HSBC Bank USA 2005 Results

HSBC Holdings PLC 17 February 2006 17 February 2006 HSBC USA INC. 2005 FULL YEAR RESULTS - HIGHLIGHTS * ** • Net income for the year ended 31 December 2005 was US$976 million (US$1,258 million in 2004). The 2005 results include the full year impact of the purchase of consumer finance assets, including private label credit cards from HSBC Finance Corporation in December 2004. *** • Total revenues increased by 23 per cent to US$4,974 million in 2005 (US$4,060 million in 2004). • Total deposits increased by 15 per cent to US$91.8 billion at 31 December 2005 (US$80.0 billion at 31 December 2004). • Total assets increased by 9 per cent to US$153.9 billion at 31 December 2005 (US$141.1 billion at 31 December 2004). • Tier 1 capital ratio of 8.25 per cent at 31 December 2005 compared to 8.34 per cent at 31 December 2004. __________________________________________________________________________ * HSBC USA Inc.'s primary subsidiary is HSBC Bank USA, National Association (the Bank), which is subject to supervision and examination by various U.S. regulators. The Bank was required to file periodic financial information (Call Report) for the year ending 31 December 2005 and this information is publicly available through U.S. government information resources. Given that this information is available in the public domain, HSBC USA Inc has elected to file this release. ** Results are prepared in accordance with U.S. GAAP (generally accepted accounting principles). HSBC USA Inc. is an indirect wholly-owned subsidiary of HSBC Holdings plc (HSBC). HSBC's 2005 results are scheduled for release on 6 March 2006. Those results will be released under International Financial Reporting Standards (IFRS) and will describe HSBC's North American results, including HSBC USA Inc. and HSBC Finance Corporation, as well as HSBC's fully consolidated figures. Certain revenues and expenses related to inter-HSBC transactions are eliminated upon consolidation. See *** below. *** The purchase of consumer finance assets, principally credit card receivables from prime customers, included an initial purchase premium of US$639 million. US$451 million of this initial purchase premium was amortized as a reduction to revenues in 2005. In addition, 2004 results included gains from the sale of credit card relationships to HSBC Finance Corporation of approximately US$99 million. As part of the HSBC consolidation process, the amortization of US$451 million and the US$99 million gain are eliminated. HSBC USA Inc. reported net income of US$976 million for the year ended 31 December 2005, compared to US$1,258 million for the year ended 31 December 2004. The reduction in pre-tax income from 2004 to 2005 of US$434 million includes two meaningful inter-HSBC accounting events, both of which are eliminated upon consolidation. US$451 million of pre-tax premium amortization costs were recorded in 2005 on the private label credit card portfolio purchased from HSBC Finance Corporation at year-end 2004. Also, 2004 results included gains from the sale of credit card relationships to HSBC Finance Corporation of approximately US$99 million. These transactions comprise the most significant factors in the year-to-year reduction in pre-tax income. The addition of the private label credit card portfolio significantly increased year-over-year revenues, provisions for credit losses, and operating expenses. Commenting on the results, Martin Glynn, President and Chief Executive Officer of HSBC USA Inc. said: "Results in 2005 were generally strong and surpassed expectations, due in part to a sound economy which led to very strong credit quality, particularly within our commercial lending portfolios. Strong revenue, loan, and deposit growth were also recorded within our core banking businesses, including Personal Financial Services, Commercial Banking and Private Banking. We were especially proud of the growth achieved with our small business customers as we were named the No. 1 Small Business Administration lender in New York State. "Within North America, numerous initiatives are underway amongst the various HSBC affiliates. One of these involved the transfer of consumer finance assets, principally credit cards, from HSBC Finance Corporation to HSBC USA Inc. in late 2004 in order to realize funding benefits. The non-cash accounting amortization of the associated purchase premiums reduced reported results in HSBC USA Inc. in 2005. Looking forward, this amortization reduces significantly in 2006 and I anticipate this portfolio will contribute positively in the years ahead. "We invested in our Corporate Investment Banking and Markets (CIBM) capabilities over the past two years as part of HSBC's strategic initiative to build this business. While this increased our expense base in 2005, it was gratifying to see a commensurate increase in trading revenues, which were up 37 per cent year over year. However, the flat yield curve did significantly