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HSBC Holdings PLC (HSBA)

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Monday 04 August, 2008

HSBC Holdings PLC

2008 Interim Report Section 6

RNS Number : 6130A
HSBC Holdings PLC
04 August 2008
 



Interim Management Report: Business Review (continued)


Hong Kong

Profit/(loss) before tax by customer group and global business


Half-year to


30 June
2008

US$m


30 June
2007

US$m


        31 December
2007
    US$m







Personal Financial Services     

2,036 


1,898 


2,314

Commercial Banking     

869 


760 


859

Global Banking and Markets     

770 


697 


881

Private Banking     

123 


161 


144

Other    

(725)


(186)


(189)







Profit before tax     

3,073 


3,330 


4,009

Profit before tax


Half-year to


30 June
200
8
US$m


30 June
200
7
        US$m


        31 December
200
7
    US$m







Net interest income     

2,835


2,568


2,915







Net fee income     

1,469


1,439


1,923







Net trading income     

314


469


773

Net income from financial instruments designated at fair value     

(361)


210


466

Gains less losses from financial investments     

(98)


32


62

Dividend income     

20


17


14

Net earned insurance premiums    

1,650


1,426


1,371

Other operating income     

448


413


432







Total operating income     

6,277


6,574


7,956







Net insurance claims incurred and movement in liabilities 
to policyholders     

(1,169)


(1,512)


(1,696)







Net operating income before loan impairment charges and other 
credit risk provisions 
    

5,108


5,062


6,260







Loan impairment charges and other credit risk provisions     

(81)


(80)


(151)







Net operating income     

5,027


4,982


6,109







Total operating expenses     

(1,975)


(1,665)


(2,115)







Operating profit     

3,052


3,317


3,994







Share of profit in associates and joint ventures     

21


13


15







Profit before tax         

3,073


3,330


4,009








    %


    %


    %







Share of HSBC's profit before tax     

    30.0


    23.5


    39.9

Cost efficiency ratio     

    38.7


    32.9


    33.8







Period-end staff numbers (full-time equivalent)     

29,467


27,066


27,655







Balance sheet data6








US$m


US$m


US$m







Loans and advances to customers (net)     

99,741


89,918


89,638

Loans and advances to banks (net)     

73,461


68,162


63,737

Trading assets, financial instruments designated at fair value, and 
financial investments 
        

78,735


98,998


102,180

Total assets     

325,692


300,681


332,691

Deposits by banks     

5,063


10,383


6,420

Customer accounts     

231,709


205,219


234,488

For footnote, see page 89.



Economic briefing

Hong Kong's economy proved robust during the first months of 2008, with year-on-year GDP growth accelerating to 7.1 per cent in the first quarter from 6.9 per cent in the final quarter of 2007. Domestic demand was the major driver of this growth, with both private consumption and fixed asset investment rising sharply. Exports also rose during the first half of 2008, adding further impetus to the economy. Labour markets remained very tight and the unemployment rate maintained a 10-year low of 3.3 per cent in the second quarter, supporting consumer spending. Investment demand was also strong in the first quarter in the falling interest environmentHowever, inflation accelerated during the first half of 2008 and while this largely reflected rising food and energy prices, increased rental and wage costs also contributed. The Government's budget measures also supported domestic demand. Interest rates fell in line with US rates.


Reconciliation of reported and underlying profit before tax


Half-year to 30 June 2008 ('1H08') compared with half-year to 30 June 2007 ('1H07')

Hong Kong

    1H07
    as
    reported
    US$m


    Disposals     and 
    dilution

     gains1

    US$m


    Currency

    translation2

    US$m


    1H07         at 1H08    exchange    rates
    US$m


    Acqui-

    sitions1

    US$m


    Under-    lying     change     US$m

    

    1H08
    as
    reported
    US$m


    Re-    ported    change    %

    

        Under-    lying

    change
    % 



















Net interest income     

2,568


-


7


2,575


-


260


2,835


10


10

Net fee income     

1,439


-


4


1,443


-


26


1,469


2


2

Other income3 

    

1,055


-


(1)


1,054


-


(250)


804


(24)


(24)




















Net operating income4     

 

5,062


-


10


5,072


-


36


5,108


1


1



















Loan impairment charges and other credit risk provisions     

(80)


-


(1)


(81)


-


-


(81)


(1)


-



















Net operating income     

4,982


-


9


4,991


-


36


5,027


1


1



















Operating expenses     

(1,665)


-


(4)


(1,669)


-


(306)


(1,975)


(19)


(18)



















Operating profit     

3,317


-


5


3,322


-


(270)


3,052


(8)


(8)



















Income from associates     

13


-


-


13


-


8


21


62


62



















Profit before tax     

3,330


-


5


3,335


-


(262)


3,073


(8)


(8)

For footnotes, see page 89.


Review of business performance

HSBC's operations in Hong Kong reported a preߛtax profit of US$3.1 billion, compared with US$3.3 billion in the first half of 2007, a decrease of 8 per cent on both a reported and an underlying basisThe decrease was due to the impairment of certain HSBC strategic investments, which were necessary as a consequence of significant falls in equity market prices. These impairments more than offset profit growth in Personal Financial Services, Commercial Banking and Global Banking and Markets. Underlying net operating income was largely in line with the first half of 2007, while operating expenses grew by 18 per cent, causing a worsening in the cost efficiency ratio to 38.7 per cent.

Pre-tax profits grew in Commercial Banking and Personal Financial Services despite the adverse effects of lower interest rates, driven by strong balance sheet growth through customer acquisition and new product offerings. Strong performance in Global Banking and Markets was driven by increased income from Balance Sheet Management, as falling interest rates led to lower cost of funds and a steeper yield curve partially offset by write-down on an exposure to a monoline insurer. In Private Banking, pre-tax profits fell, largely due to decline in the value of equities on the Hong Kong stock market, compared with the first half of 2007.

The following commentary is on an underlying basis. 

Personal Financial Services reported pre-tax profits of US$2.0 billion, 7 per cent higher than in the first half of 2007Revenues rose by 7 per cent due to growth in both net interest income and fee income. Higher cost incurred in generating increased business volumes led the cost efficiency ratio to worsen by 1.6 percentage points compared with the first half of 2007 to 29.1 per cent.

Net interest income rose by per cent to US$1.7 billiondriven by deposit volume growth from higher savings balances anby wider margins on most products apart from mortgages, following interest rate cuts. 

Average customer deposits were 10 per cent higher than in the first half of 2007. Continued emphasis on Premier helped to increase balances, the number of Premier customers increasing by 7 per cent in the first half of 2008 to over 311,000. Clients raised deposits in response to weaker investment sentiment following falls in local stock markets while, following the launch of campaigns offering preferential time deposit rates and the enhancement of HSBC's Smart Picks platform, HSBC also attracted new deposits. Deposit spreads widened, benefiting from pricing changes made to increase yields.

The property market in Hong Kong remained resilient, buoyed by the low interest rate environment and strong economic fundamentals, though the rate of property transactions and price growth slowed during the period. HSBC selectively reintroduced fixed-rate mortgages, boosting the volume of new mortgages, which rose by 82 per cent. Mortgage offerings to Premier customers continued to be well received, and the proportion of new HSBC home mortgage loans drawn down by Premier customers reached 43 per cent at 30 June 2008. Although yields on new lending increased, strong competition in the residential mortgage market resulted in narrower spreads on the portfolio.

HSBC's leadership in credit cards continued with the launch of the Green Credit Card. A percentage of cardholder spending on this card is directed by the Group to environmental initiatives. This campaign, and a separate acquisition campaign, contributed to the 630,000 new cards issued during the period to bring the total number of cards in circulation to 5.2 million at 30 June 2008. Strong momentum in cardholder spending continued in the first half of the year with an 11 per cent increase. The cards portfolio continued to perform well in the highly competitive environment and is ranked first for market share by multiple measures. Spreads increased due to lower funding costs following declines in market interest rates. This drove a 21 per cent increase in interest income from cards.

Fee income was per cent higher than in the first half of 2007, due to increased sales of investment products and higher income from current account sales, particularly Premier and PowerVantage, a wealth management account package designed for the mid-market customer. Although the volume of transactions on the Hong Kong stock exchange peaked in October 2007, volumes in the first half of 2008 remained above the levels recorded in the same period in 2007. 

Income from retail securities and investment products grew by per cent, as customers increasingly utilised online channels to complete transactions. HSBC protected its market share in investment products through programmes and incentives, including preferential brokerage and margin interest offers, and campaigns to sustain awareness of the range of HSBC funds, as well as the promotion of a series of unit trusts that have no subscription fee.

Notwithstanding the launch of new funds in 2007 and the introduction of WealthMaster (a portfolio wealth management sales tool also launched in 2007), funds under management were adversely affected by stock market performance, declining by 9 per cent to US$52 billioncompared with 31 December 2007.

