Interim Report - 7 of 21

RNS Number : 3094X

HSBC Holdings PLC

14 August 2009

 



Geographical regions

      Summary

In the analysis of profit and loss by geographical region that follows, operating income and operating expenses include intraߛHSBC items of US$1,347 million (first half of 2008: US$1,169 million; second half of 2008: US$1,323 million).

Profit/(loss) before tax 

	Half-year to
	30 June 2009				30 June 2008				31 December 2008
	US$m		%		US$m		%		US$m		%
Europe	2,976		59.3		5,177		50.5		5,692		605.5
Hong Kong	2,501		49.8		3,073		30.0		2,388		254.1
Rest of Asia-Pacific17	2,022		40.3		2,634		25.7		2,088		222.1
Middle East17	643		12.8		990		9.7		756		80.4
North America	(3,703)		(73.8)		(2,893)		(28.2)		(12,635)		(1,344.1)
Latin America	580		11.6		1,266		12.3		771		82.0
	5,019		100.0		10,247		100.0		(940)		(100.0)

Total assets23

	At 30 June 2009				At 30 June 2008				At 31 December 2008
	US$m		%		US$m		%		US$m		%
Europe	1,324,687		54.7		1,384,022		54.3		1,392,049		55.1
Hong Kong	413,107		17.1		371,584		14.6		414,484		16.4
Rest of Asia-Pacific17	217,794		9.0		239,224		9.4		225,573		8.9
Middle East17	48,601		2.0		51,777		2.0		50,952		2.0
North America	494,778		20.4		568,114		22.3		596,302		23.6
Latin America	107,515		4.4		122,009		4.8		102,946		4.1
Intra-HSBC items	(184,639)		(7.6)		(190,052)		(7.5)		(254,841)		(10.1)
	2,421,843		100.0		2,546,678		100.0		2,527,465		100.0

For footnotes, see page 94.

Europe

Profit/(loss) before tax by country within customer groups and global businesses

	Personal     Financial     Services     US$m		Commercial  Banking      US$m	Global     Banking and  Markets   US$m			Private     Banking     US$m		Other     US$m		Total     US$m
Half-year to 30 June 2009
UK	205		688		1,853		124		(1,214)		1,656
France30	26		51		661		1		(219)		520
Germany	-		17		129		8		(4)		150
Malta	13		29		5		-		-		47
Switzerland	-		-		-		233		-		233
Turkey	21		54		87		1		-		163
Other	(53)		13		156		80		11		207
	212		852		2,891		447		(1,426)		2,976
Half-year to 30 June 2008
UK	1,164		1,656		329		162		168		3,479
France30	122		151		492		14		(70)		709
Germany	-		21		122		20		(8)		155
Malta	26		33		12		-		-		71
Switzerland	-		-		-		335		-		335
Turkey	19		51		56		-		-		126
Other	(7)		28		179		48		54		302
	1,324		1,940		1,190		579		144		5,177

	Personal     Financial     Services     US$m		Commercial  Banking   US$m		Global     Banking and Markets  US$m		Private     Banking     US$m		Other     US$m		Total     US$m
Half-year to 31 December 2008
UK	382		705		(798)		88		2,829		3,206
France30	17		25		(219)		(4)		2,312		2,131
Germany	-		10		62		12		(14)		70
Malta	33		34		4		-		-		71
Switzerland	-		-		-		218		-		218
Turkey	(16)		40		74		-		-		98
Other	(82)		(32)		(118)		105		25		(102)
	334		782		(995)		419		5,152		5,692

For footnote, see page 94.

Loans and advances to customers (net) by country

	At 30 June  2009 US$m		At 30 June  2008         US$m		At 31 December 2008     US$m
UK	342,153		380,051		313,065
France30	77,096		78,376		70,896
Germany	5,201		7,638		5,756
Malta	4,480		4,684		4,343
Switzerland	9,566		14,829		12,708
Turkey	5,586		8,127		6,125
Other	13,008		15,255		13,298
	457,090		508,960		426,191

Customer accounts by country

	At 30 June  2009 US$m		At 30 June  2008         US$m		At 31 December 2008     US$m
UK	371,675		413,593		351,253
France30	85,899		60,281		74,826
Germany	10,007		11,054		11,611
Malta	5,646		6,292		5,604
Switzerland	41,122		42,125		44,643
Turkey	5,394		7,090		5,845
Other	9,982		9,205		8,694
	529,725		549,640		502,476

For footnote, see page 94.

Economic briefing

The UK economy contracted sharply during the first half of 2009, with much of this weakness concentrated in the early months of the year and the second quarter bringing some evidence of a stabilisation of economic conditions. Gross Domestic Product ('GDP') fell by 5.3 per cent below the comparable period in 2008, the sharpest contraction on record. Labour market conditions continued to deteriorate with the unemployment rate rising to a twelve-year high of 7.6 per cent in May 2009. Indicators of housing market activity improved only marginally from very subdued levels, although some monthly increases in house prices were recorded during the second quarter of 2009. After reducing interest rates to just 0.5 per cent in March 2009, the Bank of England launched the Asset Purchase Facility in an attempt to improve the circulation of credit across the economy and encourage confidence in future economic activity. Consumer Price Index ('CPI') inflation moderated throughout the first half of the year, falling from 3.0 per cent in January 2009 to 1.8 per cent in June, below the Bank of England's 2 per cent target.

