HSBC Fin Corp Q3 10-Q - Pt.2

HSBC Holdings PLC 14 November 2005 PART 2 CREDIT CARD SERVICES SEGMENT The following table summarizes results for our Credit Card Services segment. INCREASE (DECREASE) ------------------- THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT % -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income............................................... $ 138 $ 134 $ 4 3.0% Net interest income...................................... 531 519 12 2.3 Securitization related revenue........................... (42) (77) 35 45.5 Fee and other income..................................... 554 460 94 20.4 Intersegment revenues.................................... 5 6 (1) (16.7) Provision for credit losses.............................. 465 364 101 27.7 Total costs and expenses................................. 360 328 32 9.8 Receivables.............................................. 19,971 18,509 1,462 7.9 Assets................................................... 19,710 20,620 (910) (4.4) Net interest margin, annualized.......................... 10.27% 10.24% - - Return on average managed assets......................... 2.80 2.60 - - 42 HSBC Finance Corporation -------------------------------------------------------------------------------- INCREASE (DECREASE) ------------------- NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT % -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income................................................. $ 452 $ 391 $ 61 15.6% Net interest income........................................ 1,545 1,561 (16) (1.0) Securitization related revenue............................. (161) (222) 61 27.5 Fee and other income....................................... 1,465 1,271 194 15.3 Intersegment revenues...................................... 16 20 (4) (20.0) Provision for credit losses................................ 1,120 1,105 15 1.4 Total costs and expenses................................... 1,018 890 128 14.4 Net interest margin, annualized............................ 10.27% 10.10% - - Return on average managed assets........................... 3.10 2.50 - - Our Credit Card Services segment reported higher net income during both the three and nine month periods ended September 30, 2005. The increase in net income during both periods was primarily due to higher fee and other income partially offset by higher provision for credit losses and higher costs and expenses. Increases in fee and other income resulted from portfolio growth and higher interchange fees, as well as increased gains from the daily sales of new volume related to the MasterCard/Visa account relationships purchased from HSBC Bank USA in July 2004. Higher costs and expenses were to support receivable growth and increases in marketing expenses. The increase in marketing expenses was due to higher non-prime marketing expense and investments in new marketing initiatives and for the year-to-date period, changes in contractual marketing responsibilities in July 2004 associated with the domestic GM co-branded credit card. The managed basis provision for credit losses increased in both periods. Excluding, in the third quarter of 2005, the credit loss provision recorded relating to Katrina and the additional provision related to the increased bankruptcy filings, our provision for credit losses declined in both periods due to improved credit quality, partially offset by receivable growth. We increased managed loss reserves by recording loss provision greater than net charge-off of $154 million in the third quarter of 2005 and $127 million year-to-date, compared to increasing managed loss reserves by recording loss provision greater than net charge-off of $15 million in the third quarter of 2004 and decreasing managed loss reserves year-to-date September 30, 2004 by recording loss provision less than net charge-off of $6 million. We have been maintaining credit loss reserves in anticipation of the impact the new bankruptcy legislation would have on net charge-offs. However, the magnitude of the spike in bankruptcies experienced immediately before the new legislation became effective was larger than anticipated. As a result, we recorded an additional $100 million credit loss provision relating to these filings in the third quarter. We currently expect that the higher levels of personal bankruptcy filings we have been experiencing will result in significantly higher levels of net charge-offs in our domestic MasterCard/Visa portfolio during the fourth quarter of 2005. We believe that a portion of this increase is an acceleration of net charge-offs that would otherwise have been experienced in future periods. We will continue to evaluate the impact of the spike in bankruptcy filings on our credit loss reserves and currently believe that this could result in a reduction in the allowance in the fourth quarter as charge-offs occur. Our managed basis provision for credit losses also reflects an estimate of incremental credit loss exposure relating to Katrina. Based on the information currently available, we have recorded an incremental provision for credit losses of $55 million at the Credit Card Services Segment. As more information becomes available relating to the financial condition of our affected customers and the resultant impact on customer payment patterns, we will continue to review our estimate of credit loss exposure relating to Katrina and any adjustments will be reported in earnings when they become known. In an effort to assist our customers affected by the disaster, we have initiated various programs including extended payment arrangements and interest and fee waivers for up to 90 days or longer depending upon customer circumstances. These interest and fee waivers were not material during the quarter for the Credit Card Services Segment. Net interest income, which increased during the current quarter, decreased in the year-to-date period. The decrease reflects higher interest expense as a result of a rising interest rate environment and lower investment 43 HSBC Finance Corporation -------------------------------------------------------------------------------- income due to lower investment levels, partially offset by higher finance and other interest income on our receivables. The increase in finance and other interest income on our receivables during the current quarter reflects increased pricing on variable yield products and higher receivable balances partially offset by higher interest expense. Net interest margin increased compared to the year-ago periods primarily due to increases in subprime receivable levels, higher pricing on variable rate products as well as other repricing initiatives, lower average interest earning assets due to lower levels of low yielding investment securities and the impact of lower amortization from receivable origination costs resulting from changes in the contractual marketing responsibilities in July 2004 associated with the GM co-branded credit card, partially offset by higher interest expense. Although our subprime receivables tend to have smaller balances, they generate higher returns both in terms of net interest margin and fee income. Net interest margin for both periods was positively impacted by the disposal of certain low yielding investment securities as a result of the elimination of investments dedicated to our credit card bank resulting from our acquisition by HSBC. Managed receivables of $20.0 billion increased 2 percent compared to $19.6 billion at June 30, 2005. Compared to September 30, 2004, managed receivables increased 8 percent. The increase during both periods reflects organic growth in our HSBC branded prime, Union Privilege and non-prime portfolios, which was partially offset by the continued decline in certain older acquired portfolios. The increase in ROMA in both periods reflects lower average managed assets as well as the higher net income discussed above. The decrease in average managed assets is due to lower investment securities during 2005 as a result of the elimination of investments dedicated to our credit card bank resulting from our acquisition by HSBC. In accordance with FFIEC guidance, our credit card services business has adopted a plan to phase in changes to the required minimum monthly payment amount and limit certain fee billings for non-prime credit card accounts. The implementation of these new requirements began in July 2005 with the requirements to be fully phased in by December 31, 2005. Estimates of the potential impact to the business are based on numerous assumptions and take into account a number of factors which are difficult to predict, such as changes in customer behavior, which will not be fully known or understood until the changes have been in place for a period of time. It is anticipated that the changes will result in decreased fee income and fluctuations in the provision for credit losses beginning in 2006. Although we do not expect this will have a material impact on our consolidated results, the impact will be material to the Credit Card Services Segment in 2006. As previously disclosed, we sold our domestic private label portfolio to HSBC Bank USA in December 2004. We and HSBC Bank USA will consider potential transfers of some of our MasterCard and Visa receivables to HSBC Bank USA in the future based upon continuing evaluation of capital and liquidity at each entity. INTERNATIONAL SEGMENT The following table summarizes results for our International segment: INCREASE (DECREASE) ------------------- THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT % -------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income............................................... $ 12 $ 18 $(6) (33.3)% Net interest income...................................... 228 185 43 23.2 Securitization related revenue........................... 2 (87) 89 100+ Fee and other income..................................... 141 130 11 8.5 Intersegment revenues.................................... 4 4 - - Provision for credit losses.............................. 137 19 118 100+ Total costs and expenses................................. 216 181 35 19.3 Receivables.............................................. 12,564 11,833 731 6.2 Assets................................................... 13,574 12,770 804 6.3 Net interest margin annualized........................... 7.22% 6.29% - - Return on average managed assets......................... .36 .57 - - 44 HSBC Finance Corporation -------------------------------------------------------------------------------- INCREASE (DECREASE) -------------------- NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT % ------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net (loss) income........................................... $(11) $ 80 $(91) (100+)% Net interest income......................................... 680 583 97 16.6 Securitization related revenue.............................. 17 (92) 109 100+ Fee and other income........................................ 412 369 43 11.7 Intersegment revenues....................................... 11 10 1 10.0 Provision for credit losses................................. 468 207 261 100+ Total costs and expenses.................................... 649 527 122 23.1 Net interest margin annualized.............................. 7.05% 6.76% - - Return on average managed assets............................ (.10) .86 - - Our International segment reported lower net income for the three months ended September 30, 2005 and a net loss for the year-to-date period. The lower net income and year-to-date net loss reflect higher provision for credit losses and higher costs and expenses, partially offset by higher net interest income and increased fee and other income. Applying constant currency rates, which uses the average rate of exchange for the three and nine month periods ended September 30, 2004 to translate current period net income, net income as reported for the current quarter would not have been materially different and the net loss higher by $2 million year-to-date. Net interest income increased during both periods due to higher receivable levels, partially offset by higher cost of funds in the U.K. for the year-to-date period due to a rising interest rate environment. Net interest margin, annualized, increased during both the three and nine month periods due to increased yields on credit cards due to repricing initiatives during the current quarter and interest-free balances not being promoted as strongly as in the past, partially offset by run-off of higher yielding receivables, competitive pricing pressures holding down yields on our personal loans in the U.K. and, for the year-to-date period, increased cost of funds. Securitization related revenue increased during the quarter and year-to-date period due to lower amortization of prior period gains as a result of reduced securitization levels and, for the year-to-date period, higher levels of receivable replenishments to support previously issued securities in the U.K. as well as the recognition of residual balances associated with certain expired securitization transactions. Fee and other income increased primarily due to higher insurance revenues. Managed basis provision for credit losses increased primarily due to higher delinquency and charge-off levels in the U.K. due to a general increase in consumer bad debts in the U.K. market, including increased bankruptcies. We increased managed loss reserves by recording loss provision greater than net charge-offs of $3 million for the current quarter and $111 million year-to-date. We decreased managed loss reserves by recording loss provision less than net charge-off of $74 million during the third quarter of 2004 and $52 million for that year-to-date period. Total costs and expenses increased primarily due to higher expenses to support receivable growth and collection activities, higher policyholder benefits because of increased insurance sales volumes, and, for the nine month period, costs associated with branch closures in the U.K. Compared to June 30, 2005, managed receivables were unchanged due to lower retail sales volume following a slow down in retail consumer spending in the U.K. Compared to September 30, 2004, managed receivables increased 6 percent due to strong growth in our real estate secured, personal non-credit card and MasterCard/ Visa portfolios as well as growth from the introduction of an auto finance program in Canada in the third quarter of 2004. Applying constant currency rates, managed receivables at September 30, 2005 would not have been materially different using June 30, 2005 or September 30, 2004 exchange rates. The decrease in ROMA in both the three and nine month periods ended September 30, 2005 reflects higher provision for credit losses due to higher delinquency and charge-off levels in the U.K. and higher costs and expenses, as well as higher average managed assets primarily due to receivable growth since September 30, 2004. 45 HSBC Finance Corporation -------------------------------------------------------------------------------- As part of ongoing integration efforts with HSBC, we have been working with HSBC to determine if management efficiencies could be achieved by transferring all or a portion of our U.K. and other European operations to HSBC Bank plc, a U.K. based subsidiary of HSBC, and/or one or more unrelated third parties. As of the date of this filing, a decision has not been made regarding the transfer of all or a portion of our U.K. and other European operations. We anticipate that a decision regarding this potential transfer will be reached in the fourth quarter of 2005; however, any transfer is subject to approval by regulatory authorities and boards of directors of the affected entities. Reconciliation of Managed Basis Segment Results As discussed above, we monitor our operations on a managed basis. Therefore, an adjustment is required to reconcile the managed financial information to our reported financial information in our consolidated financial statements. This adjustment reclassifies net interest income, fee income and loss provision into securitization related revenue. See Note 12, "Business Segments," in the accompanying consolidated financial statements for a reconciliation of our managed basis segment results to managed basis and owned basis consolidated totals. CREDIT QUALITY -------------------------------------------------------------------------------- CREDIT LOSS RESERVES We maintain credit loss reserves to cover probable losses of principal, interest and fees, including late, overlimit and annual fees. Credit loss reserves are based on a range of estimates and are intended to be adequate but not excessive. We estimate probable losses for owned consumer receivables using a roll rate migration analysis that estimates the likelihood that a loan will progress through the various stages of delinquency, or buckets, and ultimately charge-off. This analysis considers delinquency status, loss experience and severity and takes into account whether loans are in bankruptcy, have been restructured or rewritten, or are subject to forbearance, an external debt management plan, hardship, modification, extension or deferment. Our credit loss reserves also take into consideration the loss severity expected based on the underlying collateral, if any, for the loan in the event of default. Delinquency status may be affected by customer account management policies and practices, such as the restructure of accounts, forbearance agreements, extended payment plans, modification arrangements, external debt management programs, loan rewrites and deferments. If customer account management policies, or changes thereto, shift loans from a "higher" delinquency bucket to a "lower" delinquency bucket, this will be reflected in our roll rate statistics. To the extent that restructured accounts have a greater propensity to roll to higher delinquency buckets, this will be captured in the roll rates. Since the loss reserve is computed based on the composite of all of these calculations, this increase in roll rate will be applied to receivables in all respective delinquency buckets, which will increase the overall reserve level. In addition, loss reserves on consumer receivables are maintained to reflect our judgment of portfolio risk factors that may not be fully reflected in the statistical roll rate calculation. Risk factors considered in establishing loss reserves on consumer receivables include recent growth, product mix, bankruptcy trends, geographic concentrations, economic conditions, portfolio seasoning, account management policies and practices, current levels of charge-offs and delinquencies and other items which can affect consumer payment patterns on outstanding receivables, such as the impact of Katrina. While our credit loss reserves are available to absorb losses in the entire portfolio, we specifically consider the credit quality and other risk factors for each of our products. We recognize the different inherent loss characteristics in each of our products as well as customer account management policies and practices and risk management/collection practices. Charge-off policies are also considered when establishing loss reserve requirements to ensure the appropriate reserves exist for products with longer charge-off periods. We also consider key ratios such as reserves to nonperforming loans and reserves as a percent of net annualized charge-offs in developing our loss reserve estimates. Loss reserve estimates are reviewed periodically and adjustments are reported in earnings when they become known. As these estimates are influenced by factors outside of our control, such as consumer payment patterns and economic conditions, there is uncertainty inherent in these estimates, making it reasonably possible that they could change. See Note 4, "Receivables," in the 46 HSBC Finance Corporation -------------------------------------------------------------------------------- accompanying consolidated financial statements for receivables by product type and Note 5, "Credit Loss Reserves," for an analysis of changes in the credit loss reserves. The following table summarizes owned basis credit loss reserves: SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004 ---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Owned credit loss reserves................................ $4,220 $3,756 $3,953 Reserves as a percent of: Receivables............................................. 3.28% 3.16% 3.71% Net charge-offs(1)...................................... 117.0 111.3 102.0 Nonperforming loans..................................... 110.0 107.6 104.1 --------------- (1) Quarter-to-date, annualized. Owned credit loss reserves at September 30, 2005 increased as compared to June 30, 2005 and September 30, 2004 as the provision for owned credit losses during the current quarter was $459 million greater than net charge-offs reflecting higher levels of owned receivables and, as previously discussed, additional provision due to increases in bankruptcy filings in both our domestic and foreign operations, which largely impacts our unsecured consumer products, and the additional credit loss reserves resulting from Katrina. These increases were partially offset by the impact of stable credit quality, the release of $505 million of owned credit loss reserves in December 2004 associated with the sold domestic private label portfolio as well as a shift in mix to higher levels of secured receivables. During the three months ended September 30, 2004, provision for owned credit losses was $154 million greater than net charge-offs. Reserve levels at September 30, 2005 reflect the factors discussed above. The trends in the reserve ratios reflect the fact that we are experiencing a shift in our loan portfolio to higher credit quality receivables, particularly real estate secured and auto finance receivables, partially offset by the impact of additional credit loss reserves for Katrina and increased bankruptcy filings. For securitized receivables, we also record a provision for estimated probable losses that we expect to incur under the recourse provisions. The following table summarizes managed credit loss reserves: SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004 ---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Managed credit loss reserves.............................. $4,571 $4,281 $5,199 Reserves as a percent of: Receivables............................................. 3.37% 3.35% 4.11% Net charge-offs(1)...................................... 108.6 104.1 95.4 Nonperforming loans..................................... 