Annual Financial Report - 4 o

RNS Number : 3464J

HSBC Holdings PLC

30 March 2010

Financial summary

	Page
Consolidated income statement ...................	23
Group performance by income and expense item ................................................	26
Net interest income ....................................	26
Net fee income .............................................	27
Net trading income ....................................	28
Net income from financial instruments designated at fair value ........................	30
Gains less losses from financial investments ..............................................	31
Net earned insurance premiums ..............	32
Other operating income ............................	33
Net insurance claims incurred and movement in liabilities to policyholders ..........................................	34
Loan impairment charges and other credit risk provisions ............................	35
Operating expenses ...................................	38
Share of profit in associates and joint ventures ....................................................	40
Gains arising from dilution of interests in associates ............................................	41
Economic profit ...............................................	41
Consolidated balance sheet ..........................	42
Movement from 31 December 2008 to 31 December 2009 .................................	42
Average balance sheet and net interest income ......................................................	46
Analysis of changes in net interest income ......................................................	53
Short-term borrowings ..............................	56
Contractual obligations ...........................	56
Ratios of earnings to combined fixed charges .....................................................	56
Loan maturity and interest sensitivity analysis ....................................................	57
Deposits .......................................................	58
Certificates of deposit and other time deposits ....................................................	60

Consolidated income statement

2009 compared with 2008

Reported pre-tax profits in 2009 fell by 24 per cent to US$7.1 billion and earnings per share declined to US$0.34. Return on average shareholders' equity remained broadly at 2008 levels at 5.1 per cent (2008: 4.7 per cent).

On an underlying basis, profit before tax increased by US$15.3 billion compared with 2008. The difference between reported and underlying results is explained on page 21. Except where otherwise stated, the commentaries in the Financial Summary are on an underlying basis.

Profit before tax on an underlying basis and excluding the goodwill impairment charge of US$10.6 billion in 2008, was 56 per cent or US$4.7 billion higher.

The increase in profit before tax was driven by strong growth in net operating income in Global Banking and Markets, in part reflecting the absence of significant write-downs in securities and structured credit positions which had affected results in 2008. More significantly, the business benefited from market share gains in core activities and the effect of early positioning by Balance Sheet Management, in anticipation of the low interest rate environment. Results in 2009 also reflected lower loan impairment charges in North America, partly offset by an increase in loan impairment charges and other credit risk provisions elsewhere.

Although HSBC's business in North America continued to record a loss, performance improved as write-downs in Global Banking and Markets reduced and loan impairment charges in Personal Financial Services decreased. This resulted from steps taken to curtail origination in 2007 and 2008 which culminated in the closure of the Consumer Lending branch network in the second quarter of 2009, and from the decision to place all consumer finance portfolios other than credit cards into run-off. The closure of the branch network fed through to lower operating expenses during the remainder of the year.

In Hong Kong, economic performance remained robust despite continuing challenges, with HSBC's results underpinned by a market-leading share in deposits, residential mortgages, cards and insurance. Overall profitability declined, however, as revenue was driven lower by compressed deposit spreads in the low interest rate environment. Loan impairment charges improved on 2008, remaining low, and operating expenses reflected a disciplined approach to cost management.

Consolidated income statement

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

Interest income ..........................................................................................	62,096	91,301	92,359
Interest expense .........................................................................................	(21,366)	(48,738)	(54,564)

Net interest income ...................................................................................	40,730	42,563	37,795

Fee income ................................................................................................	21,403	24,764	26,337
Fee expense ...............................................................................................	(3,739)	(4,740)	(4,335)

Net fee income ..........................................................................................	17,664	20,024	22,002

Trading income excluding net interest income ...........................................	6,236	847	4,458
Net interest income on trading activities ....................................................	3,627	5,713	5,376

Net trading income ....................................................................................	9,863	6,560	9,834

Changes in fair value of long-term debt issued and related derivatives¹⁸ ......	(6,247)	6,679	2,812
Net income/(expense) from other financial instruments designated at fair value ......................................................................................................	2,716	(2,827)	1,271

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

Gains less losses from financial investments ...............................................	520	197	1,956
Gains arising from dilution of interests in associates ...................................	-	-	1,092
Dividend income ........................................................................................	126	272	324
Net earned insurance premiums ..................................................................	10,471	10,850	9,076
Gains on disposal of French regional banks .................................................	-	2,445	-
Other operating income .............................................................................	2,788	1,808	1,439

Total operating income ..........................................................................	78,631	88,571	87,601

Net insurance claims incurred and movement in liabilities to policyholders	(12,450)	(6,889)	(8,608)

Net operating income before loan impairment charges and other credit risk provisions ....................................................................................	66,181	81,682	78,993

Loan impairment charges and other credit risk provisions ..........................	(26,488)	(24,937)	(17,242)

Net operating income .............................................................................	39,693	56,745	61,751

Employee compensation and benefits ........................................................	(18,468)	(20,792)	(21,334)
General and administrative expenses ..........................................................	(13,392)	(15,260)	(15,294)
Depreciation and impairment of property, plant and equipment ................	(1,725)	(1,750)	(1,714)
Goodwill impairment ..................................................................................	-	(10,564)	-
Amortisation and impairment of intangible assets ......................................	(810)	(733)	(700)

Total operating expenses .......................................................................	(34,395)	(49,099)	(39,042)

Operating profit .....................................................................................	5,298	7,646	22,709

Share of profit in associates and joint ventures ...........................................	1,781	1,661	1,503

Profit before tax ......................................................................................	7,079	9,307	24,212

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

Profit for the year ...................................................................................	6,694	6,498	20,455

Profit attributable to shareholders of the parent company .........................	5,834	5,728	19,133
Profit attributable to minority interests .....................................................	860	770	1,322

For footnote, see page 149.

In the Rest of Asia-Pacific region, the economic challenges faced were similar to those in Hong Kong and their impact was reflected in lower income and higher loan impairment charges. Income from associates, primarily in mainland China, made a significant positive contribution to the region's performance. HSBC continued to expand its presence in Rest of Asia-Pacific through organic growth and strategic investment.

HSBC's Middle East operations suffered from a combination of factors: a severe contraction in the economy of Dubai, a fall in oil revenues for much of the year and investment losses incurred by many regional investors. This led to a decline in profit before tax of 74 per cent, primarily due to a significant increase in loan impairment charges. The regional economic downturn and continuing uncertainty affected both retail and corporate customers, particularly in the United Arab Emirates ('UAE') where the downturn was most pronounced.

In Europe, HSBC reported an increase in profit before tax on an underlying basis, driven by Global Banking and Markets in London and Paris. This resulted from a strong performance in Rates and Balance Sheet Management, coupled with the benefit of stabilisation of asset prices and general tightening of credit spreads and lower write-downs in the credit trading business. This was partly offset by a reduction in deposit spreads in Personal Financial Services and Commercial Banking as interest rates fell, and an increase in loan impairment charges in Global Banking, reflecting a deterioration in the credit position of a small number of clients.

The increase in profit before tax was driven by strong growth in Global Banking and Markets.

In Latin America, the decline in pre-tax profits was driven by an increase in loan impairment charges in Personal Financial Services and Commercial Banking and lower revenues in Personal Financial Services, partly offset by a strong performance in trading and Balance Sheet Management in Global Banking and Markets. The lower revenues in Personal Financial Services were in part due to the continued curtailment of personal unsecured credit exposures, following the Group's adverse experience in 2008, with net interest income also adversely affected by declining interest rates and narrowing spreads.

With the exception of Personal Financial Services, which continued to be heavily affected by the consumer finance losses in North America, all customer groups remained profitable.

