FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of August, 2005
HSBC Holdings plc
42nd Floor, 8 Canada
Square, London E14 5HQ, England
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F).
Form 20-F X Form 40-F ......
(Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934).
Yes....... No X
(If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82- ..............)
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------------------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to________
COMMISSION FILE NUMBER 1-8198
---------------------
HSBC FINANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-1052062
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2700 SANDERS ROAD, PROSPECT HEIGHTS, ILLINOIS 60070
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(847) 564-5000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
At July 31, 2005, there were 50 shares of the registrant's common stock
outstanding, all of which were owned indirectly by HSBC Holdings plc.
--------------------------------------------------------------------------------
HSBC FINANCE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
--------------------------------------------------------------------------------
Item 1. Consolidated Financial Statements
Statement of Income......................................... 3
Balance Sheet............................................... 4
Statement of Changes in Shareholders' Equity................ 5
Statement of Cash Flows..................................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements.................................. 18
Executive Overview.......................................... 18
Basis of Reporting.......................................... 22
Receivables Review.......................................... 23
Results of Operations....................................... 24
Segment Results - Managed Basis............................. 31
Credit Quality.............................................. 38
Liquidity and Capital Resources............................. 43
Risk Management............................................. 48
Reconciliations to GAAP Financial Measures.................. 50
Item 4. Controls and Procedures..................................... 54
PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1. Legal Proceedings........................................... 54
Item 5. Other Information........................................... 56
Item 6. Exhibits.................................................... 57
Signature................................................................. 58
2
PART I. FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HSBC Finance Corporation
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------
(IN MILLIONS)
Finance and other interest income.......................... $3,139 $2,637 $6,089 $5,165
Interest expense........................................... 1,104 707 2,166 1,415
------ ------ ------ ------
NET INTEREST INCOME........................................ 2,035 1,930 3,923 3,750
Provision for credit losses................................ 1,031 997 1,872 1,925
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES...... 1,004 933 2,051 1,825
------ ------ ------ ------
Other revenues:
Securitization revenue................................... 54 266 139 614
Insurance revenue........................................ 229 204 450 415
Investment income........................................ 33 30 66 71
Derivative income........................................ 76 124 336 176
Fee income............................................... 354 242 660 507
Taxpayer financial services revenue...................... 18 6 261 212
Other income............................................. 360 180 674 280
------ ------ ------ ------
TOTAL OTHER REVENUES....................................... 1,124 1,052 2,586 2,275
------ ------ ------ ------
Costs and expenses:
Salaries and employee benefits........................... 526 457 1,023 942
Sales incentives......................................... 90 90 172 168
Occupancy and equipment expenses......................... 82 77 169 160
Other marketing expenses................................. 185 131 365 263
Other servicing and administrative expenses.............. 143 198 401 424
Support services from HSBC affiliates.................... 217 196 426 373
Amortization of intangibles.............................. 83 79 190 195
Policyholders' benefits.................................. 116 93 238 206
------ ------ ------ ------
TOTAL COSTS AND EXPENSES................................... 1,442 1,321 2,984 2,731
------ ------ ------ ------
Income before income tax expense........................... 686 664 1,653 1,369
Income tax expense......................................... 214 231 555 466
------ ------ ------ ------
NET INCOME................................................. $ 472 $ 433 $1,098 $ 903
====== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
3
HSBC Finance Corporation
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31,
2005 2004
----------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT SHARE DATA)
ASSETS
Cash........................................................ $ 512 $ 392
Interest bearing deposits with banks........................ 413 603
Securities purchased under agreements to resell............. 421 2,651
Securities.................................................. 4,014 3,645
Receivables, net............................................ 116,495 104,815
Intangible assets, net...................................... 2,491 2,705
Goodwill.................................................... 6,799 6,856
Properties and equipment, net............................... 470 487
Real estate owned........................................... 459 587
Derivative financial assets................................. 1,698 4,049
Other assets................................................ 3,971 3,400
-------- --------
TOTAL ASSETS................................................ $137,743 $130,190
======== ========
LIABILITIES
Debt:
Deposits.................................................. $ 38 $ 47
Commercial paper, bank and other borrowings............... 10,645 9,013
Due to affiliates......................................... 16,408 13,789
Long term debt (with original maturities over one year)... 87,044 85,378
-------- --------
Total debt.................................................. 114,135 108,227
Insurance policy and claim reserves......................... 1,295 1,303
Derivative related liabilities.............................. 397 432
Other liabilities........................................... 3,427 3,287
-------- --------
TOTAL LIABILITIES......................................... 119,254 113,249
SHAREHOLDERS' EQUITY
Redeemable preferred stock, 1,501,100 shares authorized:
Series A, $0.01 par value, 1,100 shares issued, held by
HSBC Investments (North America) Inc. ................ 1,100 1,100
Series B, $0.01 par value, 575,000 shares issued at
June 30, 2005......................................... 575 -
Common shareholder's equity:
Common stock, $0.01 par value, 100 shares authorized,
50 shares issued...................................... - -
Additional paid-in capital............................. 14,662 14,627
Retained earnings...................................... 1,632 571
Accumulated other comprehensive income................. 520 643
-------- --------
TOTAL COMMON SHAREHOLDER'S EQUITY........................... 16,814 15,841
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $137,743 $130,190
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
HSBC Finance Corporation
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005 2004
-------------------------------------------------------------------------------
(IN MILLIONS)
PREFERRED STOCK
Balance at beginning of period............................ $ 1,100 $ 1,100
Issuance of Series B preferred stock...................... 575 -
------- -------
Balance at end of period.................................. $ 1,675 $ 1,100
======= =======
COMMON SHAREHOLDER'S EQUITY
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period......................... $14,627 $14,645
Issuance costs of Series B preferred stock............. (16) -
Return of capital...................................... (13) (14)
Employee benefit plans and other....................... 64 12
------- -------
Balance at end of period............................... $14,662 $14,643
------- -------
RETAINED EARNINGS
Balance at beginning of period......................... $ 571 $ 1,303
Net income............................................. 1,098 903
Dividends:
Preferred stock...................................... (37) (36)
------- -------
Balance at end of period............................... $ 1,632 $ 2,170
------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period......................... $ 643 $ 443
Net change in unrealized gains (losses) on:
Derivatives classified as cash flow hedges........... 44 107
Securities available for sale and interest-only strip
receivables......................................... 15 (4)
Foreign currency translation adjustments............... (182) 20
------- -------
Other comprehensive income, net of tax................. (123) 123
------- -------
Balance at end of period............................... $ 520 $ 566
------- -------
TOTAL COMMON SHAREHOLDER'S EQUITY........................... $16,814 $17,379
------- -------
COMPREHENSIVE INCOME
Net income................................................ $ 1,098 $ 903
Other comprehensive income................................ (123) 123
------- -------
COMPREHENSIVE INCOME........................................ $ 975 $ 1,026
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
5
HSBC Finance Corporation
--------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 2004
---------------------------------------------------------------------------------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 1,098 $ 903
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for credit losses............................... 1,872 1,925
Insurance policy and claim reserves....................... (142) (69)
Depreciation and amortization............................. 257 253
Net change in interest-only strip receivables............. 174 288
Net change in other assets................................ (620) (315)
Net change in other liabilities........................... 224 (289)
Other, net................................................ (233) (541)
-------- --------
Net cash provided by (used in) operating activities......... 2,630 2,155
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities:
Purchased................................................. (363) (971)
Matured................................................... 224 1,078
Sold...................................................... 79 497
Net change in interest bearing deposits with banks.......... (317) 571
Net change in short-term securities available for sale...... 170 3,296
Net change in securities purchased under agreements to
resell.................................................... 2,230 (341)
Receivables:
Originations, net of collections.......................... (29,896) (26,068)
Purchases and related premiums............................ (38) (542)
Initial and fill-up securitizations....................... 5,189 16,719
Sales to affiliates....................................... 9,885 856
Properties and equipment:
Purchases................................................. (42) (32)
Sales..................................................... 2 1
-------- --------
Net cash provided by (used in) investing activities......... (12,877) (4,936)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt:
Net change in short-term debt and deposits................ 1,632 1,105
Net change in time certificates........................... (2) (155)
Net change in due to affiliates........................... 3,164 1,122
Long term debt issued..................................... 16,450 7,630
Long term debt retired.................................... (11,231) (7,316)
Redemption of company obligated mandatorily redeemable
preferred securities of subsidiary trusts................. (309) -
Insurance:
Policyholders' benefits paid.............................. (68) (89)
Cash received from policyholders.......................... 181 121
Issuance of Series B preferred stock........................ 559 -
-------- --------
Net cash provided by (used in) financing activities......... 10,376 2,418
-------- --------
Effect of exchange rate changes on cash..................... (9) 10
-------- --------
Net change in cash.......................................... 120 (353)
Cash at beginning of period................................. 392 463
-------- --------
CASH AT END OF PERIOD....................................... $ 512 $ 110
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------------------------------------------------
HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC North
America Holdings Inc. ("HNAH"), which is a wholly owned subsidiary of HSBC
Holdings plc ("HSBC"). The accompanying unaudited interim consolidated financial
statements of HSBC Finance Corporation and its subsidiaries have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all normal and recurring adjustments considered necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods have been made. HSBC Finance Corporation may also be referred to
in this Form 10-Q as "we," "us" or "our." These unaudited interim consolidated
financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2004 (the "2004 Form 10-K"). Certain
reclassifications have been made to prior period amounts to conform to the
current period presentation.
The preparation of financial statements in conformity with U.S. GAAP requires
the use of estimates and assumptions that affect reported amounts and
disclosures. Actual results could differ from those estimates. Interim results
should not be considered indicative of results in future periods.
Interim financial statement disclosures required by U.S. GAAP regarding segments
are included in the Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") section of this Form 10-Q.
2. SECURITIES
--------------------------------------------------------------------------------
Securities consisted of the following available-for-sale investments:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30, 2005 COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------
(IN MILLIONS)
Corporate debt securities............................ $2,562 $52 $(18) $2,596
Money market funds................................... 268 - - 268
U.S. government sponsored enterprises(1)............. 84 - (1) 83
U.S. government and federal agency debt securities... 593 2 (2) 593
Non-government mortgage backed securities............ 109 - - 109
Other................................................ 332 3 (4) 331
------ --- ---- ------
Subtotal............................................. 3,948 57 (25) 3,980
Accrued investment income............................ 34 - - 34
------ --- ---- ------
Total securities available for sale.................. $3,982 $57 $(25) $4,014
====== === ==== ======
7
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2004 COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------
(IN MILLIONS)
Corporate debt securities............................ $2,520 $27 $(14) $2,533
Money market funds................................... 230 - - 230
U.S. government sponsored enterprises(1)............. 49 - - 49
U.S. government and federal agency debt securities... 344 - (3) 341
Non-government mortgage backed securities............ 74 - (1) 73
Other................................................ 385 1 (3) 383
------ --- ---- ------
Subtotal............................................. 3,602 28 (21) 3,609
Accrued investment income............................ 36 - - 36
------ --- ---- ------
Total securities available for sale.................. $3,638 $28 $(21) $3,645
====== === ==== ======
---------------
(1) Includes primarily mortgage-backed securities issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation.
A summary of gross unrealized losses and related fair values as of June 30, 2005
and December 31, 2004, classified as to the length of time the losses have
existed follows:
LESS THAN ONE YEAR GREATER THAN ONE YEAR
--------------------------------------- ---------------------------------------
GROSS AGGREGATE GROSS AGGREGATE
NUMBER OF UNREALIZED FAIR VALUE OF NUMBER OF UNREALIZED FAIR VALUE OF
JUNE 30, 2005 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS
-------------------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Corporate debt
securities.............. 137 $(3) $283 325 $(15) $833
U.S. government sponsored
enterprises............. 31 (1) 74 - - -
U.S. government and
federal agency debt
securities.............. - - - 34 (2) 112
Other..................... - - - 48 (4) 232
LESS THAN ONE YEAR GREATER THAN ONE YEAR
--------------------------------------- ---------------------------------------
GROSS AGGREGATE GROSS AGGREGATE
NUMBER OF UNREALIZED FAIR VALUE OF NUMBER OF UNREALIZED FAIR VALUE OF
DECEMBER 31, 2004 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS
-------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
Corporate debt
securities.............. 254 $(6) $636 218 $(8) $647
U.S. government and
federal agency debt
securities.............. - - - 61 (3) 278
Non-government mortgage
backed securities....... - - - 3 (1) 6
Other..................... 21 (2) 114 42 (1) 130
The gross unrealized losses on our securities available for sale have increased
slightly due to a general increase in short- and medium-term interest rates
during the six months ended June 30, 2005. The contractual terms of these
securities do not permit the issuer to settle the securities at a price less
than the par value of the investment. Since substantially all of these
securities are rated A- or better, and because we have the ability and intent to
hold these investments until maturity or a market price recovery, these
securities are not considered other than temporarily impaired.
8
3. RECEIVABLES
--------------------------------------------------------------------------------
Receivables consisted of the following:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
(IN MILLIONS)
Real estate secured......................................... $ 71,930 $ 64,820
Auto finance................................................ 8,997 7,544
MasterCard(1)/Visa(1)....................................... 17,421 14,635
Private label............................................... 2,905 3,411
Personal non-credit card.................................... 17,255 16,128
Commercial and other........................................ 253 317
-------- --------
Total owned receivables..................................... 118,761 106,855
Purchase accounting fair value adjustments.................. 134 201
Accrued finance charges..................................... 1,548 1,394
Credit loss reserve for owned receivables................... (3,756) (3,625)
Unearned credit insurance premiums and claims reserves...... (580) (631)
Interest-only strip receivables............................. 151 323
Amounts due and deferred from receivable sales.............. 237 298
-------- --------
Total owned receivables, net................................ 116,495 104,815
Receivables serviced with limited recourse.................. 8,980 14,225
-------- --------
Total managed receivables, net.............................. $125,475 $119,040
======== ========
---------------
(1) MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
Purchase accounting fair value adjustments represent adjustments which have been
"pushed down" to record our receivables at fair value on March 28, 2003, the
date we were acquired by HSBC.
Interest-only strip receivables are reported net of our estimate of probable
losses under the recourse provisions for receivables serviced with limited
recourse. Our estimate of the recourse obligation totaled $525 million at June
30, 2005 and $890 million at December 31, 2004. Interest-only strip receivables
also included fair value mark-to-market adjustments, which increased the balance
by $78 million at June 30, 2005 and $76 million at December 31, 2004.
Receivables serviced with limited recourse consisted of the following:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
(IN MILLIONS)
Real estate secured......................................... $ - $ 81
Auto finance................................................ 1,819 2,679
MasterCard/Visa............................................. 4,752 7,583
Personal non-credit card.................................... 2,409 3,882
------ -------
Total....................................................... $8,980 $14,225
====== =======
9
The combination of receivables owned and receivables serviced with limited
recourse, which comprises our managed portfolio, is shown below:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
(IN MILLIONS)
Real estate secured......................................... $ 71,930 $ 64,901
Auto finance................................................ 10,816 10,223
MasterCard/Visa............................................. 22,173 22,218
Private label............................................... 2,905 3,411
Personal non-credit card.................................... 19,664 20,010
Commercial and other........................................ 253 317
-------- --------
Total....................................................... $127,741 $121,080
======== ========
4. CREDIT LOSS RESERVES
--------------------------------------------------------------------------------
An analysis of credit loss reserves was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------------------------------------------------------------------------------------------------
(IN MILLIONS)
Owned receivables:
Credit loss reserves at beginning of period........... $3,581 $ 3,753 $ 3,625 $ 3,793
Provision for credit losses........................... 1,031 997 1,872 1,925
Charge-offs........................................... (961) (1,057) (1,914) (2,108)
Recoveries............................................ 117 92 207 172
Other, net............................................ (12) 10 (34) 13
------ ------- ------- -------
Credit loss reserves for owned receivables............ 3,756 3,795 3,756 3,795
------ ------- ------- -------
Receivables serviced with limited recourse:
Credit loss reserves at beginning of period........... 661 2,159 890 2,374
Provision for credit losses........................... 52 148 82 401
Charge-offs........................................... (201) (426) (472) (925)
Recoveries............................................ 17 24 33 52
Other, net............................................ (4) (1) (8) 2
------ ------- ------- -------
Credit loss reserves for receivables serviced with
limited recourse................................... 525 1,904 525 1,904
------ ------- ------- -------
Credit loss reserves for managed receivables............ $4,281 $ 5,699 $ 4,281 $ 5,699
====== ======= ======= =======
The provision for credit losses on owned receivables and overall reserve levels
in 2005 reflect the impact of the bulk sale of our domestic private label
receivables to HSBC Bank USA, National Association ("HSBC Bank USA") in December
2004 as well as the impact of receivable growth. Reductions to the provision for
credit losses and overall reserve levels on receivables serviced with limited
recourse in 2005 reflect the impact of the bulk sale discussed above, as well as
the impact of reduced securitization levels, including our decision to structure
new collateralized funding transactions as secured financings.
Further analysis of credit quality and credit loss reserves and our credit loss
reserve methodology are presented in Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Form 10-Q
under the caption "Credit Quality."
10
5. INTANGIBLE ASSETS
--------------------------------------------------------------------------------
Intangible assets consisted of the following:
ACCUMULATED CARRYING
GROSS AMORTIZATION VALUE
----------------------------------------------------------------------------------------------
(IN MILLIONS)
JUNE 30, 2005
Purchased credit card relationships and related programs.... $1,696 $462 $1,234
Retail services merchant relationships...................... 270 122 148
Other loan related relationships............................ 326 87 239
Trade names................................................. 717 - 717
Technology, customer lists and other contracts.............. 281 128 153
------ ---- ------
Total....................................................... $3,290 $799 $2,491
====== ==== ======
DECEMBER 31, 2004
Purchased credit card relationships and related programs.... $1,723 $355 $1,368
Retail services merchant relationships...................... 270 95 175
Other loan related relationships............................ 326 71 255
Trade names................................................. 718 - 718
Technology, customer lists and other contracts.............. 281 92 189
------ ---- ------
Total....................................................... $3,318 $613 $2,705
====== ==== ======
Estimated amortization expense associated with our intangible assets for each of
the following years is as follows:
YEAR ENDING DECEMBER 31,
---------------------------------------------------------------------------
(IN MILLIONS)
2005........................................................ $351
2006........................................................ 343
2007........................................................ 325
2008........................................................ 230
2009........................................................ 122
Thereafter.................................................. 366
6. GOODWILL
--------------------------------------------------------------------------------
Goodwill balances associated with our foreign businesses will change from period
to period due to movements in foreign exchange. Since the one-year anniversary
of our acquisition by HSBC was completed in the first quarter of 2004, no
further acquisition-related adjustments to our goodwill balance will occur,
except for changes in estimates of the tax basis in our assets and liabilities
or other tax estimates recorded at the date of our acquisition by HSBC, pursuant
to Statement of Financial Accounting Standards Number 109, "Accounting for
Income Taxes." During the second quarter of 2005, we reduced our goodwill
balance by approximately $11 million as a result of such changes in tax
estimates.
As part of ongoing integration efforts with HSBC, we have begun working with
HSBC to determine if funding synergies and management efficiencies could be
achieved by transferring our U.K. and European operations to a U.K. based
subsidiary of HSBC. As required by SFAS No. 142, "Goodwill and Other Intangible
Assets," we performed an interim goodwill impairment test for our U.K. and
European operations during the second quarter of 2005. As the estimated fair
value of our U.K. and European operations exceeded its carrying amount, we
concluded that the related goodwill assigned to this reporting unit was not
impaired. As of the date
11
of this filing, a decision has not been made regarding the potential transfer of
the U.K. and European operations.
