Annual Financial Report - 29

RNS Number : 4136J

HSBC Holdings PLC

30 March 2010

value. Such investments are normally those with less than three months' maturity from the date of acquisition, and include cash and balances at central banks, treasury bills and other eligible bills, loans and advances to banks, items in the course of collection from or in transmission to other banks, and certificates of deposit.

(ac) Rights issues

Rights issues to acquire a fixed number of the entity's own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights issues pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. On initial recognition, these rights are recognised in shareholders' equity and are not subsequently re-measured during the offer period. Following the exercise of the rights and the allotment of new shares, the cash proceeds of the rights issue are recognised in shareholders' equity. Incremental costs directly attributable to the rights issue are shown as a deduction from the proceeds, net of tax.

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

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

· all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value, including liabilities under investment contracts;

· all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities designated at fair value; and

· interest income, interest expense and dividend income in respect of:

- financial assets and liabilities designated at fair value; and

- derivatives managed in conjunction with the above,

except for interest arising from HSBC's issued debt securities and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'.

	2009	2008	2007
	US$m	US$m	US$m
Net income/(expense) arising on:
- financial assets held to meet liabilities under insurance and investment contracts ............................................................................................	3,793	(5,064)	2,056
- other financial assets designated at fair value ..........................................	2	1,738	581
- derivatives managed in conjunction with financial assets designated at fair value ........................................................................................	(249)	77	(18)

	3,546	(3,249)	2,619

- liabilities to customers under investment contracts .................................	(1,329)	1,751	(940)
- HSBC's long-term debt issued and related derivatives ..............................	(6,247)	6,679	2,812
- changes in own credit spread on long-term debt ..................................	(6,533)	6,570	3,055
- derivatives managed in conjunction with HSBC's issued debt securities	(1,726)	4,413	2,476
- other changes in fair value ..................................................................	2,012	(4,304)	(2,719)
- other financial liabilities designated at fair value .....................................	492	(1,368)	(395)
- derivatives managed in conjunction with other financial liabilities designated at fair value .......................................................................	7	39	(13)

	(7,077)	7,101	1,464

Net income/(expense) from financial instruments designated at fair value ..	(3,531)	3,852	4,083

HSBC Holdings

	2009	2008	2007
	US$m	US$m	US$m
Net income/(expense) arising on:
- HSBC's long-term debt issued and related derivatives
- changes in own credit spread on long-term debt ..................................	(2,612)	2,262	876
- derivatives managed in conjunction with HSBC's issued debt securities	(352)	688	1,094
- other changes in fair value ..................................................................	201	37	(1,054)

Net income/(expense) from financial instruments designated at fair value ..	(2,763)	2,987	916

4 Gains arising from dilution of interests in associates

	Gains arising from dilution of HSBC's interests	HSBC's interests after issue of new shares	HSBC's interests before issue of new shares
	US$m	%	%
2007
Industrial Bank¹ .........................................................................................	187	12.78	15.98
Ping An Insurance ......................................................................................	485	16.78	19.90
Bank of Communications² .........................................................................	404	18.60	19.90
Financiera Independencia S.A. de C.V. ........................................................	11	18.68	19.90
Vietnam Technological and Commercial Joint Stock Bank .........................	5	14.44	15.00

Gains arising from dilution of interests in associates ...................................	1,092

1 Investment held through Hang Seng Bank, a 62.14 per cent owned subsidiary of HSBC. The dilution gains therefore include a minority interest of US$71 million.

2 Subsequent to the dilution of its interests in Bank of Communications, HSBC increased its holding from 18.60 per cent to 19.01 per cent at 31 December 2007 (Note 21).

In 2007, certain HSBC associates issued new shares. HSBC did not subscribe and, as a result, its interests in the associates' equity decreased. The assets of each associate substantially increased as a result of the new share issue and, as a consequence, HSBC's share of the associates' underlying net assets increased notwithstanding the reduction in the Group's proportionate ownership interests. This increase is a gain arising from the dilution of the Group's interests in the associates, and is presented in the income statement.

5 Net earned insurance premiums

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2009
Gross earned premiums ....................................	1,572	5,218	1,427	2,774	10,991
- gross written premiums .............................	1,339	5,285	1,427	2,774	10,825
- movement in unearned premiums .............	233	(67)	-	-	166

Reinsurers' share of gross earned premiums .....	(225)	(278)	(17)	-	(520)
- gross written premiums ceded to reinsurers ................................................................	(215)	(280)	(11)	-	(506)
- reinsurers' share of movement in unearned premiums .................................................	(10)	2	(6)	-	(14)


	1,347	4,940	1,410	2,774	10,471

2008
Gross earned premiums ....................................	1,834	6,086	1,825	2,802	12,547
- gross written premiums .............................	1,776	6,257	1,825	2,802	12,660
- movement in unearned premiums .............	58	(171)	-	-	(113)

Reinsurers' share of gross earned premiums .....	(263)	(851)	(583)	-	(1,697)
- gross written premiums ceded to reinsurers ................................................................	(260)	(878)	(564)	-	(1,702)
- reinsurers' share of movement in unearned premiums .................................................	(3)	27	(19)	-	5


	1,571	5,235	1,242	2,802	10,850

2007
Gross earned premiums ....................................	1,855	4,906	2,350	1,890	11,001
- gross written premiums .............................	1,853	4,892	2,350	1,890	10,985
- movement in unearned premiums .............	2	14	-	-	16

Reinsurers' share of gross earned premiums .....	(407)	(357)	(1,161)	-	(1,925)
- gross written premiums ceded to reinsurers ................................................................	(385)	(357)	(1,166)	-	(1,908)
- reinsurers' share of movement in unearned premiums .................................................	(22)	-	5	-	(17)


	1,448	4,549	1,189	1,890	9,076

1 Discretionary participation features.

6 Net insurance claims incurred and movement in liabilities to policyholders

	Non-life insurance	Life insurance (non-linked)	Life insurance (linked)	Investment contracts with DPF¹	Total
	US$m	US$m	US$m	US$m	US$m
2009
Gross claims incurred and movement in liabilities ....................................................................	1,281	4,669	2,676	3,934	12,560
- claims, benefits and surrenders paid ...........	987	2,098	325	1,818	5,228
- movement in liabilities .............................	294	2,571	2,351	2,116	7,332

Reinsurers' share of claims incurred and movement in liabilities ...............................	(158)	(98)	146	-	(110)
- claims, benefits and surrenders paid ...........	(156)	(159)	(21)	-	(336)
- movement in liabilities .............................	(2)	61	167	-	226


	1,123	4,571	2,822	3,934	12,450

2008
Gross claims incurred and movement in liabilities ....................................................................	1,044	5,480	939	1,743	9,206
- claims, benefits and surrenders paid ...........	1,044	1,491	481	1,911	4,927
- movement in liabilities .............................	-	3,989	458	(168)	4,279

Reinsurers' share of claims incurred and movement in liabilities ...............................	(83)	(792)	(1,442)	-	(2,317)
- claims, benefits and surrenders paid ...........	(158)	(172)	(44)	-	(374)
- movement in liabilities .............................	75	(620)	(1,398)	-	(1,943)


	961	4,688	(503)	1,743	6,889

2007
Gross claims incurred and movement in liabilities ....................................................................	1,099	3,377	2,886	2,188	9,550
- claims, benefits and surrenders paid ...........	1,017	940	790	1,080	3,827
- movement in liabilities .............................	82	2,437	2,096	1,108	5,723

Reinsurers' share of claims incurred and movement in liabilities ...............................	(171)	349	(1,120)	-	(942)
- claims, benefits and surrenders paid ...........	(207)	(169)	(45)	-	(421)
- movement in liabilities .............................	36	518	(1,075)	-	(521)


	928	3,726	1,766	2,188	8,608

1 Discretionary participation features.

7 Net operating income

Net operating income is stated after the following items of income, expense, gains and losses:

	2009	2008	2007
	US$m	US$m	US$m
Income
Interest recognised on impaired financial assets ..........................................	941	1,040	404
Fees earned on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ...........................	12,310	14,511	15,140
Fees earned on trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers .............................................	2,735	3,314	3,695
Income from listed investments .................................................................	9,201	11,425	10,944
Income from unlisted investments .............................................................	7,085	11,359	10,429
Losses from the fraud at Bernard L Madoff Investment Securities LLC ......	(72)	(984)	-

Expense
Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value ..............................................	(19,737)	(45,525)	(50,876)
Fees payable on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective interest rate calculations on these types of assets and liabilities ..................................	(1,580)	(1,866)	(1,923)
Fees payable relating to trust and other fiduciary activities where HSBC holds or invests assets on behalf of its customers ..........................	(116)	(159)	(163)

Gains/(losses)
Gain on disposal or settlement of loans and advances .................................	244	94	64
Impairment of available-for-sale equity securities .......................................	(358)	(1,042)	(42)
Gains on disposal of property, plant and equipment, intangible assets and non-financial investments ................................................................	457	465	213
Gain on sale/repurchase of 8 Canada Square¹................................................	576	416	-

Loan impairment charges and other credit risk provisions ..............	(26,488)	(24,937)	(17,242)
Net impairment charge on loans and advances ........................................	(24,942)	(24,131)	(17,177)
Impairment of available-for-sale debt securities ......................................	(1,474)	(737)	(44)
Impairment in respect of other credit risk provisions .............................	(72)	(69)	(21)

1 The repurchase of 8 Canada Square occurred in 2008. See Note 23 for further details.

8 Employee compensation and benefits

	2009	2008	2007
	US$m	US$m	US$m

Wages and salaries ......................................................................................	16,268	18,169	18,535
Social security costs ...................................................................................	1,512	1,625	1,587
Post-employment benefits .........................................................................	688	998	1,212

	18,468	20,792	21,334

The average number of persons employed by HSBC during the year was as follows:

	2009	2008	2007

Europe .......................................................................................................	84,056	87,864	86,918
Hong Kong ................................................................................................	28,894	30,030	27,702
Rest of Asia-Pacific¹ ..................................................................................	88,122	87,954	75,095
Middle East¹ ...............................................................................................	8,468	8,201	8,008
North America ...........................................................................................	42,202	53,090	58,117
Latin America ............................................................................................	57,774	64,319	66,442

Total .........................................................................................................	309,516	331,458	322,282

1 The Middle East is disclosed as a separate geographical region with effect from 1 January 2009. Previously, it formed part of Rest of Asia-Pacific. Comparative data have been adjusted accordingly.

