Interim Report - 8 of 21

RNS Number : 3097X

HSBC Holdings PLC

14 August 2009

Rest of Asia-Pacific17

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
Australia	12	9	60	–	3	84
India	(124)	(39)	244	–	120	201
Indonesia	(12)	16	77	–	(1)	80
Japan	(41)	–	38	(4)	(1)	(8)
Mainland China	188	292	258	(3)	17	752
Associates	287	255	143	–	–	685
Other mainland China	(99)	37	115	(3)	17	67

Malaysia	38	27	76	–	(2)	139
Singapore	67	43	126	54	(7)	283
South Korea	(6)	(6)	186	–	11	185
Taiwan	(7)	32	55	–	1	81
Other	20	85	119	–	1	225

	135	459	1,239	47	142	2,022

Half-year to 30 June 2008
Australia	15	34	47	–	4	100
India	(53)	75	301	2	46	371
Indonesia	(1)	19	52	–	(4)	66
Japan	(39)	–	42	1	–	4
Mainland China	277	306	357	(2)	(31)	907
Associates	321	268	159	–	–	748
Other mainland China	(44)	38	198	(2)	(31)	159

Malaysia	61	51	94	–	3	209
Singapore	63	45	185	51	(4)	340
South Korea	(10)	(2)	168	–	21	177
Taiwan	(5)	12	106	–	2	115
Other	18	113	194	–	20	345

	326	653	1,546	52	57	2,634

Half-year to 31 December 2008
Australia	4	34	55	–	(17)	76
India	(102)	43	277	–	77	295
Indonesia	(21)	(2)	74	–	4	55
Japan	(49)	(1)	46	–	4	–
Mainland China	7	316	331	(3)	47	698
Associates	72	290	176	–	–	538
Other mainland China	(65)	26	155	(3)	47	160

Malaysia	33	45	77	–	5	160
Singapore	41	38	152	59	(33)	257
South Korea	(6)	(11)	136	–	17	136
Taiwan	(36)	33	73	–	(10)	60
Other	14	87	203	1	46	351

	(115)	582	1,424	57	140	2,088

For footnote, see page 94.

Loans and advances to customers (net) by country17

	At 30 June 2009 US$m	At 30 June 2008 US$m	At 31 December 2008 US$m

Australia	10,594	12,664	9,321
India	5,236	7,585	6,244
Indonesia	2,540	1,924	1,904
Japan	2,486	4,710	5,839
Mainland China	10,784	12,653	11,440
Malaysia	8,873	9,295	9,404
Singapore	12,956	13,724	13,441
South Korea	4,426	6,581	5,336
Taiwan	4,123	5,330	4,329
Other	12,044	14,287	13,403

	74,062	88,753	80,661

For footnote, see page 94.

Customer accounts by country17

	At 30 June 2009 US$m	At 30 June 2008 US$m	At 31 December 2008 US$m

Australia	9,621	13,864	9,201
India	11,719	11,365	9,767
Indonesia	4,557	2,557	2,896
Japan	4,673	4,728	6,204
Mainland China	19,874	18,205	19,171
Malaysia	12,080	12,836	11,963
Singapore	32,920	32,784	32,748
South Korea	4,336	4,509	4,383
Taiwan	9,819	12,227	9,689
Other	16,984	17,464	18,172

	126,583	130,539	124,194

For footnote, see page 94.

Economic briefing

Growth in mainland China recovered during the first half of 2009 as the effect on domestic demand of the government's fiscal stimulus package and the reversal of the earlier tightening of monetary conditions helped offset the very sharp decline registered in exports. Second quarter GDP rose by 7.9 per cent in year-on-year terms, implying a substantial acceleration in growth from the 6.1 per cent year-on-year increase recorded during the first quarter of 2009. Growth in industrial production also accelerated during the first half of 2009, while expectations for a continuation of the rapid expansion in fixed asset investment were supported by very strong growth in bank lending. Consumer spending remained robust, with retail sales rising by 15 per cent over the year to June 2009. The annual rate of consumer price inflation turned negative during the early months of 2009, largely reflecting the earlier movements in food and energy prices. The renminbi was little changed against the US dollar during the period.

Economic conditions proved extremely difficult in Japan during the first half of 2009, although some signs of stabilisation did emerge towards the end of the period. First quarter GDP fell by 8.8 per cent against the comparable period in 2008, and industrial production fell by 30 per cent in year-on-year terms in May 2009 as demand within key export markets proved weak. Unemployment rose from 4.3 per cent in December 2008 to 5.2 per cent in May 2009, while the consumer price index fell by 1.1 per cent during the year to May 2009.