The eurozone economies performed poorly during the first half of 2009. As in the UK, first

Profit before tax

	Half-year to
Europe	30 June 2009 US$m		30 June 2008         US$m		31 December     2008     US$m
Net interest income	5,978		4,475		5,221
Net fee income	2,843		4,223		3,269
Net trading income	3,429		3,649		1,708
Changes in fair value of long-term debt issued and related derivatives	(788)		207		2,732
Net income/(expense) from other financial instruments designated  at fair value	212		(866)		(960)
Net income/(expense) from financial instruments designated at fair value	(576)		(659)		1,772
Gains less losses from financial investments	(60)		608		(190)
Dividend income	13		20		110
Net earned insurance premiums	2,134		2,286		3,013
Gains on disposal of French regional banks	-		-		2,445
Other operating income	976		1,427		669
Total operating income	14,737		16,029		18,017
Net insurance claims incurred and movement in liabilities  to policyholders	(2,383)		(1,388)		(1,979)
Net operating income before loan impairment charges and other  credit risk provisions	12,354		14,641		16,038
Loan impairment charges and other credit risk provisions	(2,813)		(1,272)		(2,482)
Net operating income	9,541		13,369		13,556
Total operating expenses	(6,587)		(8,193)		(7,879)
Operating profit	2,954		5,176		5,677
Share of profit in associates and joint ventures	22		1		15
Profit before tax	2,976		5,177		5,692

	%		%		%
Share of HSBC's profit before tax	59.3		50.5		605.5
Cost efficiency ratio	53.3		56.0		49.1
Period-end staff numbers (full-time equivalent)	79,132		84,457		82,093
Balance sheet data23
	US$m		US$m		US$m
Loans and advances to customers (net)	457,090		508,960		426,191
Loans and advances to banks (net)	72,491		94,795		61,949
Trading assets, financial instruments designated at fair value and  financial investments28	449,928		481,015		433,885
Total assets	1,324,687		1,384,022		1,392,049
Deposits by banks	87,159		112,081		80,847
Customer accounts	529,725		549,640		502,476

For footnotes, see page 94.

The commentary on Europe is on an underlying basis unless stated otherwise.

quarter GDP fell by 4.9 per cent on the first quarter of 2008 with the broad range of economic data pointing to some stabilisation of conditions during the second quarter. Investment expenditure proved exceptionally weak, while consumer spending continued to contract as the unemployment rate increased to 9.5 per cent in May 2009 from 8.2 per cent in December 2008. The annual rate of consumer price inflation fell substantially during the period, moving from 1.6 per cent in December 2008 to minus 0.1 per cent in June 2009, the first negative reading since the eurozone's inception, although much of this decline reflected the earlier rise and then fall of energy prices. The European Central Bank cut interest rates by 150 basis points during the first half of the year, leaving the refi rate at a record low level of 1 per cent in June 2009.

In Turkey, first quarter GDP fell by 13.8 per cent on the comparable period in 2008, and substantial declines in industrial activity continued to be recorded during the second quarter of the year. Inflationary pressures eased within this weak economic environment as the annual rate of change in consumer prices fell from 10.1 per cent in December 2008 to 5.7 per cent in June 2009. The unemployment rate averaged 15.6 per cent during the first four months of 2009 compared with 11.1 per cent during the equivalent period in 2008. Negotiations over an IMF assistance programme are ongoing.

Review of business performance

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 ('1H09') compared with half-year to 30 June 2008 ('1H08')
Europe	1H08     as     reported     US$m	1H08 acquisitions and      disposals     US$m			Currency     translation2     US$m		1H08 at 1H09 exchange     rates3     US$m	1H09     acquisitions and      disposals1     US$m			Under-    lying  change US$m		1H09     as     reported     US$m		Re-    ported     change4     %		Under-    lying     change4     %
Net interest income	4,475		(65)		(866)		3,544		-		2,434		5,978		34		69
Net fee income	4,223		(58)		(806)		3,359		-		(516)		2,843		(33)		(15)
Changes in fair value5	207		-		39		246		-		(1,034)		(788)		(481)		(420)
Other income6	5,736		(514)		(1,127)		4,095		280		(54)		4,321		(25)		(1)
Net operating income7	14,641		(637)		(2,760)		11,244		280		830		12,354		(16)		7
Loan impairment charges and other credit risk provisions	(1,272)		6		276		(990)		-		(1,823)		(2,813)		(121)		(184)
Net operating income	13,369		(631)		(2,484)		10,254		280		(993)		9,541		(29)		(10)
Operating expenses	(8,193)		68		1,486		(6,639)		-		52		(6,587)		20		1
Operating profit	5,176		(563)		(998)		3,615		280		(941)		2,954		(43)		(26)
Income from associates	1		-		-		1		-		21		22		2,100		2,100
Profit before tax	5,177		(563)		(998)		3,616		280		(920)		2,976		(43)		(25)

For footnotes, see page 94.

HSBC's European operations reported a pre-tax profit of US$3.0 billion, compared with US$5.2 billion in 2008, a decrease of 43 per cent. Within these figures was a negative fair value movement of US$836 million on the Group's own debt held at fair value as financial markets stabilised and credit spreads tightened in the first half of 2009. This movement compared with a gain in the first half of 2008 of US$434 million. As in previous years, HSBC does not regard this movement as part of operating performance. Results also benefited from a gain on the sale of the residual stake in the UK card-acquiring business to Global Payments Inc. of US$280 million in the first half of 2009 following the US$425 million gain realised in the comparable period in 2008 on the sale of the original holding. Adjusting for these gains on sale, the disposal of the French regional banks in July 2008 and the reversal of movements in the fair value of own debt, underlying pre-tax profits grew by US$311 million or 10 per cent. This was driven by a strong performance within Global Banking and Markets, with record revenues in Balance Sheet Management and Rates coupled with a significant fall in credit-related write-downs, partly offset by higher loan impairment charges reflecting the deterioration in the economic environment and increased impairments to assets in the available-for-sale portfolio.

Net interest income increased by 69 per cent, driven by significant growth in Balance Sheet Management revenues, which benefited from favourable positioning in expectation of interest rate cuts by central banks. The fall in interest rates also reduced the cost of funding trading activities, further boosting net interest income.

