Interim Report - 18 of 21

RNS Number : 9210Q

HSBC Holdings PLC

13 August 2010

 



15   Notes on the statement of cash flows

	Half-year to
	30 June                2010		30 June                2009		31 December                2009
	US$m		US$m		US$m
Non-cash items included in profit before tax
Depreciation, amortisation and impairment .........................................	1,442		1,153		1,385
Gains arising from dilution of interests in associates .............................	(188)		-		-
Revaluations on investment property ..................................................	8		43		(19)
Share-based payment expense ..............................................................	371		355		328
Loan impairment losses gross of recoveries and other credit risk provisions ........................................................................................	7,976		14,308		13,070
Provisions ...........................................................................................	158		361		308
Impairment of financial investments ...................................................	40		281		77
Charge/(credit) for defined benefit plans ..............................................	246		(150)		342
Accretion of discounts and amortisation of premiums ..........................	(500)		(96)		(362)
	9,553		16,255		15,129
Change in operating assets
Change in prepayments and accrued income ........................................	839		1,311		1,887
Change in net trading securities and net derivatives ..............................	20,176		1,922		13,466
Change in loans and advances to banks ................................................	(8,515)		(28,458)		(1,896)
Change in loans and advances to customers ..........................................	(3,812)		(9,279)		15,428
Change in financial assets designated at fair value ................................	5,460		(4,946)		(3,965)
Change in other assets .........................................................................	(18)		2,171		(8,444)
	14,130		(37,279)		16,476
Change in operating liabilities
Change in accruals and deferred income ...............................................	(1,016)		(2,264)		6
Change in deposits by banks .................................................................	2,444		(937)		(4,279)
Change in customer accounts ...............................................................	(11,714)		46,291		(4,308)
Change in debt securities in issue ..........................................................	6,583		(23,494)		(9,303)
Change in financial liabilities designated at fair value ...........................	342		262		7,168
Change in other liabilities ....................................................................	1,972		2,388		3,115
	(1,389)		22,246		(7,601)
Cash and cash equivalents
Cash and balances at central banks .......................................................	71,576		56,368		60,655
Items in the course of collection from other banks...............................	11,195		16,613		6,395
Loans and advances to banks of one month or less ..............................	171,022		157,856		160,673
Treasury bills, other bills and certificates of deposit less than three months ............................................................................................	24,093		36,866		28,777
Less: items in the course of transmission to other banks ......................	(11,976)		(16,007)		(5,734)
	265,910		251,696		250,766
Interest and dividends
Interest paid ........................................................................................	(9,932)		(16,696)		(12,334)
Interest received ..................................................................................	31,397		36,975		37,087
Dividends received ...............................................................................	380		835		188

16   Contingent liabilities, contractual commitments and guarantees

	At           30 June                2010		At             30 June                2009		At    31 December                2009
	US$m		US$m		US$m
Contingent liabilities and guarantees
Guarantees and irrevocable letters of credit pledged as collateral security .......................................................................................	66,140		69,287		73,385
Other contingent liabilities .............................................................	173		153		174
	66,313		69,440		73,559
Commitments
Documentary credits and short-term trade-related transactions .......	10,618		8,947		9,066
Forward asset purchases and forward forward deposits placed ...........	29		1,966		192
Undrawn formal standby facilities, credit lines and other commitments to lend ..................................................................	538,063		558,099		548,792
	548,710		569,012		558,050

The above table discloses the nominal principal amounts of contingent liabilities, commitments and guarantees; mainly credit-related instruments including both financial and non-financial guarantees and commitments to extend credit. Contingent liabilities arising from litigation against the Group are disclosed in Note 19. Nominal principal amounts represent the amounts at risk should contracts be fully drawn upon and clients default. The amount of the loan commitments shown above reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. As a significant proportion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not representative of future liquidity requirements.