The following items are significant to a comparison of reported results with 2008:

· the non-recurrence of the US$10.6 billion goodwill impairment charge in North America recorded in 2008;

· the non-recurrence of a US$2.4 billion gain on the sale of French regional banks in 2008;

· fair value losses relating to own credit spreads of US$6.5 billion in 2009 compared with gains of US$6.6 billion in 2008;

· a US$72 million fraud loss relating to Bernard L Madoff Investment Securities LLC ('Madoff Securities') in 2009, which was in addition to the US$984 million charge reported in 2008;

· loss from write-downs in legacy securities and structured credit positions amounting to US$0.3 billion in 2009 compared with US$5.4 billion in 2008;

· the acquisition in 2008 of the subsidiary, Project Maple II B.V., which owned the Group's headquarters at 8 Canada Square, and the subsequent sale of the company and leaseback of the property in 2009, resulting in gains of US$0.6 billion in 2009 and US$0.4 billion in 2008;

· the sale of the card merchant-acquiring business in the UK, resulting in gains of US$0.3 billion in 2009 and US$0.4 billion in 2008;

· the change in the basis of delivering long-term employee benefits in the UK, which generated a one-off accounting gain of US$0.5 billion in 2009; and

· the tax expense of US$0.3 billion in 2009, which was lower than in previous years as a result of the geographic distribution of income. The Group generated profits in low tax rate jurisdictions, principally Asia, and incurred losses in high tax rate jurisdictions, principally the US, which when mixed produced a low overall rate.

2008 compared with 2007

Reported pre-tax profits in 2008 fell by 62 per cent to US$9.3 billion and earnings per share declined to US$0.47. In a year characterised by a significant deterioration in the credit markets and by unprecedented illiquidity in most asset classes, return on average total shareholders' equity fell to 4.7 per cent.

The fall in profit before tax was exacerbated by recognition of a US$10.6 billion impairment charge which wrote off in full the goodwill carried on the balance sheet in respect of the Group's investment in its North America Personal Financial Services business. This non-cash charge arose substantially in the second half of 2008 as heightened risk premia in the market increased discount rates and cash flows estimated from ongoing activities fell as the US economy continued to decline and the outlook for the business deteriorated.

On an underlying basis, profit before tax declined by 102 per cent compared with 2007. The difference between the reported and underlying results is explained on page 21. Except where stated otherwise, the commentaries in the Financial Summary are on an underlying basis.

Performance in Asia was strong, generating profit before tax of US$11.9 billion, broadly in line with results excluding the dilution gains which arose in 2007 when HSBC did not participate in share offerings by its mainland China associates. Within Asia, Global Banking and Markets' results were strongly ahead, driven by foreign exchange, Rates and securities services. Balance Sheet Management revenues rose significantly from positioning ahead of interest rate cuts, and were especially strong in Europe despite losses from the defaults of certain financial sector companies. With the exception of Personal Financial Services, which incurred significant losses in North America, all customer groups remained profitable. Commercial Banking and Private Banking delivered results broadly in line with 2007, while Global Banking and Markets' profits declined.

Performance was overshadowed by a US$7.8 billion rise in loan impairment charges and other credit risk provisions, largely from the US consumer finance business, and a further US$5.4 billion in trading write-downs on illiquid legacy positions in credit trading, leveraged and acquisition finance and monoline credit exposure in Global Banking and Markets. Increases in loan impairment charges and other credit risk provisions in Personal Financial Services and Commercial Banking, the latter rising rapidly in the second half of 2008 from a low base, occurred as the global economy

slowed. Global Banking and Markets also experienced a rise in loan impairment charges and other credit risk provisions as refinancing options dried up for a number of companies as the market for long-term asset financing became increasingly illiquid. The market turmoil also led to impairments on equity securities in the available-for-sale portfolio.

The following items were significant:

· the non-recurrence of US$1.1 billion of gains which arose in 2007 on the dilution of the Group's stakes in various associates;

· a US$3.6 billion increase (from US$3.0 billion in 2007 to US$6.6 billion) in fair value gains from wider credit spreads recorded predominantly on HSBC's own long-term debt designated at fair value. These gains reported in the 'Other' segment, are not allocated to customer groups and are not included within regulatory capital calculations;

· the gain of US$2.4 billion on the sale of the French regional banks; and

· a charge against trading income of US$984 million following the fraud in December 2008 relating to Madoff Securities.

Group performance by income and expense item

Net interest income

	2009	2008	2007

Net interest income¹⁹ (US$m) ....................................................................	40,730	42,563	37,795
Average interest-earning assets (US$m) .....................................................	1,384,705	1,466,622	1,296,701
Gross interest yield²⁰ (per cent) ..................................................................	4.48	6.23	7.12
Net interest spread²¹ (per cent) ..................................................................	2.90	2.87	2.86
Net interest margin²² (per cent) .................................................................	2.94	2.90	2.91

For footnotes, see page 149.

2009 compared with 2008

Reported net interest income of US$40.7 billion fell by 4 per cent compared with 2008, but was marginally higher on an underlying basis.

Reported net interest income includes the expense of the internal funding of trading assets, while related revenue is reported in trading income. The cost of internally funding these assets declined significantly as a result of the low interest rate environment. In HSBC's customer group reporting, this cost is included within trading income.

Deposit spreads were squeezed by the exceptionally low interest rates, although this was partly offset by the reduced cost of funding trading activities. Strong revenues in Balance Sheet Management reflected positions taken in 2008 ahead of the reduction in major currency interest rates. As these positions began to mature, the revenue from Balance Sheet Management's activities reduced but remained strong in the second half of 2009.

Average interest-earning assets fell slightly due to a decline in term lending, mainly from the run-off portfolios in North America and the decline in consumer credit appetite globally.

Average interest-bearing liabilities also decreased, due to a decline in debt securities in issue as funding requirements for HSBC Finance Corporation ('HSBC Finance') fell as certain portfolios were managed down. This was largely offset by a rise in current account balances, driven by growth in customer demand for more liquid assets. The very low interest rates led to clients holding an increasing proportion of funds in liquid current accounts rather than in savings and deposit accounts as they positioned for rising interest rates or prospective investment opportunities.

Competition for deposits and exceptionally low interest rates squeezed deposit margins.

The net interest spread rose slightly. As a result of continuing deposit inflows, the Group sourced an increasing proportion of its funding from customer accounts, and consequently reduced its reliance on relatively more expensive debt securities. The benefit of this was largely offset, however, by a decline in customer lending, particularly higher yielding personal lending, which reduced the average yield on assets.

2008 compared with 2007

Reported net interest income of US$42.6 billion rose by 13 per cent compared with 2007, 13 per cent on an underlying basis.

Growth in net interest income was driven by significantly higher revenues in Balance Sheet Management, in part reflecting favourable positioning to take advantage of falling interest rates. Lending and deposit balances also grew strongly, while progressive reductions in central bank reference rates led to a decline in both asset yields and the cost of funds. Overall, spreads narrowed on an underlying basis.

Average interest-earning assets increased to US$1,467 billion, led by growth in average loans and advances to customers. This was mainly due to an increase in average term lending balances in Europe and Asia.

An increase in average interest-bearing liabilities was driven by growth in average customer accounts, notably in Europe. HSBC attracted substantial deposits from customers who valued HSBC's perceived strength at a time of global financial market turmoil and customers also expressed a preference for security and liquidity following declines in equity markets.

Interest rates were cut aggressively in many countries during 2008, as central banks reduced their reference rates as part of stimulus programmes introduced in response to deteriorating economic conditions. This contributed to a decline in asset yields. The cost of funds also fell, but this was less significant than the decline in yields as spreads narrowed overall on an underlying basis.

In North America, net interest income was also adversely affected by rises in loan modifications designed to reduce the payment burden on the Group's customers, and impaired loans.

