Annual Report and Accounts -

RNS Number : 7359P

HSBC Holdings PLC

31 March 2009

 



38    Equity

	2008
									Other reserves
	Called up     share     capital		Share      premium1		Other     equity     instru-     ments5		Retained      earnings2		Available-     for-sale     fair value     reserve		Cash flow      hedging      reserve3		Foreign     exchange     reserve		Share-     based     payment     reserve		Merger      reserve4		Total     share-    holders'     equity		Minority     interests3		Total     equity
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 1 January	5,915		8,134		-		81,097		850		(917)		10,055		1,968		21,058		128,160		7,256		135,416
Shares issued under employee share plans	20		450		-		-		-		-		-		-		-		470		-		470
Shares issued in lieu of dividends and  amounts arising thereon1	118		(121)		-		3,596		-		-		-		-		-		3,593		-		3,593
Capital securities issued5	-		-		2,133		-		-		-		-		-		-		2,133				2,133
Profit for the year	-		-		-		5,728		-		-		-		-		-		5,728		770		6,498
Dividends to shareholders	-		-		-		(11,301)		-		-		-		-		-		(11,301)		(813)		(12,114)
Own shares adjustment	-		-		-		(1,002)		-		-		-		-		-		(1,002)		-		(1,002)
Share of changes recognised directly in the  equity of associates or joint ventures	-		-		-		(559)		-		-		-		-		-		(559)		-		(559)
Actuarial losses on defined benefit plans	-		-		-		(1,457)		-		-		-		-		-		(1,457)		(152)		(1,609)
Exchange differences	-		-		-		(14,070)		2,120		(30)		-		-		-		(11,980)		(225)		(12,205)
Fair value losses taken to equity	-		-		-		-		(23,206)		(1,762)		-		-		-		(24,968)		(474)		(25,442)
Amounts transferred to the income statement3	-		-		-		-		(1,301)		1,772		-		-		-		471		(33)		438
Impairments taken to the income statement	-		-		-		-		1,701		-		-		-		-		1,701		78		1,779
Exercise and lapse of share options and  vesting of share awards	-		-		-		827		-		-		-		(848)		-		(21)		-		(21)
Cost of share-based payment arrangements	-		-		-				-		-		-		819		-		819		-		819
Other movements	-		-		-		(252)		74		5		82		56		-		(35)		73		38
Tax on items taken directly to or transferred  from equity	-		-		-		411		1,332		96		-		-		-		1,839		40		1,879
Transfers	-		-		-		17,671		(2,120)		30		(11,980)		-		(3,601)		-		-		-
Net increase in minority interest arising on acquisitions, disposals and capital issuance	-		-		-		-		-		-		-		-		-		-		118		118
At 31 December	6,053		8,463		2,133		80,689		(20,550)		(806)		(1,843)		1,995		17,457		93,591		6,638		100,229

Cumulative goodwill amounting to US$5,138 million has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including US$3,469 million charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of US$1,669 million has been charged against retained earnings.

	2007
							Other reserves
	Called up     share     capital		Share      premium1		Retained      earnings2		Available-     for-sale     fair value     reserve		Cash flow      hedging      reserve3		Foreign     exchange     reserve		Share-     based     payment     reserve		Merger      reserve4		Total     share-    holders'     equity		Minority     interests3		Total     equity
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 1 January	5,786		7,789		65,397		2,005		(101)		4,307		2,111		21,058		108,352		6,576		114,928
Shares issued under employee share plans	17		460		-		-		-		-		-		-		477		-		477
Shares issued in lieu of dividends and amounts  arising thereon1	112		(115)		4,354		-		-		-		-		-		4,351		-		4,351
Profit for the year	-		-		19,133		-		-		-		-		-		19,133		1,322		20,455
Dividends to shareholders	-		-		(10,241)		-		-		-		-		-		(10,241)		(788)		(11,029)
Own shares adjustment	-		-		(510)		-		-		-		-		-		(510)		-		(510)
Share of changes recognised directly in the equity of  associates or joint ventures	-		-		372		-		-		-		-		-		372		-		372
Actuarial gains/(losses) on defined benefit plans	-		-		2,234		-		-		-		-		-		2,234		(67)		2,167
Exchange differences	-		-		5,459		291		(28)		26		-		-		5,748		198		5,946
Fair value gains taken to equity	-		-		-		526		616		-		-		-		1,142		239		1,381
Amounts transferred to the income statement3	-		-		-		(1,799)		(1,899)		-		-		-		(3,698)		(14)		(3,712)
Impairments taken to the income statement	-		-		-		86		-		-		-		-		86		-		86
Exercise and lapse of share options and vesting of  share awards	-		-		758		-		-		-		(751)		-		7		-		7
Cost of share-based payment arrangements	-		-		-		-		-		-		870		-		870		-		870
Other movements	-		-		320		1		(6)		-		(262)		-		53		(91)		(38)
Tax on items taken directly to or transferred from equity	-		-		(720)		31		473		-		-		-		(216)		(10)		(226)
Transfers	-		-		(5,459)		(291)		28		5,722		-		-		-		-		-
Net increase in minority interest arising on acquisitions, disposals and capital issuance	-		-		-		-		-		-		-		-		-		(109)		(109)
At 31 December	5,915		8,134		81,097		850		(917)		10,055		1,968		21,058		128,160		7,256		135,416

