HSBC 20F 2003 Annual report

As filed with the Securities and Exchange Commission on March 5, 2004.

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	or

	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended December 31, 2003

	or

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from N/A to N/A

Commission file number: 1-14930

HSBC Holdings plc
(Exact name of Registrant as specified in its charter)

N/A	United Kingdom
(Translation of Registrant’s name into English)	(Jurisdiction of incorporation or organisation)

8 Canada Square
London E14 5HQ
United Kingdom
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class	Name of each exchange on which registered

Ordinary Shares, nominal value US$0.50 each. American Depository Shares, each representing 5 Ordinary Shares of nominal value US$0.50 each.	London Stock Exchange Hong Kong Stock Exchange Euronext Paris New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act of 1934:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the period covered by the annual report:

Ordinary Shares, nominal value US$0.50 each	10,998,301,166

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark which financial statements Item the registrant has elected to follow:

Item 17

Item 18

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H S B C H O L D I N G S P L C

Table ofContents

Certain Defined Terms



Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’ or the ‘Group’ means HSBC Holdings together with its subsidiary undertakings. Within this document the		Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’.

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H S B C H O L D I N G S P L C

FinancialHighlights

HSBC’s Financial Statements and Notes thereon, as set out on pages 233 to 366, are prepared in accordance with UK Generally Accepted Accounting Principles (‘UK GAAP’). HSBC uses the US dollar as its reporting currency because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts its business. As HSBC is listed on the New York Stock Exchange, it also reconciles certain financial information to US Generally Accepted Accounting Principles (‘US GAAP’), which differ in certain respects from UK GAAP as explained on page 326 and reconciled in Note 50 of the ‘Notes on the Financial Statements’. Unless otherwise stated, the numbers presented in this document have been prepared in accordance with UK GAAP.

HSBC judges its own performance by comparing returns before goodwill amortisation on cash invested as HSBC believes this gives an important measure of its underlying performance and facilitates comparison with its peer group. Profit before goodwill amortisation is derived by adjusting reported earnings to eliminate the impact of the amortisation of goodwill arising on acquisitions. The derivation of non-GAAP measures from the equivalent reported measures is explained in the ‘Footnotes to Financial Highlights’ on page 4.

	2003		2002
	US$m		US$m
For the year (excluding goodwill amortisation)
Operating profit before provisions¹	19,990		11,641
Profit on ordinary activities before tax²	14,401		10,513
Profit attributable to shareholders²	10,359		7,102

For the year (as reported)
Operating profit before provisions	18,540		10,787
Profit on ordinary activities before tax	12,816		9,650
Profit attributable to shareholders	8,774		6,239
Dividends	(6,532	)	(5,001	)

At year-end
Shareholders’ funds³	74,473		51,765
Capital resources	74,042		57,430
Customer accounts and deposits by banks	643,556		548,371
Total assets³	1,034,216		758,605
Risk-weighted assets	618,662		430,551

	US$		US$
Per ordinary share⁴
Basic earnings	0.84		0.67
Earnings excluding goodwill amortisation⁵	0.99		0.76
Diluted earnings	0.83		0.66
Dividends	0.60		0.53
Net asset value at year end	6.79		5.46

	At 31 December 2003		At 31 December 2002

Share information
US$0.50 ordinary shares in issue	10,960	m	9,481	m
Market capitalisation	US$172	bn	US$105	bn
Closing market price per ordinary share:
– London	£8.78		£6.87
– Hong Kong	HK$122.50		HK$85.25
Closing market price per American Depositary Share (‘ADS’)⁶	US$78.82		US$54.98

	HSBC		Benchmark
Total shareholder return to 31 December 2003⁷
–over 1 year	136		132
–since 1 January 1999⁸	211		126

For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.

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H S B C H O L D I N G S P L C

FinancialHighlights(continued)



Capital and performance ratios
	2003 %	2002 %
Capital ratios
Tier 1 capital	8.9	9.0
Total capital	12.0	13.3

Performance ratios (excluding goodwill amortisation)
Return on average invested capital⁹	13.7	12.9
Return on average net tangible equity^10,11	24.7	20.1
Post-tax return on average tangible assets¹¹	1.21	1.11
Post-tax return on average risk-weighted assets¹¹	2.07	1.95

Performance ratios (as reported)
Return on average shareholders’ funds³	13.0	12.4
Post-tax return on average total assets³	1.01	0.97
Post-tax return on average risk-weighted assets	1.78	1.74

Credit coverage ratios
Provisions for bad and doubtful debts as a percentage of operating profits before goodwill amortisation and provisions	30.5	11.3
Provisions for bad and doubtful debts as a percentage of average gross customer advances:
– in aggregate	1.2	0.4
– Consumer Finance (Household)¹²	5.2	n/a
– other HSBC	0.4	0.4
Total provisions outstanding as a percentage of non-performing loans at year end:
– in aggregate	91.0	86.7
– Consumer Finance (Household)¹²	110.5	n/a
– other HSBC	82.1	86.7

Efficiency and revenue mix ratios
Cost:income ratio (excluding goodwill amortisation)¹³	51.3	56.2
As a percentage of total operating income:
– net interest income	62.3	58.1
– other operating income	37.7	41.9
– net fees and commissions	25.3	29.4
– dealing profits	5.3	4.9

Constant currency

Constant currency comparatives in respect of 2002 and 2001, used in the 2003 and 2002 commentaries respectively, are computed by retranslating into US dollars:

•	the profit and loss accounts for 2002 and 2001 of non-US dollar branches, subsidiary undertakings, joint ventures and associates at the average rates of exchange for 2003 and 2002 respectively; and
•	the balance sheets at 31 December 2002 and 2001 for non-US dollar branches, subsidiary undertakings, joint ventures and associates at the rates of exchange ruling at 31 December 2003 and 2002 respectively.
	No adjustment is made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currency of any HSBC branches, subsidiary undertakings, joint ventures and associates.

	2003 compared with 2002		2002 compared with 2001

	As reported	Constant currency	As reported		Constant currency
	%	%	%		%
Operating income and cost growth
Net interest income	66	58	5		6
Fees and commissions (net)	33	24	5		4
Dealing profits	66	58	(22	)	(23	)
Total operating income	54	46	3		3
Administrative expenses (excluding goodwill
amortisation)	41	32	2		(4	)

For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.

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H S B C H O L D I N G S P L C

FinancialHighlights(continued)



Five-year comparison

	2003 US$m		2002 US$m	³	2001 US$m	³	2000 US$m	³	1999 US$m
At year-end
Share capital	5,481		4,741		4,678		4,634		4,230
Shareholders’ funds	74,473		51,765	³	45,688	³	45,631		34,402	¹⁷
Capital resources¹⁴	74,042		57,430		50,854		50,964		44,270
Customer accounts	573,130		495,438		449,991		427,069		359,972
Undated subordinated loan capital	3,617		3,540		3,479		3,546		3,235
Dated subordinated loan capital	17,580		14,831		12,001		12,676		12,188
Loans and advances to customers¹⁵	528,977		352,344		308,649		289,837		253,567
Total assets	1,034,216		758,605	³	695,545	³	673,503		569,908	¹⁷

For the year
Net interest income	25,598		15,460		14,725		13,723		11,990
Other operating income	15,474		11,135		11,163		10,850		9,012
Operating profit before provisions	18,540		10,787		10,484		10,486		9,653
Provisions for bad and doubtful debts	(6,093	)	(1,321	)	(2,037	)	(932	)	(2,073	)
Profit on ordinary activities before tax	12,816		9,650		8,000		9,775		7,982
Profit attributable to shareholders	8,774		6,239		4,992		6,457		5,408
Dividends	(6,532	)	(5,001	)	(4,467	)	(4,010	)	(2,872	)

	US$	US$		US$		US$		US$
Per ordinary share⁴
Basic earnings	0.84		0.67		0.54		0.74		0.65
Earnings excluding goodwill amortisation⁵	0.99		0.76		0.63		0.80		0.66
Diluted earnings	0.83		0.66		0.53		0.73		0.65
Dividends	0.60		0.53		0.48		0.435		0.34
Net asset value at year end	6.79		5.46		4.88		4.92		3.95

Share information
US$0.50 ordinary shares in issue	10,960	m	9,481	m	9,355	m	9,268	m	8,458	m

	%		%		%		%		%

Financial ratios
Dividend payout ratio¹⁶	60.6		69.7		76.2		54.4		51.5
Post-tax return on average total assets	1.01		0.97	³	0.86	³	1.31		1.20
Return on average shareholders’ funds	13.0		12.4	³	10.6	³	15.8		17.5
Average shareholders’ funds to average total assets	7.06		6.91	³	6.87	³	6.64		6.24

Capital ratios
Tier 1 capital	8.9		9.0		9.0		9.0		8.5
Total capital	12.0		13.3		13.0		13.3		13.2

Foreign exchange translation rates to US$
Closing – US$1:£	0.560		0.620		0.690		0.670		0.620
– US$1:€	0.793		0.953		1.130		1.076		0.996
Average – US$1:£	0.612		0.666		0.695		0.660		0.618
– US$1:€	0.885		1.061		1.117		1.084		0.943

For the above footnotes, see ‘Footnotes to Financial Highlights’ on page 4.