constrain our growth in net interest income, particularly in the second half of the year. "Our focus for 2006 will be to maintain strong revenue growth and increasingly leverage marketing initiatives to heighten awareness of the HSBC brand in the U.S. The national rollout of our Online Savings Account product offered at www.hsbcdirect.com is an example of such an effort to drive growth of the brand and add deposits. HSBC USA Inc. is well positioned to support the future financial requirements of our customers and generate increasingly positive financial results." Revenues For the year ended 31 December 2005, total revenues (pre-provision) increased by US$914 million, or 23 per cent, from US$4,060 million to US$4,974 million. The acquisition of the consumer finance assets, primarily the credit card portfolio, contributed largely to the increases (notwithstanding the premium amortization discussed above) in net interest income and in fee income (including both credit card and securitization fees). Trading revenues increased 37 per cent compared with 2004, primarily in the CIBM businesses, driven partly by investment in HSBC's strategic expansion initiative and partly by favorable capital market conditions. These increases partially offset the effect of the flat yield curve, which significantly constrained HSBC USA Inc.'s ability to generate growth in net interest income, particularly in the second half of the year. Growing levels of deposits in core banking businesses also contributed to increased revenues by providing lower cost funding to support asset growth. Residential mortgage banking revenue, including servicing fees net of impairment, origination gains, and related hedge costs, improved significantly over 2004. Operating Expenses For the year ended 31 December 2005, operating expenses increased by US$657 million, or 31 per cent, from US$2,101 million to US$2,758 million, which included a significant increase in support services received from HSBC affiliates, particularly in the fourth quarter. These include support from HSBC Finance Corporation (loan origination and servicing), HSBC Technology Services (information and technology services), and HSBC Markets USA (broker-dealer and support for CIBM). In addition, increased expenses were incurred for marketing and brand expansion initiatives, as well as expansion of retail lending and deposit activities through new products and new offices outside of New York State. Credit Quality and Provisions for Credit Losses For the year ended 31 December 2005, the provision for credit losses increased by US$691 million to US$674 million, primarily related to growth in the consumer lending portfolios. The increase is mainly related to the credit card portfolio acquisition, but also reflects increases due to the impact of Hurricane Katrina and the changes in consumer bankruptcy laws. The commercial lending provision was lower than in 2004, reflecting the continued improvement in credit quality during 2005. Net charge-offs of US$616 million for the year ended 31 December 2005 were primarily related to consumer loans. Capital Ratios HSBC USA Inc.'s tier 1 capital to risk-weighted assets ratio was 8.25 per cent on 31 December 2005 compared to 8.34 per cent at 31 December 2004. Total capital to risk-weighted assets of 12.53 per cent on 31 December 2005 was unchanged compared to 31 December 2004. Certain statements in this document are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors. More information about these factors is contained in the company's filings with the Securities and Exchange Commission. Media inquiries (U.K.): Karen Ng 020 7991 0655 Richard Lindsay 020 7992 1555 Media inquiries (USA): Kathleen Rizzo-Young (716) 841-5003 Stephen Cohen (212) 525-6901 Investor inquiries: Patrick McGuinness 020 7992 1938 About HSBC Bank USA, N.A.: HSBC Bank USA, N.A. has nearly 400 branches in New York State, a network of branches in Florida and California and a number of branches in other states. Throughout the U .S., the bank serves more than 3 million individual and business customers with a full range of financial products and services. It is the principal subsidiary of HSBC USA Inc, one of the nation's largest bank holding companies by assets and an indirectly held, wholly owned subsidiary of HSBC North America Holdings Inc. For more information about HSBC Bank USA and its products and services visit http://us.hsbc.com. HSBC USA Inc. - Summary Quarter ended Year ended 31 31 31 31 December December December December Figures in US$ millions 2005 2004 2005 2004 Revenue and Earnings Total Revenues (Pre-Provision) 1,256 1,025 4,974 4,060 Pre-tax income 312 436 1,542 1,976 Net income 196 269 976 1,258 Performance ratios (%) Return on average common equity 6.7 12.6 8.8 16.4 Net yield on average earning assets 2.1 2.4 2.3 2.7 Cost:income ratio 59.4 59.7 55.4 51.7 Other operating income to total income 40.9 31.7 38.4 32.5 Credit information Non-accruing