110.3 110.2 111.1 --------------- (1) Quarter-to-date, annualized. Managed credit loss reserves at September 30, 2005 also increased compared to June 30, 2005 as the increases in our owned credit loss reserves as discussed above were offset by lower reserves on securitized receivables due to run-off. Managed credit loss reserves at September 30, 2005 decreased as compared to September 30, 2004 as a result of improvements in credit quality, changes in securitization levels and the sale of our domestic private label receivable portfolio in December 2004 as previously discussed, partially offset by additional reserves resulting from receivable growth and Katrina and increased bankruptcy filings. See "Basis of Reporting" for additional discussion on the use of non-GAAP financial measures and "Reconciliations to GAAP Financial Measures" for quantitative reconciliations of the non-GAAP financial measures to the comparable GAAP basis financial measure. 47 HSBC Finance Corporation -------------------------------------------------------------------------------- DELINQUENCY - OWNED BASIS The following table summarizes two-months-and-over contractual delinquency (as a percent of consumer receivables): SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004 ---------------------------------------------------------------------------------------------------- Real estate secured....................................... 2.51% 2.56% 3.27% Auto finance.............................................. 2.09 2.08 1.81 MasterCard/Visa........................................... 4.46 4.14 5.84 Private label............................................. 5.22 4.91 4.72 Personal non-credit card.................................. 9.18 8.84 8.83 ---- ---- ---- Total..................................................... 3.78% 3.73% 4.43% ==== ==== ==== Total owned delinquency as a percentage of consumer receivables increased 5 basis points compared to the prior quarter. The increase in the delinquency ratio is primarily due to seasonal increases in delinquency in the third quarter, partially offset by the continuing strong economy, better underwriting and improved quality of originations. The overall decrease in the delinquency ratio of our real estate secured portfolio reflects receivable growth, the recent trend of better quality in new originations and a continuing strong economy. The increase in the MasterCard/Visa delinquency ratio reflects a seasonal increase in delinquencies during the third quarter, partially offset by changes in receivable mix resulting from lower securitization levels. The increases in the delinquency ratio in our private label receivables (which includes our foreign private label portfolio that was not sold to HSBC Bank USA in December 2004) and our personal non-credit card portfolio also reflects the increased bankruptcy filings in both the United States and the U.K. The increase in personal non-credit card delinquencies was partially offset by improved collection efforts and strong economic conditions in the U.S. Compared to a year ago, total delinquency decreased 65 basis points generally as a result of improvements in the U.S. economy, better underwriting, improved credit quality as well as higher levels of real estate secured receivables. As discussed above, the increase in delinquency in our private label receivables (which includes our foreign private label portfolio that was not sold to HSBC Bank USA in December 2004) and our personal non-credit card portfolio reflects the general increase in consumer bad debts in the U.K. market, including increased bankruptcies. The increase in the personal non-credit card portfolio also reflects the increase in bankruptcy filings in the United States due to new bankruptcy legislation in the United States which became effective in October 2005. Delinquency levels at September 30, 2004 include the domestic private label portfolio which contributed approximately 5 basis points to total delinquency. 48 HSBC Finance Corporation -------------------------------------------------------------------------------- NET CHARGE-OFFS OF CONSUMER RECEIVABLES - OWNED BASIS The following table summarizes net charge-offs of consumer receivables (as a percent, annualized, of average consumer receivables): SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004 ---------------------------------------------------------------------------------------------------- Real estate secured....................................... .75% .78% 1.19% Auto finance.............................................. 3.25 2.61 3.66 MasterCard/Visa........................................... 6.24 6.93 8.50 Private label............................................. 5.35 4.36 4.79 Personal non-credit card.................................. 8.01 7.77 9.50 ---- ---- ---- Total..................................................... 2.93% 2.93% 3.77% ==== ==== ==== Real estate secured net charge-offs and REO expense as a percent of average real estate secured receivables...... .88% .84% 1.31% Total net charge-offs as a percent, annualized, of average consumer receivables has remained flat during the quarter ended September 30, 2005 compared to the quarter ended June 30, 2005 as the lower delinquency levels we have been experiencing due to an improving economy and which had a positive impact on charge-offs, were offset by an increase in bankruptcy filings due to new bankruptcy legislation in the United States as well as increased bankruptcy filings in the U.K. Our real estate secured portfolio experienced a decrease in net charge-offs reflecting the recent trend of better quality in new originations and continuing strong economic conditions. The increase in auto finance net charge-offs reflects a seasonal pattern of higher charge-offs in the third quarter. The decrease in MasterCard/Visa charge-offs reflects changes in receivable mix resulting from lower securitization levels and continued improved credit quality. The increase in net charge-offs for the private label portfolio reflects the general increase in consumer bad debts in the U.K. markets, including increased bankruptcies. The increase in net charge-offs in the personal non-credit card portfolio reflects the increase in bankruptcy filings, as discussed above. Total net charge-offs as a percentage, annualized, of average consumer receivables for the current quarter decreased from the September 2004 net charge-off levels. Principal factors behind the decrease were improved collections and better underwriting, including both improved modeling and improved credit quality of new originations, stable economic conditions, as well as the sale of our domestic private label portfolio in December 2004. These were partially offset by the increased bankruptcy filings discussed above. The September 2004 net charge-off ratio includes the domestic private label portfolio which contributed 14 basis points to the ratio. The decrease in auto finance net charge-offs also reflects improved used auto prices which resulted in lower loss severities. OWNED NONPERFORMING ASSETS SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004 ---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Nonaccrual receivables.................................... $3,273 $3,008 $2,891 Accruing consumer receivables 90 or more days delinquent.............................................. 563 482 905 Renegotiated commercial loans............................. -- 1 1 ------ ------ ------ Total nonperforming receivables........................... 3,836 3,491 3,797 Real estate owned......................................... 462 459 601 ------ ------ ------ Total nonperforming assets................................ $4,298 $3,950 $4,398 ====== ====== ====== Credit loss reserves as a percent of nonperforming receivables............................................. 110.0% 107.6% 104.1% 49 HSBC Finance Corporation -------------------------------------------------------------------------------- Compared to June 30, 2005, the increase in total nonperforming receivables is primarily attributable to seasonal trends in delinquency as well as increased bankruptcy filings experienced in both our domestic and foreign operations. Compared to September 30, 2004, the decrease in total nonperforming assets is due to improved credit quality, continued improvement in the economy, collection efforts as well as the impact of the bulk sale of our domestic private label receivable portfolio in December 2004. Consistent with industry practice, accruing consumer receivables 90 or more days delinquent includes domestic MasterCard and Visa and for September 30, 2004, our domestic private label credit card receivables. ACCOUNT MANAGEMENT POLICIES AND PRACTICES Our policies and practices for the collection of consumer receivables, including our customer account management policies and practices, permit us to reset the contractual delinquency status of an account to current, based on indicia or criteria which, in our judgment, evidence continued payment probability. Such policies and practices vary by product and are designed to manage customer relationships, maximize collection opportunities and avoid foreclosure or repossession if reasonably possible. If the account subsequently experiences payment defaults, it will again become contractually delinquent. The tables below summarize approximate restructuring statistics in our managed basis domestic portfolio. We report our restructuring statistics on a managed basis only because the receivables that we securitize are subject to underwriting standards comparable to our owned portfolio, are generally serviced and collected without regard to ownership and result in a similar credit loss exposure for us. As previously reported, we use certain assumptions and estimates to compile our restructure statistics. We continue to enhance our ability to capture and segment restructure data across all business units. When comparing restructuring statistics from different periods, the fact that our restructure policies and practices will change over time, that exceptions are made to those policies and practices, and that our data capture methodologies have been enhanced, should be taken into account. 50 HSBC Finance Corporation -------------------------------------------------------------------------------- TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD - DOMESTIC PORTFOLIO(1) (MANAGED BASIS) SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005(3) 2005(3) 2004 ---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Never restructured........................................ 88.9% 88.0% 86.5% Restructured: Restructured in the last 6 months....................... 4.0 4.2 4.8 Restructured in the last 7-12 months.................... 2.9 3.3 3.6 Previously restructured beyond 12 months................ 4.2 4.5 5.1 ------- ------- ------- Total ever restructured(2).............................. 11.1 12.0 13.5 ------- ------- ------- Total..................................................... 100.0% 100.0% 100.0% ======= ======= ======= TOTAL RESTRUCTURED BY PRODUCT - DOMESTIC PORTFOLIO(1) (MANAGED BASIS) Real estate secured....................................... $ 8,205 $ 8,277 $ 8,895 Auto finance.............................................. 1,593 1,585 1,420 MasterCard/Visa........................................... 484 526 628 Private label(3).......................................... 