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FinancialHighlights(continued)


Five-year comparison(continued)

Amounts in accordance with US GAAP
	2003 US$m		2002 US$m		2001 US$m		2000 US$m		1999 US$m
Income statement for the year
Net income available for ordinary
shareholders	7,231		4,900		4,911		6,236		4,889
Other comprehensive income	7,401		5,502		(1,439	)	(511	)	(776	)
Dividends	(6,974	)	(4,632	)	(4,394	)	(3,137	)	(2,617	)

Balance sheet at 31 December
Total assets	1,012,023		763,565		698,312		680,076		574,588
Shareholders’ funds	80,251		55,831		48,444		48,072		35,930

	US$		US$		US$		US$		US$
Per ordinary share
Basic earnings	0.69		0.52		0.53		0.71		0.59
Diluted earnings	0.69		0.52		0.53		0.70		0.58
Dividends	0.685		0.495		0.48		0.34		0.31
Net asset value at year end	7.32		5.89		5.18		5.19		4.25

Footnotes to Financial Highlights

1	Operating profit before provisions and excluding goodwill amortisation can be reconciled to the equivalent reported measure by deducting goodwill amortisation of US$1,450 million ( 2002: US$854 million).

2	The profit on ordinary activities before tax and the profit attributable to shareholders excluding, in each case, goodwill amortisation, can be reconciled to the equivalent reported measures by deducting goodwill amortisation, including that attributable to joint ventures and associates, of US$1,585 million (2002: US$863 million).

3	The figures for shareholders’ funds, total assets and average total assets for 2002 and, in the Five-year comparison, 2001 and 2000, have been restated to reflect the adoption of Urgent Issues Task Force (‘UITF’) Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 of the ‘Notes on the Financial Statements’ on pages 239 to 240. The 1999 comparatives in the Five-year comparison have not been restated as any adjustment would not significantly alter the figures. Therefore, any benefit to be obtained from restatement would be outweighed by the cost of the exercise.

4	Per ordinary share amounts reported here and throughout the document reflect the share capital reorganisation on 2 July 1999.

5	Earnings excluding goodwill amortisation per ordinary share are calculated by dividing profit excluding goodwill amortisation attributable to shareholders (as explained in note 2 above) by the weighted average number of ordinary shares in issue and held outside the Group during the year, which is the same number used in the calculation of basic earnings per share on a reported basis.

6	Each ADS represents 5 ordinary shares.

7	Total shareholder return (‘TSR’) is defined on page 218.

8	HSBC’s governing objective for its five year strategic plan ended 31 December 2003 was to beat the TSR of its defined peer group benchmark. An additional target objective was set to achieve a doubling of TSR over the five years beginning on 1 January 1999.

9	The definition of return on invested capital and a reconciliation to the equivalent GAAP measures are set out on page 58.

10	The return on average net tangible equity is defined as attributable profit excluding goodwill amortisation of US$10,359 million (2002: US$7,102 million) divided by average shareholders’ funds after deduction of average purchased goodwill of US$42.0 billion (2002: US$35.3 billion).

11	Average net tangible equity and average tangible assets are calculated by deducting average purchased goodwill net of cumulative amortisation of US$25.4 billion (2002: US$15.0 billion). The calculation of average risk-weighted assets is the same for both the reported basis and that excluding goodwill amortisation.

12	Annualised on the basis of the period of ownership in the year of acquisition.

13	The cost:income ratio, excluding goodwill amortisation, is defined as operating expenses excluding goodwill amortisation of US$1,450 million (2002: US$854 million) divided by operating income.

14	Capital resources are defined on page 173. A detailed computation for 2003 and 2002 is provided on page 175.

15	Net of suspended interest and provisions for bad and doubtful debts

16	Dividends per share expressed as a percentage of earnings per share (excluding goodwill amortisation)

17	Apart from shareholders’ funds and total assets at the 1999 year-end, the 1999 comparatives have not been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred tax’ in 2002 as any adjustment made would not significantly alter the figures. Therefore, any benefit to be obtained from restatement would be outweighed by the cost of the exercise.

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H S B C H O L D I N G S P L C

Cautionary Statement Regarding Forward-Looking Statements

This Annual Report contains certain forward-looking statements with respect to the financial condition, results of operations and business of HSBC.

Statements that are not historical facts, including statements about HSBC’s beliefs and expectations, are forward-looking statements. Words such as ‘expects’, ‘anticipates’, ‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’, ‘reasonably possible’ and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made, and it should not be assumed that they have been revised or updated in the light of new information or future events.

Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts.

Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These factors include, among others:

·	changes in general economic conditions in the markets in which HSBC operates, such as:

	-	changes in foreign exchange rates, in both market exchange rates (for example, between the US dollar and the pound sterling) and government-established exchange rates (for example, between the Hong Kong dollar and the US dollar);

	-	volatility in interest rates;

	-	volatility in equity markets, including in the smaller and less liquid trading markets in Asia and South America;

	-	lack of liquidity in wholesale funding markets in periods of economic or political crisis;

	-	volatility in national real estate markets, particularly consumer-owned real estate markets;

	-	continuing or deepening recessions and employment fluctuations; and

	-	consumer perception as to the continuing availability of credit, and price competition in the market segments served by HSBC.

·	changes in governmental policy and regulation, including:

	-	the monetary, interest rate and other policies of central banks and bank and other regulatory authorities, including the UK Financial Services Authority, the Bank of England, the Hong Kong Monetary Authority, the US Federal Reserve, the European Central Bank, the People’s Bank of China and the central banks of other leading economies and markets where HSBC operates;

	-	expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership;

	-	initiatives by local, state and national regulatory agencies or legislative bodies to revise the practices, pricing or responsibilities of financial institutions serving their consumer markets;

	-	changes in personal bankruptcy legislation in the principal markets in which HSBC operates and the consequences thereof;

	-	general changes in governmental policy that may significantly influence investor decisions in particular markets in which HSBC operates;

	-	other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for HSBC’s products and services;

	-	the costs, effects and outcomes of regulatory reviews, actions or litigation, including any additional compliance requirements;

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H S B C H O L D I N G S P L C

Cautionary Statement Regarding Forward-Looking Statements(continued)

	-	the ability of the Government of Argentina to attract international support for the measures necessary to restructure its debt obligations and create a viable financial system with stability in monetary, fiscal and exchange rate policies; and

	-	the effects of competition in the markets where HSBC operates including increased competition resulting from new types of affiliations between banks and financial services companies, including securities firms, particularly in the United States.

·	factors specific to HSBC:

	-	the success of HSBC in adequately identifying the risks it faces, such as the incidence of loan losses or delinquency, and

		managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, HSBC’s ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; and

	-	the success of HSBC in integrating the recently acquired Grupo Financiero Bital S.A. de C.V. (now Grupo Financiero HSBC S.A. de C.V. (‘HSBC Mexico’)), Household International, Inc. (‘Household’), Losango Promotora de Vendas, and The Bank of Bermuda Limited.

Information About the Enforceability of Judgements made in the United States

HSBC Holdings is a public limited company incorporated in England and Wales. Most of HSBC Holdings’ Directors and executive officers live outside the United States. As a result, it may not be possible to serve process on such persons or HSBC Holdings in the United States or to enforce judgements obtained in US courts against them or HSBC Holdings based on civil liability provisions of the securities laws of the United States. There is doubt as to whether English courts would enforce:

·	certain civil liabilities under US securities laws

in original actions; or

·	judgements of US courts based upon these civil liability provisions.

In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in the United Kingdom. The enforceability of any judgement in the United Kingdom will depend on the particular facts of the case as well as the laws and treaties in effect at the time.

Exchange Controls and Other Limitations Affecting Equity Security Holders

There are currently no UK laws, decrees or regulations which would prevent the transfer of capital or remittance of distributable profits by way of dividends and other payments to holders of HSBC Holdings’ equity securities who are not residents of the United Kingdom. There are also no restrictions

under the laws of the United Kingdom or the terms of the Memorandum and Articles of Association of HSBC Holdings concerning the right of non-resident or foreign owners to hold HSBC Holdings’ equity securities or, when entitled to vote, to do so.

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H S B C H O L D I N G S P L C

Description of Business

Introduction

HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$172 billion at 31 December 2003.

