HSBC Holdings 2004 Interim Results

02 August 2004

• Operating income up 35 per cent to US$25,028 million (US$18,507 million in the first half of 2003).

For the half year (excluding goodwill amortisation):

• Operating profit before provisions up 41 per cent to US$12,685 million (US$9,017 million in the first half of 2003).
• Group pre-tax profit up 49 per cent to US$10,251 million (US$6,879 million in the first half of 2003).
• Attributable profit up 48 per cent to US$7,229 million (US$4,873 million in the first half of 2003).
• Return on average invested capital of 16.5 per cent (14.2 per cent in the first half of 2003).
• Earnings per share up 40 per cent to US$0.67 (US$0.48 in the first half of 2003).

For the half year (as reported):

• Operating profit before provisions up 41 per cent to US$11,802 million (US$8,385 million in the first half of 2003).
• Group pre-tax profit up 53 per cent to US$9,368 million (US$6,112 million in the first half of 2003).
• Attributable profit up 55 per cent to US$6,346 million (US$4,106 million in the first half of 2003).
• Return on average shareholders' funds of 16.0 per cent (13.5 per cent in the first half of 2003).
• Basic earnings per share up 41 per cent to US$0.58 (US$0.41 in the first half of 2003).

Dividend and capital position:

• Second interim dividend of US$0.13 per share, which, together with the first interim dividend of US$0.13 per share already paid, represents an increase of 8 per cent over the first interim dividend for 2003.
• Tier 1 capital ratio of 9.3 per cent; total capital ratio of 12.4 per cent.

On this page, the Hong Kong Special Administrative Region of the People's Republic of China has been referred to as 'Hong Kong'.

HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$9,368 MILLION

HSBC made a profit on ordinary activities before tax of US$9,368 million, a rise of US$3,256 million, or 53 per cent, over the same period in 2003. Household contributed US$1,900 million in the first half of the year compared with a contribution, from the date of acquisition, of US$536 million in 2003.

Net interest income of US$15,106 million was US$3,885 million, or 35 per cent, higher than for the same period in 2003 mainly due to the additional three months' contribution from Household compared to the first half of 2003. On an underlying basis and at constant currency, net interest income increased by 4 per cent.

Other operating income rose by US$2,636 million, or 36 per cent, to US$9,922 million over the same period in 2003. On an underlying basis and at constant currency, the increase was 15 per cent and reflected strong growth in fees and commissions across all customer groups as well as a strong performance within Global Markets.

Operating expenses, excluding goodwill amortisation, of US$12,343 million were US$2,853 million, or 30 per cent, higher than in the first half of 2003. On an underlying basis and expressed in terms of constant currency, operating expenses increased by 8 per cent.

HSBC's cost:income ratio, excluding goodwill amortisation, decreased to 49.3 per cent in the first half of 2004 from 51.3 per cent in the same period in 2003.

The charge for bad and doubtful debts rose by US$429 million to US$2,803 million in the first half of 2004 when compared with the same period in 2003. There were two key drivers to this change. The increase included an additional quarter's charge from Household amounting to US$1,294 million. Offsetting this, there were substantially fewer large specific provisions required in the corporate sector, and the improving economic environment and outlook in both the US and Hong Kong generated lower requirements for both specific and general provisions, resulting in higher levels of recoveries and releases in both categories.

Gains on disposal of investments of US$317 million were US$53 million higher than in the first half of 2003.

The tier 1 capital and total capital ratios for the Group remained strong at 9.3 per cent and 12.4 per cent, respectively, at 30 June 2004.

The Group's total assets at 30 June 2004 were US$1,154 billion, an increase of US$120 billion, or 12 per cent, since 31 December 2003.

*Comprises Household International's consumer finance business and the US residential mortgages acquired by HSBC Bank USA from Household International and its correspondents since December 2003.

Comment by Sir John Bond, Group Chairman

We delivered a solid performance in the first half of 2004. Indeed, the absolute level of profits was the highest we have achieved in a six-month period. Our results reflect sound underlying revenue growth, a disciplined management of costs while investing for the future, and improved productivity. They are also a measure of the progress we are making in harnessing the strengths of our business across all geographical regions and all our customer groups.

We grew profit attributable to shareholders by 55 per cent to US$6.3 billion. Excluding the amortisation of goodwill, profit attributable, which is the basis used to benchmark dividend proposals, was US$7.2 billion, an increase of 48 per cent. This represents US$0.67 per share, an increase of 40 per cent over the first half of 2003. In line with the programme of dividends announced with our 2003 results, the Directors have approved a second interim dividend of US$0.13 per share which will be payable on 6 October 2004. This brings the total dividend declared to date to US$0.26 per share, an increase of 8 per cent against the dividend declared at the same stage last year.