Elsewhere in Asia, growth rates were volatile during the first half of 2009. The substantial monetary and fiscal policy measures introduced across the region helped to stabilise conditions

Profit before tax

	Half-year to
Rest of Asia-Pacific¹⁷	30 June 2009 US$m	30 June 2008 US$m	31 December 2008 US$m

Net interest income	1,768	1,919	2,018

Net fee income	719	1,004	863

Net trading income	909	1,090	952

Changes in fair value of long-term debt issued and related derivatives	(2)	–	1
Net income/(expense) from other financial instruments designated at fair value	31	(88)	(84)

Net income/(expense) from financial instruments designated at fair value	29	(88)	(83)
Gains less losses from financial investments	(21)	24	–
Dividend income	1	1	1
Net earned insurance premiums	152	114	83
Other operating income	608	475	580

Total operating income	4,165	4,539	4,414

Net insurance claims incurred and movement in liabilities to policyholders	(156)	(4)	32

Net operating income before loan impairment charges and other credit risk provisions	4,009	4,535	4,446

Loan impairment charges and other credit risk provisions	(531)	(328)	(524)

Net operating income	3,478	4,207	3,922

Total operating expenses	(2,151)	(2,324)	(2,380)

Operating profit	1,327	1,883	1,542

Share of profit in associates and joint ventures	695	751	546

Profit before tax	2,022	2,634	2,088

	%	%	%

Share of HSBC’s profit before tax	40.3	25.7	222.1
Cost efficiency ratio	53.7	51.2	53.5

Period-end staff numbers (full-time equivalent)	87,567	85,581	89,706

Balance sheet data²³
	US$m	US$m	US$m

Loans and advances to customers (net)	74,062	88,753	80,661
Loans and advances to banks (net)	34,278	40,695	28,665
Trading assets, financial instruments designated at fair value, and financial investments	55,328	59,934	53,167
Total assets	217,794	239,224	225,573
Deposits by banks	12,980	18,600	12,688
Customer accounts	126,583	130,539	124,194

For footnotes, see page 94.

The commentary on Rest of Asia-Pacific is on an underlying basis unless stated otherwise.

following very sharp contractions in economic activity during the early months of the year. Such trends were particularly evident in Singapore, where the very sharp recession continued during the first quarter as GDP fell by 9.6 per cent on the comparable period in 2008, before exports and industrial production staged a sustained recovery. Second quarter GDP fell by 3.7 per cent against the comparable period in 2008. Growth proved more durable in India, with first quarter GDP rising by 5.8 per cent on the comparable period in 2008. Declining inflationary pressures and concerns over the global economic outlook nevertheless led the Reserve Bank of India to reduce interest rates and reserve requirements during the first half of 2009.

Although growth slowed during the first quarter of the year in Indonesia, the 4.4 per cent increase in GDP against the comparable period in 2008 left the country as a major out-performer in the region. Economic conditions proved very weak during the early months of 2009 in Malaysia as first quarter GDP fell by 6.2 per cent compared with the equivalent period in 2008. The open nature of the South Korean economy and relatively high levels of household and corporate sector indebtedness proved detrimental during the early months of 2009 as first quarter GDP fell by 4.2 per cent against the comparable period in 2008. However, industrial production increased monthly during the second quarter and surveys indicated consumer confidence rebounding strongly. Deteriorating external demand and weaker capital inflows proved problematic for the Philippines' economy as first quarter GDP fell on a quarter-on-quarter basis, encouraging a further decline in interest rates. Taiwan's economy proved particularly vulnerable to the contraction in global trade in early 2009, with a record 10.2 per cent decline in GDP on the comparable period in 2008. A substantial fiscal stimulus package in Vietnam contributed to improved growth during the first half of 2009. After rising by 3.1 per cent in the year to the first quarter of 2009, year-on-year GDP growth accelerated to 3.9 per cent in the second quarter.

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’)

Rest of Asia-Pacific¹⁷

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

1,919

–

(181)

1,738

–

1,768

(8)

Net fee income

1,004

–

(96)

908

–

(189)

719

(28)

(21)

Changes in fair value⁵

–

(2)

–

Other income⁶

1,612

–

(226)

1,386

–

138

1,524

(5)

Net operating income⁷

4,535

–

(503)

4,032

–

(23)

4,009

(12)

(1)

Loan impairment charges and other credit risk provisions

(328)

–

(279)

–

(252)

(531)

(62)

(90)

Net operating income

4,207

–

(454)

3,753

–

(275)

3,478

(17)

(7)

Operating expenses

(2,324)

–

237

(2,087)

–

(64)

(2,151)

(3)

Operating profit

1,883

–

(217)

1,666

–

(339)

1,327

(30)

(20)

Income from associates

751

–

777

–

(82)

695

(7)

(11)

Profit before tax

2,634

–

(191)

2,443

–

(421)

2,022

(23)

(17)

For footnotes, see page 94.