24 24 756 Personal non-credit card.................................. 3,353 3,396 3,688 ------- ------- ------- Total..................................................... $13,659 $13,808 $15,387 ======= ======= ======= (AS A PERCENT OF MANAGED RECEIVABLES) Real estate secured....................................... 10.9% 12.0% 15.8% Auto finance.............................................. 14.0 14.9 14.4 MasterCard/Visa........................................... 2.5 2.7 3.5 Private label(3).......................................... 7.0 7.1 5.0 Personal non-credit card.................................. 20.6 21.6 24.3 ------- ------- ------- Total(2).................................................. 11.1% 12.0% 13.5% ======= ======= ======= --------------- (1) Excludes foreign businesses, commercial and other. (2) Total including foreign businesses was 10.5 percent at September 30, 2005, 11.3 percent at June 30, 2005, and 12.6 percent at September 30, 2004. (3) Reflects consumer lending retail sales contracts which have historically been classified as private label. See "Credit Quality Statistics" for further information regarding owned basis and managed basis delinquency, charge-offs and nonperforming loans. The amount of domestic and foreign managed receivables in forbearance, modification, credit card services approved consumer credit counseling accommodations, rewrites or other customer account management techniques for which we have reset delinquency and that is not included in the restructured or delinquency statistics was approximately $.4 billion or .3 percent of managed receivables at September 30, 2005, $.4 billion or .3 percent of managed receivables at June 30, 2005 and $.5 billion or .4 percent of managed assets at September 30, 2004. In addition to the above, we have granted an initial 30 or 60 day payment deferral (based on product) to customers living in the FEMA designated Individual Assistance disaster areas. This deferral may be extended for a period of up to 90 days or longer based on a customer's specific circumstances, consistent with our natural disaster policies. In certain cases these arrangements have resulted in a customer's delinquency status 51 HSBC Finance Corporation -------------------------------------------------------------------------------- being reset by 30 days. These extended payment arrangements totaled $.7 billion or .4% of managed receivables at September 30, 2005 and are not reflected as restructures in the table above or included in the other customer account management techniques described in the paragraph above. LIQUIDITY AND CAPITAL RESOURCES -------------------------------------------------------------------------------- We continue to focus on balancing our use of affiliate and third-party funding sources to minimize funding expense while maximizing liquidity. As discussed below, we supplemented unsecured debt issuance during the nine months ended September 30, 2005 with proceeds from the sale of our domestic private label receivable portfolio to HSBC Bank USA in December 2004, debt issued to affiliates, higher levels of commercial paper and the issuance of Series B preferred stock. Because we are now a subsidiary of HSBC, our credit spreads relative to Treasuries have tightened compared to those we experienced during the months leading up to the announcement of our acquisition by HSBC. Primarily as a result of these tightened credit spreads, we recognized cash funding expense savings of approximately $407 million in the nine months ended September 30, 2005 ($155 million in the three months ended September 30, 2005) and approximately $235 million in the nine months ended September 30, 2004 ($95 million in the three months ended September 30, 2004) compared to the funding costs we would have incurred using average spreads and funding mix from the first half of 2002. It is anticipated that these tightened credit spreads and other funding synergies including asset transfers will eventually enable HSBC to realize annual cash funding expense savings, including external fee savings, in excess of $1 billion per year as our existing term debt matures over the course of the next few years. The portion of these savings to be realized by HSBC Finance Corporation will depend in large part upon the amount and timing of various initiatives between HSBC Finance Corporation and other HSBC subsidiaries. Debt due to affiliates and other HSBC related funding are summarized in the following table: SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------------------------------------------------------------------------------------ (IN BILLIONS) Debt issued to HSBC subsidiaries: Drawings on bank lines in the U.K......................... $ 6.6 $ 7.5 Term debt................................................. 11.0 6.0 Preferred securities issued by Household Capital Trust VIII................................................... .3 .3 ----- ----- Total debt issued to HSBC subsidiaries.................... 17.9 13.8 ----- ----- Debt issued to HSBC clients: Euro commercial paper..................................... 3.4 2.6 Term debt................................................. 1.2 .8 ----- ----- Total debt issued to HSBC clients......................... 4.6 3.4 Preferred stock held by HSBC Investments (North America) Inc. ..................................................... 1.1 1.1 Cash received on bulk and subsequent sales of domestic private label receivables to HSBC Bank USA, net (cumulative).............................................. 14.5 12.4 Real estate secured receivable activity with HSBC Bank USA: Cash received on sales (cumulative)....................... 3.7 3.7 Direct purchases from correspondents (cumulative)......... 4.2 2.8 Run-off of real estate secured receivable activity with HSBC Bank USA.......................................... (2.9) (1.5) ----- ----- Total real estate secured receivable activity with HSBC Bank USA....................................................... 5.0 5.0 ----- ----- Total HSBC related funding.................................. $43.1 $35.7 ===== ===== 52 HSBC Finance Corporation -------------------------------------------------------------------------------- At September 30, 2005, funding from HSBC, including debt issues to HSBC subsidiaries and clients and preferred stock held by HSBC Investments (North America) Inc. ("HINO") but excluding cash received on asset sales to HSBC subsidiaries, represented 18 percent of our total managed debt and preferred stock funding. At December 31, 2004, funding from HSBC, including debt issues to HSBC subsidiaries and clients and preferred stock held by HINO but excluding cash received on asset sales to HSBC subsidiaries, represented 15 percent of our total managed debt and preferred stock funding. In addition to the HSBC related funding received, we have extended lines of credit and promissory notes to other HSBC subsidiaries at interest rates comparable to third-party rates for notes with similar terms. At September 30, 2005, $1.9 billion was outstanding under these agreements compared to $.6 billion outstanding at December 31, 2004. Proceeds from the December 2004 domestic private label bulk receivable sale to HSBC Bank USA of $12.4 billion were used to pay down short-term domestic borrowings, including outstanding commercial paper balances, and to fund operations. Excess liquidity from the sale was used to temporarily fund available for sale investments at December 31, 2004. As of September 30, 2005, we had revolving credit facilities of $2.5 billion from HSBC domestically and $10 billion from HSBC subsidiaries in the U.K. There have been no draws on the domestic line. At September 30, 2005, $6.6 billion was outstanding under the U.K. lines. We had derivative contracts with a notional value of $64.3 billion, or approximately 96 percent of total derivative contracts, outstanding with HSBC affiliates at September 30, 2005. We had derivative contracts with a notional value of $62.6 billion, or approximately 87 percent of total derivative contracts, outstanding with HSBC affiliates at December 31, 2004. SECURITIES totaled $3.9 billion at September 30, 2005 and $3.6 billion at December 31, 2004. Securities purchased under agreements to resell totaled $181 million at September 30, 2005 and $2.7 billion at December 31, 2004. Interest bearing deposits with banks totaled $398 million at September 30, 2005 and $603 million at December 31, 2004. Our total investment balances at December 31, 2004 were high as a result of the timing of the bulk sale of the domestic private label receivable portfolio to HSBC Bank USA on December 29, 2004. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS totaled $11.6 billion at September 30, 2005 and $9.0 billion at December 31, 2004. The increase at September 30, 2005 was a result of a plan to increase our commercial paper issuances as a result of lowering the coverage ratio of bank credit facilities to outstanding commercial paper from 100% to 80%. This plan also assumes that the combination of bank credit facilities and undrawn committed conduit facilities will, at all times, exceed 115% of outstanding commercial paper. This plan, which was reviewed with the relevant rating agencies, resulted in an increase in our maximum outstanding commercial paper balance to in excess of $12.0 billion. Additionally, at December 31, 2004, we were carrying lower levels of commercial paper as the proceeds from the sale of the domestic private label loan portfolio to HSBC Bank USA were used to reduce the outstanding balances. Included in this total was outstanding Euro commercial paper sold to customers of HSBC of $3.4 billion at September 30, 2005 and $2.6 billion at December 31, 2004. LONG TERM DEBT (with original maturities over one year) increased to $93.2 billion at September 30, 2005 from $85.4 billion at December 31, 2004. Significant third party issuance during the nine months ended September 30, 2005 included the following: - $7.6 billion of domestic and foreign medium-term notes - $4.4 billion of foreign currency-denominated bonds - $1.3 billion of InterNotes(SM) (retail-oriented medium-term notes) - $9.6 billion of global debt - $5.4 billion of securities backed by real estate secured, auto finance, and MasterCard/Visa receivables. For accounting purposes, these transactions were structured as secured financings. 53 HSBC Finance Corporation -------------------------------------------------------------------------------- In June 2005, we redeemed the junior subordinated notes issued to the Household Capital Trust V with an outstanding principal balance of $309 million. PREFERRED SHARES In June 2005, we issued 575,000 shares of Series B Preferred Stock for $575 million. Dividends on the Series B Preferred Stock are non-cumulative and payable quarterly at a rate of 6.36 percent commencing September 15, 2005. The Series B Preferred Stock may be redeemed at our option after June 23, 2010. In August 2005, we declared an $8 million dividend on the Series B Preferred Stock which was paid on September 15, 2005. In March 2003, we issued 1,100 shares of Series A Cumulative Preferred Stock to HSBC, which are now held by HINO. COMMON EQUITY We currently intend to issue additional common equity to HINO in exchange for the Series A Cumulative Preferred Stock on or before December 15, 2005. In addition, in connection with our pending purchase of Metris, we currently intend to issue approximately $1.2 billion in additional common equity to HINO to fund a portion of the $1.6 billion purchase price. The acquisition of Metris is subject to certain conditions and is anticipated to close in the fourth quarter of 2005. SELECTED CAPITAL RATIOS are summarized in the following table: SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------------------------------------------------------------------------------------ TETMA(1),(2)................................................ 