Headquartered in London, HSBC operates through long-established businesses and has an international network of over 9,500 offices in 79 countries and territories in five regions: Europe; Hong Kong; the rest of Asia-Pacific, including the Middle East and Africa; North America; and South America. Within these geographical regions, a comprehensive range of financial services is offered to personal, commercial, corporate, institutional, investment and private banking clients. HSBC manages its business through the following customer groups: Personal Financial Services; Commercial Banking; Corporate, Investment Banking and Markets; and Private Banking. Whilst part of Personal Financial Services, the consumer finance operations of Household are currently a distinct business and have been separately identified accordingly. Services are delivered through businesses which usually operate as domestic banks, typically with large retail deposit bases and strong liquidity and capital ratios. In North America, Household is one of the largest consumer finance companies in the US, and is substantially funded in the wholesale market. By using HSBC’s extensive technological links, businesses are able to access its wide range of products and services and adapt them to local customer needs.

The establishment of HSBC and its hexagon symbol as a uniform, international brand has ensured that it has become an increasingly familiar sight across the world.

History and development

The founding member of HSBC, The Hongkong and Shanghai Banking Corporation Limited (‘The Hongkong and Shanghai Banking Corporation’), was established in Hong Kong and Shanghai in 1865. The bank expanded rapidly, with an emphasis on building up representation in China and the rest of the Asia-Pacific region, whilst also establishing a presence in the major financial and trading centres in Europe and America.

In the mid-1950s, The Hongkong and Shanghai Banking Corporation embarked on a strategy of pursuing profitable growth through acquisition as well as organic development – a combination that has remained a key feature of HSBC’s approach ever since.

As each acquisition has been made, HSBC has focused on integrating its newly acquired operations with its existing businesses with a view to maximising the synergy between the various components. Key to this integration process is to blend local and international expertise.

The most significant developments are described below. Other acquisitions in 2003 are discussed in the section headed ‘Business highlights in 2003’ under the relevant geographical region on pages 15 to 26.

The Hongkong and Shanghai Banking Corporation purchased The Mercantile Bank of India Limited and The British Bank of the Middle East (now HSBC Bank Middle East Limited) in 1959. In 1965, The Hongkong and Shanghai Banking Corporation acquired a 51 per cent interest (subsequently increased to 62.14 per cent) in Hang Seng Bank Limited (‘Hang Seng Bank’), consolidating its position in Hong Kong. Hang Seng Bank is the second-largest listed bank in Hong Kong by market capitalisation.

From the beginning of the 1980s, The Hongkong and Shanghai Banking Corporation began to focus its acquisition strategy on the UK. In 1987, it purchased a 14.9 per cent interest in Midland Bank plc, now HSBC Bank plc (‘HSBC Bank’), one of the UK’s principal clearing banks. In 1991, HSBC Holdings plc was established as the parent company of HSBC and, in 1992, HSBC Holdings purchased the remaining interests in HSBC Bank. In connection with this acquisition, HSBC’s head office was transferred from Hong Kong to London in January 1993. To expand its base in the euro zone, in October 2000 HSBC completed its acquisition of 99.99 per cent of the issued share capital of CCF S.A. (‘CCF’), a major French banking group.

The Hongkong and Shanghai Banking Corporation entered the US market in 1980 by acquiring a 51 per cent interest in Marine Midland Banks, Inc. (now HSBC USA Inc.). The remaining interest was acquired in 1987.

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H S B C H O L D I N G S P L C

Description of Business(continued)

In 1981, The Hongkong and Shanghai Banking Corporation incorporated its extant Canadian operations. HSBC Bank Canada has since made numerous acquisitions, expanding rapidly to become the largest foreign-owned bank in Canada and the seventh-largest overall at 31 December 2003.

In 1997, HSBC assumed selected assets, liabilities and subsidiaries of Banco Bamerindus do Brasil S.A. following the intervention of the Central Bank of Brazil, and completed the acquisition of Grupo Roberts in Argentina.

In December 1999, HSBC acquired Republic New York Corporation, subsequently merged with HSBC USA Inc., and Safra Republic Holdings S.A. (together ‘Republic’).

In 2002, HSBC made further steps in expanding its presence in North America, completing the acquisition of 99.59 per cent of Grupo Financiero Bital S.A. de C.V. (now ‘HSBC Mexico’), the fifth-largest banking group in Mexico measured by deposits and assets.

Mainland China remains a critical long-term growth area for the Group. In 2002, HSBC completed the acquisition of a 10 per cent equity stake in Ping An Insurance Company of China Limited. Ping An Insurance is the second-largest life insurer and the third-largest insurer in mainland China.

In March 2003, HSBC acquired Household International, Inc. (‘Household’) for a consideration of approximately US$14.8 billion. The acquisition has significantly increased the contribution from HSBC’s North American business. In particular, Household offers HSBC national coverage in the US for consumer lending, credit cards and credit insurance through varied distribution channels, including over 1,300 branch offices in 45 states.

In October 2003, HSBC agreed to acquire The Bank of Bermuda Limited for US$1.3 billion, adding a strong position in the local banking market in Bermuda and significant scale and geographical spread to HSBC’s existing international fund administration, private banking, trust and payments, and cash management businesses. The acquisition was completed on 18 February 2004.

In December 2003, HSBC acquired substantially all of Lloyds TSB Group plc’s onshore and offshore businesses and assets related to Brazil for US$745 million. Included in the transaction was the

acquisition of all the shares of Banco Lloyds TSB S.A. – Banco Múltiplo and a consumer finance company, Losango Promotora de Vendas (‘Losango’).

Outlook

In 2004, the Group has already seen growth in consumer spending and borrowing, in increased merger and acquisition activity, and a modest resumption of growth in demand for equity investment products. The Group also sees improving prospects for economic growth and private sector employment, particularly in the US and in Hong Kong.

In emerging markets, such as Brazil, Mexico and the ASEAN countries, relatively stable currencies and historically low interest rates are promoting consumer activity, fuelling domestic growth and reducing export dependence. China plays an increasingly important role, not only through its export growth, but also as the fastest growing market for commodity producing countries and for those developed countries which are supplying the technology, equipment and services to support its economic expansion.

The Group is conscious of the changing nature of the global economy and the speed of change and continues to monitor the impact on sentiment and consumer spending of globally strong property prices, which continue to rise faster than underlying wage growth in many developed markets. While such rises are understandable in the context of low interest rates and limited appetite for alternative investment opportunities, in the long run property prices have to be linked to income growth.

The picture for 2004 therefore is one of improving sentiment and stronger growth prospects in the near term, but with the potential risk of an unexpected shock as a result of circumstances which would cause a spike in either short-term interest rates or commodity prices.

Against this backdrop HSBC expects to concentrate on building its businesses steadily. HSBC expects to see lending to consumers around the world rise as a proportion of our total lending, with the emphasis on real estate secured lending. The Group also expect to see business in the US grow in importance to HSBC as the potential of the

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Household acquisition is realised and as the US economy shows its flexibility and responds to the lower value of the dollar.

Strategy

At the end of 1998, HSBC launched Managing for Value, a five-year plan to take the Group into the 21st Century. Over the life of the plan, HSBC made significant progress against the eight strategic imperatives included therein.

Under Managing for Value, HSBC established HSBC and its hexagon symbol as a globally recognised brand and greatly increased the scope and penetration of its wealth management services in a number of key markets. Corporate, Investment Banking and Markets operations were completely integrated, enabling the Group to pursue a strategy of seamlessly servicing the needs of the largest international companies and institutions, and build corporate origination and cross-selling capabilities. A risk adjusted cost of capital methodology was introduced and applied. (For the application of economic profit in HSBC and its results for 2003 see page 58.) Good progress was made against the other strategic imperatives announced under the initiative.

In financial terms, HSBC achieved its objective of doubling Total Shareholder Return (‘TSR’) and beating the TSR performance of a peer group of leading banks over the period. TSR is a measure of the growth in the value of a share over a specific period with dividends reinvested. Starting with a benchmark of 100 on 31 December 1998, HSBC’s TSR more than doubled to 211 on 31 December 2003, while that of its peer group stood at 126.

As HSBC worked on its strategic plan for the next five years it was clear that there were many opportunities to develop HSBC’s businesses further, and also that HSBC could build more from the structural and business changes achieved in the recent past. For instance, during the five years of Managing for Value, HSBC made investments in the US (Republic and Household), France (CCF) and Mexico (HSBC Mexico), as a result of which an additional 100,000 employees joined the Group. This expansion changed the profile of HSBC’s business, increased the complexity of the Group and brought new management and business challenges as well as exciting opportunities.

