HSBC Holdings plc 2001 Annual Results

4 March 2002

Operating income up 5 per cent to US$25,888 million (US$24,573 million in 2000).

On a cash basis (excluding goodwill amortisation):

• Operating profit before provisions up 3 per cent to US$11,283 million (US$10,996 million in 2000).
• Group pre-tax profit, down 14 per cent to US$8,807 million (US$10,300 million in 2000), after charging US$520 million in respect of the loss from the foreign currency redenomination in Argentina, a US$600 million additional general provision for Argentine exposure, and US$575 million in respect of a provision for the Princeton Note Matter.
• Attributable profit down 13 per cent to US$6,213 million (US$7,153 million in 2000).
• Return on invested capital of 12.1 per cent (16.4 per cent in 2000).
• Cash earnings per share US$0.67 (US$0.81 in 2000).

On a reported basis (after goodwill amortisation):

• Operating profit before provisions was in line with 2000 at US$10,484 million (US$10,486 million in 2000).
• Group pre-tax profit down 18 per cent to US$8,000 million (US$9,775 million in 2000).
• Attributable profit down 18 per cent to US$5,406 million (US$6,628 million in 2000).
• Return on average shareholders' funds of 11.4 per cent (16.5 per cent in 2000).
• Basic earnings per share US$0.59 (US$0.76 in 2000).

Dividend and capital position:

• Second interim dividend of US$0.29 per share; total dividend for 2001 of US$0.48 per share, an increase of 10 per cent over 2000.
• Tier 1 capital ratio of 9.0 per cent; total capital ratio of 13.0 per cent (2000: tier 1 capital of 9.0 per cent and total capital ratio of 13.3 per cent).

HSBC HOLDINGS REPORTS PRE-TAX PROFIT OF US$8,000 MILLION

HSBC made a profit on ordinary activities before tax of US$8,000 million in 2001, a decrease of US$1,775 million, or 18 per cent, compared with 2000. On a cash basis, profit before tax decreased by US$1,493 million, or 14 per cent, compared with 2000.

The Directors have declared a second interim dividend for 2001 of US$0.29 per ordinary share (in lieu of a final dividend) which, together with the first interim dividend of US$0.19 already paid, will make a total distribution for the year of US$0.48 per share (US$0.435 per share in 2000), an increase of 10 per cent. The dividend will be payable on 7 May 2002.

Net interest income of US$14,725 million in 2001 was US$1,002 million, or 7 per cent, higher than 2000, with a large part of this increase due to the inclusion of CCF for a full year. Net interest income in North America was US$250 million, or 12 per cent, higher than 2000 mainly reflecting growth in average interest-earning assets and the benefit of lower funding costs.

Other operating income rose by US$313 million, or 3 per cent, to US$11,163 million compared with 2000. This increase was primarily driven by the acquisition of CCF and by growth in wealth management income which offset falls in securities-related fee and commission income.

Operating expenses, excluding goodwill amortisation, were US$1,028 million, or 8 per cent, higher than 2000. This increase principally reflected recent acquisitions.

HSBC's cost:income ratio, excluding goodwill amortisation, increased to 56.4 per cent compared with 55.3 per cent in 2000, reflecting the cost structures of new acquisitions and investment in the expanding wealth management business and IT.

The charge for bad and doubtful debts was US$2,037 million in 2001, which was US$1,105 million higher than in 2000. This mainly reflected the US$600 million general provision against Argentine exposure and specific provisions made against a small number of corporate borrowers. Other charges included a loss of US$520 million arising from the foreign currency redenomination in Argentina and a charge of US$575 million for the Princeton Note Matter. The US$91 million share of operating losses in joint ventures principally reflected continuing start-up costs of Merrill Lynch HSBC, now operational in the UK, Canada and Australia.

The charge for amounts written-off fixed asset investments arose mainly from venture capital investments and holdings of emerging technology stocks.