Post-employment benefit plans

Income statement charge

	2009	2008	2007
	US$m	US$m	US$m

Defined benefit pension plans ....................................................................	161	477	694
- HSBC Bank (UK) Pension Scheme ......................................................	(179)	255	490
- Other plans .........................................................................................	340	222	204

Defined contribution pension plans ............................................................	492	498	484

	653	975	1,178
Defined benefit healthcare plans ................................................................	31	13	33
Defined contribution healthcare plans ........................................................	4	10	1

	688	998	1,212

Net liabilities recognised on balance sheet in respect of defined benefit plans

	2009	2008
	US$m	US$m

Defined benefit pension plans ................................................................................................	6,147	3,154
- HSBC Bank (UK) Pension Scheme ..................................................................................	3,822	392
- Other plans .....................................................................................................................	2,325	2,762

Defined benefit healthcare plans ............................................................................................	820	734

	6,967	3,888

HSBC pension plans

HSBC operates 211 pension plans throughout the world, covering 88 per cent of HSBC's employees, with a total pension cost of US$653 million (2008: US$975 million; 2007: US$1,178 million). The income statement charge for plans outside the UK was US$760 million (2008: US$678 million; 2007: US$626 million). This was partly offset by a gain of US$107 million on the UK plans, which included a one-off accounting gain of US$499 million due to a change in the basis of delivering death-in-service, ill health and early retirement benefits for some UK employees.

HSBC has been progressively offering all new employees membership of defined contribution plans. At 31 December 2009, 59 per cent of HSBC's staff were members of defined contribution plans. The related pension cost for the year was US$492 million (2008: US$498 million; 2007: US$484 million).

Defined benefit plans cover 29 per cent of HSBC's employees. For these plans, the long-term investment objectives of both HSBC and, where relevant and appropriate, the trustees are:

· to limit the risk of the assets failing to meet the liabilities of the plans over the long-term; and

· to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the defined benefit plans.

Both HSBC and, where relevant and appropriate, the trustees consider that the investment policy should be consistent with meeting their mutual overall long-term investment objectives. In pursuit of these long-term objectives, a benchmark is established for the allocation of the defined benefit plan assets between asset classes. In addition, each permitted asset class has its own benchmarks, such as stock market or property valuation indices and, where relevant, desired levels of out-performance. The benchmarks are reviewed at least triennially within 18 months of the date at which an actuarial valuation is made, or more frequently if required by local legislation or circumstances. The process generally involves an extensive asset and liability review.

The majority of the Group's defined benefit plans are funded plans. The assets of most of the larger ones are held in trusts or similar funds separate from HSBC. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligations and related current service costs vary according to the economic conditions of the countries in which the plans are situated.

The largest plan exists in the UK, where the HSBC Bank (UK) Pension Scheme covers employees of HSBC Bank plc and certain other employees of HSBC. This comprises a funded defined benefit plan ('the principal plan'), which is closed to new entrants, and a defined contribution plan which was established in July 1996 for new employees.

The principal plan holds a diversified portfolio of investments to meet future cash flow liabilities arising from accrued benefits as they fall due to be paid. The Trustee of the principal plan is required to produce a written Statement of Investment Principles which governs decision-making about how investments are made.

In 2006, HSBC and the Trustee of the principal plan agreed to change the investment strategy in order to reduce the investment risk. This involved switching from a mainly equity-based strategy to one based largely on holding bonds and a more diverse range of investments, and included a commitment to undertake a programme of swap arrangements by which the principal plan makes LIBOR-related interest payments in exchange for the receipt of cash flows which are based on projected future benefit payments to be made from the principal plan. The asset allocation for this strategy was:

	%

Equities ...........................................................................................................................................................	15.0
Bonds ..............................................................................................................................................................	50.0
Alternative assets¹ ...........................................................................................................................................	10.0
Property .........................................................................................................................................................	10.0
Cash ................................................................................................................................................................	15.0

	100.0

1 Alternative assets include emerging market bonds, loans, and infrastructure assets.

At 31 December 2009, the above strategy remained substantially in place with details of the swap arrangements included in Note 43.

The latest actuarial investigation of the principal plan was made as at 31 December 2008 by C G Singer, Fellow of the Institute of Actuaries, of Watson Wyatt Limited, a Towers Watson company. At that date, the market value of the HSBC Bank (UK) Pension Scheme's assets was £10.6 billion (US$15.5 billion) (including assets relating to the defined benefit plan, the defined contribution plan and additional voluntary contributions). The market value of the plan assets represented 77 per cent of the amount expected to be required, on the basis of the assumptions adopted, to provide the benefits accrued to members after allowing for expected future increases in earnings, and the resulting deficit amounted to £3.2 billion (US$4.7 billion). The method adopted for this investigation was the projected unit method.

The expected cash flows from the plan were projected by reference to the Retail Price Index ('RPI') swap break-even curve at 31 December 2008. Salary increases were assumed to be 0.5 per cent per annum above RPI and inflationary pension increases, subject to a minimum of zero per cent and a maximum of 5 per cent (maximum of 3 per cent per annum in respect of service accrued since 1 July 2009), were assumed to be in line with RPI. The projected cash flows were discounted at the LIBOR swap curve at 31 December 2008 plus a margin for the expected return on the investment strategy of 190 basis points per annum. The mortality experience of the plan's pensioners over the three year period since the previous valuation was analysed and, on the basis of this analysis, the mortality assumptions were set based on the SAPS S1 series of tables which best fit the pensioner experience. Allowance was made for future improvements to mortality rates in line with the medium cohort projections with a minimum improvement rate set at 1.75 per cent for males and 1.25 per cent for females.

HSBC Bank plc has agreed with the Trustee to reduce the deficit of the plan by meeting a schedule of additional future funding payments as set out below (unless a mutually agreed alternative is adopted by 30 June 2010):

	US$m¹	£m

2009 ......................................................................................................................................	nil	nil
2010 ......................................................................................................................................	nil	nil
2011 ......................................................................................................................................	nil	nil
2012 ......................................................................................................................................	754	465
2013 ......................................................................................................................................	754	465
2014 ......................................................................................................................................	754	465
2015 ......................................................................................................................................	1,022	630
2016 ......................................................................................................................................	1,022	630
2017 ......................................................................................................................................	1,022	630
2018 ......................................................................................................................................	1,022	630

1 The payment schedule was agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the exchange rate effective as at 31 December 2009.

The payments of £465 million (US$754 million) to be made in each of 2012, 2013 and 2014 reflect the funding payments agreed following the 2005 triennial actuarial valuation.

HSBC considers that the contributions set out above, together with investment returns at an expected level of 240 basis points above the LIBOR swap curve, would be sufficient to meet the deficit as at 31 December 2008 over the agreed period. At each subsequent actuarial valuation, HSBC has agreed with the Trustee that any shortfall in investment returns relative to this expected level, subject to a maximum of 50 basis points per annum, will be eliminated by payment of equal cash instalments over the remaining years to the end of this recovery plan period.

HSBC Bank plc also agreed to make ongoing contributions to the principal plan in respect of the accrual of benefits of defined benefit section members at various rates dependent on the benefit accrual options selected. The average rate is estimated to be 34 per cent of pensionable salaries (less member contributions) payable from 1 April 2010 until the completion of the next actuarial valuation, due as at 31 December 2011. The average rate is reflective of the different membership groups following changes made to the Scheme during 2009. During 2009, HSBC paid contributions at the rate of 38 per cent of pensionable salaries and will continue contributions at this rate until 31 March 2010.

On 1 July 2009, changes to the design of the defined benefit section of the principal plan were introduced. This included the introduction of employee contributions, optionality concerning future benefit accrual and, with effect from 1 April 2010, an increased Normal Retirement Age of 65 years. In addition, enhancements to the defined contribution section were also introduced.

As part of the 31 December 2008 valuation, calculations were also carried out as to the amount of assets that might be needed to meet the liabilities if the Scheme was discontinued and the members' benefits bought out with an insurance company (although in practice this may not be possible for a plan of this size) or the Trustee continued to run the plan without the support of HSBC. The amount required under this approach is estimated to be £19.8 billion (US$28.9 billion) as at 31 December 2008. In arriving at this estimation, a more prudent assumption about future mortality was made than for the assessment of the ongoing position and it was assumed that the Trustee would alter the investment strategy to be an appropriately matched portfolio of UK government bonds. An explicit allowance for expenses was also included.

Benefit payments (US$m)

The benefits payable from the defined benefit plan are expected to be as shown in the chart above.

In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The Hongkong and Shanghai Banking Corporation and certain other employees of HSBC Group. The scheme comprises a funded defined benefit scheme (which provides a lump sum on retirement but is now closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees. The latest valuation of the defined benefit scheme was made at 31 December 2008, and was performed by Estella Chiu, fellow of the Society of Actuaries of the United States of America, of HSBC Insurance (Asia) Limited, a subsidiary of HSBC Holdings. At that valuation date, the market value of the defined benefit scheme's assets was US$1,072 million. On an ongoing basis, the actuarial value of the scheme's assets represented 103 per cent of the actuarial present value of the benefits accrued to members, after allowing for expected future increases in salaries, and the resulting surplus amounted to US$34 million. On a wind-up basis, the scheme's assets represented 104 per cent of the members' vested benefits, based on current salaries, and the resulting surplus amounted to US$44 million. The attained age method has been adopted for the valuation and the major assumptions used in this valuation were a discount rate of 6 per cent per annum and long-term salary increases of 5 per cent per annum.

The HSBC North America (US) Retirement Income Plan covers all employees of HSBC Bank USA, HSBC Finance and HSBC USA who have reached the age of 21 and met the one year of service participation requirement. The Retirement Income Plan provides final average pay benefits to legacy participants and cash balance benefits to all other participants. All new employees participate in the cash balance section of the plan. The most recent actuarial valuation of the plan was made at 1 January 2009 by Jennifer Jakubowski, Fellow of the Society of Actuaries, Enrolled Actuary and member of the American Academy of Actuaries, and Emily Carlson, Associate of the Society of Actuaries, and member of the American Academy of Actuaries. At that date, the actuarial value of the plan's assets was US$2,429 million. The assets represented 113 per cent of the benefits accrued to members as valued under the provisions of the Pension Protection Act of 2006 that was effective for the plan year beginning 1 January 2008. The resulting surplus amounted to US$280 million. The method employed for this valuation was the traditional unit credit method and the discount rate was determined using a full yield curve method, which resulted in an effective interest rate of 8.01 per cent per annum.