Mortgage balances increased, reflecting HSBC's continued efforts to support lending to core customers. During the first half of 2009, new mortgage sales in the UK amounted to 45 per cent of the £15 billion (US$25 billion) in new mortgage facilities made available to customers at the beginning of the year. Regionally, lending balances declined in line with reduced customer demand for credit and HSBC's diminished appetite for unsecured lending throughout the region. Lower funding costs, particularly in the personal sector, boosted income in cards, mortgages and personal loans. Given the volatility in the markets, and lack of liquidity, the pricing of commercial lending increased.

HSBC also benefited from an increase in customer accounts due to the strong flow of deposits gained during the market turmoil in the second half of 2008. However, both the Personal Financial Services and Commercial Banking businesses were adversely affected by interest rate cuts, which reduced liability spreads across the region. In Personal Financial Services, spreads were further constrained by competitive pressure to retain liability balances in the UK, and by further interest rate cap reductions on credit cards in Turkey. 

Net fee income fell by 15 per cent. Card fees declined following the part disposal of the card-acquiring business to a joint venture in June 2008, and lower card utilisation which reduced transaction volumes. The relatively inactive markets resulted in lower mergers and acquisition fees, and the decline in global equity markets drove decreases in equity brokerage commissions in Private Banking and performance and management fees as the value of funds under management declined. As markets increasingly recognised the value of credit commitment and availability, HSBC generated higher underwriting fees as a result of increased debt originations in France and the UK.

Trading income increased by 19 per cent to US$3.4 billion, with a record performance in Rates and strong revenue generation in foreign exchange trading. Rates benefited from favourable positioning for falling interest rates and increased demand, while growth in foreign exchange earnings reflected market volatility. Trading income also benefited from credit spread contraction, which led to significantly lower credit write-downs on legacy positions and asset-backed securities portfolios than in the first half of 2008.

This increase in trading performance was partly offset by a loss on structured liabilities as credit spreads narrowed, compared with a gain last year, and a reduction in net interest income on trading activities due to the decline in interest rates (the compensating benefit is reported within 'Net interest income').

A net expense of US$576 million was incurred on financial instruments designated at fair value, primarily due to the fair value movements arising from the effect of narrowing credit spreads on certain fixed-rate long-term debt issued by HSBC, which partially reversed previous gains. This heading also encompasses movements in the fair value of assets held to meet liabilities under insurance and investment contracts in which, as equity markets recovered from declines sustained in the second half of 2008, gains were recorded. To the extent that investment gains are attributable to policyholders, the increase in the fair value of assets held to meet liabilities under unit-linked policies and insurance and investment contracts with discretionary participating features is offset by a corresponding increase in claims incurred and movement in liabilities to policyholders.

Gains less losses from financial investments were US$498 million lower than those arising in the first half of 2008 due to the non-recurrence of certain disposals in 2008, including the sale of MasterCard shares, realisations from private equity investments and the disposal of its remaining stake in the Hermitage Fund by Private Banking. 

Excluding the reversal of movements in the fair value on own debt credit spreads, underlying pre-tax profit in Europe grew by US$311 million or 10 per cent, with a strong performance in Global Banking and Markets.

Net earned insurance premiums increased by 13 per cent. Premium income rose, mainly because of the non-recurrence of a significant re-insurance transaction in France in the first half of 2008 which passed insurance premiums to a third-party reinsurer. Excluding this transaction, premiums fell in the region. A reduction in premiums was driven by the withdrawal of the Guaranteed Income Bond from sale in the UK as the product was no longer commercially viable in the current economic environment. Sales in France were relatively unchanged despite a significant reduction in the distribution network following the disposal of the regional banks in July 2008.

Other operating income decreased by 9 per cent, with the non-recurrence of a favourable embedded value adjustment following HSBC's introduction of enhanced benefits to existing pension products in the first half of 2008 and reduced gains on the sale and leaseback of branches, partly offset by gains on the sale of properties in Private Banking.

Net insurance claims incurred and movement in liabilities to policyholders increased by US$1.2 billion as the allocation of investment returns to policyholders increased and net insurance premiums rose, in part due to the non-recurrence of the significant reinsurance transaction undertaken in France in 2008. In addition, an increase of US$105 million in claims reserving was required to reflect a higher incidence and severity of motor insurance claims with a standalone UK motor underwriter.

Loan impairment charges and other credit
risk provisions grew by US$1.8 billion to US$2.8 billion as the signs of stress observed at the end of 2008 continued into 2009 and economic conditions deteriorated across the region. Within Personal Financial Services and Commercial Banking, which in aggregate experienced a 63 per cent rise in loan impairments to US$1.6 billion, 85 per cent of the charge arose in the UK. Credit impairment charges in the personal sector in France remained low, reflecting the upmarket segmentation of the personal customer base.

Within the UK, the core residential mortgage portfolio continued to experience low impairment, in large part reflecting HSBC's continued focus on in-house origination and control. Stresses were more evident in the cards and other unsecured portfolios, and the secured portfolio of the consumer finance business, as unemployment rose and the ability to refinance existing debt reduced. In UK Commercial Banking, loan impairment charges rose from a low base of US$173 million to US$504 million, reflecting the general economic downturn with problems most evident in the property and retail distribution sectors. In Global Banking and Markets, impairment charges largely reflected HSBC's exposure to the financial and property sectors, as well as additional credit risk provisions from marking to market asset-backed debt securities held within the Group's available-for-sale portfolios on which cash flow impairment emerged in the period. Impairment booked on these exposures reflects mark-to-market losses which HSBC judges to be significantly in excess of the likely ultimate cash losses. 