Due to an increased number of cards in circulation and a rise in cardholder balances, credit card fee income rose by 16 per cent. 

Though partially offset by lower net claims, income from securities held by the insurance business was adversely affected by the decline in global equity markets. However, net earned insurance premiums of US$1.6 billion were 14 per cent higher than in the first half of 2007, driven by increased sales of endowment products in Hang Seng Bank. Of the non-life policies, 81 per cent are now sold through low-cost channels, including the Refundable Protection Plan launched in March through the telesales distribution channel. 

Other operating income included a gain of US$159 million from the redemption of shares in the Visa Inc. ('Visa') initial public offering ('IPO') and the disposal of MasterCard shares. 

Credit quality in Hong Kong remained benign, and loan impairment charges decreased by 55 per cent, partly as a result of better performance in the cards portfolio. The ratio of non-performing loans to gross advances fell by 7 basis pointsLoan impairment charges in the credit card portfolio were lower due to improved delinquency, reflecting bankruptcy trends that were largely in line with the first half of 2007.

Inflation continued to affect wage and premises costs, with operating expenses 13 per cent higher. Additional staff were added to frontline roles in the branch network and a programme of branch and self-service banking upgrades was initiated to maintain customer service levels. Marketing costs were largely in line with the first half of 2007, notwithstanding new campaigns including the Green Credit Card launch and further emphasis of Premier. IT costs rose in support of business growth and the expansion of self-service banking coverage. Notwithstanding these investments, the cost efficiency ratio remained low, in part duto the use of direct channels. For example83 per cent of retail securities transactions were completed online, a 2.9 percentage point improvement.

Commercial Banking recorded a pre-tax profit of US$869 million, 14 per cent higher than in the first half of 2007. Increased revenues were driven by asset and liability growth, along with a rise in fee income from trade and investment products. The credit environment showed mild deterioration; loan impairment charges rose by US$27 million compared with US$1 million in the first half 
of 2007. The growth in revenue exceeded the 
growth in costs resulting in a 0.7 percentage point improvement to the cost efficiency ratio

Customer numbers grew by 8 per cent as 
HSBC continued to expand its product offerings. 16,000 new Business Vantage accounts were opened during the period, bringing the total to 139,000. HSBC continued successfully to serve the borrowing needs of small businesses through the launch of new products and pre-approved lending offers to existing customers. 

Strategic ties with the Hong Kong Trade Development and Productivity Councils were forged to reinforce the small business segment brand and to aid in the acquisition of new lending customers. In addition, HSBC continued to benefit from trade flows between Hong Kong and mainland China, and took various steps to capture cross-border business, leveraging HSBC's customer base and strong presence in the Greater China region. This included the opening of a new centre for small businesses in Sheung Shui in Hong Kong

Although net interest income rose by 6 per cent, strong growth in liability volumes was significantly offset by the effect of narrowing spreads due to lower interest rates. 

Net interest income from deposits rose, due to higher deposit balances. Balance growth was due to a series of savings and time deposit campaigns and strong market liquidity. Spreads were lower, as base rates were reduced and market competition remained intense. 

Total lending balances rose by 23 per cent, buoyed by customer business activity related to mainland China. Asset spreads contracted during the period, due to significantly lower lending yields than in 2007 across all customer segments due to lower interest rates and market competitionTo encourage further growth in trade finance and factoring, a series of trade promotion programmes was held and a product was launched by Hang Seng Bank to provide customers with a means of benefiting from renminbi appreciationThis contributed to the rise in receivables finance net interest income of 33 per cent compared with the first half of 2007.

HSBC continued to serve a significant number of clients, particularly manufacturers, who received financing to expand their operations in mainland ChinaLending to small businesses rose as a result of strong economic growth in Hong KongIn addition, trade-related lending increased, spurred partly by system enhancements to better capture cross-border business referralsTrade and supply chain offerings were successful in attracting customers from different segments.

Credit card balances rose by US$22 million, while higher yields caused spreads to increase. The total number of new credit cards in the period reached over 9,400 and there was a 1per cent increase in income from merchant acquiring compared with the first half of 2007.

Fee income rose by 11 per cent to US$278 million. Tradand supply chain products had strong growth in income and average transaction size. In addition, volumes of remittance transactions and remittance income both rose by 18 per cent. A decline in the sale of interest and foreign exchange linked products, which was partly offset by an increase in demand for equity-linked products, resulted in a fall in overall sales of structured products. The sale of wealth management products to mid-market customers rose, however, and HSBC launched 63 new funds. 

Trading income increased by 19 per cent compared with the first half of 2007. Exchange rate volatility continued into the first half of 2008 and the level of trading between US and Hong Kong dollars rose

Net earned insurance premiums rose by 53 per cent, driven by life products. The composite sales teams introduced in 2007 and the launch in June 2008 of a corporate wealth management branding campaign were used to enhance customer awareness of investment, key person and group medical insurance products. 

Loan impairment charges of US$28 million were recorded, an increase from previously low levels. The credit environment proved more volatile than in the first half of 2007, particularly for small and medium businesses with operations in mainland China. Impaired customer loans were 0.52 per cent of total loans and advances at 30 June 2008, a further 17 basis point improvement on its previously low level.

Operating expenses rose by 13 per cent, due to a combination of higher staff numbers, wage inflation and increased premises costs. Nearly 200 frontline staff were added since 30 June 2007, to provide additional capacity for business growth. IT costs rose as the number of IT-related projects, including the upgrade of internet systems, increased. The number of transactions through direct channels rose to 42 per cent of the total volume200,000 customers were registered as internet users at 30 June 2008, compared with 176,000 at the end of 2007Call centres were also increasingly utilised to generate lower cost sales.

Global Banking and Markets reported a preߛtax profit of US$770 million, an increase of 10 per cent over the first half of 2007. This growth was mainly due to an increase in net interest income in Balance Sheet Management, partly offset by a decline in trading income, driven by write-down on an exposure to monoline insurer. 

Total operating income rose by 13 per cent to US$1.3 billion. The fall in short-term US and Hong Kong dollar interest rates supported the strong results of Balance Sheet Management and Rates trading. Income from foreign exchange trading benefited from exchange rate volatility. The securities services business earned increased fees, principally in funds services. Partly offsetting this was a monoline exposure write-down in structured credit of US$0.2 billion.

Net interest income grew by 91 per cent to US$801 million, driven mainly by Balance Sheet Management, which increased by US$389 million due to a steepening of the US dollar and Hong Kong dollar yield curves. Net interest income from Global Banking increased by 13 per cent due to an improvement in lending spreads in a more conservative lending environment.

Net fee income decreased, mainly due to higher customer referral fees paid in respect of increased sales of equity-linked investments to retail banking customers; these sales drove a corresponding rise in trading income. Net fee income also decreased due to a decline in initial public offering ('IPO') success fees. This was partly offset by a rise in securities services revenues, particularly in funds services. Increased activity by fund managers and greater than expected cash balances contributed to this revenue growth. Higher fees in Global Asset Management were driven by a number of successful product launches which contributed to US$4.2 billion net new money.

Trading income declined by 43 per cent to US$217 million, due to write-down in monoline exposureFor a description of the background to monoline write-downs, see page 36Performance in Credit also weakened as spreads widened. These declines were mitigated in part by 72 per cent growth in foreign exchange trading revenues, which were driven by volatile currency markets, increased investment flows and a greater focus on cross-sales to other customer groups. Equities increased by 39 per cent as a result of higher issuance of equity-linked products, in response to market demand from retail customers. Rates income grew by 28 per cent as market conditions drove clients to hedge interest rate risk exposure.

Operating expenses rose by 13 per cent, mainly due to an increase in performance costs resulting from improved revenues in certain businesses, and a rise in staff numbers to support the growth of product areas such as structured equities, securities services and corporate lending. IT costs increased, mainly due to systems development associated with the growth of the Global Markets.

Private Banking reported a pre-tax profit of US$123 million, a decrease of 24 per cent on the first half of 2007. With the decline in the value of equities on the Hong Kong stock market in the first half of 2008, demand for equity-linked structured products diminishedresulting in lower revenue than the strong results in 2007The cost efficiency ratio worsened by 10.4 percentage points to 50.8 per cent. 

Net interest income grew by 96 per cent to US$96 million, with a 33 per cent increase in customer depositsThe growth in customer deposits was driven by customers switching from investment securities to cash deposits, due to market turbulence and poor equity market performance

Fee income rose by 19 per cent to US$95 million, owing largely to performance fees related to Asian discretionary portfolios and growth of the trust business. Partially offsetting this were lower fees from mutual funds, as funds under management decreased.

Trading income fell by 56 per cent to US$57 million, attributable to the downturn in the Hong Kong stock market. In particular, there was a decline in demand for equity-linked structured products, which were the primary driver of trading income in 2007.