In February 2010, HSBC North America announced a plan to cease all future benefit accruals for legacy participants under the final average pay formula components of the HSBC North America (US) Retirement Income Plan with effect from 1 January 2011. HSBC currently estimates that as a result of these changes, HSBC North America will record a reduction to total pension expense in 2010 of approximately US$13 million and a one-time curtailment gain of approximately US$144 million.

The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and the HSBC North America (US) Retirement Income Plan cover 34 per cent of HSBC's employees.

HSBC healthcare benefits plans

HSBC also provides post-employment healthcare benefits under plans in the UK, the US, Canada, Mexico and Brazil, the majority of which are unfunded. The majority of post-employment healthcare benefits plans are defined benefit plans and are accounted for in the same manner as defined benefit pension plans. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligation and related current service cost vary according to the economic conditions of the countries in which they are situated. Total healthcare cost was US$35 million (2008: US$23 million; 2007: US$34 million).

Post-employment defined benefit plans' principal actuarial financial assumptions

The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2009, were as follows. These assumptions will also form the basis for measuring periodic costs under the plans in 2010:

					Healthcare cost trend
	Discount rate	Inflation rate	Rate of increase for pensions¹	Rate of pay increase	Initial rate	Ultimate rate	Year of ultimate rate
	%	%	%	%	%	%

UK² ................................	5.70	3.70	3.50	4.20	7.70	7.70	n/a
Hong Kong .....................	2.58	n/a	n/a	5.00	n/a	n/a	n/a
US ..................................	5.92	2.50	n/a	3.50	7.40	4.50	2027
Jersey .............................	5.70	3.70	3.70	5.45	n/a	n/a	n/a
Mexico ...........................	8.50	3.50	3.50	4.50	6.75	6.75	n/a
Brazil .............................	11.25	4.50	4.50	5.50	10.00	5.50	2019
France ............................	5.50	2.00	2.00	3.00	n/a	n/a	n/a
Canada ...........................	6.25	2.50	n/a	3.72	8.00	5.00	2015
Switzerland .....................	3.25	1.50	n/a	2.50	n/a	n/a	n/a
Germany ........................	5.50	2.00	2.00	3.00	n/a	n/a	n/a

1 Rate of increase for pensions in payment and deferred pension (except for the UK).

2 Rate of increase for pensions in the UK is for pensions in payment only.

The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2008, were as follows. These assumptions also formed the basis for measuring periodic costs under the plans in 2009:

					Healthcare cost trend
	Discount rate	Inflation rate	Rate of increase for pensions¹	Rate of pay increase	Initial rate	Ultimate rate	Year of ultimate rate
	%	%	%	%	%	%

UK² ................................	6.50	2.90	3.00	3.40	6.90	6.90	n/a
Hong Kong .....................	1.19	n/a	n/a	5.00	n/a	n/a	n/a
US ..................................	6.05	2.50	n/a	3.50	8.90	5.00	2018
Jersey .............................	6.50	2.90	2.90	4.65	n/a	n/a	n/a
Mexico ...........................	8.10	3.50	2.00	4.50	6.75	6.75	n/a
Brazil .............................	10.75	4.50	4.50	5.50	10.00	5.50	2018
France ............................	5.75	2.00	2.00	3.00	n/a	n/a	n/a
Canada ...........................	7.19	2.50	n/a	3.85	8.20	4.90	2012
Switzerland .....................	2.60	1.50	n/a	2.39	n/a	n/a	n/a
Germany ........................	5.75	2.00	2.00	3.00	n/a	n/a	n/a

1 Rate of increase for pensions in payment and deferred pension (except for the UK).

2 Rate of increase for pensions in the UK is for pensions in payment only.

The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2007, were as follows. These assumptions also formed the basis for measuring periodic costs under the plans in 2008:

					Healthcare cost trend
	Discount rate	Inflation rate	Rate of increase for pensions¹	Rate of pay increase	Initial rate	Ultimate rate	Year of ultimate rate
	%	%	%	%	%	%

UK ...............................................	5.80	3.30	3.30	4.30	7.30	7.30	n/a
Hong Kong ...................................	3.45	n/a	n/a	5.02	n/a	n/a	n/a
US ................................................	6.55	2.50	n/a	3.75	9.60	5.00	2014
Jersey ...........................................	5.80	3.30	3.30	5.05	n/a	n/a	n/a
Mexico .........................................	7.88	3.50	2.00	4.50	6.00	6.00	n/a
Brazil ............................................	10.75	4.50	4.50	4.50	10.50	5.50	2017
France ..........................................	5.50	2.00	2.00	3.00	6.00	6.00	n/a
Canada ..........................................	5.43	2.50	n/a	3.86	9.00	4.90	2012
Switzerland ...................................	3.30	1.50	n/a	2.38	n/a	n/a	n/a
Germany .......................................	5.50	2.00	2.00	3.00	n/a	n/a	n/a

1 Rate of increase for pensions in payment and deferred pension.

HSBC determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA rated or equivalent) debt instruments, with maturities consistent with those of the defined benefit obligations. In countries where there is no deep market in corporate bonds, government bond yields have been used. The yield curve has been extrapolated where the term of the liabilities is longer than the duration of available bonds and the discount rate used then takes into account the term of the liabilities and the shape of the yield curve.

When determining the discount rate with reference to a bond index, an appropriate index for the specific region has been used. The expected return on plan assets represents the best estimate of long-term future asset returns, which takes into account historical market returns plus additional factors such as the current rate of inflation and interest rates.

Mortality assumptions are significant in measuring the Group's obligations under its defined benefit pension and post-employment healthcare plans, particularly given the maturity of the plans. The mortality tables and average life expectancy at 65 used at 31 December 2009 were as follows:

	Mortality table	Life expectancy at age 65 for a male member currently:		Life expectancy at age 65 for a female member currently:
		Aged 65	Aged 45	Aged 65	Aged 45

UK .......................................	SAPS MC¹	22.3	24.2	23.3	25.2
Hong Kong ...........................	n/a	n/a	n/a	n/a	n/a
US ........................................	RP 2000 fully generational	19.2	20.7	21.2	22.1
Jersey ...................................	80% of PNA00²	24.1	26.1	26.5	28.4
Mexico .................................	EMSSA-97, AA generational scale from RP 2000 series	18.5	20.1	21.1	22.0
Brazil ....................................	RP 2000 fully generational	19.2	20.7	21.2	22.1
France ..................................	TG 05	23.2	26.0	26.7	29.6
Canada ..................................	UP94 generational	19.5	21.1	22.0	22.8
Switzerland ...........................	BVG 2005³	17.9	17.9	21.0	21.0
Germany ...............................	Heubeck 2005 G	18.3	21.0	22.4	25.0

1 SAPS MC projections with 1 per cent minimum improvement beyond 2002. Light table with 1.08 rating for male and standard table with 1.06 rating for female.

2 PNA00 year of birth and medium cohort with 1 per cent minimum improvement thereafter.

3 Additional 8.5 per cent liability loading for future mortality improvements.

The mortality tables and average life expectancy at 65 used at 31 December 2008 were as follows:

	Mortality table	Life expectancy at age 65 for a male member currently:		Life expectancy at age 65 for a female member currently:
		Aged 65	Aged 45	Aged 65	Aged 45

UK .......................................	PA92¹	20.8	22.8	24.1	26.2
Hong Kong ...........................	n/a	n/a	n/a	n/a	n/a
US ........................................	RP 2000 fully generational	19.1	20.6	21.1	22.0
Jersey ...................................	90% of PNA00²	23.0	25.0	25.4	27.3
Mexico .................................	EMSSA-97, AA generational scale from RP 2000 series	18.3	19.8	21.0	21.9
Brazil ....................................	RP 2000 fully generational	19.1	20.6	21.1	22.0
France ..................................	TG 05	23.1	25.9	26.6	29.4
Canada pension plans ............	Between UP94 C2015 and UP94 C2027	18.5 and 19.4	18.5 and 19.4	21.1 and 21.6	21.1 and 21.6
Canada healthcare plan .........	UP94 C2025	19.3	19.3	21.5	21.5
Switzerland ...........................	BVG 2005³	17.9	17.9	21.0	21.0
Germany ...............................	Heubeck 2005 G	18.0	20.7	22.1	24.7

1 PA92 with standard improvements to 2005 and medium cohort with 1 per cent minimum improvement thereafter.

2 PNA00 year of birth and medium cohort with 1 per cent minimum improvement thereafter.

3 Additional 8.5 per cent liability loading for future mortality improvements.

Actuarial assumption sensitivities

The discount rate is sensitive to changes in market conditions arising during the reporting period. The mortality rates used are sensitive to experience from the plan member profile. The following table shows the effect of changes in these and the other key assumptions on the principal plan:

	HSBC Bank (UK) Pension Scheme
	2009	2008
	US$m	US$m

Discount rate
Change in pension obligation at year end from a 25bps increase ............................................	(879)	(559)
Change in pension obligation at year end from a 25bps decrease ............................................	946	595
Change in 2010 pension cost from a 25bps increase ..............................................................	(13)	(9)
Change in 2010 pension cost from a 25bps decrease ..............................................................	13	10

Rate of inflation
Change in pension obligation at year end from a 25bps increase ............................................	964	525
Change in pension obligation at year end from a 25bps decrease ............................................	(907)	(493)
Change in 2010 pension cost from a 25bps increase ..............................................................	65	45
Change in 2010 pension cost from a 25bps decrease ..............................................................	(63)	(41)

Rate of increase for pensions in payment and deferred pensions
Change in pension obligation at year end from a 25bps increase ............................................	800	349
Change in pension obligation at year end from a 25bps decrease ............................................	(766)	(328)
Change in 2010 pension cost from a 25bps increase ..............................................................	50	29
Change in 2010 pension cost from a 25bps decrease ..............................................................	(49)	(23)

Rate of pay increase
Change in pension obligation at year end from a 25bps increase ............................................	195	172
Change in pension obligation at year end from a 25bps decrease ............................................	(174)	(168)
Change in 2010 pension cost from a 25bps increase ..............................................................	18	16
Change in 2010 pension cost from a 25bps decrease ..............................................................	(16)	(15)

Investment return
Change in 2010 pension cost from a 25bps increase ..............................................................	(44)	(36)
Change in 2010 pension cost from a 25bps decrease ..............................................................	44	36

Mortality
Change in pension obligation from each additional year of longevity assumed .......................	487	365

The following table shows the effect of changes in the discount rate and in mortality rates on plans other than the principal plan:

	Other plans
	2009	2008
	US$m	US$m

Change in defined benefit obligation at year end from a 25bps increase in discount rate .........	(269)	(255)
Change in 2010 defined benefit charge from a 25bps increase in discount rate .......................	(3)	(4)
Increase in defined benefit obligation from each additional year of longevity assumed ...........	120	91

Defined benefit pension plans

The calculation of the net liability under the Group's defined benefit pension plans is set out below together with the expected rates of return and plan assets used to measure the net defined benefit pension costs in each subsequent year.