Outside the UK, higher loan impairment charges reflected deteriorating credit card and personal loan delinquency rates in Turkey, Greece and Central and Eastern Europe. Action taken to mitigate these trends included the strengthening of collection practices and systems, tightening unsecured lending origination criteria and the cessation of new monoline consumer finance lending. The decision was taken during the period to wind down the monoline consumer finance businesses in Hungary and Poland in line with Group strategic objectives.

Operating expenses were broadly in line with the first half of 2008. Staff costs were 5 per cent lower, notwithstanding a rise in Global Banking and Markets from performance-related pay, partly from an accounting gain of US$499 million following a change in the basis of delivering death-in-service, ill health and early retirement benefits for some UK employees.

Non-staff costs were 4 per cent higher as bank failures in the UK led to a US$52 million increase in the Financial Services Compensation Scheme levy. Higher rental charges following the sale and leaseback of properties in 2008 and increased network costs in support of business expansion in Turkey, Russia and Central and Eastern Europe were partly offset by lower advertising and marketing expenditure in response to difficult trading conditions and reduced customer demand.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 ('1H09') compared with half-year to 31 December 2008 ('2H08')
Europe	2H08     as     reported     US$m	2H08     acquisitions  and      disposals1     US$m			Currency     translation2     US$m		2H08   at 1H09   exchange     rates8     US$m	1H09     acquisitions      and      disposals1     US$m			Under-    lying change US$m		1H09     as     reported     US$m		Re-    ported     change4     %		Under    - lying     change4     %
Net interest income	5,221		-		(580)		4,641		-		1,337		5,978		14		29
Net fee income	3,269		-		(365)		2,904		-		(61)		2,843		(13)		(2)
Changes in fair value5	2,732		-		(100)		2,632		-		(3,420)		(788)		(129)		(130)
Other income6	4,816		(2,540)		(404)		1,872		280		2,169		4,321		(10)		116
Net operating income7	16,038		(2,540)		(1,449)		12,049		280		25		12,354		(23)		-
Loan impairment charges and other credit risk provisions	(2,482)		-		328		(2,154)		-		(659)		(2,813)		(13)		(31)
Net operating income	13,556		(2,540)		(1,121)		9,895		280		(634)		9,541		(30)		(6)
Operating expenses	(7,879)		-		812		(7,067)		-		480		(6,587)		16		7
Operating profit	5,677		(2,540)		(309)		2,828		280		(154)		2,954		(48)		(5)
Income from associates	15		-		(2)		13		-		9		22		47		69
Profit before  tax	5,692		(2,540)		(311)		2,841		280		(145)		2,976		(48)		(5)

For footnotes, see page 94.

Analysis by customer group and global business

Profit/(loss) before tax

	Half-year to 30 June 2009
Europe	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global  Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income/ (expense)	2,507		1,295		2,376		506		(265)		(441)		5,978
Net fee income	875		789		706		438		35		-		2,843
Trading income excluding net interest income	78		4		1,678		72		167		-		1,999
Net interest income on trading activities	(1)		7		966		9		8		441		1,430
Net trading income24	77		11		2,644		81		175		441		3,429
Changes in fair value of  long-term debt issued  and related derivatives	-		-		-		-		(788)		-		(788)
Net income/(expense)  from other financial instruments designated  at fair value	170		5		358		-		(321)		-		212
Net income/(expense) from financial instruments designated at fair value	170		5		358		-		(1,109)		-		(576)
Gains less losses from financial investments	5		2		(47)		(2)		(18)		-		(60)
Dividend income	-		1		11		1		-		-		13
Net earned insurance premiums	2,002		135		-		-		(3)		-		2,134
Other operating income	89		323		303		26		162		73		976
Total operating income/ (expense)	5,725		2,561		6,351		1,050		(1,023)		73		14,737
Net insurance claims25	(2,249)		(134)		-		-		-		-		(2,383)
Net operating income/ (expense)7	3,476		2,427		6,351		1,050		(1,023)		73		12,354
Loan impairment charges  and other credit risk provisions	(982)		(606)		(1,212)		(10)		(3)		-		(2,813)
Net operating income/ (expense)	2,494		1,821		5,139		1,040		(1,026)		73		9,541
Total operating expenses	(2,283)		(987)		(2,251)		(593)		(400)		(73)		(6,587)
Operating profit/(loss)	211		834		2,888		447		(1,426)		-		2,954
Share of profit in associates and joint ventures	1		18		3		-		-		-		22
Profit/(loss) before tax	212		852		2,891		447		(1,426)		-		2,976
	%		%		%		%		%				%
Share of HSBC's profit before tax	4.2		17.0		57.6		8.9		(28.4)				59.3
Cost efficiency ratio	65.7		40.7		35.4		56.5		(39.1)				53.3
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	143,886		89,788		198,290		23,774		1,352				457,090
Total assets	205,023		112,749		1,060,344		74,469		86,649		(214,547)		1,324,687
Customer accounts	166,295		95,132		208,792		59,503		3				529,725

For footnotes, see page 94.