HSBC's operations in the Rest of Asia-Pacific region reported a pre-tax profit of US$2.0 billion compared with US$2.6 billion in the first half of 2008, a decline of 23 per cent or 17 per cent on an underlying basis. Global Banking and Markets performance remained robust, delivering US$1.2 billion or 61 per cent of the regional preߛtax profit compared with US$1.5 billion or 59 per cent in the first half of 2008. The decline in regional performance was primarily attributable to the Personal Financial Services and Commercial Banking customer groups, which were adversely affected by the impact of sustained low interest rates, reduced economic activities and trade flows and the consequential deterioration in credit quality.

HSBC continued to demonstrate its commitment to the region through the purchase of Bank Ekonomi in Indonesia in May 2009, and by becoming the first foreign bank to incorporate locally in Vietnam, in January 2009. Organic expansion continued in mainland China with the opening of eight new HSBC branded outlets in the first half of 2009 in addition to two more rural banks, consolidating HSBC's position as the largest foreign international bank in the country. In insurance, HSBC expanded its joint ventures with Canara Bank and Oriental Bank of Commerce in India and National Trust in mainland China. The operations of The Chinese Bank in Taiwan and IL&FS Investsmart ('Investsmart') in India were successfully integrated during the period; the former is proceeding ahead of expectations: the latter added 77 outlets to the existing branch network to enhance wealth management product distribution.

Net interest income increased by 2 per cent, driven by lower interest rates, particularly related to the cost of funding the trading book. This benefit was partly offset by lower deposit spreads in the low interest rate environment and strong price competition for core deposit acquisition.

Asset balances declined as demand for financing reduced and the rate of increase in personal unsecured lending origination, which had contributed to lending growth in previous years, was curtailed in order to manage asset quality. This was particularly evident in India, where the decline in lending reflected measures to improve the quality of the asset portfolio, including eliminating the use of third-party agents in the credit card origination process as experience highlighted areas of relative weakness. The effect was readily discernible, with credit card lending balances in India falling to US$539 million at 30 June 2009 from US$647 million at the beginning of the year. As credit availability was constrained in certain sectors, HSBC was able to undertake a series of repricing initiatives throughout the region which, along with the reduced funding costs in the low interest rate environment, resulted in wider spreads being achieved on lending products. This was particularly notable in respect of corporate loans and, in India, trade advances.

HSBC remained highly successful in attracting deposits, particularly through Premier, where customer numbers increased by 14 per cent to almost half a million in the region. Balances grew in most countries, most notably India, Indonesia and mainland China. Deposit growth in India was attributable to a 12 per cent increase in the number of Premier customers and, in mainland China, to branch network expansion.

Net fee income was 21 per cent lower than in the first half of 2008, and reflected a decline in sales of investment and wealth management products. Sales of investment products, notably unit trusts, fell, particularly in Taiwan and India as investor sentiment remained risk averse and equity markets continued to have little momentum for much of the period. Similarly, in Singapore reduced demand for managed funds and depressed market values led to a decline in funds under management and lower performance fees, partly mitigated by higher sales of structured products.

Notwithstanding the decline in trade flows, fees from trade and supply chain products rose due to revised pricing strategies, most significantly in India.

Net trading income declined by 2 per cent, as the fall in interest rates reduced net interest income from trading activities.

Trading performance in Global Banking and Markets was strong as market volatility continued across the region, encouraging increased corporate hedging activity and delivering increased margins on market-making activity as investors demonstrated heightened risk aversion. Trading income growth was largely attributable to Rates trading and Credit. Revenues from Rates rose, most notably in South Korea, Indonesia and Japan, driven by increased customer demand and volatile markets. Credit related revenues rose, particularly in India, as credit spreads tightened significantly.

HSBC continued to expand in the Rest of Asia-Pacific region despite a fall of 17 per cent in underlying pre-tax profit.

Net income from financial instruments designated at fair value of US$29 million was recorded compared with a net expense of US$88 million in the first half of 2008. This was primarily attributable to equity market-related gains on unit-linked insurance products, particularly in Singapore, and was largely offset by a corresponding increase in liabilities to policyholders reflected in net insurance claims incurred and movement in liabilities to policyholders.

Net earned insurance premiums increased by 45 per cent to US$152 million, largely in Singapore due to increased sales of a new Guaranteed Saver life product.

Loan impairment charges nearly doubled, reflecting a deterioration in the credit environment across the region, but remained low in absolute terms at US$531 million.

In Personal Financial Services, loan impairment charges rose by 43 per cent, primarily in India and, to a lesser extent, in Indonesia. In India, higher loan impairment charges were driven by increased delinquency across the unsecured lending portfolio, notably credit cards and personal lending, following strong growth ahead of the economic slowdown. HSBC took specific action to mitigate loan losses, including discontinuing consumer finance loan origination towards the end of 2008, and tightening lending criteria on other unsecured lending products. In Indonesia, loan impairment charges rose due to higher delinquencies on credit cards and personal lending.