Client assets decreased by 9 per cent to US$66.4 billion, compared with 31 December 2007 because of the lower market values of funds. Despite this, the growth in cross-referrals continued, with inward referrals from other customer groups contributing US$613 million to total client assets compared with US$190 million the first half of 2007.

Operating expenses increased by 17 per cent to US$127 million, primarily due to a rise in staff costs, which were driven by increased salaries in a competitive labour market and higher numbers of staff recruited in response to a greater number of clients.

Within Other, a loss of US$725 million was reported, compared with a loss of US$186 million in the first half of 2007. The decrease was driven by equity market declines, which resulted in total impairments of US$296 million in the value of several of HSBC's strategic investments in the region. 

The fall in net interest income was partly due to lower yields on core liquidity partly as a result of a switch to shorter maturities for these investments. Hong Kong head office and central IT costs rose by 22 per cent, reflecting increased activity in supporting business expansion. These costs were substantially offset by recoveries from Group entities. 


Reconciliation of reported and underlying profit before tax


Half-year to 30 June 2008 ('1H08') compared with half-year to 31 December 2007 ('2H07')

Hong Kong

    2H07
    as
    reported
    US$m


    Disposals     and 
    dilution

     gains1

    US$m


    Currency

    translation2

    US$m


    2H07         at 1H08    exchange    rates
    US$m


    Acqui-

    sitions1

    US$m


    Under-    lying     change     US$m

    

    1H08
    as
    reported
    US$m


    Re-    ported    change    %

    

        Under-    lying

    change
    % 



















Net interest income     

2,915


-


(2)


2,913


-


(78)


2,835


(3)


(3)

Net fee income     

1,923


-


(1)


1,922


-


(453)


1,469


(24)


(24)

Other income3  

   

1,422


-


(2)


1,420


-


(616)


804


(43)


(43)




















Net operating income4    

 

6,260


-


(5)


6,255


-


(1,147)


5,108


(18)


(18)



















Loan impairment charges and other credit risk provisions     

(151)


-


-


(151)


-


70


(81)


46


46



















Net operating income     

6,109


-


(5)


6,104


-


(1,077)


5,027


(18)


(18)



















Operating expenses     

(2,115)


-


3


(2,112)


-


137


(1,975)


7


6



















Operating profit     

3,994


-


(2)


3,992


-


(940)


3,052


(24)


(24)



















Income from associates     

15


-


-


15


-


6


21


40


40



















Profit before tax     

4,009


-


(2)


4,007


-


(934)


3,073


(23)


(23)

For footnotes, see page 89.



Analysis by customer group and global business

Profit/(loss) before tax 


Half-year to 30 June 2008

Hong Kong

    Personal
    Financial
    Services
    US$m


Commercial     Banking     US$m


    Global
    Banking and
    Markets
    US$m



    Private
    Banking
    US$m




    Other
    US$m


    Inter-
    segment

    elimination9

    US$m




    Total
    US$m















Net interest income/(expense) ..    

1,693


770


801 


96 


(514)


(11)


2,835 















Net fee income    

856


278


238 


95 



-


1,469 















Trading income/(expense) excluding net interest income     

90


37


40 


57 


(121)


-


103 

Net interest income on trading activities     

6


1


177 


-


16 


11 


211 















Net trading income/(expense)7    

 

96


38


217 


57


(105)


11 


314 

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

(455)


15



-


71 


-


(361)

Gains less losses from 
financial investments 
    

159


34


12 


-


(303)


-


(98)

Dividend income     

2


1



-


14 


-


20 

Net earned insurance 
premiums
     

1,559


84



-



-


1,650 

Other operating income     

110


17


47 



448 


(176)


448 















Total operating income/(expense)     

4,020


1,237


1,332 


250


(386)


(176)


6,277 















Net insurance claims8      

(1,104)


(61)


(4)


-


-


-


(1,169)















Net operating income/(expense)4     

 

2,916


1,176


1,328 


250 


(386)


(176)


5,108 















Loan impairment (charges)/ recoveries and other credit risk provisions     

(34)


(28)


(20)


-



-


(81)















Net operating income/(expense)     

2,882


1,148


1,308 


250 


(385)


(176)


5,027 















Total operating expenses     

(848)


(279)


(538)


(127)


(359)


176 


(1,975)















Operating profit/(loss)     

2,034


869


770 


123 


(744)


-


3,052 















Share of profit in associates 
and joint ventures 
    

2


-


-


-


19 


 -


21 















Profit/(loss) before tax     

2,036 


869


770 


123 


(725)


-


3,073 
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit 
before tax 
    

    19.9


    8.5


    7.5 


    1.2 


    (7.1)




    30.0 

Cost efficiency ratio     

    29.1


    23.7


    40.5 


    50.8 


    (93.0)




    38.7 















Balance sheet data6















    US$m


    US$m


    US$m


    US$m


    US$m




    US$m

Loans and advances to 
customers (net)     

40,608 


32,112 


20,257 


4,912 


1,852 




99,741 

Total assets     

74,967 


41,800 


162,571 


15,072 


31,282 




325,692 

Customer accounts     

133,454 


49,700 


31,577 


16,602 


376 




231,709 

Loans and advances to 
banks (net)
12     

 





64,186 









Trading assets12,13     





28,334 









Financial instruments 
designated at fair value
12     

 





422 









Financial investments12     





34,455 









Deposits by banks12     





4,417 









Trading liabilities12,13     





25,895 









For footnotes, see page 89.


Profit/(loss) before tax 


Half-year to 30 June 2007

Hong Kong

    Personal
    Financial
    Services
    US$m


Commercial     Banking     US$m


    Global
    Banking and
    Markets
    US$m



    Private
    Banking
    US$m




    Other
    US$m


    Inter-
    segment

    elimination9

 

    US$m




    Total
    US$m















Net interest income/(expense) ..    

1,588 


726 


418 


49 


(372)


159


2,568















Net fee income    

791 


250 


318 


80 


-


-


1,439 















Trading income/(expense) excluding net interest 
income 
    

74 


32 


302 


130 


(13)


-


525 

Net interest income on trading activities     


-


80 


-


21 


(159)


(56)















Net trading income7     

76 


32 


382 


130 



(159)


469

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

273 


(36)



-


(28)


-


210 

Gains less losses from 
financial investments 
    

-


-




30 


-


32 

Dividend income     

1


-



-


15 


-


17 

Net earned insurance 
premiums 
    

1,366 


55 



-


-


-


1,426 

Other operating income     

97 


13 


55 


10 


390 


(152)


413 















Total operating income     

4,192 


1,040 


1,181 


270 


43 


(152)


6,574 















Net insurance claims8      

(1,473)


(34)


(5)


-


-


-


(1,512)















Net operating income4     

2,719 


1,006 


1,176 


270 


43 


(152)


5,062 















Loan impairment charges and other credit risk provisions     

(74)


(1)


(5)


-


-


-


(80)















Net operating income     

2,645 


1,005 


1,171 


270 


43 


(152)


4,982 















Total operating expenses     

(750)


(246)


(474)


(109)


(238)


152 


(1,665)















Operating profit/(loss)     

1,895 


759 


697 


161 


(195)


-


3,317 















Share of profit in associates 
and joint ventures 
    



-


-



-


13 















Profit/(loss) before tax     

1,898 


760 


697 


161 


(186)


-


3,330 
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit 
before tax 
    

    13.4 


    5.4 


    4.9 


    1.1 


    (1.3)


    


    23.5 

Cost efficiency ratio     

    27.6 


    24.5 


    40.3 


    40.4 


    553.5 




    32.9 















Balance sheet data6















    US$m


    US$m


    US$m


    US$m


    US$m




    US$m

Loans and advances to 
customers (net) 
    

39,375 


25,105 


19,231 


4,309 


1,898 




89,918 

Total assets     

62,199 


31,043 


163,766 


12,553 


31,120 




300,681 

Customer accounts     

120,638 


44,719 


26,978 


12,340 


544 




205,219 

Loans and advances to 
banks (net)
12     

 





61,850 









Trading assets12,13     





29,224









Financial instruments 
designated at fair value
12     





691









Financial investments12     

 





50,099









Deposits by banks12     





9,991 









Trading liabilities12,13     





24,045









For footnotes, see page 89.

Analysis by customer group and global business (continued)

Profit/(loss) before tax 


Half-year to 31 December 2007

Hong Kong

    Personal
    Financial
    Services
    US$m


    Commercial     Banking     US$m


    Global
    Banking and
    Markets
    US$m



    Private
    Banking
    US$m




    Other
    US$m


    Inter-
    segment

    elimination9

 

    US$m




    Total
    US$m















Net interest income/(expense) ..    

