HSBC FY05 REL2; Pt3/7

HSBC Holdings PLC 06 March 2006 20. Rescheduled advances to customers Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 31Dec05 Rescheduled advances to customers 1,941 623 - 2,564 Rescheduled advances to customers as a percentage of gross advances to customers 0.3% 0.2% - 0.3% At 31Dec04 (restated) Rescheduled advances to customers 4,009 465 5 4,479 Rescheduled advances to customers as a percentage of gross advances to customers 0.7% 0.1% 35.7% 0.5% Rescheduled advances are those advances which have been restructured or renegotiated because of a deterioration in the financial position of the borrower, or because of the inability of the borrower to meet the original repayment schedule. Rescheduled advances to customers are stated net of any advances which have subsequently become overdue for over three months and which are included in overdue advances to customers (Note 19). 21. Analysis of advances to customers based on categories used by the HSBC Group The following analysis of advances to customers is based on categories used by the HSBC Group, including The Hongkong and Shanghai Banking Corporation Limited and its subsidiary companies, to manage associated risks. Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Total At 31Dec05 Residential mortgages 182,257 117,211 4 299,472 Hong Kong SAR Government's Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme mortgages 36,291 - - 36,291 Other personal 57,362 47,855 1 105,218 Total personal 275,910 165,066 5 440,981 Commercial, industrial and international trade 129,774 110,668 - 240,442 Commercial real estate 97,364 32,615 - 129,979 Other property-related lending 47,661 17,340 - 65,001 Government 2,347 5,891 - 8,238 Other commercial 53,681 37,851 - 91,532 Total corporate and commercial 330,827 204,365 - 535,192 Non-bank financial institutions 15,246 11,987 - 27,233 Settlement accounts 2,173 323 - 2,496 Total financial 17,419 12,310 - 29,729 Gross advances to customers 624,156 381,741 5 1,005,902 Impairment allowances (3,092) (3,484) - (6,576) Net advances to customers 621,064 378,257 5 999,326 Rest of Americas/ Total Figures in HK$m Hong Kong Asia-Pacific Europe restated At 31Dec04 (restated) Residential mortgages 184,631 98,516 2 283,149 Hong Kong SAR Government's Home Ownership Scheme, Private Sector Participation Scheme and Tenants Purchase Scheme mortgages 41,845 - - 41,845 Other personal 50,741 37,873 7 88,621 Total personal 277,217 136,389 9 413,615 Commercial, industrial and international trade 109,655 105,133 - 214,788 Commercial real estate 80,726 27,956 5 108,687 Other property-related lending 46,319 14,070 - 60,389 Government 4,781 5,150 - 9,931 Other commercial 56,607 35,006 - 91,613 Total corporate and commercial 298,088 187,315 5 485,408 Non-bank financial institutions 15,008 9,148 - 24,156 Settlement accounts 3,470 472 - 3,942 Total financial 18,478 9,620 - 28,098 Gross advances to customers 593,783 333,324 14 927,121 Impairment allowances (4,032) (3,892) (5) (7,929) Net advances to customers 589,751 329,432 9 919,192 Advances to customers increased by HK$80 billion, or 8.7 per cent, since the end of 2004. Advances in Hong Kong grew by HK$31 billion, or 5.3 per cent, since the end of 2004, on account of the buoyant economy. Mortgage lending fell, attributable to persistent price competition in a flat market, and lending under the GHOS continued to decline as the scheme remained suspended during 2005. Other personal lending rose, mainly on credit cards, reflecting the increase in cardholder spending. Corporate and commercial lending rose by 11.0 per cent, with particularly strong growth in the manufacturing sector and property investment. In the rest of Asia-Pacific, advances rose by HK$49 billion, or 14.8 per cent, since the end of 2004, reflecting successful business expansion across the region. Mortgage advances increased by 19.0 per cent, principally in Korea, Singapore, Taiwan and India. Credit card receivables grew by 31.7 per cent, largely in Taiwan, India, the Philippines and India. Lending to corporate and commercial customers rose by 9.1 per cent, most significantly in mainland China, Korea and India. 