The new plan, developed to build on the achievements of the Managing for Value strategy and take the Group forward, is now being implemented. This plan, called Managing for Growth, was launched at the end of 2003. It provides HSBC with a blueprint for growth and development during the next five years. The plan is an evolutionary, not revolutionary, strategy. It builds on HSBC’s strengths and it addresses the areas where further improvement is considered both desirable and attainable.

Management’s vision for the Group remains unchanged: HSBC aims to be the world’s leading financial services company. In this context, ‘leading’ means preferred, admired and dynamic, and being recognised for giving the customer a fair deal. HSBC will strive to secure and maintain a leading position within each of its customer groups in selected markets.

HSBC will remain focused on growing its TSR. In an era of low interest rates and low nominal growth rates, HSBC remains committed to exceeding a benchmark based on peer group comparison. For full details of the benchmark, see page 217. The peer group of banks has been updated to include HSBC’s current principal competitors, and HSBC will chart its TSR progress on a three-year rolling basis and over the five-year plan period.

HSBC’s core values are integral to its strategy, and communicating them to shareholders, customers and employees is intrinsic to the plan. These values comprise a preference for long-term, ethical client relationships; high productivity through teamwork; a confident and ambitious sense of excellence; being international in outlook and character; prudence; creativity and strong marketing.

In the plan, HSBC also recognises its corporate social responsibility (‘CSR’), which is essential to sustaining the Group’s long-term success in the community. HSBC has always had a strong sense of corporate social responsibility, and believes that there is no fundamental conflict between being a good corporate citizen and being sustainably profitable. Moreover, the pressures to comply with public expectations across a wide spectrum of social, ethical and environmental issues are growing rapidly. The strategy therefore calls for a renewed recognition of HSBC’s wider obligations to society and for increased external communication of the Group’s CSR policies and performance, particularly on education and the environment, which will remain

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H S B C H O L D I N G S P L C

Description of Business(continued)

the principal beneficiaries of HSBC’s philanthropic activities.

HSBC’s new plan is led by customer groups, and specific strategies will be implemented for each of them. The expression ‘customer group’ is new in 2003. Previously ‘customer groups’ were called ‘lines of business’, but HSBC believes the new term reinforces more accurately to all its employees the Group’s customer focus.

The acquisition of Household in 2003 highlighted the importance within Personal Financial Services of a distinctive customer group, Consumer Finance, to augment HSBC’s existing activities in Personal Financial Services. HSBC’s other customer groups are Corporate, Investment Banking and Markets; Commercial Banking; and Private Banking.

Key elements in achieving HSBC’s objectives for its customer groups will be accelerating the rate of growth of revenue; developing the brand strategy further; improving productivity; and maintaining the Group’s prudent risk management and strong financial position. Developing the skills of HSBC’s staff will also be critical and it will be necessary to ensure that all employees understand how they can contribute to the successful achievement of the Group’s objectives. Employees who achieve this contribution will be rewarded accordingly.

Operating management will continue to be organised geographically under four regional intermediate head offices, with business activities concentrated in locations where growth and critical mass are to be found.

	The plan contains eight strategic imperatives:

•	Brand: make HSBC and its hexagon symbol one of the world’s leading brands for customer experience and corporate social responsibility;

•	Personal Financial Services (‘PFS’): drive growth in key markets and through appropriate channels to make HSBC the strongest global player in PFS;

•	Consumer Finance: extend HSBC’s new business to existing customers and penetrate new markets;

•	Corporate, Investment Banking and Markets: accelerate growth through enhanced capital markets and advisory capabilities focused on the client;

•	Commercial Banking: make the most of HSBC’s international customer base through effective customer relationship management and improved product offering in all the Group’s markets;

•	Private Banking: serve the Group’s highest value personal clients around the world, utilising the investments already made;

•	Attract, develop and motivate HSBC’s people, rewarding success and rejecting mediocrity; and

•	TSR: fulfil HSBC’s TSR target by achieving strong competitive performances in earnings per share growth and efficiency.

Employees and management

At 31 December 2003, HSBC’s customers were served by 232,000 employees (including part-time employees) worldwide, compared with 192,000 at 31 December 2002 and 180,000 at 31 December 2001. The main centres of employment are the UK with 56,000 employees, the US (43,000), Hong Kong (24,000), Brazil (25,000), Mexico (18,500) and France (14,000). HSBC negotiates with recognised unions, and estimates that approximately 44 per cent of its employees are unionised. The highest concentrations of union membership are in Brazil, France, India, Malaysia, Malta, Mexico, the Philippines, Singapore and the UK. HSBC has not experienced any material disruptions to its operations from labour disputes during the past five years.

In support of its new strategy, HSBC continues to focus on attracting, developing and motivating the very best individuals. Emphasis is therefore given to performance management; reward; talent management, including graduate recruitment and international secondments; diversity; and learning and development. Ensuring that employee satisfaction with the working experience is kept as high as possible is seen as beneficial to shareholders, employees and customers alike.

HSBC is proud of its diverse workforce, which is able to communicate with HSBC’s customers in local languages and dialects across 79 countries and territories. A continuing focus on policies that encourage an inclusive working environment and the development of career opportunities for all, regardless of ethnicity, gender or grade, is a key part of positioning HSBC as an employer of choice.

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HSBC operates in a highly competitive and international business environment and as such is obliged to manage its costs realistically, responding to the availability of talent pools which are proven to be both efficient and cost effective. This can lead to the migration of tasks to different geographical locations as education levels improve, and as investments in technology and telecommunications facilitate access to those locations. As a result, job losses can arise. HSBC has a good record of communicating openly and sensitively in these circumstances and of reassigning employees and minimising compulsory redundancies, wherever possible.

The quality of HSBC’s employees represents a significant competitive advantage. The international mix of staff, working in a meritocracy, enables HSBC to resource operations with employees who have a detailed knowledge of local markets, whilst maintaining a global perspective. To maintain this balance, international mobility is seen as vital to sharing best practice and is actively encouraged and managed. HSBC promotes and recruits the most able and attaches great importance to cultivating its own talent. It values teamwork and collective management. Senior management succession is planned to be as seamless as possible.

Customer Groups

Profit before tax by customer group

Year ended 31 December 2003

Total assets by customer group
Year ended 31 December 2003

*	excludes Hong Kong Government certificates of indebtedness

Personal Financial Services

Personal Financial Services provides some 39 million individual and self-employed customers with a wide range of banking and related financial services. Customer Relationship Management (‘CRM’) systems and processes are used by HSBC employees to recognise and fulfil customer needs by identifying appropriate products and services and delivering them to the customer through their channel of preference. Examples include current, cheque and savings accounts; loans and home finance; cards; payments; insurance; and investment services, including securities trading. Insurance products sold and distributed by HSBC through its branch networks include loan and health protection; life, property, casualty and health insurance; and pensions. HSBC acts as both a broker and an underwriter, and sees continuing opportunities to deliver insurance products to its personal customer base.

Personal Financial Services are increasingly delivered via self-service terminals, the telephone and the internet. Comprehensive financial planning services, covering customers’ investment, retirement, personal and asset protection needs are offered through specialist financial planning managers.

High net worth individuals and their families who choose the differentiated services offered within Private Banking are not included in this segment.

The most valuable of the 39 million Personal Financial Service customers worldwide are offered HSBCPremier. HSBC currentlyhas more than 880,000HSBC Premier customers, who have access to more than 250 specialisedPremier centres located in 31 countries. In addition to the standard range of personal banking products and services, HSBCPremier customers receive dedicated relationship

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management and 24 hour priority telephone access and global travel assistance. In 2003 HSBCPremierInternational Services were introduced in eight countries, providing seamless account opening and credit history transfer across borders for HSBCPremier customers.

Consumer Finance

Within Personal Financial Services, Household’s operations in the US, the UK and Canada make credit available to customer groups not well catered for by traditional banking operations, facilitate point of sale credit in support of retail trading purchases and support major affiliate credit card programmes. At 31 December 2003 Household had over 60 million customers with total gross advances of US$121.7 billion. Consumer Finance products are offered through the following businesses:

Household’sconsumer lendingbusiness is one of the largest sub-prime home equity originators in the US, marketed under the HFC and Beneficial brand names through a network of over 1,300 branches in 45 states, direct mail, telemarketing, strategic alliances and the internet. ‘Sub-prime’ is a US categorisation which describes customers who have limited credit histories, modest incomes, high debt-to-income ratios, high loan-to-value ratios (for real estate secured products) or have experienced credit problems caused by occasional delinquencies, prior charge-offs, bankruptcy or other credit related actions. Consumer lending products include secured and unsecured loans such as first and second lien closed-end mortgages, open-ended home equity loans, personal loans and retail finance contracts.