1,754


814


568


21


(395)


153


2,915















Net fee income     

1,182


276


364


99


2


-


1,923















Trading income excluding 
net interest income     

114


31


251


150


199


-


745

Net interest income on 
trading activities     

3


-


161


-


17


(153)


28















Net trading income7     

117


31


412


150


216


(153)


773

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

547


23


6


-


(110)


-


466

Gains less losses from 
financial investments 
    

-


-


37


-


25


-


62

Dividend income     

1


1


5


-


7


-


14

Net earned insurance 
premiums
    

1,288


75


8


-


-


-


1,371

Other operating income/ (expense)     

56


15


59


(4)


491


(185)


432















Total operating income     

4,945


1,235


1,459


266


236


(185)


7,956















Net insurance claims8      

(1,643)


(48)


(5)


-


-


-


(1,696)















Net operating income4     

3,302


1,187


1,454


266


236


(185)


6,260















Loan impairment charges and other credit risk provisions     

(101)


(27)


(23)


-


-


-


(151)















Net operating income     

3,201


1,160


1,431


266


236


(185)


6,109















Total operating expenses     

(889)


(301)


(551)


(122)


(437)


185


(2,115)















Operating profit/(loss)     

2,312


859


880


144


(201)


-


3,994















Share of profit in associates 
and joint ventures     

2


-


1


-


12


-


15















Profit/(loss) before tax     

2,314


859


881


144


(189)


-


4,009
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit 
before tax 
    

    23.0


    8.5


    8.8


    1.4


    (1.9)




    39.9

Cost efficiency ratio     

    26.9


    25.4


    37.9


    45.9


    185.2




    33.8















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net) 
    

38,197 


25,890 


19,171 


4,329 


2,051 




89,638 

Total assets     

72,386 


35,366 


185,933 


14,138 


24,868 




332,691 

Customer accounts     

129,159 


51,562 


37,364 


15,649 


754 




234,488 

Loans and advances to 
banks (net)
12     

 





53,725 









Trading assets12,13     





38,369









Financial instruments 
designated at fair value
12     

 





546









Financial investments12     





46,765









Deposits by banks12     





6,251 









Trading liabilities12,13     





26,804









For footnotes, see page 89.



Rest of Asia-Pacific (including the Middle East)

Profit/(loss) before tax by country within customer groups and global businesses 


    Personal
    Financial
    Services
    US$m


    Commercial     Banking     US$m


    Global
    Banking and
    Markets
    US$m



    Private
    Banking
    US$m




    Other
    US$m




    Total
    US$m













Half-year to 30 June 2008












Australia     

15 


34 


47 


-



100 

India     

(53)


75 


301 


2


46 


371 

Indonesia     

(1)


19


52 


-


(4)


66 

Japan     

(39)


-


42 


1


-


Mainland China     

277 


306 


357 


(2)


(31)


907 

Associates     

321 


268 


159 


-


-


748 

Other mainland China     

(44)


38 


198 


(2)


(31)


159 













Malaysia     

61


51 


94 


-



209 

Middle East     

209 


308 


426 


2


45 


990 

Egypt     

11 


37 


45 


-


22 


115 

United Arab Emirates     

106 


184 


229 


2



522 

Other Middle East     

44 


69 


65 


-


-


178 

Middle East (excluding Saudi Arabia    

161 


290 


339 



23 


815 

Saudi Arabia     

48 


18 


87 


-


22 


175 













Singapore     

63 


45 


185 


51


(4)


340 

South Korea     

(10)


(2)


168 


-


21 


177 

Taiwan     

(5)


12 


106 


-



115 

Other     

18 


113 


194 


-


20 


345 














535 


961 


1,972 


54 


102 


3,624 













Half-year to 30 June 2007












Australia     

19


16


16


-


-


51

India     

(13)


49


211


-


52


299

Indonesia     

2


15


46


-


(5)


58

Japan     

(8)


(1)


26


1


-


18

Mainland China     

168


171


126


-


1,084


1,549

Associates     

171


147


67


-


1,078


1,463

Other mainland China     

(3)


24


59


-


6


86













Malaysia     

40


28


70


1


6


145

Middle East     

125


220


216


1


44


606

Egypt     

7


22


24


-


19


72

United Arab Emirates     

62


139


93


1


-


295

Other Middle East     

37


41


53


-


(3)


128

Middle East (excluding Saudi Arabia    

106 


202 


170 


1


16 


495 

Saudi Arabia     

19


18


46


-


28


111













Singapore     

50


60


105


51


1


267

South Korea     

(15)


(8)


66


-


15


58

Taiwan     

(35)


13


64


-


1


43

Other     

18


34


152


2


44


250














351


597


1,098


56


1,242


3,344















Profit/(loss) before tax by country within customer groups and global businesses (continued)


    Personal
    Financial
    Services
    US$m


    Commercial     Banking     US$m


    Global
    Banking and
    Markets
    US$m



    Private
    Banking
    US$m




    Other
    US$m




    Total
    US$m













Half-year to 31 December 2007












Australia     

22


21


26


-


4


73

India     

(57)


39


218


(1)


31


230

Indonesia     

(9)


14


40


-


1


46

Japan     

(26)


(2)


49


(1)


5


25

Mainland China     

326


226


243


-


17


812

Associates     

345


204


153


-


15


717

Other mainland China     

(19)


22


90


-


2


95













Malaysia     

41


62


76


(1)


7


185

Middle East     

120


262


279


2


38


701

Egypt     

3


24


41


-


13


81

United Arab Emirates     

46


123


149


2


2


322

Other Middle East     

46


60


63


-


3


172

Middle East (excluding Saudi Arabia    

95


207


253


2


18


575

Saudi Arabia     

25


55


26


-


20


126













Singapore     

51


52


135


39


6


283

South Korea     

(29)


(12)


93


-


13


65

Taiwan     

(17)


14


80


-


3


80

Other     

(13)


77


127


(2)


(24)


165














409


753


1,366


36


101


2,665

    Loans and advances to customers (net) by country


    At

    30 June 
    2008
    US$m


    At 

    30 June    2007
    US$m

    

    At

    31 December
    2007
    US$m







Australia     

12,664 


9,845 


11,339 

India     

7,585 


6,216 


7,220 

Indonesia     

1,924 


1,296 


1,642 

Japan     

4,710 


3,580 


4,258 

Mainland China     

12,653 


6,787 


11,647 

Malaysia     

9,295 


8,003 


8,856 

Middle East (excluding Saudi Arabia    

25,004 


17,047 


21,607 

Egypt     

2,265 


1,196 


1,853 

United Arab Emirates     

16,416 


10,928 


14,103 

Other Middle East     

6,323 


4,923 


5,651 







Singapore     

13,724 


10,768 


11,505 

South Korea     

6,581 


6,458 


7,124 

Taiwan     

5,330 


3,834 


3,658 

Other     

14,287 


14,340 


12,996 








113,757 


88,174 


101,852 



Customer accounts by country


    At

    30 June 
    2008
    US$m


    At 

    30 June    2007
    US$m

    

    At

    31 December
    2007
    US$m







Australia     

13,864 


10,345 


11,418

India     

11,365


8,827


12,021

Indonesia     

2,557


2,082


2,574

Japan     

4,728


3,944


4,657

Mainland China     

18,205


9,229


14,537

Malaysia     

12,836


10,629


11,701

Middle East (excluding Saudi Arabia    

36,256


26,277


30,937

Egypt     

5,359 


3,358 


4,056

United Arab Emirates     

20,658 


15,362 


18,455

Other Middle East     

10,239 


7,557 


8,426 







Singapore     

32,784


25,885


28,962

South Korea     

4,509


4,705


5,760

Taiwan     

12,227


9,208


9,426

Other     

17,464 


16,328 


18,240 








166,795


127,459


150,233



Economic briefing

Mainland China maintained a robust level of growth during the first half of 2008, although some mild deceleration was evident as the year-on-year rate of GDP growth slowed from 11.3 per cent in the final quarter of 2007 to 10.1 per cent in the second quarter of 2008. This reflected both a slowing of overseas demand for Chinese exports and the effect of unusual weather patterns and natural disaster. Consumer spending continued to advance at a rapid pace with retail spending increasing by 23 per cent over the year to June 2008, reflecting strong income growth and, in part, rising inflationary pressures. The annual rate of consumer price inflation rose to 7.1 per cent in June 2008, mainly due to higher food prices. Intense price pressures led to a further tightening of economic policy during the first half of 2008. The renminbi continued its gradual appreciation against the US dollar, rising at a slightly higher rate than that of recent years.

Japan's economy, the largest in the region, proved unexpectedly strong during the first quarter of 2008 with GDP rising by 1.3 per cent year-on-year, driven in large part by a rebound in household expenditure and strong external demand. However, most indicators of growth deteriorated during the second quarter of the year. The annual rate of industrial production growth slowed to just 0.2  per cent in June 2008, household expenditure remained subdued and business confidence deteriorated during the second quarter. Inflationary pressures increased during 2008 and the headline rate of consumer price inflation hit a ten-year high of 2.0 per cent in June 2008.

