Final Results - Year Ended 31 Dec 1999, Part 6

HSBC Hldgs PLC 28 February 2000 Part 6 8. Taxation Figures in US$m 1999 1998 UK corporation tax charge 596 732 Overseas taxation 1,313 1,118 Deferred taxation 129 (71) Associated undertakings - 10 Total charge for taxation 2,038 1,789 Effective tax rate 25.5% 27.2% The Company and its subsidiary undertakings in the UK provided for UK corporation tax at 30.25 per cent, the rate for the calendar year 1999 (1998: 31.0 per cent). Overseas tax included Hong Kong profits tax of US$367 million (1998: US$293 million) provided at the rate of 16.0 per cent (1998: 16.0 per cent) on the profits assessable in Hong Kong. Other overseas taxation was provided for in the countries of operation at the appropriate rates of taxation. At 31 December 1999, there were potential future tax benefits of approximately US$520 million (31 December 1998: US$380 million) in respect of trading losses, allowable expenditure charged to the profit and loss account but not yet allowed for tax, and capital losses which have not been recognised because recoverability of the potential benefits is not considered certain. The effective tax rate was below the standard rate of UK corporation tax of 30.25 per cent, mainly because of lower rates of tax in major subsidiaries overseas. The effective tax rate was adversely affected by unrelieved losses and provisions in 1998. Although further unrelieved losses and provisions arose in 1999, they were at a much lower level, as well as being partly cushioned by utilisation of some of the previously unrelieved losses. 9. Liabilities Other Figures in US$m At 31DEC98 RNYC/SRH movements At 31DEC99 Customer accounts 308,910 38,061 13,001 359,972 Deposits by banks 34,342 8,350 (4,589) 38,103 Debt securities in issue 29,190 6,829 (2,239) 33,780 Other liabilities 75,876 19,813 (1,718) 93,971 448,318 73,053 4,455 525,826 HK SAR currency notes in circulation 7,408 9,905 Shareholders' funds 27,402 33,408 Total liabilities 483,128 569,139 Customer accounts include: - repos 5,441 6,470 - settlement accounts 5,125 2,997 Deposits by banks include: - repos 7,614 6,669 - settlement accounts 2,981 2,595 10. Financial instruments, contingent liabilities and commitments Figures in US$m 1999 1998 Contract amounts Contingent liabilities: - acceptances and endorsements 4,482 4,032 - guarantees and assets pledged as collateral security 27,319 23,686 - other 39 64 31,840 27,782 Commitments: - documentary credits and short-term trade-related transactions 6,310 5,927 - forward asset purchases and forward forward deposits placed 487 893 - undrawn note issuing and revolving underwriting facilities 82 405 - undrawn formal standby facilities, credit lines and other commitments to lend: - over 1 year 33,246 27,028 - 1 year and under 128,613 112,399 168,738 146,652 Exchange rate contracts 612,403 765,665 Interest rate contracts 951,479 1,060,563 Equities contracts 33,459 29,799 The table above gives the nominal principal amounts of third party off-balance-sheet transactions. For contingent liabilities and commitments, the contract amount represents the amount at risk should the contract be fully drawn upon and the client default. The total of the contract amounts is not representative of future liquidity requirements. For exchange rate, interest rate and equities contracts, the notional or contractual amounts of these instruments indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. The decrease in exchange rate and interest rate contracts since December 1998 was mainly due to reduced volumes following the introduction of the euro, and the reduction of derivatives trading volumes to minimise any potential Year 2000-related problems. 11. Off-balance-sheet risk-weighted and replacement cost amounts Figures in US$m 1999 1998 Risk-weighted amounts Contingent liabilities 23,134 19,823 Commitments 17,437 14,187 Replacement cost amounts Exchange rate contracts 6,764 8,899 Interest rate contracts 4,171 7,297 Equities contracts 2,685 2,218 Risk-weighted amounts are assessed in accordance with the FSA's guidelines which implement the Basel agreement on capital adequacy and depend on the status of the counterparty and the maturity characteristics. Replacement cost of contracts represents the mark-to-market assets on all third party contracts with a positive value, ie, an asset to the HSBC Group. Replacement cost is, therefore, a close approximation of the credit risk for these contracts as at the balance sheet date. The actual credit risk is measured internally and is the sum of the positive mark-to-market value and an estimate for the future fluctuation risk, using a future risk factor. The fall in the replacement cost of exchange rate and the interest rate contracts is mainly due to reduced trading volumes. 