7. INCOME TAXES
--------------------------------------------------------------------------------
Our effective tax rates were as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -----------
2005 2004 2005 2004
-----------------------------------------------------------------------------------------
Effective tax rate.......................................... 31.2% 34.8% 33.6% 34.0%
The decrease in the effective tax rate in both periods is primarily due to lower
state tax rates, partially offset by higher pretax income without a
corresponding increase in low income housing tax credits. The effective tax rate
differs from the statutory federal income tax rate primarily because of the
effects of state and local income taxes and tax credits.
8. REDEEMABLE PREFERRED STOCK
--------------------------------------------------------------------------------
We have 1,501,100 shares of preferred stock authorized for issuance. In March
2003, 1,100 shares of Series A Cumulative Preferred Stock were issued to HSBC
and are now held by HSBC Investments (North America) Inc. In June 2005, we
issued 575,000 shares of 6.36% Non-Cumulative Preferred Stock, Series B ("Series
B Preferred Stock"). Dividends on the Series B Preferred Stock are
non-cumulative and payable quarterly at a rate of 6.36 percent commencing
September 15, 2005. The Series B Preferred Stock may be redeemed at our option
after June 23, 2010 at $1,000 per share, plus accrued dividends. The redemption
and liquidation value is $1,000 per share plus accrued and unpaid dividends. The
holders of Series B Preferred Stock are entitled to payment before any capital
distribution is made to the common shareholder and have no voting rights except
for the right to elect two additional members to the board of directors in the
event that dividends have not been declared and paid for six quarters, or as
otherwise provided by law. Additionally, as long as any shares of the Series B
Preferred Stock are outstanding, the authorization, creation or issuance of any
class or series of stock which would rank prior to the Series B Preferred Stock
with respect to dividends or amounts payable upon liquidation or dissolution of
HSBC Finance Corporation must be approved by at least two-thirds of the shares
of Series B Preferred Stock outstanding at that time. Related issuance costs of
$16 million have been recorded as a reduction of additional paid-in capital.
9. RELATED PARTY TRANSACTIONS
--------------------------------------------------------------------------------
In the normal course of business, we conduct transactions with HSBC and its
subsidiaries. These transactions include funding arrangements, purchases and
sales of receivables, servicing arrangements, information technology services,
item and statement processing services, banking and other miscellaneous
services. The following tables present related party balances and the income and
(expense) generated by related party transactions:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
(IN MILLIONS)
ASSETS, (LIABILITIES) AND EQUITY:
Derivative financial assets, net............................ $ 1,220 $ 3,297
Other assets................................................ 1,532 604
Due to affiliates........................................... (16,408) (13,789)
Other liabilities........................................... (273) (168)
Series A preferred stock.................................... 1,100 1,100
12
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -------------
2005 2004 2005 2004
-------------------------------------------------------------------------------------------
(IN MILLIONS)
INCOME/(EXPENSE):
Interest expense on borrowings from HSBC and subsidiaries... $(134) $ (66) $(285) $(118)
Interest income on advances to HSBC affiliates.............. 7 - 11 -
HSBC Bank USA:
Real estate secured servicing revenues.................... 4 3 8 6
Real estate secured sourcing, underwriting and pricing
revenues............................................... 1 2 2 2
Gain on daily sale of domestic private label receivable
originations........................................... 100 - 192 -
Gain on sale of real estate secured and MasterCard/Visa
receivables............................................ 9 - 17 -
Taxpayer financial services loan origination fees......... (1) - (15) -
Domestic private label receivable servicing fees.......... 89 - 181 -
Other servicing, processing, origination and support
revenues............................................... 6 3 14 5
Support services from HSBC affiliates, primarily HSBC
Technology and Services (USA) Inc. ("HTSU")............... (217) (196) (426) (374)
HTSU:
Rental revenue............................................ 8 8 18 16
Administrative services revenue........................... 7 5 12 8
Other income from HSBC affiliates........................... 1 - 3 -
The notional value of derivative contracts outstanding with HSBC subsidiaries
totaled $58.4 billion at June 30, 2005 and $62.6 billion at December 31, 2004.
Affiliate swap counterparties provide collateral in the form of securities,
which are not recorded on our balance sheet. At June 30, 2005, the fair value of
our agreements with affiliate counterparties was below the level requiring
payment of collateral. As such at June, 30, 2005, we were not holding any swap
collateral from HSBC affiliates in the form of securities. At December 31, 2004,
affiliate swap counterparties had provided collateral in the form of securities,
which were not recorded on our balance sheet, totaling $2.2 billion.
We have extended a line of credit of $2 billion to HSBC USA, Inc. at interest
rates comparable to third-party rates for a line of credit with similar terms.
The balance outstanding under this line was $.6 billion at June 30, 2005 and
December 31, 2004 and is included in other assets. Interest income associated
with this line of credit is recorded in interest income and reflected as
interest income on HSBC USA, Inc. advances in the table above.
We extended a revolving line of credit of $.5 billion to HTSU on June 28, 2005
at interest rates comparable to third-party rates for a line of credit with
similar terms. The balance outstanding under this line of credit was $.4 billion
at June 30, 2005 and is included in other assets.
We extended a promissory note of $.5 billion to HSBC Securities (USA) Inc.
("HSI") on June 27, 2005 at interest rates comparable to third-party rates for a
note with similar terms. The entire $.5 billion note was outstanding at June 30,
2005 and included in other assets. This line of credit was repaid during July
2005.
We extended a line of credit of $.4 billion to HSBC Investments (North America)
Inc. on March 31, 2005 which was repaid during the second quarter of 2005. This
line of credit was at interest rates comparable to third-party rates for a line
of credit with similar terms.
Due to affiliates also includes amounts owed to subsidiaries of HSBC (other than
preferred stock). This funding was at interest rates (both the underlying
benchmark rate and credit spreads) comparable to third-party rates for debt with
similar maturities.
At June 30, 2005, we had revolving credit facilities of $2.5 billion from HSBC
domestically and $10.0 billion from HSBC in the U.K., of which $6.9 billion was
outstanding under the U.K. lines and no balances were
13
outstanding on the domestic lines. As of December 31, 2004, $7.4 billion was
outstanding under the U.K. lines and no balances were outstanding on the
domestic lines. Annual commitment fee requirements to support availability of
these lines are paid on a quarterly basis. Expense recognized for commitment
fees totaled $.4 million for the three months ended June 30, 2005 and 2004, and
$.8 million for the six months ended June 30, 2005 and 2004. Commitment fee
expense is included as a component of interest expense.
In the first quarter of 2004, we sold approximately $.9 billion of real estate
secured receivables from our mortgage services business to HSBC Bank USA and
recorded a pre-tax gain of $15 million on the sale. Under a separate servicing
agreement, we have agreed to service all real estate secured receivables sold to
HSBC Bank USA including all future business they purchase from our
correspondents. As of June 30, 2005, we were servicing $5.1 billion of real
estate secured receivables for HSBC Bank USA. We also received fees from HSBC
Bank USA pursuant to a service level agreement under which we sourced,
underwrote and priced $.5 billion of real estate secured receivables purchased
by HSBC Bank USA during the three months ended June 30, 2005 and $1.1 billion
during the three months ended June 30, 2004. We sourced, underwrote and priced
$1.1 billion of real estate secured receivables purchased by HSBC Bank USA
during the six months ended June 30, 2005 and $1.5 billion during the six months
ended June 30, 2004. These revenues have been recorded as other income and are
reflected as real estate secured servicing revenues and real estate secured
sourcing, underwriting and pricing revenues from HSBC Bank USA in the above
table.
In December 2004, we sold our domestic private label receivable portfolio,
including the retained interests associated with our securitized domestic
private label receivables, to HSBC Bank USA. We continue to service the sold
private label receivables and receive servicing fee income from HSBC Bank USA
for these services. As of June 30, 2005, we were servicing $15.1 billion of
domestic private label receivables for HSBC Bank USA. Servicing fee income from
HSBC Bank USA received for the three month period ended June 30, 2005 of $89
million and $181 million for the six months ended June 30, 2005 is included in
the table above as a component of other servicing, processing, origination and
support revenues from HSBC Bank USA. We continue to maintain the related
customer account relationships and, therefore, sell new domestic private label
receivable originations to HSBC Bank USA on a daily basis. We sold $4,685
million of private label receivables to HSBC Bank USA during the three months
ended June 30, 2005 and $8,938 million in the year-to-date period. The gains
associated with the sale of these receivables are reflected in the table above
and are recorded in other income.
Under several service level agreements, we also provide services to HSBC Bank
USA. These services include credit card servicing and processing activities
through our credit card services business, loan origination and servicing
through our auto finance business and other operational and administrative
support. Fees received for these services are reported as other income and are
included in the table above as a component of other servicing, processing,
origination and support revenues from HSBC Bank USA.
During 2003, Household Capital Trust VIII issued $275 million in mandatorily
redeemable preferred securities to HSBC. Interest expense recorded on the
underlying junior subordinated notes totaled $4 million during both three month
periods ended June 30, 2005 and 2004 and $8 million for both six month periods
ended June 30, 2005 and 2004. The interest expense for the Household Capital
Trust VIII is included in interest expense on borrowings from HSBC and
subsidiaries in the table above.
During the third quarter of 2004, our Canadian business began to originate and
service auto loans for an HSBC affiliate in Canada. Fees received for these
services of $1 million for the three months ended June 30, 2005 and $3 million
for the six months ended June 30, 2005 are included in other income and are
reflected in other income from HSBC affiliates in the above table.
Effective October 1, 2004, HSBC Bank USA became the originating lender for loans
initiated by our taxpayer financial services business for clients of various
third party tax preparers. We purchase the loans originated by HSBC Bank USA
daily for a fee. Origination fees paid to HSBC Bank USA totaled $1 million
during the three months ended June 30, 2005 and $15 million during the six
months ended June 30, 2005. These origination fees are included as an offset to
taxpayer financial services revenue and are reflected as taxpayer financial
services loan origination fees in the above table.
14
On July 1, 2004, HSBC Bank Nevada, National Association ("HOBN"), formerly known
as Household Bank (SB), N.A., purchased the account relationships associated
with $970 million of MasterCard and Visa credit card receivables from HSBC Bank
USA for approximately $99 million, which are included in intangible assets. The
receivables continue to be owned by HSBC Bank USA. Originations of new accounts
and receivables are made by HOBN and new receivables are sold daily to HSBC Bank
USA. We sold $480 million of credit card receivables to HSBC Bank USA during the
three months ended June 30, 2005 and $947 million in the year-to-date period.
The gains associated with the sale of these receivables are reflected in the
table above and are recorded in other income.
Effective January 1, 2004, our technology services employees, as well as
technology services employees from other HSBC entities in North America, were
transferred to HTSU. In addition, technology related assets and software
purchased subsequent to January 1, 2004 are generally purchased and owned by
HTSU. Technology related assets owned by HSBC Finance Corporation prior to
January 1, 2004 currently remain in place and were not transferred to HTSU. In
addition to information technology services, HTSU also provides certain item
processing and statement processing activities to us pursuant to a master
service level agreement. Support services from HSBC affiliates includes services
provided by HTSU as well as banking services and other miscellaneous services
provided by HSBC Bank USA and other subsidiaries of HSBC. We also receive
revenue from HTSU for certain office space which we have rented to them, which
has been recorded as a reduction of occupancy and equipment expenses, and for
certain administrative costs, which has been recorded as other income.
In addition, we utilize a related HSBC entity to lead manage substantially all
ongoing debt issuances. Fees paid to HSBC and its subsidiaries for such services
totaled approximately $23 million for the three months ended June 30, 2005 and
$26 million for the six months ended June 30, 2005. Fees paid for such services
totaled approximately $3 million for the three months ended June 30, 2004 and $6
million for the six months ended June 30, 2004. These fees are amortized over
the life of the related debt as a component of interest expense.
Employees of HSBC Finance Corporation participate in one or more stock
compensation plans sponsored by HSBC. Our share of the expense of these plans
was $36 million for the six months ended June 30, 2005 and $25 million for the
year-ago period.
10. PENSION AND OTHER POSTRETIREMENT BENEFITS
--------------------------------------------------------------------------------
In November 2004, sponsorship of the U.S. defined benefit pension plan of HSBC
Finance Corporation and the U.S. defined benefit pension plan of HSBC Bank USA
was transferred to HNAH. Effective January 1, 2005, the two separate plans were
merged into a single defined benefit pension plan which facilitates the
development of a unified employee benefit policy and unified employee benefit
plan administration for HSBC affiliates operating in the U.S. As a result, the
pension liability relating to our U.S. defined benefit plan of $49 million, net
of tax, was transferred to HNAH as a capital transaction in the first quarter of
2005.
15
Components of net periodic benefit cost related to our defined benefit pension
plans and our postretirement benefits other than pensions were as follows:
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
THREE MONTHS ENDED JUNE 30, 2005 2004 2005 2004
------------------------------------------------------------------------------------------------
(IN MILLIONS)
Service cost - benefits earned during the period............ $ 19 $ 14 $ 2 $ 1
Interest cost............................................... 21 13 4 3
Expected return on assets................................... (29) (23) - -
Recognized (gains) losses................................... 1 (1) - -
---- ---- --- ---
Net periodic benefit cost................................... $ 12 $ 3 $ 6 $ 4
==== ==== === ===
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
SIX MONTHS ENDED JUNE 30, 2005 2004 2005 2004
------------------------------------------------------------------------------------------------
(IN MILLIONS)
Service cost - benefits earned during the period............ $ 32 $ 27 $ 3 $ 2
Interest cost............................................... 36 27 8 7
Expected return on assets................................... (51) (45) - -
Recognized (gains) losses................................... 2 (2) - -
---- ---- --- ---
Net periodic benefit cost................................... $ 19 $ 7 $11 $ 9
==== ==== === ===
11. NEW ACCOUNTING PRONOUNCEMENTS
--------------------------------------------------------------------------------
In March 2004, the Financial Accounting Standards Board ("FASB") reached a
consensus on Emerging Issues Task Force 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1"). EITF 03-1 provides guidance for determining when an investment is
impaired and whether the impairment is other than temporary. EITF 03-1 also
incorporates into its consensus the required disclosures about unrealized losses
on investments announced by the EITF in late 2003 and adds new disclosure
requirements relating to cost-method investments. The new disclosure
requirements are effective for annual reporting periods ending after June 15,
2004 and the new impairment accounting guidance was to become effective for
reporting periods beginning after June 15, 2004. In September 2004, the FASB
delayed the effective date of EITF 03-1 for measurement and recognition of
impairment losses until implementation guidance is issued. We do not expect the
adoption of the impairment guidance contained in EITF 03-1 to have a material
impact on our financial position or results of operations.
In December 2004, the FASB issued FASB Statement No. 123 (Revised), "Share-Based
Payment," ("SFAS No. 123R"). SFAS No. 123R requires public entities to measure
the cost of stock-based compensation based on the grant date fair value of the
award as well as other additional disclosure requirements. On March 28, 2005,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
which amended the compliance date to allow public companies to comply with the
provisions of SFAS No. 123R at the beginning of their next fiscal year that
begins after June 15, 2005, instead of the next reporting period as originally
required by SFAS No. 123R. Because we currently apply the fair value method of
accounting for all equity based awards, the adoption of SFAS 123R will not have
a significant effect on the results of our operations or cash flows.
16
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and
Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS No. 154") which requires companies to apply voluntary changes in
accounting principles retrospectively whenever it is practicable. The
retrospective application requirement replaces APB 20's requirement to recognize
most voluntary changes in accounting principle by including the cumulative
effect of the change in net income during the period the change occurs.
Retrospective application will be the required transition method for new
accounting pronouncements in the event that a newly-issued pronouncement does
not specify transition guidance. SFAS No. 154 is effective for accounting
changes made in fiscal years beginning after December 15, 2005.
17
HSBC Finance Corporation
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
--------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report and
with our Annual Report on Form 10-K for the year ended December 31, 2004 (the
"2004 Form 10-K"). MD&A may contain certain statements that may be
forward-looking in nature within the meaning of the Private Securities
Litigation Reform Act of 1995. Our results may differ materially from those
noted in the forward-looking statements. Words such as "believe", "expects",
"estimates", "targeted", "anticipates", "goal" and similar expressions are
intended to identify forward-looking statements but should not be considered as
the only means through which these statements may be made. Statements that are
not historical facts, including statements about management's beliefs and
expectations, are forward-looking statements which involve inherent risks and
uncertainties and are based on current views and assumptions. A number of
factors could cause actual results to differ materially from those contained in
any forward-looking statements. For a list of important factors that may affect
our actual results, see Cautionary Statement on Forward Looking Statements in
Part I, Item 1 of our 2004 Form 10-K.
EXECUTIVE OVERVIEW
--------------------------------------------------------------------------------
HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC Holdings
plc ("HSBC"). HSBC Finance Corporation may also be referred to in MD&A as "we",
"us", or "our". In addition to owned basis reporting, we also monitor our
operations and evaluate trends on a managed basis (a non-GAAP financial
measure), which assumes that securitized receivables have not been sold and are
still on our balance sheet. See "Basis of Reporting" for further discussion of
the reasons we use this non-GAAP financial measure.
In measuring our results, management's primary focus is on managed receivables
growth and net income. Net income was $472 million for the quarter ended June
30, 2005, an increase of 9 percent, compared to net income of $433 million in
the prior year quarter. Net income was $1,098 million for the first six months
of 2005, an increase of 22 percent, compared to net income of $903 million for
the first six months of 2004. The increases were primarily due to higher other
revenues and higher net interest income, partially offset by higher operating
expenses and, for the three month period ended June 30, 2005, higher provision
for credit losses due to growth in receivables. The increase in other revenues
during the current quarter was primarily due to higher fee and other income,
partially offset by lower securitization revenue and lower derivative income.
During the six month period, higher fee and other income and higher derivative
income were partially offset by lower securitization revenue. Derivative income
increased during the six month period as a result of changes in interest rates
associated with the forward yield curve during the first quarter which
significantly increased the value of our pay fixed/receive variable interest
rate swaps. However, during the three month period ended June 30, 2005,
derivative income was lower due to changes in interest rates associated with the
forward yield curve and the implementation of risk management strategies
including the designation of a significant number of our non-hedging derivative
portfolio as effective hedges under SFAS 133. Other income was higher in both
periods primarily due to the gains on daily sales of domestic private label
receivable originations and fees earned for servicing the domestic private label
receivable portfolio sold to HSBC Bank USA in December 2004. Fee income was also
higher in both periods primarily as a result of higher credit card fees due to
higher volume in our MasterCard and Visa portfolios. The increases in other
revenues were partially offset by lower securitization revenue in both periods
due to reduced securitization activity. The increase in provision for credit
losses for the three month period was due to receivable growth including lower
securitization levels, partially offset by improved credit quality and a shift
in mix to higher levels of secured receivables primarily as a result of the sale
of our domestic private label receivable portfolio to HSBC Bank USA in December
2004. The increase in net interest income was due to growth in average
receivables and an improvement in the overall yield on the portfolio, partly
offset by a higher cost of funds. Yields on variable rate products were
increased in line with market movements, and also reflect various repricing
initiatives. In addition, there was a
18
HSBC Finance Corporation
--------------------------------------------------------------------------------
net increase in yields due to a change in mix in the owned balance sheet.
Increased levels of higher yielding MasterCard/Visa and auto finance receivables
were held on the balance sheet due to lower securitization activity, but the
effect of this on yields was largely offset by growth in lower yielding real
estate secured receivables and a significant decline in the level of private
label receivables as discussed above. Interest expense increased due to a
combination of growth in the loan book and a significantly higher cost of funds.
Operating expenses increased due to receivables growth and increases in
marketing expenses. Amortization of purchase accounting fair value adjustments
increased net income by $30 million for the quarter ended June 30, 2005 and $21
million for the six months ended June 30, 2005 compared to $49 million for the
quarter ended June 30, 2004 and $60 million for the six months ended June 30,
2004.