Net fee income

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

Cards ..........................................................................................................	4,625	5,844	6,496
Account services ........................................................................................	3,592	4,353	4,359
Funds under management ...........................................................................	2,172	2,757	2,975
Broking income .........................................................................................	1,617	1,738	2,012
Credit facilities ...........................................................................................	1,479	1,313	1,138
Insurance ...................................................................................................	1,421	1,771	1,836
Global custody ............................................................................................	988	1,311	1,404
Imports/exports .........................................................................................	897	1,014	866
Underwriting ..............................................................................................	746	325	367
Remittances ...............................................................................................	613	610	556
Corporate finance ......................................................................................	396	381	409
Unit trusts ..................................................................................................	363	502	875
Trust income .............................................................................................	278	325	299
Mortgage servicing .....................................................................................	124	120	109
Maintenance income on operating leases ...................................................	111	130	139
Taxpayer financial services ........................................................................	87	168	252
Other .........................................................................................................	1,894	2,102	2,245

Total fee income .......................................................................................	21,403	24,764	26,337

Less: fee expense .......................................................................................	(3,739)	(4,740)	(4,335)

Net fee income ..........................................................................................	17,664	20,024	22,002

2009 compared with 2008

Reported net fee income decreased by 12 per cent to US$17.7 billion, 5 per cent lower on an underlying basis.

Lower credit card fees and weaker equity markets led to a decline in net fee income.

Credit card fees fell significantly, mainly in North America, reflecting lower transaction volumes, a reduction in cards in issue and changes in customer behaviour which led to lower cash advance, interchange, late and overlimit fees. In the UK, the decrease primarily arose from the disposal of the card-acquiring business to a joint venture in June 2008.

Weaker equity markets and subdued investor sentiment for higher risk products led to a reduction in both the volume and the value of equity-related products. This resulted in a decrease in fees generated from funds under management, global custody and unit trusts, though fees grew from equity capital markets products in Global Banking and Markets. The impact was particularly marked in the first half of 2009, though market-related fees recovered somewhat in the second half of the year as market values rose and investor appetite for equity products increased.

Account services fees fell, predominantly in North America as the result of a decline in credit card volumes and changes in customer behaviour, and in Private Banking due to a decrease in fiduciary deposit commissions as lower interest rates drove down balances.

Insurance broking fees also fell, mainly due to lower origination volumes of credit-related products, principally in the US consumer finance business, and reduced payment protection business in the UK.

Corporate credit facility and underwriting fees increased strongly on the back of higher debt originations in Europe and North America which accompanied the considerable reconstruction and refinancing of corporate balance sheets in 2009.

2008 compared with 2007

Reported net fee income declined by 9 per cent to US$20 billion, 7 per cent lower on an underlying basis.

Lower equity market-related revenues, notably in Hong Kong, were driven by weakened investor sentiment, and reflected in the fall in the aggregate of broking income, global custody and unit trust income. Similarly, fund management fees declined as equity markets retreated and lower performance fees were earned.

HSBC announced revisions to its credit card fee charging policies in the US in 2007, and this fed through as expected in the form of a substantial decline in overlimit fees, further compounded by lower cash advance and interchange fee income as a result of reduced volumes. In the UK, the divestment in 2008 of the card acquiring business resulted in reduced card acquiring fees. Offsetting these factors were rises in card fees in Hong Kong, the Middle East, India and Turkey.

Fee income from credit facilities rose, notably in the Middle East, in line with customer volumes. Growth in fee income from trade and supply chain products reflected higher volumes and customer acquisition in India and, to a greater extent in the Middle East, increased activity driven by commodity price inflation.

Net trading income

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

Trading activities .......................................................................................	5,240	2,988	4,521
Net interest income on trading activities ....................................................	3,627	5,713	5,376
Other trading income - hedge ineffectiveness:
- on cash flow hedges .............................................................................	90	(40)	(77)
- on fair value hedges .............................................................................	(45)	5	19
Non-qualifying hedges ................................................................................	951	(1,122)	(5)
Losses on Madoff Securities fraud................................................................	-	(984)	-

Net trading income^23,24 ..............................................................................	9,863	6,560	9,834

For footnotes, see page 149.

2009 compared with 2008

Reported net trading income increased by 50 per cent to US$9.9 billion, 83 per cent higher on an underlying basis.

Reported trading income excludes the interest expense of the internal funding of trading assets. As noted in 'Net interest income', the cost of internally funding these assets declined significantly as a result of the low interest rate environment.

The Credit business benefited from a general tightening of credit spreads following a return of liquidity to much of the market, and the write-downs on legacy positions in Credit trading declined significantly following the stabilisation of asset prices.

Net trading income rose by 83 per cent on an underlying basis.

An increase in Rates revenues, particularly in the first half of the year, reflected increased market share and client trading volumes, wider bid-offer spreads and early positioning for interest rate movements. Partly offsetting these gains, fair value losses were recorded on HSBC structured liabilities as a result of credit spreads tightening, compared with gains in this area in 2008.

Equities benefited from the non-recurrence of the US$984 million charge reported in 2008 in respect of Madoff Securities. The core Equities business also took advantage of a changed competitive landscape to capture a greater share of business in strategic markets from key institutional clients.

Foreign exchange trading revenues were well ahead of 2007, but fell short of the record year in 2008. This reflected a combination of reduced customer volumes from lower trade flows and investment activity, and relatively lower market volatility.

Tightening credit spreads led to losses of US$429 million on credit default swap transactions in parts of the Global Banking portfolio. In 2008, gains of US$912 million were reported on these credit default swaps as a result of widening credit spreads.

A reduction in net interest income on trading activities reflected the sharp fall in interest rates at the end of 2008 but was partly compensated for by a reduction in the internal funding cost of trading activities, which is reported in 'Net interest income'.

Income from non-qualifying hedges related to mark-to-market gains on cross-currency swaps as the US dollar depreciated against sterling, and on interest rate swaps as US dollar long and medium term interest rates increased over the year. In 2008, appreciation of the US dollar and a fall in interest rates led to mark-to-market losses on these instruments.

During the second half of 2008, HSBC reclassified US$17.9 billion of assets from 'held for trading' to 'loans and receivables' and 'available for sale' following the IASB's amendment to International Accounting Standard ('IAS') 39. Had these reclassifications not taken place and the assets had continued to be accounted for on a fair value basis, additional gains of US$1.5 billion would have been recorded in 2009 (2008: losses of US$3.5 billion). See 'Impact of Market Turmoil', pages 151 to 195.

2008 compared with 2007

Reported net trading income fell by 33 per cent to US$6.6 billion, 32 per cent lower on an underlying basis.

Net income from trading activities declined by 81 per cent, driven by the continuing effect of the market turmoil which led to US$5.4 billion of write-downs on legacy monoline credit exposures, credit trading and leveraged and acquisition finance loans. More information about the losses, the associated assets and residual exposure is provided in 'Impact of Market Turmoil' on pages 151 to 195.

Record foreign exchange trading income was due to increased customer volumes and market volatility across all regions, as investors sought to reduce risk in the second half of 2008, driving growth in global foreign exchange trading as demand for assets denominated in US dollars and Japanese Yen increased.

Rates trading income rose substantially, with record revenues in the first half of 2008 due to favourable positioning against movements in interest rate yield curves as central banks responded to the market turmoil by lowering short-term interest rates. Revenues were also boosted by an increased number of deals, widening spreads and increased customer demand for trading and hedging products.

The decline in equities trading income reflected weaker equity markets, particularly in Hong Kong, where demand for structured equity products fell. In addition, following the alleged fraud at Madoff Securities, HSBC wrote off the value of units it held in funds that had invested with the company and took a US$984 million charge. The units had been acquired in connection with various financing transactions HSBC had entered into with institutional clients.

The decline in non-qualifying hedges related to mark-to-market losses on cross-currency swaps as the US dollar appreciated and on interest rate swaps as interest rates fell in late 2008.

