strategic investments as well as capital instruments denominated in currencies other than Hong Kong dollars. Non-structural exposures arise primarily from trading positions and balance sheet management activities. Non-structural exposures can arise and change rapidly. Foreign currency exposures are managed in accordance with the group's risk management policies and procedures.

The group had the following structural foreign currency exposures that exceeded 10 per cent of the total net structural exposure in all foreign currencies:

Figures in HK$m		Net structural position
At 31 December 2009
Chinese renminbi	108,347
Indian rupee	25,073
Korean won	11,146
At 31 December 2008
Chinese renminbi	83,819
Indian rupee	21,339
Korean won	9,802

The group had the following non-structural foreign currency positions that exceeded 10 per cent of the group's net non-structural positions in all foreign currencies:

	United States		Singapore		Brunei		Chinese
Figures in HK$m	dollars		dollars		dollars		renminbi
At 31 December 2009
Spot assets	3,053,837		247,020		84,729		109,807
Spot liabilities	(3,010,444	)	(311,720	)	(27,308	)	(92,862	)
Forward purchases	2,560,540		189,887		170		342,940
Forward sales	(2,632,313	)	(120,564	)	(62,207	)	(361,662	)
Net options positions	13,870		-		-		-
	(14,510	)	4,623		(4,616	)	(1,777	)
At 31 December 2008
Spot assets	2,947,677		113,295		73,565		97,229
Spot liabilities	(2,922,971	)	(168,458	)	(26,390	)	(77,588	)
Forward purchases	3,127,618		292,172		131		406,545
Forward sales	(3,160,163	)	(234,203	)	(50,115	)	(428,163	)
Net options positions	19,173		(12	)	-		-
	11,334		2,794		(2,809	)	(1,977	)

26. Capital adequacy

The following table shows the capital adequacy ratio and the components of the capital base contained in the 'Capital Adequacy Ratio' return required to be submitted to the Hong Kong Monetary Authority ('HKMA') by The Hongkong and Shanghai Banking Corporation Limited on a consolidated basis that is specified by the HKMA under the requirement of section 98(2) of the Banking Ordinance.

Effective 1 January 2008, the group adopted the foundation internal ratings-based approach and internal ratings-based (securitisation) approach to determine credit risk. It also used the standardised (operational risk) approach and standardised (market risk) approach to calculate its operational risk and market risk respectively. An internal models approach was adopted for calculating general market risk, while a separate model is used for calculating the market risk relating to equity options.

From 1 January 2009, the group migrated to the advanced internal ratings-based approach to calculate its credit risk for the majority of its non-securitisation exposures. As a result of the change in approach used to determine credit risk for the non-securitisation exposures, the numbers for 2008 are not strictly comparable. From 30 March 2009, the group adopted an internal models approach to calculate its market risk in respect of specific risk for the interest rate risk category. Apart from these, there are no change in the approaches used to calculate credit risk for securitisation exposures, operational risk and market risk for other risk categories.

There is no relevant capital shortfall in any of the group's subsidiaries that is not included in its consolidation group for regulatory purposes.

Figures in HK$m	2009			2008
Composition of capital
Core capital:
Paid-up ordinary share capital	21,040			21,040
Paid-up irredeemable non-cumulative preference shares	51,590			51,561
Published reserves	113,618			84,262
Profit and loss account	16,852			19,953
Minority interestsW	18,902			16,087
Less: Deduction from core capital	(19,682	)		(14,457	)
Less: 50% of total amount of deductible items (@50%)WW	(35,099	)		(32,212	)
Total core capital	167,221			146,234
Supplementary capital:
Property revaluation reservesWWW	6,742			6,655
Available-for-sale investments revaluation reservesWWWW	3,961			2,881
Unrealised fair value gains from financial instruments   designated at fair value through profit or loss	34			1
Regulatory reserveWWWWW	937			723
Collective provisionsWWWWW	858			908
Surplus provisionsWWWWWW	2,686			2,904
Perpetual subordinated debt	9,393			9,410
Paid-up irredeemable cumulative preference shares	16,517			16,508
Term subordinated debt	14,406			11,786
Paid-up term preference shares	32,956			24,800
Less: 50% of total amount of deductible items (@50%)WW	(35,099	)		(32,212	)
Total supplementary capital	53,391			44,364
Capital base	220,612			190,598
Total deductible itemsWW	70,198			64,424

W	After deduction of minority interests in unconsolidated subsidiary companies.
WW	Total deductible items are deducted from institution's core capital and supplementary capital.
WWW	Includes the revaluation surplus on investment properties that is reported as part of retained profits.
WWWW	Includes adjustments made in accordance with guidelines issued by the HKMA.
WWWWW	Total regulatory reserve and collective provisions are apportioned between the standardised approach and internal ratings-based approach in accordance with guidelines issued by the HKMA. Those apportioned to the standardised approach are included in the supplementary capital. Those apportioned to the internal ratings-based approach are excluded from the supplementary capital.
WWWWWW	Surplus provisions represent the excess of the total eligible provisions over the total expected loss amount. Surplus provisions are applicable to non-securitisation exposures calculated by using the internal ratings-based approach.