As part of ongoing integration efforts with HSBC, we have begun working with
HSBC to determine if funding synergies and management efficiencies could be
achieved by transferring our U.K. and other European operations to a U.K. based
subsidiary of HSBC. As of the date of this filing, a decision has not been made
regarding the potential transfer of the U.K. and other European operations. We
anticipate that a decision regarding this potential transfer will be reached in
the third quarter of 2005.
Return on average owned assets ("ROA") was 1.40 percent for the three months
ended June 30, 2005 and 1.65 percent for the six months ended June 30, 2005
compared to 1.47 for the three months ended June 30, 2004 and 1.52 percent for
the six months ended June 30, 2004. The decrease in ROA for the three month
period ended June 30, 2005 was attributable to lower net interest margin, lower
derivative income and lower securitization revenue as well as higher average
owned basis assets as a result of receivables growth and lower securitization
levels compared to the year-ago period as average owned assets grew faster than
net income. The increase in ROA for the six month period ended June 30, 2005 was
attributable to higher net income, partially offset by higher average owned
assets as previously discussed. Return on averaged managed assets ("ROMA") (a
non-GAAP financial measure which assumes that securitized receivables have not
been sold and are still on our balance sheet) was 1.30 percent for the three
months ended June 30, 2005 and 1.52 percent for the six months ended June 30,
2005 compared to 1.23 for the three months ended June 30, 2004 and 1.26 percent
for the six months ended June 30, 2004. The increases in ROMA in 2005 were
attributable to higher net income during the three and six months ended June 30,
2005. See "Basis of Reporting" for additional discussion on the use of non-GAAP
financial matters and "Reconciliations to GAAP Financial Measures" for
quantitative reconciliations to the equivalent GAAP basis financial measures.
19
HSBC Finance Corporation
--------------------------------------------------------------------------------
The financial information set forth below summarizes selected financial
highlights of HSBC Finance Corporation as of June 30, 2005 and 2004 and for the
three and six month periods ended June 30, 2005 and 2004.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
NET INCOME:................................................ $ 472 $ 433 $1,098 $ 903
OWNED BASIS RATIOS:
Return on average owned assets........................... 1.40% 1.47% 1.65% 1.52%
Return on average common shareholder's equity ("ROE").... 10.87 9.67 12.92 10.26
Net interest margin...................................... 6.81 7.63 6.75 7.47
Consumer net charge-off ratio, annualized................ 2.93 4.02 3.03 4.09
Efficiency ratio(1)...................................... 43.58 42.51 43.79 43.39
MANAGED BASIS RATIOS:(2)
Return on average managed assets ("ROMA")................ 1.30% 1.23% 1.52% 1.26%
Net interest margin...................................... 7.04 8.28 7.05 8.26
Risk adjusted revenue.................................... 7.17 6.65 7.25 6.77
Consumer net charge-off ratio, annualized................ 3.28 4.57 3.46 4.72
Efficiency ratio(1)...................................... 42.84 40.43 43.22 40.59
AS OF JUNE 30, 2005 2004
---------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
RECEIVABLES:
Owned basis............................................... $118,761 $ 99,432
Managed basis(2).......................................... 127,741 122,268
TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOS:
Owned basis............................................... 3.73% 4.57%
Managed basis(2).......................................... 3.85 4.70
---------------
(1) Ratio of total costs and expenses less policyholders' benefits to net
interest income and other revenues less policyholders' benefits.
(2) Managed basis reporting is a non-GAAP financial measure. See "Basis of
Reporting" for additional discussion on the use of this non-GAAP financial
measure and "Reconciliations to GAAP Financial Measures" for quantitative
reconciliations to the equivalent GAAP basis financial measure.
Owned receivables were $118.8 billion at June 30, 2005, $112.2 billion at March
31, 2005, and $99.4 billion at June 30, 2004. With the exception of private
label, we experienced growth in all our receivable products compared to March
31, 2005 and June 30, 2004, with real estate secured receivables being the
primary contributor to the growth. Real estate secured receivables do not
include purchases of correspondent receivables directly by HSBC Bank USA of $1.1
billion in the first six months of 2005 and $2.3 billion since June 30, 2004, a
portion of which we otherwise would have purchased. Lower securitization levels
also contributed to the increase in owned receivables over both periods.
Our owned basis two-months-and-over-contractual delinquency ratio decreased
compared to both the prior quarter and the prior year quarter. The decrease is
consistent with improvements in the delinquency trends we experienced throughout
2004 as a result of improvements in the economy and better underwriting and
improved credit quality of originations. Dollars of delinquency increased
compared to the prior quarter due to the higher levels of owned receivables
including lower securitizations and seasonal patterns associated with our
20
HSBC Finance Corporation
--------------------------------------------------------------------------------
auto finance business. The sale of our domestic private label portfolio in
December 2004 also contributed to the decrease in the delinquency ratio compared
with the prior year quarter.
Owned net charge-offs as a percentage of average consumer receivables for the
quarter decreased from the prior year quarter as the lower delinquency levels we
have been experiencing continue to have an impact on charge-offs. Also
contributing to the decrease in net charge-offs as a percentage of average
consumer receivables compared to the prior year quarter were improved
collections and the sale of our domestic private label receivable portfolio in
December 2004, partially offset by an increase in bankruptcy filings due to new
bankruptcy legislation in the U.S. which will become effective later this year.
Our owned basis efficiency ratio deteriorated compared to the prior year periods
primarily as a result of the impact of the bulk sale of our domestic private
label portfolio in December 2004. Excluding the results of our domestic private
label portfolio from all periods, our owned basis efficiency ratio improved as a
result of the higher net interest income due to higher levels of owned
receivables and for the six month period higher other revenues, partially offset
by higher operating expenses and lower net interest margin. Excluding the
results of our domestic private label portfolio from all periods, our managed
basis efficiency ratio would have been relatively flat compared to the prior
year quarter and improved during the year-to-date period for the reasons
discussed above.
During the first half of 2005, we supplemented unsecured debt issuance with
proceeds from the sale of our domestic private label receivable portfolio to
HSBC Bank USA in December 2004, debt issued to affiliates and higher levels of
commercial paper compared to December 31, 2004. Because we are now a subsidiary
of HSBC, our credit ratings have improved and our credit spreads relative to
Treasuries have tightened compared to those we experienced during the months
leading up to the announcement of our acquisition by HSBC. Primarily as a result
of tightened credit spreads, we recognized cash funding expense savings in
excess of approximately $252 million during the six months ended June 30, 2005
($132 million during the three months ended June 30, 2005) and approximately
$140 million during the six months ended June 30, 2004 ($70 million during the
three months ended June 30, 2004) compared to the funding costs we would have
incurred using average spreads and funding mix from the first half of 2002. It
is anticipated that these tightened credit spreads and other funding synergies
including asset transfers will eventually enable HSBC to realize annual cash
funding expense savings, including external fee savings, in excess of $1 billion
per year as our existing term debt matures over the course of the next few
years.
Securitization of consumer receivables has been a source of funding and
liquidity for us. In order to align our accounting treatment with that of HSBC
initially under U.K. GAAP and now under International Financial Reporting
Standards ("IFRS"), starting in the third quarter of 2004 we began to structure
all new collateralized funding transactions as secured financings. However,
because existing public MasterCard((1)) and Visa(1) credit card transactions
were structured as sales to revolving trusts that require replenishments of
receivables to support previously issued securities, receivables will continue
to be sold to these trusts until the revolving periods end, the last of which is
expected to occur in 2008 based on current projections. Private label trusts
that publicly issued securities are now replenished by HSBC Bank USA as a result
of the daily sale of new domestic private label credit card originations to HSBC
Bank USA. We will continue to replenish at reduced levels certain non-public
personal non-credit card and MasterCard and Visa securities issued to conduits
and record the resulting replenishment gains for a period of time in order to
manage liquidity. Since our securitized receivables have varying lives, it will
take several years for these receivables to pay-off and the related
interest-only strip receivables to be reduced to zero. The termination of sale
treatment on new collateralized funding activity reduced our reported net income
under U.S. GAAP. In the six month period ended June 30, 2005, our net
interest-only strip receivables, excluding the mark-to-market adjustment
recorded in accumulated other comprehensive income decreased $174 million,
compared to $288 million
---------------
(1) MasterCard is a registered trademark of MasterCard International,
Incorporated and Visa is a registered trademark of VISA USA, Inc.
21
HSBC Finance Corporation
--------------------------------------------------------------------------------
during the six month period ended June 30, 2004. There is no impact, however, on
cash received from operations.
BASIS OF REPORTING
--------------------------------------------------------------------------------
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP"). Unless noted,
the discussion of our financial condition and results of operations included in
MD&A is presented on an owned basis of reporting.
MANAGED BASIS REPORTING We monitor our operations and evaluate trends on a
managed basis (a non-GAAP financial measure), which assumes that securitized
receivables have not been sold and remain on our balance sheet. We manage and
evaluate our operations on a managed basis because the receivables that we
securitize are subjected to underwriting standards comparable to our owned
portfolio, are serviced by operating personnel without regard to ownership and
result in a similar credit loss exposure for us. In addition, we fund our
operations, review our operating results, and make decisions about allocating
resources such as employees and capital on a managed basis.
When reporting on a managed basis, net interest income, provision for credit
losses and fee income related to receivables securitized are reclassified from
securitization revenue in our owned statement of income into the appropriate
caption. Additionally, charge-off and delinquency associated with these
receivables are included in our managed basis credit quality statistics.
Debt analysts, rating agencies and others also evaluate our operations on a
managed basis for the reasons discussed above and have historically requested
managed basis information from us. We believe that managed basis information
enables investors and other interested parties to better understand the
performance and quality of our entire managed loan portfolio and is important to
understanding the quality of originations and the related credit risk inherent
in our owned and securitized portfolios. As the level of our securitized
receivables falls over time, managed basis and owned basis results will
eventually converge.
EQUITY RATIOS Tangible shareholder's equity to tangible managed assets
("TETMA"), tangible shareholder's equity plus owned loss reserves to tangible
managed assets ("TETMA + Owned Reserves") and tangible common equity to tangible
managed assets are non-GAAP financial measures that are used by HSBC Finance
Corporation's management and certain rating agencies to evaluate capital
adequacy. These ratios may differ from similarly named measures presented by
other companies. The most directly comparable GAAP financial measure is common
and preferred equity to owned assets.
We and certain rating agencies also monitor our equity ratios excluding the
impact of purchase accounting adjustments. We do so because we believe that the
purchase accounting adjustments represent non-cash transactions which do not
affect our business operations, cash flows or ability to meet our debt
obligations.
Preferred securities issued by certain non-consolidated trusts are considered
equity in the TETMA and TETMA + Owned Reserves calculations because of their
long-term subordinated nature and the ability to defer dividends. Our Adjustable
Conversion-Rate Equity Security Units, adjusted for purchase accounting
adjustments, are also considered equity in these calculations because they
include investor obligations to purchase HSBC ordinary shares in or prior to
2006.
INTERNATIONAL FINANCIAL REPORTING STANDARDS Prior to January 1, 2005, HSBC
reported results in accordance with accounting principles generally accepted in
the United Kingdom ("U.K. GAAP"). The European Union has determined that all
European listed companies will be required to prepare their consolidated
financial statements using IFRS by 2005. As a result, HSBC begins reporting its
financial results under IFRS rather than U.K. GAAP with the release of its
interim financial results for the six months ended June 30, 2005. We
22
HSBC Finance Corporation
--------------------------------------------------------------------------------
previously reported that we would begin presenting a reconciliation of U.S. GAAP
net income to IFRS net income in the second quarter of 2005. Filed concurrently
with this Form 10-Q, is a supplemental Form 8-K which contains certain
information on an IFRS basis reconciled to U.S. GAAP.
QUANTITATIVE RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIAL
MEASURES For a reconciliation of managed basis net interest income, fee income
and provision for credit losses to the comparable owned basis amounts, see
"Segment Results - Managed Basis" in this MD&A. For a reconciliation of our
owned loan portfolio by product to our managed loan portfolio, see Note 3,
"Receivables," to the accompanying consolidated financial statements. For
additional quantitative reconciliations of non-GAAP financial measures presented
herein to the equivalent GAAP basis financial measures, see "Reconciliations to
GAAP Financial Measures."
RECEIVABLES REVIEW
--------------------------------------------------------------------------------
The following table summarizes owned receivables at June 30, 2005 and increases
(decreases) over prior periods:
INCREASES (DECREASES) FROM
---------------------------------
MARCH 31, JUNE 30,
2005 2004
JUNE 30, -------------- ---------------
2005 $ % $ %
-----------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Real estate secured............................. $ 71,930 $3,444 5.0% $15,897 28.4%
Auto finance.................................... 8,997 890 11.0 3,538 64.8
MasterCard/Visa................................. 17,421 1,867 12.0 6,605 61.1
Private label................................... 2,905 (225) (7.2) (9,854) (77.2)
Personal non-credit card(1)..................... 17,255 647 3.9 3,236 23.1
Commercial and other............................ 253 (23) (8.3) (93) (26.9)
-------- ------ ----- ------- -----
Total owned receivables......................... $118,761 $6,600 5.9% $19,329 19.4%
======== ====== ===== ======= =====
---------------
(1) Personal non-credit card receivables are comprised of the following:
INCREASES (DECREASES) FROM
----------------------------------
MARCH 31, JUNE 30,
2005 2004
JUNE 30, --------------- ----------------
2005 $ % $ %
--------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Domestic personal non-credit card.................. $ 9,148 $ 714 8.5% $2,656 40.9%
Union Plus personal non-credit card................ 387 (39) (9.2) (189) (32.8)
Personal homeowner loans........................... 3,854 164 4.4 446 13.1
Foreign personal non-credit card................... 3,866 (192) (4.7) 323 9.1
------- ----- ---- ------ -----
Total personal non-credit card..................... $17,255 $ 647 3.9% $3,236 23.1%
======= ===== ==== ====== =====
RECEIVABLE INCREASES (DECREASES) SINCE JUNE 30, 2004 Driven by growth in our
correspondent and branch businesses, real estate secured receivables increased
over the year-ago period. Real estate secured receivable levels do not include
HSBC Bank USA's purchase of receivables directly from correspondents totaling
$1.1 billion in the first six months of 2005 and $2.3 billion since June 30,
2004, a portion of which we otherwise would have purchased. Growth in real
estate secured receivables was also supplemented by purchases from a single
correspondent relationship which totaled $2.5 billion since June 30, 2004. Real
estate secured receivable levels in our branch-based consumer lending business
continue to increase, as sales volumes remain high. Also contributing to the
increase was $1.7 billion from a portfolio acquisition program since the prior
year quarter. The increases in the real estate secured receivable levels have
been partially offset by run-off of the higher
23
HSBC Finance Corporation
--------------------------------------------------------------------------------
yielding real estate secured receivables, including second lien loans largely
due to refinancing activity. Auto finance receivables increased over the
year-ago period due to newly originated loans acquired from our dealer network,
increased growth in the consumer direct loan program, lower securitization
levels and the introduction of auto finance receivables in Canada in the second
quarter of 2004. MasterCard and Visa receivables reflect domestic organic growth
especially in our HSBC branded prime, Union Privilege and subprime portfolios,
growth in the U.K. over the year ago period, as well as lower securitization
levels. The decrease in private label receivables reflects the sale of our
domestic private label receivable portfolio to HSBC Bank USA in December 2004.
Personal non-credit card receivables increased from the year-ago period as we
began to increase the availability of this product domestically in the second
half of 2004 as a result of the improving U.S. economy as well as continued
improvements in our underwriting standards. Personal non-credit card receivables
also increased due to lower securitization levels and higher levels of foreign
personal non-credit card receivables. The rate of increase in owned receivables
was impacted by the sale of $12.2 billion in domestic private label receivables
to HSBC Bank USA in December 2004. Had this sale not taken place, owned
receivables would have increased by $31.5 billion or 32 percent at June 30,
2005.
RECEIVABLE INCREASES (DECREASES) SINCE MARCH 31, 2005 Both our correspondent and
branch businesses reported growth in their real estate secured portfolios as
discussed above. Real estate secured receivable levels reflect purchases of $.3
billion from a single correspondent relationship during the second quarter of
2005 and do not include purchases of correspondent receivables directly by HSBC
Bank USA of $.5 billion in the second quarter of 2005, a portion of which we
otherwise would have purchased. Also contributing to the increase in real estate
secured receivable levels was $.2 billion from a portfolio acquisition program.
Growth in our auto finance, MasterCard and Visa and personal non-credit card
portfolios reflect lower levels of securitizations. Growth in our MasterCard and
Visa portfolio also reflects organic growth in our HSBC branded prime, Union
Privilege and subprime portfolios. Auto finance receivables also increased due
to increased growth in the consumer direct loan program. Our foreign private
label portfolio decreased due to decreases in retail sales volume in the U.K. as
well as the impact of changes in the foreign exchange rates since March 31,
2005.
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Unless noted otherwise, the following discusses amounts reported in our owned
basis statement of income and dollars represent pre-tax amounts.
NET INTEREST INCOME The following table summarizes net interest income:
INCREASE
(DECREASE)
-------------
THREE MONTHS ENDED JUNE 30, 2005 (1) 2004 (1) AMOUNT %
-----------------------------------------------------------------------------------------------
Finance and other interest income............. $3,139 10.50% $2,637 10.42% $502 19.0%
Interest expense.............................. 1,104 3.69 707 2.79 397 56.2
------ ----- ------ ----- ---- ----
Net interest income........................... $2,035 6.81% $1,930 7.63% $105 5.4%
====== ===== ====== ===== ==== ====
INCREASE
(DECREASE)
-------------
SIX MONTHS ENDED JUNE 30, 2005 (1) 2004 (1) AMOUNT %
-----------------------------------------------------------------------------------------------
Finance and other interest income............. $6,089 10.48% $5,165 10.28% $924 17.9%
Interest expense.............................. 2,166 3.73 1,415 2.81 751 53.1
------ ----- ------ ----- ---- ----
Net interest income........................... $3,923 6.75% $3,750 7.47% $173 4.6%
====== ===== ====== ===== ==== ====
---------------
(1) % Columns: comparison to average owned interest-earning assets, annualized.
24
HSBC Finance Corporation
--------------------------------------------------------------------------------
The increases in net interest income during the quarter and year-to-date periods
were due to higher average receivables and a higher overall yield, partially
offset by higher interest expense. Overall yields increased as increased yields
on variable rate products in line with market movements and other repricing
initiatives more than offset a decline in real estate secured and auto finance
yields. Changes in receivable mix also contributed to the increase as the impact
of increased levels of higher yielding MasterCard/Visa and auto finance
receivables due to lower securitization levels was substantially offset by
growth in lower yielding real estate secured receivables and significantly lower
levels of private label receivables as a result of the sale of our domestic
private label portfolio in December 2004. The lower real estate and auto finance
yields during 2005 reflect strong receivable and refinancing growth, which has
occurred in an economic cycle with historically low market rates, high
liquidation of older, higher yielding loans, product expansion into near-prime
customer segments and competitive pricing pressures due to excess market
capacity. The higher interest expense, which contributed to lower net interest
margin, was due to a larger balance sheet and a significantly higher cost of
funds due to a rising interest rate environment. Our purchase accounting
adjustments include amortization of fair value adjustments to both our external
debt obligations and receivables. Amortization of purchase accounting fair value
adjustments increased net interest income by $147 million for the three months
ended June 30, 2005 and $260 million for the six months ended June 30, 2005
compared to $186 million for the three months ended June 30, 2004 and $375
million for the six months ended June 30, 2004.
