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 March, 2006
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- ..............)
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED
2005 CONSOLIDATED RESULTS - HIGHLIGHTS
- Operating profit excluding loan impairment charges and other credit risk
provisions up 7.2 per cent to HK$45,408 million (HK$42,375 million in
2004).
- Pre-tax profit up 3.9 per cent to HK$45,249 million (HK$43,536 million
in 2004).
- Attributable profit up 2.3 per cent to HK$32,873 million (HK$32,148
million in 2004).
- Return on average shareholders' funds of 37.4 per cent (43.1 per cent in
2004).
- Assets up 7.5 per cent to HK$2,673 billion (HK$2,487 billion at the end
of 2004).
- Total capital ratio of 12.4 per cent; tier 1 capital ratio of 11.7 per cent
(11.9 per cent and 11.4 per cent at 31 December 2004).
- Cost efficiency ratio of 41.2 per cent (38.8 per cent for 2004).
Comparative figures have been restated to reflect the adoption of a number of
new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting
Standards, details of which are set out in the appendix.
Within this document, the Hong Kong Special Administrative Region of the
People's Republic of China has been referred to as 'Hong Kong'.
Comment by Vincent Cheng, Chairman
In 2005, The Hongkong and Shanghai Banking Corporation recorded a pre-tax profit
of HK$45,249 million, an increase of 3.9 per cent over 2004. Over the course of
the year, further investments were made in our customer group businesses. These
resulted in significant increases in pre-tax profits in our Personal Financial
Services and Commercial Banking businesses of 24.9 per cent, to HK$21,640
million, and 26.2 per cent, to HK$11,131 million, respectively. In Corporate,
Investment Banking and Markets, a strong trading performance was offset by a
sharp decline in net interest income against a backdrop of exceptionally
difficult market conditions. Loan impairment charges and other credit provisions
recorded a net charge of HK$2,064 million against a credit of HK$862 million in
the previous period, reflecting higher provisions against credit card lending
outside Hong Kong, and higher individually assessed provisions in Commercial
Banking in Hong Kong.
Highlights include:
- In Hong Kong, HSBC reinforced its position as the number one card issuer with
4.0 million cards in force. In the rest of Asia-Pacific, cards in issue grew
by 32.7 per cent.
- Card spending increased by HK$31.3 billion and receivables grew by 30.0 per
cent.
- Insurance income from personal customers rose by 19.3 per cent to HK$4,522
million.
- In Commercial Banking, net interest income increased by HK$4,024 million, or
57.0 per cent.
- Net fee income in Commercial Banking was 10.0 per cent higher, supported by
strong trade finance activity in Hong Kong and mainland China.
- In Corporate, Investment Banking and Markets, net fee income rose by 7.5 per
cent to HK$5,388 million.
- HSBC acted as the joint global co-ordinator of the Hong Kong Government's
HK$22 billion Link Real Estate Investment Trust ('REIT')initial public
offering ('IPO'), the largest ever real estate offering and REIT IPO in the
world.
Further progress was made with our investments in mainland China. At the end of
December 2005, Bank of Communications had issued 650,000 credit cards co-branded
with HSBC. In August, we obtained formal approval to increase HSBC's stake in
Ping An by 9.91 per cent to 19.9 per cent. We also entered into an insurance
agency agreement to sell Ping An products through HSBC branches. We have
obtained regulatory approval to set up a fund management joint venture with
Shanxi Trust and Investment Corporation Limited, which is to be renamed HSBC
Jintrust Fund Management Company Limited and will be headquartered in Shanghai.
Other investments to support the continued expansion of our businesses include
the acquisition of a 10.0 per cent stake in Vietnam Technological and Commercial
Joint Stock Bank (Techcombank), Vietnam's third largest joint stock bank, and
the opening of three new branches in Korea. In Personal Financial Services,
headcount rose to support business expansion in the region, including the
recruitment of additional financial planning managers in Hong Kong and sales
staff in the rest of Asia-Pacific. In Commercial Banking, the number of
relationship managers and support staff increased, although savings were made
from initiatives to handle business through low cost channels.
The prospects for the Hong Kong economy are encouraging in 2006. The territory's
two-year recovery remains on track, with consumer spending continuing to be a
key driver of economic growth coupled with revived confidence and improved job
prospects in the territory. However, competition in the financial services
industry is likely to remain intense, with a flat yield curve posing significant
challenges to interest rate management in the first half of the year.
We are also encouraged by the prospects for mainland China and the rest of
Asia-Pacific. Fuelled by a growing United States economy and growing
intra-regional trade coupled with strengthening domestic demand, the Mainland
and the rest of Asia-Pacific are expected to continue to experience solid
economic growth in 2006. Asia is expected to remain at the centre of the rapid
growth of the global economy.
Results by Customer Group
Corporate,
Investment
Personal Banking
Financial Commercial and Private
Figures in HK$m Services Banking Markets Banking Other Total
Year ended 31Dec05
Net interest income 26,801 11,089 8,725 63 (3,187) 43,491
Net fee income 8,050 4,524 5,388 55 80 18,097
Net trading income 683 638 7,215 10 (1,366) 7,180
Net income from financial
instruments designated at
fair value 666 (648) 122 - 244 384
Gains less losses from
financial investments - 23 19 - 714 756
Dividend income 5 14 167 - 182 368
Net earned insurance
premiums 18,437 756 147 - - 19,340
Other operating income^ 1,984 295 572 13 2,033 4,897
Total operating income 56,626 16,691 22,355 141 (1,300) 94,513
Net insurance claims
incurred and movement in
policyholder liabilities (16,889) (330) (72) - - (17,291)
Net operating income
before loan impairment
charges and other credit
risk provisions 39,737 16,361 22,283 141 (1,300) 77,222
Loan impairment charges
and other credit
risk provisions (1,344) (896) 165 - 11 (2,064)
Net operating income 38,393 15,465 22,448 141 (1,289) 75,158
Operating expenses^ (16,932) (5,424) (9,642) (113) 297 (31,814)
Operating profit 21,461 10,041 12,806 28 (992) 43,344
Share of profit in associates 179 1,090 446 - 190 1,905
Profit before tax 21,640 11,131 13,252 28 (802) 45,249
Share of pre-tax profit 47.8% 24.6% 29.3% - (1.7%) 100.0%
Corporate,
Investment
Personal Banking
Financial Commercial and Private Total
Figures in HK$m Services Banking Markets Banking Other restated
Year ended 31Dec04
Net interest income 20,785 7,065 11,258 35 (2,173) 36,970
Net fee income 7,524 4,111 5,012 42 (408) 16,281
Net trading income 617 520 5,795 5 66 7,003
Net investment income on
assets backing
policyholder
liabilities 1,088 81 - - (271) 898
Gains less losses from
financial investments (13) 1 64 - 1,445 1,497
Dividend income 18 6 17 - 122 163
Net earned insurance premiums 13,186 751 148 - - 14,085
Other operating income^ 2,439 449 883 1 342 4,114
Total operating income 45,644 12,984 23,177 83 (877) 81,011
Net insurance claims
incurred and movement
in policyholder
liabilities (11,441) (191) (93) - - (11,725)
Net operating income
before loan impairment
charges and other credit
risk provisions 34,203 12,793 23,084 83 (877) 69,286
Loan impairment
charges and other
credit risk provisions (1,290) 638 1,519 - (5) 862
Net operating income 32,913 13,431 24,603 83 (882) 70,148
Operating expenses^ (15,659) (4,784) (7,288) (74) 894 (26,911)
Operating profit 17,254 8,647 17,315 9 12 43,237
Share of profit
in associates 73 170 20 - 36 299
Profit before tax 17,327 8,817 17,335 9 48 43,536
Share of pre-tax profit 39.8% 20.3% 39.8% - 0.1% 100.0%
^ Other operating income and operating expenses in 'Other' include an adjustment
of HK$4,305 million to eliminate intra-group items (2004: HK$4,953 million).
Personal Financial Services reported profit before tax of HK$21,640 million,
which was HK$4,313 million, or 24.9 per cent, higher than 2004. There was strong
growth in Hong Kong of HK$4,482 million, or 27.6 per cent, in profit before tax,
driven primarily by the widening of deposit spreads following the rises in Hong
Kong dollar and US dollar interest rates this year. In the rest of Asia-Pacific,
profit before tax fell by 15.9 per cent to HK$902 million due to higher
impairment provisions, while operating profit excluding loan impairment charges
increased by 15.8 per cent, reflecting continued expansion across the region,
particularly in mortgages and credit cards, and improved deposit spreads.
Net interest income increased by HK$6,016 million, or 28.9 per cent, compared
with 2004. In Hong Kong, net interest income improved by HK$4,656 million, or
29.6 per cent. During 2005, interest rates in Hong Kong rose significantly,
reflecting rising US dollar interest rates. In addition, adjustments to the HK$:
US$ Linked Exchange Rate System reduced the likelihood of an upward realignment
of the Hong Kong dollar, prompting a reversal of much of the inward flows from
investors that had depressed local market rates in 2004. This led to a widening
of deposit spreads to more normal levels compared with the exceptionally low
levels experienced in 2004. Competition in the Hong Kong mortgage market
remained intense and margins were impacted by the rising cost of funds. In the
rest of Asia-Pacific, net interest income rose by HK$1,362 million, or 26.8 per
cent, reflecting strong asset and deposit growth across the region. Mortgage
lending increased in Australia, Taiwan, Korea, Singapore and India, benefiting
from increased use of a direct sales force and successful promotional campaigns,
although spreads narrowed in the face of competitive pressures on pricing and
higher funding costs. Interest earned on credit cards was higher, notably in
Indonesia, the Philippines, India and Taiwan, reflecting strong growth in
receivables. The deposit base expanded in a number of countries, particularly
mainland China and Singapore, and rising interest rates led to a widening of
deposit spreads. Net interest income in 2005 also includes income of HK$989
million from held-to-maturity investments in the insurance business; such income
was included in 'Net investment income on assets backing policyholder
liabilities' in 2004.
Net fee income of HK$8,050 million was 7.0 per cent higher than in 2004, largely
attributable to strong growth in the sales of wealth management and insurance
products throughout the rest of Asia-Pacific and higher credit card fee income.
Total revenue from wealth management and insurance products for the group grew
by HK$547 million, or 7.0 per cent. Fee income from unit trust sales fell by
21.5 per cent, driven by a change in market sentiment in Hong Kong as, in the
higher interest rate environment and with a flattening yield curve, investors
reduced their demand for longer-term equity-related investments. Sales of
structured deposit products in Hong Kong, however, remained strong as income
grew by 69.2 per cent, reflecting increased marketing effort, an enhanced
product range and the use of private placement arrangements. Broking and custody
income decreased by 6.0 per cent, in line with the fall in retail securities
turnover in Hong Kong.
Fee income from credit cards was HK$435 million, or 20.7 per cent, higher than
in 2004, as the group maintained its position as the largest card issuer in Hong
Kong, with 4.0 million cards in force. In the rest of Asia-Pacific, cards in
issue grew by 32.7 per cent. Innovative and targeted promotional campaigns,
together with an enhanced rewards programme, led to increased card spending of
HK$31.3 billion in Hong Kong and the region, and receivables grew by 30.0 per
cent.
The group has continued to grow and develop its insurance business. Overall,
insurance income from personal customers rose by 19.3 per cent to HK$4,522
million. Life assurance income grew, attributable to an enhanced range of
insurance and investment products. Revenues from general insurance and the
mandatory provident fund business were also higher.
The charge for loan impairment increased, by HK$54 million to HK$1,344 million,
reflecting higher provisions against credit card lending in the rest of
Asia-Pacific, in line with the significant growth in receivables throughout the
region, and a sharp rise in provisions in Taiwan reflecting higher delinquency
levels. In Hong Kong, however, there were lower provisions in the credit card,
mortgage and other personal lending portfolios, as the economy continued to
recover with falling unemployment, lower bankruptcies and higher residential
property prices.
Operating expenses increased by HK$1,273 million, or 8.1 per cent, over 2004.
Headcount rose to support business expansion across the region and included the
recruitment of additional financial planning managers in Hong Kong and sales
staff in the rest of Asia-Pacific. Performance-related pay rose in line with the
increase in sales revenues. Higher marketing costs were incurred, particularly
for mortgages, credit cards, insurance and investment products, in order to
raise brand awareness and increase market penetration, particularly in the rest
of Asia-Pacific. Investment in technology increased to support higher business
volumes, new product lines and the continued development of alternative
distribution channels. The increase was partly mitigated by the impact of a
change in the allocation of certain centrally borne expenses to customer groups.
Income from associates includes a full 12 months' share of profits from Bank of
Communications attributable to Personal Financial Services.
Commercial Banking reported profit before tax of HK$11,131 million, an increase
of 26.2 per cent over 2004, attributable primarily to improved deposit spreads,
as well as balance sheet growth. Profit before tax in Hong Kong grew by 5.3 per
cent to HK$7,504 million, and in the rest of Asia-Pacific to HK$3,615 million
from HK$1,681 million. Operating profit excluding loan impairment provisions
rose by 40.4 per cent and 22.8 per cent in Hong Kong and the rest of
Asia-Pacific respectively.
Net interest income increased by HK$4,024 million, or 57.0 per cent, compared
with 2004. This reflected a 10.3 per cent growth in advances since the end of
2004, and improvements in deposit spreads following rises in Hong Kong dollar
and US dollar interest rates, coupled with increased active management of the
commercial banking deposit base. The benefit was, however, partly offset by
competitive pressure on lending margins. In Hong Kong, advances to the property,
manufacturing, trading and retail sectors grew, with higher new lending and
increased utilisation of existing facilities. The introduction of Core Business
Banking Centres in 2004, together with an increase in the number of dedicated
relationship managers to serve key accounts, and the implementation of a
pre-approved lending programme for small- and medium-sized enterprises,
contributed to the growth in lending and deposits. The group continued to
benefit from the growth in international trade and the expansion of the Mainland
economy. Business links between Hong Kong and mainland China continue to be
developed, and three new branches and a sub-branch, with commercial banking
presence, were opened. Throughout the region, the sales force and number of
relationship managers have increased to take advantage of cross-selling
opportunities for insurance and investment products, as well as expanding
lending and deposit-taking activities. In the rest of Asia-Pacific, net interest
income increased, notably in Singapore, mainland China and Taiwan, as a result
of asset and deposit growth and improved deposit spreads. Net interest income
also includes income of HK$694 million from held-to-maturity investments in the
insurance business; this was included in 'Net investment income on assets
backing policyholder liabilities' in 2004.
Net fee income at HK$4,524 million was 10.0 per cent higher than 2004. Trade
finance activity in Hong Kong and mainland China remained strong, and fee income
rose despite increased market competition. The marketing of foreign exchange
products such as swaps and options, and of remittance services to Hong Kong
customers engaged in international trade was also successful in contributing to
revenues. Growth in fees elsewhere in the region was strong, particularly in
Indonesia, Bahrain, Vietnam and Thailand, attributable to the expansion of
lending and particular focus on developing relationships with customers involved
in international trade. Income from the sale of wealth management products fell,
reflecting a fall in demand for unit trusts in Hong Kong, partly offset by
growth in structured deposits. Income from insurance increased by 6.4 per cent
(or 10.7 per cent on an underlying basis, as 2005 includes the allocation of
certain commissions to Personal Financial Services) despite intense market
competition, with a new commercial banking insurance division established in
Hong Kong to provide customer-focused commercial insurance solutions and
services.
There was a swing of HK$1,534 million in loan impairment provisions to a net
charge of HK$896 million from a net credit of HK$638 million in 2004, as 2004
benefited from a general provision release. In 2005, there were higher new
individual provisions, and lower releases and recoveries, in the bank in Hong
Kong and Hang Seng Bank, partly offset by lower new provisions and higher
releases in mainland China, and an increase in releases in India.
Operating expenses rose by HK$640 million, or 13.4 per cent, as the number of
relationship managers and support staff increased, although savings were made
from initiatives to handle business via low cost channels. This included the
enhancement of internet banking for which customer numbers have increased by
over 40 per cent. The proportion of commercial banking transactions handled at
branch counters fell by more than 10 per cent and now only account for around 65
per cent of all transactions. In mainland China and Korea, costs were driven by
increased investment to expand the branch network. A change in the allocation of
certain centrally borne expenses to customer groups also contributed to the cost
growth.
Income from associates includes a full 12 months' share of profits from Bank of
Communications and Industrial Bank attributable to Commercial Banking.
Corporate, Investment Banking and Markets reported profit before tax of
HK$13,252 million, 23.6 per cent lower than 2004, as a result of a decline in
net interest income in Global Markets which more than offset a strong trading
performance.
Net interest income fell by HK$2,533 million, or 22.5 per cent, compared with
last year. In Corporate and Institutional Banking, deposit spreads improved
following rises in Hong Kong and US dollar interest rates, which together with
growth in loans, contributed to an increase in net interest income of 41.4 per
cent. The payments and cash management business performed exceptionally well,
with new mandates won as a result of further enhancements to the product range
and the group's cross-border coverage. Liability balances increased following
the successful implementation of complex cash management solutions across the
region. In addition, India, Taiwan and Korea benefited from the growth in
deposits from securities custody and clearing customers. In Global Markets, the
adoption of new accounting standards affected trading income through the
reclassification of interest and dividend income on trading assets and
liabilities from 'Net interest income' and 'Dividend income', to 'Net trading
income'. This added HK$817 million to net interest income but was, however, more
than offset by the maturity of higher yielding assets, rising short-term rates
and flat yield curves, resulting in less profitable reinvestment opportunities.
There was also a reclassification of HK$199 million from 'Net interest income'
to 'Net income from financial instruments at fair value'.
Net fee income rose by 7.5 per cent to HK$5,388 million, principally due to the
inclusion of a full year's profits from the Bank of Bermuda businesses, which
were integrated into the group at the end of 2004 and contributed HK$1,219
million to revenues. Corporate and Institutional Banking saw an increase in fees
and commissions from the securities custody and clearing business, which
benefited from increased stock market activity across the region, notably in
Korea and India. The group's expertise in trade services and a well-established
network in Asia-Pacific were key factors in securing new business in 2005,
resulting in fee growth, particularly in India. Investment banking revenues
declined, reflecting a decrease in structured finance transactions, although fee
income from the underwriting advisory business rose, with HSBC acting as joint
global co-ordinator for three of the five largest IPOs in Hong Kong this year.
These were the Hong Kong Government's HK$22.0 billion REIT IPO, the largest ever
real estate offering and REIT IPO in the world, the HK$16.8 billion IPO by Bank
of Communications and the HK$9.5 billion IPO of China COSCO Holdings.
Net trading income increased by HK$1,420 million, or 24.5 per cent, over 2004,
notwithstanding the inclusion of the net interest expense of HK$817 million on
trading assets and liabilities this year. In Hong Kong, investments made in
enhancing the structured products platform resulted in increased revenues in
foreign exchange options, equity derivatives, structured credit derivatives and
interest rate derivatives, but were partly offset by lower revenues generated
from capital-guaranteed investment solutions provided to the personal and
commercial banking businesses, as retail investors switched to deposit products
in the higher interest rate environment. Debt securities trading benefited from
correct positioning, with tightening in short-term corporate spreads in the low
Hong Kong dollar interest rate environment in the first quarter of 2005. This
was, however, partly offset by losses on certain high yield bonds, following the
downgrading of certain companies in the automobile sector during the second
quarter, as well as a difficult credit trading environment later in the year,
reflecting low volatility in credit spreads.
