Interim Report - 23 of 25

RNS Number : 6334J

HSBC Holdings PLC

10 August 2012

 



	Assets pledged at
	30 June		30 June		31 December
	2012		2011		2011
	US$m		US$m		US$m
Europe .........................................................................................................	251,759		303,248		245,171
North America .............................................................................................	51,920		52,324		58,086
	303,679		355,572		303,257

These transactions are conducted under terms that are usual and customary to collateralised transactions, including, where relevant, standard securities lending and repurchase agreements.

Collateral accepted as security for assets

The fair value of assets accepted as collateral that HSBC is permitted to sell or repledge in the absence of default is US$327,018m (30 June 2011: US$418,064m; 31 December 2011: US$302,285m). The fair value of any such collateral that has been sold or repledged was US$196,259m (30 June 2011: US$258,913m; 31 December 2011: US$188,682m). HSBC is obliged to return equivalent securities.

These transactions are conducted under terms that are usual and customary to standard securities borrowing and reverse repurchase agreements.

20   Notes on the statement of cash flows

	Half-year to
	30 June                2012		30 June                2011		31 December                2011
	US$m		US$m		US$m
Other non-cash items included in profit before tax
Depreciation, amortisation and impairment .................................................	1,221		1,631		1,504
Gains arising from dilution of interests in associates .....................................	-		(181)		(27)
Revaluations on investment property ...........................................................	(43)		(38)		(80)
Share-based payment expense .......................................................................	541		588		574
Loan impairment losses gross of recoveries and other credit risk provisions .	5,124		6,011		7,542
Provisions ....................................................................................................	2,703		937		1,262
Impairment of financial investments ............................................................	353		339		469
Charge/(credit) for defined benefit plans .......................................................	233		(321)		181
Accretion of discounts and amortisation of premiums ..................................	288		(141)		(372)
	10,420		8,825		11,053
Change in operating assets
Change in prepayments and accrued income .................................................	323		(590)		2,497
Change in net trading securities and net derivatives ......................................	14,436		7,079		19,979
Change in loans and advances to banks .........................................................	(21,188)		(6,738)		9,356
Change in loans and advances to customers ..................................................	(42,516)		(85,132)		54,279
Change in financial assets designated at fair value .........................................	(147)		(2,480)		1,897
Change in other assets ..................................................................................	1,434		(4,699)		(2,860)
	(47,658)		(92,560)		85,148
Change in operating liabilities
Change in accruals and deferred income ........................................................	(1,379)		(474)		(326)
Change in deposits by banks .........................................................................	10,731		14,895		(12,657)
Change in customer accounts ........................................................................	27,312		91,262		(42,861)
Change in debt securities in issue ...................................................................	(5,470)		4,402		(18,790)
Change in financial liabilities designated at fair value ....................................	2,423		11,285		(5,817)
Change in other liabilities .............................................................................	7,149		8,931		(5,838)
	40,766		130,301		(86,289)
Interest and dividends
Interest paid .................................................................................................	(10,967)		(12,644)		(10,481)
Interest received ...........................................................................................	32,441		33,578		33,156
Dividends received ........................................................................................	446		376		226

Notes on the statement of cash flows (continued)

	At           30 June                2012		At             30 June                2011		At    31 December                2011
	US$m		US$m		US$m
Cash and cash equivalents
Cash and balances at central banks ................................................................	147,911		68,218		129,902
Items in the course of collection from other banks........................................	11,075		15,058		8,208
Loans and advances to banks of one month or less .......................................	184,337		215,381		169,858
Treasury bills, other bills and certificates of deposit less than three months ..	27,005		30,011		26,226
Less: items in the course of transmission to other banks ...............................	(11,321)		(16,317)		(8,745)
	359,007		312,351		325,449

Disposals of US branch network and cards business

	US cards         business		US branch          network
	US$m		US$m
Loans and advances to customers ............................................................................................	26,748		1,656
Prepayments and accrued income ............................................................................................	572		-
Goodwill and intangible assets ..................................................................................................	318		5
Other assets ............................................................................................................................	369		44
Total assets excluding cash and cash equivalents ...........................................................	28,007		1,705
Customer accounts ..................................................................................................................	-		10,297
Other liabilities .......................................................................................................................	161		7
Total liabilities ....................................................................................................................	161		10,304
Aggregate net assets at date of disposal, excluding cash and cash equivalents ...........	27,846		(8,599)
Gain on disposal including costs to sell ....................................................................................	3,148		661
Add back: costs to sell .............................................................................................................	72		15
Selling price ............................................................................................................................	31,066		(7,923)
Satisfied by:
Cash and cash equivalents received/(paid) as consideration ......................................................	31,306		(7,979)
Cash and cash equivalents sold .................................................................................................	-		(54)
Cash consideration received/(paid) up to 30 June 2012 ..................................................	31,306		(8,033)
Cash still to be (paid)/received at 30 June 2012 .......................................................................	(240)		110
Total cash consideration received/(paid) ...........................................................................	31,066		(7,923)

The completed US branch network disposal represents the sale of 138 of the 195 US branches that were held for sale at 31 December 2011. HSBC also received cash consideration of US$211m relating to the remaining 57 branches which were not yet sold at 30 June 2012, and which is included in the cash flow statement under the line 'Net cash inflow/(outflow) from disposal of US branch network and cards business' on page 214. For further details refer to page 246.