12. Market risk Market risk is the risk that foreign exchange rates, interest rates, or equities and commodity prices will move and result in profits or losses to the HSBC Group. Market risk arises on financial instruments which are valued at current market prices (mark-to-market basis) and those valued at cost plus any accrued interest (accruals basis). The Group makes markets in exchange rate, interest rate, and equities derivative instruments, as well as in debt, equities and other securities. Trading risks arise either from customer-related business or from position taking. The Group manages market risk through risk limits approved by the Group Executive Committee. Group Market Risk, an independent unit within HSBC Holdings plc, develops risk management policies and measurement techniques, and reviews limit utilisation on a daily basis. Risk limits are determined for each location and within location, for each portfolio. Limits are set by product and risk type with market liquidity being a principal factor in determining the level of limits set. Only those offices with sufficient derivative product expertise and appropriate control systems are authorised to trade derivative products. Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits, as well as value at risk (VAR) limits at a portfolio level. Similarly, options risks are controlled through full revaluation limits in conjunction with limits on the underlying variables that determine each option's value. VAR is a technique which estimates the potential losses that could occur on risk positions taken due to movements in market rates and prices over a specified time horizon and to a given level of confidence. The Group VAR, predominantly calculated on a variance/covariance basis, uses historical movements in market rates and prices, a 99 per cent confidence level, a 10-day holding period and takes account of correlations between different markets and rates and is calculated daily. The movement in market prices is calculated by reference to market data from the last two years. Aggregation of VAR from different risk types is based upon the assumption of independence between risk types. RNYC and SRH calculate VAR using a historical simulation approach, based on the previous two years' data, using a 99 per cent confidence interval over a 10-day holding period; this method differs from that of HSBC and therefore the VAR is shown separately. The Group VAR is a principal component of the management of market risk for the Group. Historically this has been calculated to a 95 per cent confidence level and for a one day holding period. From the beginning of 1999, VAR has been calculated on a more conservative basis, at a 99 per cent confidence level for a 10-day holding period (see note on page 62). This change has been made to facilitate consistency with the regulatory requirements for the use of internal models used to calculate market risk capital requirements and remains consistent with the Group's risk management control framework. VAR has inherent weaknesses. It is based on statistical models which rely on underlying assumptions and, by its nature, cannot cover every eventuality. The Group recognises these limitations by augmenting the VAR limits with other position and sensitivity limit structures, as well as with stress testing, both on individual portfolios and on a consolidated basis. The Group's stress testing regime provides senior management with an assessment of the impact of extreme events on the market risk exposures of the Group. Trading VAR for the Group, excluding RNYC and SRH at 31 December was: Minimum Maximum Average during during for the the the Figures in US$m 1999 year year year 1998 ^ Total trading activities 46.1 42.7 101.9 66.7 23.2 Foreign exchange trading positions 12.8 10.2 58.5 25.0 14.2 Interest rate trading positions 39.4 32.2 82.1 54.1 13.1 Equities trading positions 16.2 11.1 26.8 16.4 12.0 ^ The comparative figures for 1998 have been recalculated using a 99 per cent confidence level for a 10-day holding period using the VAR models in place at that date. It is not practicable retrospectively to amend these comparatives for other technical changes made to the VAR models since 31 December 1998. VAR for RNYC's and SRH's trading activities at 31 December 1999 was US$14.5 million and US$1.4 million respectively. Structural interest rate risk arises from the differing repricing characteristics of commercial banking assets and liabilities, including non-interest bearing liabilities such as shareholders' funds and some current accounts. Each operating entity assesses the structural interest rate risks which arise in its business and either transfers such risks to its local treasury unit for management or transfers the risks to separate books managed by the local asset and liability management committee ('ALCO'). Local ALCOs regularly monitor all such interest rate risk positions, subject to interest rate risk limits agreed with HSBC Holdings plc. In the course of managing interest rate