6.97% 6.27% TETMA + Owned Reserves(1),(2)............................... 9.91 9.04 Tangible common equity to tangible managed assets(1)........ 5.33 4.67 Common and preferred equity to owned assets................. 12.83 13.01 Excluding purchase accounting adjustments: TETMA(1),(2).............................................. 8.10 7.97 TETMA + Owned Reserves(1),(2)............................. 11.04 10.75 Tangible common equity to tangible managed assets(1)...... 6.46 6.38 --------------- (1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed assets represent non-GAAP financial ratios that are used by HSBC Finance Corporation management and certain rating agencies to evaluate capital adequacy and may differ from similarly named measures presented by other companies. See "Basis of Reporting" for additional discussion on the use of non-GAAP financial measures and "Reconciliations to GAAP Financial Measures" for quantitative reconciliations to the equivalent GAAP basis financial measure. (2) Beginning in the third quarter of 2005, and with the agreement of certain rating agencies, we have refined our definition of TETMA and TETMA + Owned Reserves to exclude the Adjustable Conversion-Rate Equity Security Units as this more accurately reflects the impact of these items on our equity. Prior period amounts have been revised to reflect the current period presentation. SECURITIZATIONS AND SECURED FINANCINGS Securitizations (collateralized funding transactions structured to receive sale treatment under Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement of FASB Statement No. 125," ("SFAS No. 140") and secured financings (collateralized funding transactions which do not receive sale treatment under SFAS No. 140) of consumer receivables have been used to limit our reliance on the unsecured debt markets. In a securitization, a designated pool of non-real estate consumer receivables is removed from the balance sheet and transferred through a limited purpose financing subsidiary to an unaffiliated trust. This unaffiliated trust is a qualifying special purpose entity ("QSPE") as defined by SFAS No. 140 and, therefore, is not consolidated. The QSPE funds its receivable purchase through the issuance of securities to investors, entitling them to receive specified cash flows during the life of the securities. The receivables transferred to the QSPE serve as collateral for the securities. At the time of sale, an interest-only strip receivable is recorded, representing the present value of the cash flows we expect to receive over the life of the securitized receivables, net of estimated credit losses and debt service. Under the terms of the securitizations, we receive annual 54 HSBC Finance Corporation -------------------------------------------------------------------------------- servicing fees on the outstanding balance of the securitized receivables and the rights to future residual cash flows on the sold receivables after the investors receive their contractual return. Cash flows related to the interest-only strip receivables and servicing the receivables are collected over the life of the underlying securitized receivables. In a secured financing, a designated pool of receivables are conveyed to a wholly owned limited purpose subsidiary, which in turn transfers the receivables to a trust that sells interests to investors. Repayment of the debt issued by the trust is secured by the receivables transferred. The transactions are structured as secured financings under SFAS No. 140. Therefore, the receivables and the underlying debt of the trust remain on our balance sheet. We do not recognize a gain in a secured financing transaction. Because the receivables and the debt remain on our balance sheet, revenues and expenses are reported consistent with our owned balance sheet portfolio. Using this source of funding results in similar cash flows as issuing debt through alternative funding sources. Under IFRS and prior to 2005 under U.K. GAAP, our securitizations are treated as secured financings. In order to align our accounting treatment with that of HSBC, starting in the third quarter of 2004 we began to structure all new collateralized funding transactions as secured financings. However, because existing public MasterCard and Visa credit card transactions were structured as sales to revolving trusts that require replenishments of receivables to support previously issued securities, receivables will continue to be sold to these trusts until the revolving periods end, the last of which is currently projected to occur in 2008. Private label trusts that publicly issued securities are now replenished by HSBC Bank USA as a result of the daily sale of new domestic private label credit card originations to HSBC Bank USA. We will continue to replenish at reduced levels certain non-public personal non-credit card and MasterCard and Visa securities issued to conduits and record the resulting replenishment gains for a period of time in order to manage liquidity. Since our securitized receivables have varying lives, it will take time for these receivables to pay-off and the related interest-only strip receivables to be reduced to zero. The termination of sale treatment on new collateralized funding activity reduced our reported net income under U.S. GAAP. There is no impact, however, on cash received from operations. Because we believe the market for securities backed by receivables is a reliable, efficient and cost-effective source of funds, we will continue to use secured financings of consumer receivables as a source of our funding and liquidity. As previously discussed, securitization levels were much lower in the nine months ended September 30, 2005 as a result of the use of alternate funding sources, including funding from HSBC subsidiaries, and our decision to structure all new collateralized funding transactions as secured financings beginning in the third quarter of 2004. 55 HSBC Finance Corporation -------------------------------------------------------------------------------- Securitizations (excluding replenishments of certificateholder interests) and secured financings are summarized in the following table: THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 ----------------------------------------------------------------------------- (IN MILLIONS) INITIAL SECURITIZATIONS: Auto finance................................................ $ - $ - MasterCard/Visa............................................. - - Private label............................................... - - Personal non-credit card.................................... - - ------ ------ Total....................................................... $ - $ - ====== ====== SECURED FINANCINGS: Real estate secured......................................... $1,321 $1,549 Auto finance................................................ 945 750 MasterCard/Visa............................................. 750 - ------ ------ Total....................................................... $3,016 $2,299 ====== ====== NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ----------------------------------------------------------------------------- (IN MILLIONS) INITIAL SECURITIZATIONS: Auto finance................................................ $ - $ - MasterCard/Visa............................................. - 550 Private label............................................... - 190 Personal non-credit card.................................... - - ------ ------ Total....................................................... $ - $ 740 ====== ====== SECURED FINANCINGS: Real estate secured......................................... $2,240 $3,299 Auto finance................................................ 1,943 750 MasterCard/Visa............................................. 1,250 - ------ ------ Total....................................................... $5,433 $4,049 ====== ====== Our securitized receivables totaled $6.8 billion at September 30, 2005 compared to $14.2 billion at December 31, 2004. As of September 30, 2005, secured financings of $7.7 billion were secured by $13.0 billion of real estate secured, auto finance and MasterCard/Visa receivables. Secured financings of $7.3 billion at December 31, 2004 were secured by $10.3 billion of real estate secured and auto finance receivables. At September 30, 2005, securitizations structured as sales represented 5 percent and secured financings represented 6 percent of the funding associated with our managed funding portfolio. At December 31, 2004, securitizations structured as sales represented 12 percent and secured financings represented 6 percent of the funding associated with our managed funding portfolio. 56 HSBC Finance Corporation -------------------------------------------------------------------------------- 2005 FUNDING STRATEGY As discussed previously, the acquisition by HSBC has improved our access to the capital markets as well as expanded our access to a worldwide pool of potential investors. Our current estimated domestic funding needs and sources for 2005 are summarized in the table that follows: ACTUAL ESTIMATED JANUARY 1 OCTOBER 1 THROUGH THROUGH ESTIMATED SEPTEMBER 30, DECEMBER 31, FULL YEAR 2005 2005 2005 --------------------------------------------------------------------------------------------------- (IN BILLIONS) FUNDING NEEDS: Net asset growth....................................... $16 $ 3 - 6(1) $19 - 22 Commercial paper, term debt and securitization maturities.......................................... 26 2 - 12 28 - 38 Other.................................................. 1 1 - 3(1) 2 - 4 --- ------- -------- Total funding needs, including growth.................. $43 $6 - 21 $49 - 64 === ======= ======== FUNDING SOURCES: External funding, including HSBC clients............... $38 $6 - 20 $44 - 58 HSBC and HSBC subsidiaries............................. 