	Half-year to 30 June 2008
Europe	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global  Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income/ (expense)	3,373		1,739		1,351		515		(156)		(2,347)		4,475
Net fee income	1,479		1,134		999		559		52		-		4,223
Trading income excluding net interest income	34		18		1,362		106		33		-		1,553
Net interest income/ (expense) on trading activities	(1)		20		(285)		7		8		2,347		2,096
Net trading income24	33		38		1,077		113		41		2,347		3,649
Changes in fair value of long-term debt issued  and related derivatives	-		-		-		-		207		-		207
Net income/(expense)  from other financial instruments designated  at fair value	(761)		(75)		(218)		-		188		-		(866)
Net income/(expense) from financial instruments designated at fair value	(761)		(75)		(218)		-		395		-		(659)
Gains less losses from financial investments	182		140		190		78		18		-		608
Dividend income	1		2		11		4		2		-		20
Net earned insurance premiums	2,084		213		-		-		(11)		-		2,286
Other operating income	252		581		362		4		251		(23)		1,427
Total operating income	6,643		3,772		3,772		1,273		592		(23)		16,029
Net insurance claims24	(1,290)		(98)		-		-		-		-		(1,388)
Net operating income7	5,353		3,674		3,772		1,273		592		(23)		14,641
Loan impairment (charges)/  recoveries and other credit risk provisions	(963)		(285)		(29)		5		-		-		(1,272)
Net operating income	4,390		3,389		3,743		1,278		592		(23)		13,369
Total operating expenses	(3,065)		(1,449)		(2,554)		(699)		(449)		23		(8,193)
Operating profit	1,325		1,940		1,189		579		143		-		5,176
Share of profit/(loss) in associates and joint ventures	(1)		-		1		-		1		-		1
Profit before tax	1,324		1,940		1,190		579		144		-		5,177
	%		%		%		%		%				%
Share of HSBC's profit before tax	12.9		18.9		11.6		5.7		1.4				50.5
Cost efficiency ratio	57.3		39.4		67.7		54.9		75.8				56.0
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	153,460		111,791		210,727		31,933		1,049				508,960
Total assets	219,433		138,494		1,100,421		94,321		65,122		(233,769)		1,384,022
Customer accounts	183,608		105,135		196,432		64,242		223				549,640

For footnotes, see page 94.

Analysis by customer group and global business (continued)

Profit/(loss) before tax

	Half-year to 31 December 2008
Europe	Personal     Financial     Services     US$m		Commercial     Banking     US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income/ (expense)	3,091		1,696		2,137		531		(303)		(1,931)		5,221
Net fee income	1,133		891		764		461		20		-		3,269
Trading income/(expense) excluding net interest income	13		53		151		92		(171)		-		138
Net interest income/ (expense) on trading activities	1		(8)		(370)		7		9		1,931		1,570
Net trading income/ (expense)24	14		45		(219)		99		(162)		1,931		1,708
Changes in fair value of long-term debt issued  and related derivatives	-		-		-		-		2,732		-		2,732
Net income/(expense)  from other financial instruments designated  at fair value	(873)		(139)		(393)		-		445		-		(960)
Net income/(expense) from financial instruments designated at fair value	(873)		(139)		(393)		-		3,177		-		1,772
Gains less losses from financial investments	99		(8)		(220)		(16)		(45)		-		(190)
Dividend income	34		72		14		1		(11)		-		110
Net earned insurance premiums	2,843		178		-		-		(8)		-		3,013
Gains on disposal of  French regional banks	-		-		-		-		2,445				2,445
Other operating income/ (expense)	(22)		39		36		12		581		23		669
Total operating income	6,319		2,774		2,119		1,088		5,694		23		18,017
Net insurance claims25	(1,934)		(45)		-		-		-		-		(1,979)
Net operating income7	4,385		2,729		2,119		1,088		5,694		23		16,038
Loan impairment charges and other credit risk provisions	(1,008)		(582)		(846)		(43)		(3)		-		(2,482)
Net operating income	3,377		2,147		1,273		1,045		5,691		23		13,556
Total operating expenses	(3,042)		(1,381)		(2,269)		(626)		(538)		(23)		(7,879)
Operating profit/(loss)	335		766		(996)		419		5,153		-		5,677
Share of profit/(loss) in associates and joint ventures	(1)		16		1		-		(1)		-		15
Profit/(loss) before tax	334		782		(995)		419		5,152		-		5,692
	%		%		%		%		%				%
Share of HSBC's loss  before tax	35.5		83.2		(105.9)		44.6		548.1				605.5
Cost efficiency ratio	69.4		50.6		107.1		57.5		9.4				49.1
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	126,909		87,245		185,818		25,722		497				426,191
Total assets	171,962		107,495		1,180,759		84,485		64,423		(217,075)		1,392,049
Customer accounts	145,411		91,188		199,687		66,007		183				502,476

For footnotes, see page 94.

Hong Kong

Profit/(loss) before tax by customer group and global business

	Half-year to
	30 June 2009 US$m		30 June 2008 US$m		31 December 2008     US$m
Personal Financial Services	1,337		2,036		1,392
Commercial Banking	424		869		446
Global Banking and Markets	907		770		666
Private Banking	106		123		114
Other	(273)		(725)		(230)
Profit before tax	2,501		3,073		2,388

Profit before tax

	Half-year to
	30 June 2009 US$m		30 June 2008         US$m		31 December 2008     US$m
Net interest income	2,232		2,835		2,863
Net fee income	1,200		1,469		1,111
Net trading income	704		314		879
Changes in fair value of long-term debt and related derivatives	(3)		1		2
Net income/(expense) from other financial instruments designated at fair value	348		(362)		(832)
Net income/(expense) from financial instruments designated at fair value	345		(361)		(830)
Gains less losses from financial investments	2		(98)		(211)
Dividend income	14		20		21
Net earned insurance premiums	1,838		1,650		1,597
Other operating income	505		448		369
Total operating income	6,840		6,277		5,799
Net insurance claims incurred and movement in liabilities  to policyholders	(2,126)		(1,169)		(753)
Net operating income before loan impairment charges and other  credit risk provisions	4,714		5,108		5,046
Loan impairment charges and other credit risk provisions	(273)		(81)		(684)
Net operating income	4,441		5,027		4,362
Total operating expenses	(1,935)		(1,975)		(1,968)
Operating profit	2,506		3,052		2,394
Share of profit/(loss) in associates and joint ventures	(5)		21		(6)
Profit before tax	2,501		3,073		2,388
	%		%		%
Share of HSBC's profit before tax	49.8		30.0		254.1
Cost efficiency ratio	41.0		38.7		39.0
Period-end staff numbers (full-time equivalent)	28,259		29,467		29,330
Balance sheet data23
	US$m		US$m		US$m
Loans and advances to customers (net)	97,486		99,741		100,220
Loans and advances to banks (net)	41,197		73,461		29,646
Trading assets, financial instruments designated at fair value, and  financial investments	135,916		78,735		122,602
Total assets	413,107		371,584		414,484
Deposits by banks	10,299		5,063		11,769
Customer accounts	267,532		231,709		250,517

For footnote, see page 94.