In the rest of Asia-Pacific, excellent progress was made in the roll-out of
structured products, particularly in Korea, Singapore and Taiwan. Foreign
exchange revenues also improved, notably in Indonesia, benefiting from currency
volatility and the group's growing customer franchise in the region.
There was a net release of loan impairment provisions of HK$165 million,
HK$1,354 million lower than the release in 2004. The credit environment in Hong
Kong remained stable, but there were lower releases and recoveries of individual
and collective provisions this year.
Operating expenses increased by 32.3 per cent compared with 2004, reflecting
higher staff costs and the inclusion of costs relating to the Asia-Pacific
operations of Bank of Bermuda. Headcount increased to support business
expansion, including the build up of the investment banking division and the
recruitment of senior relationship managers to extend coverage along industry
sector lines. The cost base was further impacted by a change in the allocation
of certain centrally allocated overheads to customer groups and a rise in cost
recharges in respect of global management functions.
Income from associates includes a full 12 months' share of profits from Bank of
Communications and Industrial Bank attributable to Corporate, Investment Banking
and Markets.
Other includes income and expenses relating to staff housing loans, certain
property activities, and investment and other activities that are not allocated
to other customer groups.
Net interest income was lower, reflecting an increase in preference shares
issued, coupled with higher funding costs. The surplus on property revaluation
and profits from property sales were higher, offset by lower gains on the
disposal and revaluation of long-term investments.
Consolidated Income Statement
Year ended Year ended
31Dec05 31Dec04
Figures in HK$m restated
Interest income 80,199 57,947
Interest expense (36,708) (20,977)
Net interest income 43,491 36,970
Fee income 21,671 19,476
Fee expense (3,574) (3,195)
Net fee income 18,097 16,281
Net trading income 7,180 7,003
Net income from financial
instruments designated
at fair value 384 -
Net investment income on
assets backing policyholder
liabilities - 898
Gains less losses from
financial investments 756 1,497
Dividend income 368 163
Net earned insurance premiums 19,340 14,085
Other operating income 4,897 4,114
Total operating income 94,513 81,011
Net insurance claims incurred
and movement in
policyholder liabilities (17,291) (11,725)
Net operating income before
loan impairment charges and
other credit risk provisions 77,222 69,286
Loan impairment charges
and other credit risk
provisions (2,064) 862
Net operating income 75,158 70,148
Employee compensation and benefits (17,736) (14,765)
General and administrative expenses (12,095) (10,293)
Depreciation of property, plant
and equipment (1,825) (1,752)
Amortisation of intangible assets (158) (101)
Total operating expenses (31,814) (26,911)
Operating profit 43,344 43,237
Share of profit in associates 1,905 299
Profit before tax 45,249 43,536
Tax expense (8,051) (6,988)
Profit for the year 37,198 36,548
Attributable to shareholders 32,873 32,148
Attributable to minority interests 4,325 4,400
Extract from the Consolidated Balance Sheet
At 31Dec05 At 31Dec04
Figures in HK$m restated
Assets
Cash and short-term funds 502,730 510,644
Placings with banks maturing
after one month 69,554 74,711
Items in the course of
collection from other banks 17,782 13,479
Certificates of deposit 53,831 51,743
Hong Kong SAR Government
certificates of indebtedness 97,344 92,334
Trading assets 215,681 87,732
Financial assets designated
at fair value 37,073 -
Derivatives 72,039 94,398
Advances to customers 999,326 919,192
Financial investments 394,497 472,332
Amounts due from fellow
subsidiary companies 101,173 82,592
Investments in associates 23,061 16,343
Goodwill and intangible assets 7,252 5,329
Property, plant and equipment 29,805 27,204
Deferred tax assets 1,272 1,711
Retirement benefit assets 1,788 1,307
Other assets 48,324 35,764
Total assets 2,672,532 2,486,815
Liabilities
Hong Kong SAR currency notes
in circulation 97,344 92,334
Deposits by banks 83,802 74,980
Customer accounts 1,735,110 1,728,111
Items in the course of
transmission to
other banks 20,927 23,452
Trading liabilities 250,198 37,281
Financial liabilities
designated at
fair value 2,927 -
Derivatives 72,009 92,362
Debt securities in issue 61,468 155,162
Retirement benefit liabilities 394 327
Amounts due to fellow
subsidiary companies 22,275 17,568
Amounts due to ultimate
holding company 2,502 553
Other liabilities 46,628 37,158
Liabilities to customers
under investment
contracts 30,364 28,516
Liabilities under insurance
contracts issued 41,845 26,422
Current taxation 2,044 2,333
Deferred taxation 3,729 3,395
Subordinated liabilities 12,561 11,142
Preference shares 71,980 55,602
Total liabilities 2,558,107 2,386,698
Equity
Share capital 22,494 22,494
Other reserves 6,037 6,029
Retained profits 64,303 50,484
Proposed final interim dividend 4,500 4,800
Shareholders' funds 97,334 83,807
Minority interests 17,091 16,310
114,425 100,117
Total equity and liabilities 2,672,532 2,486,815
Consolidated Statement of Changes in Equity
Year ended Year ended
31Dec05 31Dec04
Figures in HK$m restated
Called up share capital
Balance at 1 January previously reported 74,213 51,603
Effect of transition to HKFRS (51,719) (35,349)
As restated 22,494 16,254
New ordinary shares issued - 6,240
Balance at 31 December 22,494 22,494
Property revaluation reserve
Balance at 1 January previously reported 11,907 7,135
Effect of transition to HKFRS (8,842) (4,817)
As restated 3,065 2,318
Unrealised surplus on revaluation 2,053 559
Transfer of depreciation from
retained profits (173) (157)
Transfer from retained profits - 876
Realisation on disposal of properties (523) (417)
Deferred tax and other movements (340) (114)
Balance at 31 December 4,082 3,065
Other reserves
Balance at 1 January
previously reported 5,492 5,060
Effect of transition to HKFRS
(excluding the effect of HKAS 39) (2,528) (3,697)
As restated 2,964 1,363
Effect of adoption of HKAS 39 1,333 -
As restated 4,297 1,363
Long-term equity investments:
Fair value gains taken to equity - 1,610
Transfer to income statement on disposal - (1,033)
Deferred tax and other movements - (43)
Available-for-sale investments:
Fair value losses taken to equity (1,317) -
Transfer to income statement on disposal (587) -
Transfer to income statement
on change in fair value
of hedged items 983 -
Deferred tax and other movements 6 -
Share of associates'
available-for-sale reserve 557 -
Cash flow hedges:
Fair value losses taken
to equity (2,522) -
Transfer to income statement 538 -
Deferred tax and other movements 342 -
Exchange differences arising on
monetary items that form part
of a net investment in
a foreign operation (790) 843
Employees' options granted cost
free by ultimate
holding company 307 224
Exchange and other movements 141 -
Balance at 31 December 1,955 2,964
Retained profits
Balance at 1 January
previously reported 51,083 37,764
Effect of transition to
HKFRS (excluding the effect
of HKAS 39) (599) 1,235
As restated 50,484 38,999
Effect of adoption of HKAS 39 (39) -
As restated 50,445 38,999
Profit for the year attributable
to shareholders 32,873 32,148
Dividends (20,300) (20,300)
Transfer of depreciation to property
revaluation reserve 173 157
Transfer to property revaluation reserve - (876)
Realisation on disposal of properties 523 417
Actuarial gains/(losses) on defined
benefit plans 73 (453)
Deferred tax and other movements 516 392
Balance at 31 December 64,303 50,484
Dividend declared but not yet approved 4,500 4,800
Consolidated Cash Flow Statement
Year ended Year ended
31Dec05 31Dec04
Figures in HK$m restated
Operating activities
Cash generated from operations 31,009 120,557
Interest received on financial investments 14,759 12,780
Dividends received on financial investments 339 187
Dividends received from associates 108 52
Taxation paid (7,313) (5,083)
Net cash inflow from operating activities 38,902 128,493
Investing activities
Purchase of financial investments (335,668) (289,647)
Proceeds from sale or redemption of
financial investments 366,294 269,007
Purchase of property, plant and equipment (1,749) (1,369)
Proceeds from sale of property, plant
and equipment 1,153 846
Purchase of other intangibles (670) (101)
Net cash outflow in respect of
acquisition of and increased shareholding
in subsidiary companies (1,644) (972)
Net cash inflow in respect of
sale of subsidiary companies 151 39
Net cash outflow in respect of
purchase of business - (588)
Net cash outflow in respect of
purchase of interest in associates (3,358) (15,415)
Proceeds from sale of interest
in associates 10 12
Net cash inflow/(outflow) from
investing activities 24,519 (38,188)
Net cash inflow before financing 63,421 90,305
Financing
Issue of ordinary share capital - 6,240
Issue of non-cumulative irredeemable
preference shares - 16,356
Issue of cumulative irredeemable
preference shares 16,567 -
Increase in non-equity
minority interests 362 -
Repayment of loan capital - (1,771)
Issue of subordinated liabilities 2,500 -
Ordinary dividends paid (20,600) (23,950)
Dividends paid to minority interests (3,983) (3,787)
Interest paid on preference shares (1,574) (1,269)
Interest paid on loan capital (555) (576)
Net cash outflow from financing (7,283) (8,757)
Increase in cash and cash equivalents 56,138 81,548
1. Net interest income
Year ended Year ended
31Dec05 31Dec04
Figures in HK$m restated
Net interest income 43,491 36,970
Average interest-earning assets 2,031,314 1,925,044
Net interest spread 1.89% 1.82%
Net interest margin 2.14% 1.92%
Net interest income of HK$43,491 million was HK$6,521 million, or 17.6 per cent,
higher than in 2004.
Net interest income from the Personal Financial Services business rose by
HK$6,016 million, or 28.9 per cent, primarily due to improved deposit spreads
resulting from rises in Hong Kong dollar and US dollar interest rates this year.
This was coupled with strong growth in net interest income in the rest of
Asia-Pacific, driven by increased mortgage lending in Australia, Korea,
Singapore, Taiwan and India, and significant growth in credit card receivables
particularly in Hong Kong, Taiwan and Indonesia. Net interest income from the
Commercial Banking business was HK$4,024 million, or 57.0 per cent, higher than
last year, mainly due to growth in lending and deposits and improved deposit
spreads in Hong Kong. Net interest income from Corporate, Investment Banking and
Markets fell by HK$2,533 million, or 22.5 per cent, largely due to the maturity
of high yielding treasury assets in Hong Kong, and flat yield curves that gave
limited opportunity for position-taking. This was partly offset by the effect of
the reclassification this year of net interest expense of HK$1,484 million on
trading assets and liabilities to 'Trading income', which was made on adoption
of the new accounting standards. Corporate lending grew in Hong Kong, mainland
China, Korea and India, while deposit balances increased and spreads improved
throughout the region. Included in net interest income this year is income
earned on held-to-maturity investments in the insurance businesses of HK$1,692
million, which last year was classified as 'Net investment income on assets
backing policyholder liabilities', and there has been a reclassification of
HK$505 million of net interest income to 'Net income from financial instruments
designated at fair value'. Both of these reclassifications were made on adoption
of the new accounting standards.
Average interest-earning assets rose by HK$106 billion, or 5.5 per cent, to
HK$2,031 billion. Average advances to customers grew by HK$103 billion, or 11.9
per cent, with strong growth in mortgage lending in Australia, Korea, Singapore,
Taiwan and India, and increases in commercial lending and trade finance in Hong
Kong. Credit card receivables rose in most countries, notably Hong Kong, Taiwan
and Indonesia. Average loans to banks were HK$91 billion higher, principally in
the bank in Hong Kong, and lending to fellow subsidiaries rose by HK$18 billion,
but these increases were offset by the reclassification of certain
interest-earning assets to 'Trading assets' on adoption of the new accounting
standards.
The Group's net interest margin of 2.14 per cent for 2005 was 22 basis points
higher than 2004. The benefit to margin of the reclassification in 2005 of the
net interest expense on trading assets and liabilities and net interest income
from financial instruments designated at fair value was 24 basis points, and the
inclusion of net interest income on held-to-maturity investments in the
insurance businesses increased margin by four basis points. These benefits were,
however, partly offset by higher funding costs as the rise in the number of
preference shares issued and higher funding costs thereon, impacted margin by
seven basis points.
For the banking operations in Hong Kong (excluding Hang Seng Bank), net interest
margin increased by 46 basis points to 2.20 per cent for 2005. Spread improved
by 28 basis points to 1.92 per cent. This increase was principally due to the
reclassification of net interest expense on net trading liabilities to trading
income. Wholesale rates increased significantly during the year as the surplus
liquidity, which had kept rates depressed in prior years, was withdrawn from the
system. Spreads on Hong Kong dollar and foreign currency current, savings and
deposit accounts benefited, with an increase in the value of funds, although the
effect was partly offset by a smaller increase in interest paid to customers.
Spreads on mortgages, credit cards and corporate lending were adversely impacted
by a higher cost of funds and competitive pressures on margins. The average
yield on the residential mortgage portfolio, excluding Government Home Ownership
Scheme ('GHOS') and staff loans, declined to 239 basis points below BLR in 2005
compared with 201 basis points below BLR in 2004. The contribution from net free
funds rose by 18 basis points compared with the same period last year.
At Hang Seng Bank, net interest margin improved by 11 basis points to 2.19 per
cent, reflecting the rise in deposit spreads resulting from higher interest
rates and the inclusion of interest income from the held-to-maturity investment
portfolios held by life assurance funds. Spread fell by six basis points, as
returns on treasury products were affected by the rise in funding costs and flat
yield curves, and mortgage portfolio yields continued to be affected by market
competition. The average yield on the residential mortgage portfolio, excluding
GHOS and staff loans, fell to 225 basis points below BLR for 2005, compared with
202 basis points last year. The contribution from net free funds rose by 17
basis points, benefiting from the rise in market interest rates.
In the rest of Asia-Pacific, net interest margin at 2.00 per cent for 2005 was 4
basis points higher than in 2004. Spread improved by 4 basis points to 1.85 per
cent. All major sites faced an increase in funding costs, but margins rose in
several countries, notably mainland China and Indonesia from higher yields on
corporate lending, in India due to higher mortgage yields and an increase in low
cost current account balances from custody and clearing customers, and in
Australia from higher margins on personal lending. These increases were partly
offset by lower margins on mortgage advances in Taiwan and Korea, and higher
treasury funding costs in Singapore. The contribution from net free funds was
unchanged at 15 basis points.
2. Net fee income
2005 2004
Figures in HK$m restated
Account services 1,314 1,206
Credit facilities 1,159 1,447
Import/export 2,777 2,676
Remittances 1,248 1,103
Securities/stockbroking 3,402 2,842
Cards 4,231 3,439
Insurance 280 217
Unit trusts 1,627 2,488
Funds under management 2,233 1,216
Other 3,400 2,842
Fee income 21,671 19,476
Fee expense (3,574) (3,195)
18,097 16,281
Net fee income was HK$1,816 million, or 11.2 per cent, higher than 2004. Credit
card fee income rose by 23.0 per cent, reflecting the increase in the number of
cards in issue and higher cardholder spending. Customer demand for wealth
management products slowed this year in Hong Kong, although the fall in demand
for unit trusts was partially offset by increased sales of structured deposit
products. The increase in contribution from the Bank of Bermuda businesses,
following their integration into the group during the second half of last year,
was HK$967 million, principally from funds under management and securities/
stockbroking, which also benefited from higher stock market turnover in Hong
Kong and throughout the region. Credit facility fees decreased due to a change
in accounting treatment whereby certain fees are now included as part of the
effective interest rate and amortised through net interest income, rather than
through net fee income as in prior years.
3. Net trading income
2005 2004
Figures in HK$m restated
Dealing profits
- Foreign exchange 5,548 4,680
- Interest rate derivatives 2,442 2,380
- Debt securities 278 (260)
- Equities and other trading 292 203
8,560 7,003
Loss from hedging activities
Fair value hedges
- Net loss on hedged items attributable
to the hedged risk (1,085) -
- Net gain on hedging instruments 1,085 -
Cash flow hedges
- Net hedging loss (1) -
(1) -
Interest on trading assets and
liabilities
- Interest income 4,989 -
- Interest expense (6,473) -
(1,484) -
Dividend income from trading securities 105 -
7,180 7,003
Net trading income rose by 2.5 per cent to HK$7,180 million. Foreign exchange
profits benefited from higher exchange rate volatility and the group's growing
customer franchise across the region. Debt securities trading benefited from
correct positioning as short-term spreads on Hong Kong dollar bonds contracted
in the low interest rate environment in the earlier part of 2005, but this was
partly offset by losses on certain high yield bonds following the downgrading of
companies in the automobile sector during the second quarter, and low volatility
in credit spreads made for a difficult credit trading environment later in the
year. Interest rate derivatives trading performed satisfactorily, reflecting an
enhanced capability in structured products in Hong Kong, Korea and Singapore,
which more than offset the fall in demand for wealth management products in Hong
Kong as customers switched to deposit products in the higher interest rate
environment. Equity and structured credit derivatives revenues also grew despite
narrow credit spreads and low volatility in the market, and realised gains were
made on the disposal of certain private equity investments.
Net interest expense on trading assets and liabilities largely represents
interest payable on the group's own debt and structured deposits managed in the
trading book, partly offset by interest income on debt securities. All such
interest was classified under 'Net interest income' in prior years.
4. Gains less losses from financial investments
2005 2004
Figures in HK$m restated
Profit on disposal of
available-for-sale securities 762 -
Profit on disposal of
long-term investments - 1,311
Reversal of impairment of
long-term investments - 186
Other (6) -
756 1,497
The profit on disposal of available-for-sale securities primarily comprises
gains on the sale of equity securities, partly offset by losses on the disposal
of US dollar bonds.
The profit on disposal of long-term investments in 2004 comprised gains from the
sale of equity investments in Hong Kong.
In 2004, there was a partial write-back of a provision against an equity
investment.
5. Dividend income
2005 2004
Figures in HK$m restated
Listed investments 102 100
Unlisted investments 266 63
368 163
6. Net earned insurance premiums
2005 2004
Figures in HK$m restated
Gross insurance premium income 19,850 14,610
Less: reinsurance premiums (510) (525)
19,340 14,085
Premium income was HK$5,255 million, or 37.3 per cent, higher than 2004,
attributable to an enhanced range of life assurance and general insurance
products, coupled with successful sales and marketing initiatives.
7. Other operating income
2005 2004
Figures in HK$m restated
Rental income from investment properties 215 211
Movement in present value of
in force insurance business 1,185 833
Profit on disposal of property,
plant and equipment 104 192
Profit on disposal of subsidiaries
and associates 53 342
Surplus arising on property
revaluation 1,537 1,038
Other 1,803 1,498
4,897 4,114
Profit on disposal of subsidiaries and associates for 2005 comprises a gain made
on the sale of HSBC Asset Management (Australia) Limited. Profit for 2004
included a gain on the exchange of the group's interest in World Finance
International Limited, an associated company, for an interest in Bergesen
Worldwide.
The surplus arising on property revaluation comprises gains on the revaluation
of investment properties and the reversal of previous revaluation deficits that
had arisen when the value of certain premises fell below depreciated historical
cost. As permitted by the revised Hong Kong Accounting Standard 40, prior year
profit and loss figures have not been restated to include revaluation gains on
investment properties.
'Other' includes profits on the sale of a residential property in Hong Kong held
on an operating lease, and miscellaneous income from fellow HSBC Group
subsidiary companies representing recoveries of shared operating costs.