Gains on disposal of investments of US$754 million included profit on the sale of HSBC's 20 per cent stake in British Interactive Broadcasting and the investment in Modern Terminals Limited. In addition, disposal gains of US$170 million were realised from sales of investment debt securities to adjust to changes in interest rate conditions.

The tier 1 capital and total capital ratio for the Group remained strong at 9.0 per cent and 13.0 per cent, respectively, at 31 December 2001.

The Group's total assets at 31 December 2001 were US$696 billion, an increase of US$22 billion, or 3 per cent, since 31 December 2000.

Comment by Sir John Bond, Group Chairman

2001 was a challenging year for the financial services industry. That HSBC performed well overall is a measure of the resilience of our business. It is also a testament to the dedication and professionalism of my colleagues throughout the world. I particularly wish to pay tribute to our staff in New York who, in the aftermath of the terrible events of 11 September, kept our operations running, served our customers and cared for members of the general public in an exemplary manner. Similarly, I thank my colleagues in Argentina who are coping magnificently in very difficult circumstances.

In many of our major markets, the business environment deteriorated during the year. The US economy slowed markedly with a corresponding impact on much of the rest of the world, especially those countries, including many in Asia, which export to it. The UK remained fundamentally strong despite the effects of the foot and mouth epidemic and the downturn in the manufacturing sector. In France, slower growth was associated with lower consumer and business confidence. Hong Kong’s economy was more subdued than at any time in recent years, except during the Asian crisis itself. By contrast, mainland China remained buoyant and its remarkable economic progress and potential were recognised by the landmark event of its accession to the WTO. In Latin America, the Brazilian economy remained stable and was relatively unaffected by the tragic economic collapse in Argentina. Given these conditions, our performance showed the benefits of both geographical and business diversification. Our core profitability was sufficient to absorb the significant costs of the settlement of the Princeton Note Matter and the Argentine situation without impacting our capital strength or our progressive dividend policy.

We grew revenues by US$1.3 billion against cost growth of US$1.0 billion resulting in our operating profits before provisions rising US$0.3 billion to US$11.3 billion. Adjusting for the impact of exchange rate movements the growth was 5.9 per cent. Our bad debt charge (excluding the US$600 million Argentine additional general provision) absorbed 13.7 per cent of our operating profit before provisions, rising by US$0.5 billion to US$1.4 billion.

Below the operating profit line before provisions we suffered from a number of exceptional charges, including the settlement of Princeton, and benefited from some exceptional gains, including profit on the sales of HSBC’s 20 per cent stake in British Interactive Broadcasting and our investment in Modern Terminals Limited. These broadly offset one another. We have also taken exceptional charges against our current exposure in Argentina. These amount to US$1.1 billion. Consequently, profit attributable to shareholders at US$5.4 billion was US$1.2 billion lower than the result achieved in 2000. Recognising the exceptional nature of the charges in respect of Argentina and Princeton, the Board has declared a second interim dividend of US$0.29, taking the dividends for the year to US$0.48, an increase of 10 per cent.

Encouraged by our analysis of the region's economic prospects HSBC made two strategic investments in Latin America in 1997. In Brazil, we established Banco HSBC Bamerindus. In Argentina, Midland Bank had held a 29.9 per cent interest in Banco Roberts since 1988 and, with the Mercosur trade area growing in importance, we took the opportunity to acquire the remaining 70.1 per cent we did not already own through purchasing the Roberts Group.

The resilience and flexibility within the Brazilian economy has allowed HSBC to prosper in the country.

In Argentina, however, despite making considerable progress in building a broadly based business, our experience to date has been extremely disappointing. A number of factors, including protracted recession and a large internal fiscal deficit, have contributed to the country's current predicament. In line with HSBC's traditional conservatism we have charged an additional US$600 million of general provisions to cover losses in the Argentine portfolio. Over and above this, we have been forced to take a loss of US$520 million arising from the mandatory asymmetrical conversion of former US dollar denominated assets and liabilities into pesos. Our business in Argentina accounts for only 0.5 per cent of our total assets and in the context of HSBC as a whole the risks are entirely manageable. Nevertheless, the situation in Argentina remains both fluid and disturbing. It is deeply saddening to see the lives of so many of our customers and staff so badly affected. We must hope that, although necessarily slow and painful, the appropriate monetary and fiscal measures will be taken to reconstruct the financial system and to resolve the crisis. HSBC invests for the long-term and, in the course of its history, has experienced periods of extreme volatility in a number of emerging markets which, over time, have proved profitable.