22. Analysis of advances to customers by geographical area according to the location of counterparties, after risk transfer Rest of Americas/ Figures in HK$m Hong Kong Asia-Pacific Europe Others Total At 31Dec05 Gross advances to customers 570,329 354,626 73,959 6,988 1,005,902 Overdue advances to customers 2,337 2,222 224 8 4,791 At 31Dec04 (restated) Gross advances to customers 543,997 319,512 59,461 4,151 927,121 Overdue advances to customers 3,212 2,343 74 - 5,629 23. Analysis of advances to customers by industry sector based on categories and definitions used by the Hong Kong Monetary Authority ('HKMA') The following analysis of advances to customers is based on the categories contained in the 'Quarterly Analysis of Loans and Advances and Provisions' return required to be submitted to the HKMA by branches of the bank and by banking subsidiary companies in Hong Kong. At31Dec05 At 31Dec04 Figures in HK$m restated Gross advances to customers for use in Hong Kong Industrial, commercial and financial Property development 41,141 36,230 Property investment 104,214 93,696 Financial concerns 12,667 14,784 Stockbrokers 1,094 1,185 Wholesale and retail trade 34,256 32,099 Manufacturing 17,847 14,336 Transport and transport equipment 31,202 35,418 Others 44,697 41,134 287,118 268,882 Individuals Advances for the purchase of flats under the Hong Kong SAR Government's Home Ownership Scheme, Private Sector Participation and Tenants Purchase Scheme 36,291 41,845 Advances for the purchase of other residential properties 165,148 169,482 Credit card advances 29,882 23,162 Others 23,826 20,257 255,147 254,746 At 31Dec05 At 31Dec04 Figures in HK$m restated Gross advances to customers for use in Hong Kong 542,265 523,628 Trade finance 49,902 49,408 Gross advances to customers for use outside Hong Kong made by branches of the bank and subsidiary companies in Hong Kong 31,989 20,747 Gross advances to customers made by branches of the bank and subsidiary companies in Hong Kong 624,156 593,783 Gross advances to customers made by branches of the bank and subsidiary companies outside Hong Kong - Rest of Asia-Pacific 381,741 333,324 - Americas/Europe 5 14 Gross advances to customers 1,005,902 927,121 An explanation of the significant differences between the categories of advances and their definitions used by the HSBC Group and those used by the HKMA is given on page 18 of the Annual Report and Accounts for 2004. 24. Cross-border exposure The country risk exposures shown below are prepared in accordance with the HKMA Return of External Positions Part II: Cross-Border Claims (MA(BS)9) guidelines. Cross-border claims are on-balance sheet exposures to counterparties based on the location of the counterparties after taking into account the transfer of risk. The tables show claims on individual countries and territories or areas, after risk transfer, amounting to 10 per cent or more of the aggregate cross-border claims. Cross-border risk is controlled centrally through a well-developed system of country limits and is frequently reviewed to avoid concentration of transfer, economic or political risk. Banks and other Public financial sector Figures in HK$m institutions entities Other Total At 31Dec05 Americas United States 38,673 72,477 34,515 145,665 Other 39,328 9,909 50,744 99,981 78,001 82,386 85,259 245,646 Europe United Kingdom 111,377 14 22,232 133,623 Other 338,060 5,842 39,509 383,411 449,437 5,856 61,741 517,034 Asia-Pacific excluding Hong Kong 154,135 33,897 108,476 296,508 At 31Dec04 Americas United States 45,518 80,047 32,010 157,575 Other 43,044 16,143 47,297 106,484 88,562 96,190 79,307 264,059 Europe United Kingdom 86,613 27 23,294 109,934 Other 332,581 4,219 22,168 358,968 419,194 4,246 45,462 468,902 Asia-Pacific excluding Hong Kong 151,183 18,454 77,266 246,903 25. Customer accounts At 31Dec05 At 31Dec04 Figures in HK$m restated Current accounts and demand deposits 925,008 1,069,178 Savings accounts 664,478 516,237 Other deposit accounts 145,624 142,696 1,735,110 1,728,111 Customer accounts increased by HK$7 billion compared with the end of 2004. Certain structured deposits that were previously recorded in 'Other deposit accounts' have, in accordance with revised accounting standards, been reclassified in 2005 to 'Trading liabilities'. Excluding the effect of this reclassification, customer accounts rose by HK$84 billion, or 4.9 per cent. In Hong Kong, customer accounts, including accounts reclassified as trading, increased by HK$20.0 billion, or 1.5 per cent. Current accounts and demand deposits fell by HK$161 billion reflecting the shift into savings and time deposits as interest rates rose during 2005, coupled with a net outflow of deposits from personal customers attributable to intense market competition in the higher interest rate environment. Customer account balances, including trading accounts, in Commercial Banking and Corporate, Investment Banking and Markets increased by HK$43 billion, or 10.2 per cent, reflecting the success of the group's cash management capabilities in attracting new deposits from small and larger businesses alike. In the rest of Asia-Pacific, customer accounts, including trading accounts, rose by HK$65 billion, or 15.7 per cent. Deposits from personal customers increased by 8.5 per cent, notably in mainland China, Singapore and Indonesia. Deposits in Commercial Banking and Corporate, Investment Banking and Markets grew by 19.6 per cent, with increases in mainland China, India, Korea, Singapore, Brunei and Taiwan, attributable to business expansion, particularly in the payments and cash management business, and higher balances from securities custody and clearing customers. The group's advances-to-deposits ratio increased to 57.6 per cent at 31 December 2005 from 53.2 per cent at 31 December 2004. 