	HSBC Bank (UK) Pension Scheme
	2009		2008
	Expected rates of return	Value	Expected rates of return	Value
	%	US$m	%	US$m

Fair value of plan assets ..................................................		17,701		14,865
Equities .......................................................................	8.4	2,770	8.1	2,242
Bonds .........................................................................	5.3	12,597	5.7	10,999
Property .....................................................................	7.7	1,502	6.9	1,184
Other ..........................................................................	5.3	832	4.2	440

Defined benefit obligation ..............................................		(21,523)		(15,257)
Present value of funded obligations .............................		(21,523)		(15,257)


Net liability ....................................................................		(3,822)		(392)

	Other plans
	2009		2008
	Expected rates of return¹	Value	Expected rates of return¹	Value
	%	US$m	%	US$m

Fair value of plan assets ..................................................		6,822		6,024
Equities .......................................................................	8.2	2,302	8.3	1,856
Bonds .........................................................................	5.0	3,809	5.0	3,261
Property .....................................................................	6.4	55	6.3	87
Other ..........................................................................	3.5	656	3.8	820

Defined benefit obligation ..............................................		(9,109)		(8,787)
Present value of funded obligations .............................		(8,588)		(8,271)
Present value of unfunded obligations .........................		(521)		(516)

Effect of limit on plan surpluses .....................................		(47)		(9)
Unrecognised past service cost .......................................		9		10

Net liability ....................................................................		(2,325)		(2,762)

1 The expected rates of return are weighted on the basis of the fair value of the plan assets.

Plan assets of the Group's pension schemes included US$62 million (2008: US$52 million) of equities and US$2 million (2008: US$2 million) of bonds issued by HSBC and US$1,925 million (2008: US$2,204 million) of other assets placed or transacted with HSBC. The fair value of plan assets included derivatives entered into with the HSBC Bank (UK) Pension Scheme with a positive fair value of US$1,049 million at 31 December 2009 (2008: US$1,779 million positive fair value) and US$27 million positive fair value (2008: US$388 million positive fair value) in respect of the HSBC International Staff Retirement Benefits Scheme. Further details of these swap arrangements are included in Note 43.

Changes in the present value of defined benefit obligations

	HSBC Bank (UK) Pension Scheme		Other plans
	2009	2008	2009	2008
	US$m	US$m	US$m	US$m

At 1 January ...................................................................	15,257	23,512	8,787	8,873
Current service cost ........................................................	260	387	334	357
Interest cost ...................................................................	1,019	1,227	397	466
Contributions by employees ...........................................	5	2	17	40
Actuarial (gains)/losses ...................................................	4,563	(3,032)	(114)	358
Benefits paid ..................................................................	(884)	(873)	(608)	(596)
Past service cost - vested immediately ...........................	-	-	20	9
Past service cost - unvested benefits ..............................	-	-	-	10
Disposals ........................................................................	-	-	-	(44)
Business combinations ....................................................	-	-	4	-
Reduction in liabilities resulting from curtailments ..........	-	-	(41)	(20)
Liabilities extinguished on settlements ............................	(499)	-	(1)	(81)
Exchange differences ......................................................	1,802	(5,966)	314	(585)

At 31 December .............................................................	21,523	15,257	9,109	8,787

Changes in the fair value of plan assets

	HSBC Bank (UK) Pension Scheme		Other plans
	2009	2008	2009	2008
	US$m	US$m	US$m	US$m

At 1 January ...................................................................	14,865	22,704	6,024	7,768
Expected return on plan assets .......................................	959	1,359	381	549
Contributions by HSBC ...................................................	367	462	596	238
- normal .....................................................................	367	462	178	223
- special .....................................................................	-	-	418	15

Contributions by employees ...........................................	5	2	17	40
Experience gains/(losses) ................................................	871	(2,861)	65	(1,452)
Benefits paid ..................................................................	(884)	(873)	(522)	(576)
Assets distributed on curtailments ...................................	-	-	(5)	-
Assets distributed on settlements ....................................	-	-	(6)	(40)
Exchange differences ......................................................	1,518	(5,928)	272	(503)

At 31 December .............................................................	17,701	14,865	6,822	6,024

The special contributions of US$418 million include an additional contribution of US$240 million to the HSBC North America (US) Retirement Income Plan. Special contributions also include US$160 million in respect of the HSBC International Staff Retirement Benefits Scheme which was made to fund the deficit shown in the actuarial valuation report as at 31 December 2008. US$91 million of the contribution to the HSBC International Staff Retirement Benefits Scheme was made in the form of cash and US$69 million was contributed in the form of asset-backed securities previously held within the Group.

The actual return on plan assets for the year ended 31 December 2009 was a positive return of US$2,276 million (2008: negative US$2,405 million). HSBC expects to make US$520 million of contributions to defined benefit pension plans during 2010. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are:

	2010	2011	2012	2013	2014	2015-2019
	US$m	US$m	US$m	US$m	US$m	US$m
HSBC Bank (UK) Pension Scheme ...............................	683	725	756	801	847	5,359
Other significant plans ...........	453	512	534	560	592	3,561

Total (income)/expense recognised in the income statement in 'Employee compensation and benefits'

	HSBC Bank (UK) Pension Scheme			Other plans
	2009	2008	2007	2009	2008	2007
	US$m	US$m	US$m	US$m	US$m	US$m

Current service cost ...............	260	387	454	334	357	347
Interest cost ...........................	1,019	1,227	1,247	397	466	398
Expected return on plan assets ...............................................	(959)	(1,359)	(1,211)	(381)	(549)	(486)
Past service cost ....................	-	-	-	21	9	7
Gains on curtailments .............	-	-	-	(36)	(20)	(63)
(Gains)/losses on settlements ..	(499)	-	-	5	(41)	1

Total (income)/expense .........	(179)	255	490	340	222	204

The US$499 million settlement gain in 2009 relates to an accounting benefit following a restructuring of the basis of delivery of death in service and ill health early retirement benefits to certain UK employees.

Summary

	HSBC Bank (UK) Pension Scheme
	2009	2008	2007	2006	2005
	US$m	US$m	US$m	US$m	US$m

Defined benefit obligation ..............................	(21,523)	(15,257)	(23,512)	(24,332)	(20,587)
Fair value of plan assets .................................	17,701	14,865	22,704	20,587	17,396

Net deficit .....................................................	(3,822)	(392)	(808)	(3,745)	(3,191)

Experience gains/(losses) on plan liabilities ....	(234)	(49)	(64)	540	70
Experience gains/(losses) on plan assets .........	871	(2,861)	29	-	1,623
Gains/(losses) from changes in actuarial assumptions ...............................................	(4,329)	3,081	2,459	(570)	(2,038)

Total net actuarial gains/(losses) ....................	(3,692)	171	2,424	(30)	(345)

	Other plans
	2009	2008	2007	2006	2005
	US$m	US$m	US$m	US$m	US$m

Defined benefit obligation ..............................	(9,109)	(8,787)	(8,873)	(7,916)	(7,102)
Fair value of plan assets .................................	6,822	6,024	7,768	7,116	6,356

Net deficit .....................................................	(2,287)	(2,763)	(1,105)	(800)	(746)

Experience gains/(losses) on plan liabilities ....	20	(52)	(354)	(167)	(113)
Experience gains/(losses) on plan assets .........	65	(1,452)	157	203	78
Gains/(losses) from changes in actuarial assumptions ...............................................	94	(306)	(121)	(44)	(393)

Total net actuarial gains/(losses) ....................	179	(1,810)	(318)	(8)	(428)

Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. Total cumulative actuarial losses recognised in other comprehensive income at 31 December 2009 were US$4,589 million (2008: losses of US$1,076 million).

The total effect of the limit on plan surpluses recognised within actuarial losses in other comprehensive income during 2009 was a US$37 million loss excluding exchange differences of US$1 million (2008: US$41 million gain excluding exchange differences of US$5 million).

Defined benefit healthcare plans

	2009		2008
	Expected rates of return¹	Value	Expected rates of return¹	Value
	%	US$m	%	US$m

Fair value of plan assets ..................................................		142		128
Equities .......................................................................	12.2	43	11.6	39
Bonds .........................................................................	8.7	72	8.0	89
Other...........................................................................	4.6	27	-	-

Defined benefit obligation ..............................................		(937)		(839)
Present value of funded obligations .............................		(148)		(172)
Present value of unfunded obligations .........................		(789)		(667)

Unrecognised negative past service cost .........................		(25)		(23)

Net liability ....................................................................		(820)		(734)

1 The expected rates of return are weighted on the basis of the fair value of the plan assets.

Changes in the present value of defined benefit obligations

	2009	2008
	US$m	US$m

At 1 January ..........................................................................................................................	839	1,038
Current service cost ...............................................................................................................	11	19
Interest cost ..........................................................................................................................	55	65
Contributions by employees ...................................................................................................	2	2
Actuarial (gains)/losses ...........................................................................................................	44	2
Benefits paid ..........................................................................................................................	(43)	(76)
Reduction in liabilities resulting from curtailments .................................................................	(22)	(31)
Liabilities extinguished on settlements ...................................................................................	(4)	(38)
Exchange differences .............................................................................................................	55	(142)

At 31 December ....................................................................................................................	937	839

Changes in the fair value of plan assets

	2009	2008
	US$m	US$m

At 1 January ..........................................................................................................................	128	146
Expected return on plan assets ...............................................................................................	11	12
Contributions by HSBC ..........................................................................................................	11	19
Experience gains/(losses) .......................................................................................................	8	(14)
Benefits paid ..........................................................................................................................	(4)	(9)
Assets distributed on settlements ............................................................................................	(4)	(12)
Exchange differences .............................................................................................................	(8)	(14)

At 31 December ....................................................................................................................	142	128

The actual return on plan assets for the year ended 31 December 2009 was a positive return of US$19 million (2008: negative US$2 million).