Cumulative goodwill amounting to US$5,138 million has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including US$3,469 million charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of US$1,669 million has been charged against retained earnings.

	2006
							Other reserves
	Called up     share     capital		Share      premium1		Retained      earnings2		Available-     for-sale     fair value     reserve		Cash flow      hedging      reserve3		Foreign     exchange     reserve		Share-     based     payment     reserve		Merger      reserve4		Total     share-    holders'     equity		Minority      interests3		Total     equity
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
At 1 January	5,667		6,896		56,223		1,104		233		(284)		1,535		21,058		92,432		5,794		98,226
Shares issued under employee share plans	40		975		-		-		-		-		-		-		1,015		-		1,015
Shares issued in lieu of dividends and amounts arising thereon1	79		(82)		2,528		-		-		-		-		-		2,525		-		2,525
Profit for the year	-		-		15,789		-		-		-		-		-		15,789		1,082		16,871
Dividends to shareholders	-		-		(8,769)		-		-		-		-		-		(8,769)		(785)		(9,554)
Own shares adjustment	-		-		(529)		-		-		-		-		-		(529)		-		(529)
Share of changes recognised directly in the equity of  associates or joint ventures	-		-		20		-		-		-		-		-		20		-		20
Actuarial gains/(losses) on defined benefit plans	-		-		(92)		-		-		-		-		-		(92)		14		(78)
Exchange differences	-		-		4,446		89		(8)		26		38		-		4,591		84		4,675
Fair value gains taken to equity	-		-		-		1,514		1,560		-		-		-		3,074		62		3,136
Amounts transferred to the income statement3	-		-		-		(622)		(2,219)		-		-		-		(2,841)		(22)		(2,863)
Impairments taken to the income statement	-		-		-		21		-		-		-		-		21		-		21
Exercise and lapse of share options and vesting of  share awards	-		-		684		-		-		-		(623)		-		61		-		61
Cost of share-based payment arrangements	-		-		-		-		-		-		854		-		854		-		854
Other movements	-		-		(102)		(9)		2		-		345		-		236		(103)		133
Tax on items taken directly to or transferred from equity	-		-		(355)		(3)		323		-		-		-		(35)		(9)		(44)
Transfers	-		-		(4,446)		(89)		8		4,565		(38)		-		-		-		-
Net increase in minority interest arising on acquisitions, disposals and capital issuance	-		-		-		-		-		-		-		-		-		459		459
At 31 December	5,786		7,789		65,397		2,005		(101)		4,307		2,111		21,058		108,352		6,576		114,928

Cumulative goodwill amounting to US$5,138 million has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including US$3,469 million charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of US$1,669 million has been charged against retained earnings.

1    Share premium includes the deduction of US$3 million in respect of issuance costs incurred during the year (2007: US$3 million; 2006: US$3 million).

2    Retained earnings include 194,751,829 (US$3,094 million) of own shares held within HSBC's insurance business, retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or bonus plans, and the market-making activities in Global Markets (2007: 158, 706,463 (US$2,649 million); 2006: 148,323,102 (US$2,305 million)). 2006 numbers have been restated to conform with the current year's presentation.