21   Contingent liabilities, contractual commitments and guarantees

	At           30 June                2012		At             30 June                2011		At    31 December                2011
	US$m		US$m		US$m
Guarantees and contingent liabilities
Guarantees ................................................................................................	79,714		75,281		75,672
Other contingent liabilities .......................................................................	288		356		259
	80,002		75,637		75,931
Commitments
Documentary credits and short-term trade-related transactions .................	14,807		13,616		13,498
Forward asset purchases and forward forward deposits placed .....................	784		66		87
Undrawn formal standby facilities, credit lines and other commitments to lend ......................................................................................................	548,522		646,493		641,319
	564,113		660,175		654,904

The above table discloses the nominal principal amounts of commitments, excluding capital commitments, which are separately discussed below, guarantees and other contingent liabilities which are mainly credit-related instruments including both financial and non-financial guarantees and commitments to extend credit. Contingent liabilities arising from legal proceedings and regulatory matters against the Group are disclosed in Note 25. 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 portion of guarantees and commitments is expected to expire without being drawn upon, the total of the nominal principal amounts is not indicative of future liquidity requirements.

Financial Services Compensation Scheme

At 30 June 2012, HSBC recognised an accrual of US$191m in respect of its share of the estimated Financial Services Compensation Scheme ('FSCS') levy (30 June 2011: US$157m; 31 December 2011: US$87m).

The interest rate to be applied on outstanding borrowings increased from 12 month LIBOR plus 30 basis points, to 12 month LIBOR plus 100 basis points from 1 April 2012.

The FSCS confirmed in May 2012 that the first of three annual instalments of approximately £270m (US$423m) will be levied in total on participating financial institutions in Scheme Year 2013/14 to repay the balance of the loan principal that is not expected to be recovered.

The ultimate FSCS levy to the industry as a result of the collapse of certain financial services firms cannot currently be determined as it is dependent on various uncertain factors including the potential recoveries of assets by the FSCS. HSBC's share of the ultimate FSCS levy will also depend on the level of protected deposits and the population of FSCS members at the time.

Commitments

In addition to the commitments disclosed above, at 30 June 2012 HSBC had US$561m (30 June 2011: US$961m; 31 December 2011: US$715m) of capital commitments contracted but not provided for and US$204m (30 June 2011: US$356m; 31 December 2011: US$272m) of capital commitments authorised but not contracted for.

22   Special purpose entities

HSBC enters into certain transactions with customers in the ordinary course of business which involve the establishment of special purpose entities ('SPE's) to facilitate or secure customer transactions. HSBC structures that utilise SPEs are authorised centrally when they are established to ensure appropriate purpose and governance. The activities of SPEs administered by HSBC are closely monitored by senior management.

SPEs are assessed for consolidation in accordance with the accounting policy set out on page 292 of the Annual Report and Accounts 2011.

Total consolidated assets held by SPEs by balance sheet classification

	Conduits		Securit-       isations		Money        market           funds		Non-money        market investment           funds		Total
	US$bn		US$bn		US$bn		US$bn		US$bn
At 30 June 2012
Cash ...........................................................................	0.9		-		-		0.2		1.1
Trading assets .............................................................	-		0.4		-		0.5		0.9
Financial assets designated at fair value........................	0.1		-		2.7		6.5		9.3
Derivatives .................................................................	-		-		-		-		-
Loans and advances to banks ......................................	-		1.9		-		-		1.9
Loans and advances to customers ...............................	10.1		5.8		-		-		15.9
Financial investments .................................................	25.5		-		-		-		25.5
Other assets ................................................................	1.5		-		-		-		1.5
	38.1		8.1		2.7		7.2		56.1
At 30 June 2011
Cash ...........................................................................	0.7		0.5		-		0.3		1.5
Trading assets .............................................................	0.1		0.6		0.3		0.5		1.5
Financial assets designated at fair value........................	0.1		-		-		7.9		8.0
Derivatives .................................................................	-		0.3		-		-		0.3
Loans and advances to banks ......................................	-		0.9		-		-		0.9
Loans and advances to customers ...............................	9.7		20.2		-		-		29.9
Financial investments .................................................	29.6		-		-		-		29.6
Other assets ................................................................	1.9		0.2		-		-		2.1
	42.1		22.7		0.3		8.7		73.8
At 31 December 2011
Cash ...........................................................................	0.8		0.3		-		0.3		1.4
Trading assets .............................................................	0.1		0.5		0.2		0.4		1.2
Financial assets designated at fair value .......................	0.1		-		-		6.5		6.6
Derivatives .................................................................	-		0.1		-		-		0.1
Loans and advances to banks ......................................	-		1.2		-		-		1.2
Loans and advances to customers ...............................	10.5		8.0		-		-		18.5
Financial investments .................................................	25.8		-		-		-		25.8
Other assets ................................................................	1.6		-		-		-		1.6
	38.9		10.1		0.2		7.2		56.4

HSBC's maximum exposure to SPEs

The following table shows the total assets of the various types of SPEs and the amount of funding provided by HSBC to these SPEs. The table also shows HSBC's maximum exposure to the SPEs and, within that exposure, the liquidity and credit enhancements provided by HSBC. The maximum exposures to SPEs represent HSBC's maximum possible risk exposure that could occur as a result of the Group's arrangements and commitments to SPEs. The maximum amounts are contingent in nature, and may arise as a result of drawdowns under liquidity facilities, where these have been provided, and any other funding commitments, or as a result of any loss protection provided by HSBC to the SPEs. The conditions under which such exposure might arise differ depending on the nature of each SPE and HSBC's involvement with it.

