HSBC Holdings plc 2002 interim results

5 August 2002

• Operating income up 2 per cent to US$13,103 million (US$12,801 million in the first half of 2001).

On a cash basis (excluding goodwill amortisation):

• Operating profit before provisions up 5 per cent to US$5,957 million (US$5,652 million in the first half of 2001).
• Group pre-tax profit down 7 per cent to US$5,458 million (US$5,840 million in the first half of 2001).
• Attributable profit down 7 per cent to US$3,681 million (US$3,945 €  million in the first half of 2001).
• Return on invested capital of 13.8 per cent (15.2 €  per cent in the first half of 2001).
• Cash earnings per share US$0.40 (US$0.43 €  in the first half of 2001).

On a reported basis (after goodwill amortisation):

• Operating profit before provisions up 6 per cent to US$5,561 million (US$5,251 million in the first half of 2001).
• Group pre-tax profit down 7 per cent to US$5,057 million (US$5,435 million in the first half of 2001).
• Attributable profit down 7 per cent to US$3,280 million (US$3,540 €  million in the first half of 2001).
• Return on average shareholders' funds of 13.7 per cent (15.1 €  per cent in the first half of 2001).
• Basic earnings per share US$0.35 (US$0.38 €  in the first half of 2001).

Dividend and capital positions:

• First interim dividend of US$0.205 per share; an increase of 8 per cent over the 2001 first interim dividend.
• Tier 1 capital ratio of 9.7 per cent; total capital ratio of 13.5 per cent.
  
   € Restated to reflect the adoption of UK Financial Reporting Standard 19 'Deferred Tax', details of which are set out in Note 1 on page 15.

HSBC Holdings reports pre-tax profit of US$5,057 million

HSBC made a profit before tax on a reported basis of US$5,057 million, a decrease of 7 per cent compared with the first half of 2001. Profit attributable to shareholders was US$3,280 million, a decrease of 7 per cent compared with the first half of 2001.

Profit before tax on a cash basis was US$5,458 million in the first six months of 2002, down US$382 million, or 7 per cent, over the same period in 2001. On the same basis, profit attributable to shareholders declined by 7 per cent to US$3,681 million.

Net interest income of US$7,593 million was US$401 million, or 6 per cent, higher than the same period in 2001.

Other operating income fell by US$99 million, or 2 per cent, to US$5,510 million over the same period in 2001.

Operating expenses (excluding goodwill amortisation) were US$7,146 million in line with the first half of 2001 but 4 per cent lower than in the second half.

HSBC's cost:income ratio (excluding goodwill amortisation) was 54.5 per cent in the first half of 2002 compared with 55.8 per cent for the same period in 2001 and 57.0 per cent for the second half of 2001.

The charge for bad and doubtful debts of US$715 million was US$274 million higher than in the same period of 2001 but US$881 million lower than the second half of 2001. This was mainly as a result of the US$600 million general provision against Argentina charged in the second half of 2001. The loss from foreign currency redenomination in Argentina in the first half of 2002 relates to losses arising from judicial orders or 'amparos' allowing certain depositors to circumvent the mandatory pesification rules and recover their historic US dollar deposits at current exchange rates.

Amounts written off fixed asset investments mainly reflected a provision for the diminution in value of a minority holding in a European life company acquired in the CCF acquisition.

The US$23 million share of operating losses in joint ventures principally reflected the ongoing costs of Merrill Lynch HSBC. In the current period these costs have been significantly reduced from prior years.

Gains on disposal of investments of US$351 million included profit on the sales of CCF's stake in Lixxbail to its joint venture partner and HSBC's 6.99 per cent shareholding in Banco Santiago S.A. In addition, disposal gains of US$131 million were achieved mainly on the sale of investment debt securities as HSBC adjusted its exposure to interest rates and sovereign credit.

The tier 1 capital and total capital ratio for the Group remained strong at 9.7 per cent and 13.5 per cent, respectively, at 30 June 2002.

The Group's total assets at 30 June 2002 were US$746 billion, an increase of US$50 billion, or 7 per cent, since 31 December 2001.

* The figures for 2001 have been restated to reflect the adoption of UK Financial Reporting Standard 19 'Deferred Tax' details of which are set out in Note 1.

Comment by Sir John Bond, Group Chairman

Our performance in the first half of 2002 showed once again the resilience of HSBC in difficult market conditions. Our geographical spread of businesses, together with our financial strength, conservatism and our straightforward character stood us in good stead. Operating profit before provisions grew by 6 per cent to US$5,561million. Reflecting this, the Board has approved a first interim dividend of US$0.205 per share, an increase of 8 per cent over last year's first interim dividend.