Net interest margin, annualized, decreased during the three and six months ended
June 30, 2005 as compared to the year-ago period as the improvement in the
overall yield on our receivable portfolio, as discussed above, was more than
offset by the higher funding costs. The following table shows the impact of
these items on owned basis net interest margin at June 30, 2005:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2005 2005
---------------------------------------------------------------------------------------
Net interest margin - June 30, 2004......................... 7.63% 7.47%
Impact to net interest margin resulting from:
Bulk sale of domestic private label portfolio in December
2004................................................... (.29) (.27)
Receivable pricing........................................ .17 .17
Receivable mix............................................ .03 .03
Cost of funds............................................. (.82) (.81)
Investment securities mix................................. .03 .09
Other..................................................... .06 .07
---- ----
Net interest margin - June 30, 2005......................... 6.81% 6.75%
==== ====
Our net interest income on a managed basis includes finance income earned on our
owned receivables as well as on our securitized receivables. This finance income
is offset by interest expense on the debt recorded on our balance sheet as well
as the contractual rate of return on the instruments issued to investors when
the receivables were securitized. Managed basis net interest income was $2.3
billion in the three months ended June 30, 2005, a decrease of 12 percent from
$2.6 billion in the three months ended June 30, 2004. For the six months ended
June 30, 2005, managed basis net interest income was $4.5 billion, down 13
percent from $5.2 billion in the six months ended June 30, 2004. Managed basis
net interest margin, annualized, was 7.04 percent in the current quarter and
7.05 percent in the year-to-date period, compared to 8.28 percent and 8.26
percent in the year-ago periods. The decrease was due to lower yields on our
receivables, particularly in real estate secured and auto finance receivables,
partially offset by pricing increases for variable rate products and other
repricing initiatives, a higher mix of real estate secured receivables due to
significantly lower levels of private label receivables and higher funding costs
due to a larger balance sheet and a rising interest rate environment. As
discussed above, the lower real estate and auto finance yields during 2005
reflect strong receivable and refinancing growth, which has occurred in an
economic cycle with historically low market rates,
25
HSBC Finance Corporation
--------------------------------------------------------------------------------
high liquidation of older, higher yielding loans, product expansion into
near-prime customer segments and competitive pricing pressures due to excess
market capacity. The following table shows the impact of these items on our net
interest margin on a managed basis at June 30, 2005:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2005 2005
---------------------------------------------------------------------------------------
Net interest margin - June 30, 2004......................... 8.28% 8.26%
Impact to net interest margin resulting from:
Bulk sale of domestic private label portfolio in December
2004................................................... (.20) (.20)
Receivable pricing........................................ .17 .09
Receivable mix............................................ (.33) (.31)
Cost of funds............................................. (.96) (.94)
Investment securities mix................................. .03 .08
Other..................................................... .05 .07
---- ----
Net interest margin - June 30, 2005......................... 7.04% 7.05%
==== ====
Net interest margin on a managed basis is greater than on an owned basis because
the managed basis portfolio includes relatively more unsecured loans, which have
higher yields.
Managed basis risk adjusted revenue (a non-GAAP financial measure which
represents net interest income, plus other revenues, excluding securitization
revenue and derivative income, less net charge-offs as a percentage of average
interest earning assets) increased to 7.17 percent in the current quarter from
6.65 percent in the year-ago quarter. Managed basis risk adjusted revenue
increased to 7.25 percent in the year-to-date period from 6.77 in the year-ago
period. Managed basis risk adjusted revenue increased due to higher other
revenues as well as the result of the positive credit and delinquency trends due
to the improving U.S. economy. Ongoing improvements in underwriting, risk
management, collections and marketing as well as product expansion into
near-prime customer segments led to lower charge-offs which more than
compensated for the decline in net interest margin discussed above. See "Basis
of Reporting" for additional discussion on the use of non-GAAP financial
measures.
PROVISION FOR CREDIT LOSSES The following table summarizes provision for credit
losses:
INCREASE
(DECREASE)
-------------
2005 2004 AMOUNT %
---------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Three months ended June 30,................................. $1,031 $ 997 $ 34 3.4%
Six months ended June 30,................................... 1,872 1,925 (53) (2.8)
Our provision for credit losses increased during the second quarter of 2005
primarily due to receivable growth including lower securitization levels as well
as an increase in bankruptcy filings due to new bankruptcy legislation in the
U.S. which will become effective later this year, partially offset by improved
credit quality and a shift in mix to higher levels of secured receivables
primarily as a result of the sale of our domestic private label receivable
portfolio in December 2004. The provision for credit losses decreased during the
year-to-date period as the increased requirements due to receivable growth and
increases in bankruptcy filings were offset by improving credit quality and the
impact associated with the shift in mix as described above. The provision as a
percent of average owned receivables, annualized, was 3.57 percent in the
current quarter and 3.33 percent year-to date, compared to 4.13 percent and 4.06
percent in the year-ago periods. In 2005, credit loss reserves increased as the
provision for owned credit losses was $187 million greater than net charge-offs
in the second quarter of 2005 and $165 million in the year-to-date period. In
2004, provision for owned credit losses was $31 million greater than net
charge-offs in the second quarter of 2004 while provision for owned
26
HSBC Finance Corporation
--------------------------------------------------------------------------------
credit losses was $11 million less than net charge-offs in the six months ended
June 30, 2004. The provision for credit losses may vary from quarter to quarter
depending on the product mix and credit quality of loans in our portfolio. See
"Credit Quality" included in this MD&A for further discussion of factors
affecting the provision for credit losses.
OTHER REVENUES The following table summarizes other revenues:
INCREASE
(DECREASE)
--------------
THREE MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
----------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Securitization revenue...................................... $ 54 $ 266 $(212) (79.7)%
Insurance revenue........................................... 229 204 25 12.3
Investment income........................................... 33 30 3 10.0
Derivative income........................................... 76 124 (48) (38.7)
Fee income.................................................. 354 242 112 46.3
Taxpayer financial services revenue......................... 18 6 12 100+
Other income................................................ 360 180 180 100+
------ ------ ----- -----
Total other revenues........................................ $1,124 $1,052 $ 72 6.8%
====== ====== ===== =====
INCREASE
(DECREASE)
--------------
SIX MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
----------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Securitization revenue...................................... $ 139 $ 614 $(475) (77.4)%
Insurance revenue........................................... 450 415 35 8.4
Investment income........................................... 66 71 (5) (7.0)
Derivative income........................................... 336 176 160 90.9
Fee income.................................................. 660 507 153 30.2
Taxpayer financial services revenue......................... 261 212 49 23.1
Other income................................................ 674 280 394 100+
------ ------ ----- -----
Total other revenues........................................ $2,586 $2,275 $ 311 13.6%
====== ====== ===== =====
SECURITIZATION REVENUE is the result of the securitization of our receivables
and includes the following:
INCREASE
(DECREASE)
---------------
THREE MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
-------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Net initial gains(1)........................................ $ - $ 22 $ (22) (100.0)%
Net replenishment gains(1).................................. 44 113 (69) (61.1)
Servicing revenue and excess spread......................... 10 131 (121) (92.4)
--- ---- ----- ------
Total....................................................... $54 $266 $(212) (79.7)%
=== ==== ===== ======
27
HSBC Finance Corporation
--------------------------------------------------------------------------------
INCREASE
(DECREASE)
---------------
SIX MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
-------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Net initial gains(1)........................................ $ - $ 25 $ (25) (100.0)%
Net replenishment gains(1).................................. 97 233 (136) (58.4)
Servicing revenue and excess spread......................... 42 356 (314) (88.2)
---- ---- ----- ------
Total....................................................... $139 $614 $(475) (77.4)%
==== ==== ===== ======
---------------
(1)Net of our estimate of probable credit losses under the recourse provisions.
The decreases in securitization revenue were due to decreases in the level and
product mix of receivables securitized and higher run-off due to shorter
expected lives. However, because existing public MasterCard and Visa credit card
transactions were structured as sales to revolving trusts that require
replenishments of receivables to support previously issued securities,
receivables will continue to be sold to these trusts until the revolving periods
end, the last of which is expected to occur in 2008 based on current
projections. Private label trusts that publicly issued securities are now
replenished by HSBC Bank USA as a result of the daily sales of new domestic
private label receivable originations to HSBC Bank USA. We will continue to
replenish at reduced levels certain non-public personal non-credit card and
MasterCard and Visa securities issued to conduits and record the resulting
replenishment gains for a period of time in order to manage liquidity. Since our
securitized receivables have varying lives, it will take several years for these
receivables to pay-off and the related interest-only strip receivables to be
reduced to zero. While the termination of sale treatment on new collateralized
funding activity since the third quarter of 2004 and the reduction of sales
under replenishment agreements reduced our reported net income under U.S. GAAP,
there is no impact on cash received from operations.
Our interest-only strip receivables, net of the related loss reserve and
excluding the mark-to-market adjustment recorded in accumulated other
comprehensive income, decreased $85 million in the current quarter and $174
million year-to-date, compared to a decrease of $176 million and $288 million in
the year-ago periods, as securitized receivables continued to decrease.
Insurance revenue increased in both periods due to increased sales in our U.K.
business and higher sales volume for debt cancellation products in our domestic
operations, partially offset by continued run off of insurance products
discontinued in prior years.
Investment income includes income on securities available for sale in our
insurance business and realized gains and losses from the sale of securities.
Investment income, which was essentially flat in the current quarter, decreased
in the year-to-date period as a result of decreases in income due to lower
average balances and lower gains from security sales.
Derivative income, which includes realized and unrealized gains and losses on
derivatives which do not qualify as effective hedges under SFAS 133 as well as
the ineffectiveness on derivatives associated with our qualifying hedges, is
summarized in the tables below:
THREE MONTHS ENDED JUNE 30, 2005 2004
---------------------------------------------------------------------------
(IN MILLIONS)
Net realized gains.......................................... $ 18 $ 10
Net unrealized gains........................................ 80 113
Ineffectiveness............................................. (22) 1
---- ----
Total....................................................... $ 76 $124
==== ====
28
HSBC Finance Corporation
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2005 2004
---------------------------------------------------------------------------
(IN MILLIONS)
Net realized gains.......................................... $ 33 $ 17
Net unrealized gains........................................ 325 158
Ineffectiveness............................................. (22) 1
---- ----
Total....................................................... $336 $176
==== ====
Derivative income decreased in the current quarter due to changes in the
interest rates associated with the forward yield curve which decreased the value
of our pay fixed/receive variable interest rate swaps which do not qualify for
hedge accounting under SFAS 133. In addition, as part of our overall risk
management strategy and to reduce earnings volatility, a significant number of
our pay fixed/receive variable interest rate swaps which had previously not
qualified for hedge accounting under SFAS 133, were designated as effective
hedges using the long-haul method of accounting under SFAS 133 and certain other
interest rate swaps were terminated. The increase in derivative income in the
year-to-date period is primarily due to changes in the first quarter of 2005 in
interest rates associated with the forward yield curve which significantly
increased the value of our pay fixed/receive variable interest rate swaps which
did not qualify for hedge accounting under SFAS 133, partially offset by the
second quarter of 2005 events discussed above. The income associated with our
remaining pay fixed/receive variable swaps which do not qualify for hedge
accounting under SFAS 133 is significantly impacted by changes in interest
rates. Accordingly, derivative income for the three and six months ended June
30, 2005 should not be considered indicative of the results for any future
quarters or the year ended December 31, 2005. Furthermore, we continue to
evaluate the steps required to regain hedge accounting treatment under SFAS 133
for the remaining swaps which currently do not qualify for hedge accounting
under SFAS 133 in order to further reduce the earnings volatility that would
otherwise result from changes in interest rates. These derivatives remain
economic hedges of the underlying debt instruments.
Fee income increased during both periods due to higher credit card fees,
particularly relating to our subprime credit card portfolio, due to higher
volume in our MasterCard and Visa credit card receivable portfolios, partially
offset by lower private label credit card fees and higher reward program
expenses. The lower private label credit card fees were the result of the sale
of our domestic private label portfolio to HSBC Bank USA in December 2004. See
"Segment Results -- Managed Basis" for additional information on fee income on a
managed basis.
Taxpayer financial services ("TFS") revenue increased during both periods due to
increased loan volume during the 2005 tax season and for the year-to-date
period, a gain of $24 million on the sale to a third party in the first quarter
of 2005 of certain bad debt recovery rights.
Other income increased in both periods primarily due to the gains on daily sales
of domestic private label receivable originations of $100 million for the three
months ended June 30, 2005 and $192 million for the year-to-date period and fees
earned for servicing the sold domestic private label receivables resulting from
the sale of this portfolio to HSBC Bank USA in December 2004 of $89 million for
the three months ended June 30, 2005 and $181 for the year-to-date period.
Excluding the gains and servicing fee income for the private label receivables
discussed above, other income decreased during the three month period ended June
30, 2005 due to lower miscellaneous gains on assets sales, partially offset by
higher ancillary credit card revenue and higher gains and servicing fee income
on other related party transactions. In the year-to-date period, the lower
miscellaneous gains on asset sales were more than offset by higher ancillary
credit card revenue and higher servicing fee income on other related party
transactions.
29
HSBC Finance Corporation
--------------------------------------------------------------------------------
Costs and expenses The following table summarizes total costs and expenses:
INCREASE
(DECREASE)
--------------
THREE MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
----------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Salaries and employee benefits.............................. $ 526 $ 457 $ 69 15.1%
Sales incentives............................................ 90 90 - -
Occupancy and equipment expenses............................ 82 77 5 6.5
Other marketing expenses.................................... 185 131 54 41.2
Other servicing and administrative expenses................. 143 198 (55) (27.8)
Support services from HSBC affiliates....................... 217 196 21 10.7
Amortization of intangibles................................. 83 79 4 5.1
Policyholders' benefits..................................... 116 93 23 24.7
------ ------ ---- -----
Total costs and expenses.................................... $1,442 $1,321 $121 9.2%
====== ====== ==== =====
INCREASE
(DECREASE)
-------------
SIX MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
---------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Salaries and employee benefits.............................. $1,023 $ 942 $ 81 8.6%
Sales incentives............................................ 172 168 4 2.4
Occupancy and equipment expenses............................ 169 160 9 5.6
Other marketing expenses.................................... 365 263 102 38.8
Other servicing and administrative expenses................. 401 424 (23) (5.4)
Support services from HSBC affiliates....................... 426 373 53 14.2
Amortization of intangibles................................. 190 195 (5) (2.6)
Policyholders' benefits..................................... 238 206 32 15.5
------ ------ ---- ----
Total costs and expenses.................................... $2,984 $2,731 $253 9.3%
====== ====== ==== ====
Salaries and employee benefits increased during both the three and six month
periods ended June 30, 2005 as a result of additional staffing, primarily in our
consumer lending, mortgage services and international businesses to support
growth.
Sales incentives were relatively flat during both the current quarter and
year-to-date period.
Occupancy and equipment expenses were relatively flat during both the current
quarter and year-to-date period as higher occupancy and utility expense and
higher repairs and maintenance costs were substantially offset by lower
depreciation.
Other marketing expenses includes payments for advertising, direct mail programs
and other marketing expenditures. The increase in both the three and six month
periods ended June 30, 2005 was primarily due to increased domestic credit card
marketing expenses. The increase in domestic credit card marketing expense was
due to changes in contractual marketing responsibilities in July 2004 associated
with the General Motors ("GM") co-branded credit card, higher non-prime
marketing expense and investments in new marketing initiatives.
Other servicing and administrative expenses decreased in both the three and six
month periods ended June 30, 2005 due to lower REO expenses and in the quarter,
a lower estimate of exposure relating to accrued finance charges associated with
certain loan restructures which were partially offset by higher systems costs.
30
HSBC Finance Corporation
--------------------------------------------------------------------------------
Support services from HSBC affiliates, which includes technology and other
services charged to us by HSBC Technology and Services (USA) Inc. ("HTSU"),
increased primarily due to growth.
Amortization of intangibles increased during the three month period ended June
30, 2005 due to higher intangible amortization related to our purchased credit
card relationships. For the year-to-date period, lower intangible amortization
related to our TFS business was partially offset by higher intangible
amortization related to our purchased credit card relationships.
Policyholders' benefits increased during both periods due to a continuing
increase in insurance sales volume in our U.K. business, partially offset by
lower expenses in our domestic operations and lower amortization of fair value
adjustments relating to our insurance business than in the prior year periods.
The following table summarizes our owned basis efficiency ratio:
2005 2004
---------------------------------------------------------------------------
Three months ended June 30.................................. 43.58% 42.51%
Six months ended June 30.................................... 43.79 43.39
Our owned basis efficiency ratio deteriorated slightly in 2005 compared to the
prior year periods primarily as a result of the impact of the bulk sale of our
domestic private label portfolio in December 2004. Excluding the results of our
domestic private label portfolio from all periods, our owned basis efficiency
ratio improved as a result of the higher net interest income due to higher
levels of owned receivables and for the six month periods higher other revenues,
partially offset by higher operating expenses and lower net interest margin.
SEGMENT RESULTS -- MANAGED BASIS
--------------------------------------------------------------------------------
We have three reportable segments: Consumer, Credit Card Services and
International. Our Consumer segment consists of our consumer lending, mortgage
services, retail services and auto finance businesses. Our Credit Card Services
segment consists of our domestic MasterCard and Visa credit card business. Our
International segment consists of our foreign operations in the United Kingdom,
Canada, Ireland and the remainder of Europe.
There have been no changes in the basis of our segmentation or any changes in
the measurement of segment profit as compared with the presentation in our 2004
Form 10-K.
We monitor our operations and evaluate trends on a managed basis (a non-GAAP
financial measure), which assumes that securitized receivables have not been
sold and are still on our balance sheet. We manage and evaluate our operations
on a managed basis because the receivables that we securitize are subjected to
underwriting standards comparable to our owned portfolio, are serviced by
operating personnel without regard to ownership and result in a similar credit
loss exposure for us. In addition, we fund our operations, review our operating
results, and make decisions about allocating resources such as employees and
capital on a managed basis. When reporting on a managed basis, net interest
income, provision for credit losses and fee income related to receivables
securitized are reclassified from securitization revenue in our owned statement
of income into the appropriate caption.
31
HSBC Finance Corporation
--------------------------------------------------------------------------------
CONSUMER SEGMENT The following table summarizes results for our Consumer
segment:
INCREASE
(DECREASE)
--------------
THREE MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
----------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Net income................................................ $ 440 $ 256 $ 184 71.9%
Net interest income....................................... 1,699 1,915 (216) (11.3)
Securitization revenue.................................... (151) (285) 134 47.0
Fee and other income...................................... 292 161 131 81.4
Intersegment revenues..................................... 26 26 - -
Provision for credit losses............................... 580 734 (154) (21.0)
Total costs and expenses.................................. 578 647 (69) (10.7)
Receivables............................................... 95,300 92,196 3,104 3.4
Assets.................................................... 96,188 94,799 1,389 1.5
Net interest margin, annualized........................... 7.27% 8.41% - -
Return on average managed assets.......................... 1.87 1.10 - -
INCREASE
(DECREASE)
--------------
SIX MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
----------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Net income.................................................. $ 874 $ 560 $ 314 56.1%
Net interest income......................................... 3,392 3,779 (387) (10.2)
Securitization revenue...................................... (386) (541) 155 28.7
Fee and other income........................................ 577 329 248 75.4
Intersegment revenues....................................... 53 48 5 10.4
Provision for credit losses................................. 963 1,399 (436) (31.2)
Total costs and expenses.................................... 1,246 1,274 (28) (2.2)
Net interest margin, annualized............................. 7.41% 8.39% - -
Return on average managed assets............................ 1.89 1.22 - -
Our Consumer segment reported higher net income during both the three and six
month periods ended June 30, 2005. The increase in net income was primarily due
to lower provision for credit losses, higher fee and other income and lower
costs and expenses, partially offset by lower net interest income. The decrease
in credit loss provision is due to improved credit quality and a shift in mix to
higher levels of real estate secured receivables primarily as a result of the
sale of our domestic private label receivable portfolio to HSBC Bank USA in
December 2004. The increase in fee and other income is due to gains on the daily
sales of domestic private label receivable originations to HSBC Bank USA and
receipt of servicing revenue for servicing this portfolio, partially offset by
lower fee income related to the sold receivables. The decrease in costs and
expenses is due to lower REO expense and in the quarter, a lower estimate of
exposure relating to accrued finance charges associated with certain loan
restructures which were partially offset by higher salary and fringe expense.