26. Trading liabilities At 31Dec05 At 31Dec04 Figures in HK$m restated Certificates of deposit in issue 83,937 - Other debt securities in issue 20,361 - Short positions in securities 55,025 37,281 Deposits by banks 13,488 - Customer accounts 77,387 - 250,198 37,281 Trading liabilities include customer deposits, certificates of deposit and other debt securities in issue, which may contain embedded options or other derivatives, the market risk of which is managed in the trading book. In prior years, these liabilities were not shown separately. The reclassification in 2005 was made on adoption of HKAS 39. 27. Financial liabilities designated at fair value At 31Dec05 At 31Dec04 Figures in HK$m restated Deposits by banks 360 - Customer accounts 1,600 - Subordinated liabilities 967 - 2,927 - Financial liabilities designated at fair value are liabilities which have been designated as such so that movements in their fair value can be taken to the income statement rather than reserves (see Accounting policies Note (f)). This classification in 2005 was made on adoption of HKAS 39. There was no such category in 2004. 28. Debt securities in issue At 31Dec05 At 31Dec04 Figures in HK$m restated Certificates of deposit 49,068 110,922 Other debt securities 12,400 44,240 61,468 155,162 The fall in debt securities in issue compared with the end of 2004 reflects the reclassification of certain securities as 'Trading liabilities' and 'Financial assets designated at fair value', as detailed in Notes 26 and 27. The reclassification was made on adoption of HKAS 39 in 2005. 29. Reserves At 31Dec05 At 31Dec04 Figures in HK$m restated Other reserves - Property revaluation reserve 4,082 3,065 - Available-for-sale investment reserve 2,899 - - Long-term equity investment revaluation reserve - 1,799 - Cash flow hedge reserve (1,767) - - Foreign exchange reserve 53 843 - Other 770 322 6,037 6,029 Retained profits 64,303 50,484 Total reserves 70,340 56,513 30. Derivatives Derivatives are financial instruments that derive their value from the price of an underlying item such as equities, bonds, interest rates, foreign exchange rates, credit spreads, commodity prices and equity or other indices. Derivatives enable users to increase, reduce or alter exposure to credit or market risks. The group makes markets in derivatives for its customers and uses derivatives to manage its exposure to credit and market risks. Derivatives are carried at fair value and are shown in the balance sheet as separate totals of assets and liabilities. Asset and liability values represent the cost to the group of replacing all transactions, with positive or negative fair value respectively, assuming that all of the group's relevant counterparties default at the same time, and that the transactions can be replaced instantaneously. Derivative assets and liabilities on different transactions are only netted if the transactions are with the same counterparty, a legal right of set-off exists and the cash flows are intended to be settled on a net basis. Changes in the values of derivatives are recognised in 'Net trading income' or 'Net income from financial instruments designated at fair value' unless they qualify as hedges for accounting purposes. 2005 2004 Figures in HK$m Assets Liabilities Assets Liabilities Fair values of derivative open positions held for trading purposes Exchange rate 31,074 29,254 54,247 54,302 Interest rate 36,004 35,739 38,430 36,185 Equity 1,388 2,570 1,475 1,518 Credit 970 2,802 240 351 Commodity and other 288 568 6 6 69,724 70,933 94,398 92,362 Fair values of outstanding derivatives designated as fair value hedges Interest rate 658 437 - - Fair values of outstanding derivatives designated as cash flow hedges Interest rate 1,657 639 - - Total 72,039 72,009 94,398 92,362 The tables below give the nominal contract amounts, credit equivalent amounts and risk-weighted amounts of off-balance sheet transactions. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted amounts. These are assessed in accordance with the Third Schedule of the Hong Kong Banking Ordinance on capital adequacy and depend on the status of the counterparty and the maturity characteristics. The risk weights used range from zero per cent to 50 per cent for exchange rate and interest rate contracts, and from zero per cent to 100 per cent for other derivative contracts. The group has executed close-out netting agreements with certain counterparties, which allow for positive and negative mark-to-market values on different transactions to be offset and settled by a single payment in the event of default by either party. These have been taken into account in calculating