In Commercial Banking, the rise in loan impairment charges reflected an increase in corporate failures as economic growth slowed, notably in certain export sectors. Loan impairment charges also increased from the low level recorded

in 2008, notably in India where there were a few individually significant charges recorded. Other countries in the region were also affected but to a lesser degree.

Operating expenses increased by 3 per cent to US$2.2 billion to support the ongoing expansion of infrastructure in the region. Operating expenses rose in mainland China as the branch network grew and staff numbers increased accordingly. In India, operating expenses rose by 10 per cent, driven by expansion of the branch network following the integration of Investsmart and an increase in staff numbers. In Taiwan, a fifth Commercial Banking Centre was opened in Neihu, a prominent science and technology zone, and six branch renovations were completed as part of the integration of the operations of The Chinese Bank. Infrastructure investment growth was partly offset by a reduction in marketing costs, notably in respect of unsecured lending products.

The number of transactions completed through direct channels, including internet banking, telephone services and self-service machines increased and represented more than 60 per cent of commercial banking transactions.

Operating expenses within the Group Service and Software Development Centres rose by 10 per cent as the number of migrated activities and processes increased in accordance with the Group's global resourcing strategy to develop 'Centres of Excellence'. All related costs are recharged to other Group entities and the income from these recharges is reported within other operating income.

Profit from associates and joint ventures in the region was 11 per cent lower, driven by a reduction in contribution from Ping An Insurance due to the non-recurrence of favourable changes in investment assumptions in the first half of 2008. The profit contribution from the Bank of Communications was unchanged as the combination of increased fee income from cards, advisory services and cost savings were offset by reduced income from narrowing deposit spreads. The contribution from Industrial Bank declined due to a fall in net interest income as deposit spreads narrowed.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 (‘1H09’) compared with half-year to 31 December 2008 (‘2H08’)
Rest of Asia-Pacific¹⁷	2H08 as reported US$m	2H08 acquisitions and disposals¹ US$m		Currency translation² US$m	2H08 at 1H09exchange rates⁸ US$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	2,018		–	(75)	1,943		–	(175)	1,768	(12)	(9)
Net fee income	863		–	(32)	831		–	(112)	719	(17)	(13)
Changes in fair value⁵	1		–	–	1		–	(3)	(2)	(300)	(300)
Other income⁶	1,564		–	(74)	1,490		–	34	1,524	(3)	2

Net operating income⁷	4,446		–	(181)	4,265		–	(256)	4,009	(10)	(6)

Loan impairment charges and other credit risk provisions	(524)		–	16	(508)		–	(23)	(531)	(1)	(5)

Net operating income	3,922		–	(165)	3,757		–	(279)	3,478	(11)	(7)

Operating expenses	(2,380)		–	92	(2,288)		–	137	(2,151)	10	6

Operating profit	1,542		–	(73)	1,469		–	(142)	1,327	(14)	(10)

Income from associates	546		–	–	546		–	149	695	27	27

Profit before tax	2,088		–	(73)	2,015		–	7	2,022	(3)	–

For footnotes, see page 94.

Analysis by customer group and global business

Profit before tax

Half-year to 30 June 2009

Rest of Asia-Pacific¹⁷

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

730

380

626

(86)

1,768

Net fee income

254

154

294

(8)

–

719

Trading income/(expense) excluding net interest
income

609

(15)

–

740

Net interest income/(expense)
on trading activities

(1)

–

169

Net trading income/
(expense)²⁴

691

(13)

909

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

–

(3)

–

Net income/(expense) from financial instruments designated at fair value

–

(3)

–

(2)

–

Gains less losses from
financial investments

(10)

–

(19)

–

(21)

Dividend income

–

Net earned insurance
premiums

136

–

152

Other operating income

–

590

(63)

608

Total operating income

1,234

652

1,616

115

611

(63)

4,165

Net insurance claims²⁵

(145)

(11)

–

(156)

Net operating income⁷

1,089

641

1,616

115

611

(63)

4,009

Loan impairment charges and other credit risk provisions

(375)

(151)

(5)

–

(531)

Net operating income

714

490

1,611

115

611

(63)

3,478

Total operating expenses

(870)

(291)

(517)

(68)

(468)

(2,151)

Operating profit

(156)

199

1,094

143

–

1,327

Share of profit/(loss) in associates and joint
ventures

291

260

145

–

(1)

–

695

Profit before tax

135

459

1,239

142

–

2,022

Share of HSBC’s profit
before tax

2.7

9.1

24.7

0.9

2.9

40.3

Cost efficiency ratio

79.9

45.4

32.0

59.1

76.6

53.7

Balance sheet data²³

US$m

Loans and advances to
customers (net)

27,780

21,693

21,682

2,739

168

74,062

Total assets

36,761

29,760

138,266

13,068

5,958

(6,019)

217,794

Customer accounts

45,179

26,031

42,712

12,624

126,583

For footnotes, see page 94.