Princeton

We were pleased to put the Princeton Note Matter substantially behind us by reaching agreement, subsequently confirmed by the US courts, with 51 out of 53 plaintiffs. Settlement was made in January 2002 and the after tax cost to HSBC fell within the US$450 million price reduction agreed with the late Mr Edmond Safra during the acquisition of Republic New York Corporation.

Credit quality

Globally, the credit environment weakened in line with economic conditions as corporate profitability fell and the availability of funding for investment declined. Excluding Argentina, the Group's non-performing loans reduced slightly as a percentage of lending, reflecting the write-off or recovery of previously provided debt and our underweight exposure to the industries most exposed to the change in economic environment. At 0.41 per cent of the loan book our credit charges in 2001 (excluding Argentina) remained below our long-term average experience reflecting changes in mix and the current resilience of the small business sector in Western markets.

There are a number of other factors which are important for an understanding of HSBC's performance in 2001. For the first time we have expanded our disclosure to give line of business analysis, and to illustrate the progress made in achieving our strategic objectives.

Personal Financial Services

Growth continued strongly. Revenues grew US$611 million or 6 per cent. Building our PFS businesses in Asia outside Hong Kong and in particular developing internet delivery channels represents a large part of the cost growth in 2001. We are encouraged by our progress.

• The final stage of the deregulation of deposits in Hong Kong was handled smoothly. The launch of a new free banking service to coincide with deregulation was successful with 640,000 customers choosing to take up the new product. Deposit balances grew profitably.
• In view of negligible credit and equity demand in Hong Kong we concentrated on packaged investment products, distributing in excess of US$1.4 billion of capital protected funds. Sales of insurance products doubled in HSBC in Hong Kong. Including Hang Seng Bank the HSBC Group has the largest market share of new regular premium business in the territory.
• Our new UK mortgage strategy, launched in 2000, helped the bank secure its largest ever share of net new mortgage lending in 2001, 4.4 per cent compared with 3.0 per cent in 2000. Gross new mortgage loans increased by 56 per cent by value, significantly ahead of the industry average of 35 per cent.
• In the UK, we grew savings balances by more than 30 per cent in both HSBC Bank and in First Direct.
• In Malaysia, we sold in excess of US$800 million in home mortgages in 2001 making HSBC the market leader in net growth.
• By year-end 2001, more than 13 million credit cards had been issued to customers worldwide, an increase of 17 per cent over 2000.
• In Asia, cards in issue grew by more than one million in 2001 to 5.4 million in total.
• In the US, we expanded the product range available to former Republic customers contributing to a growth in wealth management income of over 15 per cent.
• 'HSBC Premier', our international service for our most valuable customers, saw exceptional growth with the customer base growing 73 per cent to 464,000 in 23 countries and territories.
• At the end of 2001 we had over three million electronic banking customers, double the number at the beginning of the year.
• Customer relationship management systems moved from development into operation in a further nine countries, and are now live in a total of 18 countries. In the UK, over five million 'Individual Solutions' were actioned across all delivery systems, resulting in over one million sales of products or services.
• In the Middle East, the appointment of several additional financial planning managers contributed to a 220 per cent growth in fee income from the investment businesses across the region.
• In Brazil, our pension business grew funds under management by 80 per cent to US$216 million. Overall HSBC is the fifth largest fund manager in Brazil with funds under management of US$9 billion.

Commercial Banking

Profitability fell in 2001 as a result of higher credit charges in Europe and the non-recurrence of 2000's provision recoveries in Asia-Pacific. Pre-tax profits fell 14 per cent to US$2,385 million. Customers continue to respond favourably to the international service dimension available through HSBC.