The economies of the Middle East continued to perform strongly during the first half of 2008, although inflationary pressures grew as the year progressed. Sharply higher oil prices once again proved the catalyst for expansion, facilitating continued growth in public and private investment. Consumption rose as employment levels increased and low interest rates supported an ongoing expansion in credit. High oil revenues continued to boost fiscal and current account surpluses throughout the Middle East, supporting in turn increases in the holdings of foreign assets.

Elsewhere in Asia, most economies continued to perform reasonably strongly in the first half of 2008, although growing concerns arising from the inflationary outlook prompted a number of central banks across the region to tighten their policies. The Indian economy proved resilient, helped by the strength of activity within the service sector and a sharp rise in government investment expenditure. A sustained rise in inflation during the first half of 2008 prompted the Reserve Bank of India to tighten policy. Economic activity in Singapore was uneven during the first half of the year, with volatility in certain specific industrial sectors. Overall, high levels of loan demand boosted strong growth during the first quarter before activity slowed. The annual rate of inflation continued to advance, hitting a 26ߛyear high of 7.5 per cent in June 2008. Inflation was also the predominant concern in Vietnam as the annual rate of consumer price inflation doubled to 27 per cent during the first half of 2008, prompting the State Bank of Vietnam to sanction substantial interest rate increases. The external trade position 

Profit before tax



Half-year to

Rest of Asia-Pacific (including the Middle East)

30 June
2008

US$m


30 June
2007
        US$m


        31 December
2007

    US$m







Net interest income     

2,633


1,901


2,242







Net fee income     

1,338


1,010


1,236







Net trading income     

1,329


797


846

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

(88)


78


33

Gains less losses from financial investments     

33


26


12

Gains arising from dilution of interests in associates     

-


1,076


5

Dividend income     

2


4


4

Net earned insurance premiums     

114


109


117

Other operating income     

484


360


438







Total operating income     

5,845


5,361


4,933







Net insurance claims incurred and movement in liabilities 
to policyholders 
    

(4)


(141)


(112)







Net operating income before loan impairment charges and other 
credit risk provisions 
    

5,841


5,220


4,821







Loan impairment charges and other credit risk provisions     

(369)


(308)


(308)







Net operating income     

5,472


4,912


4,513







Total operating expenses     

(2,784)


(2,075)


(2,689)







Operating profit     

2,688


2,837


1,824







Share of profit in associates and joint ventures     

936


507


841







Profit before tax         

3,624


3,344


2,665








    %


    %


    %







Share of HSBC's profit before tax     

    35.4


    23.6


    26.5

Cost efficiency ratio     

    47.7


    39.8


    55.8







Period-end staff numbers (full-time equivalent)     

93,747


81,031


88,573







Balance sheet data6

 







 

US$m


US$m


US$m







Loans and advances to customers (net)     

113,757


88,174


101,852

Loans and advances to banks (net)     

51,739


34,678


39,861

Trading assets, financial instruments designated at fair value, and 
financial investments 
    

68,132


52,189


64,381

Total assets     

259,041


201,123


228,112

Deposits by banks     

20,539


13,709


17,560

Customer accounts     

166,795


127,459


150,233

For footnotes, see page 89.


deteriorated considerably, raising concerns over the sustainability of the currencyFirst quarter growth in year-on-year terms remained at about 7 per cent in Malaysiadriven by rising food and energy exportsIn Indonesia, further strong growth in the first quarter of the year was driven by robust business investment expenditure. However, rising inflationary pressures eventually led Bank Indonesia into a modest tightening of policy. South Korea's economy suffered from its position as one of the most energy intensive economies of the region, with both the outlook for growth and inflation deteriorating during the first half of 2008. Rising food prices proved particularly problematic for the Philippines' economy, with inflation moving well above the central bank's targeted range. Export growth in Taiwan was generally resilient in the face of deteriorating conditions overseas, while robust economic performance in Thailand and Pakistan in the first half of 2008 was overshadowed to varying degrees by lingering domestic uncertainty.



Reconciliation of reported and underlying profit before tax


Half-year to 30 June 2008 ('1H08') compared with half-year to 30 June 2007 ('1H07')

Rest of Asia-Pacific (including the Middle East)

    1H07
    as
    reported
    US$m


    Disposals     and 
    dilution

     gains1

    US$m


    Currency

    translation2

    US$m


    1H07         at 1H08    exchange    rates
    US$m


    Acqui-

    sitions1

    US$m


    Under-    lying     change     US$m

    

    1H08
    as
    reported
    US$m


    Re-    ported    change    %

    

        Under-    lying

    change
    % 



















Net interest income     

1,901



95


1,996


8


629


2,633


39


32

Net fee income     

1,010



50


1,060


1


277


1,338


32


26

Other income3     

 

2,309


(1,076)


108


1,341


4


525


1,870


(19)


39




















Net operating income4    

 

5,220


(1,076)


253


4,397


13


1,431


5,841


12


33



















Loan impairment charges and other credit risk provisions     

(308)



(12)


(320)


-


(49)


(369)


(20)


(15)



















Net operating income     

4,912


(1,076)


241


4,077


13


1,382


5,472


11


34



















Operating expenses     

(2,075)


-


(116)


(2,191)


(11)


(582)


(2,784)


(34)


(27)



















Operating profit     

2,837


(1,076)


125


1,886


2


800


2,688


(5)


42



















Income from associates     

507



32


539


-


397


936


85


74



















Profit before tax     

3,344


(1,076)


157


2,425


2


1,197


3,624


8


49

For footnotes, see page 89.


Review of business performance

Operations in the Rest of Asia-Pacific region reported a pre-tax profit of US$3.6 billion compared with US$3.3 billion in the first half of 2007, an increase of 8 per cent. In the first half of 2007, HSBC recognised non-recurring gains of US$1.1 billion following share offerings made by HSBC's associates Ping An Insurance, Bank of Communications and Industrial Bank. Excluding these dilution gains, profit before tax increased by 49 per cent on an underlying basis.

In the first half of 2008, HSBC acquired the assets, liabilities and operations of The Chinese Bank in Taiwan, increasing the branch network there from eight to 44 and providing a presence in all major cities in Asia's fourth biggest banking market. 

Global Banking and Markets performed well, notably in the Middle East, mainland China and South Korea, driven by strong revenue growth from Balance Sheet Managementforeign exchange trading and securities services. Increased profit before tax in Commercial Banking was largely volume driven following customer acquisition, particularly in the mid-market and small business segments. In Personal Financial Services, higher contributions from HSBC associates and increased revenues from personal lending were largely offset by larger loan impairment charges, particularly in India following portfolio growth and increased delinquencies, and investment in business expansion. Pre-tax profits were broadly in line with the first half of 2007 in Private Banking as strong revenue only partially funded costs associated with expansion in Japan and mainland China.

The following commentary is on an underlying basis and excludes dilution gains.

Pre-tax profits in Personal Financial Services were US$535 million, 42 per cent higher than in the first half of 2007. Operating income and the contribution from HSBC's associates increased by 23 per cent and 79 per cent, respectively. Revenue growth across the region was driven by increased fee income and net interest income, with the latter predominantly attributable to the growth of personal lending. Loan impairment charges increased, partly as a result of the deteriorating credit environment and the effects of higher food and energy prices on consumers in IndiaNotwithstanding significant investment in the key markets of mainland Chinathe Middle East, India and Japan, the cost efficiency ratio remained in line with the first half of 2007.

Key initiatives in the region included an increased emphasis on offerings to Premier customers and growth of the wealth management business. The number of Premier customers increased by 23 per cent compared with 31 December 2007. Growth was particularly strong in the United Arab Emirates ('UAE'), India, Singapore, Australia and mainland China, assisted by the expansion of renminbi-denominated services following local incorporation in 2007. In the Middle East, several HSBC One World products for non-residents were introduced to increase cross-border business.

Branches were added during the last 12 months in mainland ChinaIndonesiaPakistanJapan, Sri Lanka and JordanIncluding 32 Hang Seng Bank outlets in Mainland China, the total number of branches in the region was 46224 per cent rise from 30 June 2007. In mainland China, HSBC added 8 new outlets in the period, maintaining its leading position among foreign banks for own-branded branches. Operating expenses rose to support expansion, including more than 1,100 additional staff. HSBC now has over 10,000 frontline staff across the region.