The commentary on Hong Kong is on an underlying basis unless stated otherwise.

Economic briefing

Hong Kong's economy suffered a sharp contraction during the early months of 2009 as first quarter GDP fell by 7.8 per cent from the comparable period in 2008. Economic weakness proved widespread with significant declines in manufacturing activity, investment expenditure and external demand being registered. Labour market conditions continued to deteriorate, the unemployment rate rising from 4.1 per cent in December 2008 to 5.4 per cent in June 2009. Consumer price inflation continued to decline as the annual rate of change fell from 2.1 per cent in December 2008 to a reading of minus 0.9 per cent in June 2009, although this movement largely reflected trends in food and energy prices. Hong Kong maintained its base interest rate at 0.5 per cent during the first half of 2009. Asset prices proved volatile, with the Hang Seng Index first falling sharply before recovering strongly to register a 28 per cent gain during the period.

Review of business performance

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 ('1H09') compared with half-year to 30 June 2008 ('1H08')
Hong Kong	1H08     as     reported     US$m	1H08 acquisitions and      disposals1     US$m			Currency     translation2     US$m		1H08 at 1H09 exchange     rates3     US$m	1H09     acquisitions and      disposals1     US$m			Under-    lying      change      US$m		1H09     as     reported     US$m		Re-    ported     change4    %		Under-    lying     change4     %
Net interest income	2,835		-		13		2,848		-		(616)		2,232		(21)		(22)
Net fee income	1,469		-		7		1,476		-		(276)		1,200		(18)		(19)
Changes in fair value5	1		-		-		1		-		(4)		(3)		(400)		(400)
Other income6	803		-		5		808		-		477		1,285		60		59
Net operating income7	5,108		-		25		5,133		-		(419)		4,714		(8)		(8)
Loan impairment charges and other credit risk provisions	(81)		-		-		(81)		-		(192)		(273)		(237)		(237)
Net operating income	5,027		-		25		5,052		-		(611)		4,441		(12)		(12)
Operating expenses	(1,975)		-		(10)		(1,985)		-		50		(1,935)		2		3
Operating profit	3,052		-		15		3,067		-		(561)		2,506		(18)		(18)
Income from associates	21		-		-		21		-		(26)		(5)		(124)		(124)
Profit before tax	3,073		-		15		3,088		-		(587)		2,501		(19)		(19)

For footnotes, see page 94.

HSBC reported pre-tax profits in Hong Kong of US$2.5 billion, a 19 per cent decline compared with US$3.1 billion in the first half of 2008. HSBC remained one of the market leaders in deposits, mortgages and credit cards. The decrease in profits was largely due to lower revenue as a result of deposit spread compression and weakened investor sentiment, which led to declines in net interest income and net fee income, respectively. The loss of revenue was compounded by a rise, albeit from a low base, in loan impairment charges driven largely by the effects of falling trade activity on the Commercial Banking portfolio and rising delinquency in the personal lending portfolio. Operating costs were reduced to mitigate falling revenue. Global Banking and Markets delivered a strong performance in Rates and financing-related fees. In addition, deposit inflows were significant in the period, adding to the commercial surplus of deposits and contributing to the higher revenues generated from treasury activities within Balance Sheet Management.

Net interest income declined by 22 per cent, driven by significant deposit spread compression evident in Personal Financial Services and Commercial Banking. This was expected in the low interest rate environment and, during this period, HSBC continued to increase deposit balances and reprice customer loans to enhance lending margins and position itself for when the current economic downturn reverses. 

Notwithstanding the decline in both GDP and trade activity, personal lending volumes rose, driven by targeted growth in mortgage lending. HSBC led the mortgage market with a combined 32 per cent market share on new loan drawdowns. Commercial lending declined, reflecting the reduction in trade activity, notwithstanding actions taken by HSBC to support local businesses in the difficult economic environment and provide access to funds. This included the SME Fund launched in 2008 to ensure small and medium-sized enterprises continued to have access to credit through the financial and economic crisis, which was trebled to HK$12 billion (and increased a further HK$4 billion in July). These facilities were 86 per cent utilised at 30 June 2009. HSBC's commitment to its SME customer base also included a two-month interest refund scheme introduced in June 2009 for customers who had suffered significant sales contraction, recognising that volumes of trade finance had declined significantly from the first half of 2008 due to reduced international and intra-regional trade. 

Asset spreads improved due to active repricing on renewals to reflect current market pricing levels, while funding costs reduced due to the low interest rate environment. 

Underlying pre-tax profits in Hong Kong fell by 19 per cent as deposit spreads narrowed and investment activity weakened.

Growth in savings and deposit balances continued, with increases across all customer groups, and by the end of May 2009 HSBC had further improved its market share compared with December 2008. Strong growth in the Commercial Banking segment was driven by a 12 per cent rise in customer numbers through a series of deposit acquisition campaigns launched in the first half of 2009. Liability spreads, however, remained under severe pressure in the first half of 2009 in the low interest rate environment.

In Global Banking and Markets, Balance Sheet Management and Credit and Lending reported increases in net interest income.

Net fee income was 19 per cent lower, as equity market-related revenues declined as customers reduced their risk tolerance, preferring deposit products to equities or structured products. This weaker market sentiment led to a decrease in income from retail brokerage, unit trusts, wealth management and other investment products. However, towards the end of the period there was an improvement in investor sentiment and, accordingly, equity-related products as the local equity market rebounded.