risk, quantitative techniques and simulation models are used where appropriate to identify and assess the potential net interest income and market value effects of these interest rate positions in different interest rate scenarios. The primary objective of such interest rate risk management is to limit potential adverse effects of interest rate movements on net interest income. HSBC has assessed its overall exposure to changes in interest rates by calculating the approximate changes in net interest income of HSBC's major businesses for changes in interest rates. An immediate hypothetical 100 basis points parallel rise or fall in all yield curves worldwide on 1 January 2000 would decrease planned net interest income for the twelve months to 31 December 2000 by US$116 million or increase it by US$82 million, respectively, assuming no management action in response to these interest rate movements. Rather than assuming that all interest rates move together, HSBC's interest rate exposures can be grouped into blocs whose interest rates are considered more likely to move together. The sensitivity of net interest income for 2000 can then be described as follows: Latin US dollar Sterling Asian American Euro Total Total Figures in US$m bloc bloc bloc bloc bloc 2000 1999 Change in 2000 projected net interest income + 100 basis points shift in yield curves (5) (83) (32) 13 (9) (116) (3) - 100 basis points shift in yield curves (4) 62 28 (13) 9 82 (16) The projections assume that rates of all maturities move by the same amount and, therefore, do not reflect the potential impact on net interest income of some rates changing while others remain unchanged. The projections also make other simplifying assumptions, such as no management action in response to a change in interest rates. The average daily revenue earned from market risk-related treasury activities in 1999, including accrual book net interest income and funding related to dealing positions, was US$8.2 million (1998 US$7.8 million). The standard deviation of these daily revenues was US$4.5 million. An analysis of the frequency distribution of daily revenues shows that negative revenues were reported on only three days during 1999. The most frequent result was a daily revenue of between US$7 million and US$8 million, with 28 occurrences. The highest daily revenue was US$26 million. 13. Segmental analysis The allocation of earnings reflects the benefit of shareholders' funds to the extent that these are actually allocated to businesses in the segment by way of intra-Group capital and funding structures. Common costs are included in segments on the basis of the actual re-charges made. Geographical information has been classified by the location of the principal operations of the subsidiary undertaking, or in the case of The Hongkong and Shanghai Banking Corporation Ltd, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA operations, by the location of the branch responsible for reporting the results or for advancing the funds. Due to the nature of the Group structure, the analysis of profits includes intra-Group items between geographical regions. The 'Rest of Asia-Pacific' geographical segment includes the Middle East, India and Australasia. 14. Year 2000 readiness The Group recognised that in the transition to the new millennium any inability of systems around the world to recognise the date change from 31 December 1999 to 1 January 2000 could have posed significant issues. The Group adopted the Year 2000 conformity requirements issued by the British Standards Institution as its definition of Year 2000 compliance. Steering Committees were formed in all the key business units and progress on the Year 2000 compliance programme ('the Year 2000 Programme') was reported regularly to their Boards of Directors and to the Group Audit and Executive Committees. The Group's operations and its services to customers were not significantly disrupted as a result of any Group systems not being Year 2000 compliant. Prior to the year-end, a small number of the Group's retailer customers in the UK experienced customer transaction-processing difficulties caused by terminals provided by a third party supplier. Customers were advised of a simple solution and the terminals worked normally from 1 January 2000. The Year 2000 Programme involved testing all the Group's relevant systems to ensure that they were Year 2000 compliant and seeking confirmation from suppliers and service providers that their products and services were Year 2000 compliant. The Group assessed its customers' commitment to achieving compliance and provided information and assistance to help customers understand the risks and issues. Relevant credit and investment policies were revised and relationship managers trained to ensure that Year 2000 risks were taken account of in credit and investment evaluations. Over the millennium change period, the