Household’s mortgage servicesbusiness purchases first and second lien residential mortgage loans from a network of over 200 unaffiliated third party lenders (‘correspondents’) in the US. Purchases are either of pools of loans (‘bulk acquisitions’) or individual loan portfolios (‘flow acquisitions’) made under predetermined underwriting guidelines. Forward commitments are offered to selected correspondents to strengthen relationships and create a sustainable growth channel for this business. Household, through its subsidiary Decision One, also offers mortgage loans referred by mortgage brokers.

Household’sretail servicesbusiness is one of the largest providers of third party private label credit cards (or store cards) in the US based on receivables

outstanding, with over 60 merchant relationships and 14 million active customer accounts.

In addition to originating and refinancing motor vehicle loans, Household’s motor vehicle financebusiness purchases retail instalment contracts of US customers who do not have access to traditional prime based lending sources. The loans are largely sourced from a network of approximately 5,000 motor dealers.

Household’scredit card services business is the seventh largest issuer of MasterCard¹ and Visa¹credit cards in the US, and also includes affiliation cards such as the GM Card ® and the AFL-CIO Union Plus² ® credit card. Also, credit cards issued in the name of Household’s Household Bank and Orchard Bank brands ar e offered to customers under-served by traditional providers, or are marketed primarily through merchant relationships established by the retail services business.

A wide range ofinsurance services is offered by Household to customers in the US, the UK and Canada who are typically under-insured by traditional sources. The purchase of insurance is never a condition of any loan or credit advanced by Household.

Therefund lending business accelerates access to funds for US taxpayers who are entitled to tax refunds. The business is seasonal with most revenues generated in the first three months of the year.

Household’s business in the UK provides mid-market consumers with mortgages, secured and unsecured loans, insurance products, credit cards and retail finance products. It concentrates on customer service through its 216 HFC Bank and Beneficial branches, and finances consumer electronics through its retail finance operations. In Canada, similar products are offered and, deposits are taken through Household’s trust operations there.

Commercial Banking

HSBC is one of the world’s leading banks in the

1	MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of Visa USA, Inc.
2	The Union plus MasterCard and Visa credit card programme is an affinity arrangement with Union Privilege under which credit cards are offered to members of unions affiliated with the American Federation of Labor and Congress of Industrial organisations (‘AFL-CIO’).

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provision of financial services and products to small and medium-sized businesses, with over 2 million business customers including sole proprietors, partnerships, clubs and associations, incorporated businesses and publicly quoted companies.

At 31 December 2003, HSBC had total commercial customer deposits of US$111.5 billion and total commercial customer loans and advances, net of suspended interest and provisions for bad and doubtful debts, of US$103.5 billion.

The Commercial Banking segment places particular emphasis on multi-disciplinary and geographical collaboration in meeting its commercial customers’ needs. This differentiated service allows HSBC to broaden and enhance its offering to its Commercial Banking customers. The range of products includes:

Payments and cash management: HSBC is a leading provider of payments, collections, liquidity management and account services worldwide, enabling financial institutions and corporate customers to manage their cash efficiently on a global basis. HSBC’s extensive network of offices and strong domestic capabilities in many countries, including direct access to local clearing systems, enhance its ability to provide high-quality cash management services.

e-banking: A key component of HSBC’s provision of financial services to commercial customers is continuing innovation and flexibility in electronic delivery solutions.

Wealth management services: These include advice and products related to savings and investments. They are provided to commercial banking customers and their employees through HSBC’s worldwide network of branches and business banking centres.

Insurance: HSBC offers insurance protection, employee benefits programmes and pension schemes designed to meet the needs of businesses and their employees, and to help fulfill the applicable statutory obligations of client companies. These products are provided by HSBC either as an intermediary (broker, agent or consultant) or as a supplier of in-house or third party offerings. Products and services include a full range of commercial insurance, including pension schemes; healthcare schemes; ‘key man’ life insurance; car fleet; goods in transit; trade credit protection; risk management and insurance due

diligence reviews; and actuarial/employee benefit consultancy.

Trade services: HSBC has more than 130 years of experience in trade services. A complete range of traditional documentary credit, collections and financing products is offered, as well as specialised services such as insured export finance, international factoring and forfaiting. HSBC’s expertise is supported by highly automated systems.

Leasing, finance and factoring: HSBC provides leasing, finance (including instalment and invoice finance) and domestic factoring services, primarily to commercial customers in the UK, Hong Kong and France. Special divisions have been established to finance vehicles, plant and equipment, materials handling, machinery and large complex leases.

Corporate, Investment Banking and Markets

HSBC’s Corporate, Investment Banking and Markets business provides tailored financial solutions to major government, corporate and institutional clients worldwide. Managed as a global business, this customer group operates a long-term relationship management approach to build a full understanding of clients’ financial requirements. Sectoral client service teams comprising relationship managers and product specialists develop financial solutions to meet individual client needs. With dedicated offices in over 50 countries and with access to HSBC’s worldwide presence and capabilities, this business serves subsidiaries and offices of these clients on a global basis.

Products and services offered include:

Global Markets: HSBC’s operations in Global Markets consist of treasury and capital markets services for supranationals, central banks, corporations, institutional and private investors, financial institutions and other market participants. Products include:

•	foreign exchange;

•	currency, interest rate, bond, credit, equity and other specialised derivatives;

•	government and non-government fixed income and money market instruments;

•	precious metals and exchange traded futures;

•	equity services, including research, sales and

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	trading for institutional, corporate, private clients and asset management services, including global investment advisory and fund management services; and

•	capital raising, both publicly and privately, including debt and equity capital, structured finance and syndicated finance, and distribution of these instruments utilising links with HSBC’s global networks.

Global Transaction Banking: This includes international, regional and ‘in-country’ payments and cash management services; trade services, particularly the specialised ‘supply chain’ product; and securities services, where HSBC is one of the world’s leading custodians providing custody and clearing services and funds administration to both domestic and cross-border investors. Factoring and banknotes services are also provided by specialist units.

Corporate and Institutional Banking: This includes:

•	direct lending, including structured finance for complex investment facilities;

•	leasing finance with an emphasis on ‘large ticket’ transactions; and

•	deposit-taking.

	Global Investment Banking: This comprises:

•	corporate finance and advisory services for mergers and acquisitions, asset disposals, stock exchange listings, privatisations and capital restructurings;

•	project and export finance services providing non-recourse finance to exporters, importers and financial institutions, and working closely with all major export credit agencies; and

•	financing and risk advisory services.

Asset management services: This comprises Asset Management products and services for institutional investors, intermediaries and individual investors and their advisors.

Private Banking

HSBC is one of the world’s leading international private banking groups with total client funds under management of US$169 billion at 31 December 2003. In December 2003, HSBC announced the

adoption of HSBC Private Bank as the worldwide marketing name for its principal private banking business.

Drawing on the strength of the HSBC Group and utilising the best products from the marketplace, Private Banking works with its clients to offer both traditional and innovative ways to manage and preserve wealth whilst optimising returns. Products and services offered include:

Investment services: These comprise both advisory and discretionary investment services. A wide range of investment vehicles is covered, including bonds, equities, derivatives, structured products, mutual funds and hedge funds. Supported by five major advisory centres in Hong Kong, Singapore, Geneva, New York and London, Private Banking selects and validates the most suitable investments for clients’ needs and investment strategies.

Global wealth solutions: These comprise planning, trustee and other fiduciary services designed to protect existing wealth and create tailored structures to preserve wealth for future generations. Areas of expertise include trusts, foundations, charitable trusts, private investment companies, insurance vehicles and offshore structures.

Specialist advisory services: Private Banking offers expertise in several specialist areas of wealth management including tax advisory, family office advisory, charities and foundations, media, diamonds and jewellery, and real estate. Such specialist advisers are available to deliver products and services which are tailored to meet the full range of high net worth clients’ individual financial needs.

General banking services: These are the ancillary services necessary for the management of clients’ finances. They include treasury and foreign exchange, offshore and onshore deposits, tailor-made loans and internet banking. The skills and products available in HSBC’s other customer groups, such as corporate banking, investment banking and insurance are also offered to Private Banking clients.

HSBC Private Bank is the marketing name for the private banking business conducted by the principal private banking subsidiaries of the HSBC Group worldwide. Private Banking services are also provided by HSBC Guyerzeller and HSBC Trinkaus & Burkhardt.

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	Geographical Regions


	Profit before tax split by geographical region

	Year ended 31 December 2003



	Total assets¹ split by geographical region

	As at 31 December 2003



	¹	Excludes Hong Kong Government certificates of indebtedness.

	Business highlights in 2003

	For additional information regarding business developments in 2003, as well as comparative information relating to developments in 2002 and 2001, please refer to the ‘Financial Review’ on pages 36-117.