	Half-year to 30 June 2008
Rest of Asia-Pacific17	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	864	446	759	45	68	(263)	1,919

Net fee income	320	175	456	41	12	-	1,004

Trading income/(expense) excluding net interest income	32	72	674	36	(49)	-	765
Net interest income/(expense) on trading activities	(2)	-	59	-	5	263	325

Net trading income/ (expense)24	30	72	733	36	(44)	263	1,090

Changes in fair value of long-term debt issued and related derivatives	-	-	-	-	-	-	-
Net expense from other financial instruments designated at fair value	(85)	(1)	(2)	-	-	-	(88)

Net expense from financial instruments designated at fair value	(85)	(1)	(2)	-	-	-	(88)
Gains less losses from financial investments	14	3	6	-	1	-	24
Dividend income	-	-	1	-	-	-	1
Net earned insurance premiums	98	16	-	-	-	-	114
Other operating income	18	7	37	1	516	(104)	475

Total operating income	1,259	718	1,990	123	553	(104)	4,539

Net insurance claims25	6	(9)	-	-	(1)	-	(4)

Net operating income7	1,265	709	1,990	123	552	(104)	4,535

Loan impairment (charges)/ recoveries and other credit risk provisions	(310)	(7)	(11)	-	-	-	(328)

Net operating income	955	702	1,979	123	552	(104)	4,207

Total operating expenses	(949)	(318)	(591)	(71)	(499)	104	(2,324)

Operating profit	6	384	1,388	52	53	-	1,883

Share of profit in associates and joint ventures	320	269	158	-	4	-	751

Profit before tax	326	653	1,546	52	57	-	2,634

	%	%	%	%	%		%
Share of HSBC's profit before tax	3.2	6.4	15.0	0.5	0.6		25.7
Cost efficiency ratio	75.0	44.9	29.7	57.7	90.3		51.2

Balance sheet data23
	US$m	US$m	US$m	US$m	US$m		US$m
Loans and advances to customers (net)	31,402	25,285	28,609	3,297	160		88,753
Total assets	39,336	32,012	151,490	10,798	10,498	(4,910)	239,224
Customer accounts	43,479	27,540	48,625	10,830	65		130,539

For footnotes, see page 94.

Analysis by customer group and global business (continued)

Profit before tax

	Half-year to 31 December 2008
Rest of Asia-Pacific17	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	844	488	765	58	71	(208)	2,018

Net fee income	272	180	375	30	6	-	863

Trading income/(expense) excluding net interest income	33	50	559	41	(3)	-	680
Net interest income/(expense) on trading activities	(3)	-	64	-	3	208	272

Net trading income24	30	50	623	41	-	208	952

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	(87)	1	(2)	-	4	-	(84)

Net income/(expense) from financial instruments designated at fair value	(87)	1	(2)	-	5	-	(83)
Dividend income	-	-	-	-	1	-	1
Net earned insurance premiums	74	9	-	-	-	-	83
Other operating income/(expense)	41	70	42	(2)	558	(129)	580

Total operating income	1,174	798	1,803	127	641	(129)	4,414

Net insurance claims25	36	(4)	-	-	-	-	32

Net operating income7	1,210	794	1,803	127	641	(129)	4,446

Loan impairment charges and other credit risk provisions	(330)	(131)	(62)	(1)	-	-	(524)

Net operating income	880	663	1,741	126	641	(129)	3,922

Total operating expenses	(1,067)	(371)	(494)	(69)	(508)	129	(2,380)

Operating profit	(187)	292	1,247	57	133	-	1,542

Share of profit/(loss) in associates and joint ventures	72	290	177	-	7	-	546

Profit/(loss) before tax	(115)	582	1,424	57	140	-	2,088

	%	%	%	%	%		%
Share of HSBC's loss before tax	(12.2)	61.9	151.5	6.1	14.9		222.1
Cost efficiency ratio	88.2	46.7	27.4	54.3	79.3		53.5

Balance sheet data23
	US$m	US$m	US$m	US$m	US$m		US$m
Loans and advances to customers (net)	27,634	21,967	27,941	2,960	159		80,661
Total assets	36,310	29,030	147,714	12,440	5,528	(5,449)	225,573
Customer accounts	42,778	25,372	42,977	12,713	354		124,194

For footnotes, see page 94.

