2/3: HK&S Bk Corp 1H04 PT 3

HSBC Holdings PLC 02 August 2004 16. Cross-border exposure The country risk exposures shown below are prepared in accordance with the Bank of England Country Exposure Report (Form C1) and 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 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$m institutions entities Other Total At 30Jun04 Americas United States 22,178 78,603 28,591 129,372 Other 41,665 15,244 48,098 105,007 63,843 93,847 76,689 234,379 Europe United Kingdom 72,230 16 27,131 99,377 Other 262,703 3,785 23,954 290,442 334,933 3,801 51,085 389,819 Asia-Pacific excluding Hong Kong 134,372 37,255 81,332 252,959 At 30Jun03 Americas United States 18,999 59,066 20,732 98,797 Other 41,562 21,409 17,607 80,578 60,561 80,475 38,339 179,375 Europe United Kingdom 55,012 16 23,181 78,209 Other 229,071 3,732 26,529 259,332 284,083 3,748 49,710 337,541 Asia-Pacific excluding Hong Kong 98,008 41,838 71,347 211,193 At 31Dec03 Americas United States 21,464 58,929 23,304 103,697 Other 39,840 23,040 20,898 83,778 61,304 81,969 44,202 187,475 Europe United Kingdom 81,520 16 31,175 112,711 Other 253,748 1,567 30,124 285,439 335,268 1,583 61,299 398,150 Asia-Pacific excluding Hong Kong 110,348 37,847 79,558 227,753 17. Current, savings and other deposits Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Current accounts 240,306 160,969 211,749 Savings accounts 714,633 572,386 682,412 Other deposit accounts 617,449 710,504 665,234 Customer accounts 1,572,388 1,443,859 1,559,395 Certificates of deposit in issue 104,209 89,323 92,521 Other debt securities in issue 23,189 15,685 17,788 1,699,786 1,548,867 1,669,704 Current, savings and other deposits remained flat compared with the end of 2003. In Hong Kong, customer accounts decreased by HK$6.1 billion, or 0.5 per cent, since the end of December 2003. Personal account balances fell by HK$34.1 billion, or 4.0 per cent, while there was a further movement of funds from time deposits to current and savings accounts in both the bank and Hang Seng Bank as customers preferred liquidity in the low interest environment. Deposits from customers in the Commercial, and Corporate, Investment Banking and Markets businesses rose by HK$28.1 billion, mainly in the bank in Hong Kong. In the rest of the Asia-Pacific region, customer accounts rose by HK$19.1 billion compared with the end of December 2003. Deposits from personal customers decreased by 1.2 per cent, mainly in the bank in India, partially offset by significant growth in China. Customer deposits from Commercial Banking customers were 9.0 per cent higher than at the end of 2003 with strong increases in China and Mauritius. In the Corporate, Investment Banking and Markets division, deposits grew by 11.0 per cent with notable increases in Korea, Taiwan, Singapore and Japan. The increases in certificates of deposit in issue compared with December 2003 were mainly in the bank in Hong Kong and Hang Seng Bank and related to wealth management products launched by the group. The group's advances-to-deposits ratio improved to 50.0 per cent at 30 June 2004 from 48.8 per cent at 31 December 2003. 18. Reserves Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Share premium account 3,896 3,895 3,878 Revaluation reserves - Premises revaluation reserve 8,957 5,284 5,439 - Investment properties revaluation reserve 1,899 1,765 1,696 - Long-term equity investments revaluation reserve 1,070 863 1,182 11,926 7,912 8,317 Retained profits 44,204 34,992 37,764 60,026 46,799 49,959 19. Contingent liabilities, commitments and derivatives Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 30Jun04 Contingent liabilities - Acceptances and endorsements 19,538 3,908 3,782 - Guarantees 143,236 126,211 43,358 - Other 67 67 37 162,841 130,186 47,177 Commitments - Documentary credits and short-term trade-related transactions 51,706 13,922 10,170 - Forward asset purchases and forward forward deposits placed 4,320 4,320 2,140 - Undrawn note issuing and revolving underwriting facilities 4,126 2,063 1,686 - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 70,567 35,283 33,817 - under one year 579,396 - - 710,115 55,588 47,813 Exchange rate contracts - Spot and forward foreign exchange 2,300,878 35,515 8,732 - Other exchange rate contracts 650,466 30,711 8,618 2,951,344 66,226 17,350 Interest rate contracts - Interest rate swaps 2,974,127 46,253 12,519 - Other interest rate contracts 695,439 2,652 682 3,669,566 48,905 13,201 Other derivative contracts 40,153 2,938 881 Impact of counterparty netting agreements on derivatives' exposure - (41,574) (8,699) Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 30Jun03 Contingent liabilities - Acceptances and endorsements 17,300 3,934 