3    Amounts transferred to the income statement in respect of cash flow hedges include US$152 million (2007: US$57 million: 2006: US$479 million) taken to 'Net interest income' and US$1,602 million (2007: US$1,829 million; 2006: US$1,719 million) taken to 'Net trading income'.

4    Statutory share premium relief under Section 131 of the Companies Act 1985 was taken in respect of the acquisition of HSBC France in 2000 and HSBC Finance in 2003 and the shares issued were recorded at their nominal value only. The fair value differences of US$8,290 million and US$12,768 million in respect of HSBC France and HSBC Finance, respectively, were recognised as a merger reserve. The merger reserve created on the acquisition of HSBC Finance subsequently became attached to HSBC Overseas Holdings (UK) Limited ('HOHU'), following a number of inter-group reorganisations. At 31 December 2008, an amount of US$3,601 million was transferred from this reserve to retained earnings as a result of impairment in HSBC Holdings' investment in HOHU.

5    During April 2008, HSBC Holdings issued US$2,200 million of Perpetual Subordinated Capital Securities ('Capital Securities'), including US$67 million of issuance costs, which are classified as equity under IFRSs. 

39    Notes on the cash flow statement

Non-cash items included in profit before tax

	HSBC						HSBC Holdings
	2008		2007		2006		2008		2007
	US$m		US$m		US$m		US$m		US$m
Depreciation, amortisation and impairment	13,367		2,522		2,528		3,601		(25)
Gains arising from dilution of interests in associates	-		(1,092)		-		-		-
Revaluations on investment property	92		(152)		(164)		-		-
Share-based payment expense	819		870		854		14		29
Loan impairment losses gross of recoveries and other credit risk provisions	25,034		18,247		11,352		-		-
Provisions	591		989		498		-		-
Impairment of financial investments	1,779		39		-		-		-
Charge for defined benefit plans	490		727		664		-		-
Accretion of discounts and amortisation of  premiums	(867)		(449)		(776)		4		6
	41,305		21,701		14,956		3,619		10

Change in operating assets

	HSBC						HSBC Holdings
	2008		2007		2006		2008		2007
	US$m		US$m		US$m		US$m		US$m
Change in loans to HSBC undertakings	-		-		-		3,129		(2,786)
Change in prepayments and accrued income	4,178		(5,069)		(2,478)		166		(183)
Change in net trading securities and net derivatives	(23,293)		(4,972)		(13,620)		(16)		(1,094)
Change in loans and advances to banks	22,596		(8,922)		(11,505)		-		-
Change in loans and advances to customers	7,279		(131,886)		(132,987)		-		-
Change in financial assets designated at fair value	12,757		(13,360)		(4,883)		(12)		-
Change in other assets	(5,394)		(12,329)		(9,844)		(4)		4
	18,123		(176,538)		(175,317)		3,263		(4,059)

Change in operating liabilities

	HSBC						HSBC Holdings
	2008		2007		2006		2008		2007
	US$m		US$m		US$m		US$m		US$m
Change in accruals and deferred income	(6,169)		5,119		3,549		138		39
Change in deposits by banks	(3,038)		32,594		28,378		-		-
Change in customer accounts	32,372		199,806		149,849		-		-
Change in debt securities in issue	(67,152)		(12,489)		42,253		-		-
Change in financial liabilities designated at fair value	(15,352)		12,304		8,382		(2,299)		148
Change in other liabilities	(4,074)		12,761		4,967		126		(8)
	(63,413)		250,095		237,378		(2,035)		179

Cash and cash equivalents

	HSBC						HSBC Holdings
	2008		2007		2006		2008		2007
	US$m		US$m		US$m		US$m		US$m
Cash at bank with HSBC undertakings	-		-		-		443		360
Cash and balances at central banks	52,396		21,765		12,732		-		-
Items in the course of collection from other banks	6,003		9,777		14,144		-		-
Loans and advances to banks of one month or less	165,066		232,320		162,998		-		-
Treasury bills, other bills and certificates of deposit  less than three months	62,639		41,819		38,237		-		-
Less: items in the course of transmission to  other banks	(7,232)		(8,672)		(12,625)		-		-
Total cash and cash equivalents	278,872		297,009		215,486		443		360