Financial Services Compensation Scheme

The UK Financial Services Compensation Scheme ('FSCS') has provided compensation to consumers following the collapse of a number of deposit-takers such as Bradford & Bingley plc, Heritable Bank plc and Kaupthing Singer & Friedlander Limited. The financial impact on HSBC Bank plc ('the bank'), the basis for estimating costs, and the uncertainties involved in estimating the ultimate FSCS levy to the industry, remain consistent with those disclosed on page 464 of the Annual Report and Accounts 2009.

At 30 June 2010, the bank held an accrual of US$207 million (30 June 2009: US$200 million; 31 December 2009: US$182 million) in respect of its share of forecast management expenses based on its market share of deposits protected under the FSCS.

Sales of payment protection insurance

On 1 July 2008 the Financial Ombudsman Service ('FOS') wrote to the FSA to draw to its attention under the 'Wider Implications' process the issues arising from past payment protection insurance ('PPI') sales. The FOS considered that there was evidence of widespread and regular failure on the part of many firms to comply with the FSA's rules.

On 29 September 2009, the FSA published a Consultation Paper ('CP (09/23)') setting out proposals, and draft Rules and Guidance, on how firms should assess PPI complaints and, where they up-held such complaints, calculate redress. At the same time, it also published an open letter, setting out what it considered to be common failings by firms in sales of PPI. When announcing the publication of CP (09/23), the FSA also reported that it had obtained agreement from firms representing 40 per cent of the market for face to face single premium PPI sales to review all such sales since July 2007. No HSBC subsidiary or associate was included in that group of firms.

The Consultation Paper anticipated new FSA rules and guidance covering how firms should deal with PPI complaints with effect from the beginning of 2010. However, the FSA subsequently issued a further Consultation Paper ('CP(10/6)') setting out revised proposals in relation to which there was another consultation period to 22 April 2010.

The FSA is currently considering responses to this second consultation. It is not yet known when the FSA will publish a policy statement nor what its form and content will be. In the circumstances, it is not possible for HSBC to determine what impact, if any, the FSA's proposals will eventually have.

17   Segmental analysis

	Europe		Hong         Kong		Rest of         Asia-      Pacific		Middle           East		North   America		Latin   America		Intra-      HSBC        items		Total
	US$m		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Net operating income
Half-year to:
30 June 2010 ........	11,220		4,833		4,351		750		4,446		3,895		(1,467)		28,028
30 June 2009 ..........	9,541		4,441		3,478		978		652		3,067		(1,347)		20,810
31 December 2009 ..	8,435		4,526		3,629		282		(11)		3,431		(1,409)		18,883

Profit/(loss) before tax

Half-year to:
30 June 2010 ........	3,521		2,877		2,985		346		492		883		-		11,104
30 June 2009 ..........	2,976		2,501		2,022		643		(3,703)		580		-		5,019
31 December 2009 ..	1,033		2,528		2,178		(188)		(4,035)		544		-		2,060

Total assets

At 30 June 2010 .......	1,280,698		410,991		244,624		49,637		495,408		121,885		(184,789)		2,418,454
At 30 June 2009 .........	1,324,687		413,107		217,794		48,601		494,778		107,515		(184,639)		2,421,843
At 31 December 2009	1,268,600		399,243		222,139		48,107		475,014		115,967		(164,618)		2,364,452

18   Goodwill impairment

It is HSBC's policy to test goodwill allocated to each cash generating unit ('CGU') for impairment as at 1 July each year. Goodwill is also tested for impairment whenever there is an indication that goodwill may be impaired.

The allocation of goodwill to CGUs is described in Note 22 on page 434 of the Annual Report and Accounts 2009.

There was no indication of impairment in the period to 30 June 2010 and therefore goodwill has not been retested.

19   Litigation

Bernard L. Madoff Investment Securities LLC

As referred to in the Annual Report and Accounts 2009, on 29 June 2009 Bernard L. Madoff ('Madoff') was sentenced to 150 years in prison following his guilty plea to fraud and other charges. The relevant US authorities are continuing their investigations into the fraud, and have brought charges against others, including several employees of Bernard L. Madoff Investment Securities LLC ('Madoff Securities') as well as its external auditor. Some details of the fraud have come to light as a result of these and other investigations and proceedings; however, significant uncertainty remains as to the facts of the fraud and the total amount of assets that will ultimately be available for distribution by the Madoff Securities trustee.