HSBC expects to make US$56 million (2008: US$4 million) of contributions to post-employment healthcare benefit plans during 2010. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are:

	2010	2011	2012	2013	2014	2015-2019
	US$m	US$m	US$m	US$m	US$m	US$m

Significant plans .....................	52	53	54	56	58	323

Total expense recognised in the income statement in 'Employee compensation and benefits'

	2009	2008	2007
	US$m	US$m	US$m

Current service cost ...................................................................................	11	19	25
Interest cost ...............................................................................................	55	65	67
Expected return on plan assets ...................................................................	(11)	(12)	(13)
Past service cost ........................................................................................	(2)	(2)	(4)
Gains on curtailments .................................................................................	(22)	(31)	(42)
Gains on settlements ..................................................................................	-	(26)	-

Total expense ............................................................................................	31	13	33

Summary

	2009	2008	2007	2006	2005
	US$m	US$m	US$m	US$m	US$m

Defined benefit obligation ...............................	(937)	(839)	(1,038)	(1,106)	(1,004)
Fair value of plan assets ..................................	142	128	146	133	107

Net deficit .......................................................	(795)	(711)	(892)	(973)	(897)

Experience gains/(losses) on plan liabilities .....	13	(34)	15	(12)	19
Experience gains/(losses) on plan assets ..........	8	(14)	(6)	(1)	1
Gains/(losses) from changes in actuarial assumptions .................................................	(57)	32	94	(25)	(63)

Total net actuarial gains/(losses) .....................	(36)	(16)	103	(38)	(43)

Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. Total cumulative net actuarial losses recognised in other comprehensive income at 31 December 2009 were US$25 million (2008: gains of US$11 million).

The actuarial assumptions of the healthcare cost trend rates have a significant effect on the amounts recognised. A one percentage point change in assumed healthcare cost trend rates would have the following effects on amounts recognised in 2009:

	2009		2008
	1% increase	1% decrease	1% increase	1% decrease
	US$m	US$m	US$m	US$m

Increase/(decrease) of the aggregate of the current service cost and interest cost ..................................................	8	(7)	9	(7)
Increase/(decrease) of defined benefit obligation .............	86	(75)	77	(62)

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2009 amounted to US$217 million (2008: US$218 million). The average number of persons employed by HSBC Holdings during 2009 was 876 (2008: 730).

Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings pays contributions to plans in accordance with schedules determined by the Trustees following consultation with qualified actuaries.

Directors' emoluments

The aggregate emoluments of the Directors of HSBC Holdings, computed in accordance with the Companies Act 2006 as amended by statutory instrument 2008 No.410, were:

	2009	2008	2007
	US$000	US$000	US$000

Fees ...........................................................................................................	3,756	2,529	2,626
Salaries and other emoluments ...................................................................	11,835	11,584	7,929
Bonuses ......................................................................................................	-	-	8,938

	15,591	14,113	19,493

Gains on the exercise of share options .......................................................	-	23	13
Vesting of Long-Term Incentive awards .....................................................	1,579	7,147	4,563

In addition, there were payments under retirement benefit agreements with former Directors of US$1,036,385 (2008: US$1,139,968). The provision at 31 December 2009 in respect of unfunded pension obligations to former Directors amounted to US$16,296,028 (2008: US$15,164,791).

During the year, aggregate contributions to pension schemes in respect of Directors were US$788,734 (2008: US$664,174).

Discretionary bonuses for Directors are based on a combination of individual and corporate performance and are determined by the Remuneration Committee. Details of Directors' remuneration, share options and conditional awards under the Restricted Share Plan 2000 and the HSBC Share Plan are included in the 'Directors' Remuneration Report' on pages 334 to 348.

9 Auditors' remuneration

Auditors' remuneration in relation to the statutory audit amounted to US$50.7 million (2008: US$54.9 million; 2007: US$52.3 million). The following fees were payable by HSBC to the Group's principal auditor, KPMG Audit Plc and its associates (together 'KPMG'):

	2009	2008	2007
	US$m	US$m	US$m

Audit fees for HSBC Holdings' statutory audit¹ ...........................................	2.3	2.1	3.0
-. fees relating to current year ................................................................	2.1	2.5	3.0
-. fees relating to prior year ...................................................................	0.2	(0.4)	-

Fees payable to KPMG for other services provided to HSBC ......................	77.1	88.3	79.1
Audit-related services:
-. audit of HSBC's subsidiaries, pursuant to legislation² .......................	45.9	48.6	45.2
-. other services pursuant to legislation³ .............................................	24.2	26.5	19.4
Tax services⁴ ..........................................................................................	2.6	3.1	2.9
Other services:
-. services relating to information technology⁵ ..................................	0.3	0.6	0.4
-. services related to corporate finance transactions⁶ ..........................	0.1	1.4	1.8
-. all other services⁷ ...........................................................................	4.0	8.1	9.4


Total fees payable ......................................................................................	79.4	90.4	82.1

1 Fees payable to KPMG Audit Plc for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They exclude amounts payable for the statutory audit of HSBC Holdings' subsidiaries which have been included in 'Fees payable to KPMG for other services provided to HSBC'.

2 Including fees payable to KPMG for the statutory audit of HSBC's subsidiaries.

3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews. Other services pursuant to legislation included no fees paid to KPMG in respect of work relating to preparation for reporting under section 404 of the Sarbanes-Oxley Act (2008: nil; 2007: US$1.6 million). No other accounting firms were paid for work on this project in 2009 (2008: US$1.2 million; 2007: US$2.5 million).

4 Including tax compliance services and tax advisory services.

5 Including advice on IT security and business continuity and performing agreed-upon IT testing procedures.

6 Including fees payable to KPMG for transaction-related work, including US debt issuances.

7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of financial models.

No fees were payable by HSBC to KPMG for the following types of services: internal audit services, valuation and actuarial services, services related to litigation, and services related to recruitment and remuneration. The following fees were payable by HSBC's associated pension schemes to KPMG:

	2009	2008	2007
	US$000	US$000	US$000

Audit fees ...................................................................................................	670	720	612
Tax services ...............................................................................................	-	73	14
All other services .......................................................................................	260	-	36

Total fees payable ......................................................................................	930	793	662

No fees were payable by HSBC's associated pension schemes to KPMG for the following types of services: other services pursuant to legislation, services relating to information technology, internal audit services, valuation and actuarial services, services related to litigation, services related to recruitment and remuneration, and services related to corporate finance transactions.

In addition to the above, KPMG estimate they have been paid fees of US$8.1 million (2008: US$4.8 million; 2007: US$3.4 million) by parties other than HSBC but where HSBC is connected with the contracting party and therefore may be involved in appointing KPMG. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.

Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for HSBC Group.

10 Share-based payments

During 2009, US$683 million was charged to the income statement in respect of share-based payment transactions settled in equity (2008: US$819 million; 2007: US$870 million). This expense, which was computed from the fair values of the share-based payment transactions when contracted, arose under employee share awards made in accordance with HSBC's reward structures.

In April 2009, HSBC Holdings completed a rights issue, details of which are provided in Note 41. The terms of the share plans have been adjusted based on the theoretical ex-rights price, which was considered to be the most appropriate methodology to reflect the rights issue. These adjustments are set out in the tables below.

Calculation of fair values

Fair values of share options/awards, measured at the date of grant of the option/award, are calculated using a Black-Scholes model. When modelling options/awards with vesting dependent on HSBC's Total Shareholder Return ('TSR') over a period, the TSR performance targets are incorporated into the model using Monte Carlo simulation. The expected life of options depends on the behaviour of option holders, which is incorporated into the option model on the basis of historic observable data. The fair values calculated are inherently subjective and uncertain due to the assumptions made and the limitations of the model used.

The significant weighted average assumptions used to estimate the fair value of the options granted were as follows:

	1-year savings- related share option plan	3-year savings- related share option plans	5-year savings- related share option plans
2009
Risk-free interest rate¹ (%) ........................................................................	0.7	2.1	2.4
Expected life² (years) .................................................................................	1	3	5
Expected volatility³ (%) ............................................................................	50	35	30
Share price at grant date (£) .......................................................................	4.65	4.65	4.65

2008
Risk-free interest rate¹ (%) ........................................................................	4.5	4.5	4.5
Expected life² (years) .................................................................................	1	3	5
Expected volatility³ (%) ............................................................................	25	25	25
Share price at grant date (£) .......................................................................	8.80	8.80	8.80

2007
Risk-free interest rate¹ (%) ........................................................................	5.6	5.5	5.4
Expected life² (years) .................................................................................	1	3	5
Expected volatility³ (%) ............................................................................	17	17	17
Share price at grant date (£) .......................................................................	9.24	9.24	9.24

1 The risk-free rate was determined from the UK gilts yield curve for the UK Savings-Related Share Option Plans. A similar yield curve was used for the International Savings-Related Share Option Plans.

2 Expected life is not a single input parameter but a function of various behavioural assumptions.

3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded options over HSBC shares of similar maturity to those of the employee options.

The expected US dollar denominated dividend yield was determined to be 4.5 per cent per annum in line with consensus analyst forecasts. Prior to 2009, HSBC adopted a dividend growth model and incorporated expected dividends into the valuation model for share options and awards. In 2008, the expected dividend growth was determined to be 7 per cent for the first year and 8 per cent thereafter.

The HSBC Share Plan

The HSBC Share Plan was approved at the 2005 Annual General Meeting and amendments were approved at the 2008 Annual General Meeting. Under this plan, Performance Share awards, Restricted Share awards and share option awards may be made. The aim of the HSBC Share Plan is to align the interests of executives with the creation of shareholder value and recognise individual performance and potential. Awards are also made under this plan for recruitment and retention purposes.