Interest and dividends

	HSBC						HSBC Holdings
	2008		2007		2006		2008		2007
	US$m		US$m		US$m		US$m		US$m
Interest paid	(60,342)		(63,626)		(47,794)		(2,525)		(2,397)
Interest received	107,019		103,393		85,143		1,619		1,627
Dividends received	1,876		1,833		1,525		10,779		9,187

40    Contingent liabilities, contractual commitments and guarantees 

	HSBC				HSBC Holdings
	2008		2007		2008		2007
	US$m		US$m		US$m		US$m
Guarantees and contingent liabilities
Guarantees and irrevocable letters of credit  pledged as collateral security	72,895		77,885		47,341		38,457
Other contingent liabilities	259		334		-		-
	73,154		78,219		47,341		38,457
Commitments
Documentary credits and short-term trade-related transactions	9,789		13,510		-		-
Forward asset purchases and forward forward  deposits placed	197		490		-		-
Undrawn note issuing and revolving  underwriting facilities	-		109		-		-
Undrawn formal standby facilities, credit lines  and other commitments to lend	594,036		750,348		3,241		3,638
	604,022		764,457		3,241		3,638

The above table discloses the nominal principal amounts of commitments excluding capital commitments, which are separately disclosed below, guarantees and other contingent liabilities; mainly credit-related instruments including both financial and non-financial guarantees and commitments to extend credit. Contingent liabilities arising from litigation against the Group are disclosed in Note 42. Nominal principal amounts represent the amounts at risk should contracts be fully drawn upon and clients default. The amount of the loan commitments shown above reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. As a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not representative of future liquidity requirements. 

Guarantees

HSBC provides guarantees and similar undertakings on behalf of both third-party customers and other entities within the HSBC Group. These guarantees are generally provided in the normal course of HSBC's banking business. The principal types of guarantees provided, and the maximum potential amount of future payments which HSBC could be required to make at 31 December 2008, were as follows:

	At 31 December 2008				At 31 December 2007
	Guarantees in favour of third parties		Guarantees  by HSBC Holdings in favour of other HSBC Group entities		Guarantees in favour of third parties		Guarantees by HSBC Holdings in favour of other HSBC Group entities
	US$m		US$m		US$m		US$m
Guarantee type
Financial guarantee contracts1	20,879		47,341		25,086		38,457
Standby letters of credit which are financial  guarantee contracts2	11,171		-		8,357		-
Other direct credit substitutes3	4,613		-		4,938		-
Performance bonds4	15,304		-		12,969		-
Bid bonds4	627		-		1,119		-
Standby letters of credit related to particular  transactions4	4,791		-		8,235		-
Other transaction-related guarantees4	15,028		-		16,940		-
Other items	482		-		241		-
	72,895		47,341		77,885		38,457

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

2    Standby letters of credit which are financial guarantee contracts are irrevocable obligations on the part of HSBC to pay third parties when customers fail to make payments when due.

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

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

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

Financial Services Compensation Scheme

The UK Financial Services Compensation Scheme ('FSCS') has provided compensation to consumers following the collapse of a number of deposit takers such as Bradford & Bingley plc, Heritable Bank plc, Kaupthing Singer & Friedlander Limited, Landsbanki 'Icesave' and London Scottish Bank plc. The compensation paid out to consumers is currently funded through loans from the Bank of England and HM Treasury. HSBC Bank plc ('the bank') could be liable to pay a proportion of the outstanding borrowings that the FSCS has borrowed from HM Treasury which at 16 December 2008 stood at £19.7 billion (US$28.7 billion). The bank is also obligated to pay its share of forecast management expenses based on the bank's market share of deposits protected under the FSCS. The bank has provided £86 million (US$125.4 million) as at 31 December 2008 in respect of the share of forecast management expense, including interest costs, for the 2008/9 and 2009/10 levy years. This accrual is based on the bank's estimated share of total market protected deposits at 31 December 2007 and 2008, respectively. However, the ultimate FSCS levy to the industry as a result of the 2008 collapses cannot currently be estimated reliably as it is dependent on various uncertain factors including the potential recoveries of assets by the FSCS and changes in the interest rate, the level of protected deposits and the population of FSCS members at the time.

Commitments

In addition to the commitments disclosed on page 440, at 31 December 2008, HSBC had US$1,541 million (2007: US$942 million) of capital commitments contracted but not provided for and US$267 million (2007: US$194 million) of capital commitments authorised but not contracted for.