	Europe

	HSBC’s principal banking subsidiaries in Europe are HSBC Bank, CCF and HSBC Private Bank. HSBC provides a wide range of banking, treasury and financial services to personal, commercial and corporate customers in the UK, France, and across continental Europe, with strong coverage in Malta and Turkey. The bank’s strategy is to build long-term relationships attracting customers through value-for-money products and high-quality service.

General

•	The remarkable efforts of colleagues in Turkey ensured that business returned to normal following the two bomb blasts on 20 November, 2003 which severely damaged the Head Office and a branch in Istanbul. All branches were operating as normal the day after, with the exception of Beyoglu, which was damaged by the bomb at the British Consulate. Head Office employees relocated to a contingency site and the bank’s business recovery planning proved both highly effective and invaluable. In the face of the terrible events, colleagues responded with incredible courage and commitment. HSBC immediately launched support initiatives for the bereaved and those most impacted by the tragic events.

•	In March, HSBC added the consumer finance business, HFC Bank plc (‘HFC Bank’), to its European network as a consequence of the Household acquisition. HFC Bank provides a range of loan and insurance products to over 3.5 million customers throughout the UK, making it one of the country’s largest pure consumer finance businesses.

Personal Financial Services

•	For the second year running, HSBC won a major category of the ‘What Mortgage?’ award in the UK and was the Mortgage Magazine winner of the ‘Lender of the Year’ award. First Direct won the Mortgage Advisor and Home Buyer Magazine award for ‘Offset Mortgage of the Year’.

•	In July, HSBC became the first British high street bank to offer an Islamic mortgage to the estimated UK Muslim population of 1.8 million. The Amanah Home Finance product was launched with the backing of HSBC's Dubai-based Amanah Finance division.

•	The Premier customer base in the UK grew by 57 per cent to over 280,000. Premier International, offering credit history transfer across borders and seamless account opening, was launched in the UK, Jersey (Offshore) and France, while Malta and Greece became the 30th and 31st countries to offer the HSBC Premier service.

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•	In July, HSBC launched HSBC InvestDirect, a new online and telephone investment service in the UK. This provides internet and telephone share-dealing and price information across a broad range of UK equities and gilts.

•	HSBC in the UK was awarded the coveted ‘Five Star Award’ from Money Management magazine for its regular premium stakeholder pensions.

•	HSBC’s Private Clients service was ranked the number one UK Independent Financial Adviser (‘IFA’) in a survey of the top 50 IFAs by Professional Advisor Magazine again in 2003.

•	In the UK, individual service reviews (a review of a customer’s financial service needs) were completed for more than 800,000 customers during the year, an increase of 67 per cent on 2002.

•	By the end of 2003, over 2 million customers in the UK were registered for personal internet banking and over 4.7 million customers are now registered for telephone banking.

•	Significant progress was made in migrating the UK card issuing business onto Household’s credit card system, improving both operational and cost efficiency. HSBC Card Services issued its highest ever number of new credit cards and gained a record number of competitor balance transfers in the UK, boosted by the introduction of a ‘0%’ balance transfer offer in July.

•	Following successful participation in the UK ‘chip and pin’ trials earlier in the year, HSBC will begin issuing chip and pin enabled credit and debit cards in 2004, delivering greater security for card users and reducing exposure to fraud costs.

•	HSBC expanded its UK debt counselling service for customers with potential repayment difficulties. The service works with customers to construct plans to manage debt more effectively ahead of possible problems.

Consumer Finance

•	In June, HFC Bank announced a long-term agreement with the John Lewis Partnership, the employee-owned UK department store and supermarket group, for the joint management and operation of the John Lewis, Peter Jones and Waitrose store card business. The agreement

•	involves the transfer of US$400 million of loans and 1.8 million cardholders to HFC Bank on a revenue-sharing basis. The bank will work with the John Lewis Partnership to enhance its credit card offering to existing and potential customers.

Commercial Banking

•	HSBC’s commitment to supporting new businesses in the UK helped in the formation of over 102,000 start-ups during the year through its ‘Start-up Stars’ programme. Additionally, the bank attracted more than 23,000 new competitor balance transfers in 2003.

•	The Chartered Institute of Management Accountants (‘CIMA’) voted HSBC ‘Best Small Business Bank’ following feedback from its Members in Practice Group. The CIMA recognition follows the Forum of Private Business’s announcement of HSBC as the ‘Best High Street Clearing Bank for Small Businesses’, while the UK 200 Group, a consortium of leading accountants, also named HSBC the best bank for business.

•	A new Business Money Manager deposit product was launched in January, attracting an average of 1,700 new accounts per week.

•	During 2003, in response to depolarisation in the UK investments market, the bank introduced a number of Commercial Independent Financial Advisors to provide quality independent financial advice to business customers. Based on the success of the initial pilot, the initiative is being expanded across the network. HSBC is now the number one provider of income protection products in the UK.

	HSBC DriverQuote won the award for the ‘most innovative e-delivery channel’ at the Institute of Financial Services’ Financial Innovation Awards 2003. HSBC DriverQuote is the UK bank’s online quotation and ordering system and allows businesses to manage their company car policy over the internet.

•	HSBC Invoice Finance (UK) Limited was awarded the Best Factoring Award by Trade Finance Magazine in 2003.

•	Business Moneyfacts, a leading independent finance guide, named HSBC the UK’s ‘Best Computer Banking Provider’. Over 130,000

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	customers in the UK registered for business internet banking in 2003. Fifty-four per cent of all new business customers register for internet banking at the time of account opening. The value of payments generated using business internet banking now exceeds US$786 million per month. At the Institute of Financial Services’ Financial Innovation Awards HSBC won the award for the ‘Best Internet Banking Service’ and the ‘Grand Prix Award’ for general innovation in the financial services industry.

•	By the end of 2003, over 280,000 UK customers were registered for business telephone banking, utilising the bank’s telephone centres in the UK and India. These handle some 3,000 sales and more than 100,000 in-bound calls per month, leaving relationship managers to focus on customer service.

•	Group ‘Secure E-Payments’ remote payments solution successfully launched in June 2003. HSBC’s offering has enhanced security features over other providers and includes compliance with MasterCard ‘Securecode’ and verification by Visa standards for internet merchants.

Corporate, Investment Banking and Markets

•	In June, HSBC announced the appointment of co-heads of its global Corporate, Investment Banking and Markets business. Under this new management structure, HSBC combined its origination capabilities with its broad-based trading and sales platform to ensure a seamless banking, financing and investor service for the Group’s corporate and institutional clients.

•	During 2003, the business strengthened its client coverage model, adopting a sector-based relationship approach to client servicing. The origination businesses were restructured to reflect this sectoral approach and reinforced through selective recruitment. As a result of this investment, HSBC strengthened its corporate client service offering, winning a number of notable contracts.

•	In March 2003, the payments and cash management, trade services, securities services and banknotes businesses were brought together under a single management and organisation structure, Global Transaction Banking.

•	In September, HSBC commenced the integration

	of its equities business into the Global Markets business, creating a single platform for all trading and sales operations. In addition, HSBC announced the restructuring of the research offering so as to align macro, sectoral and price driven research with both institutional investor and corporate client needs.

•	In the international bond market, HSBC’s market share rose to 4.4 per cent, and in the fourth quarter, HSBC came third in the international bond bookrunner league table.

•	HSBC was joint adviser to Safeway on its £3 billion recommended merger with Morrison in the UK and advised LNM Holdings on its US$1.2 billion acquisition of Polish steel maker Polski Huty Stali.

•	The London and Paris dealing rooms were fully integrated with each site taking a lead role in specific product areas. This dual-hub structure in Europe has proved to be a key competitive advantage.

•	HSBC won a five-year contract to support British Telecommunications plc’s (‘BT’) corporate card programme. The BT programme is the largest in both the UK and Europe with more than 35,000 corporate cards in issue and an annual spend of over £100 million (US$164 million).

•	The Universities Superannuation Scheme, the UK’s third largest pension fund, appointed HSBC Global Fund Services Limited as sole provider of a full range of investment accounting and performance measurement services.

•	In response to the anticipated growth in employee share saving schemes and personal retirement schemes, CCF created HSBC CCF Épargne Enterprise, following the acquisition of minority shareholdings in Elysees Gestion and Elysees Fonds
	.
Private Banking

•	HSBC Private Bank was rated among the top three ‘Best Global Private Banks’ in Euromoney’s first annual survey of wealth management providers published in January 2004.

•	HSBC Private Bank’s alternative investments attracted in excess of US$3 billion new assets,

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	raising total client assets invested in hedge funds to US$14 billion. In Switzerland, four new hedge funds were launched. HSBC Private Bank was voted ‘Best European High Net Worth/Retail Hedge Fund of Funds Product Provider’ for 2003 at the ‘Hedge Funds Review’ and received Financial Adviser magazine’s gold award as a ‘Top Provider’ in the long/short funds of funds sector.