Performance Share awards

Awards of Performance Shares are made to executive Directors and other senior executives after taking into account individual performance in the previous year. For awards made prior to 2008, each award is divided into two equal parts for testing attainment against pre-determined benchmarks. One half of the award is subject to a TSR measure, based on HSBC's ranking against a comparator group of 28 major banks; the other half is subject to an earnings per share target. For each element of the award, shares are released to the employee on a sliding scale from 30 to 100 per cent of the award, depending on the scale of achievement against the benchmarks, providing that the minimum criteria for each performance measure have been met.

For awards made during 2008 and prospectively, each award is divided into three parts for testing attainment against pre-determined benchmarks. 40 per cent of the award is subject to a TSR measure, based on a free-float market capitalisation ranking method; 40 per cent is subject to an economic profit measure, calculated as the average annual difference between return on invested capital and HSBC's benchmark cost of capital; and 20 per cent is subject to an earnings per share target. For the TSR and EPS elements of the awards, shares are released to the employee on a sliding scale from 20 to 100 per cent of the award, depending on the scale of achievement against the benchmarks. For the economic profit element of the awards, shares are released to the employee on a sliding scale from zero to 100 per cent, depending on the scale of achievement against the benchmark. In all cases, shares are only released when the minimum criteria for each performance measure has been met. The performance conditions are measured over a three year performance period and awards forfeited to the extent they have not been met.

In addition to the performance conditions mentioned above, before an award can vest, the Remuneration Committee needs to be satisfied that the Group has shown a sustained improvement in the period since the award was made. In determining whether HSBC Holdings has achieved such sustained improvement the Remuneration Committee will take account of all relevant factors, in particular, comparisons against the TSR comparator group in areas such as revenue growth and mix, cost efficiency, credit performance as measured by risk-adjusted revenues, cash return on cash invested, dividend performance and TSR.

	2009	2008
	Number	Number
	(000s)	(000s)

Outstanding at 1 January ........................................................................................................	11,619	12,318
Additions during the year¹.......................................................................................................	333	5,664
Adjustment for rights issue .....................................................................................................	1,712	-
Released in the year ...............................................................................................................	(1,076)	(2,246)
Forfeited in the year ..............................................................................................................	(5,228)	(4,117)

Outstanding at 31 December ..................................................................................................	7,360	11,619

1 Additions in 2009 comprised reinvested dividend equivalents

No Performance Shares were awarded by HSBC in 2009. The weighted average fair value of Performance Shares awarded in 2008 was US$13.61.

Restricted Share awards

Awards of Restricted Shares are made to employees on the basis of their performance, potential and retention requirements, to aid recruitment or as a part-deferral of annual bonuses. Shares are awarded without corporate performance conditions and generally vest between one and three years from the date of award, providing the employees have remained continually employed by HSBC for this period.

	2009	2008
	Number	Number
	(000s)	(000s)

Outstanding at 1 January ........................................................................................................	122,206	79,256
Additions during the year........................................................................................................	108,439	72,120
Adjustment for rights issue .....................................................................................................	26,119	-
Released in the year ...............................................................................................................	(49,718)	(17,092)
Forfeited in the year ..............................................................................................................	(22,728)	(12,078)

Outstanding at 31 December ..................................................................................................	184,318	122,206

The weighted average fair value of Restricted Share awards in 2009 was US$6.31 (2008: US$14.64).

Share options

A small number of discretionary share options were granted in 2005 under the HSBC Share Plan rules, after the expiry of the Group Share Option Plan rules. The options granted in 2005 were awarded exclusively to individuals employed by HSBC France.

Nil-cost share options were granted to senior executives on the basis of their performance in the previous year. The share options were subject to the achievement of the same corporate performance conditions as the 2005 Performance Share awards, which consisted of an absolute earnings per share measure and a TSR measure based on HSBC Holdings' ranking against a comparator group of 28 major banks. The options vested after three years in the same proportion as the 2005 Performance Shares but were only exercisable up to the fourth anniversary of the date of grant. These options have now lapsed and there are currently no options with outstanding performance conditions.

Additionally, share options were awarded to a number of employees under the HSBC Share Plan rules. These options may vest after three years and are exercisable up to the tenth anniversary of the date of the grant, after which they will lapse.

	2009		2008
	Number	Weighted average exercise price	Number	Weighted average exercise price
	(000s)	£	(000s)	£

Outstanding at 1 January ................................................	300	8.89	524	8.85
Adjustment for rights issue .............................................	44	7.75	-	-
Forfeited and expired in the year ....................................	(258)	7.66	(224)	8.79

Outstanding and exercisable at 31 December ...................	86	7.99	300	8.89

No share options were granted in 2009 and 2008. The weighted average remaining contractual life of options outstanding at the balance sheet date was 5.8 years (2008: 2.1 years). The exercise price of options outstanding at the balance sheet date was £7.99 (2008: £8.79 - £9.17).

Savings-related share option plans

Savings-related share option plans invite eligible employees to enter into savings contracts to save up to £250 per month (or its equivalent in US dollars, Hong Kong dollars or euros), with the option to use the savings to acquire shares. The aim of the plans is to align the interests of all employees with the creation of shareholder value. The options are exercisable within three months following the first anniversary of the commencement of a one-year savings contract or within six months following either the third or the fifth anniversaries of the commencement of three-year or five-year savings contracts, respectively. The exercise price is set at a 20 per cent (2008: 20 per cent) discount to the market value immediately preceding the date of invitation (except for the one-year options granted under the US sub-plan where a 15 per cent discount is applied).

	2009		2008
	Number	Weighted average exercise price	Number	Weighted average exercise price
	(000s)	£	(000s)	£

Outstanding at 1 January ................................................	74,401	6.97	89,739	6.83
Granted in the year .........................................................	152,796	3.32	32,951	6.82
Adjustment for rights issue .............................................	7,970	6.08	-	-
Exercised in the year.......................................................	(5,011)	5.72	(30,126)	6.10
Forfeited, cancelled and expired in the year ....................	(57,630)	5.96	(18,163)	7.04

Outstanding at 31 December ...........................................	172,526	3.69	74,401	6.97

The weighted average fair value of options granted during the year was US$2.03 (2008: US$3.89). The weighted average share price at the date the share options were exercised was US$10.23 (2008: US$15.48). The exercise price range and weighted average remaining contractual life for options outstanding at the balance sheet date were as follows:

	2009	2008

Exercise price range (£) .........................................................................................................	3.31 - 6.69	5.35 - 7.67
Weighted average remaining contractual life (years) ..............................................................	3.47	1.87
Of which exercisable:
Number (000s) ...................................................................................................................	5,145	1,751
Weighted average exercise price (£) ...................................................................................	6.26	6.03

HSBC Holdings Restricted Share Plan 2000

Performance Share awards made under the HSBC Holdings Restricted Share Plan 2000 (the 'Restricted Share Plan')

Awards of Performance Shares were made under the Restricted Share Plan to senior executives from 2000 to 2004. The aim of the plan was to align the interests of executives with the creation of shareholder value. This was achieved by setting certain TSR targets against a peer group of major banks which would normally have to be attained in order for the awards to vest. In addition to these performance conditions, none of the outstanding awards will vest unless the Remuneration Committee is satisfied that, during the performance period, HSBC has achieved sustained growth. Following adoption of the HSBC Share Plan in 2005, no further awards have been made under this Plan other than from reinvested dividend equivalents.

	2009	2008
	Number	Number
	(000s)	(000s)

Outstanding at 1 January ........................................................................................................	-	4,811
Additions during the year¹ ......................................................................................................	-	159
Released in the year ...............................................................................................................	-	(11)
Forfeited in the year ..............................................................................................................	-	(4,959)

Outstanding at 31 December ..................................................................................................	-	-

1 Additions during the year comprised reinvested dividend equivalents.

Restricted Share awards made under the Restricted Share Plan

Awards of Restricted Shares were made under the Restricted Share Plan were granted to eligible employees from 2000 to 2005, after taking into account the employees' performance in the previous year, their potential and retention requirements. Restricted shares were also awarded as part-deferral of annual bonuses or for recruitment purposes. Shares were awarded without corporate performance conditions and in most cases fully vest within three years from the date of award, providing the employees have remained continuously employed by HSBC for the period.

	2009 Number	2008 Number
	(000s)	(000s)

Outstanding at 1 January ........................................................................................................	2,717	19,299
Additions during the year¹ ......................................................................................................	30	934
Adjustment for rights issue .....................................................................................................	376	-
Released in the year ...............................................................................................................	(2,916)	(16,405)
Forfeited in the year ..............................................................................................................	(34)	(1,111)

Outstanding at 31 December ..................................................................................................	173	2,717

1 Additions during the year principally comprised reinvested dividend equivalents.

The weighted average remaining vesting period as at 31 December 2009 was 0.3 years (2008: 0.5 years).

HSBC Holdings Group Share Option Plan

The HSBC Holdings Group Share Option Plan was a long-term incentive plan under which certain HSBC employees between 2000 and 2005 were awarded share options. The aim of the plan was to align the interests of those higher performing employees with the creation of shareholder value. In most jurisdictions, this was achieved by setting certain TSR targets which would normally have to be attained in order for the awards to vest. Options were granted at market value and are normally exercisable between the third and tenth anniversaries of the date of grant, subject to vesting conditions. Options granted after May 2005 are made under the HSBC Share Plan.