Pre-tax profits rose by 52 per cent in mainland China, with a significant rise in revenues from the locally incorporated bank along with profits from associates which nearly doubled. Net interest income grew strongly, benefiting from substantial volume growth of mortgages and renminbi deposits following branch expansion into the important economic zones of the Pearl River Delta, the Yangtze River Delta and the Bohai Rim. Business expansion was curtailed slightly due to regulatory restrictions on lending growth for banks operating in mainland Chinawhich took effect from the second half of 2007. Fees related to products offered through the Qualified Domestic Institutional Investors ('QDII') scheme contributed to a doubling of net fee income.

The Middle East reported profit before tax of US$209 million, an increase of 65 per cent. Revenues rose by 52 per cent, driven by higher net interest income from balance sheet growth and wider spreads in a falling interest rate environment, particularly for personal loans, cards and mortgagesMortgage balances more than doubled in the UAE, with growth driven by customer demand. Fee income also rose as a result of strong sales of investment and insurance products and higher fees from cards, as both cards in force and cardholder spending increased. New structured products and mutual funds were introduced to match client appetite in the volatile stock market conditionsTrading income rose due to stronger than anticipated foreign exchange income, in part due to higher volatility fuelled by expectations that currencies in the region may be unpegged from the US dollar or revalued. 

In Singapore, pre-tax profits grew by 17 per cent, largely attributable to higher net interest income from an increase in deposit balances. Fees rose strongly due to higher sales of investment products and the growth of the credit card business

In India, a pre-tax loss of US$53 million was recorded, compared with a loss of US$13 million in the first half of 2007. Investment in the business continued and drove higher asset balances and income growth. Loan impairment charges increased by 181 per cent, driven by volume growth in an adverse credit and collections environment as a result of high interest rates and inflation which inhibited customer repayment capabilities. Operating expenses increased due to higher business volumes and a rise in staff costs combined with rise in fees paid to collection agencies.

A pre-tax loss in Taiwan was significantly lower than in the first half of 2007, due to reduced loan impairment charges. 

Profit before tax in Malaysia rose by 42 per cent following strong revenue growth as a result of higher deposit balances and a rise in card and mortgage balances. In addition, there were gains from the redemption of Visa shares and sale of MasterCard shares. Growth was moderated by reduced consumer interest in investment products and competition in the mortgage sector which resulted in lower spreads.

Net interest income increased by 20 per cent to US$1.2 billion, driven mainly by wider spreads on credit cards and personal lending. Income was substantially higher in the Middle East, IndiaIndonesia and mainland ChinaHigher pricing resulted in a widening of asset spreads.

14 per cent increase in average deposit balances was largely driven by mainland China and Singapore. The success of Premier was also instrumental in deposit growth in mainland China and India. HSBC Direct balances rose by 58 per cent. Spreads contracted during the period due to falling interest rates.

The mortgage portfolio grew by 9 per cent, excluding New Zealandwhere there had been the sale of a mortgage portfolio in the second half of 2007. Growth was recorded in the UAE, SingaporeAustralia and mainland ChinaMortgage spreads improved, due to lower base rates.

Average card balances increased by 29 per cent, and interest income related to credit cards rose significantly in the Middle East, India and Australia. In the Middle East, credit card balances rose following the success of efforts to increase cardholder spending and the number of cards 
in circulation. The latter rose by 12 per cent in the first half of 2008 to over 1.3 million. Total cards in 
issue in the Rest of Asia-Pacific region exceeded 9.3 million. Spreads on credit card lending widened, driven by the Middle East and India, where base rate cuts led to lower funding costs while asset pricing was maintained.

In Indonesia and India, lending growth, including personal instalment loans and cards, continued following the expansion of the consumer finance business begun in 2007 which continued in Indonesia with the addition of 24 branchesSpreads in each of these countries improved due to higher lending rates combined with stable base rates.

Net fee income increased by 23 per cent to US$434 million, with growth in cards and the sale of investment productsCredit card fee income increased by 33 per cent, driven by higher balances, cardholder spending and new cards in the Middle East and India. Funds under management continued to grow, reaching US$13.1 billion. Sales of investment products increased despite stock market volatility, as customers increasingly chose structured products over market-led unit trustsHSBC increased fees from the sale of insurance products by 41 per cent as a result of new product launches, including credit enhancement insurance. 

Declines in global equity markets resulted in lower net claims, however this was offset by a corresponding net loss on investments held by the insurance business.

Loan impairment charges rose by 43 per cent, driven by higher charges in India, the Middle East and, to a lesser extent, Australia. The main contributing factors in India were volume growth, seasoning of the personal lending portfolio, higher delinquency on credit cards and personal loans and a challenging collections environment. In the Middle East, volume growth of the credit card portfolio led to a rise in delinquency, notably in the UAE. Loan impairment charges increased by 83 per cent in Australia due to increased delinquencies on cards.

In Taiwan, loan impairment charges decreased by 67 per cent, due to an improvement in asset quality and increased collection efforts in the high risk segments. 

HSBC continued to invest substantially in the region, particularly in India and mainland China. The number of staff increased in key markets including mainland China and the Middle EastFurther branches in mainland China led to the hiring of over 800 additional staff. Deteriorating credit performance and increased loan delinquencies in the consumer finance business drove a rise in fees paid to collection agencies in India and Indonesia. In Japanoperating expenses increased, primarily due to the launch of Premier and branch expansion. Cost increases were controlled in part by customer use of low-cost channels. In the UAE, the number of 
e-Saver accounts increased by 204 per cent, along with a 96 per cent rise in internet transactions.

Income from associates rose substantially and was 79 per cent higher than in the first half of 2007. HSBC's associate, Ping An Insurance, continued to be successful in increasing life insurance premiums, which, combined with an increase to long-term 
yield assumptions led to increased embedded 
value. In addition, contributions from Bank of Communications and The Saudi British Bank rose by 95 per cent and 146 per cent, respectively. The increase in the latter was primarily attributable to strong asset growth and limited loan impairment charges. The Saudi British Bank also launched three Premier centres

Commercial Banking reported a pre-tax profit of US$961 million, 52 per cent higher than in the first half of 2007. Growth was largely attributable to mid-market and small business customer acquisition, and increased associates' income from the Bank of Communications and Industrial Bank in mainland ChinaRevenue growth across the region was largely volume driven and the credit environment remained relatively benign. Asian intra-regional trade and investment flows continued to strengthen, mitigating the effects of the global economic slowdown. Notwithstanding the expansion of the network to 'second tier' cities in India, Taiwan and mainland China and an increase in staff numbers, the cost efficiency ratio remained broadly in line with the first half of 2007.

In the Middle East, profit before tax rose by 41 per cent, as buoyant economic conditions across the region contributed to notable customer and revenue growth. Additional staff were recruited to increase sales of trade services and actively manage relationships with customers of trade and supply-chain products

In mainland China, operating profit grew by 46 per cent as HSBC continued to strengthen the local distribution network, adding a further branch in the first half of 2008 to supplement volume growth in deposits. The Greater China regional model continued to show strong results, demonstrated by a 163 per cent growth in the number of referrals from mainland China through Global Links, the cross-border referral system. Though hindered by restrictions on local currency lending imposed by the People's Bank of China, HSBC continued to grow revenues by repricing assets and fee-based business.

Profit before tax in Singapore declined by 32 per cent, largely due to reduced net interest income as lower interest rates resulted in compressed margins on current accounts. This was partially offset by an increased focus on income generation from fund and ancillary services, augmented by net recoveries of loan impairment charges.

In India, profit before tax rose by 47 per cent to US$75 million. Strong revenue growth in the country was driven by increased customer acquisition, particularly in 'second tier' cities. This growth was supplemented by stronger bilateral business flows with Mauritius and higher deposit balances. 

In Malaysia, profit before tax increased by 68 per cent, as loan impairment charges improved in comparison with the first half of 2007. Revenues increased by 12 per cent, due to growth in deposit and asset balances which more than offset the effect of narrower spreads for foreign currency deposits.

Profit before tax in Australia increased by 86 per cent. Revenue growth was broad-based with interest income growth of 36 per cent attributable to increased deposit balances. 

HSBC further enhanced its cross-border business capabilities with the opening of a new International Banking Centre in Japan, taking coverage to 27 countries and territories in the region. Successful referral volumes originating within the Asia-Pacific region from Global Links, the cross-border referral system, more than doubled compared with the first half of 2007. 

Net interest income increased by 25 per cent, due largely to growth in deposit volumes from enhanced focus on generating both local and foreign currency balances. Lower interest rates contributed to the contraction of liability and asset spreads, and to lower earnings from free funds. 

Lending volumes rose by 22 per cent, particularly in India and the Middle East. In India, growth was spurred by an increase in customer numbers across all segments and product groups, along with higher spreads on customer advances. Receivables finance also reported increased income in IndiaFavourable economic conditions in the Middle East contributed to increased lending volumes, and spreads increased on corporate lending products, as pricing resulted in higher yields. Branch expansion in mainland China succeeded in increasing customer numbers by 29 per cent and driving lending growth.