The background to our results was one of improving economic conditions in many of our most important markets compared with the first half of 2003, particularly in the US and Hong Kong.

There was, thankfully, no repetition of the outbreak of SARS which had so severely affected a number of countries in Asia in the first half of 2003. Hong Kong's economy achieved a significantly higher rate of growth, buoyed by rising business and consumer confidence and by measures taken by the Chinese authorities to allow increased tourism from mainland China. Both the property market and employment levels improved. These factors in turn contributed to renewed activity in the stock market which encouraged greater investment flows, particularly from private investors.

The US economy is expected to have achieved real GDP growth of around 5 per cent in the first six months of 2004. Employment levels began to rise after three years of decline. Over one million new jobs were created in the period as the full effects of earlier monetary and fiscal stimuli began to feed through. Rising property prices and tax cuts helped consumer spending to continue growing at a healthy rate.

The UK economy was resilient, with employment levels remaining strong. Interest rate rises during the first half appear not to have dampened consumer confidence.

Against this background, we continued to invest in the future of HSBC and implementation of our new five-year strategic plan is well under way. In the first six months of 2004, we have taken a number of significant initiatives in line with the plan.

We have started to reorganise our business in the UK to improve productivity and customer contact. Some of the measures we are taking in the UK are painful but they are essential, and there are already signs that they are yielding results in terms of business growth. Meanwhile, our creation of 1,000 new customer-facing roles will strengthen the service levels that we want HSBC to be known for.

Elsewhere, we have expanded our network of branches in Asia and, on 24 June, we confirmed that The Hongkong and Shanghai Banking Corporation Limited is in discussions to acquire 19.9 per cent of Bank of Communications in China. Those discussions have gone well and we have now reached agreement in principle on the terms of our investment. We expect to make a further announcement shortly. We have deployed a growing amount of work internationally through the further development of our Group Service Centres. We have upgraded and expanded through selective recruitment our markets and investment banking capabilities. Above all, we are reconfiguring our business in response to the transforming effects which technology has on our relationship with our customers.

We made good progress in all customer groups during this half-year. It is particularly pleasing to note that we have achieved strong organic growth in many of our established markets which have not benefited from our acquisition activity over the past few years. For example, we increased pre-tax profits in the Middle East by 27 per cent to US$159 million and in India by 36 per cent to US$98 million. In Hong Kong, fees and commissions rose by 40 per cent to reach US$904 million. This represents compound annual growth of 16 per cent since the first half of 1999.

Personal Financial Services ('PFS')

Our priority in PFS is to meet the financial needs of our customers in an efficient and informed way so that we build and retain strong, valued relationships with them.

During the first half of the year, we continued to grow our customer base profitably, with increasing numbers of customers choosing to access us online. The progressive expansion of our customer relationship management systems, the deployment of technologies and techniques from Household and the roll-out of segmentation models all contributed to increased sales. In May, we gained our one-millionth HSBC Premier customer, with cross-sales to this, our most valuable customer segment, remaining very strong.

The improved economic environment, combined with collaborative initiatives between PFS and Household, has allowed us to expand profitably our personal credit business. At the same time, improved stock market sentiment and rising equity prices reinvigorated retail interest in investment products.

• In the UK, we achieved record mortgage sales through our 'One great rate' campaign, which allowed customers to choose between a fixed or variable rate mortgage offered at the same price. This led to an 18 per cent growth in mortgage balances. Last month, Moneyfacts named HSBC the best value mortgage lender in the UK. Also in the UK, we achieved strong growth in current accounts and, through more effective marketing, in savings, personal lending and credit card balances. Our fee income benefited from increased sales of repayment protection products.
• First Direct in the UK acquired more current account customers than any other direct bank in the first half of the year and it remains the country's top bank for service and customer recommendation.
• In Hong Kong, sales of unit trusts and capital-protected investment products reached record levels. Retail brokerage flows were also strong in Hong Kong and in Canada. In insurance, HSBC led the market in new regular premium life sales in the first quarter of 2004, with a market share of 24.9 per cent. Insurance income in total grew by 50 per cent, or US$71 million, over the same period in 2003. We also benefited from an improved personal credit environment leading to lower provisioning requirements.
• In Hong Kong, a mature credit card market, we concentrated on card usage and, as a result, spending on HSBC-issued cards grew by 43 per cent.
• With the launch of HSBC Premier in April 2004, Mexico became the 32nd country to offer this service. Deposit growth has accelerated with current account balances up 15 per cent to US$5.5 billion since June 2003. Acquisitions in the insurance and pensions businesses in the second half of 2003 also contributed to the overall strong revenue growth within our PFS franchise. HSBC Mexico's market share of international remittances from the US has increased substantially and collaborative efforts with Household effectively position us to further capitalise on this high growth market.
• Our Middle East business has refocused its sales activities and this has resulted in good all-round growth, particularly in the cards business where the base has increased by 35 per cent. The June launch of HSBC Amanah as the dedicated brand for our Shariah-compliant products and services is being well received in the Middle East as well as in Indonesia, Malaysia, Singapore, the UK and the US.
• In South America, the integration of the Losango consumer finance business acquired at the end of 2003 has progressed well. The combined customer base and enhanced capabilities have resulted in significantly increased personal business in the region.
• We continue to innovate for the benefit of our customers and to introduce new products and services to our key markets. Amongst our most recent initiatives are a new retirement service in France, and new insurance-linked, capital-protected investment products in Hong Kong. In the US, we have introduced free current account services and also launched our first marketing initiatives aimed specifically at the fast-growing Hispanic and Latino communities.