The mixed economic signals we referred to when reporting our full year results for 2001 continued throughout the first half of 2002. They provided the backdrop to significant swings in confidence which influenced financial markets during the half year. The unfolding of a number of corporate scandals, particularly in the United States, drove investors to seek capital protection rather than capital growth. In the corporate market, nervousness over continuing access to finance led companies to bolster their financial position, to focus on expenses and to defer investment spending.

In this environment, we concentrated on controlling costs and on extending the range of products we deliver to our core customer base. Compared with the first half of 2001 we added some US$300 million in revenues and held costs flat. Credit costs of US$715 million absorbed 12 per cent of cash basis operating profit before provisions, in line with 2001 (excluding the additional general provision for Argentina), reflecting a broadly stable experience in a difficult credit environment. Disposal gains of US$350 million were some 48 per cent or US$326 million lower than the equivalent period in 2001 which benefited from the sale of our stakes in British Interactive Broadcasting and Modern Terminals Limited. Accordingly, attributable profit for the first half of 2002 on a cash basis of US$3.7 billion was 7 per cent lower than the comparable period in 2001.

Our performance in the first half of 2002 also illustrated the continued development of HSBC in line with our strategy. In particular, there is evidence that the investment of recent years in electronic distribution channels, customer relationship management systems, and in training, is resulting in improved service for our customers and productivity for our shareholders. Furthermore, we are harnessing our international resources and capabilities to serve customer needs. The improved focus on our worldwide customer segments has resulted in stronger revenue generation. There has been progress in our business with all groups of customers.

Personal Financial Services

With confidence in equity markets eroding, customers have preferred to keep their funds readily available and the combination of higher deposits and shorter maturities improved our margins. At the same time, given the low yield on deposits, sales of unit trusts which offer capital protection were again very strong, particularly in Hong Kong. Economic uncertainty also encouraged sales of insurance products. With interest rates low and equity investment seen as volatile, real property activity boomed driving strong mortgage growth in the UK and the US. In Hong Kong the property market enjoyed a period of relative stability with some modest improvements in activity. Other consumer lending was also strong in the first half of 2002.

Perhaps the most significant long-term trend in our personal financial services business, however, is the increasing use by our customers of automated and electronic access channels for conducting their transactions. The benefits of this trend are evident. On average, internet customers source more products from the Group than non-internet customers. The internet is also contributing to lower operating costs and freeing up staff to handle more complex transactions.

• HSBC grew its deposit base successfully, in particular in the personal sector. In the UK savings balances grew by US$4.9 billion or 23 per cent.
• During the first half of 2002 we sold US$1.9 billion of capital protection products in Hong Kong, an increase of 58 per cent compared with the first half of 2001.
• In mainland China we advanced our preparations for the day when we can offer domestic retail banking services by obtaining licences for all our branches to transact foreign currency business with domestic retail customers.
• On a like for like basis revenues from sales of insurance products in the UK, US and Hong Kong at US$159 million, US$21 million and US$123 million respectively were 26, 55 and 27 per cent higher than the levels achieved in the first half of 2001.
• In the UK we generated more than 64,000 mortgages, adding US$6.6 billion to mortgage lending. HSBC Bank plc was again winner of the What Mortgage Award for the best national bank over two, five and 10 years. In the US mortgages grew by US$1.7 billion or 11 per cent. In Hong Kong balances excluding the Government Home Ownership Scheme have grown by 5.6 per cent over the last twelve months. We achieved strong origination in Canada, Singapore, New Zealand, Korea, Taiwan and India.
• By 30 June 2002 we had 3.3 million registered internet users, up 33 per cent from 31 December 2001. In First Direct internet traffic has overtaken telephone traffic as the primary contact. Through our partnership with Yahoo! we were the lead sponsor of the China World Cup website which attracted 16 million visits to HSBC's mini site.

Commercial Banking

HSBC has perhaps the largest international middle market or small business customer base and this continued to provide opportunities for growth. For the first six months of 2002 the acquisitions of Banque Hervet in France and Demirbank in Turkey made full period contributions for the first time, both meeting our expectations. Trade flows in Asia began to pick up against the second half of last year and, with interest rates remaining low and domestic economies in Asia strengthening, credit costs remained low. In the UK much attention has been directed to the sector as a result of the Competition Commission Review of banking services to small and medium sized businesses.

• Although the conclusions of the Competition Commission Review were disappointing we were pleased that HSBC was ranked top for services provided on business accounts and for relationship management. HSBC UK customers are the most satisfied overall with their bank.
• The necessary actions to implement the pricing adjustments proposed by the Competition Commission are underway and will be in place by the end of this year. The cost to our shareholders is estimated at  £80 million in a full year.
• Business internet banking was launched in Hong Kong, the USA and the UK.