• For the fifth year running HSBC was voted Best Trade Finance Bank in Asia by Finance Asia.
• In cash management we added 14,000 customers in 2001 to our Hexagon system, an increase of over 25 per cent.
• Business internet banking was launched in the UK in January 2002 and will roll out in Hong Kong, the United States and Canada later this year.
• Work has progressed in connecting the CCF commercial customer base to the Group's trade finance and cash management capabilities, an area of strong potential for 2002 and beyond.

Corporate, Investment Banking and Markets

Our wholesale banking activities produced record results in 2001 as successes in corporate banking and in treasury and capital markets more than offset weak performance in our corporate finance and equities business. Pre-tax profits grew by US$467 million to US$4,030 million.

• The integration of CCF into HSBC has generated better than expected revenue synergies in handling major corporate business for French domiciled companies and in euro capital market activities. We estimate that our market share comfortably exceeds the aggregate of HSBC and CCF as separate entities.
• Investment in our US Markets capability has been rewarded with significantly higher pre-tax profits which rose by over 50 per cent.
• Our global custody business increased market share notably in 2001 and was the No 1 rated custodian in 20 out of the 25 countries covered by the annual Global Custodian survey.
• Our asset management business increased its focus on designing products for distribution through our retail networks including the successful capital protected bonds mentioned above. Net inflows of funds during the year amounted to US$8.8 billion.
• HSBC won Treasury Management International’s 2001 Best Bank in Asia awards for both cash and risk management.
• The alignment of corporate banking with investment banking has generated significant additional revenues, particularly in the debt capital markets business where we have focused marketing initiatives. Revenues from bond origination business increased by 39 per cent to US$70 million.

Private Banking

Reflecting the restrained economic climate pre-tax profits from our private banking activities declined by US$135 million to US$412 million. However, the net inflow of funds was encouraging, amounting to US$13.2 billion. In a subdued environment we focused on the integration and reorganisation of private banking units originating in former HSBC, Republic and CCF entities. By the end of 2001 we had achieved our objective of establishing a new Swiss holding company under which the Group's international private banking activities are managed. This will facilitate better management of capital and will yield cost savings from 2002 onwards.

Investment activity

Following the major developments of 1999 and 2000, 2001 was a quieter year as we concentrated on integration and consolidation. Nevertheless, we made 38 acquisitions and investments and completed 17 disposals. We were particularly pleased to expand our interests in China through the purchase of an 8 per cent stake in Bank of Shanghai announced in December. Significant acquisitions included Banque Hervet in France, Demirbank in Turkey, NRMA Building Society in Australia and China Securities Investment Trust Corporation in Taiwan.

Priorities for 2002

The task before us in 2002 is to build upon the progress we have made during the last 12 months in implementing our strategic plan. While economic conditions mean that our traditional cost discipline will remain of paramount importance, we shall continue to develop all our lines of business and to invest in the new delivery systems, including e-channels, which are part of the fabric of our industry. In particular, we shall work to enhance our position in the commercial banking market and to build on our growing strengths in Personal Financial Services. We are becoming increasingly customer-driven and we shall continue to develop the HSBC brand as a uniformly desirable customer experience around the world.

Outlook

We are cautious about the outlook for the year ahead. Much will depend on the pace of recovery in the US. Recent economic indicators provide mixed signals. The robust consumer demand which has supported a number of western economies may prove hard to maintain as pressure on corporate profits leads to further industry restructuring and higher levels of unemployment. Many of the world's largest industries and service sectors are still suffering from overcapacity, which will take time to absorb and may defer further investment. Offsetting these factors are the strong and co-ordinated monetary policy initiatives of the world’s leading nations, which may have staved off protracted recession. It is possible that we shall see signs of a modest economic recovery during the year. HSBC has entered 2002 financially and structurally stronger than a year ago. We are well able to weather the remainder of the downturn and we are in a strong position to benefit from any improvement in economic conditions that may occur in 2002.