Group undertook relevant checks on systems and equipment, and provided appropriate information and reports to interested parties within and outside the Group. As part of its Year 2000 Programme, the Group tested various dates in 2000 that might cause systems and equipment problems and appropriate plans have been formulated to mitigate any outstanding risks. In addition, our business customers were encouraged to ensure they would not be impacted by any Year 2000 problems within their supply chain. For more than a decade parts of the Group have been modifying their systems to be Year 2000 compliant when making other enhancements. The costs of the Year 2000 modifications made as part of such a combined package have not been separately identified. Costs incurred for the year ended 31 December 1999 were US$53 million (1998: US$113 million), including US$21 million (1998: US$48 million) attributable to incremental external costs. Estimated costs for the remaining Year 2000 work to 31 March 2000 are US$6 million. Costs relating to major systems changes that are not directly related to the Year 2000 but which address some Year 2000 issues are not included in these costs. 15. Attributable profit by subsidiary and line of business Figures in US$m 1999 1998 Hang Seng Bank 1,071 876 less: minority interests (406) (332) 665 544 HSBC Investment Bank Asia Holdings 275 59 The Hongkong and Shanghai Banking Corporation Ltd and other subsidiaries 1,368 789 The Hongkong and Shanghai Banking Corporation Ltd and subsidiaries 2,308 1,392 HSBC Bank plc 1,929 1,726 less: preference dividend (76) (71) 1,853 1,655 HSBC USA, Inc 466 527 HSBC Bank Middle East 78 141 HSBC Bank Malaysia Berhad (126) (91) HSBC Bank Canada^ 111 122 HSBC Latin American operations 178 147 HSBC Holdings sub-group: - Canary Wharf vacant space provisions - (158) - other 156 28 Other commercial banking entities 179 187 UK GAAP adjustments (23) 161 Less: Investment banking profits included above^^ (325) (92) Commercial banking 4,855 4,019 Investment banking^^ 553 299 Group profit 5,408 4,318 ^ Figures for HSBC Bank Canada for 1998 are based on the fourteen month period ended 31 December 1998. The attributable profit arising in the additional two month period was US$16 million. ^^ Restated to include HSBC Trinkaus & Burkhardt KGaA transferred to HSBC Investment Banking on 1 January 1999. 16. Differences between UK GAAP and US GAAP The consolidated financial statements of HSBC are prepared in accordance with UK GAAP which differs in certain significant respects from US GAAP. A summary of the significant differences applicable to HSBC can be found in HSBC's Registration Statement on Form 20-F for the year ended 31 December 1998. The following tables summarise the significant adjustments to consolidated net income and shareholders' equity which would result from the application of US GAAP: Net income Figures in US$m At 31DEC99 At 31DEC98 Attributable profit of HSBC (UK GAAP) 5,408 4,318 Lease financing (53) (93) Debt swaps (44) 3 Shareholders' interest in long-term assurance fund (101) (93) Pension costs (199) (47) Stock-based compensation (133) (31) Goodwill (296) (320) Internal software costs 137 - Revaluation of property 34 79 Purchase accounting adjustments 130 - Deferred taxation - US GAAP (20) 68 - on reconciling items 37 68 17 136 Minority interest in reconciling items (11) (18) Estimated net income (US GAAP) 4,889 3,934 Per share amounts Amounts on a US GAAP basis US$ US$ Basic earnings per ordinary share 0.59 0.49 Diluted earnings per ordinary share 0.58 0.48 Shareholders' equity Figures in US$m At 31DEC99 At 31DEC98 Shareholders' funds (UK GAAP) 33,408 27,402 Lease financing (233) (184) Debt swaps (108) (66) Shareholders' interest in long-term assurance fund (563) (473) Pension costs (1,093) (945) Goodwill 3,173 3,640 Internal software costs 137 - Revaluation of property (2,752) (2,507) Purchase accounting adjustment 130 - Fair value adjustment for securities available for sale 736 742 Dividend payable 1,754 1,499 Deferred taxation - US GAAP 714 661 - on reconciling items 395 318 1,109 979 Minority interest in reconciling items 232 264 Estimated shareholders' equity (US GAAP) 35,930 30,351 Total assets Total assets at 31 December 1999, incorporating adjustments arising from the application of US GAAP, was estimated to be US$582,706 million (31 December 1998: US$493,099 million). 17. Registers of shareholders The Overseas Branch Register of shareholders in Hong Kong will be closed from Wednesday 15 March to Friday 17 March 2000 (both dates inclusive). Any person who has acquired shares registered on the Hong Kong Branch Register but who has not lodged the share transfer with the Branch Registrar should do so before 4.00 pm on Tuesday 14 March 2000 in order to receive the dividend. Any person who has acquired shares registered on the Principal Register in the United Kingdom but who has not lodged the share transfer with the Principal Registrar should do so before 4.00 pm on Friday 17 March 2000 in order to receive the dividend. Transfers between the Principal Register and the Branch Register may not be made while the Branch Register is closed. Similarly, transfers of American Depositary Shares must be lodged with the depositary, HSBC Bank USA, by noon on Friday 17 March 2000 in order to receive the dividend. 