5 0 - 1 5 - 6 --- ------- -------- Total funding sources.................................. $43 $6 - 21 $49 - 64 === ======= ======== --------------- (1) Capital requirements resulting from the acquisition of Metris are included in Other. RISK MANAGEMENT -------------------------------------------------------------------------------- CREDIT RISK There have been no significant changes in our approach to credit risk management since December 31, 2004. At September 30, 2005, we had derivative contracts with a notional value of approximately $67.1 billion, including $64.3 billion outstanding with HSBC affiliates. Most swap agreements, both with unaffiliated and affiliated third parties, require that payments be made to, or received from, the counterparty when the fair value of the agreement reaches a certain level. Generally, third-party swap counterparties provide collateral in the form of cash which is recorded in our balance sheet as other assets or derivative related liabilities and totaled $343 million at September 30, 2005. Affiliate swap counterparties provide collateral in the form of securities as required, which are not recorded on our balance sheet. At September 30, 2005, the fair value of our agreements with affiliate counterparties was below the level requiring payment of collateral. As such at September, 30, 2005, we were not holding any swap collateral from HSBC affiliates in the form of securities. LIQUIDITY RISK There have been no significant changes in our approach to liquidity risk since December 31, 2004. MARKET RISK HSBC has certain limits and benchmarks that serve as guidelines in determining appropriate levels of interest rate risk. One such limit is expressed in terms of the Present Value of a Basis Point ("PVBP"), which reflects the change in value of the balance sheet for a one basis point movement in all interest rates. Our total PVBP limit as of September 30, 2005 was $2 million, which includes risk associated with hedging instruments. Thus, for a one basis point change in interest rates, the policy dictates that the value of the balance sheet shall not increase or decrease by more than $2 million. Our PVBP position at both September 30, 2005 and December 31, 2004 was less than $1 million. While the total PVBP position was not impacted by the loss of hedge accounting for certain derivative financial instruments at the time of our acquisition by HSBC, the portfolio of ineffective hedges remaining at September 30, 2005 represent PVBP risk of $($1.7) million. The interest rate risk remaining for all other assets and liabilities, including effective hedges, results in an offsetting PVBP risk of $2.3 million. Therefore, 57 HSBC Finance Corporation -------------------------------------------------------------------------------- at September 30, 2005 we had a net PVBP position of less than $1 million, which is within our PVBP limit of $2 million. We also monitor the impact that a hypothetical increase or decrease in interest rates of 25 basis points applied at the beginning of each quarter over a 12 month period would have on our net interest income. The following table summarizes such estimated impact: SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------------------------------------------------------------------------------------ (IN MILLIONS) Decrease in net interest income following a hypothetical 25 basis points rise in interest rates applied on a quarterly basis over the next 12 months............................. $179 $176 Increase in net interest income following a hypothetical 25 basis points fall in interest rates applied on a quarterly basis over the next 12 months............................. $119 $169 These estimates include both the net interest income impact of the derivative positions we have entered into which are considered to be effective hedges under SFAS No. 133 and the impact of economic hedges of certain underlying debt instruments which do not qualify for hedge accounting as if they were effective hedges under SFAS No. 133. These estimates also assume we would not take any corrective actions in response to interest rate movements and, therefore, exceed what most likely would occur if rates were to change by the amount indicated. Net interest income at risk has changed as a result of the loss of hedge accounting on our portfolio of economic hedges. At September 30, 2005, our net interest income sensitivity to a hypothetical 25 basis point rise in rates applied on a quarterly basis over the next 12 months is a decrease of $188 million as opposed to the amount reported above, and the sensitivity to a hypothetical 25 basis point fall in rates applied on a quarterly basis over the next 12 months is an increase of $128 million as opposed to the amount reported above. At December 31, 2004, our net interest income sensitivity to a hypothetical 25 basis point rise in rates applied on a quarterly basis over the next 12 months is a decrease of $190 million as opposed to the amount reported above, and the sensitivity to a hypothetical 25 basis point fall in rates applied on a quarterly basis over the next 12 months is an increase of $186 million as opposed to the amount reported above. This sensitivity only considers changes in interest rates and does not consider changes from other variables, such as exchange rates that may impact margin. The decrease in exposure to rising interest rates results primarily from the reclassification of the pay fixed/receive floating interest rate swaps, which do not qualify for hedge accounting under SFAS No. 133. As part of our overall risk management strategy to reduce earnings volatility, in the second and third quarters of 2005, a significant number of our pay fixed/receive variable interest rate swaps which had not previously qualified for hedge accounting under SFAS No. 133, have been designated as effective hedges using the long-haul method of accounting, and certain other interest rate swaps were terminated. This will significantly reduce the volatility of the mark-to-market on the previously non-qualifying derivatives which have been designated as effective hedges going forward, but will result in the recording of ineffectiveness under the long-haul method of accounting under SFAS No. 133. In order to further reduce earnings volatility that would otherwise result from changes in interest rates, we continue to evaluate the steps required to regain hedge accounting treatment under SFAS No. 133 for the remaining swaps which do not currently qualify for hedge accounting. These derivatives remain economic hedges of the underlying debt instruments. We will continue to manage our total interest rate risk on a basis consistent with the risk management process employed since the acquisition. OPERATIONAL RISK There has been no significant change in our approach to operational risk management since December 31, 2004. 58 HSBC FINANCE CORPORATION RECONCILIATIONS TO GAAP FINANCIAL MEASURES THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2005 2004 --------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) RETURN ON AVERAGE ASSETS: Net income................................ $ 281 $ 325 $ 1,379 $ 1,228 ======== ======== ======== ======== Average assets: Owned basis............................. $141,765 $124,512 $136,185 $120,456 Serviced with limited recourse.......... 7,779 21,542 10,288 23,462 -------- -------- -------- -------- Managed basis........................... $149,544 $146,054 $146,473 $143,918 ======== ======== ======== ======== Return on average owned assets............ .79% 1.04% 1.35% 1.36% Return on average managed assets.......... .75 .89 1.26 1.14 RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY: Net income................................ $ 281 $ 325 $ 1,379 $ 1,228 Dividends on preferred stock.............. (25) (18) (62) (54) -------- -------- -------- -------- Net income available to common shareholders............................ $ 256 $ 307 $ 1,317 $ 1,174 ======== ======== ======== ======== Average common shareholder's equity....... $ 16,973 $ 17,367 $ 16,605 $ 17,057 Return on average common shareholder's equity.................................. 6.03% 7.07% 10.58% 9.18% NET INTEREST INCOME: Net interest income: Owned basis............................. $ 2,163 $ 1,969 $ 6,086 $ 5,719 Serviced with limited recourse.......... 177 581 758 1,987 -------- -------- -------- -------- Managed basis........................... $ 2,340 $ 2,550 $ 6,844 $ 7,706 ======== ======== ======== ======== Average interest-earning assets: Owned basis............................. $127,038 $107,955 $119,848 $102,957 Serviced with limited recourse.......... 7,779 21,542 10,288 23,462 -------- -------- -------- -------- Managed basis........................... $134,817 $129,497 $130,136 $126,419 ======== ======== ======== ======== Owned basis net interest margin........... 6.81% 7.29% 6.77% 7.41% Managed basis net interest margin......... 6.94 7.88 7.01 8.13 MANAGED BASIS RISK ADJUSTED REVENUE: Net interest income....................... $ 2,340 $ 2,550 $ 6,844 $ 7,706 Other revenues, excluding securitization related revenue and the mark-to-market on derivatives which do not qualify as effective hedges and ineffectiveness associated with qualifying hedges under SFAS No. 133............................ 1,185 916 3,494 2,812 Less: Net charge-offs..................... (1,052) (1,363) (3,198) (4,172) -------- -------- -------- -------- Risk adjusted revenue..................... $ 2,473 $ 2,103 $ 7,140 $ 6,346 ======== ======== ======== ======== Average interest-earning assets........... $134,817 $129,497 $130,136 $126,419 Managed basis risk adjusted revenue....... 7.34% 6.50% 7.32% 6.69% 59 HSBC FINANCE CORPORATION RECONCILIATIONS TO GAAP FINANCIAL MEASURES THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------------- ----------------------------- SEPTEMBER 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2005 2004 2005 2004 --------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) CONSUMER NET CHARGE-OFF RATIO: Consumer net charge-offs: Owned basis.................. $ 902 $ 844 $ 969 $ 2,602 $ 2,905 Serviced with limited recourse.................. 150 184 394 589 1,267 -------- -------- -------- -------- -------- Managed basis................ $ 1,052 $ 1,028 $ 1,363 $ 3,191 $ 4,172 ======== ======== ======== ======== ======== Average consumer receivables: Owned basis.................. $123,163 $115,354 $102,821 $115,815 $ 97,328 Serviced with limited recourse.................. 7,779 10,203 21,542 10,288 23,462 -------- -------- -------- -------- -------- Managed basis................ $130,942 $125,557 $124,363 $126,103 $120,790 ======== ======== ======== ======== ======== Owned basis consumer net charge-off ratio............. 2.93% 2.93% 3.77% 3.00% 3.98% Managed basis consumer net charge-off ratio............. 3.21 3.28 4.38 3.37 4.61 ======== ======== ======== ======== ======== RESERVES AS A PERCENT OF NET CHARGE-OFFS Loss reserves: Owned basis.................. $ 4,220 $ 3,756 $ 3,953 $ 4,220 $ 3,953 Serviced with limited recourse.................. 351 525 1,246 351 1,246 -------- -------- -------- -------- -------- Managed basis................ $ 4,571 $ 4,281 $ 5,199 $ 4,571 $ 5,199 ======== ======== ======== ======== ======== Net charge-offs: Owned basis.................. $ 902 $ 844 $ 969 $ 2,609 $ 2,905 Serviced with limited recourse.................. 150 184 394 589 1,267 -------- -------- -------- -------- -------- Managed basis................ $ 1,052 $ 1,028 $ 1,363 $ 3,198 $ 4,172 ======== ======== ======== ======== ======== Owned basis reserves as a percent of net charge-offs... 117.0% 111.3% 102.0% 121.3% 102.1% Managed basis reserves as a percent of net charge-offs... 108.6 104.1 95.4 107.2 93.5 EFFICIENCY RATIO: Total costs and expenses less policyholders' benefits...... $ 1,374 $ 1,326 $ 1,315 $ 4,120 $ 3,840 ======== ======== ======== ======== ======== Net interest income and other revenues less policyholders' benefits: Owned basis.................. $ 3,156 $ 3,043 $ 2,916 $ 9,427 $ 8,735 Serviced with limited recourse.................. (23) 52 (232) 59 169 -------- -------- -------- -------- -------- Managed basis................ $ 3,133 $ 3,095 $ 2,684 $ 9,486 $ 8,904 ======== ======== ======== ======== ======== Owned basis efficiency ratio... 43.54% 43.58% 45.10% 43.70% 43.96% Managed basis efficiency ratio........................ 43.86 42.84 48.99 43.43 43.13 60 HSBC FINANCE CORPORATION RECONCILIATIONS TO GAAP FINANCIAL MEASURES SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004 --------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TWO-MONTHS-AND-OVER-CONTRACTUAL DELINQUENCY: Consumer two-months-and-over-contractual delinquency: Owned basis............................................ $ 4,861 $ 4,419 $ 4,702 Serviced with limited recourse......................... 376 484 1,092 -------- -------- -------- Managed basis.......................................... $ 5,237 $ 4,903 $ 5,794 ======== ======== ======== Consumer receivables: Owned basis............................................ $128,524 $118,532 $106,130 Serviced with limited recourse......................... 6,759 8,980 20,175 -------- -------- -------- Managed basis.......................................... $135,283 $127,512 $126,305 ======== ======== ======== Consumer two-months-and-over-contractual delinquency: Owned basis............................................ 3.78% 3.73% 4.43% Managed basis.......................................... 3.87 3.85 4.59 RESERVES AS A PERCENT OF RECEIVABLES: Loss reserves: Owned basis............................................ $ 4,220 $ 3,756 $ 3,953 Serviced with limited recourse......................... 351 525 1,246 -------- -------- -------- Managed basis.......................................... $ 4,571 $ 4,281 $ 5,199 ======== ======== ======== Receivables: Owned basis............................................ $128,722 $118,761 $106,437 Serviced with limited recourse......................... 6,759 8,980 20,175 -------- -------- -------- Managed basis.......................................... $135,481 $127,741 $126,612 ======== ======== ======== Reserves as a percent of receivables: Owned basis............................................ 3.28% 3.16% 3.71% Managed basis.......................................... 3.37 3.35 4.11 RESERVES AS A PERCENT OF NONPERFORMING LOANS: Loss reserves: Owned basis............................................ $ 4,220 $ 3,756 $ 3,953 Serviced with limited recourse......................... 351 525 1,246 -------- -------- -------- Managed basis.......................................... $ 4,571 $ 4,281 $ 5,199 ======== ======== ======== Nonperforming loans: Owned basis............................................ $ 3,836 $ 3,491 $ 3,797 Serviced with limited recourse......................... 309 395 881 -------- -------- -------- Managed basis.......................................... $ 4,145 $ 3,886 $ 4,678 ======== ======== ======== Reserves as a percent of nonperforming loans: Owned basis............................................ 110.0% 107.6% 104.1% Managed basis.......................................... 110.3 110.2 111.1 61 HSBC FINANCE CORPORATION RECONCILIATIONS TO GAAP FINANCIAL MEASURES SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) TANGIBLE COMMON EQUITY: Common shareholder's equity................................. $ 17,137 $ 15,841 Exclude: Unrealized (gains) losses on cash flow hedging instruments............................................ (283) (119) Minimum pension liability................................. 4 4 Unrealized gains on investments and interest-only strip receivables............................................ (24) (53) Intangible assets......................................... (2,394) (2,705) Goodwill.................................................. (6,799) (6,856) -------- -------- Tangible common equity...................................... 7,641 6,112 Purchase accounting adjustments............................. 1,617 2,227 -------- -------- Tangible common equity, excluding purchase accounting adjustments............................................... $ 9,258 $ 8,339 ======== ======== TANGIBLE SHAREHOLDERS' EQUITY: Tangible common equity...................................... $ 7,641 $ 6,112 Preferred stock............................................. 1,675 1,100 Mandatorily redeemable preferred securities of Household Capital Trusts............................................ 681 994 -------- -------- Tangible shareholder's equity............................... 9,997 8,206 Purchase accounting adjustments............................. 1,611 2,208 -------- -------- Tangible shareholders' equity, excluding purchase accounting adjustments............................................... $ 11,608 $ 10,414 ======== ======== TANGIBLE SHAREHOLDERS' EQUITY PLUS OWNED LOSS RESERVES: Tangible shareholders' equity............................... $ 9,997 $ 8,206 Owned loss reserves......................................... 4,220 3,625 -------- -------- Tangible shareholders' equity plus owned loss reserves...... 14,217 11,831 Purchase accounting adjustments............................. 1,611 2,208 -------- -------- Tangible shareholders' equity plus owned loss reserves, excluding purchase accounting adjustments................. $ 15,828 $ 14,039 ======== ======== TANGIBLE MANAGED ASSETS: Owned assets................................................ $146,574 $130,190 Receivables serviced with limited recourse.................. 6,759 14,225 -------- -------- Managed assets.............................................. 153,333 144,415 Exclude: Intangible assets......................................... (2,394) (2,705) Goodwill.................................................. (6,799) (6,856) Derivative financial assets............................... (662) (4,049) -------- -------- Tangible managed assets..................................... 143,478 130,805 Purchase accounting adjustments............................. (91) (202) -------- -------- Tangible managed assets, excluding purchase accounting adjustments............................................... $143,387 $130,603 ======== ======== EQUITY RATIOS: Common and preferred equity to owned assets................. 12.83% 13.01% Tangible common equity to tangible managed assets........... 5.33 4.67 Tangible shareholders' equity to tangible managed assets ("TETMA")................................................. 6.97 6.27 Tangible shareholders' equity plus owned loss reserves to tangible managed assets ("TETMA + Owned Reserves")........ 9.91 9.04 Excluding purchase accounting adjustments: Tangible common equity to tangible managed assets......... 6.46 6.38 TETMA..................................................... 8.10 7.97 TETMA + Owned Reserves.................................... 11.04 10.75 ======== ======== 62 ITEM 4. CONTROLS AND PROCEDURES -------------------------------------------------------------------------------- DISCLOSURE CONTROLS We conducted an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by HSBC Finance Corporation in the reports we file under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported on a timely basis. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report so as to alert them in a timely fashion to material information required to be disclosed in reports we file under the Exchange Act. INTERNAL CONTROLS There have not been any changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS -------------------------------------------------------------------------------- GENERAL We are parties to various legal proceedings resulting from ordinary business activities relating to our current and/or former operations. Certain of these actions are or purport to be class actions seeking damages in very large amounts. These actions assert violations of laws and/or unfair treatment of consumers. Due to the uncertainties in litigation and other factors, we cannot be certain that we will ultimately prevail in each instance. We believe that our defenses to these actions have merit and any adverse decision should not materially affect our consolidated financial condition. CONSUMER LENDING LITIGATION During the past several years, the press has widely reported certain industry related concerns that may impact us. Some of these involve the amount of litigation instituted against finance and insurance companies operating in certain states and the large awards obtained from juries in those states. Like other companies in this industry, some of our subsidiaries are involved in a number of lawsuits pending against them in these states. The cases, in particular, generally allege inadequate disclosure or misrepresentation of financing terms. In some suits, other parties are also named as defendants. Unspecified compensatory and punitive damages are sought. Several of these suits purport to be class actions or have multiple plaintiffs. The judicial climate in these states is such that the outcome of all of these cases is unpredictable. Although our subsidiaries believe they have substantive legal defenses to these claims and are prepared to defend each case vigorously, a number of such cases have been settled or otherwise resolved for amounts that in the aggregate are not material to our operations. Appropriate insurance carriers have been notified of each claim, and a number of reservations of rights letters have been received. Certain of the financing of merchandise claims have been partially covered by insurance. CREDIT CARD LITIGATION On November 15, 2004, a matter entitled American Express Travel Related Services Company, Inc. v. Visa U.S.A. Inc., et al. was filed in the U.S. District Court for the Southern District of New York. This case alleges that HSBC Finance Corporation, Household Bank (SB), N.A. and others violated Sections 1 and 2 of the Sherman Act by conspiring to monopolize and unreasonably restrain trade by allegedly implementing and enforcing an agreement requiring any United States bank that issues Visa or MasterCard general cards to refuse to issue such cards from competitors, such as American Express and Discover. Plaintiff seeks a declaration that defendants in this action (including Visa, MasterCard and other banks belonging to those associations), have violated the antitrust laws, and requests an injunction restraining the defendants, their directors, officers, employees, agents, successors, owners and members from "continuing or maintaining in any 63 manner, directly or indirectly, the rules, policies, and agreements at issue," and seeks "full compensation for damages it has sustained, from each Defendant, jointly, severally," for each of plaintiff's claims, in an amount "to be trebled according to law, plus interest, attorneys' fees and costs of suit". On February 18, 2005, the Defendants filed a motion to dismiss the complaint for failure to state a cause of action. At this time, we are unable to quantify the potential impact from this action, if any. On June 22, 2005, a matter entitled Photos Etc. Corporation, et al. v. VISA U.S.A. Inc., et al. was filed in the U.S. District Court for the District of Connecticut as case number 305CV1007. This purported class action named as defendants VISA, MasterCard and a number of alleged members of those associations, including HSBC Finance Corporation and two other HSBC entities. The case seeks certification of a class of retail merchants that operate commercial businesses throughout the United States and alleges the defendants engage in an anti-competitive conspiracy to fix the level of "interchange fees" charged by the associations. This and other similar suits filed in various federal courts have been consolidated for pre-trial matters in the U.S. District Court for the Eastern District of New York. At this time, we are unable to quantify the potential impact from this action, if any. SECURITIES LITIGATION In August 2002, we restated previously reported consolidated financial statements. The