Widening credit spreads led to further gains on credit default swap transactions in parts of the Global Banking portfolio.

Net income from financial instruments designated at fair value

	2009 US$m	2008 US$m	2007 US$m
Net income/(expense) arising from:
- financial assets held to meet liabilities under insurance and investment contracts ..........................................................................	3,793	(5,064)	2,056
- 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
Change in own credit spread on long-term debt ...............................	(6,533)	6,570	3,055
Other changes in fair value²⁵ ...........................................................	286	109	(243)

- other instruments designated at fair value and related derivatives ........	252	486	155

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

Financial assets designated at fair value at 31 December .............................	37,181	28,533	41,564
Financial liabilities designated at fair value at 31 December ........................	80,092	74,587	89,939

For footnote, see page 149.

HSBC designates certain financial instruments at fair value to remove or reduce accounting mismatches in measurement or recognition, or where financial instruments are managed and their performance is evaluated together on a fair value basis. All income and expense from financial instruments designated at fair value are included in this line except for interest arising from HSBC's issued debt securities and related derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'.

HSBC principally uses the fair value designation in the following instances (for which all numbers are 'reported'):

· for certain fixed-rate long-term debt issues whose rate profile has been changed to floating through interest rate swaps as part of a documented interest rate management strategy. Approximately US$63 billion (2008: US$59 billion) of the Group's debt issues have been accounted for using the fair value option.

The movement in fair value of these debt issues includes the effect of own credit spread changes and any ineffectiveness in the economic relationship between the related swaps and own debt. As credit spreads widen or narrow, accounting profits or losses, respectively, are booked. The size and direction of the accounting consequences of changes in own credit spread and ineffectiveness can be volatile from year to year, but do not alter the cash flows envisaged as part of the documented interest rate management strategy. As a consequence, gains and losses arising from changes in own credit spread on long-term debt are not regarded internally as part of managed performance and are excluded from underlying results. Similarly, such gains and losses are ignored in the calculation of regulatory capital;

· for US$15 billion (2008: US$11 billion) of financial assets held to meet liabilities under insurance contracts, and certain liabilities under investment contracts with discretionary participation features; and

· for US$8 billion (2008: US$7 billion) of financial assets held to meet liabilities under unit-linked and other investment contracts, as well as the associated liabilities.

2009 compared with 2008

A net expense from financial instruments designated at fair value of US$3.5 billion was reported compared with income of US$3.9 billion in 2008.

A significant change in credit spread on HSBC's own debt in 2009 reversed the movement in 2008.

On an underlying basis, HSBC reported income of US$3.0 billion in 2009 compared with an expense of US$2.6 billion in 2008. The large difference between the reported and underlying results is due to the exclusion of the effect of credit spread-related movements in the fair value of HSBC's own long-term debt from underlying performance.

Income of US$3.8 billion was recorded due to a fair value movement on assets held to back insurance and investment contracts, compared with an expense of US$4.8 billion in 2008. This reflected investment gains in the current year driven by improved market performance, predominantly affecting the value of assets held in unit-linked and participating funds in Hong Kong, the UK and France.

· To the extent that the investment gains related to assets held to back investment contracts, the expense associated with the corresponding increase in liabilities to customers was also recorded under net income from financial instruments designated at fair value. This expense amounted to US$1.3 billion in 2009 compared with an income of US$1.5 billion in 2008 when liabilities fell in line with declining asset markets.

· To the extent that the investment gains related to assets held to back insurance contracts, they were offset by a corresponding increase in 'Net insurance claims and movement in liabilities to policyholders' to reflect the extent to which unit-linked policyholders, in particular, participate in the investment performance experienced in the associated asset portfolios.

2008 compared with 2007

Reported net income from financial instruments designated at fair value decreased by US$231 million to US$3.9 billion in 2008.

On an underlying basis, in particular excluding a large income from movements in the fair value of the Group's own long-term debt, a net expense of US$2.7 billion was recorded, compared with income of US$1.1 billion in 2007.

A negative movement of US$5.1 billion was recorded in the fair value of assets held to back insurance and investment contracts, compared with a positive reported movement of US$2.1 billion in 2007. This reflected investment losses driven by falling equity and bond markets, predominantly affecting the value of assets held in unit-linked and participating funds in Hong Kong, France and the UK. The negative movement in fair value is partially offset by a corresponding reduction in 'Net insurance claims and movement in liabilities to policyholders', where unit-linked policyholders in particular participate in the investment performance experienced on the investment portfolios held to support the liabilities.

For assets held to meet liabilities under investment contracts the corresponding reduction in the liability to customers is also reported within net income from financial instruments designated at fair value. A reduction of US$1.8 billion in the fair value of liabilities held under investment contracts compared with a reported increase in the fair value of liabilities of US$940 million in 2007.

Gains less losses from financial investments

	2009 US$m	2008 US$m	2007 US$m
Net gain from disposal of:
- debt securities ......................................................................................	463	19	120
- equity securities ...................................................................................	407	1,216	1,864
- other financial investments .................................................................	8	4	14

	878	1,239	1,998
Impairment of available-for-sale equity securities .......................................	(358)	(1,042)	(42)

Gains less losses from financial investments ...............................................	520	197	1,956

2009 compared with 2008

Reported gains less losses from financial investments increased by US$323 million to US$520 million. On an underlying basis, they increased by US$546 million.

Net gains on the disposal of debt securities increased significantly, due to gains recorded on the sale of mortgage-backed securities in North America. They were supplemented by smaller gains, principally on the disposal of available-for-sale bonds in Latin America and the UK.

Sales of Visa shares contributed significant gains during 2008, with additional gains from further sales in 2009. Other gains recognised during 2008, including those recorded on the sale of MasterCard shares, were not repeated in 2009.

A significantly lower level of impairments on equity investments was recognised in 2009 than in 2008 in Asia, Europe and North America, reflecting the improvement in the economic situation and equity markets. Of the investments on which material impairments were recognised in 2008, a significant amount reversed during 2009 due to share price appreciation, notably in India and, to a lesser extent, Vietnam; however, under IFRSs all subsequent increases in the fair value are treated as a revaluation and are recognised in other comprehensive income rather than the income statement.

2008 compared with 2007

Reported gains less losses of US$197 million from financial investments during 2008 were 90 per cent lower than in 2007, 93 per cent lower on an underlying basis. A reduction in net gains from disposals was compounded by significant impairments recognised on equity securities held in the available-for-sale portfolio as certain investments were marked down to reflect the prevailing market conditions.

The redemption of Visa shares following its initial public offering ('IPO') resulted in significant gains, and there were further gains from the sale of MasterCard shares. These were more than offset by losses in Principal Investments and the non-recurrence of various significant gains in 2007, mostly in respect of Euronext, the European stock exchange, and a credit bureau in Brazil.

Declining equity markets caused impairments to be recognised against a number of strategic investments in Asia, held in the available-for-sale portfolio and on private equity investments, mainly in Europe. The market turmoil in the US also led to impairments against investments in various US financial institutions.

Net earned insurance premiums

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

Gross insurance premium income ...............................................................	10,991	12,547	11,001
Reinsurance premiums ................................................................................	(520)	(1,697)	(1,925)

Net earned insurance premiums ..................................................................	10,471	10,850	9,076

2009 compared with 2008

Reported net earned insurance premiums amounted to US$10.5 billion, a decrease of 3 per cent compared with 2008. On an underlying basis, net earned insurance premiums increased by 3 per cent. Growth was recorded in Asia, Brazil and France, but this was largely offset by significant declines in the UK and the US.