Total assets of consolidated and unconsolidated SPEs and HSBC's funding and maximum exposure

	Consolidated SPEs								Unconsolidated SPEs
	Total assets		Funding provided by HSBC		Liquidity and credit enchance- ments		HSBC's maximum exposure		Total assets		Funding provided by HSBC		HSBC's maximum exposure
	US$bn		US$bn		US$bn		US$bn		US$bn		US$bn		US$bn
At 30 June 2012
Conduits .................................	38.1		26.7		34.6		45.5		-		-		-
Securities investment conduits .......................................	26.6		26.4		20.0		30.9		-		-		-
Multi-seller conduits ...........	11.5		0.3		14.6		14.6		-		-		-
Securitisations ........................	8.1		0.5		0.1		3.3		7.7		-		-
Money market funds ..............	2.7		1.5		-		1.5		65.8		0.8		0.8
Constant net asset value funds .......................................	-		-		-		-		53.0		0.7		0.7
Other .................................	2.7		1.5		-		1.5		12.8		0.1		0.1
Non-money market investment funds ..................................	7.2		6.9		-		6.9		278.6		1.8		1.8
Other .....................................	-		-		-		-		20.0		3.9		5.0
	56.1		35.6		34.7		57.2		372.1		6.5		7.6
At 30 June 2011
Conduits .................................	42.1		28.4		38.1		49.9		-		-		-
Securities investment conduits .......................................	31.6		28.0		23.2		35.0		-		-		-
Multi-seller conduits ...........	10.5		0.4		14.9		14.9		-		-		-
Securitisations ........................	22.7		1.9		0.1		4.3		9.0		-		0.4
Money market funds ..............	0.3		0.3		-		0.3		93.7		0.9		0.9
Constant net asset value funds .......................................	-		-		-		-		69.2		0.7		0.7
Other .................................	0.3		0.3		-		0.3		24.5		0.2		0.2
Non-money market investment funds ..................................	8.7		8.4		-		8.4		288.7		1.6		1.6
Other .....................................	-		-		-		-		19.2		9.4		4.3
	73.8		39.0		38.2		62.9		410.6		11.9		7.2
At 31 December 2011
Conduits .................................	38.9		27.7		37.1		48.5		-		-		-
Securities investment conduits .......................................	27.9		27.4		22.1		33.5		-		-		-
Multi-seller conduits ...........	11.0		0.3		15.0		15.0		-		-		-
Securitisations ........................	10.1		1.6		0.1		3.8		8.1		-		-
Money market funds ..............	0.2		0.2		-		0.2		73.9		0.9		0.9
Constant net asset value funds .......................................	-		-		-		-		54.4		0.7		0.7
Other .................................	0.2		0.2		-		0.2		19.5		0.2		0.2
Non-money market investment funds ..................................	7.2		6.9		-		6.9		260.8		1.7		1.7
Other .....................................	-		-		-		-		19.4		3.7		4.6
	56.4		36.4		37.2		59.4		362.2		6.3		7.2

Conduits

HSBC sponsors and manages two types of conduits: securities investment conduits ('SIC's) and multi-seller conduits.

Securities investment conduits

Solitaire, HSBC's principal SIC, holds ABSs on behalf of HSBC. At 30 June 2012, Solitaire held US$10.1bn of ABSs (30 June 2011: US$11.8bn; 31 December 2011: US$10.6bn). These are included within the disclosures of ABS 'held through consolidated SPEs' on page 156. HSBC's other SICs, Mazarin Funding Limited ('Mazarin'), Barion Funding Limited ('Barion') and Malachite Funding Limited ('Malachite'), evolved from the restructuring of HSBC's sponsored structured investment vehicles ('SIV's) in 2008.

Solitaire

Commercial Paper ('CP') issued by Solitaire benefits from a 100% liquidity facility provided by HSBC. At 30 June 2012, US$9.7bn of Solitaire's assets were funded by the draw-down of the liquidity facility (30 June 2011: US$8.9bn; 31 December 2011: US$9.3bn). HSBC is exposed to credit losses on the drawn amounts.

HSBC's maximum exposure represents the risk that HSBC may be required to fund the vehicle in the event the CP is redeemed without reinvestment from third parties. At 30 June 2012 this amounted to US$14.2bn (30 June 2011: US$15.9bn; 31 December 2011: US$15.6bn).

Mazarin

HSBC is exposed to the par value of Mazarin's assets through the provision of a liquidity facility equal to the lower of the amortised cost of issued senior debt and the amortised cost of non-defaulted assets. At 30 June 2012, this amounted to US$8.9bn (30 June 2011: US$10.2bn; 31 December 2011: US$9.5bn). First loss protection is provided through the capital notes issued by Mazarin, which are substantially held by third parties.

At 30 June 2012, HSBC held 1.3% of Mazarin's capital notes (30 June 2011: 1.3%; 31 December 2011: 1.3%) which have a par value of US$17m (30 June 2011: US$17m; 31 December 2011: US$17m) and a carrying amount of nil (30 June 2011: US$0.6m; 31 December 2011: nil).