total risk assets. Derivatives arise from futures, forward, swap and option transactions undertaken by the group in the foreign exchange, interest rate, equity, credit and commodity markets. The contract amounts of these instruments indicate the volume of transactions outstanding at the balance sheet date; they do not represent amounts at risk. 2005 2004 Credit Risk- Credit Risk- Contract equivalent weighted Contract equivalent weighted Figures in HK$m amount amount amount amount amount amount Exchange rate contracts: - Spot and forward foreign exchange 2,536,795 36,655 9,753 2,411,793 46,694 11,759 - Swaps and other exchange rate contracts 884,046 41,124 12,481 696,883 39,635 11,180 3,420,841 77,779 22,234 3,108,676 86,329 22,939 Interest rate contracts: - Interest rate swaps 4,775,236 55,580 14,442 3,754,053 57,131 14,679 - Other interest rate contracts 815,110 4,159 1,340 684,692 3,117 875 5,590,346 59,739 15,782 4,438,745 60,248 15,554 Other derivative contracts 289,019 15,885 5,649 71,395 4,030 1,222 Impact of counterparty netting agreements on derivatives exposure - (55,354) (11,915) - (59,487) (12,535) 31. Contingent liabilities and commitments Credit Risk- Contract equivalent weighted Figures in HK$m amount amount amount At 31Dec05 Contingent liabilities - Acceptances and endorsements - - - - Guarantees 83,114 60,166 48,893 - Other 37 37 37 83,151 60,203 48,930 Commitments - Documentary credits and short-term trade-related transactions 55,402 20,650 10,905 - Forward asset purchases and forward forward deposits placed 1,849 1,849 775 - Undrawn note issuing and revolving underwriting facilities 3,249 1,625 975 - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 97,207 48,604 41,115 - under one year 752,797 - - 910,504 72,728 53,770 At 31Dec04 Contingent liabilities - Acceptances and endorsements 22,714 4,559 4,423 - Guarantees 87,243 65,884 48,837 - Other 35 35 33 109,992 70,478 53,293 Commitments - Documentary credits and short-term trade-related transactions 48,493 13,770 9,591 - Forward asset purchases and forward forward deposits placed 10,166 10,166 3,716 - Undrawn note issuing and revolving underwriting facilities 4,116 2,058 1,680 - Undrawn formal standby facilities, credit lines and other commitments: - one year and over 82,142 41,071 38,311 - under one year 657,682 - - 802,599 67,065 53,298 The tables above give the nominal contract amounts, credit equivalent amounts and risk-weighted amounts of contingent liabilities and commitments. The credit equivalent amounts are calculated for the purposes of deriving the risk-weighted amounts. These are assessed in accordance with the Third Schedule of the Hong Kong Banking Ordinance on capital adequacy and depend on the status of the counterparty and the maturity characteristics. The risk-weights used range from 0 per cent to 100 per cent for contingent liabilities and commitments. Contingent liabilities and commitments are credit-related instruments which include letters of credit, guarantees and commitments to extend credit. The contract amounts represent the amounts at risk should the contract be fully drawn upon and the client default. Since a significant portion of guarantees and commitments is expected to expire without being drawn upon, the total of the contract amounts is not representative of future liquidity requirements. In 2005, assets and liabilities relating to acceptances and endorsements were recognised on the balance sheet, and have been included in 'Other assets' and 'Other liabilities'. This reclassification was made on adoption of the new accounting standards. 32. Foreign exchange exposure The group had the following structural foreign currency exposures which exceeded 10 per cent of the net structural foreign currency exposure in all currencies: Figures in HK$m Net structural position At 31Dec05 Chinese renminbi 32,510 Indian rupees 7,979 United States dollars 11,780 At 31Dec04 (restated) Australian dollars 4,911 Chinese renminbi 17,398 Indian rupees 5,808 United States dollars 7,476 The group had the following non-structural foreign currency positions which exceeded 10 per cent of the group's net foreign currency non-structural positions in all currencies: United States Singapore Brunei Figures in HK$m dollars dollars dollars At 31Dec05 Spot assets 1,229,340 107,578 5,523 Spot liabilities (1,188,737) (90,549) (18,062) Forward purchases 1,507,086 157,007 43 Forward sales (1,558,902) (161,647) - Net options position 3,361 - - (7,852) 12,389 (12,496) At 31Dec04 (restated) Spot assets 1,060,593 83,986 5,129 Spot liabilities (1,042,370) (74,193) (15,134) Forward purchases 1,471,800 104,625 - Forward sales (1,490,489) (104,339) - Net options position (707) - - (1,173) 10,079 (10,005) This information is provided by RNS The company news service from the London Stock Exchange

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