The contraction of trade flows in the region adversely affected commercial customers, and the effect on fees was in line with the decline in import and export volumes. 

Net trading income more than doubled compared with the first half of 2008, in part from the non-recurrence of write-downs on legacy exposures within Global Banking and Markets. Additionally, income from Credit trading increased due to higher volumes of bond trading in institutional markets and increased margins on market-making activities. 

Income of US$345 million was generated from financial instruments designated at fair value, compared with a net loss of US$361 million in the first half of 2008. This mostly related to the insurance business as asset values increased due to a modest recovery in equity market levels during the period. To the extent that these gains were attributed to policyholders, there was an equivalent increase in net insurance claims incurred and movement in liabilities to policyholders. 

Net earned insurance premiums grew by 11 per cent to US$1.8 billion as sales, particularly those associated with traditional life products, increased. HSBC continued to maintain its leadership position with a combined 35 per cent share of the market for new individual life business in the first quarter. 

Gains less losses from financial investments were US$2 million compared with a loss of US$98 million in the first half of 2008, mainly due to the non-recurrence of impairments against long-term equity investments in that period following declines in market valuations as regional equity markets fell. It is worth noting that the value of investments against which impairments of US$296 million were taken in the first half of 2008 as a result of significant market price declines, recovered by US$214 million in the first half of 2009, most notably in Vietnam. Under IFRSs, while impairments on non-trading equities are taken through the income statement, reversals are credited to reserves. In the first half of 2009, Global Banking and Markets recorded a net loss of US$76 million, mostly in respect of the write-down of certain unlisted investments. This was more than offset by gains of US$104 million on the sale of Visa shares, compared with gains of US$203 million from Visa and MasterCard shares in the first half of 2008.

Loan impairment charges increased from the first half of 2008's low level of US$81 million to US$273 million as the economic slowdown and trade downturn adversely affected credit conditions.

In Commercial Banking, loan impairment charges increased from a low base, reflecting a broad weakening in credit quality, particularly amongst exporters who were exposed to the slowdown in global trade. By the end of May, the values of Hong Kong's exports and imports had each declined by a fifth compared with the first five months of 2008. 

The rising unemployment rate and an increase in bankruptcy petitions contributed to increased loan impairment charges against unsecured lending within Personal Financial Services. Credit policies were tightened to reduce risk where necessary. Property prices increased in the first half of 2009 and mortgage lending remained well secured with loan-to-value ratios on origination subject to tight regulatory restrictions.

Operating expenses were reduced by 3 per cent to US$1.9 billion in response to the adverse effect of market conditions on revenues. Management restricted non-staff costs, driving a 7 per cent decline. In particular, marketing costs were reduced as new campaigns were targeted carefully. IT costs rose due to higher utilisation of data services as processes were automated to improve productivity. A number of activities are performed at a central data centre in Hong Kong on behalf of other Group entities. Related recoveries are recorded in Other operating income. Staff costs were in line due to tight control of staff numbers.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 ('1H09') compared with half-year to 31 December 2008 ('2H08')
Hong Kong	2H08     as     reported     US$m	2H08     acquisitions and      disposals1     US$m			Currency     translation2     US$m		2H08 at 1H09  exchange     rates8     US$m	1H09     acquisitions and      disposals1     US$m			Under-    lying      change   US$m		1H09     as     reported     US$m		Re-    ported     change4     %		Under-    lying     change4     %
Net interest income	2,863		-		8		2,871		-		(639)		2,232		(22)		(22)
Net fee income	1,111		-		3		1,114		-		86		1,200		8		8
Changes in fair value5	2		-		-		2		-		(5)		(3)		(250)		(250)
Other income6	1,070		-		3		1,073		-		212		1,285		20		20
Net operating income7	5,046		-		14		5,060		-		(346)		4,714		(7)		(7)
Loan impairment charges and other credit risk provisions	(684)		-		-		(684)		-		411		(273)		60		60
Net operating income	4,362		-		14		4,376		-		65		4,441		2		1
Operating expenses	(1,968)		-		(5)		(1,973)		-		38		(1,935)		2		2
Operating profit	2,394		-		9		2,403		-		103		2,506		5		4
Income from associates	(6)		-		-		(6)		-		1		(5)		17		17
Profit before tax	2,388		-		9		2,397		-		104		2,501		5		4

For footnotes, see page 94.

Analysis by customer group and global business

Profit/(loss) before tax 

	Half-year to 30 June 2009
Hong Kong	Personal     Financial     Services     US$m		Commercial  Banking US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income/(expense) ..	1,294		480		713		122		(313)		(64)		2,232
Net fee income	643		244		230		57		26		-		1,200
Trading income/(expense) excluding net interest  income	69		41		555		42		(70)		-		637
Net interest income/(expense) on trading activities	2		-		(7)		-		8		64		67
Net trading income/ (expense)24	71		41		548		42		(62)		64		704
Changes in fair value of long-term debt issued and related derivatives	-		-		-		-		(3)		-		(3)
Net income/(expense) from  other financial instruments designated at fair value	319		(22)		28		-		23		-		348
Net income/(expense) from financial instruments designated at fair value	319		(22)		28		-		20		-		345
Gains less losses from  financial investments	81		17		(76)		-		(20)		-		2
Dividend income	4		-		1		-		9		-		14
Net earned insurance  premiums	1,622		211		5		-		-		-		1,838
Other operating income	146		39		18		5		440		(143)		505
Total operating income	4,180		1,010		1,467		226		100		(143)		6,840
Net insurance claims25	(1,953)		(168)		(5)		-		-		-		(2,126)
Net operating income7	2,227		842		1,462		226		100		(143)		4,714
Loan impairment charges and other credit risk provisions	(122)		(137)		(14)		-		-		-		(273)
Net operating income	2,105		705		1,448		226		100		(143)		4,441
Total operating expenses	(770)		(281)		(541)		(120)		(366)		143		(1,935)
Operating profit/(loss)	1,335		424		907		106		(266)		-		2,506
Share of profit/(loss) in associates and joint  ventures	2		-		-		-		(7)		-		(5)
Profit/(loss) before tax	1,337		424		907		106		(273)		-		2,501
	%		%		%		%		%				%
Share of HSBC's profit  before tax	26.6		8.4		18.1		2.1		(5.4)				49.8
Cost efficiency ratio	34.6		33.4		37.0		53.1		366.0				41.0
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	42,665		26,682		23,182		3,054		1,903				97,486
Total assets	79,113		33,209		221,196		23,000		67,820		(11,231)		413,107
Customer accounts	157,437		54,730		34,875		19,919		571				267,532