Barion and Malachite

HSBC's primary exposure to these SICs is represented by the amortised cost of the debt required to support the non-cash assets of the vehicles. At 30 June 2012, this amounted to US$7.8bn (30 June 2011: US$8.9bn; 31 December 2011: US$8.4bn). First loss protection is provided through the capital notes issued by these vehicles, which are substantially all held by third parties.

At 30 June 2012, HSBC held 3.7% of the capital notes issued by these vehicles (30 June 2011: 3.8%; 31 December 2011: 3.7%) which have a par value of US$35m (30 June 2011: US$36m; 31 December 2011: US$35m) and a carrying amount of US$1.1m (30 June 2011: US$2m; 31 December 2011: US$1.1m).

Multi-seller conduits

These vehicles were established for the purpose of providing access to flexible market-based sources of finance for HSBC's clients.

HSBC's maximum exposure is equal to the transaction-specific liquidity facilities offered to the multi-seller conduits. First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities.

The following table sets out the weighted average life of the asset portfolios for the above mentioned conduits:

Weighted average life of portfolios

Weighted average life (years)	Solitaire		Other SICs		Total SICs		Total multi-     seller conduits
At 30 June 2012 ....................................................	5.8		4.5		5.1		1.7
At 30 June 2011 ......................................................	5.9		4.2		4.9		2.1
At 31 December 2011 ..............................................	5.9		4.1		4.9		2.0

Securitisations

HSBC uses SPEs to securitise customer loans and advances that it has originated in order to diversify its sources of funding for asset origination and for capital efficiency purposes. The loans and advances are transferred by HSBC to the SPEs for cash, and the SPEs issue debt securities to investors to fund the cash purchases.

HSBC's maximum exposure is the aggregate of any holdings of notes issued by these vehicles and the reserve account positions intended to provide credit support under certain pre-defined circumstances to senior note holders.

In addition, HSBC uses SPEs to mitigate the capital absorbed by some of the customer loans and advances it has originated. Credit derivatives are used to transfer the credit risk associated with these customer loans and advances to an SPE, using securitisations commonly known as synthetic securitisations by which the SPE writes credit default swap protection to HSBC. The SPE is funded by the issuance of notes with the cash held as collateral against the credit default protection. From a UK regulatory perspective, the credit protection issued by the SPE in respect of the customer loans allows the risk weight of the loans to be replaced by the risk weight of the collateral in the SPE and as a result mitigates the capital absorbed by the customer loans. Any notes issued by the SPE and held by HSBC attract the appropriate risk weight under the relevant regulatory regime. These SPEs are consolidated when HSBC is exposed to the majority of the risks and rewards of ownership.

Money market funds

HSBC has established and manages a number of money market funds which provide customers with tailored investment opportunities within narrow and well-defined objectives.

HSBC's maximum exposure to money market funds is represented by HSBC's investment in the units of each fund, which at 30 June 2012 amounted to US$2.3bn (30 June 2011: US$1.2bn; 31 December 2011: US$1.1bn).

Non-money market investment funds

HSBC has established a large number of non-money market investment funds to enable customers to invest in a range of assets, typically equities and debt securities.

HSBC's maximum exposure to non-money market investment funds is represented by its investment in the units of each fund which at 30 June 2012 amounted to US$8.7bn (30 June 2011: US$10.0bn; 31 December 2011: US$8.6bn).

Other

HSBC also establishes SPEs in the normal course of business for a number of purposes, for example, structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions.

In certain transactions, HSBC is exposed to risk often referred to as gap risk. Gap risk typically arises in transactions where the aggregate potential claims against the SPE by HSBC pursuant to one or more derivatives could be greater than the value of the collateral held by the SPE and securing such derivatives. HSBC often mitigates such gap risk by incorporating in the SPE transaction features which allow for deleveraging, a managed liquidation of the portfolio, or other mechanisms including trade restructuring or unwinding the trade. Following the inclusion of such risk reduction mechanisms, HSBC has, in certain circumstances, retained all or a portion of the underlying exposure in the transaction. In these circumstances, HSBC assesses whether the exposure retained causes a requirement under IFRSs to consolidate the SPE. When this retained exposure represents ABSs, it has been included in 'Securitisation exposures and other structured products' on page 153.

Third-party sponsored SPEs

Through standby liquidity facility commitments, HSBC has exposure to third-party sponsored SIVs, conduits and securitisations under normal banking arrangements on standard market terms. These exposures are not considered significant to HSBC's operations.

Additional off-balance sheet arrangements and commitments

Additional off-balance sheet commitments such as financial guarantees, letters of credit and commitments to lend are disclosed in Note 21.

Leveraged finance transactions

Loan commitments in respect of leveraged finance transactions are accounted for as derivatives where it is HSBC's intention to sell the loan after origination. Further information is provided on page 161.

23   Segmental analysis

The basis of identifying segments and measuring segmental results is set out on page 336 of the Annual Report and Accounts 2011. There have been no material changes to the segments identified since 31 December 2011.