8. Loan impairment charges and other credit risk provisions
2005 2004
Figures in HK$m restated
Net charge/(release) for impairment provisions
Advances to customers
- Individually assessed impairment provisions^
New provisions 2,127 4,016
Releases (1,755) (2,450)
Recoveries (267) (617)
105 949
- Net charge/(release) for collectively
assessed impairment provisions^^ 1,961 (1,723)
- Country risk provisions 2 -
2,068 (774)
Placings with banks maturing after one month
- Net release of individually assessed
provisions^ - (1)
2,068 (775)
Net release of other credit risk provisions (4) (87)
Net charge/(release) for loan
impairment and other credit risk provisions 2,064 (862)
^ Individually assessed impairment provisions in 2004 refer to specific
provisions.
^^ Collectively assessed impairment provisions in 2004 refer to general
provisions.
There was a net charge for loan impairment and other credit risk provisions of
HK$2,064 million compared with a net release of HK$862 million in 2004. The
charge for new individually assessed provisions was lower as credit card
provisions were classified as individual in 2004, but collective in 2005. New
individually assessed provisions against mortgages and other personal lending
fell, in line with the improving economy in Hong Kong, with lower bankruptcies,
falling unemployment and a rise in property prices, although new provisions
against commercial banking customers in Hong Kong increased. Releases and
recoveries were lower, largely relating to corporates in Hong Kong, Singapore
and Thailand, but this was partly offset by higher releases against personal
lending in Hong Kong and against lending to commercial banking customers in
mainland China. There was a net charge for collectively assessed provisions,
reflecting the reclassification of credit card provisions as collectively
assessed, and a small charge against corporate lending, reflecting a rise in
lending while the credit environment across the region was stable. The net
charge for provisions against credit card lending rose by 35.3 per cent,
attributable to the increase in delinquency levels in Taiwan, coupled with
growth in receivables throughout the region.
9. Employee compensation and benefits
2005 2004
Figures in HK$m restated
Wages, salaries and other costs 16,428 13,816
Social security costs 238 184
Retirement benefit costs 1,070 765
17,736 14,765
Staff numbers by region^
At 31Dec05 At 31Dec04
Hong Kong 24,842 23,947
Rest of Asia-Pacific 25,956 21,009
Americas/Europe 18 16
Total 50,816 44,972
^ Full-time equivalent
Staff costs increased by HK$2,971, or 20.1 per cent, compared with 2004,
attributable to the increase in headcount throughout the region of 5,844. Staff
numbers rose in all customer groups, notably in Personal Financial Services in
India, Taiwan, Korea and Indonesia, in Commercial Banking in Hong Kong and
mainland China, and in Corporate, Investment Banking and Markets as the build-up
of the investment banking division in Hong Kong was substantially completed.
Headcount in the Group Service Centre in Guangdong rose by more than 1,000 in
order to support the expansion in processing work. Performance-related
remuneration increased in line with the improved operating profits.
10. General and administrative expenses
2005 2004
Figures in HK$m restated
Premises and equipment
- Rental expenses 1,243 1,144
- Amortisation of prepaid operating lease
payments 56 55
- Other premises and equipment 2,089 1,761
3,388 2,960
Other administrative expenses 8,394 7,202
Litigation and other provisions 313 131
12,095 10,293
The increase in general and administrative expenses of HK$1,802 million, or 17.5
per cent, reflected additional costs incurred in business expansion throughout
the region. Advertising and marketing expenditure increased in Hong Kong, Korea,
Taiwan, Thailand and India, in line with the growth in the Personal Financial
Services business in these countries. Technology costs increased as the group's
growth initiatives required investment in systems and the development of
distribution channels. Other general expenses, including rental, communications
and travel costs increased in support of business expansion across the region.
11. Share of profit in associates
Share of profit in associates in 2005 included the group's share of post-tax
profits from Bank of Communications and Industrial Bank, and amortisation of
intangible assets arising on acquisition, for the 12 months to 30 September
2005. In 2004, this included share of profits and amortisation for the period
from the date of acquisition (August 2004 and May 2004 for Bank of
Communications and Industrial Bank respectively) to 30 September 2004.
12. Tax expense
The charge for taxation in the consolidated income statement comprises:
2005 2004
Figures in HK$m restated
Current income tax
- Hong Kong profits tax 4,974 3,982
- Overseas taxation 2,598 2,497
Deferred taxation 479 509
8,051 6,988
The effective rate of tax for 2005 was 17.8 per cent compared with 16.1 per cent
in 2004, largely as a result of the interest expense on preference shares for
which tax relief is not available, and a different product and geographic mix of
taxable profits.
13. Dividends
2005 2004
HK$ HK$m HK$ HK$m
per per
share share
Dividends paid on ordinary share capital
- in respect of the previous financial
year, approved and paid during the year 0.53 4,800 1.30 8,450
- in respect of the current financial year 1.76 15,800 2.18 15,500
2.29 20,600 3.48 23,950
The Directors have declared a fourth interim dividend in respect of the
financial year ending 31 December 2005 of HK$4,500 million (HK$0.50 per ordinary
share).
14. Trading assets
At 31Dec05 At 31Dec04
Figures in HK$m restated
Debt securities 108,687 82,159
Equity shares 22,677 5,573
Treasury bills 69,880 -
Other 14,437 -
215,681 87,732
Treasury bills held for trading have been reclassified from 'Cash and short-term
funds' to 'Trading assets' on adoption of HKAS 39.
15. Financial assets designated at fair value
At 31Dec05 At 31Dec04
Figures in HK$m restated
Debt securities 15,070 -
Equity shares 18,320 -
Treasury bills 94 -
Other 3,589 -
37,073 -
Financial assets designated at fair value are assets which have been designated
as such so that movements in their fair value can be taken to the income
statement rather than reserves (see Accounting policies Note (f)).
This classification in 2005 was made on adoption of HKAS 39. There was no such
category in 2004.
16. Advances to customers
At 31Dec05 At 31Dec04
Figures in HK$m restated
Gross advances to customers 1,005,902 927,121
Impairment allowances
- Individually assessed^ (2,963) (5,482)
- Collectively assessed^^ (3,600) (2,447)
- Country risk allowances (13) -
(6,576) (7,929)
999,326 919,192
Allowances as a percentage of gross
advances to customers:
Individually assessed 0.29% 0.59%
Collectively assessed 0.36% 0.26%
Country risk allowances - -
Total allowances 0.65% 0.85%
^ Individually assessed impairment allowances in 2004 refer to specific
provisions.
^^ Collectively assessed impairment allowances in 2004 refer to general
provisions.
17. Impairment allowances against advances to customers
Individually Collectively Country
assessed assessed risk
Figures in HK$m allowances allowances allowances Total
At 1Jan05 (restated^) 4,719 3,179 11 7,909
Amounts written off (1,982) (1,948) - (3,930)
Recoveries of advances
written off in previous years 267 395 - 662
Net charge to income statement
(Note 8) 105 1,961 2 2,068
Unwinding of discount of
loan impairment (81) - - (81)
Exchange and other adjustments (65) 13 - (52)
At 31Dec05 2,963 3,600 13 6,576
^ Includes the effect of adoption of HKAS 39.
18. Impaired advances to customers and allowances
The geographical information shown below, and in notes 19, 20, 21 and 23, has
been classified by location of the principal operations of the subsidiary
company or, in the case of the bank, by location of the branch responsible for
advancing the funds.
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Total
Year ended 31Dec05
Impairment provision charge/(release) 1,156 924 (12) 2,068
At 31Dec05
Advances to customers which are
considered to be impaired are as
follows:
Gross impaired advances 3,920 3,079 - 6,999
Individually assessed allowances (1,335) (1,628) - (2,963)
2,585 1,451 - 4,036
Individually assessed allowances
as a percentage of gross
impaired advances 34.1% 52.9% - 42.3%
Gross impaired advances as a
percentage of gross advances to
customers 0.6% 0.8% - 0.7%
Hong Rest of Americas/ Total
Figures in HK$m Kong Asia-Pacific Europe Restated
Year ended 31Dec04 (restated)
Impairment provision charge/(release) (1,680) 912 (6) (774)
At 31Dec04 (restated)
Advances to customers which are
considered to be impaired are as
follows:
Gross impaired advances^ 5,423 4,268 5 9,696
Individually assessed allowances^^ (2,485) (2,992) (5) (5,482)
2,938 1,276 - 4,214
Individually assessed allowances
as a percentage of gross
impaired advances 45.8% 70.1% 100.0% 56.5%
Gross impaired advances as a
percentage of gross advances to
customers 0.9% 1.3% 35.7% 1.0%
Impaired advances to customers are those advances where objective evidence
exists that full repayment of principal or interest is considered unlikely.
The individually assessed allowances are made after taking into account the
value of collateral in respect of such advances.
^ Impaired advances in 2004 refer to non-performing advances.
^^ Individually assessed allowances in 2004 refer to specific provisions.
19. Overdue advances to customers
Hong Rest of Americas/
Figures in HK$m Kong Asia-Pacific Europe Total
At 31Dec05
Gross advances to customers which
have been overdue with respect to
either principal or interest for periods
of:
- six months or less but over three
months 1,073 891 - 1,964
- one year or less but over six
months 272 430 - 702
- over one year 1,053 1,071 - 2,124
2,398 2,392 - 4,790
Overdue advances to customers as
a percentage of gross advances to
customers:
- six months or less but over
three months 0.2% 0.2% - 0.2%
- one year or less but over six
months - 0.1% - 0.1%
- over one year 0.2% 0.3% - 0.2%
0.4% 0.6% - 0.5%
Hong Rest of Americas/ Total
Figures in HK$m Kong Asia-Pacific Europe Restated
At 31Dec04 (restated)
Gross advances to customers which
have been overdue with respect to
either principal or interest for
periods of:
- six months or less but over
three months 959 706 - 1,665
- one year or less but over six
months 607 296 - 903
- over one year 1,631 1,430 - 3,061
3,197 2,432 - 5,629
Overdue advances to customers as
a percentage of gross advances to
customers:
- six months or less but over
three months 0.1% 0.2% - 0.2%
- one year or less but over six
months 0.1% 0.1% - 0.1%
- over one year 0.3% 0.4% - 0.3%
0.5% 0.7% - 0.6%
20. Rescheduled advances to customers
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Total
At 31Dec05
Rescheduled advances to customers 1,941 623 - 2,564
Rescheduled advances to
customers as a percentage of
gross advances to customers 0.3% 0.2% - 0.3%
At 31Dec04 (restated)
Rescheduled advances to customers 4,009 465 5 4,479
Rescheduled advances to customers
as a percentage of gross
advances to customers 0.7% 0.1% 35.7% 0.5%
Rescheduled advances are those advances which have been restructured or
renegotiated because of a deterioration in the financial position of the
borrower, or because of the inability of the borrower to meet the original
repayment schedule.
Rescheduled advances to customers are stated net of any advances which have
subsequently become overdue for over three months and which are included in
overdue advances to customers (Note 19).
21. Analysis of advances to customers based on categories used by the HSBC Group
The following analysis of advances to customers is based on categories used by
the HSBC Group, including The Hongkong and Shanghai Banking Corporation Limited
and its subsidiary companies, to manage associated risks.
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Total
At 31Dec05
Residential mortgages 182,257 117,211 4 299,472
Hong Kong SAR Government's
Home Ownership Scheme,
Private Sector
Participation Scheme and
Tenants Purchase Scheme
mortgages 36,291 - - 36,291
Other personal 57,362 47,855 1 105,218
Total personal 275,910 165,066 5 440,981
Commercial, industrial and
international trade 129,774 110,668 - 240,442
Commercial real estate 97,364 32,615 - 129,979
Other property-related lending 47,661 17,340 - 65,001
Government 2,347 5,891 - 8,238
Other commercial 53,681 37,851 - 91,532
Total corporate and commercial 330,827 204,365 - 535,192
Non-bank financial institutions 15,246 11,987 - 27,233
Settlement accounts 2,173 323 - 2,496
Total financial 17,419 12,310 - 29,729
Gross advances to customers 624,156 381,741 5 1,005,902
Impairment allowances (3,092) (3,484) - (6,576)
Net advances to customers 621,064 378,257 5 999,326
Rest of Americas/ Total
Figures in HK$m Hong Kong Asia-Pacific Europe restated
At 31Dec04 (restated)
Residential mortgages 184,631 98,516 2 283,149
Hong Kong SAR Government's
Home Ownership Scheme,
Private Sector
Participation Scheme and
Tenants Purchase Scheme
mortgages 41,845 - - 41,845
Other personal 50,741 37,873 7 88,621
Total personal 277,217 136,389 9 413,615
Commercial, industrial and
international trade 109,655 105,133 - 214,788
Commercial real estate 80,726 27,956 5 108,687
Other property-related lending 46,319 14,070 - 60,389
Government 4,781 5,150 - 9,931
Other commercial 56,607 35,006 - 91,613
Total corporate and commercial 298,088 187,315 5 485,408
Non-bank financial institutions 15,008 9,148 - 24,156
Settlement accounts 3,470 472 - 3,942
Total financial 18,478 9,620 - 28,098
Gross advances to customers 593,783 333,324 14 927,121
Impairment allowances (4,032) (3,892) (5) (7,929)
Net advances to customers 589,751 329,432 9 919,192
Advances to customers increased by HK$80 billion, or 8.7 per cent, since the end
of 2004.
Advances in Hong Kong grew by HK$31 billion, or 5.3 per cent, since the end of
2004, on account of the buoyant economy. Mortgage lending fell, attributable to
persistent price competition in a flat market, and lending under the GHOS
continued to decline as the scheme remained suspended during 2005. Other
personal lending rose, mainly on credit cards, reflecting the increase in
cardholder spending. Corporate and commercial lending rose by 11.0 per cent,
with particularly strong growth in the manufacturing sector and property
investment.
In the rest of Asia-Pacific, advances rose by HK$49 billion, or 14.8 per cent,
since the end of 2004, reflecting successful business expansion across the
region. Mortgage advances increased by 19.0 per cent, principally in Korea,
Singapore, Taiwan and India. Credit card receivables grew by 31.7 per cent,
largely in Taiwan, India, the Philippines and India. Lending to corporate and
commercial customers rose by 9.1 per cent, most significantly in mainland China,
Korea and India.
22. Analysis of advances to customers by geographical area according to the
location of counterparties, after risk transfer
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Others Total
At 31Dec05
Gross advances to customers 570,329 354,626 73,959 6,988 1,005,902
Overdue advances to customers 2,337 2,222 224 8 4,791
At 31Dec04 (restated)
Gross advances to customers 543,997 319,512 59,461 4,151 927,121
Overdue advances to customers 3,212 2,343 74 - 5,629
23. Analysis of advances to customers by industry sector based on categories and
definitions used by the Hong Kong Monetary Authority ('HKMA')
The following analysis of advances to customers is based on the categories
contained in the 'Quarterly Analysis of Loans and Advances and Provisions'
return required to be submitted to the HKMA by branches of the bank and by
banking subsidiary companies in Hong Kong.
At31Dec05 At 31Dec04
Figures in HK$m restated
Gross advances to customers for
use in Hong Kong
Industrial, commercial and financial
Property development 41,141 36,230
Property investment 104,214 93,696
Financial concerns 12,667 14,784
Stockbrokers 1,094 1,185
Wholesale and retail trade 34,256 32,099
Manufacturing 17,847 14,336
Transport and transport equipment 31,202 35,418
Others 44,697 41,134
287,118 268,882
Individuals
Advances for the purchase of flats
under the Hong Kong SAR Government's
Home Ownership Scheme, Private Sector
Participation and Tenants Purchase
Scheme 36,291 41,845
Advances for the purchase of other
residential properties 165,148 169,482
Credit card advances 29,882 23,162
Others 23,826 20,257
255,147 254,746
At 31Dec05 At 31Dec04
Figures in HK$m restated
Gross advances to customers for
use in Hong Kong 542,265 523,628
Trade finance 49,902 49,408
Gross advances to customers for
use outside Hong Kong made by
branches of the bank and
subsidiary companies in Hong Kong 31,989 20,747
Gross advances to customers made
by branches of the bank and
subsidiary companies in Hong Kong 624,156 593,783
Gross advances to customers made
by branches of the bank and
subsidiary companies outside Hong Kong
- Rest of Asia-Pacific 381,741 333,324
- Americas/Europe 5 14
Gross advances to customers 1,005,902 927,121
An explanation of the significant differences between the categories of advances
and their definitions used by the HSBC Group and those used by the HKMA is given
on page 18 of the Annual Report and Accounts for 2004.
24. Cross-border exposure
The country risk exposures shown below are prepared in accordance with the HKMA
Return of External Positions Part II: Cross-Border Claims (MA(BS)9) guidelines.
Cross-border claims are on-balance sheet exposures to counterparties based on
the location of the counterparties after taking into account the transfer of
risk.
The tables show claims on individual countries and territories or areas, after
risk transfer, amounting to 10 per cent or more of the aggregate cross-border
claims.
Cross-border risk is controlled centrally through a well-developed system of
country limits and is frequently reviewed to avoid concentration of transfer,
economic or political risk.
Banks and
other Public
financial sector
Figures in HK$m institutions entities Other Total
At 31Dec05
Americas
United States 38,673 72,477 34,515 145,665
Other 39,328 9,909 50,744 99,981
78,001 82,386 85,259 245,646
Europe
United Kingdom 111,377 14 22,232 133,623
Other 338,060 5,842 39,509 383,411
449,437 5,856 61,741 517,034
Asia-Pacific excluding Hong Kong 154,135 33,897 108,476 296,508
At 31Dec04
Americas
United States 45,518 80,047 32,010 157,575
Other 43,044 16,143 47,297 106,484
88,562 96,190 79,307 264,059
Europe
United Kingdom 86,613 27 23,294 109,934
Other 332,581 4,219 22,168 358,968
419,194 4,246 45,462 468,902
Asia-Pacific excluding Hong Kong 151,183 18,454 77,266 246,903
25. Customer accounts
At 31Dec05 At 31Dec04
Figures in HK$m restated
Current accounts and demand deposits 925,008 1,069,178
Savings accounts 664,478 516,237
Other deposit accounts 145,624 142,696
1,735,110 1,728,111
Customer accounts increased by HK$7 billion compared with the end of 2004.
Certain structured deposits that were previously recorded in 'Other deposit
accounts' have, in accordance with revised accounting standards, been
reclassified in 2005 to 'Trading liabilities'. Excluding the effect of this
reclassification, customer accounts rose by HK$84 billion, or 4.9 per cent.
In Hong Kong, customer accounts, including accounts reclassified as trading,
increased by HK$20.0 billion, or 1.5 per cent. Current accounts and demand
deposits fell by HK$161 billion reflecting the shift into savings and time
deposits as interest rates rose during 2005, coupled with a net outflow of
deposits from personal customers attributable to intense market competition in
the higher interest rate environment. Customer account balances, including
trading accounts, in Commercial Banking and Corporate, Investment Banking and
Markets increased by HK$43 billion, or 10.2 per cent, reflecting the success of
the group's cash management capabilities in attracting new deposits from small
and larger businesses alike.
In the rest of Asia-Pacific, customer accounts, including trading accounts, rose
by HK$65 billion, or 15.7 per cent. Deposits from personal customers increased
by 8.5 per cent, notably in mainland China, Singapore and Indonesia. Deposits in
Commercial Banking and Corporate, Investment Banking and Markets grew by 19.6
per cent, with increases in mainland China, India, Korea, Singapore, Brunei and
Taiwan, attributable to business expansion, particularly in the payments and
cash management business, and higher balances from securities custody and
clearing customers.