The capital ratios on a consolidated basis calculated in accordance with the rules are as follows:

	2009		2008
Capital adequacy ratio	16.1	%	13.4	%
Core capital ratio	12.2	%	10.3	%

27. Liquidity ratio

The Hong Kong Banking Ordinance requires banks operating in Hong Kong to maintain a minimum liquidity ratio of 25 per cent, calculated in accordance with the provisions of the Fourth Schedule of the Banking Ordinance. This requirement applies separately to the Hong Kong branches of the bank and to those subsidiary companies that are Authorised Institutions under the Banking Ordinance in Hong Kong.

				2009		2008
The average liquidity ratio for the
year was as follows:
Hong Kong branches of the bank				50.4	%	51.2	%

28. Property revaluation

The group's premises and investment properties were revalued as at 30 November 2009 and updated for any material changes as at 31 December 2009. The basis of valuation was open market value or depreciated replacement cost.

Premises and investment properties in the Hong Kong SAR, the Macau SAR and mainland China, which represent 94 per cent by value of the group's properties subject to valuation, were valued by DTZ Debenham Tie Leung Limited. The valuations were carried out by qualified valuers who are members of the Hong Kong Institute of Surveyors. Properties in 12 other countries and territories, which represent six per cent by value of the group's properties, were valued by different independent professionally qualified valuers.

The November property revaluation, together with the revaluation of Hong Kong properties undertaken in June 2009, resulted in an increase in the group's revaluation reserves of HK$470 million, net of deferred taxation of HK$73 million and minority interests of HK$265 million, and a credit to the income statement of HK$119 million. Of the HK$119 million credit to the income statement, HK$262 million represents the surplus on the revaluation of investment properties and HK$143 million relates to revaluation deficits that had arisen when the value of certain premises fell below depreciated historical cost or surrender value, or when newly acquired premises had existing revaluation losses.

29. Accounting policies

The accounting policies applied in preparing this news release are the same as those applied in preparing the financial statements for the year ended 31 December 2008, as disclosed in the Annual Report and Accounts for 2008 with the exception set out below.

Amendments to HKFRS 7 'Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments.' The amendments introduce a three level fair value hierarchy, which reflects the availability of observable market inputs when estimating fair values and clarifies the quantitative disclosures about the liquidity risk associated with financial instruments. The adoption of the amendment has no effect on the results reported in the consolidated financial statements.

HKFRS 8 'Operating Segments' ('HKFRS 8'), which replaced HKAS 14 'Operating Segments'. HKFRS 8 requires an entity to disclose information about its segments which enables users to evaluate the nature and financial effects of its business activities and the economic environments in which it operates. The group's operating segments are organised into two geographical regions, Hong Kong and Rest of Asia-Pacific. Due to the nature of the group its chief operating decision-maker regularly reviews operating activity on a number of bases, including by geography, by customer group and by retail and global businesses. The group's HKFRS 8 operating segments were determined to be geographical segments because the chief operating decision-maker uses information on geographical segments in order to make decisions about allocating resources and assessing performance. The group's chief operating decision-maker was determined to be the Executive Committee.

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

HKAS 1 (Revised 2007) 'Presentation of Financial Statements'. The revised standard aims to improve users' ability to analyse and compare information given in financial statements. The adoption of the revised standard has no effect on the results reported in the consolidated financial statements. It does, however, result in certain presentational changes in the consolidated financial statements, including:

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

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

In addition, the group also adopted a number of HKFRSs or amendments to HKFRSs which had an insignificant effect on the consolidated financial statements.

30. Events after the balance sheet date

On 19 January 2010, the group, through its subsidiary, HSBC Insurance (Asia-Pacific) Holdings Limited, increased its shareholding in Bao Viet Holdings to 18 per cent from 10 per cent through the purchase of additional shares for a cash consideration of VND1.88 trillion (or approximately US$101.8 million). Bao Viet Holdings will be accounted for as an associate with effect from 19 January 2010.

31. Statutory accounts

The information in this news release is not audited and does not constitute statutory accounts.

Certain financial information in this news release is extracted from the financial statements for the year ended 31 December 2009, which were approved by the Board of Directors on 1 March 2010 and will be delivered to the Registrar of Companies and the HKMA. The Auditors expressed an unqualified opinion on those financial statements in their report dated 1 March 2010. The Annual Report and Accounts for the year ended 31 December 2009, which include the financial statements, can be obtained on request from Group Communications (Asia), The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong, and will be made available on our website: www.hsbc.com.hk. A further press release will be issued to announce the availability of this information.

32. Ultimate holding company

The Hongkong and Shanghai Banking Corporation Limited is an indirectly held, wholly-owned subsidiary of HSBC Holdings plc.

Media enquiries to:         David Hall                   Telephone no: + 852 2822 1133                                              

                                          Gareth Hewett             Telephone no: + 852 2822 4929                                         

                                          Richard Beck               Telephone no: + 44 20 7991 0633                                          

                                          Patrick McGuinness      Telephone no: + 44 20 7991 0111

 

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