3,849 - Guarantees 109,466 96,680 33,562 - Other 79 79 79 126,845 100,693 37,490 Commitments - Documentary credits and short-term trade-related transactions 46,065 12,251 8,949 - Forward asset purchases and forward forward deposits placed 2,576 2,576 518 - Undrawn note issuing and revolving underwriting facilities 3,182 1,591 1,591 - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 57,753 28,877 25,698 - under one year 540,783 - - 650,359 45,295 36,756 Exchange rate contracts - Spot and forward foreign exchange 2,219,544 37,160 8,740 - Other exchange rate contracts 629,793 25,873 7,283 2,849,337 63,033 16,023 Interest rate contracts - Interest rate swaps 2,256,119 53,507 13,408 - Other interest rate contracts 831,780 1,729 447 3,087,899 55,236 13,855 Other derivative contracts 14,860 4,465 2,633 Impact of counterparty netting agreements on derivatives' exposure - (45,535) (9,387) Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec03 Contingent liabilities - Acceptances and endorsements 19,355 4,033 3,803 - Guarantees 122,075 107,562 35,892 - Other 130 130 130 141,560 111,725 39,825 Commitments - Documentary credits and short-term trade-related transactions 45,038 12,890 8,767 - Forward asset purchases and forward forward deposits placed 7,696 7,696 2,665 - Undrawn note issuing and revolving underwriting facilities 4,187 2,094 1,686 - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 55,456 27,728 26,042 - under one year 554,808 - - 667,185 50,408 39,160 Exchange rate contracts - Spot and forward foreign exchange 2,043,936 40,361 9,882 - Other exchange rate contracts 563,533 30,485 8,613 2,607,469 70,846 18,495 Interest rate contracts - Interest rate swaps 2,715,154 48,890 12,719 - Other interest rate contracts 915,413 1,939 532 3,630,567 50,829 13,251 Other derivative contracts 27,375 5,697 3,777 Impact of counterparty netting agreements on derivatives' exposure - (46,347) (9,564) The tables above give the nominal contract amounts, credit equivalent amounts and risk-weighted amounts of off-balance sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted amounts. These are assessed in accordance with the Third Schedule of the Hong Kong Banking Ordinance on capital adequacy and depend on the status of the counterparty and the maturity characteristics. The risk weights used range from 0 per cent to 100 per cent for contingent liabilities and commitments, from 0 per cent to 50 per cent for exchange rate and interest rate contracts, and from 0 per cent to 100 per cent for other derivative contracts. The group has executed close-out netting agreements with certain counterparties, which allow for positive and negative mark-to-market values on different transactions to be offset and settled by a single payment in the event of default by either party. These have been taken into account in calculating total risk assets. Contingent liabilities and commitments are credit-related instruments which include acceptances, letters of credit, guarantees and commitments to extend credit. The contract amounts represent the amounts at risk should the contract be fully drawn upon and the client default. Since a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements. Derivatives arise from futures, forward, swap and option transactions undertaken by the group in the foreign exchange, interest rate and equity markets. The contract amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date; they do not represent amounts at risk. Replacement cost of contracts Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Exchange rate contracts 26,380 27,338 42,119 Interest rate contracts 35,328 46,952 39,360 Other derivative contracts 1,318 379 601 63,026 74,669 82,080 Less:netting adjustments (24,115) (33,146) (31,259) cash collateral received (1,690) (4,973) (2,889) 37,221 36,550 47,932 The replacement cost of contracts represents the mark-to-market assets on all contracts with a positive value, ie. an asset to the group. This comprises the mark-to-market assets on contracts with third parties and fellow subsidiary companies included in the balance sheet in 'Other assets', and on accrual accounted contracts which are not marked-to-market in the balance sheet. Replacement cost is a close approximation of the credit risk for these contracts as at the balance sheet date. The actual credit risk is measured internally as the sum of positive mark-to-market values and an estimate for the future fluctuation risk, using a future risk factor. The netting adjustments represent amounts where the group has in place legally enforceable rights of offset with individual counterparties to offset the gross amount of positive mark-to-market assets with any negative mark-to-market liabilities with the same customer. These offsets are recognised by the Hong Kong Monetary Authority in the calculation of risk assets for the capital adequacy ratio. Cash collateral received represents amounts specifically held against identifiable transactions which meet the offset criteria. 