	Europe		Hong         Kong		Rest of         Asia-      Pacific		MENA		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 2012 ........	8,630		6,101		5,649		1,102		7,817		4,429		(1,630)		32,098
30 June 2011 ..........	10,167		5,389		5,248		1,137		5,191		4,863		(1,567)		30,428
31 December 2011 ..	11,567		5,137		5,198		1,177		3,793		4,707		(1,854)		29,725

Profit/(loss) before tax

Half-year to:
30 June 2012 ........	(667)		3,761		4,372		772		3,354		1,145		-		12,737
30 June 2011 ..........	2,147		3,081		3,742		747		606		1,151		-		11,474
31 December 2011 ..	2,524		2,742		3,729		745		(506)		1,164		-		10,398

Total assets

At 30 June 2012 .......	1,375,553		486,608		334,978		62,881		500,590		138,968		(247,244)		2,652,334
At 30 June 2011 .........	1,379,308		474,044		298,590		58,038		529,386		163,611		(211,990)		2,690,987
At 31 December 2011	1,281,945		473,024		317,816		57,464		504,302		144,889		(223,861)		2,555,579

24   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, and whenever there is an indication that goodwill may be impaired.

At 30 June 2012 we reviewed the inputs used in our most recent impairment test in the light of current economic and market conditions.

The allocation of goodwill to CGUs is described on page 372 of the Annual Report and Accounts 2011.

25   Legal proceedings and regulatory matters

HSBC is party to legal proceedings, investigations and regulatory matters in a number of jurisdictions including the UK, EU and the US arising out of its normal business operations. Apart from the matters described below, HSBC considers that none of these matters is material, either individually or in the aggregate. HSBC recognises a provision for a liability in relation to these matters when it is probable that an outflow of economic benefits will be required to settle an obligation which has arisen as a result of past events, and for which a reliable estimate can be made of the amount of the obligation. While the outcome of these matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of legal proceedings, investigations and regulatory matters as at 30 June 2012 (see Note 17, Provisions).

Securities litigation

As a result of an August 2002 restatement of previously reported consolidated financial statements and other corporate events, including the 2002 settlement with 46 State Attorneys General relating to real estate lending practices, Household International (now HSBC Finance) and certain former officers were named as defendants in a class action law suit, Jaffe v Household International Inc, et al No 2. C 5893 (N.D.Ill, filed 19 August 2002). The complaint asserted claims under the US Securities Exchange Act of 1934, on behalf of all persons who acquired and disposed of Household International common stock between 30 July 1999 and 11 October 2002. The claims alleged that the defendants knowingly or recklessly made false and misleading statements of material fact relating to Household's Consumer Lending operations, including collections, sales and lending practices, some of which ultimately led to the 2002 State settlement agreement, and facts relating to accounting practices evidenced by the restatement. Following a jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs, the District Court issued a ruling on 22 November 2010 within the second phase of the case to determine actual damages, that claim forms should be mailed to class members, and also set out a method for calculating damages for class members who filed claims. As previously reported, lead plaintiffs, in court filings in March 2010, estimated that damages could range 'somewhere between US$2.4bn to US$3.2bn to class members', before pre-judgement interest.

In December 2011, plaintiffs submitted the report of the court-appointed claims administrator to the District Court. That report stated that the total number of claims that generated an allowed loss was 45,921, and that the aggregate amount of these claims was approximately US$2.23bn. Defendants have submitted their objections to certain claims and the plaintiffs have filed their response. At a conference held before the District Court in April 2012, the District Court referred the issues relating to claims to a magistrate judge for resolution. Subsequently, plaintiffs filed a motion with the District Court seeking withdrawal of the referral to the magistrate judge, which is pending. Plaintiffs are expected to ask the District Court to assess pre-judgement interest to be included as part of the District Court's final judgement. We expect the District Court's final judgement to be entered at some point after the claims issues are resolved.

Despite the jury verdict and the 22 November 2010 ruling, HSBC continues to believe that it has meritorious grounds for appeal of one or more of the rulings in the case, and intends to appeal the District Court's final judgement, which could involve a substantial amount once it is entered. Upon appeal, HSBC Finance will be required to provide security for the judgement in order to suspend its execution while the appeal is ongoing by either depositing cash in an interest-bearing escrow account or posting an appeal bond in the amount of the judgement (including any pre-judgement interest awarded).

Given the complexity and uncertainties associated with the actual determination of damages, including the outcome of any appeals, there is a wide range of possible damages. HSBC believes it has meritorious grounds for appeal on matters of both liability and damages and will argue on appeal that damages should be nil or a relatively insignificant amount. If the Appeals Court rejects or only partially accepts HSBC's arguments, the amount of damages, including pre‑judgement interest, could be higher, and may lie in a range from a relatively insignificant amount to somewhere in the region of US$3.5bn.

Bernard L. Madoff Investment Securities LLC

In December 2008, Bernard L. Madoff ('Madoff') was arrested for running a Ponzi scheme and a trustee was appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC ('Madoff Securities'), an SEC-registered broker-dealer and investment adviser. Since his appointment, the trustee has been recovering assets and processing claims of Madoff Securities customers. Madoff subsequently pleaded guilty to various charges and is serving a 150-year prison sentence. He has acknowledged, in essence, that while purporting to invest his customers' money in securities and, upon request, return their profits and principal, he in fact never invested in securities and used other customers' money to fulfil requests for the return of profits and principal. The relevant US authorities are continuing their investigations into his fraud, and have brought charges against others, including certain former employees and the former auditor of Madoff Securities.

Various non-US HSBC companies provided 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 purported aggregate value of these funds was US$8.4bn, an amount that includes fictitious profits reported by Madoff. Based on information available to HSBC to date, we estimate that the funds' actual transfers to Madoff Securities, minus their actual withdrawals from Madoff Securities during the time that HSBC serviced the funds, totalled approximately US$4bn.