Agreement to acquire Bank Ekonomi

In October 2008, HSBC entered into an agreement to acquire 88.89 per cent of PT Bank Ekonomi Raharja Tbk ('Bank Ekonomi'), in Indonesia, for cash consideration of US$608 million. Following acquisition of this initial stake, HSBC would be required under Indonesian law to make a mandatory tender offer for a further holding of up to 10.11 per cent, taking HSBC's share to 99 per cent. The transaction is pending regulatory approval.

Associates

HSBC's share of associates' contingent liabilities amounted to US$17,943 million at 31 December 2008 (2007: US$18,437 million). No matters arose where HSBC was severally liable.

41    Lease commitments

Finance lease commitments

HSBC leases land and buildings (including branches) and equipment from third parties under finance lease arrangements to support its operations.

	2008						2007
	Total future     minimum     payments		Future     interest     charges	Present      value of finance     lease commitments			Total future     minimum     payments		Future     interest     charges	Present      value of     finance lease     commitments
	US$m		US$m		US$m		US$m		US$m		US$m
Lease commitments:
-     no later than one year	55		(28)		27		39		(24)		15
-     later than one year and no later than five years	188		(130)		58		128		(101)		27
-     later than five years	736		(258)		478		835		(174)		661
	979		(416)		563		1,002		(299)		703

At 31 December 2008, future minimum sublease payments of US$458 million (2007: US$465 million) are expected to be received under non-cancellable subleases at the balance sheet date.

Operating lease commitments

At 31 December 2008, HSBC was obligated under a number of non-cancellable operating leases for properties, plant and equipment on which the future minimum lease payments extend over a number of years.

	2008				2007
	Land and buildings		Equipment		Land and buildings		Equipment
	US$m		US$m		US$m		US$m
Future minimum lease payments under non-cancellable  operating leases:
-     no later than one year	757		9		788		11
-     later than one year and no later than five years	1,791		9		2,010		14
-     later than five years	1,573		-		1,736		-
	4,121		18		4,534		25

In 2008, US$861 million (2007: US$849 million; 2006: US$781 million) was charged to 'General and administrative expenses' in respect of lease and sublease agreements, of which US$636 million (2007: US$838 million; 2006: US$762 million) related to minimum lease payments, US$22 million (2007: US$8 million; 2006: US$19 million) to contingent rents, and US$204 million (2007: US$3 million; 2006: nil) to sublease payments.

The contingent rent represents escalation payments made to landlords for operating, tax and other escalation expenses. 

Finance lease receivables

HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft), property and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for further terms. Lessees may participate in any sales proceeds achieved. Lease rentals arising during the lease terms will either be fixed in quantum or be varied to reflect changes in, for example, tax or interest rates. Rentals are calculated to recover the cost of assets less their residual value, and earn finance income.

	2008						2007
	Total future minimum payments		Unearned finance income		Present value		Total future minimum payments		Unearned finance income		Present value
	US$m		US$m		US$m		US$m		US$m		US$m
Lease receivables:
-     no later than one year	3,013		(389)		2,624		2,958		(528)		2,430
-     later than one year and  no later than five years	8,783		(1,186)		7,597		8,741		(1,500)		7,241
-     later than five years	8,114		(2,334)		5,780		9,194		(2,789)		6,405
	19,910		(3,909)		16,001		20,893		(4,817)		16,076

At 31 December 2008, unguaranteed residual values of US$197 million (2007: US$224 million) had been accrued, and the accumulated allowance for uncollectible minimum lease payments receivable amounted to US$21 million (2007: US$23 million).

During the year, a total of US$10 million (2007: US$44 million) was received as contingent rents and recognised in the income statement.

Operating lease receivables

HSBC leases a variety of different assets to third parties under operating lease arrangements, including transport assets (such as rolling stock), property and general plant and machinery.