Middle East17

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
Egypt	10	27		49	-	34	120
United Arab Emirates	(14)	141		182	(1)	3	311
Other	19	35		20	-	(4)	70

Middle East (excluding Saudi Arabia)	15	203		251	(1)	33	501
Saudi Arabia	20	49		53	6	14	142

	35	252		304	5	47	643

Half-year to 30 June 2008
Egypt	11	37		45	-	22	115
United Arab Emirates	106	184		229	2	1	522
Other	44	69		65	-	-	178

Middle East (excluding Saudi Arabia)	161	290		339	2	23	815
Saudi Arabia	48	18		87	-	22	175

	209	308		426	2	45	990

Half-year to 31 December 2008
Egypt	5	31		45	-	27	108
United Arab Emirates	27	146		159	2	5	339
Other	36	56		96	-	1	189

Middle East (excluding Saudi Arabia)	68	233		300	2	33	636
Saudi Arabia	12	17		90	-	1	120

	80	250		390	2	34	756

Loans and advances to customers (net) by country17

	At 30 June 2009 US$m	At 30 June 2008 US$m	At 31 December 2008 US$m

Egypt	2,503	2,265	2,473
United Arab Emirates	15,906	16,416	17,537
Other	6,688	6,323	7,285

	25,097	25,004	27,295

Customer accounts by country17

	At 30 June 2009 US$m	At 30 June 2008 US$m	At 31 December 2008 US$m

Egypt	5,642	5,359	5,363
United Arab Emirates	19,284	20,658	19,808
Other	9,355	10,239	9,994

	34,281	36,256	35,165

For footnote, see page 94.

Profit before tax

	Half-year to
Middle East17	30 June 2009 US$m	30 June 2008 US$m	31 December 2008 US$m

Net interest income	763	714	842

Net fee income	308	334	357

Net trading income	220	239	163

Gains less losses from financial investments	13	9	(1)
Dividend income	2	1	1
Net earned insurance premiums	-	-	-
Other operating income	63	9	-

Total operating income	1,369	1,306	1,362

Net insurance claims incurred and movement in liabilities to policyholders	-	-	-

Net operating income before loan impairment charges and other credit risk provisions	1,369	1,306	1,362

Loan impairment charges and other credit risk provisions	(391)	(41)	(238)

Net operating income	978	1,265	1,124

Total operating expenses	(482)	(460)	(499)

Operating profit	496	805	625

Share of profit in associates and joint ventures	147	185	131

Profit before tax	643	990	756

	%	%	%

Share of HSBC's profit before tax	12.8	9.7	80.4
Cost efficiency ratio	35.2	35.2	36.6

Period-end staff numbers (full-time equivalent)	8,819	8,166	8,453

Balance sheet data23
	US$m	US$m	US$m

Loans and advances to customers (net)	25,097	25,004	27,295
Loans and advances to banks (net)	6,556	11,044	7,476
Trading assets, financial instruments designated at fair value, and financial investments	10,064	8,198	8,056
Total assets	48,601	51,777	50,952
Deposits by banks	991	1,939	1,001
Customer accounts	34,281	36,256	35,165

For footnotes, see page 94.

The commentary on Middle East is on an underlying basis unless stated otherwise.

Economic briefing

After a period of very rapid expansion, the economies of the Middle East slowed sharply during the first half of 2009 as oil prices fell and access to regional and international funding was compromised. Government spending growth was maintained despite sharply reduced oil revenues, which offered some support to domestic demand. Private consumption and private investment

spending, however, moderated after several years of rapid growth. Previous inflationary pressures subsided, allowing policymakers to track the exceptionally low level of interest rates in the US without reigniting consumer or asset price growth. The large surpluses accumulated during recent years of high oil prices are likely to ensure that funding for fiscal or external account shortfalls remains accessible.

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')
Middle East17	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	714		-	(5)	709		-	54	763	7	8
Net fee income	334		-	(2)	332		-	(24)	308	(8)	(7)
Other income6	258		-	(1)	257		-	41	298	16	16

Net operating income7	1,306		-	(8)	1,298		-	71	1,369	5	5

Loan impairment charges and other credit risk provisions	(41)		-	(1)	(42)		-	(349)	(391)	(854)	(831)

Net operating income	1,265		-	(9)	1,256		-	(278)	978	(23)	(22)

Operating expenses	(460)		-	4	(456)		-	(26)	(482)	(5)	(6)

Operating profit	805		-	(5)	800		-	(304)	496	(38)	(38)

Income from associates	185		-	1	186		-	(39)	147	(21)	(21)

Profit before tax	990		-	(4)	986		-	(343)	643	(35)	(35)

For footnotes, see page 94.

HSBC reported profit before tax in the Middle East of US$643 million, a decrease of 35 per cent compared with the first half of 2008 on both reported and underlying bases. This decrease was largely driven by the decline in economic activity, predominantly infrastructure development, following the dramatic fall in the price of oil, the adverse effect of lower regional and global equity markets on individual wealth and the depressed real estate sector. These factors contributed to a marked increase, albeit from a low base, in loan impairment charges in the United Arab Emirates ('UAE'). While new lending was constrained during the period, personal lending balances were higher than at 30 June 2008 and drove an increase in revenues of 6 per cent, partly offset by lower trading income as the first half of 2009 experienced lower levels of currency-related trading.