20. Foreign exchange exposure The group had the following structural foreign currency exposures which exceeded 10 per cent of the net structural foreign currency exposure in all currencies: Figures in HK$m Net structural position At 30Jun04 Australian dollars 3,330 Chinese renminbi 4,361 Indian rupees 4,064 Korean won 2,670 Singapore dollars 3,614 United States dollars (50,013) At 30Jun03 Indian rupees 3,721 Singapore dollars 3,941 United States dollars (40,009) At 31Dec03 Australian dollars 2,510 Indian rupees 3,824 Singapore dollars 3,432 United States dollars (43,558) The group's US dollar non-structural foreign currency position exceeded 10 per cent of the group's net foreign currency non-structural positions in all currencies and was made up as follows: US$ non-structural position --------------------------- Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Spot assets 983,440 849,116 985,356 Spot liabilities (970,080) (841,137) (954,240) Forward purchases 1,487,766 1,421,153 1,320,615 Forward sales (1,410,343) (1,319,593) (1,239,787) Net options position 892 - (560) 91,675 109,539 111,384 21. Reconciliation of operating profit to cash generated from operations Half-year ended Half-year ended Figures in HK$m 30Jun04 30Jun03 Operating profit 22,366 16,747 Net interest income (18,620) (19,520) Dividend income (139) (128) Depreciation and amortisation 1,057 1,042 Provisions for bad and doubtful debts (1,592) 2,413 Advances written off net of recoveries (2,699) (2,859) Other provisions for liabilities and charges 690 458 Provisions utilised (346) (192) Interest received 22,199 21,952 Interest paid (8,507) (8,013) Net cash inflow from trading activities 14,409 11,900 Change in treasury bills with original term to maturity of more than three months (50,171) 3,976 Change in placings with banks maturing after one month (1,417) (15,116) Change in certificates of deposit with original term to maturity of more than three months (7,122) (1,606) Change in securities held for dealing purposes 6,851 7,702 Change in advances to customers (30,780) (35,642) Change in amounts due from fellow subsidiary companies 13,901 (19,629) Change in other assets 7,030 (31,579) Change in current, savings and other deposit accounts 30,082 75,328 Change in deposits by banks 5,789 14,260 Change in amounts due to fellow subsidiary companies 19,918 4,601 Change in amounts due to ultimate holding company 285 255 Change in other liabilities 13,120 15,663 Exchange adjustments (478) 823 Cash generated from operations 21,417 30,936 22. Analysis of cash and cash equivalents a. Changes in cash and cash equivalents during the period Half-year ended Half-year ended Figures in HK$m 30Jun04 30Jun03 Balance at beginning of period 311,435 266,407 Net cash inflow before the effect of foreign exchange movements 762 965 Effect of foreign exchange movements (887) 2,953 Balance at end of period 311,310 270,325 b. Analysis of balances of cash and cash equivalents as classified in the consolidated balance sheet Half-year ended Half-year ended Figures in HK$m 30Jun04 30Jun03 Cash in hand and current balances with banks 63,745 52,635 Placings with banks 223,261 175,464 Treasury bills 21,939 41,934 Certificates of deposit 2,365 292 311,310 270,325 c. Analysis of net outflow of cash and cash equivalents in respect of acquisition of and increased shareholding in subsidiary companies Half-year ended Half-year ended Figures in HK$m 30Jun04 30Jun03 Cash consideration (972) (694) Cash and cash equivalents acquired - 38 (972) (656) 23. Segmental analysis The allocation of earnings reflects the benefits of shareholders' funds to the extent that these are actually allocated to businesses in the segment by way of intra-group capital and funding structures. Common costs are included in segments on the basis of the actual recharges made. Geographical information has been classified by the location of the principal operations of the subsidiary company or, in the case of the bank, by the location of the branch responsible for reporting the results or advancing the funds. Due to the nature of the group structure, the analysis of profits shown below includes intra-group items between geographical regions. Profit and loss account Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total Half-year ended 30Jun04 Interest income 18,239 10,166 258 28,663 Interest expense (4,750) (5,067) (226) (10,043) Net interest income 13,489 5,099 32 18,620 Dividend income 132 7 - 139 