Average deposit balances increased by 16 per cent, notwithstanding lower margins. In India, deposit volumes benefited from increased customer numbers. Customer numbers also rose in the Middle East and, with HSBC's focus on payments and cash management, contributed to a 37 per cent rise in deposit balances. Lower interest rates caused spreads on deposits to reduce in India, the Middle East and mainland China.

Net fee income rose by 37 per cent to US$290 million, predominantly driven by growth in fees from trade services products, notably in the Middle East and mainland China.

Trade-related lending fees rose by 36 per cent, largely in the Middle East as international and trading activity in the region remained strong, but also in IndiaMalaysiaSouth Korea and Australia. In the Middle East, volume growth was enhanced by inflation-induced increases in commodity prices, notably on materials vital to the booming construction industry. HSBC's distribution capabilities in the region also contributed to growth. HSBC's positioning in Dubai, a key trading market and international hub, resulted in over 65 per cent growth in import and export trading volumes in the UAE, along with similar growth in fees from trade and supply chain activities. In mainland China, growth in forfaiting led to a 32 per cent increase in trade-related fees. Customer acquisition in India drove significant volume increases in fees from trade services and payments and cash management. 

Trading income grew by 70 per cent, mainly due to growth in volumes of transactions in the Middle East and in India, attributable to increased volatility in the foreign exchange markets. Within the Middle East, higher trading income also reflected growth in the total value of transactions due to the effects of inflation and increased remittances. 

Loan impairment recoveries of US$16 million were largely due to the non-recurrence of downgrades to certain customers in Thailand and Malaysia. In addition benign credit conditions continued in the Middle East with net releases more than doubling. 

Total operating expenses rose by 33 per cent, driven by rising staff costs across the majority of the region. Investment was undertaken to expand HSBC's presence, notably in mainland China. Customer facing staff numbers increased across the region by 30 per cent to support business expansion. In the Middle Eastincreased staff numbers, wage inflation driven by competitive labour market conditions and higher performance related pay as a consequence of improved profits caused a 30 per cent rise in staff costs. Cost growth in India was principally due to geographical expansion into second tier cities and growth in the number of relationship managers.

The percentage of total transactions completed using lower-cost channels increased compared with the first half of 2007. Over 3.5 million transactions were completed using these channels and the number of customers registered for business internet banking rose by 43 per cent. 

HSBC's associate, Bank of Communications, increased its contribution by 67 per cent, driving a 63 per cent increase in income from associates. Bank of Communications continued to expand its operations in mainland China. The contribution from Industrial Bank also increased compared with the first half of 2007 due to growth and rising margins.

Global Banking and Markets profit before tax rose by 71 per cent to US$2.0 billion, with growth in all major countries, with notable improvements in the Middle East, South Koreamainland China and India.

In the Middle East, pre-tax profit doubled due to a combination of strong growth in foreign exchange trading and a robust contribution from Global Banking and Balance Sheet Management. Securities services profit also grew, reflecting the importance of the region for the securities services strategy. Global Banking increased lending, taking advantage of strong economic growth in the region and wider spreads. Balance Sheet Management profit was higher due to lower cost of funds as local central banks reduced interest rates in line with the US.

In India, higher pre-tax profit was attributable to foreign exchange trading and securities services. Foreign exchange profits were driven by high customer demand and market volatility. The increased securities services profit was due to growth in deposit account balances and in the derivatives clearing business. 

Pre-tax profit in mainland China rose substantially, driven by Balance Sheet Management, which earned higher revenues due to an increase in surplus funds as the People's Bank of China restricted lending, combined with a steepening yield curve. Rates and foreign exchange trading also performed strongly, as did income from associates as Ping An Insurance and Bank of Communications expanded. Ping An Insurance continued to grow its asset management business, while Bank of Communications earned increased fees for asset custody and advisory work.

Balance Sheet Management was the main reason for increased profits in Singapore, benefiting from the reduction in short-term US and Singapore dollar interest rates.

In South Korea, pre-tax profits grew as Rates performed strongly, driven by increased client demand for hedging products linked to financing activity.

In Malaysia, Rates and foreign exchange were the main contributors to profit growth. Significant client activity was driven by market volatility as inflationary expectations triggered a sharp upward move in interest rates, leading clients to demand products which protected them from interest and exchange rate risks.

The region's total operating income grew by 55 per cent to US$2.4 billion. Foreign exchange trading delivered strong revenues throughout the regionDuring the first half of 2008 there was significant volatility in the foreign exchange markets contributing to increased trading and strong customer demand for foreign exchange products, while HSBC's broad distribution network helped to attract clients. Balance Sheet Management benefited in most countries from the steepening of the yield curve as central banks responded to the credit market turmoil.

Net interest income increased by 58 per cent due to the strong performance of Balance Sheet Management, described above, and also growth in the Middle East as average customer lending rose by more than 40 per cent due to overall investment in infrastructure and business expansion in the region, and widening spreads.

Net fee income grew by 29 per cent, driven by the ongoing strength of the securities services and payments and cash management businesses. Transaction volumes and growing client balances drove the increase in payments and cash management. In securities services, higher client trading volumes increased the level of transactions which led to higher fees in the custody and clearing businessGlobal Asset Management also reported an increase in fees, as funds under management benefited from inflows of new funds and new product launches, despite declining local stock markets.

Trading income rose significantly, driven by foreign exchange products, as noted above. Foreign exchange trading income increased by 68 per cent, continuing its strong upward momentum. Rates trading in South Korea also contributed, in response to increased client activity in local rates markets and hedging relating to financing activity.

Gains less losses from financial investments were lower due to the non-recurrence of significant disposals in 2007 in the Philippines.

The corporate credit environment remained benign, with a very low loan impairment chargeNonetheless, this compared unfavourably with the first half of 2007 due to releases in Singapore and South Korea.

Operating expenses rose as the business invested to support growth across the region, driving an increase in staff numbers, with rises in most countries. Salary levels also rose, in line with inflation. Higher profits across the region also led to increased performance-related costs.

Private Banking reported pre-tax profit of US$54 million, a decrease of 4 per cent when compared with the first half of 2007Strong revenue growth continued in Singapore with a large rise in deposits. Higher profits were also recorded in India, notwithstanding further investment. Overall, the cost efficiency ratio worsened by 8.4 percentage points to 57.5 per cent, as a result of investment in domestic operations in a number of countries. 

33 per cent rise in customer deposits in Singapore to US$9.4 billion was the main reason for a 68 per cent increase in net interest incomeThis trend was due to customers switching from investment securities to cash deposits in response to the turbulence in the equity markets. 

Other revenues decreased by 2 per cent to US$80 million, as the demand for equity-linked structured products declined as the Hong Kong equity market underperformed in the first half of the year. However, this was partly offset by a US$6 million growth in trading income in Japan from clients active in foreign exchange trading.

Client assets increased by 3 per cent to US$20.9 billion, with net new money of US$1.6 billion partly offset by a lower market valuation compared with 31 December 2007The growth in cross-referrals continued, with inward referrals from other customer groups contributing US$168 million to total client assets, compared with US$66 million in the first half of 2007.

Operating expenses rose by 35 per cent to US$73 million, driven by market related pressures in Singapore. Business expansion, particularly in Japan and the new Private Banking offices in mainland China, also contributed to the rise in staff, property and IT costs.

Profit before tax reported within the Other segment was US$102 million. The costs and related recharges of HSBC's 15 GSCs, located primarily in mainland China and India, are reported in Other. Costs at GSCs increased by 9 per cent to US$286 million, due to increased volumes of activities undertaken and the opening of 4 new centres in the second half of 2007. This growth was supported by a 14 per cent rise in staff numbers. Costs are recovered from Group entities and recorded as other operating income.


Reconciliation of reported and underlying profit before tax


Half-year to 30 June 2008 ('1H08') compared with half-year to 31 December 2007 ('2H07')

Rest of Asia-Pacific (including the Middle East)

    2H07
    as
    reported
    US$m


    Disposals     and 
    dilution

     gains1

    US$m


    Currency

    translation2

    US$m


    2H07         at 1H08    exchange    rates
    US$m


    Acqui-

    sitions1

    US$m


    Under-    lying     change     US$m

    

    1H08
    as
    reported
    US$m


    Re-    ported    change    %

    

        Under-    lying

    change
    % 



















Net interest income     

2,242


-


53


2,295


8


330


2,633


17


14

Net fee income     

1,236


-


32


1,268


1


69


1,338


8


5

Other income3     

 

1,343


(5)


14


1,352


4


514


1,870


39


38




















Net operating income4     

 

4,821


(5)


99


4,915


13


913


5,841


21


19



















Loan impairment charges and other credit risk provisions     

(308)


-


(1)


(309)


-


(60)


(369)


(20)


(19)



















Net operating income     

4,513


(5)


98


4,606


13


853


5,472


21


19



















Operating expenses     

(2,689)


-


(57)


(2,746)


(11)


(27)


(2,784)


(4)


(1)



















Operating profit     

1,824


(5)


41


1,860


2


826


2,688


47


44



















Income from associates     

841


-


37


878


-


58


936


11


7



















Profit before tax     

2,665


(5)


78


2,738


2


884


3,624


36


32

For footnotes, see page 89.