	2008				2007
	Land and buildings		Equipment		Land and buildings		Equipment
	US$m		US$m		US$m		US$m
Future minimum lease payments under  non-cancellable operating leases:
-    no later than one year	37		678		50		838
-    later than one year and no later than five years	31		625		14		1,363
-    later than five years	21		110		10		400
	89		1,413		74		2,601

42    Litigation

On 27 July 2007, the UK Office of Fair Trading ('OFT') issued High Court legal proceedings against a number of UK financial institutions, including HSBC Bank, to determine the legal status and enforceability of certain of the charges applied to their personal customers in relation to unauthorised overdrafts (the 'charges'). Pending the resolution of the proceedings, the Financial Services Authority ('FSA') has granted firms (including HSBC Bank) a waiver enabling them to place relevant complaints about the charges on hold and the County Courts have stayed all individual customer claims.

Certain preliminary issues in these proceedings have been heard in the Commercial Division of the High Court. This has confirmed that HSBC Bank's current and historic charges are capable of being tested for fairness but are not capable of being penalties. HSBC Bank (and all the other financial institutions involved in the legal proceedings) appealed the finding that the current charges are capable of being tested for fairness. The Court of Appeal delivered its judgement on 26 February 2009, confirming the decision of the High Court that the charges of HSBC Bank (and all of the other financial institutions involved in the legal proceedings) are capable of being tested for fairness. HSBC Bank is considering applying for leave to appeal to the House of Lords. 

The proceedings remain at an early stage and may, allowing for appeals on the issues, take some time to conclude. A wide range of outcomes is possible, depending upon the outcome of any appeal to the House of Lords and, to the extent applicable, upon the Court's assessment of the fairness of each charge across the period under review. Since July 2001, there have been a variety of charges applied by HSBC Bank across different charging periods under the then existing contractual arrangements. HSBC Bank considers the charges to be and to have been valid and enforceable, and intends strongly to defend its position. 

If, contrary to HSBC Bank's current assessment, the Court should ultimately (after appeals) reach an adverse decision that results in a liability, a large number of different outcomes is possible, each of which would have a different financial impact. Given that there is limited authority on how an assessment of fairness should be conducted, HSBC Bank's estimate of the potential financial impact is that it could be in the order of approximately £350 million (US$510 million), as published in the Interim Report 2008. To make an estimate of the potential financial impact at this stage with any precision is extremely difficult, owing to (among other things) the complexity of the issues, the number of permutations of possible outcomes, and the early stage of the proceedings. In addition, the assumptions made by HSBC Bank may prove to be incorrect.

On 11 December 2008 Bernard L Madoff ('Madoff') was arrested and charged in the United States District Court for the Southern District of New York with one count of securities fraud. That same day, the US Securities and Exchange Commission ('SEC') filed securities fraud charges against Madoff and his firm Bernard L Madoff Investment Securities LLC ('Madoff Securities'), a broker dealer and investment advisor registered with the SEC. The criminal complaint and SEC complaint each alleged that Madoff had informed senior Madoff Securities employees, in substance, that his investment advisory business was a fraud. On 15 December 2008, on the application of the Securities Investor Protection Corporation, the United States District Court for the Southern District of New York appointed a trustee for the liquidation of the business of Madoff Securities, and removed the liquidation proceeding to the United States Bankruptcy Court for the Southern District of New York. On 9 February 2009, on Madoff's consent, the United States District Court for the Southern District of New York entered a partial judgement in the SEC action, permanently enjoining Madoff from violating certain antifraud provisions of the US securities laws, ordering Madoff to pay disgorgement, prejudgement interest and a civil penalty in amounts to be determined at a later time, and continuing certain other relief previously imposed, including a freeze on Madoff's assets. The relevant US authorities are continuing their investigations into the alleged fraud. There remains significant uncertainty as to the facts of the alleged fraud and the extent of any assets of, and remaining within, Madoff Securities.

Various non-US HSBC group companies provide custodial, administration and similar services to a number of funds incorporated outside the United States of America whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the aggregate net asset value of these funds (which would include principal amounts invested and unrealised gains) was US$8.4 billion.

Proceedings concerning Madoff and Madoff Securities have already been issued in various jurisdictions against numerous defendants and HSBC expects further proceedings to be brought, including by the Madoff Securities trustee. Various HSBC group companies have been named as defendants in suits in the United States anticipated to seek class action status and cases in the Commercial List of the Irish courts. All of the cases where HSBC group companies are named as a defendant are at a very early stage. HSBC considers that it has good defences to these claims and will continue to defend them vigorously. HSBC is unable reliably to estimate the liability, if any, that might arise as a result of such claims.