Fees and commissions receivable 7,206 2,981 1 10,188 Fees and commissions payable (880) (740) (6) (1,626) Dealing profits 2,353 1,355 - 3,708 Rental income from investment properties 107 - - 107 Other 2,759 442 4 3,205 Operating income 25,166 9,144 31 34,341 Operating expenses (8,582) (4,821) (12) (13,415) Operating profit before provisions 16,584 4,323 19 20,926 Provisions for bad and doubtful debts 1,752 (160) - 1,592 Provisions for contingent liabilities and commitments (29) (120) (3) (152) Operating profit 18,307 4,043 16 22,366 Profit on tangible fixed assets and long-term investments 1,064 28 - 1,092 Surplus on property revaluation 853 - - 853 Share of profits less losses of associated companies (12) - - (12) Profit on ordinary activities before tax 20,212 4,071 16 24,299 Tax on profit on ordinary activities (2,901) (1,111) (3) (4,015) Profit on ordinary activities after tax 17,311 2,960 13 20,284 Minority interests (2,365) - - (2,365) Profit attributable to shareholders 14,946 2,960 13 17,919 Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total Half-year ended 30Jun03 Interest income 20,456 8,603 353 29,412 Interest expense (5,252) (4,336) (304) (9,892) Net interest income 15,204 4,267 49 19,520 Dividend income 116 8 4 128 Fees and commissions receivable 5,398 2,218 4 7,620 Fees and commissions payable (697) (549) (26) (1,272) Dealing profits 1,110 1,169 (1) 2,278 Rental income from investment properties 109 - - 109 Other 2,055 327 - 2,382 Operating income 23,295 7,440 30 30,765 Operating expenses (7,609) (3,918) (15) (11,542) Operating profit before provisions 15,686 3,522 15 19,223 Provisions for bad and doubtful debts (2,355) (90) 32 (2,413) Provisions for contingent liabilities and commitments (22) (41) - (63) Operating profit 13,309 3,391 47 16,747 Profit on tangible fixed assets and long-term investments 489 103 125 717 Deficit on property revaluation (322) - - (322) Share of profits less losses of associated companies 51 - - 51 Profit on ordinary activities before tax 13,527 3,494 172 17,193 Tax on profit on ordinary activities (1,810) (1,044) (13) (2,867) Profit on ordinary activities after tax 11,717 2,450 159 14,326 Minority interests (1,902) - - (1,902) Profit attributable to shareholders 9,815 2,450 159 12,424 Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total Half-year ended 31Dec03 Interest income 19,353 9,111 346 28,810 Interest expense (4,828) (4,472) (292) (9,592) Net interest income 14,525 4,639 54 19,218 Dividend income 123 1 - 124 Fees and commissions receivable 6,163 2,653 (2) 8,814 Fees and commissions payable (800) (700) (24) (1,524) Dealing profits 813 935 (2) 1,746 Rental income from investment properties 111 - - 111 Other 2,746 395 4 3,145 Operating income 23,681 7,923 30 31,634 Operating expenses (8,687) (4,810) (19) (13,516) Operating profit before provisions 14,994 3,113 11 18,118 Provisions for bad and doubtful debts (743) (231) 1 (973) Provisions for contingent liabilities and commitments (29) 16 - (13) Operating profit 14,222 2,898 12 17,132 Profit/(loss) on tangible fixed assets and long-term investments 290 7 (1) 296 Surplus on property revaluation 60 28 - 88 Share of profits less losses of associated companies 88 - - 88 Profit on ordinary activities before tax 14,660 2,933 11 17,604 Tax on profit on ordinary activities (1,802) (716) (2) (2,520) Profit on ordinary activities after tax 12,858 2,217 9 15,084 Minority interests (1,711) - - (1,711) Profit attributable to shareholders 11,147 2,217 9 13,373 Interest income and interest expense for the first half of 2004 include intra-group interest of HK$1,231 million (first half of 2003: HK$1,259 million; second half of 2003: HK$1,193 million). Fees and commissions receivable and fees and commissions payable for the first half of 2004 include intra-group fees of HK$116 million (first half of 2003: HK$87 million; second half of 2003: HK$92 million). Other operating income and operating expenses for the first half of 2004 include intra-group items of HK$626 million (first half of 2003: HK$459 million; second half of 2003: HK$575 million). 