•	Strategic Investment Solutions (‘SIS’) was launched in July, providing clients with externally managed multi-manager investment portfolios.

•	The Family Office Advisory team launched Consolidation and Analysis of Investment Portfolios providing wealthy clients and their families with a single set of statements covering all their wealth. For clients with more complex portfolios, the service provides a means of developing coherent tax and investment management strategies.

•	The Group’s four French private banking subsidiaries combined into a single operating unit, HSBC Private Bank France, to create a major player in the French private banking market, with over US$15 billion in assets under management. The new unit comprises three divisions: resident private clients, international clients and institutional clients.

Other

•	HSBC Actuaries and Consultants Limited were appointed as actuarial consultant for a UK pension fund, The Pensions Trust. With assets approaching £2 billion (US$3.6 billion), The Pensions Trust is the leading multi-employer occupational pension fund for employees involved in the charitable, social, educational, voluntary and not-for-profit sectors.

Hong Kong

HSBC’s principal banking subsidiaries in Hong Kong are The Hongkong and Shanghai Banking Corporation and Hang Seng Bank, in which HSBC has a 62.14 per cent stake. The Hongkong and Shanghai Banking Corporation is the largest bank incorporated in Hong Kong and is HSBC’s flagship bank in the Asia-Pacific region. It is one of Hong Kong’s three note-issuing banks, accounting for more than 62 per cent by value of banknotes in

	circulation in 2003.

General

•	Surveys indicated that HSBC has the strongest brand equity amongst all banks in Hong Kong. With its ‘The world's local bank’ positioning, HSBC combines a strong global brand with local reach and knowledge.

•	To support the recovery of the Hong Kong economy post-SARS (severe acute respiratory syndrome), HSBC launched the ‘HSBC Supports Hong Kong’ campaign, investing up to HK$100 million (US$12.8 million) to provide financial assistance to those affected by atypical pneumonia, and to stimulate local consumer spending. This leadership position received a very positive reaction from all sectors of the community.

•	Hang Seng Bank celebrated its 70th anniversary on 3 March 2003. The anniversary tagline, ‘70 Years of Excellence’, highlighted the bank’s commitment to providing high quality services that exceed customer expectations.

Personal Financial Services

•	HSBC’s position as one of the leading providers of wealth management services was sustained amid keen competition. Income from wealth management, including commissions on sales of unit trust products, funds under management, and securities transactions, grew by 38 per cent to US$408 million. A wide range of new retail unit trusts, certificates of deposit, bonds and structured deposits were launched to provide products to meet customers’ needs in the low-interest rate environment.

•	HSBC increased sales of new regular premium individual life insurance by 59 per cent, growing its market share from 13.9 per cent to 18.6 per cent.

•	On the back of this success, HSBC continued to add to its dedicated sales force, and the number of sales staff gaining professional qualifications in investment and insurance business also rose.

•	HSBC maintained its position as the number one credit card issuer in Hong Kong and, through strong and targeted customer marketing, increased card usage despite the subdued economy.

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•	HSBC continued to focus on operational efficiency, with the Group Service Centres in mainland China expanding to provide about half the operational support for credit cards in Hong Kong.

•	HSBC continues to have the largest market share in online banking in Hong Kong, with more than 665,000 registered users at December 2003, up by 41 per cent on 2002. A 62 per cent increase in monthly website visits was achieved in 2003, following the introduction of tailored web pages for customer segments, alert services and market information.

•	HSBC was judged the best consumer internet bank in Hong Kong for the second year in a row by Global Finance and also won awards for the best consumer online securities trading service; the best consumer online credit service in Asia, and the best consumer web site design in Asia.

•	Hang Seng Bank continued to enhance its internet banking services, launching the e-Fund Supermarket in July to provide customers with comprehensive one-stop online investment fund services. By the year-end the number of Hang Seng customers registered for Personal e-Banking services in Hong Kong had risen by 34 per cent to 337,000, and internet transactions represented 20 per cent of total transactions.

•	HSBC increased the number of Premier centres in Hong Kong to 36, which support an enlarged Premier customer base of 224,000.

•	HSBC was named the Best Bank in Hong Kong in 2003 by Euromoney, The Asset, and The Banker, and Best Local Bank in Hong Kong by Finance Asia. HSBC was also named as the Best Managed Company in Hong Kong for the second consecutive year by Asiamoney, and won the Hong Kong Retail Management Association’s 2003 Award for Services: Customer Service Grand Award.

•	Hang Seng Bank was named the Best Domestic Commercial Bank in Hong Kong by The Asset and Asiamoney.

•	Hang Seng Bank strengthened its suite of insurance and investment products by widening its product range. The number of funds under the Hang Seng Investment series launched by Hang Seng Bank rose from 60 to 90 in 2003, and funds under management increased by 30 per

	cent to HK$30 billion (US$3.9 billion) at the year end.

•	Hang Seng Investment Management Limited introduced the first exchange traded fund tracking the Hang Seng China Enterprises Index. This fund was listed on the Hong Kong stock exchange in December 2003.

•	Hang Seng Bank launched Leisure Class in June 2003, a new service which offers retirees and those who are planning to retire, comprehensive investment services and benefits and a range of leisure activities including Chinese painting and calligraphy classes and seminars on Chinese medicine.

•	Following the relaxation of restrictions on individual travel to Hong Kong by mainland China visitors, the People’s Bank of China and the Hong Kong Monetary Authority announced consent at the end of 2003 for Hong Kong banks to commence specified renminbi services, including exchange, deposit taking, remittances and renminbi credit cards. HSBC and Hang Seng Bank launched renminbi services in February 2004.

Commercial Banking

•	HSBC maintained its position as the leading trade services bank in 2003, growing market share and being named the Best Trade Finance Bank in Asia by Global Finance. With 80 per cent of HSBC’s substantial trade income coming from Commercial Banking customers, instant@dvice, an internet based service which supports electronic documentary credits advising, was launched.

•	Launched in August 2001, HSBC’s Business Internet Banking service continued to be well received in the market. HSBC was recognised by Global Finance as the Best Corporate/ Institutional Internet Bank in Hong Kong in 2003. Surveys indicated that HSBC had the largest online business banking market share in Hong Kong with over 31,000 companies registered as users. In addition, Hang Seng Bank had some 13,000 business e-banking customers by the year-end compared with 5,000 at the end of 2002.

•	Hang Seng Bank launched the Integrated Business Solutions Account in September 2003,

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H S B C H O L D I N G S P L C

Description of Business(continued)

	offering small and medium-sized enterprises one-stop financial services to facilitate their business growth.

•	Hang Seng Bank opened its first branch in the Macau SAR in December 2003 to serve the trade finance needs of its customers with business operations there.

Corporate, Investment Banking and Markets

•	HSBC increased its market share in G3 and local currency bond issuance in the Hong Kong market from 33 per cent in 2002 to 45 per cent in 2003, with 249 issues totalling US$11 billion. It was named Best Hong Kong Bond House by IFR.

•	HSBC was a joint bookrunner on Hutchison Whampoa’s US$5 billion global bond issue, the largest bond issue in Asia to date.

•	The debt finance group set up Cheung Kong’s HK$10 billion (US$1.3 billion) retail bond programme and led Hong Kong’s largest retail bond to date, for Kowloon-Canton Railway Corporation.

•	The securitisation team led the industry’s first securitisation of taxi and public light bus loans and the first synthetic securitisation of non-mortgage consumer and small and medium-sized enterprise (‘SME’) obligors in Hong Kong and the rest of Asia-Pacific.

•	The equity capital markets team executed equity placements amounting to US$576 million.

•	HSBC Asset Management celebrated its 30th anniversary on 4 September 2003, with the theme ‘Your Advantage in Investment In Asia and Around the World’, highlighting its commitment to providing investment solutions and delivering results.

•	By the end of 2003, HSBC Asset Management had launched 14 capital guaranteed funds, covering a wide range of sector and country themes, with US$3.5 billion in assets at the year-end, which represented more than 80 per cent of the guaranteed fund market in Hong Kong.

Private Banking

•	HSBC Private Bank was named the Best Private Bank in Hong Kong in 2003 by Euromoney.

•	HSBC Private Bank continued to expand its family office capabilities with the relaunch of its tax consulting service as Wealth and Tax Advisory Services (‘WTAS’) (Asia) Limited.

•	In October 2003, HSBC and Hang Seng Bank launched one-stop private banking services to cater to the needs of applicants to the Hong Kong Government’s Capital Investment Entrant Scheme.