18. Foreign currency amounts The sterling and Hong Kong dollar equivalent figures in the consolidated profit and loss account and balance sheet are for information only. These are translated at the average rate for the period for the profit and loss account and the closing rate for the balance sheet as follows: Period-end 31DEC99 31DEC98 Closing: HK$/US$ 7.773 7.746 : £/US$ 0.619 0.603 Average: HK$/US$ 7.759 7.746 : £/US$ 0.618 0.603 19. Litigation During 1999 Japanese and US regulatory agencies began investigating Princeton Global Management Ltd (and related entities), a customer of RNYC's broker dealer subsidiary, and Princeton's chairman, Martin Armstrong for his alleged fraud in selling promissory notes to certain Japanese entities. Certain of the Japanese entities which allegedly hold such promissory notes have brought civil actions in the United States against this broker dealer subsidiary and HSBC USA Inc. and HSBC Bank USA (as the successors to RNYC and Republic National Bank of New York, respectively). The matter will be defended vigorously and is described in greater detail in the 1999 Annual Report and Accounts. The Group, through a number of its subsidiary undertakings, is named in and is defending other legal actions in various jurisdictions arising from its normal business. No material adverse impact on the financial position of the Group is expected to arise from these proceedings. 20. Substantial interests in share capital No substantial interest, being 10 per cent or more, in the equity share capital is recorded in the register maintained under Section 16(1) of the Securities (Disclosure of Interests) Ordinance. 21. Dealings in HSBC Holdings shares Save for dealings by HSBC Investment Bank plc, trading as an intermediary in the Company's shares in London, neither the Company nor any subsidiary undertaking has bought or sold any shares of the Company during the year ended 31 December 1999. 22. Statutory accounts The information in this news release does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985 (the Act). The statutory accounts for the year ended 31 December 1999 will be delivered to the Registrar of Companies in England and Wales in accordance with Section 242 of the Act. The auditor has reported on those accounts; its report was unqualified and did not contain a statement under Section 237(2) or (3) of the Act. 23. Forward-looking statements This news release contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Group. These forward-looking statements represent the Group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. For example, certain of the market risk disclosures, some of which are only estimates and therefore could be materially different from actual results, are dependent on key model characteristics and assumptions and are subject to various limitations. Certain statements, such as those that include the words 'potential', 'value at risk', 'estimated', and similar expressions or variations on such expressions may be considered 'forward-looking statements'. 24. Annual Report and Accounts Copies of the 1999 Annual Report and Accounts will be sent to shareholders on or about 19 April 2000 and may be obtained from Group Corporate Affairs, HSBC Holdings plc, 10 Lower Thames Street, London EC3R 6AE, United Kingdom; or The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong; or HSBC Bank USA, 452 Fifth Avenue, New York, New York 10018, USA, or from the HSBC website - www.hsbc.com. A Chinese translation of the report may be obtained on request from Central Registration Hong Kong Limited, Rooms 1901-5, Hopewell Centre, 183 Queen's Road East, Hong Kong. Custodians or nominees that wish to distribute copies of the Annual Report and Accounts to their clients may request copies for collection by writing to Group Corporate Affairs at the address given above. Requests must be received by no later than 15 March 2000. 25. Annual General Meeting The Annual General Meeting of the Company will be held at the Barbican Hall, Barbican Centre, London EC2 on Friday 26 May 2000 at 11.00 am. 26. News release Copies of this news release may be obtained from Group Corporate Affairs, HSBC Holdings plc, 10 Lower Thames Street, London EC3R 6AE, United Kingdom; The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road Central, Hong Kong; HSBC Bank USA, 452 Fifth Avenue, New York, New York 10018, USA, or from the HSBC website - www.hsbc.com.

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