HSBC continued to expand its presence in the region, opening eight new branches in Egypt over the last 12 months. The priority given to building the Premier business across the region continued with the number of customers increasing by 14 per cent since 31 December 2008.

The Middle East is disclosed as a separate segment for the first time. Its underlying profit before tax declined by 35 per cent.

Net interest income increased by 8 per cent due to higher average interest earning balances compared with the first half of 2008 and asset repricing in Personal Financial Services.

Mortgage balances were higher than in the first half of 2008, reflecting mortgage approvals early in 2008 which were not drawn until later in the year; new approvals were significantly lower in the first half of 2009 as a result of the changed market circumstances. Credit card and trade balances also increased due to higher utilisation of facilities. Asset spreads widened, benefiting from repricing activity.

HSBC increasingly focused on liability products, and customer accounts in Personal Financial Services rose due to a combination of attractive rates offered in the last quarter of 2008 and ongoing marketing campaigns. The growth in Personal Financial Services balances was partly masked by a contraction in Global Banking and Markets balances following an outflow of funds in the second half of 2008 as currency trading abated. The revenue benefit from the limited growth in the balance sheet was partly offset by deposit spread compression in the low interest rate environment.

Net fee income fell by 7 per cent to US$308 million as reduced activity led to a fall in transaction fees on credit cards and a decrease in origination fees for personal loans. Additionally, custody fees decreased in line with declining asset values.

Net trading income fell by 8 per cent, to US$220 million. This was largely attributable to lower foreign exchange revenue as Middle Eastern currency markets attracted lower volumes and became less volatile than in 2008 as currency trading declined. Gains related to favourable credit spread movements were offset by the non-recurrence of private equity gains.

Other operating income included gains of US$55 million arising from the buy-back and extinguishing of HSBC's own debt issued locally.

Loan impairment charges rose sharply, increasing from US$41 million to US$391 million as credit quality across the region deteriorated as a consequence of weaker economic conditions.

Loan impairment charges within Personal Financial Services rose most significantly in the UAE as a result of increased default rates on Consumer Lending, notably credit cards and personal lending. Management actions, such as reducing credit lines and tightening lending criteria to the portfolio segments most at risk, served to limit the level of these charges. There was very little impairment recognised on mortgage lending which reflected HSBC's disciplined risk appetite, which targeted primary developments. The global economic slowdown, together with the decline in oil prices, placed intense pressure on the UAE's economy which suffered a significant fall in property and equity prices. Unemployment steadily increased, triggered mainly by the impact of the real estate downturn on new construction which precipitated the departure of growing numbers of expatriate workers, some of whom left debts unpaid.

For commercial and corporate banking customers, loan impairment charges rose with the deterioration in the economy, as some local businesses faced a sudden drop in operating activity. In addition, there were a few individually significant loan impairment charges recorded on exposures to large business groups in the region in financial difficulty.

Operating expenses increased by 5 per cent to US$482 million, mostly due to the full effect of business growth in 2008. Staff numbers reflected this growth, but further increases were restricted across most of the region in response to the current economic environment. Expansion of the retail network continued in Egypt, with the opening of eight branches since 30 June 2008.

Profit from associates and joint ventures in the region fell by 21 per cent, mainly from lower investment banking activity through IBSA. HSBC's share of IBSA's pre-tax profit fell by 77 per cent to US$7 million as advisory fees from debt capital markets declined. The Group's share of income from The Saudi British Bank was lower than in the comparable period in 2008 at US$136 million as higher loan impairment charges and marginally higher operating expenses were only partly offset by strong foreign exchange and trade-related income.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2009 ('1H09') compared with half-year to 31 December 2008 ('2H08')
Middle East17	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	842		-	(5)	837		-	(74)	763	(9)	(9)
Net fee income	357		-	(3)	354		-	(46)	308	(14)	(13)
Other income6	163		-	(4)	159		-	139	298	83	87

Net operating income7	1,362		-	(12)	1,350		-	19	1,369	1	1

Loan impairment charges and other credit risk provisions	(238)		-	2	(236)		-	(155)	(391)	(64)	(66)

Net operating income	1,124		-	(10)	1,114		-	(136)	978	(13)	(12)

Operating expenses	(499)		-	7	(492)		-	10	(482)	3	2

Operating profit	625		-	(3)	622		-	(126)	496	(21)	(20)

Income from associates	131		-	-	131		-	16	147	12	12

Profit before tax	756		-	(3)	753		-	(110)	643	(15)	(15)

For footnotes, see page 94.