Net interest income and net interest margin, annualized, decreased during both
the three and six month periods ended June 30, 2005 compared to the year-ago
periods primarily due to a shift in mix to lower yielding real estate secured
receivable resulting from significantly lower levels of private label
receivables primarily resulting from the sale of our private label portfolio in
December 2004 as well as organic growth of real estate secured receivables. Also
contributing to the decrease were lower yields on real estate secured and auto
finance receivables as a result of competitive pressure on pricing and product
expansion into near-prime consumer
32
HSBC Finance Corporation
--------------------------------------------------------------------------------
segments, as well as the run off of higher yielding real estate secured
receivables, including second lien loans, largely due to refinance activity. Our
auto finance business experienced lower yields as we have targeted higher credit
quality customers. Although higher credit quality receivables generate lower
yields, such receivables are expected to result in lower operating costs,
delinquency ratios and charge-off. The decreases in yield for our consumer
segment receivable portfolio were partially offset by higher pricing on our
variable rate products. A higher cost of funds due to a rising interest rate
environment also contributed to the decrease in net interest margin.
During the three months ended June 30, 2005, we continued to experience improved
credit quality. Our managed basis provision for credit losses, which includes
both provision for owned basis receivables and over-the-life provision for
receivables serviced with limited recourse, decreased during both the three and
six month periods ended June 30, 2005 due to lower net charge-off levels as a
result of improving credit quality and the impact of the sale of the domestic
private label portfolio in December 2004, as well as lower securitization
levels. We have experienced lower dollars of net charge-offs in our owned
portfolio during the six months ended June 30, 2005 due to the sale of $12.2
billion of owned domestic private label receivables in December 2004 and as a
result of improving credit quality. These factors more than offset increased
requirements associated with receivable growth and has resulted in a decrease to
our owned provision for credit losses compared to the prior year quarter and
year-to-date period. Over-the-life provisions for credit losses for securitized
receivables recorded in any given period reflect the level and product mix of
securitizations in that period. Subsequent charge-offs of securitized
receivables result in a decrease in the over-the-life reserves without any
corresponding increase to managed loss provision. The combination of these
factors resulted in a decrease in managed loss reserves and managed loss
provision during the year. In the three months ended June 30, 2005, the
provision for credit losses was greater than net charge-offs by $6 million while
net charge-offs were greater than the provision for credit losses by $266
million for the year-to-date period. For 2004, we decreased managed loss
reserves as net charge-offs were greater than the provision for credit losses by
$163 million and $482 million in the year-ago periods.
Managed receivables increased 4 percent compared to $91.2 billion at March 31,
2005. Growth during the quarter was driven by higher real estate secured
receivables in both our correspondent and branch-based consumer lending
businesses. Real estate secured receivable levels do not include direct
purchases of receivables by HSBC Bank USA from correspondents totaling $.5
billion, a portion of which we otherwise would have purchased. Growth in our
correspondent business was supplemented by purchases from a single correspondent
relationship which totaled $.3 billion in the quarter. Also contributing to the
increase was $.2 billion from a portfolio acquisition program during the second
quarter of 2005. We also experienced growth in auto finance receivables through
the consumer direct loan program. Personal non-credit card receivables also
increased during the current quarter reflecting normal seasonal patterns
associated with pay downs which typically occur during the first quarter.
Compared to June 30, 2004, managed receivables increased 3 percent. The rate of
increase in managed receivables was impacted by the sale of $15.6 billion in
domestic private label receivables to HSBC Bank USA in December 2004. Had this
sale not taken place, managed receivables would have increased by $18.7 billion
or 20% at June 30, 2005. We continued to experience strong growth in our real
estate secured portfolio in the second quarter of 2005. Real estate secured
receivable levels do not include $2.3 billion of correspondent receivables
purchased directly by HSBC Bank USA since June 30, 2004, a portion of which we
otherwise would have purchased. Growth in real estate secured receivables was
also supplemented by purchases from a single correspondent relationship which
totaled $2.5 billion since June 30, 2004. Also contributing to the increase was
$1.7 billion from a portfolio acquisition program since the prior year quarter.
Our auto finance portfolio also reported strong growth as a result of newly
originated loans acquired from our dealer network as well as increases through
the consumer direct loan program. Personal non-credit card receivables increased
from the year-ago period as we began to increase the availability of this
product domestically in the second half of 2004 as a result of the improving
U.S. economy.
33
HSBC Finance Corporation
--------------------------------------------------------------------------------
The increase in return on average managed assets reflects higher net income
primarily due to lower provision for credit losses as a result of improving
credit quality, partially offset by lower overall yields on our receivables.
Additionally, ROMA at June 30, 2005 reflects higher average managed assets.
In accordance with Federal Financial Institutions Examination Council ("FFIEC")
guidance, in the first quarter of 2006, the required minimum monthly payment
amounts for domestic private label credit card accounts will change. As
previously discussed, we sell new domestic private label receivable originations
to HSBC Bank USA on a daily basis. Preliminary estimates of the potential impact
to the business are based on numerous assumptions and take into account a number
of factors which are difficult to predict, such as changes in customer behavior,
which will not be fully known or understood until the changes are implemented.
It is anticipated that the changes will reduce the premium associated with these
daily sales beginning in 2006, but do not expect this will have a material
impact on our consolidated results or on the results of the Consumer segment.
CREDIT CARD SERVICES SEGMENT The following table summarizes results for our
Credit Card Services segment.
INCREASE (DECREASE)
--------------------
THREE MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
-------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Net income............................................. $ 165 $ 120 $ 45 37.5%
Net interest income.................................... 507 513 (6) (1.2)
Securitization revenue................................. (55) (118) 63 53.4
Fee and other income................................... 475 398 77 19.3
Intersegment revenues.................................. 5 6 (1) (16.7)
Provision for credit losses............................ 334 319 15 4.7
Total costs and expenses............................... 333 284 49 17.3
Receivables............................................ 19,615 18,355 1,260 6.9
Assets................................................. 19,391 20,405 (1,014) (5.0)
Net interest margin, annualized........................ 10.20% 10.15% - -
Return on average managed assets....................... 3.42 2.35 - -
INCREASE (DECREASE)
--------------------
SIX MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
-------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Net income............................................. $ 313 $ 257 $ 56 21.8%
Net interest income.................................... 1,013 1,041 (28) (2.7)
Securitization revenue................................. (119) (145) 26 17.9
Fee and other income................................... 912 811 101 12.5
Intersegment revenues.................................. 11 14 (3) (21.4)
Provision for credit losses............................ 655 740 (85) (11.5)
Total costs and expenses............................... 657 561 96 17.1
Net interest margin, annualized........................ 10.27% 10.08% - -
Return on average managed assets....................... 3.24 2.45 - -
Our Credit Card Services segment reported higher net income during both the
three and six month periods ended June 30, 2005. The increase in net income
during the current quarter was due to higher fee and other income, partially
offset by higher provision for credit losses, lower net interest income and
higher operating expenses. The increase in net income for the year-to-date
period reflects higher fee and other income and lower provision for credit
losses, partially offset by higher operating expenses and lower net interest
income. The decrease in net interest income during both periods primarily
reflects higher interest expense as a result of
34
HSBC Finance Corporation
--------------------------------------------------------------------------------
a rising interest rate environment. Net interest margin increased compared to
the year-ago periods primarily due to increases in the subprime receivable
levels, the impact of lower amortization from receivable origination costs
resulting from changes in the contractual marketing responsibilities in July
2004 associated with the GM Card(R), higher pricing on variable rate products as
well as other repricing initiatives, and lower average interest earning assets
due to lower levels of low yielding investment securities, partially offset by
higher interest expense. Although our subprime receivables tend to have smaller
balances, they generate higher returns both in terms of net interest margin and
fee income. Net interest margin for both periods was positively impacted by the
disposal of certain low yielding investment securities as a result of the
elimination of investments dedicated to our credit card bank resulting from our
acquisition by HSBC. Increases in fee and other income resulted from portfolio
growth and higher interchange fees, as well as increased gains from the daily
sale of new volume related to the MasterCard/Visa account relationships
purchased from HSBC Bank USA in July 2004. We decreased managed loss reserves by
recording loss provision less than net charge-off of $3 million in the second
quarter of 2005 and $26 million year-to-date, compared to recording loss
provision less than net charge-off of $67 million and $20 million in the
year-ago periods.
Managed receivables of $19.6 billion increased 3 percent compared to $19.1
billion at March 31, 2005. Compared to June 30, 2004, managed receivables
increased 7 percent. The increase during both periods reflects organic growth in
our HSBC branded prime, UP and subprime portfolios, which was partially offset
by the continued decline in certain older acquired portfolios.
The increase in ROMA in both periods reflects lower average managed assets as
well as the higher net income discussed above. The decrease in average managed
assets is due to lower investment securities during 2005 as a result of the
elimination of investments dedicated to our credit card bank resulting from our
acquisition by HSBC.
In accordance with FFIEC guidance, in the second half of 2005, our credit card
services business will change the required minimum monthly payment amounts and
for non-prime credit card accounts limit certain fee billings. Preliminary
estimates of the potential impact to the business are based on numerous
assumptions and take into account a number of factors which are difficult to
predict, such as changes in customer behavior, which will not be fully known or
understood until the changes are implemented. It is anticipated that the changes
will result in decreased fee income and an increase in the provision for credit
losses beginning in 2006 but we do not expect this will have a material impact
on our consolidated results. However, the impact may be material to the Credit
Card Services segment in 2006.
As previously disclosed, we sold our domestic private label portfolio to HSBC
Bank USA in December 2004. We and HSBC Bank USA will consider potential
transfers of some of our MasterCard and Visa receivables to HSBC Bank USA in the
future based upon continuing evaluation of capital and liquidity at each entity.
35
HSBC Finance Corporation
--------------------------------------------------------------------------------
INTERNATIONAL SEGMENT The following table summarizes results for our
International segment:
INCREASE (DECREASE)
-------------------
THREE MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
-------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Net (loss) income....................................... $ (14) $ 34 $ (48) (100+)%
Net interest income..................................... 224 196 28 14.3
Securitization revenue.................................. 4 3 1 33.3
Fee and other income.................................... 141 122 19 15.6
Intersegment revenues................................... 4 3 1 33.3
Provision for credit losses............................. 166 93 73 78.5
Total costs and expenses................................ 217 173 44 25.4
Receivables............................................. 12,581 11,380 1,201 10.6
Assets.................................................. 13,492 12,342 1,150 9.3
Net interest margin annualized.......................... 6.93% 6.91% - -
Return on average managed assets........................ (.41) 1.10 - -
INCREASE (DECREASE)
-------------------
SIX MONTHS ENDED JUNE 30, 2005 2004 AMOUNT %
-------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Net (loss) income....................................... $ (23) $ 62 $ (85) (100+)%
Net interest income..................................... 453 398 55 13.8
Securitization revenue.................................. 14 (6) 20 100+
Fee and other income.................................... 271 239 32 13.4
Intersegment revenues................................... 7 7 - -
Provision for credit losses............................. 331 188 143 76.1
Total costs and expenses................................ 433 345 88 25.5
Net interest margin annualized.......................... 6.97% 7.00% - -
Return on average managed assets........................ (.33) 1.01 - -
Our International segment reported a net loss in both periods. The losses
reflect higher provision for credit losses and higher operating expenses,
partially offset by higher net interest income, increased fee and other income
and for the year-to-date period higher securitization revenue. Applying constant
currency rates, which uses the average rate of exchange for the three and six
months period ended June 30, 2004 to translate current period net income, would
not have resulted in a materially different net loss for either the 2005 current
quarter or year-to-date period.
Net interest income increased during both periods due to higher receivable
levels, partially offset by higher cost of funds in the U.K. due to a rising
interest rate environment. Net interest margin, annualized, which was
essentially flat during the current quarter, decreased in the year-to-date
period due to run-off of higher yielding receivables, competitive pricing
pressures holding down yields on our personal loans in the U.K. and increased
cost of funds. These were partially offset by increased yields on credit cards
as interest-free balances were not promoted as strongly as in the past.
Securitization revenues increased during the year-to-date period due to higher
levels of receivable replenishments to support previously issued securities in
the U.K. as well as the recognition of residual balances associated with certain
expired securitization transactions. Fee and other income increased primarily
due to higher insurance revenues. Provision for credit losses increased
primarily due to higher delinquency and charge-off levels in the U.K. due to a
general increase in consumer bad debts in the U.K. market, including increased
bankruptcies. We increased managed loss reserves by recording loss provision
greater than net charge-offs of $53 million for the current quarter and $108
million year-to-date compared with $9 million and $22 million in the year-ago
periods. Total costs and expenses increased
36
HSBC Finance Corporation
--------------------------------------------------------------------------------
primarily due to higher expenses to support receivable growth and collection
activities, higher policyholder benefits because of increased insurance sales
volumes, and for the six month period costs associated with branch closures in
the U.K.
Compared to March 31, 2005, managed receivables decreased 4 percent due to
decreases in retail sales volume due to a slow down in retail consumer spending
in the U.K. Compared to June 30, 2004, managed receivables increased 11 percent
due to strong growth in our real estate secured, personal non-credit card and
MasterCard/Visa portfolios as well as growth from the introduction of auto
finance receivables in Canada in the third quarter of 2004. Applying constant
currency rates, managed receivables at June 30, 2005 would have been $549
million higher using March 31, 2005 exchange rates and $97 million lower using
June 30, 2004 exchange rates.
The decrease in ROMA in both the three and six month periods ended June 30, 2005
reflects the net losses incurred, primarily due to higher provision for credit
losses due to higher delinquency and charge-off levels in the U.K. and lower
overall yields on our receivables, as well as higher average managed assets
primarily due to receivable growth since June 30, 2004.
As part of ongoing integration efforts with HSBC, we have begun working with
HSBC to determine if funding synergies and management efficiencies could be
achieved by transferring our U.K. and other European operations to a U.K. based
subsidiary of HSBC. As of the date of this filing, a decision has not been made
regarding the potential transfer of the U.K. and other European operations. We
anticipate that a decision regarding this potential transfer will be reached in
the third quarter of 2005.
Reconciliation of Managed Basis Segment Results Fair value adjustments related
to purchase accounting and related amortization have been allocated to
Corporate, which is included in the "All Other" caption within our segment
disclosure. Reconciliations of our managed basis segment results to managed
basis and owned basis consolidated totals are as follows:
MANAGED
CREDIT ADJUSTMENTS/ BASIS
CARD RECONCILING CONSOLIDATED
CONSUMER SERVICES INTERNATIONAL ALL OTHER ITEMS TOTALS
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
THREE MONTHS ENDED JUNE 30,
2005
Net interest income............ $ 1,699 $ 507 $ 224 $ (146) $ - $ 2,284
Securitization revenue......... (151) (55) 4 (15) - (217)
Fee and other income........... 292 475 141 270 (34)(1) 1,144
Intersegment revenues.......... 26 5 4 (1) (34)(1) -
Provision for credit losses.... 580 334 166 - 3(5) 1,083
Total costs and expenses....... 578 333 217 314 - 1,442
Net income..................... 440 165 (14) (95) (24) 472
Receivables.................... 95,300 19,615 12,581 245 - 127,741
Assets......................... 96,188 19,391 13,492 26,223 (8,571)(2) 146,723
------- ------- ------- ------- ------- --------
THREE MONTHS ENDED JUNE 30,
2004
Net interest income............ $ 1,915 $ 513 $ 196 $ (42) $ - $ 2,582
Securitization revenue......... (285) (118) 3 (36) - (436)
Fee and other income........... 161 398 122 337 (34)(1) 984
Intersegment revenues.......... 26 6 3 (1) (34)(1) -
Provision for credit losses.... 734 319 93 (1) - 1,145
Total costs and expenses....... 647 284 173 217 - 1,321
Net income..................... 256 120 34 45 (22) 433
Receivables.................... 92,196 18,355 11,380 337 - 122,268
Assets......................... 94,799 20,405 12,342 24,471 (8,648)(2) 143,369
------- ------- ------- ------- ------- --------
OWNED BASIS
SECURITIZATION CONSOLIDATED
ADJUSTMENTS TOTALS
------------------------------- -----------------------------
(IN MILLIONS)
THREE MONTHS ENDED JUNE 30,
2005
Net interest income............ $ (249)(3) $ 2,035
Securitization revenue......... 271(3) 54
Fee and other income........... (74)(3) 1,070
Intersegment revenues.......... - -
Provision for credit losses.... (52)(3) 1,031
Total costs and expenses....... - 1,442
Net income..................... - 472
Receivables.................... (8,980)(4) 118,761
Assets......................... (8,980)(4) 137,743
-------- --------
THREE MONTHS ENDED JUNE 30,
2004
Net interest income............ $ (652)(3) $ 1,930
Securitization revenue......... 702(3) 266
Fee and other income........... (198)(3) 786
Intersegment revenues.......... - -
Provision for credit losses.... (148)(3) 997
Total costs and expenses....... - 1,321
Net income..................... - 433
Receivables.................... (22,836)(4) 99,432
Assets......................... (22,836)(4) 120,533
-------- --------
37
HSBC Finance Corporation
--------------------------------------------------------------------------------
MANAGED
CREDIT ADJUSTMENTS/ BASIS
CARD RECONCILING CONSOLIDATED
CONSUMER SERVICES INTERNATIONAL ALL OTHER ITEMS TOTALS
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
SIX MONTHS ENDED JUNE 30, 2005
Net interest income............ $ 3,392 $ 1,013 $ 453 $ (354) $ - $ 4,504
Securitization revenue......... (386) (119) 14 (34) - (525)
Fee and other income........... 577 912 271 920 (68)(1) 2,612
Intersegment revenues.......... 53 11 7 (3) (68)(1) -
Provision for credit losses.... 963 655 331 - 5(5) 1,954
Total costs and expenses....... 1,246 657 433 648 - 2,984
Net income..................... 874 313 (23) (19) (47) 1,098
SIX MONTHS ENDED JUNE 30, 2004
Net interest income............ $ 3,779 $ 1,041 $ 398 $ (62) $ - $ 5,156
Securitization revenue......... (541) (145) (6) (93) - (785)
Fee and other income........... 329 811 239 743 (67)(1) 2,055
Intersegment revenues.......... 48 14 7 (2) (67)(1) -
Provision for credit losses.... 1,399 740 188 (2) 1(5) 2,326
Total costs and expenses....... 1,274 561 345 551 - 2,731
Net income..................... 560 257 62 67 (43) 903
OWNED BASIS
SECURITIZATION CONSOLIDATED
ADJUSTMENTS TOTALS
------------------------------- -----------------------------
(IN MILLIONS)
SIX MONTHS ENDED JUNE 30, 2005
Net interest income............ $ (581)(3) $ 3,923
Securitization revenue......... 664(3) 139
Fee and other income........... (165)(3) 2,447
Intersegment revenues.......... - -
Provision for credit losses.... (82)(3) 1,872
Total costs and expenses....... - 2,984
Net income..................... - 1,098
SIX MONTHS ENDED JUNE 30, 2004
Net interest income............ $ (1,406)(3) $ 3,750
Securitization revenue......... 1,399(3) 614
Fee and other income........... (394)(3) 1,661
Intersegment revenues.......... - -
Provision for credit losses.... (401)(3) 1,925
Total costs and expenses....... - 2,731
Net income..................... - 903
---------------
(1) Eliminates intersegment revenues.
(2) Eliminates investments in subsidiaries and intercompany borrowings.
(3) Reclassifies net interest income, fee income and provision for credit losses
relating to securitized receivables to other revenues.
(4) Represents receivables serviced with limited recourse.
(5) Eliminates bad debt recovery sales between operating segments.
CREDIT QUALITY
--------------------------------------------------------------------------------
CREDIT LOSS RESERVES
We maintain credit loss reserves to cover probable losses of principal, interest
and fees, including late, overlimit and annual fees. Credit loss reserves are
based on a range of estimates and are intended to be adequate but not excessive.