Various HSBC group companies have also received requests for information from various regulatory authorities in connection with the alleged fraud by Madoff. HSBC group companies are co-operating with these requests for information.

These actions apart HSBC is party to legal actions in a number of jurisdictions including the UK, Hong Kong and the US arising out of its normal business operation. HSBC considers that none of the actions is material, and none is expected to result in a significant adverse effect on the financial position of HSBC, either individually or in the aggregate. Management believes that adequate provisions have been made in respect of the litigation arising out of its normal business operations. HSBC has not disclosed any contingent liability associated with these legal actions because it is not practical to do so.

43    Related party transactions

Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures and post-employment benefit plans for HSBC employees, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family members.

Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of HSBC Holdings, being the Directors and Group Managing Directors of HSBC Holdings.

Compensation of Directors and other Key Management Personnel

	HSBC
	2008		2007		2006
	US$m		US$m		U$m
Short-term employee benefits	31		62		76
Post-employment benefits	5		4		3
Termination benefits	-		9		-
Share-based payments	16		40		61
	52		115		140

Transactions, arrangements and agreements involving related parties

Particulars of transactions, arrangements and agreements entered into by subsidiaries of HSBC Holdings with Directors, disclosed pursuant to section 232 of the Companies Act 1985, are shown below: 

	2008				2007
	Number of     persons		Balance at     31 December		Number of     persons1		Balance at     31 December1
			US$000				US$000
Directors	19				14
Loans			1,758				649
Credit cards			293				204
Guarantees			-				-

1    Comparative figures have been restated to show Directors, excluding their connected persons following a change to section 232 and Part 2 of Schedule 6 of the Companies Act.

Particulars of transactions with related parties, disclosed pursuant to the requirements of IAS 24, are shown below. The disclosure of the year-end balance and the highest amounts outstanding during the year in the table below is considered to be the most meaningful information to represent the amount of the transactions and the amount of outstanding balances during the year.

	2008				2007
	Balance at     31 December		Highest     amounts     outstanding     during year		Balance at     31 December		Highest      amounts     outstanding     during year
	US$000		US$000		US$000		US$000
Key Management Personnel and their related parties
Loans	216,983		474,115		325,648		804,845
Credit cards	400		933		323		1,077
Guarantees	25,249		42,178		27,044		30,317

Some of the transactions were connected transactions, as defined by the Rules Governing The Listing of Securities on The Stock Exchange of Hong Kong Limited but were exempt from any disclosure requirements under the provisions of those Rules.

The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.

Shareholdings, options and other securities of Directors and other Key Management Personnel 

	At 31 December
	2008      (000s)		2007     (000s)
Number of options held over HSBC Holdings ordinary shares made under employee  share plans	943		36
Number of HSBC Holdings ordinary shares held beneficially and non-beneficially	16,733		12,358
Number of HSBC Holdings preference shares held beneficially and non-beneficially	8		8
Number of HSBC Holdings 8.125% Perpetual Subordinated Capital Securities held  beneficially and non-beneficially	21		-
	17,705		12,402

Transactions with other related parties of HSBC

Associates and joint ventures

The Group provides certain banking and financial services to associates and joint ventures, including loans, overdrafts, interest and non-interest bearing deposits and current accounts. Details of the interests in associates and joint ventures are given in Note 21. Transactions and balances during the year with associates and joint ventures were as follows:

	2008				2007
	Highest      balance during     the year1		Balance at     31 December1		Highest      balance during     the year1		Balance at     31 December1
	US$m		US$m		US$m		US$m
Amounts due from joint ventures:
- unsubordinated	424		343		632		603
Amounts due from associates:
- subordinated	59		59		15		15
- unsubordinated	1,060		280		7,310		823
	1,543		682		7,957		1,441
Amounts due to joint ventures	66		64		71		27
Amounts due to associates	735		293		5,243		327
	801		357		5,314		354

1    The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to represent transactions during the year.

The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

Post-employment benefit plans

At 31 December 2008, US$3.5 billion (2007: US$4.1 billion) of HSBC post-employment benefit plan assets were under management by HSBC companies. Fees of US$26 million (2007: US$42 million) were earned by HSBC companies for these management services provided to its post-employment benefit plans. HSBC's post-employment benefit plans had placed deposits of US$430 million (2007: US$506 million) with its banking subsidiaries, on which interest payable to the schemes amounted to US$55 million (2007: US$40 million). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties.