Analysis by customer group and global business

Profit before tax

	Half-year to 30 June 2009
Middle East17	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	343	243		149	1	27	-	763

Net fee income	99	109		98	1	1	-	308

Trading income excluding net interest income	26	37		146	-	1	-	210
Net interest income on trading activities	-	-		10	-	-	-	10

Net trading income24	26	37		156	-	1	-	220

Gains less losses from financial investments	11	(2)		(1)	-	5	-	13
Dividend income	-	-		2	-	-	-	2
Other operating income	24	33		25	2	19	(40)	63

Total operating income	503	420		429	4	53	(40)	1,369

Net insurance claims25	-	-		-	-	-	-	-

Net operating income7	503	420		429	4	53	(40)	1,369

Loan impairment charges and other credit risk provisions	(244)	(83)		(64)	-	-	-	(391)

Net operating income	259	337		365	4	53	(40)	978

Total operating expenses	(245)	(135)		(117)	(5)	(20)	40	(482)

Operating profit/(loss)	14	202		248	(1)	33	-	496

Share of profit in associates and joint ventures	21	50		56	6	14	-	147

Profit before tax	35	252		304	5	47	-	643

	%	%		%	%	%		%
Share of HSBC's profit before tax	0.7	5.0		6.1	0.1	0.9		12.8
Cost efficiency ratio	48.7	32.1		27.3	125.0	37.7		35.2

Balance sheet data23
	US$m	US$m		US$m	US$m	US$m		US$m
Loans and advances to customers (net)	6,645	11,567		6,799	31	55		25,097
Total assets	7,578	13,040		27,423	95	5,285	(4,820)	48,601
Customer accounts	14,967	9,844		7,312	1,645	513		34,281

For footnotes, see page 94.

Analysis by customer group and global business (continued)

Profit before tax

	Half-year to 30 June 2008
Middle East17	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	302	234	159	2	20	(3)	714

Net fee income	114	114	104	2	-	-	334

Trading income excluding net interest income	21	32	155	-	19	-	227
Net interest income/(expense) on trading activities	-	-	23	-	(14)	3	12

Net trading income24	21	32	178	-	5	3	239
Gains less losses from financial investments	14	-	(5)	-	-	-	9
Dividend income	-	-	1	-	-	-	1
Other operating income	12	6	5	-	11	(25)	9

Total operating income	463	386	442	4	36	(25)	1,306

Net insurance claims25	-	-	-	-	-	-	-

Net operating income7	463	386	442	4	36	(25)	1,306

Loan impairment (charges)/ recoveries and other credit risk provisions	(65)	23	-	-	1	-	(41)

Net operating income	398	409	442	4	37	(25)	1,265

Total operating expenses	(238)	(123)	(110)	(2)	(12)	25	(460)

Operating profit	160	286	332	2	25	-	805

Share of profit in associates and joint ventures	49	22	94	-	20	-	185

Profit before tax	209	308	426	2	45	-	990

	%	%	%	%	%		%
Share of HSBC's profit before tax	2.1	3.0	4.2	-	0.4		9.7
Cost efficiency ratio	51.4	31.9	24.9	50.0	33.3		35.2

Balance sheet data23
	US$m	US$m	US$m	US$m	US$m		US$m
Loans and advances to customers (net)	6,459	12,099	6,392	53	1		25,004
Total assets	7,361	13,774	28,966	63	5,436	(3,823)	51,777
Customer accounts	13,073	11,428	9,537	1,764	454		36,256

For footnotes, see page 94.

	Half-year to 31 December 2008
Middle East17	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	350	276	203	1	26	(14)	842

Net fee income	113	127	113	4	-	-	357

Trading income excluding net interest income	26	33	89	-	5	-	153
Net interest expense on trading activities	-	-	(3)	-	(1)	14	10

Net trading income24	26	33	86	-	4	14	163

Gains less losses from financial investments	-	-	(1)	-	-	-	(1)
Dividend income	-	-	1	-	-	-	1
Other operating income	9	2	6	3	15	(35)	-

Total operating income	498	438	408	8	45	(35)	1,362

Net insurance claims25	-	-	-	-	-	-	-

Net operating income7	498	438	408	8	45	(35)	1,362

Loan impairment charges and other credit risk provisions	(158)	(68)	(12)	-	-	-	(238)

Net operating income	340	370	396	8	45	(35)	1,124

Total operating expenses	(273)	(141)	(102)	(6)	(12)	35	(499)

Operating profit	67	229	294	2	33	-	625

Share of profit in associates and joint ventures	13	21	96	-	1	-	131

Profit before tax	80	250	390	2	34	-	756

	%	%	%	%	%		%
Share of HSBC's loss before tax	8.5	26.6	41.5	0.2	3.6		80.4
Cost efficiency ratio	54.8	32.2	25.0	75.0	26.7		36.6

Balance sheet data23
	US$m	US$m	US$m	US$m	US$m		US$m
Loans and advances to customers (net)	7,226	13,221	6,649	29	170		27,295
Total assets	8,168	14,672	27,975	46	5,754	(5,663)	50,952
Customer accounts	13,753	10,978	7,628	1,762	1,044		35,165

For footnotes, see page 94.

This information is provided by RNS

The company news service from the London Stock Exchange

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