loans at end of period 241 264 Commercial net charge-offs 21 10 4 (7) Consumer net charge-offs 183 24 612 86 Allowance available for credit losses - Balance at end of period 846 788 - As a per centage of non-accruing loans 351.0 % 298.5 % - As a per centage of loans outstanding 0.9 % 0.9 % Average balances Assets 152,509 127,741 147,176 112,226 Loans 89,741 69,985 87,898 60,328 Deposits 88,663 77,194 85,523 72,853 Common equity 10,697 8,289 10,603 7,557 Capital ratios (%) at end of period Leverage ratio 6.51 7.20 Tier 1 capital to risk-weighted assets 8.25 8.34 Total capital to risk-weighted assets 12.53 12.53 Assets under administration at end of period Funds under management 27,883 29,243 Custody accounts 26,093 25,906 Total assets under administration 53,976 55,149 Quarter ended Year ended 31 31 31 31 December December December December Figures in US$ millions 2005 2004 2005 2004 Interest income Loans 1,253 851 4,630 2,912 Securities 231 218 882 868 Trading assets 82 51 275 165 Short-term investments 109 53 310 115 Other interest income 9 5 32 18 Total interest income 1,684 1,178 6,129 4,078 Interest expense Deposits 572 282 1,771 825 Short-term borrowings 71 32 276 132 Long-term debt 299 164 1,019 380 Total interest expense 942 478 3,066 1,337 Net interest income 742 700 3,063 2,741 Provision (credit) for credit losses 198 (24 ) 674 (17 ) Net interest income, after provision for credit 544 724 2,389 2,758 losses Other revenues Trust income 22 25 87 95 Service charges 52 55 210 213 Other fees and commissions 217 84 698 425 Securitization revenue 15 - 114 - Other income 56 50 237 333 Residential mortgage banking revenue (expense) 24 (14 ) 64 (120 ) Trading revenues 127 99 395 288 Security gains, net 1 26 106 85 Total other revenues 514 325 1,911 1,319 Operating expenses Salaries and employee benefits 274 234 1,052 947 Occupancy expense, net 48 52 182 176 Support services from HSBC affiliates 269 129 919 420 Other expenses 155 198 605 558 Total operating expenses 746 613 2,758 2,101 Pre-tax income 312 436 1,542 1,976 Income tax expense 116 167 566 718 Net income 196 269 976 1,258 Quarter ended 31 30 30 31 Figures in US$ millions March June September December 2005 2005 2005 2005 Interest income Loans 1,049 1,136 1,192 1,253 Securities 210 215 225 231 Trading assets 59 60 73 82 Short-term investments 49 70 83 109 Other interest income 6 9 9 9 Total interest income 1,373 1,490 1,582 1,684 Interest expense Deposits 327 396 476 572 Short-term borrowings 52 67 87 71 Long-term debt 219 242 258 299 Total interest expense 598 705 821 942 Net interest income 775 785 761 742 Provision for credit losses 107 170 199 198 Net interest income, after provision for credit 668 615 562 544 losses Other revenues Trust income 23 22 21 22 Service charges 52 53 52 52 Other fees and commissions 145 144 192 217 Securitization revenue 44 25 30 15 Other income 72 83 25 56 Residential mortgage banking revenue (expense) 23 (13 ) 31 24 Trading revenues 96 35 137 127 Security gains, net 23 64 17 1 Total other revenues 478 413 505 514 Operating expenses Salaries and employee benefits 266 254 257 274 Occupancy expense, net 42 43 49 48 Support services from HSBC affiliates 218 218 213 269 Other expenses 128 169 154 155 Total operating expenses 654 684 673 746 Pre-tax income 492 344 394 312 Income tax expense 176 131 142 116 Net income 316 213 252 196 At 31 At 31 December December Figures in US$ millions 2005 2004 Assets Cash and due from banks 4,441 2,682 Interest bearing deposits with banks 3,001 2,776 Federal funds sold and securities purchased under resale agreements 4,568 3,126 Trading assets 21,220 19,815 Securities available for sale 17,764 14,655 Securities held to maturity 3,171 3,881 Loans 90,342 84,947 Less - allowance for credit losses 846 788 Loans, net 89,496 84,159 Properties and equipment, net 538 594 Intangible assets, net 463 352 Goodwill 2,694 2,697 Other assets 6,503 6,313 Total assets 153,859 141,050 Liabilities Deposits in domestic offices - Non-interest bearing 9,695 7,639 - Interest bearing 57,911 50,069 Deposits in foreign offices - Non-interest bearing 320 248 - Interest bearing 23,889 22,025 Total deposits 91,815 79,981 Trading account liabilities 10,710 12,120 Short-term borrowings 7,049 9,874 Interest, taxes and other liabilities 4,732 4,370 Long-term debt 27,959 23,839 Total liabilities 142,265 130,184 Shareholders' equity Preferred stock 1,316 500 Total common shareholders' equity - Common stock * ($5 par; 150,000,000 shares - - authorized; 706 shares issued) - Capital surplus 8,118 8,418 - Retained earnings 2,172 1,917 - Accumulated other comprehensive (loss) income (12 ) 31 Total common shareholders' equity 10,278 10,366 Total shareholders' equity 11,594 10,866 Total liabilities and shareholders' equity 153,859 141,050 * Less than $500,000. This information is provided by RNS The company news service from the London Stock Exchange

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