Plaintiffs (including funds, fund investors, and the Madoff Securities trustee) have commenced Madoff-related proceedings against numerous defendants in a multitude of jurisdictions. Various HSBC companies have been named as defendants in suits in the US, Ireland, Luxembourg, and other jurisdictions. Certain suits (which include US putative class actions) allege that the HSBC defendants knew or should have known of Madoff's fraud and breached various duties to the funds and fund investors.

In November 2011, the US District Court Judge overseeing three related putative class actions in the Southern District of New York dismissed all claims against the HSBC defendants on forum non conveniens grounds, but temporarily stayed this ruling as to one of the actions against the HSBC defendants - the claims of investors in Thema International Fund plc - in light of a proposed amended settlement agreement, pursuant to which, subject to various conditions, the HSBC defendants had agreed to pay from US$52.5m up to a maximum of US$62.5m. In December 2011, the court lifted this temporary stay and dismissed all remaining claims against the HSBC defendants, and declined to consider preliminary approval of the settlement. In light of the court's decisions, HSBC terminated the settlement agreement. The Thema plaintiff contests HSBC's right to terminate. Plaintiffs in all three actions filed notices of appeal to the US Court of Appeals for the Second Circuit. Plaintiffs' opening briefs were filed in April 2012 and HSBC filed responses in July 2012.

One of the individual claims that have been commenced by investors in Thema International Fund plc against HSBC in the Irish High Court has been listed for trial in November 2012.

In December 2010, the Madoff Securities trustee commenced suits against various HSBC companies in the US Bankruptcy Court and in the English High Court. The US action (which also names certain funds, investment managers, and other entities and individuals) sought US$9bn in damages and additional recoveries from HSBC and the various co-defendants. It sought damages against HSBC for allegedly aiding and abetting Madoff's fraud and breach of fiduciary duty. In July 2011, after withdrawing the case from the Bankruptcy Court in order to decide certain threshold issues, the US District Court Judge dismissed the trustee's various common law claims on the grounds that the trustee lacks standing to assert them. In December 2011, the trustee filed a notice of appeal to the US Court of Appeals for the Second Circuit. Briefing in that appeal was completed in April 2012; oral argument is expected later this year.

The District Court returned the remaining claims to the US Bankruptcy Court for further proceedings. Those claims seek, pursuant to US bankruptcy law, recovery of unspecified amounts received by HSBC from funds invested with Madoff, including amounts that HSBC received when it redeemed units HSBC held in the various funds. HSBC acquired those fund units in connection with financing transactions HSBC had entered into with various clients. The trustee's US bankruptcy law claims also seek recovery of fees earned by HSBC for providing custodial, administration and similar services to the funds. Between September 2011 and April 2012, the HSBC defendants and certain other defendants moved again to withdraw the case from the Bankruptcy Court. The District Court granted those withdrawal motions as to certain issues and is considering the motions as to other issues. Briefing on the merits of the withdrawn issues is ongoing.

The trustee's English action seeks recovery of unspecified transfers of money from Madoff Securities to or through HSBC, on the ground that the HSBC defendants actually or constructively knew of Madoff's fraud. HSBC has not been served with the trustee's English action.

Between October 2009 and April 2012, Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited ('Fairfield'), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands ('BVI') and the US against numerous fund shareholders, including various HSBC companies that acted as nominees for clients of HSBC's private banking business and other clients who invested in the Fairfield funds. The Fairfield actions seek restitution of amounts paid to the defendants in connection with share redemptions, on the ground that such payments were made by mistake, based on inflated values resulting from Madoff's fraud, and some actions also seek recovery of the share redemptions under BVI insolvency law. The actions in the BVI have been dismissed, and those dismissals affirmed on appeal. The actions in the United States are currently stayed in the Bankruptcy Court pending developments in related appellate litigation in the BVI.

There are many factors which may affect the range of possible outcomes, and the resulting financial impact, of the various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple jurisdictions in which the proceedings have been brought and the number of different plaintiffs and defendants in such proceedings. For these reasons, among others, it is not practicable at this time for HSBC to estimate reliably the aggregate liabilities, or ranges of liabilities, that might arise as a result of all such claims but they could be significant. In any event, HSBC considers that it has good defences to these claims and will continue to defend them vigorously.

US mortgage-related investigations

In April 2011, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller of the Currency and HSBC Finance and HSBC North America Holdings Inc. ('HNAH') entered into a similar consent order with the Federal Reserve Board following completion of a broad horizontal review of industry residential mortgage foreclosure practices. These consent orders require prescribed actions to address the deficiencies noted in the joint examination and described in the consent orders. HSBC Bank USA, HSBC Finance and HNAH continue to work with the Office of the Comptroller of the Currency and the Federal Reserve Board to align their processes with the requirements of the consent orders and are implementing operational changes as required.

These consent orders require an independent review of foreclosures pending or completed between January 2009 and December 2010 (the 'Foreclosure Review Period') to determine if any customer was financially injured as a result of an error in the foreclosure process. Customer outreach efforts are required, to notify borrowers with foreclosures pending or completed during the Foreclosure Review Period of the foreclosure complaint review process and their ability to request a review of their foreclosure proceeding. The costs associated with the foreclosure review include the costs of conducting the customer outreach plan and complaint process, and the cost of any resulting remediation.