HSBC Bank (UK) Pension Scheme entered into swap transactions with HSBC as part of the management of the inflation and interest rate sensitivity of its liabilities. At 31 December 2008, the gross notional value of the swaps was US$17.7 billion (2007: US$21.2 billion), the swaps had a positive fair value of US$1.8 billion (2007: positive fair value of US$248 million) to the scheme and HSBC had delivered collateral of US$2.4 billion (2007: US$759 million) to the scheme in respect of these swaps, on which HSBC earned interest amounting to US$59 million (2007: US$15 million). All swaps were executed at prevailing market rates and within standard market bid/offer spreads.

In order to satisfy diversification requirements, there are special collateral provisions for the swap transactions between HSBC and the scheme. The collateral agreement stipulates that the scheme never posts collateral to HSBC. Collateral is posted to the scheme by HSBC at an amount that provides the Trustee with a high level of confidence that would be sufficient to replace the swaps in the event of default by HSBC Bank plc. With the exception of the special collateral arrangements detailed above, all other aspects of the swap transactions between HSBC and the scheme are on substantially the same terms as comparable transactions with third-party counterparties.

HSBC International Staff Retirements Benefits Scheme entered into swap transactions with HSBC to manage the inflation and interest rate sensitivity of the liabilities and selected assets. At 31 December 2008, the gross notional value of the swaps was US$1.5 billion (2007: US$1.7 billion), and the swaps had a net positive fair value of US$388 million to the scheme (2007: US$63 million). 

HSBC Holdings

Details of HSBC Holdings' principal subsidiaries are shown in Note 24. Transactions and balances during the year with subsidiaries were as follows:

	2008				2007
	Highest     balance during     the year1		Balance at     31 December1		Highest     balance during     the year1		Balance at     31 December1
Subsidiaries	US$m		US$m		US$m		US$m
Assets
Cash at bank	443		443		729		360
Derivatives	3,682		3,682		2,660		2,660
Loans and advances	17,242		11,804		17,242		17,242
Financial investments	2,844		2,629		3,389		2,676
Investments in subsidiaries	86,233		81,993		69,411		69,411
Total related party assets	110,444		100,551		93,431		92,349
Liabilities
Amounts owed to HSBC undertakings	4,042		4,042		3,191		2,969
Derivatives	1,324		1,324		290		44
Subordinated liabilities:
- cost	4,168		3,795		4,109		4,109
- fair value	4,186		3,067		4,231		4,187
Total related party liabilities	13,720		12,228		11,821		11,309
Guarantees	56,733		47,341		38,457		38,457
Commitments	3,638		3,241		3,985		3,638

1     The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to represent transactions during the year. The above outstanding balances arose in the ordinary course of business and are on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties, with the exception of US$476 million (2007: US$654 million) in respect of loans from HSBC subsidiaries to HSBC Holdings made at an agreed zero per cent interest rate. 

Some employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a separate Group company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure in relation to the scheme is made in Note 8 to the accounts.

44    Events after the balance sheet date

A fourth interim dividend for 2008 of US$0.10 per ordinary share (US$1,214 million) (2007: US$0.39 per ordinary share, US$4,628 million) was declared by the Directors after 31 December 2008.

In late February 2009, it was decided to discontinue all originations by the branch-based consumer lending business of HSBC Finance. HSBC Finance will continue to service and collect the existing portfolio as it runs off. Closure costs of approximately US$265 million are expected to be incurred, mainly relating to one-off termination and other employee benefit costs, and charges for impairment of fixed assets associated with the consumer lending branch network, a substantial portion of which will be recorded in the first half of 2009.

On 2 March 2009, HSBC Holdings plc announced its proposal to raise £12.5 billion (US$17.7 billion) (net of expenses) by way of a fully underwritten rights issue of 5,060 million new ordinary shares at a price of 254 pence per share on the basis of 5 new ordinary shares for every 12 existing ordinary shares. The proposal is subject to authorisation by the shareholders at a general meeting on 19 March 2009. 

These accounts were approved by the Board of Directors on 2 March 2009 and authorised for issue.

 

END

 

 

ACSILFIEVIIIVIA