We estimate probable losses for owned consumer receivables using a roll rate
migration analysis that estimates the likelihood that a loan will progress
through the various stages of delinquency, or buckets, and ultimately
charge-off. This analysis considers delinquency status, loss experience and
severity and takes into account whether loans are in bankruptcy, have been
restructured or rewritten, or are subject to forbearance, an external debt
management plan, hardship, modification, extension or deferment. Our credit loss
reserves also take into consideration the loss severity expected based on the
underlying collateral, if any, for the loan in the event of default. Delinquency
status may be affected by customer account management policies and practices,
such as the restructure of accounts, forbearance agreements, extended payment
plans, modification arrangements, external debt management programs, loan
rewrites and deferments. If customer account management policies, or changes
thereto, shift loans from a "higher" delinquency bucket to a "lower" delinquency
bucket, this will be reflected in our roll rate statistics. To the extent that
restructured accounts have a greater propensity to roll to higher delinquency
buckets, this will be captured in the roll rates. Since the loss reserve is
computed based on the composite of all of these calculations, this increase in
roll rate will be applied to receivables in all respective delinquency buckets,
which will increase the overall reserve level. In addition, loss reserves on
consumer receivables are maintained to reflect our judgment of portfolio risk
factors that may not be fully reflected in the statistical roll rate
calculation. Risk factors considered in establishing loss reserves on consumer
receivables include recent growth, product mix, bankruptcy trends, geographic
concentrations, economic conditions, portfolio seasoning, account management
policies and practices and current levels of charge-offs and delinquencies.
While our credit loss reserves are available to absorb losses in the entire
portfolio, we specifically consider the credit quality and other risk factors
for each of our products. We recognize the different inherent loss
characteristics in each of our products as well as customer account management
policies and practices and risk
38
HSBC Finance Corporation
--------------------------------------------------------------------------------
management/collection practices. Charge-off policies are also considered when
establishing loss reserve requirements to ensure the appropriate reserves exist
for products with longer charge-off periods. We also consider key ratios such as
reserves to nonperforming loans and reserves as a percent of net annualized
charge-offs in developing our loss reserve estimates. Loss reserve estimates are
reviewed periodically and adjustments are reported in earnings when they become
known. As these estimates are influenced by factors outside of our control, such
as consumer payment patterns and economic conditions, there is uncertainty
inherent in these estimates, making it reasonably possible that they could
change. See Note 3, "Receivables," in the accompanying consolidated financial
statements for receivables by product type and Note 4, "Credit Loss Reserves,"
for an analysis of changes in the credit loss reserves.
The following table summarizes owned basis credit loss reserves:
JUNE 30, MARCH 31, JUNE 30,
2005 2005 2004
---------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Owned credit loss reserves.................................. $3,756 $3,581 $3,795
Reserves as a percent of:
Receivables............................................... 3.16% 3.19% 3.82%
Net charge-offs(1)........................................ 111.3 103.7 98.2
Nonperforming loans....................................... 107.6 103.6 103.0
---------------
(1) Quarter-to-date, annualized.
Owned credit loss reserves at June 30, 2005 increased as compared to March 31,
2005 as the provision for owned credit losses during the current quarter was
$187 million greater than net charge-offs reflecting higher levels of owned
receivables partially offset by continued improvements in credit quality. Owned
credit loss reserves at June 30, 2005 decreased as compared to June 30, 2004
reflecting improved credit quality and a shift in mix to higher levels of
secured receivables which were partially offset by growth. Compared to the year
ago period, the decrease also reflects the release of $505 million of owned
credit loss reserves associated with the sold domestic private label portfolio.
During the three months ended June 30, 2004, provision for owned credit losses
was $32 million greater than net charge-offs. Reserve levels at June 30, 2005
reflect the factors discussed above. The trends in the reserve ratios reflect
the fact that we are experiencing a shift in our loan portfolio to higher credit
quality receivables, particularly real estate secured and auto finance
receivables.
For securitized receivables, we also record a provision for estimated probable
losses that we expect to incur under the recourse provisions. The following
table summarizes managed credit loss reserves:
JUNE 30, MARCH 31, JUNE 30,
2005 2005 2004
---------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Managed credit loss reserves................................ $4,281 $4,242 $5,699
Reserves as a percent of:
Receivables............................................... 3.35% 3.43% 4.66%
Net charge-offs(1)........................................ 104.1 94.9 104.2
Nonperforming loans....................................... 110.2 106.9 122.8
---------------
(1) Quarter-to-date, annualized.
Managed credit loss reserves at June 30, 2005 were relatively flat compared to
March 31, 2005 as increases in our owned credit loss reserves as discussed above
were offset by lower reserves on securitized receivables due to run-off. Managed
credit loss reserves at June 30, 2005 decreased as compared to June 30, 2004 as
a result of improvements in credit quality, changes in securitization levels and
the sale of our domestic private label receivable portfolio in December 2004 as
previously discussed.
39
HSBC Finance Corporation
--------------------------------------------------------------------------------
See "Basis of Reporting" for additional discussion on the use of non-GAAP
financial measures and "Reconciliations to GAAP Financial Measures" for
quantitative reconciliations of the non-GAAP financial measures to the
comparable GAAP basis financial measure.
DELINQUENCY - OWNED BASIS
The following table summarizes two-months-and-over contractual delinquency (as a
percent of consumer receivables):
JUNE 30, MARCH 31, JUNE 30,
2005 2005 2004
---------------------------------------------------------------------------------------------
Real estate secured......................................... 2.56% 2.62% 3.39%
Auto finance................................................ 2.08 1.65 2.12
MasterCard/Visa............................................. 4.14 4.60 5.83
Private label............................................... 4.91 4.71 5.00
Personal non-credit card.................................... 8.84 8.63 8.92
---- ---- ----
Total....................................................... 3.73% 3.78% 4.57%
==== ==== ====
Total owned delinquency as a percentage of consumer receivables decreased 5
basis points compared to the prior quarter. The decrease in the delinquency
ratio is consistent with improvements in the delinquency roll rate trends we
experienced throughout 2004 as a result of improvements in the economy, better
underwriting and improved quality of originations. The overall decrease in the
delinquency ratio of our real estate secured portfolio reflects receivable
growth, improved collection efforts, the recent trend of better quality in new
originations and improved economic conditions. The increase in the auto finance
delinquency ratio reflects seasonal patterns. The decrease in the
MasterCard/Visa delinquency ratio reflects changes in receivable mix resulting
from lower securitization levels and for our domestic receivables improved
credit quality, improvements in the economy and enhanced resources in
collections. These decreases were partially offset by increases in delinquencies
in our foreign MasterCard/Visa receivables due to a general increase in consumer
bad debts in the U.K. market, including increased bankruptcies. The increases in
the delinquency ratio in our private label receivables (which includes our
foreign private label portfolio that was not sold to HSBC Bank USA in December
2004) and our personal non-credit card portfolio also reflects the general
increase in consumer bad debts in the U.K. market, including increased
bankruptcies. The increases in personal non-credit card delinquencies was
partially offset by improved collection efforts and economic conditions in the
U.S.
Compared to a year ago, total delinquency decreased 84 basis points as all
products reported lower delinquency levels. The improvements are generally the
result of improvements in the U.S. economy, better underwriting and higher
levels of real estate secured receivables. Delinquency levels at June 30, 2004
include the domestic private label portfolio which contributed approximately 8
basis points to total delinquency.
40
HSBC Finance Corporation
--------------------------------------------------------------------------------
NET CHARGE-OFFS OF CONSUMER RECEIVABLES - OWNED BASIS
The following table summarizes net charge-offs of consumer receivables (as a
percent, annualized, of average consumer receivables):
JUNE 30, MARCH 31, JUNE 30,
2005 2005 2004
---------------------------------------------------------------------------------------------
Real estate secured......................................... .78% .87% 1.04%
Auto finance................................................ 2.61 3.80 3.05
MasterCard/Visa............................................. 6.93 7.17 9.91
Private label............................................... 4.36 4.18 5.06
Personal non-credit card.................................... 7.77 8.18 10.59
---- ---- -----
Total....................................................... 2.93% 3.15% 4.02%
==== ==== =====
Real estate secured net charge-offs and REO expense as a
percent of average real estate secured receivables........ .84% 1.01% 1.47%
Net charge-offs as a percent, annualized, of average consumer receivables
decreased during the quarter ended June 30, 2005 compared to the quarter ended
March 31, 2005 as the lower delinquency levels we have been experiencing due to
an improving economy continue to have an impact on charge-offs. The impact of
the lower delinquency levels was partially offset by an increase in bankruptcy
filings due to new bankruptcy legislation in the U.S. which will become
effective later this year. Our real estate secured portfolio experienced a
decrease in net charge-offs reflecting improved collection efforts, the recent
trend of better quality in new originations and improved economic conditions.
The decrease in auto finance net charge-offs reflects a seasonal pattern related
to higher charge-offs in the first quarter. The decrease in MasterCard/Visa
charge-offs reflects changes in receivable mix resulting from lower
securitization levels and continued improved credit quality. The increase in net
charge-offs for the private label portfolio reflects the general increase in
consumer bad debts in the U.K. markets, including increased bankruptcies. The
decrease in net charge-offs in the personal non-credit card portfolio reflects
the lower level of delinquency experienced in prior quarters.
Total net charge-offs as a percentage, annualized, of average consumer
receivables for the current quarter decreased from the June 2004 net charge-off
levels. Principal factors behind the decrease were receivable growth, improved
collections and better underwriting, including both improved modeling and
improved credit quality of originations, improved economic conditions, as well
as the sale of our domestic private label portfolio in December 2004. These were
partially offset by the increased bankruptcy filings discussed above. The June
2004 net charge-off ratio includes the domestic private label portfolio which
contributed 17 basis points to the ratio. The decrease in auto finance net
charge-offs also reflects improved used auto prices which resulted in lower loss
severities.
OWNED NONPERFORMING ASSETS
JUNE 30, MARCH 31, JUNE 30,
2005 2005 2004
---------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Nonaccrual receivables...................................... $3,008 $2,956 $2,833
Accruing consumer receivables 90 or more days delinquent.... 482 499 849
Renegotiated commercial loans............................... 1 1 2
------ ------ ------
Total nonperforming receivables............................. 3,491 3,456 3,684
Real estate owned........................................... 459 509 624
------ ------ ------
Total nonperforming assets.................................. $3,950 $3,965 $4,308
====== ====== ======
Credit loss reserves as a percent of nonperforming
receivables............................................... 107.6% 103.6% 103.0%
41
HSBC Finance Corporation
--------------------------------------------------------------------------------
Total nonperforming assets at June 30, 2005 were relatively flat compared to
March 31, 2005. The decrease in total nonperforming assets compared to June 30,
2004 is due to improved credit quality, continued improvement in the economy,
collection efforts as well as the impact of the bulk sale of our domestic
private label receivable portfolio in December 2004. Consistent with industry
practice, accruing consumer receivables 90 or more days delinquent includes
domestic MasterCard and Visa and for June 30, 2004 our domestic private label
credit card receivables.
ACCOUNT MANAGEMENT POLICIES AND PRACTICES
Our policies and practices for the collection of consumer receivables, including
our customer account management policies and practices, permit us to reset the
contractual delinquency status of an account to current, based on indicia or
criteria which, in our judgment, evidence continued payment probability. Such
policies and practices vary by product and are designed to manage customer
relationships, maximize collection opportunities and avoid foreclosure or
repossession if reasonably possible. If the account subsequently experiences
payment defaults, it will again become contractually delinquent.
The tables below summarize approximate restructuring statistics in our managed
basis domestic portfolio. We report our restructuring statistics on a managed
basis only because the receivables that we securitize are subject to
underwriting standards comparable to our owned portfolio, are generally serviced
and collected without regard to ownership and result in a similar credit loss
exposure for us. As previously reported, we use certain assumptions and
estimates to compile our restructure statistics. We continue to enhance our
ability to capture and segment restructure data across all business units. When
comparing restructuring statistics from different periods, the fact that our
restructure policies and practices will change over time, that exceptions are
made to those policies and practices, and that our data capture methodologies
have been enhanced, should be taken into account.
42
HSBC Finance Corporation
--------------------------------------------------------------------------------
TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD - DOMESTIC PORTFOLIO(1)
(MANAGED BASIS)
JUNE 30, MARCH 31, JUNE 30,
2005(3) 2005(3) 2004
---------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
Never restructured.......................................... 88.0% 87.2% 86.1%
Restructured:
Restructured in the last 6 months......................... 4.2 4.8 4.8
Restructured in the last 7-12 months...................... 3.3 3.2 4.0
Previously restructured beyond 12 months.................. 4.5 4.8 5.1
------- ------- -------
Total ever restructured(2)................................ 12.0 12.8 13.9
------- ------- -------
Total....................................................... 100.0% 100.0% 100.0%
======= ======= =======
TOTAL RESTRUCTURED BY PRODUCT - DOMESTIC PORTFOLIO(1)
(MANAGED BASIS)
Real estate secured......................................... $ 8,277 $ 8,470 $ 8,885
Auto finance................................................ 1,585 1,560 1,304
MasterCard/Visa............................................. 526 567 639
Private label(3)............................................ 24 23 830
Personal non-credit card.................................... 3,396 3,466 3,727
------- ------- -------
Total....................................................... $13,808 $14,086 $15,385
======= ======= =======
(AS A PERCENT OF MANAGED RECEIVABLES)
Real estate secured......................................... 12.0% 12.9% 16.5%
Auto finance................................................ 14.9 15.3 14.0
MasterCard/Visa............................................. 2.7 3.0 3.6
Private label(3)............................................ 7.1 7.0 5.6
Personal non-credit card.................................... 21.6 22.3 25.0
------- ------- -------
Total(2).................................................... 12.0% 12.8% 13.9%
======= ======= =======
---------------
(1) Excludes foreign businesses, commercial and other.
(2) Total including foreign businesses was 11.3 percent at June 30, 2005, 11.9
percent at March 31, 2005, and 13.0 percent at June 30, 2004.
(3) Reflects consumer lending retail sales contracts which have historically
been classified as private label.
See "Credit Quality Statistics" for further information regarding owned basis
and managed basis delinquency, charge-offs and nonperforming loans.
The amount of domestic and foreign managed receivables in forbearance,
modification, credit card services approved consumer credit counseling
accommodations, rewrites or other customer account management techniques for
which we have reset delinquency and that is not included in the restructured or
delinquency statistics was approximately $.4 billion or .3 percent of managed
receivables at June 30, 2005, $.4 billion or .4 percent of managed receivables
at March 31, 2005 and $.5 billion or .4 percent of managed assets at June 30,
2004.
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
We continue to focus on balancing our use of affiliate and third-party funding
sources to minimize funding expense while maximizing liquidity. As discussed
below, we supplemented unsecured debt issuance during the
43
HSBC Finance Corporation
--------------------------------------------------------------------------------
six months ended June 30, 2005 with proceeds from the sale of our domestic
private label receivable portfolio to HSBC Bank USA in December 2004, debt
issued to affiliates, higher levels of commercial paper and the issuance of
Series B preferred stock.
Because we are now a subsidiary of HSBC, our credit spreads relative to
Treasuries have tightened compared to those we experienced during the months
leading up to the announcement of our acquisition by HSBC. Primarily as a result
of these tightened credit spreads, we recognized cash funding expense savings of
approximately $252 million in the six months ended June 30, 2005 ($132 million
in the three months ended June 30, 2005) and approximately $140 million in the
six months ended June 30, 2004 ($70 million in the three months ended June 30,
2004) compared to the funding costs we would have incurred using average spreads
and funding mix from the first half of 2002. It is anticipated that these
tightened credit spreads and other funding synergies including asset transfers
will eventually enable HSBC to realize annual cash funding expense savings,
including external fee savings, in excess of $1 billion per year as our existing
term debt matures over the course of the next few years. The portion of these
savings to be realized by HSBC Finance Corporation will depend in large part
upon the amount and timing of various initiatives between HSBC Finance
Corporation and other HSBC subsidiaries.
Debt due to affiliates and other HSBC related funding are summarized in the
following table:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
(IN BILLIONS)
Debt issued to HSBC subsidiaries:
Drawings on bank lines in the U.K. ....................... $ 6.9 $ 7.5
Term debt................................................. 9.2 6.0
Preferred securities issued by Household Capital Trust
VIII................................................... .3 .3
----- -----
Total debt issued to HSBC subsidiaries.................... 16.4 13.8
----- -----
Debt issued to HSBC clients:
Euro commercial paper..................................... 3.5 2.6
Term debt................................................. 1.0 .8
----- -----
Total debt issued to HSBC clients......................... 4.5 3.4
Preferred stock held by HSBC Investments (North America)
Inc. ..................................................... 1.1 1.1
Cash received on bulk and subsequent sales of domestic
private label receivables to HSBC Bank USA, net
(cumulative).............................................. 13.1 12.4
Real estate secured receivable activity with HSBC Bank USA:
Cash received on sales (cumulative)....................... 3.7 3.7
Direct purchases from correspondents (cumulative)......... 3.9 2.8
Run-off of real estate secured receivable activity with
HSBC Bank USA.......................................... (2.5) (1.5)
----- -----
Total real estate secured receivable activity with HSBC Bank
USA....................................................... 5.1 5.0
----- -----
Total HSBC related funding.................................. $40.2 $35.7
===== =====
At June 30, 2005, funding from HSBC, including debt issuances to HSBC
subsidiaries and clients and preferred stock held by HSBC Investments (North
America) Inc. ("HINO") but excluding cash received on asset sales to HSBC
subsidiaries, represented 18 percent of our total managed debt and preferred
stock funding. At December 31, 2004, funding from HSBC, including debt issuances
to HSBC subsidiaries and clients and preferred stock held by HINO but excluding
cash received on asset sales to HSBC subsidiaries, represented 15 percent of our
total managed debt and preferred stock funding.
In addition to the HSBC related funding received, we have extended lines of
credit and promissory notes to other HSBC subsidiaries at interest rates
comparable to third-party rates for notes with similar terms. At
44
HSBC Finance Corporation
--------------------------------------------------------------------------------
June 30, 2005, $1.5 billion was outstanding under these agreements compared to
$.6 billion outstanding at December 31, 2004.
Proceeds from the December 2004 domestic private label bulk receivable sale to
HSBC Bank USA of $12.4 billion were used to pay down short-term domestic
borrowings, including outstanding commercial paper balances, and to fund
operations. Excess liquidity from the sale was used to temporarily fund
available for sale investments at December 31, 2004.
As of June 30, 2005, we had revolving credit facilities of $2.5 billion from
HSBC domestically and $10.0 billion from HSBC subsidiaries in the U.K. There
have been no draws on the domestic line. At June 30, 2005, $6.9 billion was
outstanding under the U.K. lines. We had derivative contracts with a notional
value of $58.4 billion, or approximately 94 percent of total derivative
contracts, outstanding with HSBC affiliates at June 30, 2005. We had derivative
contracts with a notional value of $62.6 billion, or approximately 87 percent of
total derivative contracts, outstanding with HSBC affiliates at December 31,
2004.
SECURITIES totaled $4.0 billion at June 30, 2005 and $3.6 billion at December
31, 2004. Securities purchased under agreements to resell totaled $.4 billion at
June 30, 2005 and $2.7 billion at December 31, 2004. Interest bearing deposits
with banks totaled $.4 billion at June 30, 2005 and $.6 billion at December 31,
2004. Our total investment balances at December 31, 2004 were high as a result
of the timing of the bulk sale of the domestic private label receivable
portfolio to HSBC Bank USA on December 29, 2004.