The group's advances-to-deposits ratio increased to 57.6 per cent at 31 December
2005 from 53.2 per cent at 31 December 2004.
26. Trading liabilities
At 31Dec05 At 31Dec04
Figures in HK$m restated
Certificates of deposit in issue 83,937 -
Other debt securities in issue 20,361 -
Short positions in securities 55,025 37,281
Deposits by banks 13,488 -
Customer accounts 77,387 -
250,198 37,281
Trading liabilities include customer deposits, certificates of deposit and other
debt securities in issue, which may contain embedded options or other
derivatives, the market risk of which is managed in the trading book. In prior
years, these liabilities were not shown separately.
The reclassification in 2005 was made on adoption of HKAS 39.
27. Financial liabilities designated at fair value
At 31Dec05 At 31Dec04
Figures in HK$m restated
Deposits by banks 360 -
Customer accounts 1,600 -
Subordinated liabilities 967 -
2,927 -
Financial liabilities designated at fair value are liabilities which have been
designated as such so that movements in their fair value can be taken to the
income statement rather than reserves (see Accounting policies Note (f)).
This classification in 2005 was made on adoption of HKAS 39. There was no such
category in 2004.
28. Debt securities in issue
At 31Dec05 At 31Dec04
Figures in HK$m restated
Certificates of deposit 49,068 110,922
Other debt securities 12,400 44,240
61,468 155,162
The fall in debt securities in issue compared with the end of 2004 reflects the
reclassification of certain securities as 'Trading liabilities' and 'Financial
assets designated at fair value', as detailed in Notes 26 and 27. The
reclassification was made on adoption of HKAS 39 in 2005.
29. Reserves
At 31Dec05 At 31Dec04
Figures in HK$m restated
Other reserves
- Property revaluation reserve 4,082 3,065
- Available-for-sale investment reserve 2,899 -
- Long-term equity investment revaluation reserve - 1,799
- Cash flow hedge reserve (1,767) -
- Foreign exchange reserve 53 843
- Other 770 322
6,037 6,029
Retained profits 64,303 50,484
Total reserves 70,340 56,513
30. Derivatives
Derivatives are financial instruments that derive their value from the price of
an underlying item such as equities, bonds, interest rates, foreign exchange
rates, credit spreads, commodity prices and equity or other indices.
Derivatives enable users to increase, reduce or alter exposure to credit or
market risks. The group makes markets in derivatives for its customers and uses
derivatives to manage its exposure to credit and market risks.
Derivatives are carried at fair value and are shown in the balance sheet as
separate totals of assets and liabilities. Asset and liability values represent
the cost to the group of replacing all transactions, with positive or negative
fair value respectively, assuming that all of the group's relevant
counterparties default at the same time, and that the transactions can be
replaced instantaneously.
Derivative assets and liabilities on different transactions are only netted if
the transactions are with the same counterparty, a legal right of set-off exists
and the cash flows are intended to be settled on a net basis. Changes in the
values of derivatives are recognised in 'Net trading income' or 'Net income from
financial instruments designated at fair value' unless they qualify as hedges
for accounting purposes.
2005 2004
Figures in HK$m Assets Liabilities Assets Liabilities
Fair values of derivative open
positions held for trading
purposes
Exchange rate 31,074 29,254 54,247 54,302
Interest rate 36,004 35,739 38,430 36,185
Equity 1,388 2,570 1,475 1,518
Credit 970 2,802 240 351
Commodity and other 288 568 6 6
69,724 70,933 94,398 92,362
Fair values of outstanding
derivatives designated as
fair value hedges
Interest rate 658 437 - -
Fair values of outstanding
derivatives designated as
cash flow hedges
Interest rate 1,657 639 - -
Total 72,039 72,009 94,398 92,362
The tables below give the nominal contract amounts, credit equivalent amounts
and risk-weighted amounts of off-balance sheet transactions. The credit
equivalent amounts are calculated for the purposes of deriving the risk-weighted
amounts. These are assessed in accordance with the Third Schedule of the Hong
Kong Banking Ordinance on capital adequacy and depend on the status of the
counterparty and the maturity characteristics. The risk weights used range from
zero per cent to 50 per cent for exchange rate and interest rate contracts, and
from zero per cent to 100 per cent for other derivative contracts. The group has
executed close-out netting agreements with certain counterparties, which allow
for positive and negative mark-to-market values on different transactions to be
offset and settled by a single payment in the event of default by either party.
These have been taken into account in calculating total risk assets.
Derivatives arise from futures, forward, swap and option transactions undertaken
by the group in the foreign exchange, interest rate, equity, credit and
commodity markets. The contract amounts of these instruments indicate the volume
of transactions outstanding at the balance sheet date; they do not represent
amounts at risk.
2005 2004
Credit Risk- Credit Risk-
Contract equivalent weighted Contract equivalent weighted
Figures in HK$m amount amount amount amount amount amount
Exchange rate contracts:
- Spot and forward foreign
exchange 2,536,795 36,655 9,753 2,411,793 46,694 11,759
- Swaps and other exchange
rate contracts 884,046 41,124 12,481 696,883 39,635 11,180
3,420,841 77,779 22,234 3,108,676 86,329 22,939
Interest rate contracts:
- Interest rate swaps 4,775,236 55,580 14,442 3,754,053 57,131 14,679
- Other interest rate
contracts 815,110 4,159 1,340 684,692 3,117 875
5,590,346 59,739 15,782 4,438,745 60,248 15,554
Other derivative contracts 289,019 15,885 5,649 71,395 4,030 1,222
Impact of counterparty
netting agreements on
derivatives exposure - (55,354) (11,915) - (59,487) (12,535)
31. Contingent liabilities and commitments
Credit Risk-
Contract equivalent weighted
Figures in HK$m amount amount amount
At 31Dec05
Contingent liabilities
- Acceptances and endorsements - - -
- Guarantees 83,114 60,166 48,893
- Other 37 37 37
83,151 60,203 48,930
Commitments
- Documentary credits and short-term
trade-related transactions 55,402 20,650 10,905
- Forward asset purchases and forward
forward deposits placed 1,849 1,849 775
- Undrawn note issuing and revolving
underwriting facilities 3,249 1,625 975
- Undrawn formal standby facilities,
credit lines and other commitments:
- one year and over 97,207 48,604 41,115
- under one year 752,797 - -
910,504 72,728 53,770
At 31Dec04
Contingent liabilities
- Acceptances and endorsements 22,714 4,559 4,423
- Guarantees 87,243 65,884 48,837
- Other 35 35 33
109,992 70,478 53,293
Commitments
- Documentary credits and short-term
trade-related transactions 48,493 13,770 9,591
- Forward asset purchases and forward
forward deposits placed 10,166 10,166 3,716
- Undrawn note issuing and revolving
underwriting facilities 4,116 2,058 1,680
- Undrawn formal standby facilities,
credit lines and other commitments:
- one year and over 82,142 41,071 38,311
- under one year 657,682 - -
802,599 67,065 53,298
The tables above give the nominal contract amounts, credit equivalent amounts
and risk-weighted amounts of contingent liabilities and commitments. The credit
equivalent amounts are calculated for the purposes of deriving the risk-weighted
amounts. These are assessed in accordance with the Third Schedule of the Hong
Kong Banking Ordinance on capital adequacy and depend on the status of the
counterparty and the maturity characteristics. The risk-weights used range from
0 per cent to 100 per cent for contingent liabilities and commitments.
Contingent liabilities and commitments are credit-related instruments which
include letters of credit, guarantees and commitments to extend credit. The
contract amounts represent the amounts at risk should the contract be fully
drawn upon and the client default. Since a significant portion of guarantees and
commitments is expected to expire without being drawn upon, the total of the
contract amounts is not representative of future liquidity requirements.
In 2005, assets and liabilities relating to acceptances and endorsements were
recognised on the balance sheet, and have been included in 'Other assets' and
'Other liabilities'. This reclassification was made on adoption of the new
accounting standards.
32. Foreign exchange exposure
The group had the following structural foreign currency exposures which exceeded
10 per cent of the net structural foreign currency exposure in all currencies:
Figures in HK$m Net structural position
At 31Dec05
Chinese renminbi 32,510
Indian rupees 7,979
United States dollars 11,780
At 31Dec04 (restated)
Australian dollars 4,911
Chinese renminbi 17,398
Indian rupees 5,808
United States dollars 7,476
The group had the following non-structural foreign currency positions which
exceeded 10 per cent of the group's net foreign currency non-structural
positions in all currencies:
United States Singapore Brunei
Figures in HK$m dollars dollars dollars
At 31Dec05
Spot assets 1,229,340 107,578 5,523
Spot liabilities (1,188,737) (90,549) (18,062)
Forward purchases 1,507,086 157,007 43
Forward sales (1,558,902) (161,647) -
Net options position 3,361 - -
(7,852) 12,389 (12,496)
At 31Dec04 (restated)
Spot assets 1,060,593 83,986 5,129
Spot liabilities (1,042,370) (74,193) (15,134)
Forward purchases 1,471,800 104,625 -
Forward sales (1,490,489) (104,339) -
Net options position (707) - -
(1,173) 10,079 (10,005)
33. Reconciliation of operating profit to cash generated from operations
2005 2004
Figures in HK$m restated
Operating profit 43,344 43,237
Net interest income (43,491) (36,970)
Dividend income (368) (163)
Depreciation and amortisation 1,983 1,853
Impairment and other credit risk provisions 2,064 (862)
Advances written off net of recoveries (3,268) (4,066)
Other provisions for liabilities and charges 373 453
Provisions utilised (99) (672)
Surplus arising on property revaluation (1,537) (1,038)
Profit on disposal of property, plant and equipment (104) (192)
Profit on disposal of subsidiaries and associates (53) (342)
Gains less losses from financial investments (756) (1,497)
Employees' options granted cost free 333 242
Interest received 63,331 45,635
Interest paid (31,956) (18,052)
Operating profit before changes in working capital 29,796 27,566
Change in treasury bills with original term to
maturity of more than three months 10,704 (49,096)
Change in placings with banks maturing after one
month 4,139 38,639
Change in certificates of deposit with original
term to maturity of more than three months (2,351) (5,422)
Change in trading assets (85,741) 13,061
Change in trading liabilities 87,174 8,279
Change in financial assets designated at fair value (1,001) -
Change in financial liabilities designated at
fair value 673 -
Change in derivative assets 15,122 (14,344)
Change in derivative liabilities (21,007) 20,630
Change in financial investments held for backing
liabilities to long-term policyholders (8,227) (12,137)
Change in advances to customers (82,836) (99,508)
Change in amounts due from fellow subsidiary
companies (20,058) (25,203)
Change in deposits by banks 11,147 4,289
Change in other assets 13,558 (16,711)
Change in customer accounts 41,993 168,856
Change in amounts due to fellow subsidiary
companies 6,438 6,006
Change in amounts due to ultimate holding company 1,949 178
Change in debt securities in issue (2,221) 40,206
Change in liabilities to customers under insurance
and investment contracts 17,271 13,445
Change in other liabilities 15,750 898
Exchange adjustments (1,263) 925
Cash generated from operations 31,009 120,557
34. Analysis of cash and cash equivalents
a. Changes in cash and cash equivalents during the year
2005 2004
Figures in HK$m restated
Balance at 1 January 403,545 314,861
Net cash inflow before the effect of
foreign exchange movements 56,138 81,548
Effect of foreign exchange movements (15,169) 7,136
Balance at 31 December 444,514 403,545
b. Analysis of balances of cash and cash equivalents in the consolidated balance sheet
2005 2004
Figures in HK$m restated
Cash in hand and current balances with banks 86,882 54,509
Items in the course of collection from other banks 17,782 13,479
Placings with banks 310,396 336,292
Treasury bills 45,484 17,916
Certificates of deposit 4,897 4,801
Less: items in the course of transmission to
other banks (20,927) (23,452)
444,514 403,545
The difference between the amounts above and the amounts included in the
consolidated balance sheet reflects treasury bills and certificates of deposit
with an initial maturity of more than 3 months.
c. Analysis of net outflow of cash and cash equivalents in respect of
acquisition of and increased shareholding in subsidiary companies
2005 2004
Figures in HK$m restated
Cash consideration (2,391) (972)
Cash and cash equivalents acquired 747 -
(1,644) (972)
d. Analysis of net flow of cash and cash equivalents in respect of sale of
subsidiary companies
Figures in HK$m 2005 2004
Sale proceeds 151 63
Cash and cash equivalents transferred - (24)
151 39
35. Segmental analysis
The allocation of earnings reflects the benefits of shareholders' equity to the
extent that these are actually allocated to businesses in the segment by way of
intra-group capital and funding structures. Common costs are included in
segments on the basis of the actual recharges made. Geographical information has
been classified by the location of the principal operations of the subsidiary
company or, in the case of the bank, by the location of the branch responsible
for reporting the results or advancing the funds. Due to the nature of the group
structure, the analysis of profits shown below includes intra-group items
between geographical regions.
Income statement
Rest of Americas/
Figures in HK$m Hong Kong Asia-Pacific Europe Total
Year ended 31Dec05
Interest income 55,139 29,613 529 85,281
Interest expense (24,149) (17,336) (305) (41,790)
Net interest income 30,990 12,277 224 43,491
Fee income 14,237 7,921 2 22,160
Fee expense (2,252) (1,803) (8) (4,063)
Net trading income 3,152 4,198 (170) 7,180
Net income from financial
instruments designated at
fair value (69) 453 - 384
Gains less losses from
financial investments 714 42 - 756
Dividend income 350 18 - 368
Net earned insurance premiums 18,140 1,200 - 19,340
Other operating income 6,480 1,131 22 7,633
Total operating income 71,742 25,437 70 97,249
Net insurance claims incurred
and movement in policyholder
liabilities (16,002) (1,289) - (17,291)
Net operating income before
loan impairment charges and
other credit risk provisions 55,740 24,148 70 79,958
Loan impairment charges and
other credit risk provisions (1,161) (915) 12 (2,064)
Net operating income 54,579 23,233 82 77,894
Operating expenses (20,514) (13,998) (38) (34,550)
Operating profit 34,065 9,235 44 43,344
Share of profit in associates 178 1,727 - 1,905
Profit before tax 34,243 10,962 44 45,249
Tax expense (5,411) (2,634) (6) (8,051)
Profit for the year 28,832 8,328 38 37,198
Attributable to shareholders 24,644 8,191 38 32,873
Attributable to minority
interests 4,188 137 - 4,325
Income statement
Rest of Americas/ Total
Figures in HK$m Hong Kong Asia-Pacific Europe restated
Year ended 31Dec04
Interest income 38,533 21,777 601 60,911
Interest expense (12,211) (11,255) (475) (23,941)
Net interest income 26,322 10,522 126 36,970
Fee income 13,717 6,066 1 19,784
Fee expense (1,913) (1,578) (12) (3,503)
Net trading income 4,413 2,590 - 7,003
Net investment income on assets
backing policyholder liabilities 669 229 - 898
Gains less losses from financial
investments 1,361 135 1 1,497
Dividend income 148 15 - 163
Net earned insurance premiums 13,351 734 - 14,085
Other operating income 4,686 726 8 5,420
Total operating income 62,754 19,439 124 82,317
Net insurance claims incurred
and movement in policyholder
liabilities (11,098) (627) - (11,725)
Net operating income before
loan impairment charges and
other credit risk provisions 51,656 18,812 124 70,592
Loan impairment charges and
other credit risk provisions 1,684 (828) 6 862
Net operating income 53,340 17,984 130 71,454
Operating expenses (17,917) (10,268) (32) (28,217)
Operating profit 35,423 7,716 98 43,237
Share of profit in associates 52 247 - 299
Profit before tax 35,475 7,963 98 43,536
Tax expense (4,768) (2,214) (6) (6,988)
Profit for the year 30,707 5,749 92 36,548
Attributable to shareholders 26,334 5,722 92 32,148
Attributable to minority
interests 4,373 27 - 4,400
Interest income and interest expense include intra-group interest of HK$5,082
million (2004: HK$2,964 million). Fee income and fee expense include intra-group
fees of HK$489 million (2004: HK$308 million). Other operating income and
operating expenses include intra-group items of HK$2,736 million (2004: HK$1,306
million).
36. Capital adequacy
The table below sets out an analysis of regulatory capital and capital adequacy
ratios for the group.
Figures in HK$m 31Dec05 31Dec04^
Composition of capital
Tier 1:
Shareholders' funds 97,334 147,495
Less: proposed dividend (4,500) (4,800)
property revaluation reserves^^ (7,892) (11,907)
available-for-sale investments and
equity revaluation reserves^^^ (3,051) (1,609)
classified as regulatory reserve^^^^ (1,319) -
term preference shares - (3,886)
goodwill (3,784) (5,771)
others 1,769 -
Irredeemable non-cumulative preference shares 51,587 -
Minority interests^^^^^ 14,808 14,384
Total qualifying tier 1 capital 144,952 133,906
Tier 2:
Property revaluation reserves (@70%) 5,524 7,977
Available-for-sale investments and equity
revaluation reserves (@70%) 2,136 1,126
Collective impairment provision and
regulatory reserve 5,112 2,447
Perpetual subordinated debt 9,359 9,328
Term subordinated debt 6,117 1,814
Term preference shares 3,877 3,109
Irredeemable cumulative preference shares 16,516 -
Total qualifying tier 2 capital 48,641 25,801
Deductions (39,528) (20,251)
Total capital 154,065 139,456
Risk-weighted assets 1,238,164 1,173,432
^ Comparative amounts for 31 December 2004 are as previously reported.
^^ Includes the revaluation surplus on investment properties, which is now
reported as part of retained profits.
^^^ Includes adjustments made in accordance with guidelines issued by HKMA.
^^^^ The regulatory reserve is maintained for the purpose of satisfying the
Banking Ordinance for prudential supervision. Movements in this reserve
are made in consultation with the HKMA.
^^^^^ After deduction of minority interests in unconsolidated subsidiary
companies.
The group's capital adequacy ratios adjusted for market risks calculated in
accordance with the HKMA Guideline on 'Maintenance of Adequate Capital Against
Market Risks' are as follows:
31Dec05 31Dec04
Total capital 12.4% 11.9%
Tier 1 capital 11.7% 11.4%
The group's capital adequacy ratios calculated in accordance with the provisions
of the Third Schedule of the Banking Ordinance, which does not take into account
market risks, are as follows:
Total capital 12.0% 11.9%
Tier 1 capital 11.2% 11.4%
37. Liquidity ratio
The Banking Ordinance requires banks operating in Hong Kong to maintain a
minimum liquidity ratio, calculated in accordance with the provisions of the
Fourth Schedule of the Banking Ordinance, of 25 per cent. This requirement
applies separately to the Hong Kong branches of the bank and to those subsidiary
companies which are Authorised Institutions under the Banking Ordinance in Hong
Kong.
2005 2004
The average liquidity ratio for the
period was as follows:
Hong Kong branches of the bank 48.2% 41.7%
38. Property revaluation
The group's premises and investment properties were revalued as at 30 September
2005 and updated for any material changes at 31 December 2005. The basis of
valuation was open market value.