24. Capital adequacy The table below sets out an analysis of regulatory capital and capital adequacy ratios for the group. Figures in HK$m At 30Jun04 At 30Jun03 At 31Dec03 Composition of capital Tier 1: Shareholders' funds 124,346 97,863 110,012 Less: proposed dividends (4,750) (3,200) (8,450) property revaluation reserves (10,856) (7,049) (7,135) long-term equity investments revaluation reserve (1,070) (863) (1,182) term preference shares (3,900) (3,899) (3,882) goodwill (1,718) (886) (961) Minority interests^ 14,318 14,298 14,167 Total qualifying tier 1 capital 116,370 96,264 102,569 Tier 2: Property revaluation reserves (@70%) 7,599 4,934 4,994 Long-term equity investments revaluation reserve (@70%) 749 604 827 General provisions 2,623 4,388 4,138 Perpetual subordinated debt 9,360 9,358 9,316 Term subordinated debt 1,997 2,831 2,099 Term preference shares 3,120 3,899 3,882 Total qualifying tier 2 capital 25,448 26,014 25,256 Investments in associated companies (1,620) (1,764) (1,443) Investments in unconsolidated subsidiary companies (5,573) (3,943) (4,812) Investments in other banks (1,441) (498) (501) Total capital 133,184 116,073 121,069 Risk-weighted assets 1,068,628 926,444 1,008,824 ^After deduction of minority interests in unconsolidated subsidiary companies. The group's capital adequacy ratios adjusted for market risks calculated in accordance with the Hong Kong Monetary Authority Guideline on 'Maintenance of Adequate Capital Against Market Risks' are as follows: At 30Jun04 At 30Jun03 At 31Dec03 Total capital 12.5% 12.5% 12.0% Tier 1 capital 10.9% 10.4% 10.2% The group's capital adequacy ratios calculated in accordance with the provisions of the Third Schedule of the Banking Ordinance which does not take into account market risks are as follows: Total capital 12.4% 12.1% 11.8% Tier 1 capital 10.8% 10.0% 10.0% 25. Liquidity ratio The Banking Ordinance requires banks operating in Hong Kong to maintain a minimum liquidity ratio, calculated in accordance with the provisions of the Fourth Schedule of the Banking Ordinance, of 25 per cent. This requirement applies separately to the Hong Kong branches of the bank and to those subsidiary companies which are Authorised Institutions under the Banking Ordinance in Hong Kong. Half-year ended Half-year ended Half-year ended 30Jun04 30Jun03 31Dec03 The average liquidity ratio for the period was as follows: Hong Kong branches of the bank 40.4% 50.8% 49.0% 26. Property revaluation The group's premises and investment properties in Hong Kong were revalued as at 30 June 2004. The basis of the valuation for premises was open market value for existing use or, in the case of one specialised building, depreciated replacement cost. The basis of the valuation for investment properties was open market value. The bases of valuation are unchanged from those used at 31 December 2003. Premises and investment properties in the Hong Kong SAR were valued by Chesterton Petty Limited at 30 June 2004. The valuations were carried out by independent qualified valuers who are members of the Hong Kong Institute of Surveyors. Management considered that there had either been no material changes in the values of the properties located outside Hong Kong since 30 September 2003, when the properties were last revalued or reviewed, or that the values of the properties were not material. The property revaluation has resulted in an increase in the group's revaluation reserves of HK$4,288 million, net of deferred taxation of HK$849 million, as at 30 June 2004, and a credit to the profit and loss account of HK$853 million being the reversal of previous revaluation deficits that had arisen when the value of certain premises fell below depreciated historical cost. 27. Accounting policies The accounting policies adopted are consistent with those described in the Annual Report and Accounts for 2003. 28. Constant exchange rates When reference to constant exchange rates is made, prior and current year data, as expressed in the functional currencies of the group's operations, have been translated into Hong Kong dollars using the same exchange rates for both years. 29. 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 statutory accounts for the year ended 31 December 2003 which have been delivered to the Registrar of Companies and the Hong Kong Monetary Authority. The Auditors expressed an unqualified opinion on those statutory accounts in their report dated 1 March 2004. The Annual Report and Accounts for the year ended 31 December 2003, which include the statutory accounts, can be obtained on request from Group Public Affairs, The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong, and may be viewed on our website: www.asiapacific.hsbc.com. 30. Ultimate holding company The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held, wholly-owned subsidiary of HSBC Holdings plc. 31. Statement of compliance The information in this news release for the half-year ended 30 June 2004 complies with the Hong Kong Statement of Standard Accounting Practice 25 on Interim Financial Reporting and the module on Interim Financial Disclosure by Locally Incorporated Authorised Institutions under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority. This information is provided by RNS The company news service from the London Stock Exchange

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