COMMERCIAL PAPER, BANK AND OTHER BORROWINGS totaled $10.6 billion at June 30,
2005 and $9.0 billion at December 31, 2004. The increase at June 30, 2005 was a
result of higher levels of short-term notes outstanding as well as higher levels
of commercial paper as compared to the lower levels outstanding at December 31,
2004 as the proceeds from the sale of the domestic private label loan portfolio
to HSBC Bank USA were used to reduce the outstanding balances. Included in this
total was outstanding Euro commercial paper sold to customers of HSBC of $3.5
billion at June 30, 2005 and $2.6 billion at December 31, 2004.
During the second quarter of 2005, all three major domestic rating agencies
approved a plan which allows us to increase our commercial paper issuances as a
result of lowering the coverage ratio of bank credit facilities to outstanding
commercial paper from 100% to 80%. This plan also assumes that the combination
of bank credit facilities and undrawn conduit facilities will, at all times,
exceed 115% of outstanding commercial paper. This approved plan will result in
an increase in our maximum outstanding commercial paper balance to in excess of
$12.0 billion.
LONG TERM DEBT (with original maturities over one year) increased to $87.0
billion at June 30, 2005 from $85.4 billion at December 31, 2004. Significant
third party issuance during the six months ended June 30, 2005 included the
following:
- $6.7 billion of domestic and foreign medium-term notes
- $1.2 billion of foreign currency-denominated bonds
- $.7 billion of InterNotes(SM) (retail-oriented medium-term notes)
- $5.5 billion of global debt
- $2.4 billion of securities backed by real estate secured, auto finance,
and MasterCard/Visa receivables. For accounting purposes, these
transactions were structured as secured financings.
In June 2005, we redeemed the junior subordinated notes issued to the Household
Capital Trust V with an outstanding principal balance of $309 million.
PREFERRED SHARES In June 2005, we issued 575,000 shares of Series B Preferred
Stock for $575 million. Dividends on the Series B Preferred Stock are
non-cumulative and payable quarterly at a rate of 6.36 percent commencing
September 15, 2005. The Series B Preferred Stock may be redeemed at our option
after June 23, 2005.
45
HSBC Finance Corporation
--------------------------------------------------------------------------------
SELECTED CAPITAL RATIOS are summarized in the following table:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
TETMA(1).................................................... 7.52% 6.68%
TETMA + Owned Reserves(1)................................... 10.29 9.45
Tangible common equity to tangible managed assets(1)........ 5.38 4.67
Common and preferred equity to owned assets................. 13.42 13.01
Excluding purchase accounting adjustments:
TETMA(1).................................................. 8.78 8.38
TETMA + Owned Reserves(1)................................. 11.55 11.16
Tangible common equity to tangible managed assets(1)...... 6.64 6.38
---------------
(1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed
assets represent non-GAAP financial ratios that are used by HSBC Finance
Corporation management and certain rating agencies to evaluate capital
adequacy and may differ from similarly named measures presented by other
companies. See "Basis of Reporting" for additional discussion on the use of
non-GAAP financial measures and "Reconciliations to GAAP Financial Measures"
for quantitative reconciliations to the equivalent GAAP basis financial
measure.
SECURITIZATIONS AND SECURED FINANCINGS Securitizations (collateralized funding
transactions structured to receive sale treatment under Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a Replacement of FASB
Statement No. 125," ("SFAS No. 140")) and secured financings (collateralized
funding transactions which do not receive sale treatment under SFAS No. 140) of
consumer receivables have been used to limit our reliance on the unsecured debt
markets.
In a securitization, a designated pool of non-real estate consumer receivables
is removed from the balance sheet and transferred through a limited purpose
financing subsidiary to an unaffiliated trust. This unaffiliated trust is a
qualifying special purpose entity ("QSPE") as defined by SFAS No. 140 and,
therefore, is not consolidated. The QSPE funds its receivable purchase through
the issuance of securities to investors, entitling them to receive specified
cash flows during the life of the securities. The receivables transferred to the
QSPE serve as collateral for the securities. At the time of sale, an
interest-only strip receivable is recorded, representing the present value of
the cash flows we expect to receive over the life of the securitized
receivables, net of estimated credit losses and debt service. Under the terms of
the securitizations, we receive annual servicing fees on the outstanding balance
of the securitized receivables and the rights to future residual cash flows on
the sold receivables after the investors receive their contractual return. Cash
flows related to the interest-only strip receivables and servicing the
receivables are collected over the life of the underlying securitized
receivables.
In a secured financing, a designated pool of receivables are conveyed to a
wholly owned limited purpose subsidiary, which in turn transfers the receivables
to a trust that sells interests to investors. Repayment of the debt issued by
the trust is secured by the receivables transferred. The transactions are
structured as secured financings under SFAS No. 140. Therefore, the receivables
and the underlying debt of the trust remain on our balance sheet. We do not
recognize a gain in a secured financing transaction. Because the receivables and
the debt remain on our balance sheet, revenues and expenses are reported
consistently with our owned balance sheet portfolio. Using this source of
funding results in similar cash flows as issuing debt through alternative
funding sources.
Under IFRS and prior to 2005 under U.K. GAAP, our securitizations are treated as
secured financings. In order to align our accounting treatment with that of
HSBC, starting in the third quarter of 2004 we began to structure all new
collateralized funding transactions as secured financings. However, because
existing public MasterCard and Visa credit card transactions were structured as
sales to revolving trusts that require replenishments of receivables to support
previously issued securities, receivables will continue to be sold to
46
HSBC Finance Corporation
--------------------------------------------------------------------------------
these trusts until the revolving periods end, the last of which is expected to
occur in 2008 based on current projections. Private label trusts that publicly
issued securities are now replenished by HSBC Bank USA as a result of the daily
sale of new domestic private label credit card originations to HSBC Bank USA. We
will continue to replenish at reduced levels certain non-public personal
non-credit card and MasterCard and Visa securities issued to conduits and record
the resulting replenishment gains for a period of time in order to manage
liquidity. Since our securitized receivables have varying lives, it will take
several years for these receivables to pay-off and the related interest-only
strip receivables to be reduced to zero. The termination of sale treatment on
new collateralized funding activity reduced our reported net income under U.S.
GAAP. There is no impact, however, on cash received from operations. Because we
believe the market for securities backed by receivables is a reliable, efficient
and cost-effective source of funds, we will continue to use secured financings
of consumer receivables as a source of our funding and liquidity.
As previously discussed, securitization levels were much lower in the six months
ended June 30, 2005 as a result of the use of alternate funding sources,
including funding from HSBC subsidiaries, and our decision to structure all new
collateralized funding transactions as secured financings beginning in the third
quarter of 2004.
Securitizations (excluding replenishments of certificateholder interests) and
secured financings are summarized in the following table:
THREE MONTHS ENDED JUNE 30, 2005 2004
------------------------------------------------------------------------------
(IN MILLIONS)
INITIAL SECURITIZATIONS:
Auto finance................................................ $ - $ 300
MasterCard/Visa............................................. - 500
Private label............................................... - 190
Personal non-credit card.................................... - -
------ ------
Total....................................................... $ - $ 990
====== ======
SECURED FINANCINGS:
Real estate secured......................................... $ 919 $1,750
Auto finance................................................ 998 -
MasterCard/Visa............................................. 500 -
------ ------
Total....................................................... $2.417 $1,750
====== ======
SIX MONTHS ENDED JUNE 30, 2005 2004
------------------------------------------------------------------------------
(IN MILLIONS)
INITIAL SECURITIZATIONS:
Auto finance................................................ $ - $ 300
MasterCard/Visa............................................. - 550
Private label............................................... - 190
Personal non-credit card.................................... - -
------ ------
Total....................................................... $ - $1,040
====== ======
SECURED FINANCINGS:
Real estate secured......................................... $ 919 $1,750
Auto finance................................................ 998 -
MasterCard/Visa............................................. 500 -
------ ------
Total....................................................... $2,417 $1,750
====== ======
47
HSBC Finance Corporation
--------------------------------------------------------------------------------
Our securitized receivables totaled $9.0 billion at June 30, 2005 compared to
$14.2 billion at December 31, 2004. As of June 30, 2005, secured financings of
$5.6 billion are secured by $10.8 billion of real estate secured, auto finance
and MasterCard/Visa receivables. Secured financings of $7.3 billion at December
31, 2004 are secured by $10.3 billion of real estate secured and auto finance
receivables. At June 30, 2005, securitizations structured as sales represented 7
percent and secured financings represented 5 percent of the funding associated
with our managed funding portfolio. At December 31, 2004, securitizations
structured as sales represented 12 percent and secured financings represented 6
percent of the funding associated with our managed funding portfolio.
2005 FUNDING STRATEGY As discussed previously, the acquisition by HSBC has
improved our access to the capital markets as well as expanded our access to a
worldwide pool of potential investors. Our current estimated domestic funding
needs and sources for 2005 are summarized in the table that follows:
ACTUAL ESTIMATED
JANUARY 1 JULY 1
THROUGH THROUGH ESTIMATED
JUNE 30, DECEMBER 31, FULL YEAR
2005 2005 2005
--------------------------------------------------------------------------------------------------
(IN BILLIONS)
FUNDING NEEDS:
Net asset growth.......................................... $ 8 $ 8 - 11 $16 - 19
Commercial paper, term debt and securitization
maturities............................................. 18 10 - 15 28 - 33
Other..................................................... 1 1 - 3 2 - 4
--- -------- --------
Total funding needs, including growth..................... $27 $19 - 29 $46 - 56
=== ======== ========
FUNDING SOURCES:
External funding, including HSBC clients.................. $24 $18 - 26 $42 - 50
HSBC and HSBC subsidiaries................................ 3 1 - 3 4 - 6
--- -------- --------
Total funding sources..................................... $27 $19 - 29 $46 - 56
=== ======== ========
RISK MANAGEMENT
--------------------------------------------------------------------------------
CREDIT RISK There have been no significant changes in our approach to credit
risk management since December 31, 2004.
At June 30, 2005, we had derivative contracts with a notional value of
approximately $62.0 billion, including $58.4 billion outstanding with HSBC
affiliates. Most swap agreements, both with unaffiliated and affiliated third
parties, require that payments be made to, or received from, the counterparty
when the fair value of the agreement reaches a certain level. Generally,
third-party swap counterparties provide collateral in the form of cash which is
recorded in our balance sheet as other assets or derivative related liabilities
and totaled $347 million at June 30, 2005. Affiliate swap counterparties
generally provide collateral in the form of securities which are not recorded on
our balance sheet. At June 30, 2005, the fair value of our agreements with
affiliate counterparties was below the level requiring payment of collateral. As
such at June, 30, 2005, we were not holding any swap collateral from HSBC
affiliates in the form of securities.
LIQUIDITY RISK There have been no significant changes in our approach to
liquidity risk since December 31, 2004.
MARKET RISK HSBC has certain limits and benchmarks that serve as guidelines in
determining appropriate levels of interest rate risk. One such limit is
expressed in terms of the Present Value of a Basis Point ("PVBP"), which
reflects the change in value of the balance sheet for a one basis point movement
in all interest rates. Our total PVBP limit as of June 30, 2005 was $2 million,
which includes risk associated with hedging instruments. Thus, for a one basis
point change in interest rates, the policy dictates that the value of
48
HSBC Finance Corporation
--------------------------------------------------------------------------------
the balance sheet shall not increase or decrease by more than $2 million. Our
PVBP position at both June 30, 2005 and December 31, 2004 was less than $1
million.
While the total PVBP position was not impacted by the loss of hedge accounting
for certain derivative financial instruments at the time of our acquisition by
HSBC, the portfolio of ineffective hedges remaining at June 30, 2005 represent
PVBP risk of ($4.7) million. The interest rate risk remaining for all other
assets and liabilities, including effective hedges, results in an offsetting
PVBP risk of $5.0 million. Therefore, at June 30, 2005 we had a net PVBP
position of less than $1 million, which is within our PVBP limit of $2 million.
We also monitor the impact that a hypothetical increase or decrease in interest
rates of 25 basis points applied at the beginning of each quarter over a 12
month period would have on our net interest income. The following table
summarizes such estimated impact:
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------
(IN MILLIONS)
Decrease in net interest income following a hypothetical 25
basis points rise in interest rates applied on a quarterly
basis over the next 12 months............................. $ 149 $ 176
Increase in net interest income following a hypothetical 25
basis points fall in interest rates applied on a quarterly
basis over the next 12 months............................. $ 88 $ 169
These estimates include both the net interest income impact of the derivative
positions we have entered into which are considered to be effective hedges under
SFAS 133 and the impact of economic hedges of certain underlying debt
instruments which do not qualify for hedge accounting as if they were effective
hedges under SFAS 133. These estimates also assume we would not take any
corrective actions in response to interest rate movements and, therefore, exceed
what most likely would occur if rates were to change by the amount indicated.
Net interest income at risk has changed as a result of the loss of hedge
accounting on a portfolio of economic hedges. At June 30, 2005, our net interest
income sensitivity to a hypothetical 25 basis point rise in rates applied on a
quarterly basis over the next 12 months is a decrease of $139 million as opposed
to the amount reported above, and the sensitivity to a hypothetical 25 basis
point fall in rates applied on a quarterly basis over the next 12 months is an
increase of $78 million as opposed to the amount reported above. At December 31,
2004, our net interest income sensitivity to a hypothetical 25 basis point rise
in rates applied on a quarterly basis over the next 12 months is a decrease of
$190 million as opposed to the amount reported above, and the sensitivity to a
hypothetical 25 basis point fall in rates applied on a quarterly basis over the
next 12 months is an increase of $186 million as opposed to the amount reported
above. This sensitivity only considers changes in interest rates and does not
consider changes from other variables, such as exchange rates that may impact
margin. The decrease in exposure to rising interest rates results primarily from
the reclassification of the pay fixed/receive floating interest rate swaps,
which do not qualify for hedge accounting under SFAS 133. We have reduced our
exposure during the second quarter of 2005 by regaining hedge accounting
treatment for a significant number of our cash flow hedges as well as
terminating other derivative instruments. We continue to evaluate the steps
required to regain hedge accounting treatment under SFAS 133 for the remaining
cash flow hedges which do not qualify for hedge accounting under SFAS 133 where
possible. We will continue to manage our total interest rate risk on a basis
consistent with the risk management process employed since the acquisition.
OPERATIONAL RISK There has been no significant change in our approach to
operational risk management since December 31, 2004.
49
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
RETURN ON AVERAGE ASSETS:
Net income......................................... $ 472 $ 433 $ 1,098 $ 903
======== ======== ======== ========
Average assets:
Owned basis...................................... $134,834 $117,467 $133,394 $118,428
Serviced with limited recourse................... 10,203 23,568 11,543 24,422
-------- -------- -------- --------
Managed basis.................................... $145,037 $141,035 $144,937 $142,850
======== ======== ======== ========
Return on average owned assets..................... 1.40% 1.47% 1.65% 1.52%
Return on average managed assets................... 1.30 1.23 1.52 1.26
RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY:
Net income......................................... $ 472 $ 433 $ 1,098 $ 903
Dividends on preferred stock....................... (19) (18) (37) (36)
-------- -------- -------- --------
Net income available to common shareholders........ $ 453 $ 415 $ 1,061 $ 867
======== ======== ======== ========
Average common shareholder's equity................ $ 16,671 $ 17,160 $ 16,421 $ 16,903
Return on average common shareholder's equity...... 10.87% 9.67% 12.92% 10.26%
NET INTEREST INCOME:
Net interest income:
Owned basis...................................... $ 2,035 $ 1,930 $ 3,923 $ 3,750
Serviced with limited recourse................... 249 652 581 1,406
-------- -------- -------- --------
Managed basis.................................... $ 2,284 $ 2,582 $ 4,504 $ 5,156
======== ======== ======== ========
Average interest-earning assets:
Owned basis...................................... $119,523 $101,238 $116,254 $100,457
Serviced with limited recourse................... 10,203 23,568 11,543 24,422
-------- -------- -------- --------
Managed basis.................................... $129,726 $124,806 $127,797 $124,879
======== ======== ======== ========
Owned basis net interest margin.................... 6.81% 7.63% 6.75% 7.47%
Managed basis net interest margin.................. 7.04 8.28 7.05 8.26
MANAGED BASIS RISK ADJUSTED REVENUE:
Net interest income................................ $ 2,284 $ 2,582 $ 4,504 $ 5,156
Other revenues, excluding securitization revenue
and derivative income............................ 1,068 860 2,276 1,879
Less: Net charge-offs.............................. (1,028) (1,367) (2,146) (2,809)
-------- -------- -------- --------
Risk adjusted revenue.............................. $ 2,324 $ 2,075 $ 4,634 $ 4,226
======== ======== ======== ========
Average interest-earning assets.................... $129,726 $124,806 $127,797 $124,879
Managed basis risk adjusted revenue................ 7.17% 6.65% 7.25% 6.77%
50
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- -------------------------
JUNE 30, MARCH 31, JUNE 30, JUNE 30, JUNE 30,
2005 2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
CONSUMER NET CHARGE-OFF RATIO:
Consumer net charge-offs:
Owned basis........................... $ 844 $ 856 $ 966 $ 1,700 $ 1,936
Serviced with limited recourse........ 184 255 401 439 873
-------- -------- -------- -------- --------
Managed basis......................... $ 1,028 $ 1,111 $ 1,367 $ 2,139 $ 2,809
======== ======== ======== ======== ========
Average consumer receivables:
Owned basis........................... $115,354 $108,928 $ 96,189 $112,141 $ 94,581
Serviced with limited recourse........ 10,203 12,884 23,568 11,543 24,422
-------- -------- -------- -------- --------
Managed basis......................... $125,557 $121,812 $119,757 $123,684 $119,003
======== ======== ======== ======== ========
Owned basis consumer net charge-off
ratio................................. 2.93% 3.15% 4.02% 3.03% 4.09%
Managed basis consumer net charge-off
ratio................................. 3.28 3.65 4.57 3.46 4.72
======== ======== ======== ======== ========
RESERVES AS A PERCENT OF NET CHARGE-OFFS
Loss reserves:
Owned basis........................... $ 3,756 $ 3,581 $ 3,795 $ 3,756 $ 3,795
Serviced with limited recourse........ 525 661 1,904 525 1,904
-------- -------- -------- -------- --------
Managed basis......................... $ 4,281 $ 4,242 $ 5,699 $ 4,281 $ 5,699
======== ======== ======== ======== ========
Net charge-offs:
Owned basis........................... $ 844 $ 863 $ 966 $ 1,707 $ 1,936
Serviced with limited recourse........ 184 255 401 439 873
-------- -------- -------- -------- --------
Managed basis......................... $ 1,028 $ 1,118 $ 1,367 $ 2,146 $ 2,809
======== ======== ======== ======== ========
Owned basis reserves as a percent of net
charge-offs........................... 111.3% 103.7% 98.2% 110.0% 98.0%
Managed basis reserves as a percent of
net charge-offs....................... 104.1 94.9 104.2 99.7 101.4
EFFICIENCY RATIO:
Total costs and expenses less
policyholders' benefits............... $ 1,326 $ 1,420 $ 1,228 $ 2,746 $ 2,525
======== ======== ======== ======== ========
Net interest income and other revenues
less policyholders' benefits:
Owned basis........................... $ 3,043 $ 3,228 $ 2,889 $ 6,271 $ 5,819
Serviced with limited recourse........ 52 30 148 82 401
-------- -------- -------- -------- --------
Managed basis......................... $ 3,095 $ 3,258 $ 3,037 $ 6,353 $ 6,220
======== ======== ======== ======== ========
Owned basis efficiency ratio............ 43.58% 43.99% 42.51% 43.79% 43.39%
Managed basis efficiency ratio.......... 42.84 43.59 40.43 43.22 40.59
51
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
JUNE 30, MARCH 31, JUNE 30,
2005 2005 2004
------------------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
TWO-MONTHS-AND-OVER-CONTRACTUAL DELINQUENCY:
Consumer two-months-and-over-contractual delinquency:
Owned basis............................................... $ 4,419 $ 4,229 $ 4,534
Serviced with limited recourse............................ 484 626 1,194
-------- -------- --------
Managed basis............................................. $ 4,903 $ 4,855 $ 5,728
======== ======== ========
Consumer receivables:
Owned basis............................................... $118,532 $111,911 $ 99,115
Serviced with limited recourse............................ 8,980 11,486 22,836
-------- -------- --------
Managed basis............................................. $127,512 $123,397 $121,951
======== ======== ========
Consumer two-months-and-over-contractual delinquency:
Owned basis............................................... 3.73% 3.78% 4.57%
Managed basis............................................. 3.85 3.93 4.70
RESERVES AS A PERCENT OF RECEIVABLES:
Loss reserves:
Owned basis............................................... $ 3,756 $ 3,581 $ 3,795
Serviced with limited recourse............................ 525 661 1,904
-------- -------- --------
Managed basis............................................. $ 4,281 $ 4,242 $ 5,699
======== ======== ========
Receivables:
Owned basis............................................... $118,761 $112,161 $ 99,432
Serviced with limited recourse............................ 8,980 11,486 22,836
-------- -------- --------
Managed basis............................................. $127,741 $123,647 $122,268
======== ======== ========
Reserves as a percent of receivables:
Owned basis............................................... 3.16% 3.19% 3.82%
Managed basis............................................. 3.35 3.43 4.66
RESERVES AS A PERCENT OF NONPERFORMING LOANS:
Loss reserves:
Owned basis............................................... $ 3,756 $ 3,581 $ 3,795
Serviced with limited recourse............................ 525 661 1,904
-------- -------- --------
Managed basis............................................. $ 4,281 $ 4,242 $ 5,699
======== ======== ========
Nonperforming loans:
Owned basis............................................... $ 3,491 $ 3,456 $ 3,684
Serviced with limited recourse............................ 395 511 958
-------- -------- --------
Managed basis............................................. $ 3,886 $ 3,967 $ 4,642
======== ======== ========
Reserves as a percent of nonperforming loans:
Owned basis............................................... 107.6% 103.6% 103.0%
Managed basis............................................. 110.2 106.9 122.8
52
HSBC FINANCIAL CORPORATION
RECONCILIATIONS TO GAAP FINANCIAL MEASURES
JUNE 30, DECEMBER 31,
2005 2004
-------------------------------------------------------------------------------------------
(DOLLARS ARE IN MILLIONS)
TANGIBLE COMMON EQUITY:
Common shareholder's equity................................. $ 16,814 $ 15,841
Exclude:
Unrealized (gains) losses on cash flow hedging
instruments............................................ (163) (119)
Minimum pension liability................................. 4 4
Unrealized gains on investments and interest-only strip
receivables............................................ (69) (53)
Intangible assets......................................... (2,491) (2,705)
Goodwill.................................................. (6,799) (6,856)
-------- --------
Tangible common equity...................................... 7,296 6,112
Purchase accounting adjustments............................. 1,706 2,227
-------- --------
Tangible common equity, excluding purchase accounting
adjustments............................................... $ 9,002 $ 8,339
======== ========
TANGIBLE SHAREHOLDERS' EQUITY:
Tangible common equity...................................... $ 7,296 $ 6,112
Preferred stock............................................. 1,675 1,100
Mandatorily redeemable preferred securities of Household
Capital Trusts............................................ 704 994
Adjustable Conversion-Rate Equity Security Units............ 535 530
-------- --------
Tangible shareholder's equity............................... 10,210 8,736
Purchase accounting adjustments............................. 1,698 2,208
-------- --------
Tangible shareholders' equity, excluding purchase accounting
adjustments............................................... $ 11,908 $ 10,944
======== ========
TANGIBLE SHAREHOLDERS' EQUITY PLUS OWNED LOSS RESERVES:
Tangible shareholders' equity............................... $ 10,210 $ 8,736
Owned loss reserves......................................... 3,756 3,625
-------- --------
Tangible shareholders' equity plus owned loss reserves...... 13,966 12,361
Purchase accounting adjustments............................. 1,698 2,208
-------- --------
Tangible shareholders' equity plus owned loss reserves,
excluding purchase accounting adjustments................. $ 15,664 $ 14,569
======== ========
TANGIBLE MANAGED ASSETS:
Owned assets................................................ $137,743 $130,190
Receivables serviced with limited recourse.................. 8,980 14,225
-------- --------
Managed assets.............................................. 146,723 144,415
Exclude:
Intangible assets......................................... (2,491) (2,705)
Goodwill.................................................. (6,799) (6,856)
Derivative financial assets............................... (1,698) (4,049)
-------- --------
Tangible managed assets..................................... 135,735 130,805
Purchase accounting adjustments............................. (131) (202)
-------- --------
Tangible managed assets, excluding purchase accounting
adjustments............................................... $135,604 $130,603
======== ========
EQUITY RATIOS:
Common and preferred equity to owned assets................. 13.42% 13.01%
Tangible common equity to tangible managed assets........... 5.38 4.67
Tangible shareholders' equity to tangible managed assets
("TETMA")................................................. 7.52 6.68
Tangible shareholders' equity plus owned loss reserves to
tangible managed assets ("TETMA + Owned Reserves")........ 10.29 9.45
Excluding purchase accounting adjustments: Tangible common
equity to tangible managed assets......................... 6.64 6.38
TETMA..................................................... 8.78 8.38
TETMA + Owned Reserves.................................... 11.55 11.16
======== ========
53
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
DISCLOSURE CONTROLS We conducted an evaluation, with the participation of the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Our disclosure controls and procedures are designed to ensure that
information required to be disclosed by HSBC Finance Corporation in the reports
we file under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported on a timely basis. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report so as to alert them in a timely fashion
to material information required to be disclosed in reports we file under the
Exchange Act.
