Grupo Financiero HSBC, S.A. de C.V. first half 2008 financial results - highlights

28 July 2008

• Net income for the first half of 2008 was MXN2,854 million, up 13.6 per cent compared with MXN2,512 million for the same period in 2007.
• Total operating income (excluding loan impairment charges) for the first half of 2008 was MXN18,684 million, up MXN2,328 million or 14.2 per cent compared with MXN16,356 million for the same period in 2007*.
• Net operating income for the first half of 2008 was MXN1,435 million, down MXN810 million compared to the same period of 2007.
• Net loans and advances to customers were MXN183.8 billion at 30 June 2008, up MXN9.1 billion, or 5.2 per cent, compared with MXN174.7 billion recorded at 30 June 2007.
• Total customer demand and time deposits were MXN261.6 billion at 30 June 2008, up MXN30.2 billion or 13.0 per cent, compared with MXN231.4 billion at 30 June 2007.
• The cost efficiency ratio was 58.1 per cent in the first half of 2008, compared to 60.5 per cent for the same period of 2007*.
• Return on equity was 15.1 per cent in the first half of 2008, compared with 14.5 per cent for the same period in 2007.

*For comparative purposes, the monetary position result has been excluded from 2007 figures.

HSBC Mexico S.A. (the bank) is Grupo Financiero HSBC, S.A. de C.V.'s (HSBC) primary subsidiary company and is subject to supervision by the Mexican Banking and Securities Commission. The bank is required to file periodic financial information on a quarterly basis (in this case for the quarter ended June 30 2008) and this information is publicly available. Given that this information is available in the public domain, Grupo Financiero HSBC, S.A. de C.V. has elected to file this release.

Results are prepared in accordance with Mexican GAAP (Generally Accepted Accounting Principles). With effect from January 1, 2008, in accordance with Financial Information Standard B-10, "Effects of Inflation", the effects of inflation in financial statements cannot be recognized. This is due to the change from an inflationary to a non-inflationary economic environment. The comparative figures of the financial statements of periods prior to 2008 are expressed in monetary units with purchasing power at December 31, 2007.

Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly owned subsidiary of HSBC Holdings plc (HSBC Group).

Overview

The net income of Grupo Financiero HSBC, S.A. de C.V. was MXN2,854 million in the first half of 2008, up MXN342 million compared with the net income for the same period in 2007.

In an environment characterized by economic deceleration, inflationary pressures and greater market volatility, the bank's results reflect selective growth of assets and expense control, as well as a flexible pricing strategy for products. Credit quality, particularly of credit card and revolving credit portfolios, has deteriorated in the first half of 2008 and, consequently, income was affected by the significant increase in loan impairment charges. The performance of our subsidiaries, particularly HSBC Seguros, added to the results, with a contribution of 18.5 per cent of total net income.

Net interest income increased by MXN2,085 million in the six months to 30 June 2008 to MXN12,529 million, which represents growth of 20.0 per cent compared to the same period in 2007*. This increase was driven by growth in the consumer loan portfolio, particularly in credit cards and the commercial portfolio, which contributed MXN1,323 million and MXN633 million respectively.

Net fee income was MXN5,822 million in the first half of 2008, an increase of 13.9 per cent over the same period in 2007. Increased fee income from credit cards, trade services, membership programs, ATMs, payments and cash management, investment funds and card acquiring contributed significantly to the growth in the period.

Trading income was MXN333 million in the first half of 2008, MXN467 million or 58.4 per cent lower compared to the same period in 2007. The increase in longer-term interest rates observed in the last two months affected the mark to market of the bond positions, resulting in lower income.

In this period, particular emphasis has been placed on the expense control policy. Administrative expenses increased in the first half of 2008 by MXN960 million, compared to the same period in 2007, reflecting a combination of selective investment, with improvements in productivity and more efficient expense control. Part of the increase is attributable to higher promotion expenses for the Tu Cuenta packaged product, the on-going strengthening of the technological infrastructure and loan recovery service costs. Staff expenses rose in line with our business growth investment strategy. The cost efficiency ratio* improved by 2.4 percentage points to 58.1 per cent, with revenue growth of 14.2 per cent exceeding expense growth of 9.7 per cent.

Other income increased MXN1,296 million to MXN2,189 million in the first half of 2008. This growth is primarily due to extraordinary income of MXN1,045 million received during the first half of 2008 from the sale of VISA Inc. stock, as a result of the company's global Initial Public Offering ("IPO"), and MXN114 million following the sale of HSBC's shares in the Mexican Stock Exchange ("BMV") to the exchange prior to BMV's IPO.

Loan impairment charges increased by MXN2,463 million in the first half of 2008 compared with the same period in 2007. This increase is due to greater requirements for impairment charges as a result of portfolio growth and increased credit card reserves, in line with the expansion of the credit card portfolio, as well as higher delinquency in this portfolio and loans to individuals and small businesses. This increase in loan impairment charges is consistent with market trends and also reflects the cost of HSBC's strategy to grow organically in areas in which the bank had previously been under represented. HSBC's allowance for loan losses as a percentage of impaired loans was 124.2 per cent at 30 June 2008, compared to 146.2 per cent for the same period in 2007.

Regular reviews of the credit quality of new business are undertaken to ensure close control of customer acquisition channels, including external referring agencies. Adjustments have also been made to the credit underwriting models to improve the portfolio credit quality. At the same time, we continue to strengthen our collection capabilities.

Loans to government entities have decreased by MXN6,791 million compared to the same period in 2007 as a result of several repayments made by government entities.

The Bank's capital ratio at June 30 2008 was 13.5 per cent.

*For comparative purposes, the monetary position result has been excluded from 2007 figures.

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