These consent orders do not preclude additional enforcement actions against HSBC Bank USA, HSBC Finance or HNAH by bank regulatory, governmental or law enforcement agencies, such as the US Department of Justice ('DoJ') or State Attorneys General, which could include the imposition of civil money penalties and other sanctions relating to the activities that are the subject of the consent orders. The Federal Reserve Board has indicated in a press release relating to the financial services industry in general that it believes monetary penalties are appropriate for the enforcement actions and that it plans to announce such penalties. An increase in private litigation concerning these practices is also possible.

It has been announced that the five largest US mortgage servicers (not including HSBC Group companies) have reached a settlement with the DoJ, the US Department of Housing and Urban Development and State Attorneys General of 49 states with respect to foreclosure and other mortgage servicing practices. HNAH, HSBC Bank USA and HSBC Finance have had preliminary discussions with bank regulators and other governmental agencies regarding a potential resolution, although the timing of any settlement is not presently known. Based on discussions to date, HSBC recognised provisions of US$257m in the fourth quarter of 2011 to reflect the estimated liability associated with a proposed settlement of this matter. Any such settlement, however, may not completely preclude other enforcement actions by state or federal agencies, regulators or law enforcement bodies related to foreclosure and other mortgage servicing practices, including, but not limited to matters relating to the securitisation of mortgages for investors, including the imposition of civil money penalties, criminal fines or other sanctions. In addition, such a settlement would not preclude private litigation concerning these practices. In June 2012, the Federal Reserve Board and the Office of the Comptroller of the Currency released a financial remediation framework for use by the independent consultants to recommend remediation for financial injury identified during the Foreclosure Review. Pursuant to this framework, remediation available to a borrower who is found to have been financially injured as a result of servicer errors could include suspension of a pending foreclosure, loan modification, or a lump sum payment. Any borrower who receives remediation will not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices.

Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the subject of lawsuits and governmental and regulatory investigations and inquiries, which have been directed at groups within the US mortgage market, such as servicers, originators, underwriters, trustees or sponsors of securitisations, and at particular participants within these groups. As the industry's residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to an increasing number of foreclosed homes as trustee on behalf of various securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws regarding property upkeep and tenants' rights. While HSBC believes and continues to maintain that the obligations at issue and the related liability are properly those of the servicer of each trust, HSBC continues to receive significant and adverse publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of 'HSBC, as trustee'.

HSBC Bank USA and HSBC Securities (USA) Inc. have been named as defendants in a number of actions in connection with residential mortgage-backed securities ('RMBS') offerings, which generally allege that the offering documents for securities issued by securitisation trusts contained material misstatements and omissions, including statements regarding the underwriting standards governing the underlying mortgage loans. These include an action filed in September 2011 by the Federal Housing Finance Agency ('FHFA'). This action is one of a series of similar actions filed against 17 financial institutions alleging violations of federal securities laws and state statutory and common law in connection with the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to 2008. This action, along with all of the similar FHFA RMBS actions, was transferred to a single judge, who directed the defendant in the first-filed matter to file a motion to dismiss. In May 2012, the District Court filed its decision denying the motion to dismiss FHFA's securities law claims and granting the motion to dismiss FHFA's negligent misrepresentation claims. The District Court's ruling will form the basis for rulings on the other matters, including the action filed against HSBC Bank USA and HSBC Securities (USA) Inc. In the first half of 2012, HSBC Finance Corporation received notice of several claims from claimants related to its activities as sponsor and the activities of its subsidiaries as originators in connection with RMBSs purchased between 2005 and

2007. The claims are currently being evaluated and discussions continue to be held with the claimants, but it has not been concluded that these claims are procedurally or substantively valid.

In December 2010 and February 2011, HSBC Bank USA has received subpoenas from the SEC seeking production of documents and information relating to its involvement and the involvement of its affiliates in specified private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. HSBC Bank USA has also had preliminary contacts with other government authorities exploring the role of trustees in private label RMBS transactions. In February 2011, HSBC Bank USA also received a subpoena from the US Attorney's Office, Southern District of New York seeking production of documents and information relating to loss mitigation efforts with respect to residential mortgages in the State of New York and a Civil Investigative Demand from the Massachusetts State Attorney General seeking documents, information and testimony related to the sale of RMBS to public and private customers in the State of Massachusetts from January 2005 to the present.

HSBC expects this level of focus will continue and, potentially, intensify, so long as the US real estate markets continue to be distressed. As a result, HSBC Group companies may be subject to additional claims, litigation and governmental and regulatory scrutiny related to its participation in the US mortgage securitisation market, either individually or as a member of a group. HSBC is unable to estimate reliably the financial effect of any action or litigation relating to these matters. As situations develop it is possible that any related claims could be significant.

Anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control investigations

In October 2010, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller of the Currency and the indirect parent of that company, HNAH, entered into a consent cease and desist order with the Federal Reserve Board (the 'Orders'). These Orders required improvements to establish an effective compliance risk management programme across the Group's US businesses, including various issues relating to US Bank Secrecy Act ('BSA') and anti-money laundering ('AML') compliance. Steps continue to be taken to address the requirements of the Orders to ensure compliance, and that effective policies and procedures are maintained.

The Orders do not preclude additional enforcement actions against HSBC Bank USA or HNAH by US bank regulatory or law enforcement agencies, including the imposition of civil money penalties, criminal fines and other sanctions relating to activities that are the subject of the Orders. HSBC continues to cooperate in ongoing investigations by the DoJ, the Federal Reserve, the Office of the Comptroller of the Currency and the US Department of Treasury's Financial Crimes Enforcement Network in connection with AML/BSA compliance including cross-border transactions involving our cash handling business in Mexico and banknotes business in the US.