Net earned insurance premiums continued to grow in Asia, mainly from the launch of new products including a life insurance product designed for high net worth individuals and a guaranteed savings product. In Hong Kong, HSBC retained its position as the leading bancassurer and net earned insurance premiums increased as a result of higher sales of unit-linked and whole life products.

Growth in insurance premiums in Asia, Brazil and France was largely offset by declines in the UK and US.

In Latin America, premium growth was driven by higher sales of pension and life products in Brazil, partly due to a number of customers switching their personal pension annuities to HSBC.

In France, growth was significantly influenced by a large one-off reinsurance transaction in June 2008, which passed insurance premiums to a third-party reinsurance provider. Adjusting for this, net earned insurance premiums were ahead of 2008 despite a significant reduction in the distribution network following the disposal of the French regional banks in July 2008.

In the UK, demand for the Guaranteed Income Bond savings product declined as HSBC offered more favourable rates on an alternative deposit product. As the deposit product was a savings bond rather than an insurance contract, its income was recorded under net interest income, while the associated fall in sales of insurance products led to a US$1.1 billion reduction in insurance premium income with an equivalent decrease in 'Net insurance claims incurred and movement in liabilities to policyholders', as described below.

The reduction in origination volumes in the consumer finance business in North America also led to correspondingly lower sales of credit protection insurance as the consumer finance business was closed.

2008 compared with 2007

Reported net earned insurance premiums amounted to US$10.9 billion, 20 per cent higher than in 2007. HSBC acquired the remaining interest in HSBC Assurances in France in March 2007 and, in October 2007, sold the Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited in the UK. On an underlying basis, net earned insurance premiums increased by 14 per cent.

Growth in net earned insurance premiums was driven by a continued strong performance from the UK life assurance business, mainly as a result of higher sales of the Guaranteed Income Bond, a non-linked product that was launched in June 2007. The introduction of enhanced life assurance benefits to certain pension products, which led to these products being reclassified as insurance contracts, also resulted in higher premiums.

The Hong Kong insurance business also performed well with respect to premium growth, due to stronger sales of products with DPF and an increase in regular premiums partly offset by a reduction in unit-linked premiums.

In France, HSBC Assurances performed well in a declining market, as three promotional campaigns during the year contributed to growth in sales of policies with DPF. However, a significant one-off reinsurance transaction undertaken during 2008 caused net earned insurance premiums to decrease compared with 2007.

Other operating income

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

Rent received .............................................................................................	547	606	630
Gains/(losses) recognised on assets held for sale ..........................................	(115)	(130)	5
Valuation gains/(losses) on investment properties ......................................	(24)	(92)	152
Gain on disposal of property, plant and equipment, intangible assets and non-financial investments ......................................................................	1,033	881	213
Change in present value of in-force long-term insurance business ...............	605	286	(145)
Other .........................................................................................................	742	257	584

Other operating income .............................................................................	2,788	1,808	1,439

2009 compared with 2008

Reported other operating income of US$2.8 billion was 54 per cent higher than in 2008. This included a US$280 million gain related to the sale of the remaining stake in the card merchant-acquiring business in the UK, compared with a US$425 million gain in 2008 from the sale of the first tranche. In 2008 results also included gains of US$71 million related to the sale of HSBC's stake in Financiera Independencia. On an underlying basis, other operating income rose by 163 per cent, driven mainly by an increase in insurance-related income in Hong Kong, a rise in gains on property disposals and lower losses on foreclosed properties.

Increased insurance income in Hong Kong, higher gains on property disposals and lower losses on foreclosed properties in the US helped drive an underlying US$1.5 billion rise in other operating income.

Losses recognised on assets held for sale declined as losses on foreclosed properties in HSBC Finance decreased, partly due to lower inventory levels following delays in the foreclosure process and partly due to some stabilisation in real estate prices.

Property gains of US$576 million were recognised in respect of the sale and leaseback of 8 Canada Square, London which was effected through the disposal of HSBC's entire shareholding in Project Maple II B.V. ('PMII') to the National Pension Service of Korea. In 2008, HSBC reported a gain of US$416 million in respect of the purchase of PMII. See Note 23 on the Financial Statements.

An increase in insurance sales to new customers in Hong Kong resulted in positive movements in the present value of in-force ('PVIF') long-term insurance business. Further positive movements arose from refining the income recognition methodology used in respect of long-term insurance contracts in HSBC Finance. In 2008, a similar refinement in Brazil and HSBC's introduction of enhanced benefits to existing pension products in the UK, resulted in favourable movements in PVIF.

In Hong Kong, a gain of US$110 million was recognised in respect of a property disposal, and in Argentina a gain was realised on the sale of the head office building.

Other operating income includes higher gains on the sale of prime residential mortgage portfolios in the US, gains from the extinguishment of certain debt issued by HSBC's mortgage securitisation vehicles in the UK and lower costs associated with the provision of support to certain money market funds.

2008 compared with 2007

Reported other operating income of US$1.8 billion was 26 per cent higher than in 2007. This included gains of US$425 million on the sale of the card merchant acquiring business in the UK and US$71 million on the sale of HSBC's entire stake in Financiera Independencia, a Mexican consumer lending company. On an underlying basis, other operating income fell by 23 per cent.

The difficult property market conditions in the UK led to a loss in value of a property fund, lower income from the sale of property fund assets and a reduction in Group real estate disposals in 2008. Similarly, in Hong Kong revaluation gains on investment properties did not recur.

Life assurance enhancements to pension products resulted in increased present value of in-force long-term insurance ('PVIF') business, which also benefited from the non-recurrence of regulatory changes in 2007 in the UK.

During 2008, HSBC recognised a gain of US$416 million in respect of the purchase of the subsidiary of Metrovacesa which owned the property and long leasehold comprising 8 Canada Square, London.

Other operating income declined, driven by losses on sale of the Canadian vehicle finance business and other loan portfolios in 2008, in addition to the non-recurrence of gains on disposal of fixed assets and private equity investments in 2007.

Net insurance claims incurred and movement in liabilities to policyholders

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

Insurance claims incurred and movement in liabilities to policyholders:
- gross ...................................................................................................	12,560	9,206	9,550
- reinsurers' share .................................................................................	(110)	(2,317)	(942)

- net²⁶ ...................................................................................................	12,450	6,889	8,608

For footnote, see page 149.

2009 compared with 2008

Reported net insurance claims incurred and movement in liabilities to policyholders increased by 81 per cent to US$12.5 billion. On an underlying basis, they increased by 94 per cent.

The increase in net insurance claims incurred and movement in liabilities to policyholders mainly reflected the improvement in investment market performance compared with 2008 described above under 'Financial instruments designated at fair value'. Higher investment gains were broadly matched by movement in liabilities to policyholders on unit-linked and, to a certain extent, participating policies whose policyholders share in the investment performance of the supporting assets. The gains generated on the assets held to support insurance contract liabilities are reported in 'Net income from financial instruments designated at fair value'.

New business growth in a number of regions during 2009, particularly Hong Kong and Singapore, also contributed to an increase in the movement in liabilities to policyholders, as did the non-recurrence of a large one-off reinsurance transaction in France in 2008. The decline in sales of a Guaranteed Income Bond noted above had a corresponding effect on movement in liabilities to policyholders in the UK.

As a consequence of a rising incidence and severity of claims, aggregate charges of US$310 million were made to strengthen reserves in the UK motor book and the Irish reinsurance business during 2009. The UK motor insurance business was placed into run-off in September 2009.

2008 compared with 2007

Reported net insurance claims incurred and movement in liabilities to policyholders decreased by 20 per cent to US$6.9 billion. HSBC acquired the remaining interest in HSBC Assurances in France in March 2007 and, in October 2007, sold Hamilton Insurance Company Limited and Hamilton Life Assurance Company Limited in the UK. On an underlying basis, net insurance claims incurred and movement in liabilities to policyholders fell by 22 per cent.