Corporate, Investment Banking and Markets

Our services for Corporate and Institutional Banking clients were integrated in the first half of 2002. Our strategy for this business will ensure a greater focus on client needs and an improved ability to provide tailored financial solutions. Co-operation between all products and geographic areas is being strengthened and the fruits of these efforts are already becoming visible in the results of the business.

• Throughout the first half, equity markets remained difficult and market values declined. As part of our overall strategy, we have reorganised our corporate finance and equities business to provide a strong focus on our customers'requirements. We will continue to ensure that the resources applied to this business are appropriate to client needs.
• In Debt Capital Markets activities, HSBC ranked first in issuance in all currencies for UK and French corporates and all Asian issuers (excluding Japan). In addition, for the fifth consecutive year we achieved the "Best at Treasury and Risk Management in Asia" Euromoney award for excellence.
• We led the IPO of Autoroutes du Sud de la France, the largest European IPO in the first half of 2002.
• We were privileged to be awarded the mandate to lead the first ever global Islamic bond which was issued on behalf of the Government of Malaysia, and was successfully completed in June.
• In our global custody business we again increased market share in Asia and reinforced our position as the largest UK based custodian.
• We continued to pursue our web-enabling initiatives and are a leading participant in FXall, which provides customers with access to an electronic trading platform offering foreign currency trade execution, access to research, and straight through processing.

Private Banking

Against a background of investment uncertainty, our Private Banking operations performed well, attracting net inflows over the last twelve months of US$14.8 billion and increasing fee and commission income by 6 per cent to US$316 million. We have substantially completed the co-ordination of our Private Banking businesses. Now we look forward to growing this business within HSBC.

Credit Quality

The credit environment was variable during the first half of 2002 as corporate profits fell and unemployment increased. However, our provisioning requirements remained substantially in line with those of 2001 (excluding last year's exceptional charge for Argentina) amounting on an annualised basis to 0.41 per cent of our loan book. 61 per cent of this net charge arose from personal lending, in line with our expectations as we grow this higher margin business. The stability of our bad debt charge reflects the continuing benefit to our customers of historically low interest rates. We also benefited from a relatively modest exposure to the US telecommunications and technology sectors and to US high yield debt. Credit costs in the first half of 2002 remained below what we would regard as the trend level for this part of the economic cycle and therefore we remain cautious.

Argentina

The situation in Argentina remains of great concern but we do not need at present to revise the provisioning we made at the end of last year. The principal deterioration in the first half of 2002 has been in relation to events we cannot control, such as the impact of judicial orders or 'amparos' allowing certain depositors to circumvent the mandatory pesification rules and recover their historic US dollar deposits at current exchange rates. This has been the major factor contributing to the attributable loss of US$61 million arising in the first half of 2002.

On the positive side we have recovered 25 per cent of personal and corporate credit outstanding at 31 December 2001 and renegotiation of all contractual arrangements is now proceeding. Government approval for the issue of compensation bonds to address the impact of the asymmetrical pesification has now been finalised and the bonds are expected to be issued later this year. We have taken no benefit from these bonds as they are not issued and therefore there is no reliable basis of valuation. We hope that the continuing dialogue with the IMF can be concluded satisfactorily. We cannot discount the risk of further deterioration, however.

Share Based Payments

Currently, there is considerable debate internationally about the proper accounting for share option plans. HSBC benefits from the use of share option plans to align the interests of employees and shareholders. Our Savings Related Share Option Plan (SRSOP) is the only one of our plans to offer an option over shares at a discount to market prices. This is offered to all our employees (subject to a service condition) and has over 70,000 participants, almost 45 per cent of our employee base. We support moves at the International Accounting Standards Board and from some leading US corporates to reflect the cost of such schemes through earnings. We have been doing so in our US GAAP numbers since 1997 and in Note 24 to the Interim Report we disclose that the expense in the first six months of 2002 was US$127 million, of which US$45 million arose from our SRSOP. HSBC is giving consideration to reflecting this cost in its primary UK financial statements in due course.

Outlook

Given the events of recent months, our view is that the outlook for the rest of 2002 is more likely to be shaped by sentiment than by economic fundamentals or by policy action although there are signs of recovery in the world economy.

It is unlikely that the decline in personal wealth caused by the fall in the equity markets can be reversed quickly by macroeconomic policy actions. Consumers, who drove a prolonged period of growth and mitigated the effects of the bursting of the technology and telecoms bubble, are becoming more cautious. Without growth in corporate profitability and investment, a stock market rebound is unlikely.

We continue to position HSBC for a subdued environment. We have strengthened our capital position still further. We maintain strong liquidity and we are pursuing a policy of diversification, both geographically and by line of business. We are in a good position to seek out and respond to new opportunities and to create long term value for our shareholders.