Consumer Finance

The integration of Household into HSBC is virtually complete. The potential we saw in providing wider access to Household's technology and marketing skills and from using its experience in consumer credit management and retail services in the rest of our Group is now being realised.

The roll-out of Household's WHIRL credit card system will enable us to accelerate the geographical build up of cards in a number of countries. Household's experience in retail services was crucial in helping HSBC win the competitive tender for Marks and Spencer's financial services business in July. Household is also supporting the development of our consumer credit business in Mexico and Brazil by providing staff and access to its technology and collection processes.

Driven by improved economic conditions and the benefits of integration with HSBC, Household's performance in the first half of 2004 was strong.

• Compared with a year ago, Household achieved underlying growth in customer loans of 13 per cent despite increased competition in the sector.
• Delinquency trends were positive across all products and maturities.
• The combination of HSBC and Household has opened a 'near prime' real estate secured lending opportunity which offers continuing lending growth at attractive margins.
• Funding synergies continue to afford Household access to wider sources of funds at competitive rates.

Commercial Banking ('CMB')

Our commercial banking customer base remains a core area of focus and development. During the first half of 2004, we expanded sales support covering this segment and made further progress in building cross-border business and referrals. We also enhanced our business internet banking service and invested further in customer relationship management systems and related marketing support. The results were encouraging.

• Underlying revenue grew by 9 per cent, more than double the rate of cost growth, driven by higher fee and commission income as we expanded sales of trade finance, credit and insurance services.
• Cross-border business referrals into China and between the US and Canada grew strongly. Two further regional cross-border initiatives - between the UK, France and Germany, and between Brazil and Argentina - were launched.
• Supporting this growth, we added specialist Business Banking Centres in Hong Kong and relationship-managed more top tier customers through our Corporate Banking Centres in the UK, France and Canada.
• Trade finance activity was particularly strong in the Middle East and Asia with significant growth recorded in our businesses in Japan, Malaysia and China.
• We have grown business internet banking customer numbers by over 50 per cent since June 2003 and seen a significant increase in revenues. Internet banking transaction volumes increased in Mexico, and in the UK we achieved particular success in enrolling new customers.
• Joint initiatives between Household's retail services business and HSBC's corporate customers generated a growing number of leads. New business was booked in Canada, the US, and in Brazil, where new business from the Losango acquisition is well ahead of expectations.

Corporate, Investment Banking and Markets ('CIBM')

The planned investment to upgrade the product and service capabilities of our CIBM businesses is on track. During the first half of 2004, over 700 people were recruited and our restructuring saw a similar number of staff departures. Some 90 per cent of planned senior hires have now been made. Growing revenues have helped to fund this investment.

• In our Global Markets business, revenues were higher than in the first half of 2003. We added to our trading and sales capabilities in areas such as derivatives and structured products, contributing to the growth in revenues. New hires significantly enhanced our capabilities in convertibles, asset-backed securities, mortgage-backed securities and emerging market debt. Equities sales and trading, now integrated with our Global Markets business, was profitable in the first half on higher revenue, compared with a loss in the first half of 2003.
• Corporate and Institutional Banking continued to invest in people and infrastructure, appointing new business heads in a number of key countries, upgrading client relationship managers to improve client servicing and enhancing management information systems. Improved economic conditions led to restructuring and refinancing activity internationally that allowed HSBC to recover provisions against impaired loans.
• Within Global Transaction Banking our custody business has benefited significantly from strong market sentiment and investment flows across markets within Asia-Pacific. The custody and funds administration businesses of HSBC and Bank of Bermuda were integrated quickly and successfully. Major mandates won during the first half of 2004 included the outsourcing by Gartmore of its back office operation.
• Our Debt Finance and Advisory business performed well. Worldwide, our share of international bond issuance rose to 4.5 per cent from 3.8 per cent in the same period in 2003. In Asia, we maintained our position as the leading arranger and underwriter. We made significant progress in Europe and the Americas, arranging major financing transactions for clients, including a US$11.8 billion multi-tranche financing for Network Rail and a US$1.5 billion issue for Petroleos Mexicanos (PEMEX).
• Even at this early stage of the development of our Global Investment Banking advisory business there was an encouraging improvement in the scope of mandates awarded. Significant appointments included acting as financial adviser to Saudi Arabian Oil Co. on its acquisition of a stake in Showa Shell Sekiyu K.K. (Japan) from the Royal Dutch/Shell Group, and acting as joint global co-ordinator of Ping An Insurance Co.'s US$1.84 billion initial public offering, the largest IPO in Hong Kong in the period.