The reduction in net insurance claims incurred and movement in liabilities to policyholders primarily reflected the impact of markedly weaker investment markets worldwide. This led to a reduction in liabilities to policyholders on unit-linked and, to a certain extent, participating policies.

The decline arising from market value movements was partially offset by an increase in claims incurred and movement in liabilities to policyholders driven by new business growth, most significantly in France, the UK and Hong Kong. In addition, 2007 was affected by the implementation of an FSA regulatory change, which led to lower gross liability valuations in that year, along with a reduction in the corresponding reinsurers' share.

A significant increase in the reinsurers' share of claims incurred and movement in liabilities to policyholders was primarily driven by the above regulatory change plus an increase in a reserve provision on a unit-linked product in Hong Kong, which was fully reinsured. In addition, a significant one-off reinsurance transaction was undertaken in France during 2008.

Loan impairment charges and other credit risk provisions

	2009 US$m	2008 US$m	2007 US$m
Loan impairment charges
New allowances net of allowance releases ...............................................	25,832	24,965	18,182
Recoveries of amounts previously written off .........................................	(890)	(834)	(1,005)

	24,942	24,131	17,177

Individually assessed allowances ..................................................................	4,458	2,064	796
Collectively assessed allowances .................................................................	20,484	22,067	16,381

Impairment of available-for-sale debt securities ..........................................	1,474	737	44
Other credit risk provisions ........................................................................	72	69	21

Loan impairment charges and other credit risk provisions ..........................	26,488	24,937	17,242

	%	%	%
As a percentage of net operating income excluding the effect of fair value movements in respect of credit spread on own debt and before loan impairment charges and other credit risk provisions ...............................	36.4	33.2	22.7
Impairment charges on loans and advances to customers as a percentage of gross average loans and advances to customers .......................................	2.8	2.5	2.0

	US$m	US$m	US$m

Customer impaired loans ............................................................................	30,606	25,352	19,582
Customer loan impairment allowances .......................................................	25,542	23,909	19,205

2009 compared with 2008

Reported loan impairment charges and other credit risk provisions were US$26.5 billion in 2009, an increase of 6 per cent over 2008, 9 per cent on an underlying basis. Within this, collectively assessed allowances declined while individually assessed impairment allowances continued to increase.

HSBC's aggregate outstanding customer loan impairment allowances at 31 December 2009 of US$25.5 billion represented 3 per cent of gross customer advances (net of reverse repos and settlement accounts), compared with 2.6 per cent at the end of 2008.

Loan impairment charges declined in certain businesses, notably Personal Financial Services in North America and Commercial Banking in Hong Kong, but this was more than offset by increases elsewhere, primarily on individually significant loans within Global Banking and Markets and more broadly on Commercial Banking exposures outside Hong Kong as the global economic downturn adversely affected the ability of many customers to service their loan commitments. As a consequence, loan impairment charges rose despite an underlying 9 per cent decline in gross loans and advances to customers which was driven mainly by the run-off of the US consumer finance portfolios.

In the US Personal Financial Services business, loan impairment charges declined by 11 per cent to US$14.2 billion, as additional delinquencies due to the continued deterioration in the US economy were more than offset by the effect of lower balances in the run-off portfolios in HSBC Finance.

In HSBC Finance, loan impairment charges decreased by 12 per cent. The reduction arose in most portfolios, but mainly in Mortgage Services as the portfolio continued to run off. In Consumer Lending, loan impairment charges increased, particularly in the unsecured personal lending portfolio, due to a deterioration in the 2006 and 2007 vintages and, to a lesser extent, first lien real estate secured loans, which was partly offset by lower loan impairment charges in the real estate secured portfolio. Loan impairment charges in the Card and Retail Services portfolio decreased despite the state of the US economy and higher levels of unemployment and personal bankruptcy. The main reason was the decline in card balances following actions taken to manage risk beginning in the fourth quarter of 2007 and continuing through 2009, and stable credit conditions.

In HSBC Bank USA, increased loan impairment charges in the personal lending portfolios were due to additional delinquencies which resulted in increased write-offs in the prime first lien mortgage loan portfolios as house prices continued to deteriorate in certain markets.

Loan impairment charges and other credit risk provisions increased significantly in Global Banking and Markets. Loan impairment charges increased, reflecting the impairment of a small number of exposures in the financial and property sectors in Europe and the Middle East. Further impairments were also recognised in respect of certain asset-backed securities held in the available-for-sale portfolio, reflecting mark-to-market losses which HSBC judged to be significantly in excess of the likely ultimate cash losses.

Loan impairment charges declined in Personal Financial Services in the US but rose in Commercial Banking outside Hong Kong and in Global Banking and Markets.

In the UK, loan impairment charges rose in both the Commercial Banking and Personal Financial Services portfolios. However, despite the contraction in the economy, charges remained a low proportion of the portfolio. In Commercial Banking, loan impairment charges largely reflected economic weakness in a broad range of sectors.

In UK Personal Financial Services, loan impairment charges also increased as unemployment rose. This was seen primarily in the credit card and unsecured personal loan portfolios. In the residential mortgage portfolios, delinquency rates decreased as HSBC continued to benefit from very limited exposure to buy-to-let and self-certified mortgages. HSBC's mortgage exposure continued to be well secured, with an average loan-to-value ratio for new UK business in HSBC Bank's mortgage portfolio, excluding First Direct, of under 55 per cent in 2009, compared with 59 per cent in 2008.

In the Middle East, loan impairment charges increased markedly from US$280 million to US$1.3 billion as the region experienced a significant economic contraction in activity, predominantly in real estate and construction, which particularly affected the UAE. Commercial Banking recorded a number of specific loan impairment charges and a significant increase in collective loan impairment charges. Lower employment in the region, largely driven by the decline in construction activity, led to a rise in loan impairment charges in Personal Financial Services, particularly in the credit card and personal lending portfolios.

In Latin America, portfolios were affected by the weaker economic environment for much of the year. In Personal Financial Services, loan impairment charges rose by 12 per cent to US$2.0 billion, with increased delinquencies in credit cards, mortgages, vehicle finance and payroll loans due to higher unemployment. In the Brazilian Commercial Banking portfolios, higher delinquencies were experienced primarily in the business banking and mid-market segments. In Mexico, action taken in 2008 to curtail originations and increase collection resources held loan impairment charges broadly unchanged notwithstanding the deterioration in the economy and the impact of the H1N1 virus.

In India, as in Mexico, curtailment of origination activity in unsecured personal lending slowed the increase in loan impairment charges in the unsecured credit card and personal lending portfolios in Personal Financial Services. In Commercial Banking, a higher number of corporate failures including a number of fraud-related losses, led to increased loan impairment charges.

Loan impairment charges and other credit risk provisions in Hong Kong decreased by 35 per cent to US$500 million as the economic environment improved in 2009, credit conditions recovered and international trade volumes improved.

In Private Banking, loan impairment charges increased from a very low level, largely attributable to a specific charge relating to a single client relationship in the US.

2008 compared with 2007

Reported loan impairment charges and other credit risk provisions were US$24.9 billion in 2008, an increase of 45 per cent over 2007, 46 per cent on an underlying basis.

A deterioration in credit quality was experienced across all customer groups and geographical regions as the global economy slowed. The rise in Group loan impairment charges and other credit risk provisions also reflected an underlying 8 per cent increase in lending to customers (excluding the financial sector and settlement accounts).

Loan impairment charges rose significantly in the US by 38 per cent to US$16.3 billion, due to credit quality deterioration across all US portfolios in Personal Financial Services.