INTERNAL CONTROLS There have not been any changes in our internal control over
financial reporting during the fiscal quarter to which this report relates that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
GENERAL
We are parties to various legal proceedings resulting from ordinary business
activities relating to our current and/or former operations. Certain of these
actions are or purport to be class actions seeking damages in very large
amounts. These actions assert violations of laws and/or unfair treatment of
consumers. Due to the uncertainties in litigation and other factors, we cannot
be certain that we will ultimately prevail in each instance. We believe that our
defenses to these actions have merit and any adverse decision should not
materially affect our consolidated financial condition.
CONSUMER LENDING LITIGATION
During the past several years, the press has widely reported certain industry
related concerns that may impact us. Some of these involve the amount of
litigation instituted against finance and insurance companies operating in
certain states and the large awards obtained from juries in those states. Like
other companies in this industry, some of our subsidiaries are involved in a
number of lawsuits pending against them in these states. The cases, in
particular, generally allege inadequate disclosure or misrepresentation of
financing terms. In some suits, other parties are also named as defendants.
Unspecified compensatory and punitive damages are sought. Several of these suits
purport to be class actions or have multiple plaintiffs. The judicial climate in
these states is such that the outcome of all of these cases is unpredictable.
Although our subsidiaries believe they have substantive legal defenses to these
claims and are prepared to defend each case vigorously, a number of such cases
have been settled or otherwise resolved for amounts that in the aggregate are
not material to our operations. Appropriate insurance carriers have been
notified of each claim, and a number of reservations of rights letters have been
received. Certain of the financing of merchandise claims have been partially
covered by insurance.
In a case decided on March 31, 2004 and published on May 13, the Appellate Court
of Illinois, First District (Cook County), ruled in U.S. Bank National
Association v. Clark, et al., that certain lenders (which did not include any
subsidiaries of HSBC Finance Corporation) violated the Illinois Interest Act by
imposing points and finance charge fees in excess of 3% of the principal amount
on loans with an interest rate in excess of 8%. The Appellate Court held for the
first time that when the Illinois legislature made amendments to the late fee
provisions of the Interest Act in 1992, Illinois opted out of the Federal
Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDMCA")
and, in "certain instances," the Federal Alternative Mortgage Transaction Parity
Act of 1982 ("AMTPA"). DIDMCA and AMTPA each contain provisions that preempt
certain state laws unless state legislatures took affirmative action to
"opt-out" of the federal preemptions within specified time frames. The Court
found that as a result of 1992 legislative action, the State's 3% restriction on
points and finance charge fees are now enforceable in Illinois. The Appellate
Court's
54
ruling reversed the trial court's decision, which had relied on previous
opinions of the Illinois Attorney General, the Illinois Office of Banks and Real
Estate, and other courts. Should the decision stand and be applied retroactively
throughout Illinois, lenders would be required to make refunds to customers who
had a closed-end real estate secured first mortgage loan of double the interest
paid or contracted for, whichever is greater. The plaintiffs in the Clark case
filed a notice of appeal with the Illinois Supreme Court which the court
accepted. Briefing in the Illinois Supreme Court is underway. We reported
previously that three cases and one counterclaim were filed against subsidiaries
of HSBC Finance Corporation based upon the Clark decision: Wilkes v. Household
Finance Corporation III, et al., Circuit Court of Cook County, Illinois,
Chancery Division, filed on June 18, 2004 (purported class action); Aslam v.
Accredited Home Lenders, Inc., et al., Circuit Court of Cook County, Illinois,
Chancery Division, filed on June 11, 2004 (purported class action); MERS Inc. as
nominee for HFC v. Gloss, Circuit Court of DuPage County, Illinois (filed as a
foreclosure counterclaim in September, 2004); and Morris, et al. v. Household
Mortgage Services, Inc., U.S. District Court for the Northern District of
Illinois, filed on June 22, 2004. These matters have all been settled for
immaterial amounts and have been dismissed.
CREDIT CARD LITIGATION
On November 15, 2004, a matter entitled American Express Travel Related Services
Company, Inc. v. Visa U.S.A. Inc., et al. was filed in the U.S. District Court
for the Southern District of New York. This case alleges that HSBC Finance
Corporation, Household Bank (SB), N.A. and others violated Sections 1 and 2 of
the Sherman Act by conspiring to monopolize and unreasonably restrain trade by
allegedly implementing and enforcing an agreement requiring any United States
bank that issues Visa or MasterCard general cards to refuse to issue such cards
from competitors, such as American Express and Discover. Plaintiff seeks a
declaration that defendants in this action (including Visa, MasterCard and other
banks belonging to those associations), have violated the antitrust laws, and
requests an injunction restraining the defendants, their directors, officers,
employees, agents, successors, owners and members from "continuing or
maintaining in any manner, directly or indirectly, the rules, policies, and
agreements at issue," and seeks "full compensation for damages it has sustained,
from each Defendant, jointly, severally," for each of plaintiff's claims, in an
amount "to be trebled according to law, plus interest, attorneys' fees and costs
of suit". On February 18, 2005, the Defendants filed a motion to dismiss the
complaint for failure to state a cause of action. At this time, we are unable to
quantify the potential impact from this action, if any.
On June 22, 2005, a matter entitled Photos Etc. Corporation, et al. v. VISA
U.S.A. Inc., et al. was filed in the U.S. District Court for the District of
Connecticut as case number 305CV1007. This purported class action named as
defendants VISA, MasterCard and a number of alleged members of those
associations, including HSBC Finance Corporation and two of its affiliates. The
case seeks certification of a class of retail merchants that operate commercial
businesses throughout the United States and alleges the defendants engage in an
anti-competitive conspiracy to fix the level of "interchange fees" charged by
the associations. At this time, we are unable to quantify the potential impact
from this action, if any.
SECURITIES LITIGATION
In August 2002, we restated previously reported consolidated financial
statements. The restatement related to certain MasterCard and Visa co-branding
and affinity credit card relationships and a third party marketing agreement,
which were entered into between 1992 and 1999. All were part of our Credit Card
Services segment. In consultation with our prior auditors, Arthur Andersen LLP,
we treated payments made in connection with these agreements as prepaid assets
and amortized them in accordance with the underlying economics of the
agreements. Our current auditor, KPMG LLP, advised us that, in its view, these
payments should have either been charged against earnings at the time they were
made or amortized over a shorter period of time. The restatement resulted in a
$155.8 million, after-tax, retroactive reduction to retained earnings at
December 31, 1998. As a result of the restatement, and other corporate events,
including, e.g., the 2002 settlement with 50 states and the District of Columbia
relating to real estate lending practices, HSBC Finance Corporation, and its
directors, certain officers and former auditors, have been involved in various
legal proceedings, some of which purport to be class actions. A number of these
actions allege violations of federal
55
securities laws, were filed between August and October 2002, and seek to recover
damages in respect of allegedly false and misleading statements about our common
stock. These legal actions have been consolidated into a single purported class
action, Jaffe v. Household International, Inc., et al., No. 02 C 5893 (N.D.
Ill., filed August 19, 2002), and a consolidated and amended complaint was filed
on March 7, 2003. On December 3, 2004, the court signed the parties' stipulation
to certify a class with respect to the claims brought under sec.10 and sec.20 of
the Securities Exchange Act of 1934. The parties stipulated that plaintiffs will
not seek to certify a class with respect to the claims brought under sec.11 and
sec.15 of the Securities Act of 1933 in this action or otherwise.
The amended complaint purports to assert claims under the federal securities
laws, on behalf of all persons who purchased or otherwise acquired our
securities between October 23, 1997 and October 11, 2002, arising out of alleged
false and misleading statements in connection with our sales and lending
practices, the 2002 state settlement agreement referred to above, the
restatement and the HSBC merger. The amended complaint, which also names as
defendants Arthur Andersen LLP, Goldman, Sachs & Co., and Merrill Lynch, Pierce,
Fenner & Smith, Inc., fails to specify the amount of damages sought. In May
2003, we, and other defendants, filed a motion to dismiss the complaint. On
March 19, 2004, the Court granted in part, and denied in part the defendants'
motion to dismiss the complaint. The Court dismissed all claims against Merrill
Lynch, Pierce, Fenner & Smith, Inc. and Goldman Sachs & Co. The Court also
dismissed certain claims alleging strict liability for alleged misrepresentation
of material facts based on statute of limitations grounds. The claims that
remain against some or all of the defendants essentially allege the defendants
knowingly made a false statement of a material fact in conjunction with the
purchase or sale of securities, that the plaintiffs justifiably relied on such
statement, the false statement(s) caused the plaintiffs' damages, and that some
or all of the defendants should be liable for those alleged statements. The
Court has ordered that all factual discovery must be completed by January 13,
2006 and expert witness discovery must be completed by July 24, 2006.
On June 27, 2003, a case entitled, West Virginia Laborers Pension Trust Fund v.
Caspersen, et al., was filed in the Chancery Division of the Circuit Court of
Cook County, Illinois as case number 03CH10808. This purported class action
named as defendants the directors of Beneficial Corporation at the time of the
1998 merger of Beneficial Corporation into a subsidiary of HSBC Finance
Corporation, and claimed that those directors' due diligence of HSBC Finance
Corporation at the time they considered the merger was inadequate. The Complaint
claimed that as a result of some of the securities law and other violations
alleged in the Jaffe case, HSBC Finance Corporation common shares lost value.
Pursuant to the merger agreement with Beneficial Corporation, we assumed the
defense of this litigation. In September of 2003, the defendants filed a motion
to dismiss which was granted on June 15, 2004 based upon a lack of personal
jurisdiction over the defendants. The plaintiffs appealed that decision. On May
11, 2005, the appellate court affirmed the trial court's ruling. The time for
any further appeals has expired. In addition, on June 30, 2004, a case entitled,
Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Caspersen, et al.,
was filed in the Superior Court of New Jersey, Law Division, Somerset County as
Case Number L9479-04. Other than the change in plaintiff, the suit is
substantially identical to the foregoing West Virginia Laborer's Pension Trust
Fund case, and is brought by the same principal law firm that brought that suit.
The defendants' motion to dismiss was granted on February 10, 2005 and the
plaintiffs have appealed that ruling.
With respect to these securities litigation matters, we believe that we have
not, and our officers and directors have not, committed any wrongdoing and in
each instance there will be no finding of improper activities that may result in
a material liability to us or any of our officers or directors.
ITEM 5. OTHER INFORMATION
--------------------------------------------------------------------------------
As approved by the Audit Committee of the Board of Directors, we have engaged
KPMG to perform certain non-audit services during the year. Those services
include language translation services relating to debt offerings of
subsidiaries, preparation of SAS 70 reports relating to services performed for
contractual counterparties and certain tax services including account analysis,
advice regarding certain transactions and preparation of returns for
securitization trusts.
56
ITEM 6. EXHIBITS
--------------------------------------------------------------------------------
Exhibits included in this Report:
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Debt and Preferred Stock Securities Ratings.
57
SIGNATURE
--------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HSBC FINANCE CORPORATION
(Registrant)
/s/ Simon C. Penney
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
Date: August 1, 2005
58
EXHIBIT INDEX
--------------------------------------------------------------------------------
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and to Combined Fixed Charges and Preferred Stock
Dividends.
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Debt and Preferred Stock Securities Ratings.
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
SIX MONTHS ENDED
JUNE 30,
-----------------
2005 2004
-------------------------------------------------------------------------------
(DOLLARS ARE IN
MILLIONS)
Net income.................................................. $1,098 $ 903
Income tax expense.......................................... 555 466
------ ------
Income before income tax expense............................ 1,653 1,369
------ ------
Fixed charges:
Interest expense.......................................... 2,166 1,415
Interest portion of rentals(1)............................ 30 27
------ ------
Total fixed charges......................................... 2,196 1,442
------ ------
Total earnings as defined................................... $3,849 $2,811
====== ======
Ratio of earnings to fixed charges.......................... 1.75 1.95
Preferred stock dividends(2)................................ 55 54
Ratio of earnings to combined fixed charges and preferred
stock dividends........................................... 1.71 1.88
---------------
(1) Represents one-third of rentals, which approximates the portion representing
interest.
(2) Preferred stock dividends are grossed up to their pretax equivalents.
EXHIBIT 31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Siddharth N. Mehta, Chairman and Chief Executive Officer of HSBC Finance
Corporation, certify that:
1. I have reviewed this report on Form 10-Q of HSBC Finance
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 1, 2005
/s/ SIDDHARTH N. MEHTA
--------------------------------------
Siddharth N. Mehta
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Simon C. Penney, Senior Executive Vice President and Chief Financial Officer
of HSBC Finance Corporation, certify that:
1. I have reviewed this report on Form 10-Q of HSBC Finance
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 1, 2005
/s/ SIMON C. PENNEY
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Q
for the period ending June 30, 2005 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Siddharth N. Mehta, Chairman
and Chief Executive Officer of HSBC Finance Corporation, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ SIDDHARTH N. MEHTA
--------------------------------------
Siddharth N. Mehta
Chairman and Chief Executive Officer
August 1, 2005
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Q
for the period ending June 30, 2005 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Simon C. Penney, Senior
Executive Vice President and Chief Financial Officer of HSBC Finance
Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ SIMON C. PENNEY
--------------------------------------
Simon C. Penney
Senior Executive Vice President and
Chief Financial Officer
August 1, 2005
This certification accompanies each Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Signed originals of these written statements required by Section 906 of the
Sarbanes-Oxley Act of 2002 have been provided to HSBC Finance Corporation and
will be retained by HSBC Finance Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
EXHIBIT 99.1
DEBT AND PREFERRED STOCK SECURITIES RATINGS
STANDARD & MOODY'S
POOR'S INVESTORS
CORPORATION SERVICE FITCH, INC.
---------------------------------------------------------------------------------------------------
AT JUNE 30, 2005
HSBC Finance Corporation
Senior debt............................................... A A1 AA-
Senior subordinated debt.................................. A- A2 A+
Commercial Paper.......................................... A-1 P-1 F-1+
Series B preferred stock.................................. BBB+ A3 A+
HFC Bank Limited
Senior debt............................................... A A1 AA-
Commercial paper.......................................... A-1 P-1 F-1+
HSBC Bank Nevada, National Association
Senior debt............................................... A A1 AA-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HSBC Holdings plc
By:
Name: P A Stafford
Title: Assistant Group Secretary
Date: 1 August 2005