Premises and investment properties in the Hong Kong SAR, the Macau SAR and
mainland China, which represent 95 per cent by value of the group's properties
subject to valuation, were valued by DTZ Debenham Tie Leung Limited. The
valuations were carried out by independent qualified valuers who are members of
the Hong Kong Institute of Surveyors. Properties in 11 other countries, which
represent 5 per cent by value of the group's properties, were valued by
different, independent, professionally qualified valuers.
The September property revaluation, together with the revaluation of Hong Kong
properties undertaken in June 2005, has resulted in an increase in the group's
revaluation reserves of HK$1,017 million, net of deferred taxation of HK$307
million, and a credit to the income statement of HK$1,537 million, of which
HK$1,167 million represents the surplus on the revaluation of investment
properties and HK$370 million relates to the reversal of previous revaluation
deficits that had arisen when the value of certain premises fell below
depreciated historical cost.
39. Transition to new Hong Kong Financial Reporting Standards and comparative
figures
The group has adopted new and revised Hong Kong Financial Reporting Standards
and Hong Kong Accounting Standards ('new HKFRS') which are broadly equivalent to
International Financial Reporting Standards, and are effective for accounting
periods beginning on or after 1 January 2005.
The adoption of the new HKFRS has resulted in changes to the group's accounting
policies which have affected the amounts reported for the current and prior
year. Comparative numbers have been restated to conform with the new accounting
policies, except for those applicable to financial instruments (HKAS 39).
Included in the appendix to this news release is the reconciliation of the
consolidated income statement for 2004 and of the consolidated balance sheet at
31 December 2004, as previously reported and as restated, showing the effects of
the adoption of the new HKFRS (except HKAS 39). Also included in the appendix is
the restatement of the opening consolidated balance sheet at 1 January 2005,
showing the effects of the adoption of HKAS 39.
40. Accounting policies
The accounting policies adopted in 2005 and 2004, and a summary of the effects
of the significant changes, are detailed in the appendix to this news release.
41. Statutory accounts
The information in this news release is not audited and does not constitute
statutory accounts.
Certain financial information in this news release is extracted from the
statutory accounts for the year ended 31 December 2005 which were approved by
the Board of Directors on 6 March 2006 and will be delivered to the Registrar of
Companies and the Hong Kong Monetary Authority. The Auditors expressed an
unqualified opinion on those statutory accounts in their report dated 6 March
2006. The Annual Report and Accounts for the year ended 31 December 2005, which
include the statutory accounts, can be obtained on request from Group Public
Affairs, The Hongkong and Shanghai Banking Corporation Limited, 1 Queen's Road
Central, Hong Kong, and may be viewed on our website: www.hsbc.com.hk on or
after 4 April 2006.
42. Ultimate holding company
The Hongkong and Shanghai Banking Corporation Limited is an indirectly-held,
wholly-owned subsidiary of HSBC Holdings plc.
Appendix
1. Accounting policies
a Interest income and expense
From 1 January 2005
Interest income and expense for all interest-bearing financial instruments,
except those classified as held-for-trading or designated at fair value, are
recognised in 'Interest income' and 'Interest expense' in the income statement
using the effective interest rates of the financial assets or financial
liabilities to which they relate.
The effective interest rate is the rate that exactly discounts estimated future
cash payments or receipts through the expected life of the financial asset or
financial liability to the net carrying amount of the financial asset or
financial liability. When calculating the effective interest rate, the group
estimates cash flows considering all contractual terms of the financial
instrument but not future credit losses. The calculation includes all amounts
paid or received by the group that are an integral part of the effective
interest rate, including transaction costs and all other premiums or discounts.
Interest on impaired financial assets is recognised at the original effective
interest rate of the financial asset applied to the impaired carrying amount.
The accounting policy for recognising impairment of loans and advances is set
out in Note (d) below.
From 1 January 2004 to 31 December 2004
Interest income was recognised in the income statement as it accrued, except in
the case of impaired loans and advances. Interest on impaired loans was not
recognised in the income statement, but was credited to an interest suspense
account in the balance sheet which was netted against the relevant loan.
b Non-interest income
(i) Fee income
From 1 January 2005
The group earns fee income from a diverse range of services it provides to its
customers. Fee income is accounted for as follows:
- if the income is earned on the execution of a significant act, it is
recognised as revenue when the significant act has been completed (for
example,
fees arising from negotiating, or participating in the negotiation of, a
transaction for a third party, such as the arrangement for the acquisition of
shares or other securities);
- if the income is earned as services are provided, it is recognised as
revenue as the services are provided (for example, asset management, portfolio
and other management advisory and service fees); and
- if the income is an integral part of the effective interest rate of a
financial instrument, it is recognised as an adjustment to the effective
interest rate (for example, loan commitment fees) and recorded in 'Interest
income' (see Note (a) above).
From 1 January 2004 to 31 December 2004
Fee income was accounted for as follows:
- income earned on the execution of a significant act and income earned
as services were provided, were recognised as revenue on the same basis as
described above for 2005;
- if the income was clearly interest in nature, it was recognised on an
appropriate basis over the relevant period and recorded in 'Interest income'
(see Note (a) above).
(ii) Dividend income
Dividend income is recognised when the right to receive payment is established.
This is the ex-dividend date for equity securities.
(iii) Net income from financial instruments designated at fair value
From 1 January 2005
Net income from financial instruments designated at fair value comprises all
gains and losses from changes in the fair value (net of accrued coupon) of such
financial assets and financial liabilities, together with interest income and
expense and dividend income attributable to those financial instruments.
There was no such category for financial instruments prior to 1 January 2005.
(iv) Net trading income
From 1 January 2005
Net trading income comprises interest income and expense and dividend income
attributable to trading financial assets and liabilities, together with all
gains and losses from changes in fair value. Income and expense arising from
economic hedging activities which do not qualify for hedge accounting under HKAS
39, as well as from the ineffective portion of qualifying hedges, are also
included in 'Net trading income'.
From 1 January 2004 to 31 December 2004
Net trading income comprised all gains and losses from changes in fair value
(net of accrued coupons) of trading financial assets and financial liabilities.
Interest income and expense, and dividend income, were recognised in 'Net
interest income' or 'Dividend income' as appropriate.
c Advances to customers and placings with banks
From 1 January 2005
Advances to customers and placings with banks are loans and advances originated
by the group, which have not been classified as held for trading or designated
at fair value. Loans and advances are recognised when cash is advanced to
borrowers. They are initially recorded at fair value plus any transaction costs,
and are subsequently measured at amortised cost using the effective interest
method, less impairment losses.
Loans and advances classified as held for trading or designated at fair value
are reported as 'Trading assets' or 'Financial assets designated at fair value'
respectively (see Notes (e) and (f) below).
From 1 January 2004 to 31 December 2004
Advances to customers and placings with banks included loans and advances
originated by the group, which were not intended to be sold in the short term
and had not been classified as held for trading. Loans and advances were
recognised when cash was advanced to borrowers. They were measured at cost plus
or minus amortisation of discounts or premiums as appropriate, less provisions
for impaired loans and advances.
d Loan impairment
From 1 January 2005
It is the group's policy to make provisions for impaired loans and advances
promptly where there is objective evidence that impairment of a loan or
portfolio of loans has occurred.
Impairment losses are assessed for all credit exposures. Loans that are
individually significant are assessed and where impairment is identified,
impairment losses are recognised. Loans that have been subject to individual
assessment, but for which no impairment has been identified, are then assessed
collectively to estimate the amount of impairment at the reporting date, which
has not been specifically identified. Loans which are not individually
significant, but which can be aggregated into groups of exposures sharing
similar characteristics, are then assessed collectively to identify and
calculate impairment losses which have occurred by the reporting date. This
methodology is explained in greater detail below.
Impairment losses are only recognised when there is evidence that they have been
incurred prior to the reporting date. Losses which may be expected as a result
of future events, no matter how likely, are not recognised.
(i) Individually significant loans
Impairment losses on individually significant accounts are assessed by an
evaluation of the exposures on a case-by-case basis. The group assesses at each
reporting date whether there is any objective evidence that a loan is impaired.
This procedure is applied to all accounts that are considered individually
significant. In determining the impairment losses on individually assessed
accounts, the following factors are considered:
- the group's aggregate exposure to the customer;
- the viability of the customer's business model and capability to trade
successfully out of financial difficulties and generate sufficient cash flow
to service their debt obligations;
- the amount and timing of expected receipts and recoveries;
- the likely dividend available on liquidation or bankruptcy;
- the extent of other creditors' commitments ranking ahead of, or pari
passu with, HSBC and the likelihood of other creditors continuing to support
the company;
- the complexity of determining the aggregate amount and ranking of all
creditor claims and the extent to which legal and insurance uncertainties are
evident;
- the realisable value of security (or other credit mitigants) and
likelihood of successful repossession;
- the likely deduction of any costs involved in recovery of amounts
outstanding;
- the ability of the borrower to obtain and make payments in the relevant
foreign currency if loans are not in local currency; and
- where available, the secondary market price for the debt.
The impairment loss is calculated by comparing the present value of the expected
future cash flows, discounted at the original effective interest rate of the
loan, with its current carrying value and the amount of any loss is charged to
the income statement. The carrying amount of impaired loans is reduced through
the use of an allowance account.
(ii) Collectively assessed loans
Impairment losses are calculated on a collective basis in two different
scenarios:
- in respect of losses which have been incurred but have not yet been
identified on loans subject to individual assessment for impairment (see
section (i) above); and
- for homogeneous groups of loans that are not considered individually
significant.
Incurred but not yet identified impairment
Where loans have been individually assessed and no evidence of loss has been
identified, these loans are grouped together on the basis of similar credit risk
characteristics for the purpose of calculating a collective impairment loss. The
loss calculated by this method represents impairments that have occurred at the
balance sheet date but which will not be individually identified as such until
some time in the future.
The collective impairment loss is determined after taking into account:
- historical loss experience in portfolios of similar risk
characteristics (for example, by industry and geographical sectors, loan grade
or product);
- the estimated period between a loss occurring and the establishment of
an allowance against the loss on an individual loan; and
- management's experienced judgement as to whether the current economic
and credit conditions are such that the actual level of inherent losses is
likely to be greater or less than that suggested by historical experience.
The estimated period between a loss occurring and its identification is
determined by management for each identified portfolio.
Homogeneous groups of loans
For homogeneous groups of loans that are not considered individually
significant, two alternative methods are used to calculate allowances on a
portfolio basis.
- When appropriate empirical information is available, the group utilises
roll rate methodology. This methodology utilises a statistical analysis of
historical trends of the probability of default and amount of consequential
loss, assessed for each time period during which the customer's contractual
payments are overdue. The amount of loss is based on the present value of
expected future cash flows, discounted at the original effective interest rate
of the portfolio. Other historical data and an evaluation of current economic
conditions are also considered to calculate the appropriate level of
impairment allowance based on inherent loss.
- In other cases, when the portfolio size is small or when information is
insufficient or not sufficiently reliable to adopt a roll rate methodology,
the group adopts a formulaic approach which allocates loss rates having regard
to the period of time for which a customer's loan is overdue. Loss rates are
based on the discounted expected future cash flows from a portfolio.
- Roll rates, loss rates and the expected timing of future recoveries are
regularly benchmarked against actual outcomes to ensure they remain
appropriate.
(iii) Loan write-offs
Loans (and the related impairment allowance accounts) are normally written off,
either partially or in full, when there is no realistic prospect of recovery of
these amounts and, for collateralised loans, when the proceeds from the
realisation of security have been received.
(iv) Reversals of impairment
If the amount of an impairment loss decreases in a subsequent period and the
decrease can be related objectively to an event occurring after the impairment
was recognised, the previously recognised impairment loss is reduced
accordingly. The reduction of an impairment loss under these circumstances is
recognised in the income statement in the period in which it occurs.
(v) Assets acquired in exchange for loans
Non-financial assets acquired in exchange for loans in order to achieve an
orderly realisation are recorded as assets held for sale and reported in 'Other
assets'. The asset acquired is recorded at the lower of its fair value less
costs to sell and the carrying amount of the loan, net of impairment allowance
amounts, at the date of exchange. No depreciation is provided in respect of
assets held for sale. Any subsequent write-down of the acquired asset to fair
value less costs to sell is recorded as an impairment loss and included within
'Other operating income' in the income statement. Any subsequent increase in the
fair value less costs to sell, to the extent this does not exceed the cumulative
impairment loss, is recognised as a gain in 'Other operating income' in the
income statement. Debt securities or equities acquired in debt-to-debt/equity
swaps are included in 'Financial investments' and are classified as
available-for-sale.
(vi) Renegotiated loans
Loans that have been individually identified as impaired and whose terms have
been subsequently renegotiated and which have been performing satisfactorily for
a certain period are no longer treated as impaired.
From 1 January 2004 to 31 December 2004
Loans were designated as non-performing as soon as management had doubts as to
the ultimate collectibility of principal or interest or when contractual
payments of principal or interest were 90 days overdue. When a loan was
designated as non-performing, interest was suspended (see below) and a specific
provision raised if required.
However, the suspension of interest could be exceptionally deferred for up
to 12 months in the following situations:
- where cash collateral was held covering the total of principal and interest
due and a legal right of set-off existed; or
- where the value of net realisable tangible security was
considered more than sufficient to cover the full repayment of all
principal and interest due and credit approval had been given to the
rolling-up or capitalisation of interest payments.
There were two basic types of provision, specific and general, each of which was
considered in terms of the charge and the amount outstanding.
Specific provisions
Specific provisions represented the quantification of actual and expected losses
from identified accounts and were deducted from loans and advances in the
balance sheet.
Other than where provisions on smaller balance homogenous loans were assessed on
a portfolio basis, the amount of specific provision raised was assessed on a
case by case basis. The amount of specific provision raised was the group's
conservative estimate of the amount needed to reduce the carrying value of the
asset to the expected ultimate net realisable value, and in reaching a decision
consideration was given, among other things, to the following factors:
- the financial standing of the customer, including a realistic assessment of
the likelihood of repayment of the loan within an acceptable period and the
extent of the group's other commitments to the same customer;
- the realisable value of any security for the loan;
- the costs associated with obtaining repayment and realisation of
the security;
- if loans were not in the local currency, the ability of the
borrower to obtain the relevant foreign currency; and
- the expected timeframe over which repayment would be made.
Where specific provisions were raised on a portfolio basis, the level of
provisioning took into account management's assessment of the portfolio's
structure, past and expected credit losses, business and economic conditions,
and any other relevant factors. The principal portfolios evaluated on this basis
were credit cards and other consumer lending products.
General provisions
General provisions augmented specific provisions and provided cover for loans
which were impaired at the balance sheet date but which would not be identified
as such until some time in the future. The group maintained a general provision
which was determined by taking into account the structure and risk
characteristics of the loan portfolio. Historical levels of latent risk were
regularly reviewed to determine that the level of general provisioning continued
to be appropriate. Where entities of the group operated in a significantly
higher risk environment, an increased level of general provisioning was applied
taking into account local market conditions and economic and political factors.
General provisions were deducted from loans and advances to customers in the
balance sheet.
Loans on which interest was being suspended
Provided that there was a realistic prospect of interest being paid at some
future date, interest on non-performing loans was charged to the customer's
account. However, the interest was not credited to the income statement but to
an interest suspense account in the balance sheet which was netted against the
relevant loan. On receipt of cash (other than from the realisation of security),
suspended interest was recovered and taken to the income statement. Amounts
received from the realisation of security were applied to the repayment of
outstanding indebtedness, with any surplus used to release any specific
provisions and then suspended interest.
Non-accrual loans
Where the probability of receiving interest payments was remote, interest was no
longer accrued and any suspended interest balance was written off.
Loans were not reclassified as accruing until interest and principal payments
were up-to-date and future payments were reasonably assured.
Loans and suspended interest were written off, either partially or in full, when
there was no prospect of recovery of these amounts.
Assets acquired in exchange for advances in order to achieve an orderly
realisation continued to be reported as advances. The asset acquired was
recorded at the carrying value of the advance disposed of at the date of the
exchange, and provisions were based on any subsequent deterioration in its
value.
e Trading assets and trading liabilities
From 1 January 2005
Treasury bills, debt securities, structured deposits, equity shares, own debt
issued and short positions in securities which have been acquired or incurred
principally for the purpose of selling or repurchasing in the near term, or
are part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of
short-term profit-taking, are classified as held-for-trading. Such financial
assets or financial liabilities are recognised initially at fair value, with
transaction costs taken to the income statement, and are subsequently
remeasured at fair value. All subsequent gains and losses from changes in the
fair value of these assets and liabilities, together with related interest
income and expense and dividends, are recognised in the income statement
within 'Net trading income' as they arise. Financial assets and financial
liabilities are recognised using trade date accounting.
From 1 January 2004 to 31 December 2004
Treasury bills, debt securities, equity shares and short positions in securities
held for dealing purposes were included in 'Cash and short-term funds', 'Trading
assets' or 'Trading liabilities' in the balance sheet at market value. Changes
in the clean market value of such assets and liabilities were recognised in the
income statement as 'Net trading income' as they arose. Related interest income
and expense and dividends were recognised in 'Net interest income' and 'Dividend
income' respectively.
f Financial instruments designated at fair value
From 1 January 2005
A financial instrument, other than one held for trading, is classified in this
category if it meets the criteria set out below, and is so designated by
management.
Financial assets and financial liabilities so designated are recognised
initially at fair value, with transaction costs taken directly to the income
statement, and are subsequently remeasured at fair value. This designation, once
made, is irrevocable in respect of the financial instruments to which it is
made. Financial assets and financial liabilities are recognised using trade date
accounting.
Gains and losses from changes in the fair value of such assets and liabilities
are recognised in the income statement as they arise, together with related
interest income and expense and dividends, within 'Net income from financial
instruments designated at fair value'.
Gains and losses arising from the changes in fair value of derivatives that are
managed in conjunction with financial assets or financial liabilities designated
at fair value are included in 'Net income from financial instruments designated
at fair value'.
Where issued debt has been designated at fair value, and there is a related
derivative, then the interest components of the debt and the derivative are
recognised in 'Interest expense'.
The group may designate financial instruments at fair value where the
designation:
- eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring financial assets or
financial liabilities or recognising the gains and losses on them on different
bases; examples include unit-linked investment contracts, financial assets
held to back certain insurance contracts, and certain portfolios of securities
and debt issuances that are managed in conjunction with financial assets or
liabilities measured on a fair value basis; or
- applies to a group of financial assets, financial liabilities, or both, that
is managed and its performance evaluated on a fair value basis, in accordance
with a documented risk management or investment strategy, and where
information about that group of financial instruments is provided internally
on that basis to key management personnel; examples include financial assets
held to back certain insurance contracts and certain asset-backed securities;
or
- relates to financial instruments containing one or more embedded
derivatives that significantly modify the cash flows resulting from those
financial instruments, and which would otherwise be accounted for separately;
examples include certain debt issuances and debt securities held.
From 1 January 2004 to 31 December 2004
The category, 'Financial instruments designated at fair value' was introduced on
1 January 2005 in accordance with HKAS 39.
g Financial investments
From 1 January 2005
Available-for-sale securities
Treasury bills, debt securities and equity shares intended to be held on a
continuing basis are classified as available-for-sale securities unless they
have been designated at fair value (see Note (f) above) or they are classified
as held-to-maturity (see below). Available-for-sale securities are initially
measured at fair value (which is usually the same as the consideration paid)
plus direct and incremental transaction costs. They are subsequently remeasured
at fair value.