In the US consumer lending portfolio, loan impairment charges rose as delinquency rates deteriorated sharply and the economy declined markedly in the second half of 2008, most notably in the first lien portfolio. This was particularly apparent in the geographical regions most affected by house price depreciation and rising unemployment rates. In mortgage services, loan impairment charges rose as 2005 and 2006 vintages matured and moved into the later stages of delinquency. This was partly offset by the benefit of lower balances as run-off continued, albeit at a slowing pace as house price depreciation restricted refinancing options for customers. In HSBC USA, loan impairment charges rose as credit quality worsened across the real estate secured portfolio and private label cards. Delinquencies rose in the prime first lien residential mortgage portfolio, Home Equity Line of Credit and Home Equity Loan second lien portfolios. The higher delinquency rate for prime first lien mortgages was in part due to lower balances following US$7.0 billion of portfolio sales during the year.

Loan impairment charges in the US card and retail services portfolios rose, again driven by increasing unemployment, portfolio seasoning, higher levels of personal bankruptcy filings and continued weakness in the US economy which was most apparent in regions with the most significant declines in house prices and rising unemployment.

Loan impairment charges in Commercial Banking in North America more than doubled from a low base in 2007, due to deterioration across the commercial real estate, middle market and corporate banking portfolios in the US and, to a lesser extent, higher loan impairment charges against firms in the manufacturing, export and commercial real estate sectors in Canada.

In the UK, a modest decline in loan impairment charges in Personal Financial Services reflected the non-recurrence of a methodology change at HFC in 2007 which resulted in higher impairment charges. Credit quality in the Personal Financial Services portfolio remained broadly stable, reflecting early risk mitigation through the tightening of lending controls and the sale of non-core credit card portfolios during the year. Credit quality in the unsecured portfolios deteriorated slightly in 2008, particularly in the second half of the year, due to the weakening UK economy. Loan impairment charges in the commercial portfolio rose in 2008 as the weakening property market led to higher impairment charges against construction companies and businesses dependent upon the real estate sector, particularly in the final quarter of the year. Impairment charges against banks rose due to some exposure to the Icelandic banks in 2008. In addition, rising levels of personal indebtedness resulted in lower releases and recoveries of charges than in 2007.

Higher loan impairment and other credit risk provisions within Global Banking and Markets in Europe reflected increased charges against certain corporate accounts and impairment recorded on available-for-sale debt securities.

In Mexico, loan impairment charges rose by US$513 million or 69 per cent, primarily in the credit card portfolio. This was due to a combination of higher lending volumes from organic expansion and higher delinquency rates which were driven by a deterioration in credit quality as the portfolio continued to season and move into the later stages of delinquency. Management took action to enhance collection activity and improve the quality of new business. Impairment charges in the commercial portfolio also rose due to credit quality deterioration among small and medium-sized enterprises as the economy weakened.

In Hong Kong, the rise in loan impairment charges was driven by weakness in parts of the export sector within the commercial portfolio in the second half of 2008. In Global Banking and Markets, credit impairment charges within Balance Sheet Management principally reflected losses on debt securities and paper issued by financial institutions previously rated at investment grade which failed in the year.

In Rest of Asia-Pacific, the growth in loan impairment charges reflected a combination of the expansion of consumer lending and credit quality deterioration in India and the Middle East. In addition, higher impairment charges in Commercial Banking were driven by a deterioration in credit quality in the second half of the year.

For the Group as a whole, the aggregate outstanding customer loan impairment allowances at 31 December 2008 of US$23.9 billion represented 2.6 per cent of gross customer advances (net of reverse repos and settlement accounts), compared with 2 per cent at 31 December 2007.

Operating expenses

	2009	2008	2007
	US$m	US$m	US$m
By expense category
Employee compensation and benefits ........................................................	18,468	20,792	21,334
Premises and equipment (excluding depreciation and impairment) ..............	4,099	4,305	3,966
General and administrative expenses ..........................................................	9,293	10,955	11,328

Administrative expenses ............................................................................	31,860	36,052	36,628
Depreciation and impairment of property, plant and equipment ................	1,725	1,750	1,714
Amortisation and impairment of intangible assets ......................................	810	733	700
Goodwill impairment ..................................................................................	-	10,564	-

Total operating expenses ...........................................................................	34,395	49,099	39,042

	At 31 December
	2009	2008	2007
Staff numbers (full-time equivalent)
Europe .......................................................................................................	76,703	82,093	82,166
Hong Kong ................................................................................................	27,614	29,330	27,655
Rest of Asia-Pacific²⁷ .................................................................................	87,141	89,706	80,523
Middle East²⁷ .............................................................................................	8,281	8,453	8,050
North America ...........................................................................................	35,458	44,725	52,722
Latin America ............................................................................................	54,288	58,559	64,404

Total staff numbers ....................................................................................	289,485	312,866	315,520

For footnote, see page 149.

2009 compared with 2008

Reported operating expenses fell by US$14.7 billion to US$34.4 billion, with the most significant feature being the non-recurrence of the goodwill impairment charge of US$10.6 billion in 2008 to fully write off goodwill in Personal Financial Services in North America. Excluding this and on an underlying basis, operating expenses fell by 4 per cent.

Underlying operating expenses excluding goodwill impairment fell by 4 per cent.

Employee compensation and benefits fell by 4 per cent as costs in the US declined following the closure of the branch-based consumer finance business in the first quarter of 2009. Average headcount in most regions was lower and this was reflected in lower costs. In the UK, a change in the basis of delivering death-in-service, ill health and early retirement benefits for some UK employees generated a one-off accounting gain of US$499 million which was partly offset by increased regular pension costs. There were higher performance-related costs in Global Banking and Markets reflecting its results. The UK and French governments announced one-off taxes in late 2009 in respect of certain bonuses payable by banks and banking groups. In both countries there is uncertainty over the interpretation of the draft proposals, and detailed analysis of individual awards

in the context of the final legislation will be required to determine the precise effect of the taxes. The estimated tax payable under the proposals as currently drafted is US$355 million in the UK and US$45 million in France. The taxes will be payable and accounted for in 2010 once the legislation is enacted. For further details, see page 326.

Premises and equipment costs increased marginally with higher rental costs reflecting the sale and leaseback of a number of properties in 2008. One-off costs incurred due to the closure of the Consumer Lending branch network in the US were partly offset by savings resulting from the closure.

General and administrative expenses fell as HSBC focused on managing costs tightly and increasing efficiency. Marketing and advertising costs fell across the group, most notably in Card and Retail Services in North America, and in the UK. Travel and entertainment costs, and expenditure related to services contracted to third parties, fell, primarily in Europe and North America. Better use of direct channels, increased automation of manual processes, enhanced utilisation of global service centres and elimination of redundant systems continued to be driven through the One HSBC programme. In North America, cost savings also resulted in the Consumer Lending Business from thediscontinuation of loan originations and the closure of branches.

2008 compared with 2007

Reported operating expenses increased by US$10.1 billion to US$49.1 billion, due to an impairment charge of US$10.6 billion to fully write off goodwill in Personal Financial Services in North America. Excluding this, operating expenses remained broadly in line on both reported and underlying bases.

Employee compensation and benefits fell marginally. Lower discretionary bonuses reflected weaker performance in the current economic conditions. A review of actuarial assumptions on employees' defined benefit pensions resulted in lower service costs in the UK. The restructuring of the consumer finance business in North America led to reduced headcount and lower costs. This was partially offset by higher salaries and increased headcount to support business expansion, mainly in Asia. Restructuring costs were incurred primarily in Latin America and Europe.

Premises and equipment costsincreased primarily in the UK and the Rest of Asia-Pacific region, driven by investment in technology and extensions and improvements to the branch and ATM networks. As a consequence, repairs and maintenance costs rose. Commercial property rental costs also increased as a result of higher prices, new rentals and sale and leaseback deals.