Various non-US HSBC companies provide custodial, administration and similar services to a number of funds incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November 2008, the aggregate net asset value of these funds (which would include principal amounts invested and unrealised gains) was US$8.4 billion. Proceedings concerning Madoff and Madoff Securities have been issued by different plaintiffs (including funds, fund investors, and the Madoff Securities trustee) in various jurisdictions against numerous defendants and HSBC expects further proceedings may be brought. Various HSBC companies have been named as defendants in suits in the US, Ireland, Luxembourg, and other jurisdictions. All of the cases where HSBC companies are named as a defendant are at an early stage. HSBC considers that it has good defences to these claims and will continue to defend them vigorously. HSBC is unable reliably to estimate the liability, if any, that might arise as a result of such claims.

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

Other litigation

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

20   Events after the balance sheet date

On 2 July 2010, the Group entered into an agreement to acquire The Royal Bank of Scotland Group plc's retail and commercial banking businesses in India. The total consideration will comprise a premium of up to US$95 million over the net asset value of the businesses being acquired. The purchase price will be reduced in respect of 90 per cent of any credit losses incurred on the unsecured lending portfolio in the two years subsequent to completion. The initial consideration paid will be reduced by an estimate of these losses with an adjustment to reflect the actual losses at the end of the 2 year protection period. The acquisition is subject to regulatory approvals and is expected to be completed in the first half of 2011.

On 28 July 2010 HSBC agreed in principle the sale of the remaining US consumer finance run-off portfolio of vehicle finance loans. The carrying amount of the loans at 30 June 2010 was US$4.3 billion. The transaction is expected to be completed in the second half of 2010.

A second interim dividend for the financial year ending 31 December 2010 was declared by the Directors after 30 June 2010, as described in Note 3.

21   Interim Report 2010 and statutory accounts

The information in this Interim Report 2010 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The Interim Report 2010 was approved by the Board of Directors on 2 August 2010. The statutory accounts for the year ended 31 December 2009 have been delivered to the Registrar of Companies in England and Wales in accordance with section 447 of the Companies Act 2006. The auditor has reported on those accounts. Its report was unqualified; did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Responsibility Statement

The Directors, the names of whom are set out on pages 198 to 203 of this Interim Report, confirm to the best of their knowledge:

·     the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU;

·     the Interim Management Report includes a fair review of the information required by:

(a)   DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year ending 31 December 2010 and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

(b)   DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related parties transactions that have taken place in the first six months of the financial year ending 31 December 2010 and that have materially affected the financial position or performance of HSBC during that period; and any changes in the related parties transactions described in the Annual Report and Accounts 2009 that could do so.

On behalf of the Board, S K Green Group Chairman

2 August 2010

Introduction

We have been engaged by HSBC Holdings plc ('the Company') to review the financial information for the six months ended 30 June 2010 set out on pages 204 to 232 which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of cash flows, consolidated statement of changes in equity and related notes. We have read the other information contained in the Interim Report 2010 and considered whether it contains any apparent misstatements or material inconsistencies with the information in the financial information.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure Rules and Transparency Rules ('DTR') of the UK's Financial Services Authority ('the UK FSA'). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The Interim Report 2010 is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Report 2010 in accordance with the DTR of the UK FSA. As disclosed in Note 1, the annual financial statements of the Company are prepared in accordance with IFRSs as adopted by the EU. The financial information included in the Interim Report 2010 has been prepared in accordance with IAS 34 Interim Financial Reporting adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the financial information in the Interim Report 2010 based on our review.

Scope of review

We conducted our review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain an assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the financial information in the Interim Report 2010 for the six months ended 30 June 2010 is not prepared in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

G Bainbridge

For and on behalf of KPMG Audit Plc

Chartered Accountants

London, England

2 August 2010

 

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