Changes in fair value are recognised in equity until the securities are either
sold or impaired. On the sale of available-for-sale securities, cumulative gains
or losses previously recognised in equity are recognised through the income
statement and classified as 'Gains less losses from financial investments'.
An assessment is made at each balance sheet date as to whether there is any
objective evidence of impairment, i.e. circumstances where an adverse impact on
estimated future cash flows of the financial asset or group of assets can be
reliably estimated.
If an available-for-sale security is determined to be impaired, the cumulative
loss (measured as the difference between the acquisition cost and the current
fair value, less any impairment loss on that financial asset previously
recognised in the income statement) is removed from equity and recognised in the
income statement. If, in a subsequent period, the fair value of a debt
instrument classified as available-for-sale increases and the increase can be
objectively related to an event occurring after the impairment loss was
recognised in the income statement, the impairment loss is reversed through the
income statement. Impairment losses on equity instruments previously recognised
in the income statement that are no longer required are reversed through
reserves, not through the income statement.
Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or
determinable payments and fixed maturities that the group has the positive
intention and ability to hold until maturity. Held-to-maturity investments are
initially recorded at fair value plus any directly attributable transaction
costs, and are subsequently measured at amortised cost using the effective
interest rate method, less any impairment losses.
On 1 January 2005, the group has re-designated certain debt securities
previously described as 'Long-term held-to-maturity investments' as
'available-for-sale securities' following the implementation of HKAS 39.
Financial investments are recognised using trade date accounting.
From 1 January 2004 to 31 December 2004
Treasury bills, debt securities and equity shares were accounted for in
accordance with HK SSAP 24.
Treasury bills and debt securities intended to be held on a continuing basis
were classified as 'Financial investments' and included in the balance sheet at
cost, adjusted for amortisation of premium and discount on acquisition less
provision for permanent diminution in value. Any gain or loss on realisation of
these securities was recognised in the income statement as it arose and included
in 'Gains less losses from financial investments'.
Equity shares intended to be held on a continuing basis were classified as
'Financial investments' and included in the balance sheet at fair value. Gains
and losses arising from changes in fair value were accounted for as movements in
the 'Long-term equity investment revaluation reserve'. When an investment was
disposed of, the cumulative profit or loss, including any amounts previously
recognised in the long-term equity investment revaluation reserve, was included
in the income statement for the year in 'Gains less losses from financial
investments'.
h Determination of fair value
For trading instruments, available-for-sale securities and financial instruments
designated at fair value that are quoted in active markets, fair values are
determined by reference to the current quoted bid/offer price. Where independent
prices are not available, fair values may be determined using valuation
techniques with reference to observable market data. These include comparison to
similar instruments where market observable prices exist, discounted cash flow
analysis, option pricing models and other valuation techniques commonly used by
market participants.
The use of a valuation technique takes account of a number of factors as
appropriate. These factors include adjustments for bid-offer spread, credit
factors, and servicing costs of portfolios.
i Sale and repurchase agreements (including stock lending and borrowing)
Where securities are sold subject to a commitment to repurchase them at a
predetermined price ('repos') they remain on the balance sheet and a liability
is recorded in respect of the consideration received. Conversely, securities
purchased under commitments to sell ('reverse repos') are not recognised on the
balance sheet and the consideration paid is recorded in 'Cash and short term
funds', 'Placings with banks maturing after one month', or 'Advances to
customers' as appropriate.
The difference between the sale and repurchase price is treated as interest and
recognised over the life of the agreement.
Securities lending and borrowing transactions are generally entered into on a
collateralised basis, with securities or cash advanced or received as
collateral. The transfer of the securities to counterparties is not normally
reflected on the balance sheet. If cash collateral is advanced or received, an
asset or liability is recorded at the amount of cash collateral advanced or
received.
Securities borrowed are not recognised on the balance sheet, unless they are
sold to third parties, in which case the obligation to return the securities is
recorded as a trading liability and measured at fair value and any gains or
losses are included in 'Net trading income'.
j Derivative financial instruments and hedge accounting
From 1 January 2005
Derivatives are initially recognised at fair value from the date a derivative
contract is entered into and are subsequently re-measured at their fair value at
each reporting date.
Fair values are obtained from quoted market prices in active markets, or by
using valuation techniques, including recent market transactions, where an
active market does not exist. Valuation techniques include discounted cash flow
models and option pricing models as appropriate. All derivatives are classified
as assets when their fair value is positive, or as liabilities when their fair
value is negative.
In the normal course of business, the fair value of a derivative on initial
recognition is considered to be the transaction price (i.e. the fair value of
the consideration given or received). However, in certain circumstances the fair
value of an instrument will be evidenced by comparison with other observable
current market transactions in the same instrument (i.e. without modification or
repackaging) or based on a valuation technique whose variables include only data
from observable markets, including interest rate yield curves, option
volatilities and currency rates. When such evidence exists and results in a
value which is different from the transaction price, the group recognises a
trading profit or loss on inception of the derivative. If observable market data
are not available, the initial change in fair value indicated by the valuation
model, but based on unobservable inputs, is not recognised immediately in the
income statement but is recognised over the life of the transaction on an
appropriate basis, or recognised in the income statement when the inputs become
observable, or when the transaction matures or is closed out.
Certain derivatives embedded in other financial instruments, such as the
conversion option in a convertible bond, are treated as separate derivatives
when their economic characteristics and risks are not clearly and closely
related to those of the host contract, the terms of the embedded derivative are
the same as those of a stand-alone derivative, and the combined contract is not
designated at fair value through profit and loss. These embedded derivatives are
measured at fair value with changes in fair value recognised in the income
statement.
Derivative assets and liabilities on different transactions are only netted if
the transactions are with the same counterparty, a legal right of set-off
exists, and the cash flows are intended to be settled on a net basis.
The method of recognising the resulting fair value gains or losses depends on
whether the derivative is held for trading, or is designated as a hedging
instrument, and if so, the nature of the risk being hedged. All gains and losses
from changes in the fair value of derivatives held for trading are recognised in
the income statement. Where derivatives are designated and highly effective as
hedges, the group classifies them as either: (i) hedges of the change in fair
value of recognised assets or liabilities or firm commitments ('fair value
hedge'); (ii) hedges of the variability in highly probable future cash flows
attributable to a recognised asset or liability, or a forecast transaction
('cash flow hedge'); or (iii) hedges of net investments in a foreign operation
('net investment hedge'). Hedge accounting is applied to derivatives designated
as hedging instruments in a fair value, cashflow or net investment hedge
provided certain criteria are met.
Hedge accounting
It is the group's policy to document, at the inception of a hedging
relationship, the relationship between the hedging instruments and hedged items,
as well as its risk management objective and strategy for undertaking the hedge.
Such policies also require documentation of the assessment, both at hedge
inception and on an ongoing basis, of whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items attributable to the hedged risks. Interest on
designated qualifying hedges is included in 'Net interest income'.
Fair value hedge
Changes in the fair value of derivatives (net of interest accrual) that are
designated and qualify as fair value hedging instruments are recorded as 'Net
trading income' in the income statement, together with changes in the fair value
of the asset or liability that are attributable to the hedged risk.
If the hedging relationship no longer meets the criteria for hedge accounting,
the cumulative adjustment to the carrying amount of a hedged item for which the
effective interest method is used is amortised to the income statement over the
residual period to maturity in net interest income. Where the adjustment relates
to the carrying amount of a hedged available-for-sale equity security, this
remains in equity until the disposal of the equity security.
Cash flow hedge
The effective portion of changes in the fair value of derivatives (net of
interest accrual) that are designated and qualify as cash flow hedges is
recognised in shareholders' equity. Any gain or loss relating to an ineffective
portion is recognised immediately in the income statement within 'Net trading
income' along with accrued interest.
Amounts accumulated in shareholders' equity are recycled to the income statement
in the periods in which the hedged item will affect profit or loss. However,
when the forecast transaction that is hedged results in the recognition of a
non-financial asset or a non-financial liability, the gains and losses
previously deferred in equity are transferred from shareholders' equity and
included in the initial measurement of the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets
the criteria for hedge accounting, any cumulative gain or loss existing in
shareholders' equity at that time remains in shareholders' equity until the
forecast transaction is ultimately recognised in the income statement. When a
forecast transaction is no longer expected to occur, the cumulative gain or loss
that was reported in shareholders' equity is immediately transferred to the
income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for similarly to
cash flow hedges. Any gain or loss on the hedging instrument relating to the
effective portion of the hedge is recognised in shareholders' equity; the gain
or loss relating to the ineffective portion is recognised immediately in the
income statement. Gains and losses accumulated in equity are included in the
income statement when the foreign operation is disposed of.
Hedge effectiveness testing
To qualify for hedge accounting, HKAS 39 requires that at the inception of the
hedge and throughout its life, each hedge must be expected to be highly
effective (prospective effectiveness). Actual effectiveness (retrospective
effectiveness) must also be demonstrated on an ongoing basis.
The documentation of each hedging relationship sets out how the effectiveness of
the hedge is assessed. The method adopted for assessing hedge effectiveness will
depend on the risk management strategy.
For fair value hedge relationships, the cumulative dollar offset method or
regression analysis are used to test hedge effectiveness. For cash flow hedge
relationships, effectiveness is tested by applying the change in variable cash
flow method or the cumulative dollar offset method using the hypothetical
derivative approach.
For prospective effectiveness, the hedging instrument must be expected to be
highly effective in achieving offsetting changes in fair value or cash flows
attributable to the hedged risk during the period for which the hedge is
designated.
For actual effectiveness, the changes in fair value or cash flows must offset
each other. The group considers that a hedge is highly effective when the offset
is within the range of 80 per cent to 125 per cent.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair value of any derivative instrument
that does not qualify for hedge accounting under HKAS 39 are recognised
immediately in the income statement and reported in 'Net trading income', except
where derivative contracts are used with financial instruments designated at
fair value, in which case gains and losses are reported in 'Net income from
financial instruments designated at fair value'.
From 1 January 2004 to 31 December 2004
Derivative financial instruments comprised futures, forward, swap and option
transactions undertaken by the group in the foreign exchange, interest rate,
equity, credit derivative, and commodity markets. Netting was applied where a
legal right of set-off existed.
Accounting for these instruments was dependent upon whether the transactions
were undertaken for trading or non-trading purposes.
Trading transactions
Trading transactions included transactions undertaken for market-making, to
service customers' needs and for proprietary purposes, as well as any related
hedges.
Transactions undertaken for trading purposes were marked-to-market and the net
present value of any gain or loss arising was recognised in the income statement
as 'Net trading income', after appropriate deferrals for unearned credit margins
and future servicing costs. Derivative trading transactions were valued by
reference to an independent liquid price where this was available. For those
transactions where there were no readily available quoted prices, which
predominantly related to over-the-counter transactions, market values were
determined by reference to independently sourced rates, using valuation models.
Adjustments were made for illiquid positions where appropriate.
Assets, including gains, resulting from derivative exchange rate, interest rate,
equity, credit derivative and commodity contracts which were marked-to-market
were included in 'Derivatives' on the assets side of the balance sheet.
Liabilities, including losses, resulting from such contracts, were included in
'Derivatives' on the liabilities side of the balance sheet.
Non-trading transactions
Non-trading transactions, which were those undertaken for hedging purposes as
part of the group's risk management strategy against cash flows, assets,
liabilities or positions, were measured on an accrual basis. Non-trading
transactions included qualifying hedges and positions that synthetically altered
the characteristics of specified financial instruments.
Non-trading transactions were accounted for on an equivalent basis to the
underlying assets, liabilities or net positions. Any gain or loss was recognised
on the same basis as that arising from the related assets, liabilities or
positions.
To qualify as a hedge, a derivative was required effectively to reduce the
price, foreign exchange or interest rate risk of the asset, liability or
anticipated transaction to which it was linked and designated as a hedge at
inception of the derivative contract. Accordingly, changes in the market value
of the derivative were required to be highly correlated with changes in the
market value of the underlying hedged item at inception of the hedge and over
the life of the hedge contract. If these criteria were met, the derivative was
accounted for on the same basis as the underlying hedged item. Derivatives used
for hedging purposes included swaps, forwards and futures. Interest rate swaps
were also used to alter synthetically the interest rate characteristics of
financial instruments. In order to qualify for synthetic alteration, a
derivative instrument had to be linked to specific individual, or pools of
similar, assets or liabilities by the notional principal and interest rate risks
of the associated instruments, and had to achieve a result that was consistent
with defined risk management objectives. If these criteria were met,
accrual-based accounting was applied, i.e. income or expense was recognised and
accrued to the next settlement date in accordance with the contractual terms of
the agreement.
Any gain or loss arising on the termination of a qualifying derivative was
deferred and amortised to earnings over the original life of the terminated
contract. Where the underlying asset, liability or position was sold or
terminated, the qualifying derivative was immediately marked-to-market and any
gain or loss arising was taken to the income statement.
k Derecognition of financial assets and liabilities
Financial assets are derecognised when the rights to receive cash flows from the
assets have expired; or where the group has transferred its contractual rights
to receive the cash flows of the financial assets and has transferred
substantially all the risks and rewards of ownership; or where both control and
substantially all the risks and rewards are not retained.
Financial liabilities are derecognised when they are extinguished, i.e. when the
obligation is discharged or cancelled or expires.
l Offsetting financial assets and financial liabilities
Financial assets and liabilities are offset and the net amount reported in the
balance sheet when there is a legally enforceable right to offset the recognised
amounts and the group intends to settle on a net basis, or realise the asset and
settle the liability simultaneously. In 2004, netting was applied where a legal
right of set-off existed.
m Subsidiaries and associates
Subsidiaries are companies in which the group, directly or indirectly, holds
more than half of the issued share capital or controls more than half of the
voting power or controls the composition of the board of directors. Subsidiaries
are controlled if the group has the power to govern their financial and
operating policies so as to obtain benefits from their activities. Subsidiaries
are consolidated in the group's financial statements from the date on which the
group obtains control until control ceases.
Balances and transactions between entities that comprise the group, together
with unrealised gains and losses thereon, are eliminated in the consolidated
financial statements. Minority interests represent the portion of the profit or
loss and net assets of subsidiaries attributable to equity interests in those
subsidiaries that are not held by the group.
Associates are entities over which the group has significant influence but not
control or joint control. Investments in associates in the consolidated balance
sheet are stated at the group's attributable share of the net assets of the
associates using the equity method of accounting.
'Share of profit in associates' is stated in the income statement net of tax.
n Goodwill and intangible assets
(i) Goodwill arises on business combinations, including the
acquisition of subsidiaries or associates, when the cost of acquisition
exceeds the fair value of the group's share of the identifiable assets,
liabilities and contingent liabilities acquired. Goodwill on acquisitions
of associates is included in 'Interests in associates'. Goodwill is tested
for impairment annually by comparing the present value of the expected
future cash flows from a business with the carrying value of its net
assets, including attributable goodwill. Goodwill is allocated to
cash-generating units for the purposes of impairment testing. Goodwill is
tested for impairment at the lowest level at which it is monitored for
internal management purposes. Goodwill is stated at cost less accumulated
impairment losses which are charged to the income statement.
Negative goodwill is recognised immediately in the income statement as it
arises.
At the date of disposal of a business, attributable goodwill is included in
the group's share of the net assets in the calculation of the gain or loss
on disposal.
(ii) Intangible assets include the value of in-force long-term assurance
business, computer software, trade names, customer relationships and core
deposit relationships. Intangible assets that have an indefinite useful
life, or are not yet ready for use, are tested for impairment annually.
Intangible assets that have a finite useful life, except for the value of
in-force long-term assurance business, are stated at cost less amortisation
and accumulated impairment losses and are amortised over their estimated
useful lives. Estimated useful life is the lower of legal duration and
expected economic life.
Intangible assets are subject to impairment review if there are events or
changes in circumstances that indicate that the carrying amount may not be
recoverable.
The accounting policy on the value of the in-force long-term assurance
business is set out in Note (v) below.
o Property, plant and equipment
(i) Premises
Premises held for own use, comprising freehold land and buildings, and
leasehold land and buildings where the value of the land cannot be reliably
separated from the value of the building at inception of the lease and the
premises are not clearly held under an operating lease, are stated at
valuation less accumulated depreciation and impairment losses.
Such premises are revalued by professionally qualified valuers with
sufficient regularity to ensure that the net carrying amount does not
differ materially from the fair value. Surpluses arising on revaluation
are credited firstly to the income statement to the extent of any deficits
arising on revaluation previously charged to the income statement in
respect of the same premises, and are thereafter taken to the
'Property revaluation reserve'. Deficits arising on revaluation are
firstly set off against any previous revaluation surpluses included in
the 'Property revaluation reserve' in respect of the same premises,
and are thereafter taken to the income statement.
Buildings held for own use which are situated on leasehold land where it is
possible to reliably separate the value of the building from the value of
the leasehold land at inception of the lease are stated at valuation less
accumulated depreciation and impairment losses.
Depreciation on premises is calculated to write off the assets over their
estimated useful lives as follows:
- freehold land is not depreciated;
- leasehold land is depreciated over the unexpired terms of the leases;
and
- buildings and improvements thereto are depreciated at the greater of
2 per cent per annum on the straight line basis or over the unexpired
terms of the leases or over the remaining useful lives of the buildings.
(iii)Other plant and equipment
Equipment, fixtures and fittings (including equipment on operating
leases where the group is the lessor) are stated at cost less any
impairment losses. Depreciation is calculated on a straight-line basis
to write off the assets over their useful lives, which are generally
between five and 20 years.
(iv) Investment properties
The group holds certain properties as investments to earn rentals, or for
capital appreciation, or both. Investment properties are stated at fair
value with changes in fair value being recognised in the income statement
(in 'Other operating income') with effect from 1 January 2005. Previously,
the change in the fair value of investment properties was recognised in
the property revaluation reserve. The comparative income statement
for 2004 has not been adjusted to reflect the revaluation of investment
properties, as permitted by HKAS 40. Fair values are determined by
independent professional valuers who apply recognised valuation techniques.
Property, plant and equipment is subject to review for impairment if there
are events or changes in circumstances that indicate that the carrying
amount may not be recoverable.
p Finance and operating leases
(i) Assets leased to customers under agreements which transfer
substantially all the risks and rewards associated with ownership, other
than legal title, are classified as finance leases. Where the group is
a lessor under finance leases the amounts due under the leases, after
deduction of unearned charges, are included in 'Advances to customers'
as appropriate. Finance income receivable is recognised over the periods
of the leases so as to give a constant rate of return on the net
investment in the leases.
(ii) Where the group is a lessee under finance leases the leased assets
are capitalised and included in 'Property, plant and equipment' and the
corresponding liability to the lessor is included in 'Other liabilities'.
The finance lease and corresponding liability are recognised initially at
the fair value of the asset or, if lower, the present value of the
minimum lease payments. Finance charges payable are recognised over
the periods of the leases based on the interest rates implicit in the
leases so as to give a constant rate of interest on the remaining
balance of the liability.
(iii)All other leases are classified as operating leases. Where the group
is the lessor, the assets subject to the operating leases are included in
'Property, plant and equipment' and accounted for accordingly. Impairment
losses are recognised to the extent that the carrying value of equipment
is impaired through residual values not being fully recoverable. Where
the group is the lessee, the leased assets are not recognised on the
balance sheet. Rentals payable and receivable under operating leases are
accounted for on a straight-line basis over the periods of the leases
and are included in 'General and administrative expenses' and 'Other
operating income' respectively.