For footnotes, see page 94.

Analysis by customer group and global business (continued)

Profit/(loss) before tax 

	Half-year to 30 June 2008
Hong Kong	Personal     Financial     Services     US$m		Commercial  Banking  US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income/(expense) ..	1,693		770		801		96		(514)		(11)		2,835
Net fee income	856		278		238		95		2		-		1,469
Trading income/(expense) excluding net interest  income	90		37		40		57		(121)		-		103
Net interest income on trading activities	6		1		177		-		16		11		211
Net trading income/ (expense)24	96		38		217		57		(105)		11		314
Changes in fair value of long-term debt issued and related derivatives	-		-		-		-		1		-		1
Net income/(expense) from  other financial instruments designated at fair value	(455)		15		8		-		70		-		(362)
Net income/(expense) from financial instruments designated at fair value	(455)		15		8		-		71		-		(361)
Gains less losses from  financial investments	159		34		12		-		(303)		-		(98)
Dividend income	2		1		3		-		14		-		20
Net earned insurance  premiums	1,559		84		6		-		1		-		1,650
Other operating income	110		17		47		2		448		(176)		448
Total operating income/ (expense)	4,020		1,237		1,332		250		(386)		(176)		6,277
Net insurance claims25	(1,104)		(61)		(4)		-		-		-		(1,169)
Net operating income/  (expense)7	2,916		1,176		1,328		250		(386)		(176)		5,108
Loan impairment (charges)/ recoveries and other credit risk provisions	(34)		(28)		(20)		-		1		-		(81)
Net operating income/ (expense)	2,882		1,148		1,308		250		(385)		(176)		5,027
Total operating expenses	(848)		(279)		(538)		(127)		(359)		176		(1,975)
Operating profit/(loss)	2,034		869		770		123		(744)		-		3,052
Share of profit in associates  and joint ventures	2		-		-		-		19		-		21
Profit/(loss) before tax	2,036		869		770		123		(725)		-		3,073
	%		%		%		%		%				%
Share of HSBC's profit  before tax	19.9		8.5		7.5		1.2		(7.1)				30.0
Cost efficiency ratio	29.1		23.7		40.5		50.8		(93.0)				38.7
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	40,608		32,112		20,257		4,912		1,852				99,741
Total assets	69,810		38,553		201,094		31,635		59,923		(29,431)		371,584
Customer accounts	133,454		49,700		31,577		16,602		376				231,709

For footnotes, see page 94.

	Half-year to 31 December 2008
Hong Kong	Personal     Financial     Services     US$m		Commercial  Banking US$m		Global     Banking and     Markets     US$m		Private     Banking     US$m		Other     US$m		Inter-     segment     elimination29     US$m		Total     US$m
Net interest income/(expense) ..	1,688		728		723		118		(155)		(239)		2,863
Net fee income	585		270		176		68		12		-		1,111
Trading income excluding  net interest income	53		42		443		63		151		-		752
Net interest income/(expense)  on trading activities	5		-		67		-		(184)		239		127
Net trading income/ (expense)24	58		42		510		63		(33)		239		879
Changes in fair value of long-term debt issued and related derivatives	-		-		-		-		2		-		2
Net income/(expense) from  other financial instruments designated at fair value	(836)		(25)		31		-		(2)		-		(832)
Net income/(expense) from financial instruments designated at fair value	(836)		(25)		31		-		-		-		(830)
Gains less losses from  financial investments	(3)		(2)		(121)		-		(85)		-		(211)
Dividend income	1		1		14		-		5		-		21
Net earned insurance  premiums	1,488		97		11		-		1		-		1,597
Other operating income	22		21		54		6		458		(192)		369
Total operating income	3,003		1,132		1,398		255		203		(192)		5,799
Net insurance claims25	(669)		(75)		(7)		-		(2)		-		(753)
Net operating income7	2,334		1,057		1,391		255		201		(192)		5,046
Loan impairment charges and other credit risk provisions	(100)		(307)		(264)		(13)		-		-		(684)
Net operating income	2,234		750		1,127		242		201		(192)		4,362
Total operating expenses	(843)		(305)		(462)		(128)		(422)		192		(1,968)
Operating profit/(loss)	1,391		445		665		114		(221)		-		2,394
Share of profit/(loss) in associates and joint  ventures	1		1		1		-		(9)		-		(6)
Profit/(loss) before tax	1,392		446		666		114		(230)		-		2,388
	%		%		%		%		%				%
Share of HSBC's loss  before tax	148.1		47.4		70.9		12.1		(24.4)				254.1
Cost efficiency ratio	36.1		28.9		33.2		50.2		210.0				39.0
Balance sheet data23
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	41,447		30,331		23,042		3,605		1,795				100,220
Total assets	75,419		36,428		233,187		28,800		66,192		(25,542)		414,484
Customer accounts	145,002		54,869		30,866		19,416		364				250,517

For footnotes, see page 94. 

 

END

 

 

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