	2009		2008
	Number	Weighted average exercise price	Number	Weighted average exercise price
	(000s)	£	(000s)	£

Outstanding at 1 January ................................................	142,593	8.16	152,216	8.15
Adjustment for rights issue .............................................	21,333	7.12	-	-
Exercised in the year ......................................................	(1,548)	6.28	(3,734)	7.38
Forfeited and expired in the year ....................................	(4,659)	7.15	(5,889)	8.28

Outstanding at 31 December ...........................................	157,719	7.12	142,593	8.16

The weighted average share price at the date the share options were exercised was US$9.14 (2008: US$14.65). The number of options, weighted average exercise price, and weighted average remaining contractual life of options outstanding at the balance sheet date, analysed by exercise price range, were as follows:

	2009		2008

Exercise price range (£)...................................................	6.00-7.00	7.01-8.50	6.00-8.00	8.01-10.00

Number (000s) ...............................................................	28,406	129,313	25,947	116,646
Weighted average exercise price (£) ...............................	6.03	7.36	6.91	8.44
Weighted average remaining contractual life (years) .......	3.33	3.34	4.33	4.34
Of which exercisable:
Number (000s) ............................................................	28,406	129,313	25,947	116,646
Weighted average exercise price (£) ............................	6.03	7.36	6.91	8.44

HSBC Holdings Executive Share Option Scheme

The HSBC Holdings Executive Share Option Scheme was a long-term incentive plan under which certain senior HSBC employees were awarded share options before the adoption of the HSBC Holdings Group Share Option Plan in 2000. The aim of the plan was to align the interests of those higher performing senior employees with the creation of shareholder value. This was achieved by setting certain TSR targets to be attained in order for the awards to vest. Options were granted at market value and were exercisable between the third and tenth anniversaries of the date of grant, subject to vesting conditions. No awards have been made under this plan since 2000 and the remaining unexercised options are summarised below:

	2009		2008
	Number	Weighted average exercise price	Number	Weighted average exercise price
	(000s)	£	(000s)	£

Outstanding at 1 January ................................................	13,964	6.92	18,239	6.85
Adjustment for rights issue .............................................	2,046	6.04	-	-
Exercised in the year ......................................................	(920)	6.39	(4,051)	6.58
Expired in the year .........................................................	(8,383)	5.61	(224)	7.70

Outstanding at 31 December ...........................................	6,707	6.50	13,964	6.92

The weighted average share price at the date the share options were exercised was US$9.14 (2008: US$14.65).

The number of options, weighted average exercise price and weighted average remaining contractual life of options outstanding at the balance sheet date, analysed by exercise price range, were as follows:

	2009	2008

Exercise price range (£) .........................................................................................................	5.50 - 7.00 6.01 - 7.87	6.01 - 7.87

Number (000s) .......................................................................................................................	6,707	13,964
Weighted average exercise price (£) .......................................................................................	6.50	6.92
Weighted average remaining contractual life (years) ..............................................................	0.26	0.75
Of which exercisable:
Number (000s) ...................................................................................................................	6,707	13,964
Weighted average exercise price (£) ...................................................................................	6.50	6.92

HSBC France and subsidiary company plans

Before its acquisition by HSBC in 2000, HSBC France and certain of its subsidiaries operated employee share plans under which share options were granted over their respective shares.

Options over HSBC France shares granted between 1994 and 1999 vested upon announcement of HSBC's agreement to acquire HSBC France and were therefore included in the valuation of HSBC France.

HSBC France granted 909,000 options in 2000 after the public announcement of the acquisition and these options did not vest as a result of the change in control. The options were subject to continued employment and vested on 1 January 2002. The HSBC France shares obtained on exercise of the options are exchangeable for HSBC Holdings ordinary shares of US$0.50. As a consequence of the rights issue, the ratio of HSBC Holdings ordinary shares exchangeable for each HSBC France share was adjusted from 13 to 14.92. Options were granted at market value and are exercisable within 10 years of the date of grant.

	2009		2008
	Number	Exercise price	Number	Exercise price
	(000s)	€	(000s)	€

Outstanding and exercisable at 1 January and 31 December .......................................................................................	604	142.5	604	142.5

No share options were exercised in 2009 and 2008. The remaining contractual life for options outstanding at the balance sheet date was 0.3 years (2008: 1.3 years).

At the date of its acquisition in 2000, certain of HSBC France's subsidiary companies also operated employee share option plans under which options could be granted over their respective shares. On exercise of certain of these options, the subsidiary shares are exchanged for HSBC ordinary shares. The total number of HSBC ordinary shares exchanged under such arrangements in 2009 was 70,257 (2008: 12,810).

HSBC Finance

Upon acquisition, HSBC Finance share options previously granted were converted to share options over HSBC ordinary shares of US$0.50 each at a rate of 2.675 HSBC share options (the same ratio as the Exchange Offer for HSBC Finance) for each HSBC Finance share option. Options granted under HSBC Finance's own share option schemes prior to the announcement of the acquisition by HSBC in November 2002 vested as options over HSBC shares upon acquisition by HSBC. Options granted after the announcement of the acquisition but prior to its completion on 28 March 2003 generally vest equally over four years and expire ten years from the date of grant.

	2009		2008
	Number	Exercise price	Number	Exercise price
	(000s)	US$	(000s)	US$

Outstanding at 1 January ................................................	2,402	10.66	2,455	10.66
Adjustment for rights issue .............................................	354	9.29	-	-
Exercised in the year ......................................................	(20)	9.29	(12)	10.66
Expired in the year .........................................................	-	9.29	(41)	10.66

Outstanding and exercisable at 31 December ...................	2,736	9.29	2,402	10.66

The weighted average share price at the date the share options were exercised was US$9.14 (2008: US$14.65). The remaining contractual life for options outstanding at the balance sheet date was 2.9 years (2008: 3.9 years).

11 Tax expense

	2009	2008	2007
	US$m	US$m	US$m
Current tax
UK Corporation tax ...................................................................................	206	1,671	1,326
- on current year profit ..........................................................................	280	1,738	1,372
- adjustments in respect of prior years ...................................................	(74)	(67)	(46)

Overseas tax ..............................................................................................	1,847	1,703	3,879
- on current year profit ..........................................................................	1,826	1,732	3,976
- adjustments in respect of prior years ...................................................	21	(29)	(97)


	2,053	3,374	5,205

Deferred tax
Origination and reversal of temporary differences ......................................	(1,672)	(504)	(1,247)
Effect of changes in tax rates .....................................................................	(10)	(89)	(35)
Adjustments in respect of prior years .........................................................	14	28	(166)

	(1,668)	(565)	(1,448)

Tax expense ..............................................................................................	385	2,809	3,757

The UK corporation tax rate applying to HSBC Holdings and its subsidiaries was 28 per cent (2008: 30 per cent to 31 March 2008 and 28 per cent thereafter; 2007: 30 per cent). Overseas tax included Hong Kong profits tax of US$783 million (2008: US$846 million; 2007: US$1,137 million). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5 per cent (2008: 16.5 per cent; 2007: 17.5 per cent). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

The following table reconciles the tax expense which would apply if all profits had been taxed at the UK corporation tax rate:

	2009		2008		2007
	US$m	%	US$m	%	US$m	%
Analysis of tax expense
Taxation at UK corporation tax rate of 28% (2008: 28.5%; 2007: 30%)¹ ..................	1,982	28.0	2,652	28.5	7,264	30.0
Goodwill impairment .................................	-	-	3,010	32.3	-	-
Non-deductible loss on foreign exchange swaps on rights issue proceeds² ........................	96	1.4	-	-	-	-
Effect of taxing overseas profits in principal locations at different rates .....................	(1,345)	(19.0)	(1,339)	(14.4)	(1,460)	(6.0)
Gains not subject to tax .............................	(238)	(3.4)	(1,016)	(10.9)	(296)	(1.2)
Adjustments in respect of prior period liabilities ................................................	(39)	(0.6)	(67)	(0.7)	(309)	(1.3)
Low income housing tax credits³ ...............	(98)	(1.4)	(103)	(1.1)	(107)	(0.4)
Effect of profit in associates and joint ventures ................................................	(499)	(7.1)	(473)	(5.1)	(450)	(1.9)
Release of deferred tax consequent on restructuring of Group interests .............	-	-	-	-	(359)	(1.5)
Impact of gains arising from dilution of interests in associates⁵ .........................................	-	-	-	-	(253)	(1.0)
Deferred tax temporary differences not provided⁴................................................	360	5.1	157	1.7	(432)	(1.8)
Non taxable income ..................................	(365)	(5.2)	(519)	(5.6)	(404)	(1.7)
Permanent disallowables ............................	223	3.2	217	2.3	202	0.8
Additional provision for tax on overseas dividends ...............................................	341	4.8	294	3.2	335	1.4
Other items ...............................................	(33)	(0.4)	(4)	-	26	0.1

Overall tax expense¹ .................................	385	5.4	2,809	30.2	3,757	15.5

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

2 In August 2009, the UK Government enacted legislation that gains or losses on transactions designated to hedge foreign exchange exposures connected to rights issues should be disregarded for tax purposes.

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

4 2008 includes the effect of previously unrecognised temporary differences principally related to the recognition of trading losses (2007: capital losses).

5 The gains arising from the dilution of HSBC's interests in associates were not subject to tax and, as such, there is a reconciling item which reduces the effective tax rate for 2007 (see Note 4).

In addition to the amount charged to the income statement, the aggregate amount of the current and deferred tax relating to items that are taken to other comprehensive income and directly to equity amounted to US$227 million reduction in other comprehensive income and equity (2008: US$1,879 million increase in other comprehensive income and equity; 2007: US$226 million reduction in other comprehensive income and equity).

Deferred taxation

HSBC

	2009	2008
	US$m	US$m

At 1 January ..........................................................................................................................	5,156	3,425
Income statement credit ........................................................................................................	1,668	565
Equity:
- available-for-sale investments .........................................................................................	(587)	582
- cash flow hedges ..............................................................................................................	(517)	90
- actuarial losses ................................................................................................................	978	434
- share-based payments ......................................................................................................	9	-
Foreign exchange and other adjustments ................................................................................	76	60

At 31 December ....................................................................................................................	6,783	5,156

The amount of deferred taxation accounted for in the consolidated balance sheet comprised the following deferred tax assets and liabilities:

	2009	2008
	US$m	US$m
Deferred tax assets
Retirement benefits ...............................................................................................................	1,772	927
Loan impairment allowances .................................................................................................	6,363	5,891
Unused tax losses ...................................................................................................................	164	282
Accelerated capital allowances ...............................................................................................	215	99
Available-for-sale investments ...............................................................................................	68	518
Cash flow hedges ....................................................................................................................	229	1,145
Share-based payments ............................................................................................................	196	245
Other short-term temporary differences ................................................................................	1,778	457

	10,785	9,564

Deferred tax liabilities
Assets leased to customers .....................................................................................................	1,121	916
Revaluation of property ........................................................................................................	399	374
Accelerated capital allowances ...............................................................................................	129	167
Other short-term temporary differences ................................................................................	564	419
Provision for tax on profit remitted from overseas ...............................................................	-	78
Available-for-sale investments ...............................................................................................	340	121
Cash flow hedges ....................................................................................................................	91	280
Fee income ............................................................................................................................	1,080	930
Other temporary differences ..................................................................................................	278	1,123

	4,002	4,408

Net deferred tax assets before offsetting balances within countries .........................................	6,783	5,156

HSBC presents deferred tax balances in the consolidated balance sheet after offsetting asset and liability balances where HSBC has the legal right to set off, and intends to settle on a net basis, as follows:

	2009	2008
	US$m	US$m

Deferred tax assets .................................................................................................................	8,620	7,011
Deferred tax liabilities ............................................................................................................	(1,837)	(1,855)

	6,783	5,156

The deferred tax assets are recognised in respect of the following countries:

	2009	2008
	US$m	US$m

US .........................................................................................................................................	5,110	5,073
Brazil .....................................................................................................................................	1,289	850
Mexico ..................................................................................................................................	620	456
UK ........................................................................................................................................	395	-
Other .....................................................................................................................................	1,206	632

	8,620	7,011

The amount of temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised in the balance sheet is US$2,068 million (2008: US$1,651 million). Of this amount, US$502 million (2008: US$1,003 million) has no expiry date and US$972 million (2008: US$648 million) is scheduled to expire within 10 years (2008: 10 years). The amounts for 2008 have been restated as a result of temporary differences, unused tax losses and unused tax credits not previously reported, resulting in an increase in the unrecognised deferred tax asset of US$773 million.