Analysis by customer group and global business 

Profit before tax 


Half-year to 30 June 2008



Rest of Asia-Pacific (including the Middle East)

    Personal
    Financial
    Services
    US$m


Commercial     Banking     US$m


    Global
    Banking and
    Markets
    US$m



    Private
    Banking
    US$m




    Other
    US$m


    Inter-
    segment

    elimination9

    US$m




    Total
    US$m















Net interest income     

1,166 


680 


918 


47 


88 


(266)


2,633 















Net fee income     

434 


290 


560 


43 


11 


-


1,338 















Trading income/(expense) excluding net interest income     

53 


104 


829 


36 


(30)


-


992 

Net interest income/(expense) 
on trading activities     

(2)


-


82 


-


(9)


266 


337 















Net trading income/(expense)7     

51 


104 


911 


36 


(39)


266 


1,329 

Net expense from financial instruments designated at fair value     

(85)


(1)


(2)


-


-


-


(88)

Gains less losses from 
financial investments 
    

28 




-



-


33 

Gains arising from dilution of 
interests in associates 
    

-


-


- 


-


-


-


-

Dividend income     

-


-



-


-


-


Net earned insurance 
premiums
     

98 


16 


-


-


-


-


114 

Other operating income     

30 


12 


42 



522 


(123)


484 















Total operating income     

1,722 


1,104 


2,432 


127 


583 


(123)


5,845 















Net insurance claims8     


(9)


-


- 


(1)


-


(4)















Net operating income4     

1,728 


1,095 


2,432 


127 


582 


(123)


5,841 















Loan impairment (charges)/ recoveries and other credit risk provisions     

(375)


16 


(11)


-



-


(369)















Net operating income     

1,353 


1,111 


2,421 


127 


583 


(123)


5,472 















Total operating expenses     

(1,187)


(441)


(701)


(73)


(505)


123 


(2,784)















Operating profit     

166 


670 


1,720 


54 


78 


-


2,688 















Share of profit in associates 
and joint ventures 
    

369 


291 


252 


-


24 


-


936 















Profit before tax     

535 


961 


1,972 


54 


102 


-


3,624 
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit 
before tax 
    

5.2 


9.4 


19.2 


0.5 


1.1 




35.4 

Cost efficiency ratio     

68.7 


40.3 


28.8 


57.5 


86.8 




47.7 















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net)     

37,861 


37,384 


35,001 


3,350 


161 




113,757 

Total assets     

43,684 


42,833 


153,733 


8,413 


10,378 




259,041 

Customer accounts     

56,552 


38,968 


58,162 


12,594 


519 




166,795 

 Loans and advances to
banks (net)12           





39,583 









Trading assets12,13     





40,477 









Financial instruments 
designated at fair value
12     





27 









Financial investments12     





40,631 









Deposits by banks12     





20,113 









Trading liabilities12,13     





25,659 









For footnotes, see page 89.

Analysis by customer group and global business (continued) 

Profit before tax 


Half-year to 30 June 2007



Rest of Asia-Pacific (including the Middle East)

    Personal
    Financial
    Services
    US$m


    Commercial     Banking     US$m


    Global
    Banking and
    Markets
    US$m



    Private
    Banking
    US$m




    Other
    US$m


    Inter-
    segment

    elimination9

 

    US$m




    Total
    US$m















Net interest income     

914 


517 


551


28


66


(175)


1,901 















Net fee income     

336 


202 


409


52


11


-


1,010 















Trading income excluding net interest income     

34 


58 


475


35


4


-


606 

Net interest income/(expense) 
on trading activities 
    

(1)


-


14


-


3


175


191 















Net trading income7     

33


58 


489


35


7


175


797 

Net income from financial instruments designated 
at fair value     

55



5


-


15


-


78 

Gains less losses from 
financial investments 
    

2


4


19


-


1


-


26 

Gains arising from dilution of 
interests in associates 
    

-


-


-


-


1,076


-


1,076 

Dividend income     

-


-


1


-


3


-


Net earned insurance 
premiums 
    

100 



-


-


-


-


109 

Other operating income/ (expense)     

20 



20


(6)


387


(69)


360 















Total operating income     

1,460 


801 


1,494


109


1,566


(69)


5,361 















Net insurance claims8     

(137)


(4)


-


-


-


-


(141)















Net operating income4     

1,323 


797


1,494


109


1,566


(69)


5,220 















Loan impairment charges and other credit risk provisions     

(252)


(54)


(2)


-


-


-


(308)















Net operating income     

1,071 


743


1,492 


109


1,566


(69)


4,912 















Total operating expenses     

(911)


(313)


(510)


(53)


(357)


69


(2,075)















Operating profit     

160 


430 


982


56


1,209


-


2,837 















Share of profit in associates 
and joint ventures 
    

191 


167


116


-


33


-


507 















Profit before tax     

351 


597


1,098


56


1,242


-


3,344 
















    %


    %


    %


    %


    %


    


    %

Share of HSBC's profit 
before tax 
    

2.5 


4.2 


7.8


0.4


8.8




23.6 

Cost efficiency ratio     

68.9 


39.3 


34.1


48.6


22.8




39.8 















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net) 
    

31,768 


25,996 


27,575


2,716


119




88,174 

Total assets     

38,544 


31,553 


116,396


6,791


7,839




201,123 

Customer accounts     

44,686 


28,803 


44,126


9,092


752




127,459 

Loans and advances to 
banks (net)
12     

 





28,663









Trading assets12,13     





27,699









Financial instruments 
designated at fair value
12     

 





979









Financial investments12     





27,269









Deposits by banks12     





12,860 









Trading liabilities12,13     





16,810









For footnotes, see page 89.



Profit before tax 


Half-year to 31 December 2007



Rest of Asia-Pacific (including the Middle East)

    Personal
    Financial
    Services
    US$m


    Commercial     Banking     US$m


    Global
    Banking and
    Markets
    US$m



    Private
    Banking
    US$m




    Other
    US$m


    Inter-
    segment

    elimination9

    US$m




    Total
    US$m















Net interest income     

1,051


614


744


32


87


(286)


2,242















Net fee income     

430


227


543


33


3


-


1,236















Trading income/(expense) excluding net interest 
income     

38


71


525


36


(74)


-


596

Net interest income/(expense) 
on trading activities     

(1)


-


(36)


-


1


286


250















Net trading income/(expense)7     

37


71


489


36


(73)


286


846

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

18


1


(8)


(1)


23


-


33

Gains less losses from 
financial investments 
    

3


-


9


-


-


-


12

Gains arising from dilution of interests in associates     

-


-


-


-


5


-


5

Dividend income     

-


-


1


-


3


-


4

Net earned insurance 
premiums
     

109


7


-


-


1


-


117

Other operating income     

20


7


33


8


462


(92)


438















Total operating income     

1,668


927


1,811


108


511


(92)


4,933















Net insurance claims8     

(109)


(3)


-


-


-


-


(112)















Net operating income4     

1,559


924


1,811


108


511


(92)


4,821















Loan impairment charges and other credit risk provisions     

(300)


(7)


(1)


-


-


-


(308)















Net operating income     

1,259


917


1,810


108


511


(92)


4,513















Total operating expenses     

(1,220)


(426)


(630)


(72)


(433)


92


(2,689)















Operating profit     

39


491


1,180


36


78


-


1,824















Share of profit in associates 
and joint ventures     

370


262


186


-


23


-


841















Profit before tax     

409


753


1,366


36


101


-


2,665
















    %


    %


    %


    %


    %




    %

Share of HSBC's profit 
before tax 
    

    4.1


    7.5


    13.6


    0.4


    1.0




    26.5

Cost efficiency ratio     

    78.3


    46.1


    34.8


    66.7


    84.7




    55.8















Balance sheet data6















US$m


US$m


US$m


US$m


US$m




US$m

Loans and advances to 
customers (net) 
    

34,486 


32,159 


32,106 


2,955 


146 




101,852 

Total assets     

40,092 


37,215 


133,814 


7,561 


9,430 




228,112 

Customer accounts     

49,703 


34,891 


54,120 


11,116 


403 




150,233 

Loans and advances to 
banks (net)
12     





30,853 









Trading assets12,13     





29,966









Financial instruments 
designated at fair value
12     

 





43









Financial investments12     

 





39,448









Deposits by banks12     

 





17,174 









Trading liabilities12,13    

 





18,257









For footnotes, see page 89.





This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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