General and administrative expenses decreased, primarily due to a one-off recovery of US$110 million of previous years' transactional taxes in Brazil and the non-recurrence of a number of one-off items in 2007, most notably (i) ex-gratia payments made in the UK in respect of overdraft fees, (ii) the provision for reimbursement of certain charges on historic will trusts and other related services in the UK, (iii) the indemnification agreement with Visa ahead of Visa's IPO, and (iv) restructuring charges in the US consumer finance business incurred in 2007. These were partly offset by an increase in the Financial Services compensation scheme levy in the UK and an increase in a litigation provision in Asia.

Goodwill impairment amounting to US$10.6 billion was booked following the continued deterioration in economic and credit conditions in North America. For further information see Note 22 on the Financial Statements.

Cost efficiency ratios

	2009 %	2008 %	2007 %

HSBC .......................................................................................................	52.0	60.1	49.4

Personal Financial Services ..................................................................	51.7	76.4	50.3
Europe .......................................................................................................	68.7	62.7	64.8
Hong Kong ................................................................................................	34.9	32.2	27.2
Rest of Asia-Pacific²⁷ .................................................................................	81.2	81.5	77.9
Middle East²⁷ .............................................................................................	53.5	53.2	61.1
North America ...........................................................................................	38.1	106.8	42.3
Latin America ............................................................................................	66.7	59.7	61.3

Commercial Banking ............................................................................	46.4	43.0	44.8
Europe .......................................................................................................	47.4	44.2	49.3
Hong Kong ................................................................................................	33.7	26.2	24.9
Rest of Asia-Pacific²⁷ .................................................................................	47.0	45.9	47.5
Middle East²⁷ .............................................................................................	33.8	32.0	34.5
North America ...........................................................................................	47.7	46.1	45.1
Latin America ............................................................................................	57.0	55.0	54.3

For footnote, see page 149.

Share of profit in associates and joint ventures

	2009 US$m	2008 US$m	2007 US$m
Associates
Bank of Communications Co., Limited ...................................................	754	741	445
Ping An Insurance (Group) Company of China, Limited .........................	551	324	518
Industrial Bank Co., Limited ...................................................................	216	221	128
The Saudi British Bank ...........................................................................	172	251	216
Other .....................................................................................................	42	63	159

Share of profit in associates .......................................................................	1,735	1,600	1,466
Share of profit in joint ventures .................................................................	46	61	37

Share of profit in associates and joint ventures ...........................................	1,781	1,661	1,503

2009 compared with 2008

The share of profit in associates and joint ventures was US$1.8 billion, an increase of 7 per cent on 2008, and 6 per cent on an underlying basis.

HSBC's share of profits from Ping An Insurance (Group) Company of China, Limited ('Ping An Insurance') increased by 62 per cent as a result of the non-recurrence of Ping An Insurance's impairment of its investment in Fortis SA/NV and Fortis N.V. ('Fortis') in 2008 and an increase in new business sales and investment returns which were boosted by a recovery in equity markets during 2009. This was partly offset by the non-recurrence of favourable changes to investment assumptions in the first half of 2008.

6 per cent underlying increase in share of profit in associates and joint ventures.

HSBC's share of profits from the Bank of Communications Co., Limited ('Bank of Communications') remained in line with 2008 as higher fee and trading income and a lower tax charge were broadly offset by a decline in net interest income and higher loan impairment charges.

Profits from The Saudi British Bank were lower than in 2008 as an increase in loan impairment charges was only partly offset by increased operating income.

The share of profits from joint ventures fell due to a decline in the profitability of HSBC Saudi Arabia Ltd as a result of a slowdown in initial public offerings ('IPO's) and a decline in assets under management. This was partly offset by an increase in profits from HSBC Merchant Services UK Ltd in the first half of 2009 compared with the second half of 2008. HSBC Merchant Services UK Ltd was created in June 2008 and sold in June 2009.

2008 compared with 2007

Share of profit in associates and joint ventures was US$1.7 billion, an increase of 11 per cent compared with 2007, and 4 per cent on an underlying basis.

This increase was driven by higher contributions from Bank of Communications, Industrial Bank, and The Saudi British Bank, partly offset by lower profits from Ping An Insurance.

HSBC's share of profits from Bank of Communications rose by 52 per cent to US$741 million, primarily driven by increased margins, as yields rose following higher base rates in mainland China through most of 2008, and balance sheet growth. Growth in revenues from the asset custody business, financial advisory services and bank card transactions also drove higher profits.

HSBC's share of profits from Ping An Insurance decreased by 43 per cent, primarily due to the impairment of its investment in Fortis, following significant declines in its market value.

Profits from The Saudi British Bank were higher by 16 per cent due to strong balance sheet growth, particularly in the lending portfolio, augmented by higher fees from cards, account services and trade.

Profits from Industrial Bank grew by 72 per cent, driven by increased investment income and balance sheet growth.

The share of profits from joint ventures rose due to growth in HSBC Saudi Arabia Ltd and the recognition of profits in HSBC Merchant Services UK Ltd, the new merchant acquiring venture with Global Payments Inc.

An adjustment to the embedded value of HSBC Assurances in 2007 did not recur.

Gains arising from dilution of interests in associates

In 2007, HSBC's associates, Industrial Bank, Ping An Insurance and Bank of Communications in mainland China, Financiera Independencia in Mexico and Techcombank in Vietnam issued new shares for which HSBC did not subscribe. As a consequence of the new monies raised by the associates, HSBC's share of their underlying assets increased by US$1.1 billion, notwithstanding the reduction in the Group's interests. These gains were presented in the income statement as 'Gains arising from dilution of interests in associates', and should be regarded as exceptional.

Economic profit

HSBC's internal performance measures include economic profit, a calculation which compares the return on financial capital invested in HSBC by its shareholders with the cost of that capital. HSBC prices its cost of capital internally and the difference between that cost and the post-tax profit attributable to ordinary shareholders represents the amount of economic profit generated. Economic profit generated is used by management as one input in deciding where to allocate capital and other resources.

In seeking to drive long-term sustainable risk‑based performance, HSBC emphasises the trend in economic profit ahead of absolute amounts within business units. The Group's long-term cost of equity is reviewed annually and for 2009 remained at 10 per cent. The following commentary on economic profit is on a reported basis.

The economic loss decreased by US$0.2 billion. Profit attributable to shareholders reflected a significant negative fair value movement in own debt of US$6.5 billion as credit spreads tightened, compared with an equivalent gain of US$6.6 billion in 2008, and the non-recurrence of a goodwill impairment charge of US$10.6 billion in 2008.

Average invested capital decreased by 1 per cent. The additional equity raised through the rights issue was offset by the effect of the goodwill impairment charge at the end of 2008 and losses on structural foreign exchange exposures, the result of a stronger US dollar.

Economic spread increased by 0.1 percentage points, the result of an increase in return on invested capital of 2 per cent and a decrease in the cost of capital in dollar terms of 1 per cent compared with 2008.

	2009		2008
	US$m	%²⁸	US$m	%²⁸

Average total shareholders' equity ........................................................	115,431		122,292
Adjusted by:
Goodwill previously amortised or written off .....................................	8,123		8,152
Property revaluation reserves ............................................................	(799)		(828)
Reserves representing unrealised losses on effective cash flow hedges	385		997
Reserves representing unrealised losses on available-for-sale securities	16,189		9,163
Preference shares and other equity instruments .................................	(3,538)		(2,685)

Average invested capital²⁹ .....................................................................	135,791		137,091

Return on invested capital³⁰ ..................................................................	5,565	4.1	5,497	4.0

Benchmark cost of capital ....................................................................	(13,579)	(10.0)	(13,709)	(10.0)

Economic loss and spread ......................................................................	(8,014)	(5.9)	(8,212)	(6.0)

For footnotes, see page 149.

This information is provided by RNS

The company news service from the London Stock Exchange

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