HSBC continues to cooperate in ongoing investigations by the DoJ, the New York County District Attorney's Office, the Office of Foreign Assets Control ('OFAC'), the Federal Reserve and the Office of the Comptroller of the Currency regarding historical transactions involving Iranian parties and other parties subject to OFAC economic sanctions.

In July 2012, the US Senate Permanent Subcommittee on Investigations held a hearing and released a report that was critical of, among other things, HSBC's AML/BSA compliance and compliance with OFAC sanctions.

In each of these US regulatory and law enforcement matters, HSBC Group companies have received Grand Jury subpoenas or other requests for information from US Government or other agencies, and HSBC is cooperating fully and engaging in efforts to resolve matters, including through preliminary discussions with relevant authorities. The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges and the imposition of significant fines and penalties. The prosecution of corporate criminal charges in these types of cases has most often been deferred through an agreement with the relevant authorities; however, the US authorities have substantial discretion, and prior settlements can provide no assurance as to how the US authorities will proceed in these matters. It is not possible at this time for HSBC to know the terms on which a resolution of the ongoing investigations could be achieved or the form or timing of any such resolution. Based on the facts currently known, HSBC has recognised a provision of US$700m, which reflects HSBC's best estimate of the aggregate amount of fines and penalties that are likely to be imposed in connection with these matters. There is a high degree of uncertainty in making this estimate, and it is possible that the amounts when finally determined could be higher, possibly significantly higher.

In July 2012, HSBC Mexico paid a fine imposed by the Mexican National Banking and Securities Commission amounting to 379m Mexican pesos (approximately US$28m), in connection with non-compliance with anti-money laundering systems and controls.

Other US regulatory and law enforcement investigations

In April 2011, HSBC Bank USA received a summons from the US Internal Revenue Service directing HSBC Bank USA to produce records with respect to US-based clients of an HSBC Group company in India. While the summons was withdrawn voluntarily, HSBC Bank USA has cooperated fully by providing responsive documents in its possession in the US to the US Internal Revenue Service, and engaging in efforts to resolve these matters.

HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain Group companies acted appropriately in relation to certain customers who had US tax reporting requirements.

In April 2011, HSBC Bank USA received a subpoena from the SEC directing HSBC Bank USA to produce records in the US related to, among other things, HSBC Private Bank Suisse SA's cross-border policies and procedures and adherence to US broker-dealer and investment adviser rules and regulations when dealing with US resident clients. HSBC Bank USA continues to cooperate with the SEC.

Based on the facts currently known in respect of each of these investigations, it is not practicable at this time for HSBC to determine the terms on which the ongoing investigations will be resolved or the timing of such resolution or for HSBC to estimate reliably the amounts, or range of possible amounts, of any fines and/or penalties. As matters progress, it is possible that any fines and/or penalties could be significant.

Investigations into the setting of London interbank offered rates, European interbank offered rates and other interest rates

Various regulators and competition and enforcement authorities around the world including in the UK, the US, Canada, the EU, Switzerland and Asia, are conducting investigations related to certain past submissions made by panel banks in connection with the setting of London interbank offered rates ('LIBOR'), European interbank offered rates ('EURIBOR') and other interest rates. As certain HSBC entities are members of such panels, HSBC and/or its subsidiaries have been the subject of regulatory demands for information and are cooperating with those investigations. In addition, HSBC and other panel banks have been named as defendants in private lawsuits filed in the US with respect to the setting of LIBOR and EURIBOR, including putative class action lawsuits which have been consolidated before the US District Court for the Southern District of New York. The complaints in those actions assert claims against HSBC and other panel banks under various US laws including US antitrust laws, the US Commodities Exchange Act, and state law. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these regulatory investigations or private lawsuits, including the timing and potential impact on HSBC.

26   Events after the balance sheet date

A second interim dividend for the financial year ending 31 December 2012 was declared by the Directors after 30 June 2012, as described in Note 3.

In July 2012, HSBC sold 53 of the remaining 57 US branches classified as held for sale at 30 June 2012, recognising a gain of approximately US$200m (see Note 14).

27   Interim Report 2012 and statutory accounts

The information in this Interim Report 2012 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The Interim Report 2012 was approved by the Board of Directors on 30 July 2012. The statutory accounts for the year ended 31 December 2011 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.

The Directors are required to prepare the financial statements on the going concern basis unless it is not appropriate. Since the Directors are satisfied that the Group has the resources to continue in business for the foreseeable future, the financial statements continue to be prepared on the going concern basis.

The Directors, the names of whom are set out on pages 205 to 210 of this Interim Report, confirm that 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 2012 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 party transactions that have taken place in the first six months of the financial year ending 31 December 2012 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 2011 that could do so.

On behalf of the Board

D J Flint

Group Chairman

30 July 2012

Introduction

We have been engaged by HSBC Holdings plc ('the Company') to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2012 set out on pages 211 to 263 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 2012 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 2012 is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Report 2012 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 2012 has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the financial information in the Interim Report 2012 based on our review.

Scope of review

We conducted our review in accordance with 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 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 2012 for the six months ended 30 June 2012 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

30 July 2012

 

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