restatement related to certain MasterCard and Visa co-branding and affinity credit card relationships and a third party marketing agreement, which were entered into between 1992 and 1999. All were part of our Credit Card Services segment. In consultation with our prior auditors, Arthur Andersen LLP, we treated payments made in connection with these agreements as prepaid assets and amortized them in accordance with the underlying economics of the agreements. Our current auditor, KPMG LLP, advised us that, in its view, these payments should have either been charged against earnings at the time they were made or amortized over a shorter period of time. The restatement resulted in a $155.8 million, after-tax, retroactive reduction to retained earnings at December 31, 1998. As a result of the restatement, and other corporate events, including, e.g., the 2002 settlement with 50 states and the District of Columbia relating to real estate lending practices, HSBC Finance Corporation, and its directors, certain officers and former auditors, have been involved in various legal proceedings, some of which purport to be class actions. A number of these actions allege violations of federal securities laws, were filed between August and October 2002, and seek to recover damages in respect of allegedly false and misleading statements about our common stock. These legal actions have been consolidated into a single purported class action, Jaffe v. Household International, Inc., et al., No. 02 C 5893 (N.D. Ill., filed August 19, 2002), and a consolidated and amended complaint was filed on March 7, 2003. On December 3, 2004, the court signed the parties' stipulation to certify a class with respect to the claims brought under sec.10 and sec.20 of the Securities Exchange Act of 1934. The parties stipulated that plaintiffs will not seek to certify a class with respect to the claims brought under sec.11 and sec.15 of the Securities Act of 1933 in this action or otherwise. The amended complaint purports to assert claims under the federal securities laws, on behalf of all persons who purchased or otherwise acquired our securities between October 23, 1997 and October 11, 2002, arising out of alleged false and misleading statements in connection with our sales and lending practices, the 2002 state settlement agreement referred to above, the restatement and the HSBC merger. The amended complaint, which also names as defendants Arthur Andersen LLP, Goldman, Sachs & Co., and Merrill Lynch, Pierce, Fenner & Smith, Inc., fails to specify the amount of damages sought. In May 2003, we, and other defendants, filed a motion to dismiss the complaint. On March 19, 2004, the Court granted in part, and denied in part the defendants' motion to dismiss the complaint. The Court dismissed all claims against Merrill Lynch, Pierce, Fenner & Smith, Inc. and Goldman Sachs & Co. The Court also dismissed certain claims alleging strict liability for alleged misrepresentation of material facts based on statute of limitations grounds. The claims that remain against some or all of the defendants essentially allege the defendants knowingly made a false statement of a material fact in conjunction with the purchase or sale of securities, that the plaintiffs justifiably relied on such statement, the false statement(s) caused the plaintiffs' damages, and that some or all of the defendants should be liable for those alleged statements. All factual discovery must be completed by May 12, 2006 and expert witness discovery must be completed by July 24, 2006. 64 On June 27, 2003, a case entitled, West Virginia Laborers Pension Trust Fund v. Caspersen, et al., was filed in the Chancery Division of the Circuit Court of Cook County, Illinois as case number 03CH10808. This purported class action named as defendants the directors of Beneficial Corporation at the time of the 1998 merger of Beneficial Corporation into a subsidiary of HSBC Finance Corporation, and claimed that those directors' due diligence of HSBC Finance Corporation at the time they considered the merger was inadequate. The Complaint claimed that as a result of some of the securities law and other violations alleged in the Jaffe case, HSBC Finance Corporation common shares lost value. Pursuant to the merger agreement with Beneficial Corporation, we assumed the defense of this litigation. In September of 2003, the defendants filed a motion to dismiss which was granted on June 15, 2004 based upon a lack of personal jurisdiction over the defendants. The plaintiffs appealed that decision. On May 11, 2005, the appellate court affirmed the trial court's ruling. The time for any further appeals has expired. In addition, on June 30, 2004, a case entitled, Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Caspersen, et al., was filed in the Superior Court of New Jersey, Law Division, Somerset County as Case Number L9479-04. Other than the change in plaintiff, the suit is substantially identical to the foregoing West Virginia Laborer's Pension Trust Fund case, and is brought by the same principal law firm that brought that suit. The defendants' motion to dismiss was granted on February 10, 2005 and the plaintiffs have appealed that ruling. With respect to these securities litigation matters, we believe that we have not, and our officers and directors have not, committed any wrongdoing and in each instance there will be no finding of improper activities that may result in a material liability to us or any of our officers or directors. ITEM 6. EXHIBITS -------------------------------------------------------------------------------- Exhibits included in this Report: 3 Amended and Restated Certificate of Incorporation of HSBC Finance Corporation and amendments thereto, including Amended Certificate of Designations of Series A Cumulative Preferred Stock of HSBC Finance Corporation and Certificate of Designations of Series B Cumulative Preferred Stock (previously filed as Exhibit 3.1 to HSBC Finance Corporation's Current Report on Form 8-K, dated June 16, 2005, filed with the Securities and Exchange Commission on June 22, 2005). 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Debt and Preferred Stock Securities Ratings. 65 SIGNATURE -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HSBC FINANCE CORPORATION (Registrant) /s/ Beverley A. Sibblies -------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer Date: November 14, 2005 66 EXHIBIT INDEX -------------------------------------------------------------------------------- 3 Amended and Restated Certificate of Incorporation of HSBC Finance Corporation and amendments thereto, including Amended Certificate of Designations of Series A Cumulative Preferred Stock of HSBC Finance Corporation and Certificate of Designations of Series B Cumulative Preferred Stock (previously filed as Exhibit 3.1 to HSBC Finance Corporation's Current Report on Form 8-K, dated June 16, 2005, filed with the Securities and Exchange Commission on June 22, 2005). 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Debt and Preferred Stock Securities Ratings. EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS NINE MONTHS ENDED SEPTEMBER 30, ----------------- 2005 2004 ------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income.................................................. $1,379 $1,228 Income tax expense.......................................... 695 619 ------ ------ Income before income tax expense............................ 2,074 1,847 ------ ------ Fixed charges: Interest expense.......................................... 3,405 2,225 Interest portion of rentals(1)............................ 45 39 ------ ------ Total fixed charges......................................... 3,450 2,264 ------ ------ Total earnings as defined................................... $5,524 $4,111 ====== ====== Ratio of earnings to fixed charges.......................... 1.60 1.82 Preferred stock dividends(2)................................ 93 81 Ratio of earnings to combined fixed charges and preferred stock dividends........................................... 1.56 1.75 --------------- (1) Represents one-third of rentals, which approximates the portion representing interest. (2) Preferred stock dividends are grossed up to their pretax equivalents. EXHIBIT 31 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Siddharth N. Mehta, Chairman and Chief Executive Officer of HSBC Finance Corporation, certify that: 1. I have reviewed this report on Form 10-Q of HSBC Finance Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ SIDDHARTH N. MEHTA -------------------------------------- Siddharth N. Mehta Chairman and Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Beverley A. Sibblies, Senior Vice President and Chief Financial Officer of HSBC Finance Corporation, certify that: 1. I have reviewed this report on Form 10-Q of HSBC Finance Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ BEVERLEY A. SIBBLIES -------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer EXHIBIT 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Siddharth N. Mehta, Chairman and Chief Executive Officer of HSBC Finance Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ SIDDHARTH N. MEHTA -------------------------------------- Siddharth N. Mehta Chairman and Chief Executive Officer November 14, 2005 This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by HSBC Finance Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Signed originals of these written statements required by Section 906 of the Sarbanes-Oxley Act of 2002 have been provided to HSBC Finance Corporation and will be retained by HSBC Finance Corporation and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Beverley A. Sibblies, Senior Vice President and Chief Financial Officer of HSBC Finance Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ BEVERLEY A. SIBBLIES -------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer November 14, 2005 This certification accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by HSBC Finance Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Signed originals of these written statements required by Section 906 of the Sarbanes-Oxley Act of 2002 have been provided to HSBC Finance Corporation and will be retained by HSBC Finance Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 99.1 DEBT AND PREFERRED STOCK SECURITIES RATINGS STANDARD & MOODY'S POOR'S INVESTORS DOMINION BOARD CORPORATION SERVICE FITCH, INC. RATING SERVICE ------------------------------------------------------------------------------------------------------- AT SEPTEMBER 30, 2005 HSBC Finance Corporation Senior debt.................................. A A1 AA- AA (low) Senior subordinated debt..................... A- A2 A+ * Commercial paper............................. A-1 P-1 F-1+ R-1 (middle) Series B preferred stock..................... BBB+ A3 A+ * HFC Bank Limited Senior debt.................................. A A1 AA- * Commercial paper............................. A-1 P-1 F-1+ * HSBC Bank Nevada, National Association Senior debt.................................. A A1 AA- * HSBC Financial Corporation Limited Senior notes and term loans.................. * * * AA (low) Commercial paper............................. * * * R-1 (middle) --------------- * Not rated by this agency. This information is provided by RNS The company news service from the London Stock Exchange

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