(iv) There are no freehold interests in land in Hong Kong. Accordingly all
such land is considered to be held under operating leases. Unless it
qualifies for inclusion in 'Property, plant and equipment'
(as described in Note (o) above), such land is included under
'Other assets' in the balance sheet and is stated at cost less
amortisation and impairment losses. Amortisation is calculated to write
off the cost of the land on a straight-line basis over the terms of the
leases, which are generally between 20 and 999 years.
q Income tax
(i) Income tax for the year comprises current and deferred tax. Income
tax is recognised in the income statement except to the extent that it
relates to items recognised directly in reserves, in which case it is
recognised in reserves.
(ii) Current tax is the expected tax payable on the taxable income for
the year, calculated using tax rates enacted or substantively enacted at
the balance sheet date, and any adjustment to tax payable in respect of
previous years. Current tax assets and liabilities are offset when the
group intends to settle on a net basis and the legal right to set-off
exists.
(iii)Deferred tax is recognised on temporary differences between the carrying
amount of assets and liabilities in the balance sheet and the amount
attributed to such assets and liabilities for tax purposes. Deferred tax
liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent it is probable that
future taxable profits will be available against which deductible
temporary differences can be utilised.
Deferred tax is calculated using the tax rates that have been enacted or
substantively enacted at the balance sheet date and are expected to apply
in the periods in which the assets will be realised or the liabilities
settled. Deferred tax assets and liabilities are offset when they arise
in the same tax reporting group, relate to income taxes levied by the
same taxation authority, and a legal right to set-off exists in the entity.
Deferred tax relating to actuarial gains and losses arising from
post-employment benefit plans which are recognised directly in equity,
is also credited or charged directly to equity.
From 1 January 2005, deferred tax relating to fair value re-measurement of
available-for-sale investments and cash flow hedges, which are charged or
credited directly to equity, is also credited or charged directly to equity
and is subsequently recognised in the income statement when the deferred
fair value gain or loss is recognised in the income statement.
r Pension and other post-retirement benefits
The group operates a number of pension plans which include both defined benefit
and defined contribution plans.
Payments to defined contribution plans and state-managed retirement benefit
plans, where the group's obligations under the plans are equivalent to a defined
contribution plan, are charged as an expense as they fall due.
The costs recognised for funding defined benefit plans are determined using the
projected unit credit method, with annual actuarial valuations performed on each
plan. Actuarial differences that arise are recognised in shareholders' equity
and presented in the statement of changes in equity in the period they arise.
Past service costs are recognised immediately to the extent the benefits are
vested, and are otherwise recognised on a straight-line basis over the average
period until the benefits are vested. The current service costs and any past
service costs together with the expected return on plan assets less the
unwinding of the discount on the plan liabilities are charged to operating
expenses.
The net defined benefit asset recognised in the balance sheet represents the
excess of the fair value of plan assets over the present value of the defined
benefit obligations adjusted for unrecognised past service costs. The asset is
limited to unrecognised past service costs plus the present value of available
refunds and reductions in future contributions to the plan.
The group implemented HK SSAP 34 (which is materially equivalent to HKAS 19) in
relation to the accounting for pensions in 2003, and adopted the corridor
approach for the recognition of actuarial gains and losses. The group has
changed its policy in 2005 to recognise in full actuarial gains and losses in
the statement of changes in equity.
s Share based payments
The group grants shares of HSBC Holdings plc to certain employees under various
vesting conditions and the group has the obligation to acquire HSBC Holdings plc
shares to deliver to the employees upon vesting. The group's liability under
such arrangements is measured at fair value at each reporting date. The changes
in fair value are recognised as an expense in each period. The main kinds of
awards in this category are as follows:
- shares awarded to an employee to join HSBC that are made available
immediately, with no vesting period attached to the award, are expensed
immediately;
- when an inducement in the form of shares is awarded to an employee
on commencement of employment with HSBC, and the employee must complete a
specified period of service before the inducement vests, the expense is
spread over the period to vesting;
- discretionary bonuses awarded in respect of service in the past,
are expensed over the vesting period which, in this case, is the period
from the date the bonus is announced until the award vests.
For share options granted to employees of the group directly by HSBC Holdings
plc, the compensation expense to be spread over the vesting period is determined
by reference to the fair value of the options on grant date, and the impact of
any non-market vesting conditions such as option lapses. The expense is
recognised over the vesting period. The corresponding amount is credited to
'Other reserves'.
t Foreign currencies
(i) Items included in each of the group's entities are measured using
the currency of the primary economic environment in which the entity
operates ('the functional currency'). The group's financial statements
are presented in Hong Kong dollars.
Transactions in foreign currencies are recorded in the functional currency
at the rate of exchange prevailing on the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are
translated into the functional currency at the rate of exchange ruling
at the balance sheet date. Any resulting exchange differences are included
in the income statement. Non-monetary assets and liabilities that are
measured in terms of historical cost in a foreign currency are translated
into the functional currency using the rate of exchange at the date of the
initial transaction. Non-monetary assets and liabilities measured at fair
value in a foreign currency are translated into the functional currency
using the rate of exchange at the date the fair value was determined.
(ii) The results of branches, subsidiaries and associates not reporting
in Hong Kong dollars are translated into Hong Kong dollars at the average
rates of exchange for the reporting period. Exchange differences arising
from the retranslation of opening foreign currency net investments and
exchange differences arising from retranslation of the result for the
reporting period from the average rate to the exchange rate prevailing
at the period-end are accounted for in a separate foreign exchange reserve.
Exchange differences on a monetary item that is part of a net investment
in a foreign operation are recognised in the income statement of the
separate subsidiary financial statements. In the consolidated financial
statements these exchange differences are recognised in the foreign
exchange reserve in shareholders' equity. On disposal of a foreign
operation, exchange differences relating thereto and previously recognised
in reserves are recognised in the income statement.
u Provisions
Provisions for liabilities and charges are recognised when it is probable
that an outflow of economic benefits will be required to settle a present
legal or constructive obligation arising from past events and a reliable
estimate can be made of the amount of the obligation.
v Insurance contracts
From 1 January 2005
Through its insurance subsidiaries, the group issues contracts to customers that
contain insurance risk, financial risk, or a combination thereof. A contract
under which the group accepts significant insurance risk from another party, by
agreeing to compensate that party on the occurrence of a specified uncertain
future event, is classified as an insurance contract. An insurance contract may
also transfer financial risk, but is accounted for as an insurance contract if
the insurance risk is significant.
Insurance contracts are accounted for as follows:
Premiums
Gross insurance premiums for general insurance business are reported as income
over the term of the insurance contract attributable to the risks borne during
the accounting period. The unearned premium or the proportion of the business
underwritten in the accounting year relating to the period of risk after the
balance sheet date is calculated on a daily or monthly pro-rata basis.
Premiums for life assurance are accounted for when receivable, except in
unit-linked business where premiums are accounted for when liabilities are
established.
Reinsurance premiums are accounted for in the same accounting period as the
premiums for the direct insurance to which they relate.
Claims and reinsurance recoveries
Gross insurance claims for general insurance business include paid claims and
movements in outstanding claims reserves. The outstanding claims reserves are
based on the estimated ultimate cost of all claims that have occurred but not
settled at the balance sheet date, whether reported or not, together with
related claim handling costs and a reduction for the expected value of salvage
and other recoveries. Reserves for claims incurred but not reported ('IBNR')
are made on an estimated basis, using appropriate statistical techniques.
Gross insurance claims for life assurance reflect the total cost of claims
arising during the year, including claim handling costs and any policyholder
bonuses allocated in anticipation of a bonus declaration. The technical reserves
for non-linked liabilities (long-term business provision) are calculated by each
life assurance operation based on local actuarial principles. The technical
reserves for linked liabilities are at least the element of any surrender or
transfer value which is calculated by reference to the relevant fund or funds or
index. Some insurance contracts may contain discretionary participation features
whereby the policyholder is entitled to additional payments whose amount and/or
timing is at the discretion of the issuer. The discretionary element of these
contracts is included in 'Liabilities under insurance contracts issued'.
Reinsurance recoveries are accounted for in the same period as the related
claim.
Value of long-term assurance business
A value is placed on insurance contracts that are classified as long-term
assurance business, and are in force at the balance sheet date.
The value of in-force long-term assurance business is determined by discounting
future earnings expected to emerge from business currently in force, using
appropriate assumptions in assessing factors such as recent experience and
general economic conditions. Movements in the value of in-force long-term
assurance business are included in 'Other operating income' on a gross of tax
basis.
w Investment contracts
Customer liabilities under unit-linked investment contracts and the linked
financial assets are designated at fair value, and the movements in fair value
are recognised in the income statement in 'Net income from financial instruments
designated at fair value'.
Premiums receivable and amounts withdrawn are accounted for as increases or
decreases in the liability recorded in respect of investment contracts.
Investment management fees receivable are recognised in the income statement
over the period of the provision of the investment management services.
The incremental costs directly related to the acquisition of new investment
contracts or renewal of existing investment contracts are capitalised and
amortised over the period of the provision of the investment management
services.
x Dividends
Dividends proposed or declared after the balance sheet date are disclosed as a
separate component of shareholders' equity.
y Debt securities in issue and subordinated liabilities
From 1 January 2005
Debt securities issued for trading purposes or designated at fair value are
reported under the appropriate balance sheet captions. Other debt securities in
issue and subordinated liabilities are measured at amortised cost using the
effective interest rate method and are reported under 'Debt securities in issue'
or 'Subordinated liabilities'.
From 1 January 2004 to 31 December 2004
Debt securities in issue were measured at cost adjusted for amortised premiums
and discounts, and were reported under 'Debt securities in issue' or
'Subordinated liabilities'.
z Cash and cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents include
highly liquid investments that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of change in value. Such
investments comprise cash and balances with banks maturing within one month, and
treasury bills and certificates of deposit with less than three months' maturity
from the date of acquisition.
aa Share capital
From 1 January 2005
Shares are classified as equity when the group has the unconditional right to
avoid transferring cash or other financial assets.
From 1 January 2004 to 31 December 2004
Share capital included preference shares issued by the group. These have been
reclassified as liabilities upon the adoption of HKAS 32.
2. Effect of changes in accounting policies
A description of the significant changes from accounting policies previously
applied by the group together with estimates, to the extent practicable, of the
amounts involved are set out below.
Changes in accounting policies have generally been applied retrospectively,
except as noted below. Retrospective application of a new accounting policy
involves restating the comparative figures and restating the opening balance
sheet as at 1 January 2004 as if the new policy had always been applied.
Some standards specify transitional provisions governing the initial application
of the standard. In some cases transitional provisions restrict the extent to
which a change in accounting policy may be applied retrospectively. The most
significant exception to retrospective application is HKAS 39.
a HKAS 32 - Financial instruments: disclosure and presentation
Application of HKAS 32 has resulted in the reclassification of preference
shares issued by the group from share capital to liabilities. This has
had the effect of increasing liabilities and reducing equity at
31 December 2005 by HK$71,980 million (2004: HK$55,602 million).
In addition, dividends payable on those preference shares have been
reclassified as interest expense whereas they were previously dealt with
as an appropriation of retained earnings. This has reduced net interest
income and operating profit in 2005 by approximately HK$3,010 million
(2004: HK$1,540 million).
HKAS 32 also requires that financial assets and liabilities may only be
offset in the circumstances described in section 1 - Accounting policies
Note (l). This resulted in a grossing up of assets and liabilities by
approximately HK$57,718 million at 31 December 2005
(2004: HK$52,157 million). This adjustment had no effect on reported
profit or equity.
b HKAS 39 - Financial instruments: recognition and measurement
HKAS 39 sets requirements for the classification, recognition, measurement
and derecognition of financial instruments as well as hedge accounting.
These requirements affect the measurement and timing of income and
expense associated with many of the activities of the group as well as
the carrying values of financial assets and liabilities in the balance
sheet.
The new accounting policies resulting from the application of HKAS 39 are
set out in section 1 above. Where the accounting policies have changed
as a result of the application of HKAS 39, the previous policies have
also been disclosed.
The transitional provisions of HKAS 39 prohibit full retrospective
application of the standard and instead require the adjustments to the
carrying values of all financial instruments on initial application of
the standard to be made in the opening balance sheet at 1 January 2005.
This means that the recognition and measurement of certain financial
instruments, together with associated income and expense, for 2005 is
not necessarily consistent with the amounts reported for 2004.
The more significant changes in the 2005 financial statements resulting
from HKAS 39 include (but are not limited to) the following:
- Effective interest rate method (section 1 - Accounting policies Notes
(a)&(b))
HKAS 39 requires the use of the effective interest rate method for
calculating interest income and the amount of amortisation of premiums,
discounts and transaction costs associated with debt instruments.
This affects the timing of recognition of certain types of fee income
and expense as well as their reclassification to 'Net interest income'.
- Derivatives and hedging (section 1 - Accounting policies Note (j))
HKAS 39 requires all derivatives to be recognised on the balance sheet
at fair (market) value regardless of the purpose for which they are
held. In addition, the rules for applying hedge accounting under
HKAS 39 are more restrictive than the policies previously applied by
the group. This results in fewer transactions qualifying for hedge
accounting in 2005 compared to previously, while the gains and losses
on the derivatives are now generally recognised in 'Net trading income'.
- Acceptances and endorsements
HKAS 39 requires that assets and liabilities associated with acceptances
and endorsements related to trade finance should be recognised on the
balance sheet. This results in an increase in both 'Other assets' and
'Other liabilities' of HK$22,744 million. Under the previous accounting
policy, these items had been disclosed as off-balance sheet contingent
liabilities and commitments. This change has no effect on profit for
the year.
- Fair value measurement
HKAS 39 generally requires treasury bills and debt securities intended
to be held on a continuing basis to be carried at fair value in the
balance sheet. Unless the securities are designated under the
'fair value option' (see below), then the changes in fair value are
recognised in equity until the securities are sold. These securities
were previously carried at cost.
In addition, the group has early-adopted the 'Amendment to
HKAS 39 - The fair value option' in 2005. This allows financial
assets and liabilities, under certain restricted circumstances, to be
designated at fair value with changes in fair value being recognised
in the income statement as they arise. This is described in
section 1 - Accounting policies Note (f). There was no such category
in 2004.
Upon initial application of HKAS 39 in 2005, the following financial
assets and liabilities were designated at fair value under
the 'fair value option':
Fair value at 01Jan05 HK$m
Assets
Customer advances 3,807
Treasury bills 1,318
Debt securities 15,976
Equity shares 14,971
36,072
Liabilities
Customer deposits 1,252
Deposits by banks 1
1,253
Effect of HKAS 39 on the income statement
To the extent practicable, management has estimated the effect of
applying HKAS 39 on the group's income statement in 2005 as follows:
Estimated effect of applying HKAS 39: HK$m
Increase in net interest income 1,076
Decrease in net fee income (298)
Decrease in net trading income (957)
Net income from financial instruments
designated at fair value 372
Increase in gains less losses from
financial investments 139
Decrease in dividend income (105)
Increase in impairment charges and
other credit risk provisions (53)
Increase in net operating income 174
Decrease in operating expenses 193
Increase in profit before tax 367
c HKFRS 4 - Insurance contracts
HKFRS 4 introduced a formal definition of the term 'Insurance contract'.
Application of this standard has materially affected the financial
statements in the manner set out below.
- Certain contracts issued by the group which have the legal form of
insurance contracts do not meet the definition of insurance contracts
in HKFRS 4. The assets, liabilities, income and expense associated with
such contracts are dealt with as investment contracts and from
1 January 2005, are accounted for under HKAS 39.
- Reclassification of items relating to the insurance business
- Financial assets held by insurance subsidiaries were previously
reported as 'Other assets'. These financial assets have been
disaggregated and classified into their respective categories.
Measurement of such assets is also in accordance with HKAS 39 with
effect from 1 January 2005.
- The income statement captions 'Net earned insurance premiums' and 'Net
insurance claims incurred and movement in policyholders' liabilities'
now include only the amounts relating to insurance contracts as
defined under HKFRS 4. Income and expense relating to contracts which
are, in substance, investment contracts are included in other income
statement captions according to their nature. Income from related
assets is included in 'Net interest income' and 'Net income from
financial instruments designated at fair value'. The related assets are
included in the balance sheet under 'Financial assets designated at
fair value' and 'Financial investments'. The liabilities related to
these contracts are included in 'Financial liabilities designated at
fair value'.
- Previously all income and expense related to the insurance business
was included in 'Other operating income'. The comparative figures
disclosed in the financial statements have been reclassified to show
net earned insurance premiums and net insurance claims incurred.
However, in accordance with the transitional provisions of HKAS 39, the
comparative figures have not been remeasured. These reclassifications
have no impact on operating profit.
d HKFRS 2 - Share-based payment
HKFRS 2 requires an expense to be recognised by the group where employees
are awarded options over shares in HSBC Holdings plc and where the group
awards shares to employees in compensation for services rendered to the
group. The group recognises an expense in all cases where equity
instruments of HSBC Holdings plc are granted to employees for services
rendered to the group, regardless of whether the equity instruments are
granted directly by HSBC Holdings plc or by the group. The expense is
recognised over the vesting period relevant to each type
of award. Details of the new accounting policy are set out in
section 1 - Accounting policies Note (s).
Prior to the adoption of HKFRS 2, share options that were awarded by HSBC
Holdings plc directly to employees of the group were not recognised in the
group's financial statements. When the group awarded its employees shares
of HSBC Holdings plc the amount payable by the group to acquire the
shares was recorded as an expense.
In accordance with the transitional rules of HKFRS 2, the group has
applied the new accounting policy retrospectively to all share-based
payment transactions where the grant date was after 7 November 2002
and which had not vested by 31 December 2004.
The change in accounting policy has resulted in share-based payment
expenses being recognised in 2005 of HK$876 million (2004: HK$466 million).
At 31 December 2005 the reserve arising from the grant of share options
to the group's employees was HK$629 million (2004: HK$322 million) and the
liability recognised for share awards made by the group was HK$576
million (2004: HK$211 million).
e HKAS 17 - Leases
HKAS 17 requires leasehold land to be classified as held under operating
leases. With some exceptions, as described in section 1 - Accounting
policies Note (o), this has resulted in the remeasurement of certain
interests in land (principally held in Hong Kong) from a fair value
basis to a historical cost basis. Such interests in land have been removed
from 'Property, plant & equipment' and reclassified as 'Other assets'. This
has resulted in a decrease in assets and a decrease in previously reported
revaluation reserves.
If the previous accounting policy had been applied in 2005, total assets
and equity would have been increased by approximately HK$15,061 million
and HK$12,425 million respectively at 31 December 2005 (2004: HK$10,746
million and HK$9,352 million respectively). The deferred tax liability
would have been increased by HK$2,636 million (2004: HK$1,394 million).
In addition, operating profit in 2005 would have been reduced by the
additional depreciation charge attributable to the revaluation of
approximately HK$420 million (2004: HK$245 million).
In the group's interim news release for the six months ended 30 June 2005,
leases of land exceeding 500 years to expiry at inception were recognised
as finance leases and were included in the balance sheet
as 'Property, plant & equipment' at fair value less accumulated
depreciation. Following the publication of a summary of a meeting of
the International Financial Reporting Interpretations Committee in
December 2005, at which a related issue had been discussed, the group
considered it would be appropriate to classify all leases of land as
operating leases, regardless of the length of the lease, unless the
specific conditions described in section 1 - Accounting policies
Note (o) are met.
f HKAS 40 - Investment properties (section 1 - Accounting
policies Note (o)(iii))
HKAS 40 requires unrealised revaluation gains and losses on investment
properties to be recognised directly in the income statement as they arise.