Private Banking

Private Banking achieved broadly based growth across the business. Revenue growth comfortably exceeded cost growth and contributed to a pre-tax profit of US$345 million which, adjusting for acquisitions and business transfers, represented an underlying increase of 29 per cent.

The rebranded business, HSBC Private Bank, expanded its range of services in Singapore following the receipt of a wholesale banking licence in 2003. It also grew in Malaysia, where we established an onshore presence, and in Sweden and Greece where we opened representative offices.

Good progress has been made in integrating Bank of Bermuda's Private Client Services business with HSBC's. As a result, HSBC Private Bank's Global Wealth Solutions business is now one of the world's largest international private trust and fiduciary administrators, operating from 23 locations.

• Positive flows into the HSBC Private Bank Funds and our alternative investment capability have attracted US$3.8 billion of new assets since 30 June 2003. Total client assets invested in hedge funds increased to US$18 billion.
• Strategic Investment Solutions has attracted US$610 million in client assets since its launch in July 2003, reflecting client demand for open architecture products.
• Lending to clients, their families and related structures has grown by 30 per cent since 30 June 2003.

Credit Quality

One important aspect of the improving economic climate has been the favourable effect on credit quality, particularly in the US and Hong Kong. Improving levels of employment, steadily rising property prices and resilient consumer confidence are all key factors in our evaluation of portfolio provisioning requirements. As a result of our assessment of the current benign credit environment, and historic loss rates, some US$245 million of general provisions were released in North America and Hong Kong.

In the UK, we paid considerable attention to our consumer portfolios given the level of sensitivity within these businesses to rises in either interest rates or unemployment. Although there is some evidence of deterioration, our experience of arrears, repossessions and losses has continued to compare favourably with industry averages. This reflects HSBC's long-standing traditions of lending conservatively and providing early support for customers who find themselves in difficulties.

Corporate credit experience remained highly favourable compared with historical trends. Improved sentiment in the corporate sectors afforded further restructuring opportunities which allowed us to recover provisions as companies refinanced.

There were no concentrations of industry or geographical exposures emerging in the first half of 2004 that were of significance in terms of credit risk exposure.

Bank of Bermuda

The acquisition of Bank of Bermuda was completed in February this year, and integration is proceeding well. We are delighted with the reaction of customers who see our investment as strengthening our capabilities in funds administration and trust services, as well as bringing additional products to an important commercial banking presence in Bermuda. The current trend in the fund management industry to offer an increasing number of alternative investment strategies is accelerating the move towards outsourcing fund administration. Our combined strengths have already been successful in attracting sizeable new mandates. Similarly, in supporting Bermuda's reinsurance industry, HSBC's capital strength is allowing Bank of Bermuda to expand its coverage of this important sector. The synergies we identified at the time of the acquisition are on track and we expect the integration process to be substantially completed by the end of 2004.

Outlook

When I described the outlook for our businesses on reporting our full year results for 2003, there were many questions and uncertainties. How sustainable were the early signs of recovery in the United States and Hong Kong? Could China manage to slow its economy softly? When global interest rates began to rise, would the rate of change be gradual and predictable? Had consumer indebtedness in Western markets reached unmanageable levels? What would be the impact of the continued threat of international terrorism? Would the growing burden of regulation stifle innovation or investment?

As our results for the first half of this year demonstrate, my colleagues have found opportunities within this challenging environment to deliver our strongest ever performance in a six-month period. Although trading conditions in our Global Markets business in the second quarter were less buoyant than in the first, there are no obvious signs of significant deterioration. The current operating environment remains favourable.

However, the global imbalances which brought about such uncertainties remain. It would be unwise to relax, particularly when the last 18 months have seen a significant build-up of capital reserves within the financial services industry and while capital investment in the West has remained muted. The risk of market disruption rises as financial institutions use increasingly similar technology to manage risk. The possibility of volatility also increases as the investment sector becomes more highly geared in search of better returns.

We remain focused on these issues. Our strength lies in the broad diversification of our revenues by geography and by customer group. It also rests on delivering the revenue growth and cost control objectives of our current strategic plan. That is the challenge before us now. I know that my colleagues around the world, talented and industrious as they are, are committed to meeting it.

The full text of the news release can be downloaded using the link on the right.