Deferred tax of US$94 million (2008: nil) has been provided in respect of distributable reserves of associates that, on distribution, would attract withholding tax.

Deferred tax is not recognised in respect of the Group's investments in subsidiaries and branches where remittance is not contemplated, and for those associates and interests in joint ventures where it has been determined that no additional tax will arise. The aggregate amount of temporary differences associated with investments where no deferred tax liability is recognised is nil (2008: US$38,443 million; 2007: US$29,947 million). Following the change in the UK tax treatment of dividends on 1 July 2009, no UK tax is expected to arise on distributions from group entities and no temporary difference exists except where withholding tax or other foreign tax could arise on the investments. No amount is disclosed for the unrecognised deferred tax or the 2009 temporary differences associated with such investments, as it is impracticable to determine the amount of income taxes that would be payable when any temporary differences reverse.

Of the total net deferred tax assets of US$8.6 billion at 31 December 2009 (2008: US$7.0 billion), US$5.1 billion (2008: US$5.1 billion) arose in respect of HSBC's US operations where there has been a recent history of losses. Management's analysis of the recognition of these deferred tax assets significantly discounts any future expected profits from the US operations and relies to a greater extent on capital support to the US operations from HSBC, including tax planning strategies implemented in relation to such support. US legislation enacted on 6 November 2009 allowed for an extended carryback period for certain federal tax net operating losses. This had the effect of reducing the net deferred tax assets related to such losses at 31 December 2009 by approximately US$1.6 billion. Management's updated analysis is consistent with the assumption that it is probable that there will be sufficient taxable income to support the resulting deferred tax assets that have been recognised in respect of the US operations as at 31 December 2009.

The deferred tax asset relating to HSBC's Brazil operation is US$1.3 billion (2008: US$0.9 billion). On the evidence available, including management projections of income and the state of the Brazilian economy, there will be sufficient taxable income generated by the business to support this asset.

HSBC Holdings

	Deferred tax asset/(liability)
	2009	2008
	US$m	US$m
Temporary differences:
- short-term timing differences ..........................................................................................	1	1
- fair valued assets and liabilities ........................................................................................	(23)	30
- share-based payments ......................................................................................................	8	11

	(14)	42

12 Dividends

Dividends to shareholders of the parent company were as follows:

	2009			2008			2007
	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m	Per share US$	Total US$m	Settled in scrip US$m

Dividends declared on ordinary shares
In respect of previous year:
- fourth interim dividend ............	0.10	1,210	624	0.39	4,620	2,233	0.36	4,161	2,116
In respect of current year:
- first interim dividend ...............	0.08	1,384	190	0.18	2,158	256	0.17	1,986	712
- second interim dividend ...........	0.08	1,385	696	0.18	2,166	727	0.17	1,997	912
- third interim dividend ..............	0.08	1,391	160	0.18	2,175	380	0.17	2,007	614

	0.34	5,370	1,670	0.93	11,119	3,596	0.87	10,151	4,354

Quarterly dividends on preference shares classified as equity
March dividend ..............................	15.50	22		15.50	22		15.50	22
June dividend ..................................	15.50	23		15.50	23		15.50	23
September dividend ........................	15.50	22		15.50	22		15.50	22
December dividend .........................	15.50	23		15.50	23		15.50	23

	62.00	90		62.00	90		62.00	90

Quarterly coupons on capital securities classified as equity¹
January coupon ..............................	0.508	44		-	-		-	-
April coupon ..................................	0.508	45		-	-		-	-
July coupon ....................................	0.508	45		0.541	47		-	-
October coupon .............................	0.508	45		0.508	45		-	-

	2.032	179		1.049	92		-	-

1 During April 2008, HSBC Holdings issued US$2,200 million of Perpetual Subordinated Capital Securities, which are classified as equity under IFRSs.

The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended 31 December 2009 of US$0.10 per ordinary share, a distribution of approximately US$1,741 million. The fourth interim dividend will be payable on 5 May 2010 to holders of record on 18 March 2010 on the Hong Kong Overseas Branch Register and 19 March 2010 on the Principal Register in the UK or the Bermuda Overseas Branch Register. No liability is recorded in the financial statements in respect of the fourth interim dividend for 2009.

On 15 January 2010, HSBC paid a further coupon on the capital securities of US$0.508 per security, a distribution of US$44 million. No liability is recorded in the balance sheet at 31 December 2009 in respect of this coupon payment.

13 Earnings per share

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

In April 2009, HSBC Holdings completed a rights issue, details of which are provided in Note 41. The effect of the bonus element included within the rights issue has been included within the calculation of basic and diluted earnings per share. The effect of the rights issue was to increase the weighted average number of ordinary shares for 2008 and 2007 by 1,743 million and 1,703 million respectively, and dilutive potential ordinary shares by 15 million and 17 million, respectively.

Profit attributable to the ordinary shareholders of the parent company

	2009	2008	2007
	US$m	US$m	US$m

Profit attributable to shareholders of the parent company .........................	5,834	5,728	19,133
Dividend payable on preference shares classified as equity ..........................	(90)	(90)	(90)
Coupon payable on capital securities classified as equity .............................	(179)	(92)	-

Profit attributable to the ordinary shareholders of the parent company .....	5,565	5,546	19,043

Basic and diluted earnings per share

	2009				2008				2007
	Profit US$m	Number of shares (millions)		Per share US$	Profit US$m	Number of shares (millions)		Per share US$	Profit US$m	Number of shares (millions)		Per share US$

Basic ..........................................	5,565		16,277	0.34	5,546		13,555	0.41	19,043		13,248	1.44
Effect of dilutive potential ordinary shares........................			143				118				133

Diluted .......................................	5,565		16,420	0.34	5,546		13,673	0.41	19,043		13,381	1.42

The effect of dilutive potential ordinary shares on the weighted average number of ordinary shares outstanding was as follows:

	Number of shares (millions)
	2009	2008	2007

Weighted average number of ordinary shares outstanding ...........................	16,277	13,555	13,248
Weighted average number of dilutive potential ordinary shares ..................	143	118	133
- Savings-related Share Option Plan .......................................................	26	13	23
- Executive Share Option Scheme ..........................................................	-	3	6
- Group Share Option Plan .....................................................................	-	5	18
- Restricted and performance share awards .............................................	117	95	77
- HSBC France share options .................................................................	-	1	6
- HSBC Finance share options ................................................................	-	1	3


Weighted average number of ordinary shares outstanding assuming dilution	16,420	13,673	13,381

The weighted average number of dilutive potential ordinary shares excludes 214 million employee share options that were anti-dilutive (2008: 166 million; 2007: 22 million).

14 Segmental analysis

HSBC's operating segments are organised into six geographical regions, Europe, Hong Kong, Rest of Asia-Pacific, Middle East, North America and Latin America. Due to the nature of the Group, HSBC's chief operating decision-maker regularly reviews operating activity on a number of bases, including by geographical region, customer group and global business, and retail businesses by geographical region. The segmental analysis is presented on a geographical basis because, although information is reviewed on a number of bases, capital resources are allocated and performance is assessed primarily by geographical region. Also, the economic conditions of each geographical region are highly influential in determining the performance of the different businesses carried out in each region. As a result, provision of segmental information on a geographical basis provides the most meaningful basis from which to assess performance. HSBC's chief operating decision-maker is the Group Management Board which operates as a general management committee under the direct authority of the Board.

Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East and HSBC Bank USA, by the location of the branch responsible for reporting the results or advancing the funds.

Information provided to HSBC's chief operating decision-maker to make decisions about allocating resources to, and assessing the performance of, operating segments is measured in accordance with IFRSs. The financial information shown below includes the effects of intra-HSBC transactions between operating segments which are conducted on an arm's length basis and eliminated in a separate column. Shared costs are included in operating segments on the basis of the actual recharges made.

The Middle East is presented as a separate operating segment with effect from 1 January 2009. Previously, it was included within the Rest of Asia-Pacific segment. The change was made to align the segmental analysis with the information reviewed by the chief operating decision-maker and comparative figures have been restated accordingly.

Products and services

HSBC provides a comprehensive range of banking and related financial services to its customers in its six geographical regions. The products and services offered to customers are organised by customer group and global business.

· Personal Financial Services offers a broad range of products and services to meet the personal banking, consumer finance and wealth management needs of individual customers. Personal banking products typically include current and savings accounts, mortgages and personal loans, credit cards, insurance, wealth management and local and international payment services.

· Commercial Banking product offerings include the provision of financing services, payments and cash management, international trade finance, treasury and capital markets, commercial cards, insurance, wealth management and investment banking services.

· Global Banking and Markets provides tailored financial solutions to major government, corporate and institutional clients worldwide. The client-focused business lines deliver a full range of banking capabilities including investment banking and financing solutions; a markets business that provides services in credit, rates, foreign exchange, money markets and securities services; global asset management services and principal investment activities.

· Private Banking provides a range of services to meet the banking, investment and wealth advisory needs of high net worth individuals.

Financial information

In the following segmental analysis, the benefit of shareholders' funds impacts the analysis only to the extent that these funds are actually allocated to businesses in the segment by way of intra-HSBC capital and funding structures.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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