Prior to the implementation of this standard, revaluation gains on
investment properties were recognised in equity until the investment
properties were sold, at which point the cumulative revaluation gains or
losses would be included in the calculation of the gain or loss on
disposal. The new policy increases operating profit for 2005
by HK$1,167 million.
In accordance with the transitional provisions of HKAS 40, the 2004
income statement has not been restated to conform to the new
accounting policy.
g HKFRS 3 - Business combinations
HKFRS 3 has been applied with effect from 1 January 2004, in accordance
with the transitional provisions of the standard. The principal effect
of this is that previously recognised goodwill has been frozen at
its carrying value (cost less accumulated amortisation and impairment)
as at 1 January 2004. Thereafter, goodwill is not amortised, but is
tested annually for impairment. Prior to this change of accounting
policy, goodwill was amortised over its estimated useful life.
HKFRS 3 also requires intangible assets to be recognised upon acquisition
of a subsidiary or an associate. As a result of this, intangible assets
have been reclassified from goodwill.
No impairment losses have been recognised as a result of applying the
new policy for 2004 and 2005. The comparative figures for 2004 have
been restated to comply with the new policy.
The cessation of goodwill amortisation has resulted in an increase in
profit before tax for 2005 of HK$145 million (2004: HK$43 million).
The carrying amount of goodwill in the balance sheet has therefore
not been reduced by the same amount.
The net effect of ceasing the amortisation of goodwill and the additional
amortisation charged on intangible assets leads to a decrease in profit
before tax of HK$44 million in 2005. For 2004, the net effect was an
increase in profit before tax of HK$43 million.
h HKAS 38 - Intangible assets
The application of HKAS 38 has resulted in the recognition of internally
developed software as an asset in 2005 of approximately HK$628 million.
Under the group's previous accounting policy, software development costs
were recognised as expenses as they were incurred.
The effect of the new policy is to increase operating profit for 2005 by
approximately HK$590 million, representing the capitalised internally
developed software, less amortisation for the year.
3. Critical accounting estimates and judgements in applying accounting policies
The preparation of financial statements requires the group to make certain
estimates and to form judgments about the application of its accounting
policies. The most significant areas where estimates and judgments have been
made are set out below.
Fair value estimation
As disclosed in section 1 - Accounting policies, a significant proportion of the
group's financial assets and liabilities are stated in the balance sheet at fair
value. Fair value is defined as the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable, willing parties in an
arm's length transaction.
Where there is an active market for financial assets and liabilities and quoted
prices are available, then such prices are the best indicator of fair value. In
the normal course of business, however, the group also holds financial assets
and liabilities, including certain non-exchange traded derivatives, where quoted
prices in an active market are not available. The group uses valuation
techniques to determine the fair value of such financial instruments. The
valuation techniques used for different financial instruments are selected to
reflect how the market would be expected to price the instruments, using inputs
that reasonably reflect the risk-return factors inherent in the instruments.
Depending upon the characteristics of the financial instruments concerned,
observable market factors are available for use in most valuations, while others
involve a greater degree of judgment and estimation.
In the case of trading assets and liabilities, derivatives, and financial assets
and liabilities designated at fair value, the estimation of fair value at the
reporting date affects profit for the year. The group has, and maintains, a
substantial pool of expertise in the valuation of financial instruments and
valuation estimates are benchmarked against actual outcomes, where practicable,
to ensure that the valuation techniques reflect actual market activity.
Accounting standards also require disclosure of the estimated fair value of
certain financial instruments that are stated in the balance sheet at amortised
cost. These disclosures, which are made in the notes on the financial
statements, affect neither the profit for the year nor the carrying amounts of
any assets or liabilities in the balance sheet. The estimation of fair value of
some of these classes of assets and liabilities is performed in the absence of
active markets for instruments with similar characteristics. The amounts
disclosed, therefore, may involve a higher degree of judgment and estimation
than is the case for most of the assets and liabilities which are carried at
fair value on the balance sheet.
Loan impairment
Application of the group's methodology for assessing loan impairment, as set out
in section 1 - Accounting policies Note (d), involves considerable judgment and
estimation.
For individually significant loans, judgment is required in determining first,
whether there are indications that an impairment loss may have already been
incurred, and then estimating the amount and timing of expected cash flows,
which form the basis of the impairment loss that is recorded.
For collectively assessed loans, judgment is involved in selecting and applying
the criteria for grouping together loans with similar credit characteristics, as
well as in selecting and applying the statistical and other models used to
estimate the losses incurred for each group of loans in the reporting period.
The benchmarking of loss rates and the ongoing refinement of modelling
methodologies provide a means of identifying changes that may be required, but
the process is inherently one of estimation.
Special purpose entities
In the normal course of business, the group participates, in a variety of ways,
in financial structures involving special purpose entities. Judgment is required
in determining whether the rights and obligations taken on result in the group
having control of the special purpose entity and whether it should be included
in the consolidated financial statements as a subsidiary.
Impairment of available-for-sale financial investments
Judgment is required in determining whether or not a decline in fair value of an
available-for-sale financial investment below its original cost is of such a
nature as to constitute impairment, and thus whether an impairment loss needs to
be recognised under HKAS 39.
Liabilities under investment contracts
Estimating the liabilities for long-term investment contracts where the group
has guaranteed a minimum return involves the use of statistical techniques. The
selection of these techniques and the assumptions used about future interest
rates and rates of return on equity, as well as behavioural and other future
events, have a significant impact on the amount recognised as a liability.
Insurance contracts
Classification
HKFRS 4 and HKAS 39 require the group to determine whether an insurance contract
that transfers both insurance risk and financial risk is classified as an
insurance contract under HKFRS 4, or as a financial instrument, or whether the
insurance and non-insurance elements of the contract should be accounted for
separately. This process involves judgment and estimation of the amounts of
different types of risks that are transferred or assumed under a contract. The
estimation of such risks often involves the use of assumptions about future
events and is thus subject to a degree of uncertainty.
Present value of in-force long-term assurance business ('PVIF')
The value of PVIF, which is recorded as an intangible asset, depends upon
assumptions regarding future events. The assumptions are reassessed at each
reporting date and changes in the estimates which affect the value of PVIF are
reflected in the income statement.
Insurance liabilities
The estimation of insurance claims liabilities involves selecting statistical
models and making assumptions about future events which need to be frequently
calibrated against experience and forecasts.
Income taxes
The group is subject to income taxes in many jurisdictions and significant
judgment is required in estimating the group's provision for income taxes. There
are many transactions and interpretations of tax law for which the final outcome
will not be established until some time later. The group recognises liabilities
for taxation based on estimates of whether additional taxes will be payable. The
estimation process includes seeking expert advice where appropriate. Where the
final liability for taxation is different from the amounts that were initially
recorded, these differences will affect the income tax and deferred tax
provisions in the period in which the estimate is revised or the final liability
is established.
Held to maturity securities
As indicated in section 1 - Accounting policies Note (g), certain debt
instruments within the 'Financial investments' category are classified as
held-to-maturity investments. In order to be able to use this classification,
the group needs to exercise judgment upon initial recognition of the investments
as to whether it has the positive intention and ability to hold them until
maturity. A failure to hold these investments to maturity, in all but a limited
number of circumstances, would result in the entire held-to-maturity category
being reclassified as 'available-for-sale'. They would then be measured at fair
value.
Consolidated income statement for the year ended 31Dec04
Reconciliation of HK GAAP and HKFRS
Effect of transition to HKFRS (excluding HKAS 39)
Pension
Assets and other
20004 acquired in post- Equity
As exchange for retirement compensation
Figures in HK$m reported advances benefits Property Goodwill plans
Interest income 57,911 (2) - - - -
Interest expense (19,679) - - - - -
Net interest income 38,232 (2) - - - -
Fee income 19,874 - - - - -
Fee expense (3,184) - - - - -
Net fee income 16,690 - - - - -
Net trading income 6,615 - - - - 8
Net investment income on
assets backing policyholder
liabilities - - - - - -
Gains less losses from
financial investments - - - - - -
Dividend income 186 - - - - -
Net earned insurance premiums - - - - - -
Other operating income 5,930 55 - 3 - -
Total operating income 67,653 53 - 3 - 8
Net insurance claims incurred
and movement in policyholder
liabilities - - - - - -
Net operating income
before loan impairment charges
and other credit risk
provisions 67,653 53 - 3 - 8
Loan impairment charges and
other credit risk provisions 769 (38) - - - -
Net operating income 68,422 15 - 3 - 8
Employee compensation
and benefits (14,743) - 33 - - (95)
General and administrative
expenses (10,079) - - (56) - -
Depreciation of property,
plant and equipment (2,096) - - 245 - -
Amortisation of intangible
assets (74) - - - 73 -
Total operating expenses (26,992) - 33 189 73 (95)
Operating profit 41,430 15 33 192 73 (87)
Profit on tangible fixed
assets and long-term
investments 2,098 (16) - - (62) -
Surplus arising on property
revaluation 1,024 - - 10 - -
Share of profit in associates 414 - - - 32 -
Profit before tax 44,966 (1) 33 202 43 (87)
Tax expense (7,086) - (16) (33) - (24)
Profit after tax 37,880 (1) 17 169 43 (111)
Profit attributable to
minority interests (4,315) - - - - 18
Profit attributable to
shareholders 33,565 (1) 17 169 43 (93)
Reconciliation of HK GAAP and HKFRS
Effect of transition to HKFRS (excluding HKAS 39)
Investment 2004
Insurance contracts Preference Consolidation As
Figures in KK$m contracts reclassified shares and others Reclassification restated
Interest income 266 - - (228) - 57,947
Interest expense 4 - (1,540) 238 - (20,977)
Net interest income 270 - (1,540) 10 - 36,970
Fee income 10 - - (408) - 19,476
Fee expense (102) - - 91 - (3,195)
Net fee income (92) - - (317) - 16,281
Net trading income 15 - - 365 - 7,003
Net investment income on
assets backing
policyholder
liabilities 2,420 (1,522) - - - 898
Gains less losses from
financial investments - - - - 1,497 1,497
Dividend income (1) - - (22) - 163
Net earned insurance
premiums 18,222 (4,137) - - - 14,085
Other operating income (3,436) - - (5) 1,567 4,114
Total operating income 17,398 (5,659) (1,540) 31 3,064 81,011
Net insurance claims
incurred and movement
in policyholder
liabilities (17,384) 5,659 - - - (11,725)
Net operating income
before loan impairment
charges and other
credit risk provisions 14 - (1,540) 31 3,064 69,286
Loan impairment charges
and other credit risk
provisions - - - - 131 862
Net operating income 14 - (1,540) 31 3,195 70,148
Employee compensation
and benefits 8 - - 32 - (14,765)
General and administrative
expenses (22) - - (5) (131) (10,293)
Depreciation of property,
plant and equipment - - - 99 - (1,752)
Amortisation of intangible
assets - - - (100) - (101)
Total operating expenses (14) - - 26 (131) (26,911)
Operating profit - - (1,540) 57 3,064 43,237
Profit on tangible fixed
assets and long-term
investments - - - 10 (2,030) -
Surplus arising on
property revaluation - - - - (1,034) -
Share of profit in
associates - - - (3) (144) 299
Profit before tax - - (1,540) 64 (144) 43,536
Tax expense - - - 27 144 (6,988)
Profit after tax - - (1,540) 91 - 36,548
Profit attributable
to minority interests - - - (103) - (4,400)
Profit attributable to
shareholders - - (1,540) (12) - 32,148
Consolidated balance sheet at 31 December 2004
Reconciliation of HK GAAP and HKFRS
Effect of transition to HKFRS (excluding HKAS 39)
Pension
At Assets and other
31Dec04 acquired in post- Equity
as exchange retirement compensation
Figures in HK$m reported advances benefits Property Goodwill plans
ASSETS
Cash and short-term funds 501,207 - - - - -
Placings with banks maturing
after one month 74,481 - - - - -
Items in the course of
collection from other banks 13,479 - - - - -
Certificates of deposit 48,643 - - - - -
Hong Kong SAR Government
certificates of indebtedness 92,334 - - - - -
Trading assets 85,356 - - - - -
Derivatives 54,837 - - - - -
Advances to customers 919,253 (561) - - - -
Financial investments 425,635 - - - - 566
Amounts due from fellow
subsidiary companies 82,592 - - - - -
Investments in associates 16,918 - - (107) 32 -
Goodwill and intangible assets 1,526 - - - 67 -
Property, plant and
equipment 42,080 - - (14,653) - -
Deferred tax assets 1,659 - - - - -
Retirement benefit assets 1,297 - 10 - - -
Other assets 97,748 561 - 4,014 24 (83)
2,459,045 - 10 (10,746) 123 483
LIABILITIES
Hong Kong SAR currency
notes in circulation 92,334 - - - - -
Deposits by banks 73,098 - - - - -
Customer accounts 1,730,494 - - - - -
Items in the course of
transmission to other banks 23,452 - - - - -
Trading liabilities 37,281 - - - - -
Derivatives 50,635 - - - - -
Debt securities in issue 150,179 - - - - -
Retirement benefit
liabilities 211 - 116 - - -
Amounts due to fellow
subsidiary companies 17,137 - - - - -
Amounts due to ultimate
holding company 479 - - - - -
Other liabilities 39,096 - - - (121) (46)
Liabilities to policyholders
under long-term assurance
business 62,643 - - - - -
Liabilities to customers under
investment contracts - - - - - -
Liabilities to customers under
insurance contracts issued - - - - - -
Current taxation 2,333 - - - - -
Deferred taxation 4,676 - (23) (1,394) 50 88
Subordinated liabilities 11,142 - - - - -
Preference shares - - - - - -
2,295,190 - 93 (1,394) (71) 42
EQUITY
Share capital 74,213 - - - - -
Other reserves 17,399 - - (10,594) - 332
Retained profits 51,083 - (83) 1,242 194 109
Proposed final
interim dividend 4,800 - - - - -
Shareholders' funds 147,495 - - - - -
Minority interests 16,360 - - - - -
163,855 - - - - -
2,459,045 - 10 (10,746) 123 483
Reconciliation of HK GAAP and HKFRS
Effect of transition to HKFRS (excluding HKAS 39)
At
Investment 31Dec04
Insurance contracts Preference Consolidation As
Figures in HK$m contracts reclassified Netting shares and others restated
ASSETS
Cash and short-term funds 5,098 - 4,287 - 52 510,644
Placings with banks maturing
after one month 230 - - - - 74,711
Items in the course of
collection from other
banks - - - - - 13,479
Certificates of deposit 3,100 - - - - 51,743
Hong Kong SAR Government
certificates of
indebtedness - - - - - 92,334
Trading assets (7,230) - 8,330 - 1,276 87,732
Derivatives - - 39,541 - 20 94,398
Advances to customers - - - - 500 919,192
Financial investments 45,996 - - - 135 472,332
Amounts due from fellow
subsidiary companies 6,330 - - - (6,330) 82,592
Investments in associates - - - - (500) 16,343
Goodwill and intangible
assets 3,513 - - - 223 5,329
Property, plant and
equipment - - - - (223) 27,204
Deferred tax assets - - - - 52 1,711
Retirement benefit assets - - - - - 1,307
Other assets (66,259) - (1) - (240) 35,764
(9,222) - 52,157 - (5,035) 2,486,815
LIABILITIES
Hong Kong SAR currency
notes in circulation - - - - - 92,334
Deposits by banks 2 - 1,880 - - 74,980
Customer accounts (227) - 221 - (2,377) 1,728,111
Items in the course of
transmission to other banks - - - - - 23,452
Trading liabilities - - - - - 37,281
Derivatives - - 41,727 - - 92,362
Debt securities in
issue (55) - 8,315 - (3,277) 155,162
Retirement benefit liabilities - - - - - 327
Amounts due to fellow
subsidiary companies 219 - - 432 (220) 17,568
Amounts due to ultimate
holding company - - - 74 - 553
Other liabilities (54) - 14 (506) (1,225) 37,158
Liabilities to policyholders
under long-term assurance
business (9,107) (54,938) - - 1,402 -
Liabilities to customers
under investment contracts - 28,516 - - - 28,516
Liabilities to customers
under insurance contracts
issued - 26,422 - - - 26,422
Current taxation - - - - - 2,333
Deferred taxation - - - - (2) 3,395
Subordinated liabilities - - - - - 11,142
Preference shares - - - 55,602 - 55,602
(9,222) - 52,157 55,602 (5,699) 2,386,698
EQUITY
Share capital - - - (51,719) - 22,494
Other reserves - - - (3,883) 2,775 6,029
Retained profits - - - - (2,061) 50,484
Proposed final
interim dividend - - - - - 4,800
Shareholders' funds - - - - - 83,807
Minority interests - - - - (50) 16,310
- - - - - 100,117
(9,222) - 52,157 - (5,035) 2,486,815
Consolidated balance sheet at 1 January 2005
Effect of transition impacted by HKAS 39
Balance Balance
excluding including
Figures in HK$m HKAS 39 HKAS 39 HKAS 39
ASSETS
Cash and short-term funds 510,644 (33,625) 477,019
Placings with banks maturing
after one month 74,711 (1,018) 73,693
Items in the course of collection
from other banks 13,479 - 13,479
Certificates of deposit 51,743 (2) 51,741
Hong Kong SAR Government
certificates of indebtedness 92,334 - 92,334
Trading assets 87,732 42,208 129,940
Financial assets designated at
fair value - 36,072 36,072
Derivatives 94,398 (7,237) 87,161
Advances to customers 919,192 (4,036) 915,156
Financial investments 472,332 (37,635) 434,697
Amounts due from fellow
subsidiary companies 82,592 (1,477) 81,115
Investments in associates 16,343 - 16,343
Goodwill and intangible assets 5,329 - 5,329
Property, plant and equipment 27,204 - 27,204
Deferred tax assets 1,711 (328) 1,383
Retirement benefit assets 1,307 - 1,307
Other assets 35,764 12,241 48,005
Total assets 2,486,815 5,163 2,491,978
LIABILITIES
Hong Kong SAR currency notes in
circulation 92,334 - 92,334
Deposits by banks 74,980 (2,325) 72,655
Customer accounts 1,728,111 (34,994) 1,693,117
Items in the course of
transmission to other banks 23,452 - 23,452
Financial liabilities designated
at fair value - 1,254 1,254
Trading liabilities 37,281 125,743 163,024
Derivatives 92,362 654 93,016
Debt securities in issue 155,162 (91,473) 63,689
Retirement benefit liabilities 327 - 327
Amounts due to fellow subsidiary
companies 17,568 (1,731) 15,837
Amounts due to ultimate holding
company 553 - 553
Other liabilities 37,158 6,445 43,603
Liabilities to customers under
investment contracts 28,516 - 28,516
Liabilities under insurance
contracts issued 26,422 - 26,422
Current taxation 2,333 29 2,362
Deferred taxation 3,395 (155) 3,240
Subordinated liabilities 11,142 74 11,216
Preference shares 55,602 - 55,602
Total liabilities 2,386,698 3,521 2,390,219
CAPITAL RESOURCES
Share capital 22,494 - 22,494
Other reserves 6,029 1,333 7,362
Retained profits 50,484 (39) 50,445
Proposed final interim dividend 4,800 - 4,800
Shareholders' funds 83,807 - 85,101
Minority interest 16,310 348 16,658
100,117 - 101,759
2,486,815 5,163 2,491,978
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: 06 March 2006