Rest of Asia-Pacific (including the Middle East)

The Hongkong and Shanghai Banking Corporation offers personal, commercial, corporate and investment banking and markets services in mainland China. The bank’s network spans 11 major cities, comprising nine branches and two representative offices. Hang Seng Bank offers personal and commercial banking services and operates five branches, a sub-branch, and two representative offices in seven cities.

Outside Hong Kong and mainland China, the HSBC Group conducts business in the Asia-Pacific region primarily through branches and subsidiaries of The Hongkong and Shanghai Banking Corporation, with particularly strong coverage in India, Indonesia, Korea, Singapore, Taiwan and Thailand. HSBC’s presence in the Middle East is led by HSBC Bank Middle East Limited, the largest foreign-owned bank in the region; in Australia by HSBC Bank Australia Limited; and in Malaysia by HSBC Bank Malaysia Berhad, which has the second largest presence of any foreign-owned bank in the country.

General

•	In 2003 HSBC celebrated 150 years of doing business in India.

•	HSBC remains committed to the local communities in which it operates across the region. With the World Health Organization declaring the SARS virus contained worldwide in July, HSBC launched the ‘Shop Asia, Dine Asia’ programme to stimulate affected industries. Over 2,500 outlets across Asia-Pacific joined with HSBC to support the programme.

•	HSBC entered into an agreement to acquire a 14.71 per cent stake in UTI Bank Limited, an Indian retail bank, for a consideration of

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	Rs3.1 billion (US$66 million), with the option to acquire a further 5.37 per cent stake. UTI has some 200 branches and extension counters and over 1,000 ATMs nationwide, and offers a comprehensive range of corporate banking, retail lending and deposit products, and an internet banking service, to its one million customers.

•	In New Zealand, HSBC purchased the retail banking business of AMP Bank Limited, which comprised mortgage lending of US$1.1 billion and deposits of US$122 million. The purchase, which complements HSBC’s existing retail franchise in New Zealand, involved the acquisition of approximately 25,000 customer accounts and substantially increased HSBC’s mortgage and deposit business.

•	In October, HSBC Insurance Brokers Limited entered into a joint venture agreement to offer insurance broking and risk management services to domestic and international clients in mainland China, the first foreign joint venture in China to obtain such a licence. HSBC holds a 24.9 per cent stake in the new company, Beijing HSBC Insurance Brokers Limited.

•	In December, HSBC and China Ping An Trust & Investment Co. Limited (‘Ping An’) announced an agreement to acquire 50 per cent each of Fujian Asia Bank Limited for not more than US$20 million in cash. Completion of the transaction is expected to be at the end of March 2004, by which time Ping An is committed to injecting a further US$23 million into Fujian Asia bank, diluting HSBC’s share to 27 per cent.

•	Also in December, Hang Seng Bank signed an agreement to acquire 15.98 per cent of Industrial Bank Co. Limited’s (‘Industrial Bank’) enlarged capital for a consideration of 1.7 billion renminbi (US$208 million) in cash, subject to regulatory and shareholder approval. With this transaction, Hang Seng Bank will become the first foreign bank to acquire more than 15 per cent of a mainland Chinese bank. Industrial Bank has assets of 190 billion renminbi (US$23 billion).

•	In January 2004, HSBC and the Bank of Shanghai launched the Shanghai International Credit Card, which enables mainland Chinese customers to make purchases when travelling outside the mainland at any merchant accepting

	Visa credit cards, and settle their payments in renminbi through a Bank of Shanghai account.

•	Six new branches were opened during the year, one in Bangladesh, one in New Zealand and four in India, further building HSBC’s position in the region.

•	In March, HSBC was among the first foreign banks in mainland China to receive full approval to offer custodian services to Qualified Foreign Institutional Investors (‘QFII’s) in China’s A-share market. HSBC also provides custodian services for China’s B-share market, in which it has a leading market position.

•	HSBC obtained approval for its QFII licence in August and as a result is able to invest in renminbi-denominated securities in China’s A-share market.

•	HSBC has been providing renminbi banking services to foreign-invested companies and foreign nationals through its Shanghai and Shenzhen branches since 1997 and 1998 respectively. In November 2003, HSBC received approval to provide these services through its branches in Guangzhou, Qingdao and Tianjin. In a further development, with effect from 1 December 2003, foreign banks have also been allowed, subject to regulatory approval, to offer renminbi services to local corporations in selected cities. HSBC will introduce these services in the first half of 2004.

•	Hang Seng Bank expanded its services in mainland China to help customers capture business opportunities arising from the Closer Economic Partnership Arrangement (‘CEPA’) between Hong Kong and the mainland. The bank opened its fifth mainland branch in Nanjing in the economically important Yangtze River Delta area in August, and a sub-branch in Puxi, Shanghai in October, and applied to upgrade its Beijing representative office to a branch.

•	Hang Seng Bank commenced renminbi services at its Guangzhou branch in October – the bank’s second branch, after Shanghai in 2002, to offer such services – and its Shenzhen branch in January 2004.

•	Hang Seng Investment Management Limited opened a representative office in Shenzhen in March.

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H S B C H O L D I N G S P L C

Description of Business(continued)

Personal Financial Services

•	HSBC continued to broaden its range of products and services across the Asia-Pacific region, notably in investment products. Structured deposit products were launched across the region, and a wide range of unit trusts were sold, driving funds under management up year-on-year.

•	HSBC’s credit card business in the rest of Asia-Pacific achieved significant growth in 2003, with over 3.7 million cards in force.

•	An enhanced credit card processing system was implemented in five countries, improving operational efficiency. The new system applies state-of-the-art technology to risk and fraud management allowing HSBC to better protect its customers.

•	As part of the strategic management of costs, selected processing activities were moved into the Group Service Centres in Bangalore, Kuala Lumpur and Shanghai from Australia, New Zealand, the Philippines and Singapore. In January 2004, HSBC announced plans to open a new Group Service Centre in Colombo, Sri Lanka, during the year.

•	HSBC continued to upgrade and enhance its online banking offering, and the number of personal internet banking customers increased by 52 per cent to 378,000. The quality of its services was recognised in Malaysia where HSBC was named the Best Consumer Internet Banking Site by Global Finance.

•	HSBC was the first international bank in the United Arab Emirates to offer a range of Shariah (Islamic law) compliant personal financial services. Two services were launched initially –the HSBC Amanah Current Account and HSBC Amanah Personal Finance.

•	HSBC was named Asia-Pacific Bank of the Year by The Banker, and Best Foreign Bank in mainland China, India and Indonesia by FinanceAsia.

Commercial Banking

•	HSBC achieved impressive growth of over 49 per cent in its loan book in mainland China in 2003, with its branches in Hong Kong,Taiwan and the mainland working closely together on

	cross-border referrals and knowledge transfer. The increase is also attributable to strong growth in trade advances.

•	A Commercial Banking intranet was developed in 2003 that facilitates the spread of best practice and cross-border referrals between different members of the Group.

•	In Malaysia, new business facilities approval increased by 65 per cent.

•	Delivery channels were further developed across the region. In Malaysia, HSBC recorded a 150 per cent increase in internet, and an 80 per cent increase in telephone banking customers, and significantly enhanced the electronic delivery of trade services to its customers

•	As part of its wider Islamic Banking initiatives, HSBC won approval from the Bangladesh Bank to launch an Islamic Banking service in the country with specific focus on Commercial Banking products.

•	HSBC launched a Shariah banking service in Indonesia, the first foreign bank to do so. The Group’s Indonesian Shariah business will initially focus on the corporate and institutional sectors, providing structured financial capabilities and debt capital markets advisory services. In the medium term, HSBC intends to extend the service to provide a broad range of wealth management and investment products and services.

•	HSBC Bank Middle East launched a new factoring service to assist businesses financing their outstanding invoices. The service provides domestic and international factoring facilities for businesses trading on open account payment terms.

•	Trade Services continued to build on its leading presence in the region and HSBC was named Best Trade Finance Bank in Asia by FinanceAsia. Document Tracker, a new service which provides customers with a convenient way to check the delivery status of international documents sent through HSBC’s Trade Services offices, is now available in eight countries in Asia following its rollout in 2003 in Bangladesh, mainland China, Korea, Malaysia and Thailand.

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•	HSBC was named Best Bank in India, the Philippines and Thailand inThe Asset Magazine’s Triple A Country Awards 2003.

Corporate, Investment Banking and Markets

•	HSBC’s rankings and market share improved, with the bank raising more debt in a single year than any other bank in Hong Kong and the rest of Asia-Pacific and leading more deals than any other firm. It led 311 G3 and local currency deals with a market share of 15 per cent, and raising US$14.8 billion. HSBC was named the Best International Bond House and Best Local Currency Bond House byFinanceAsia.

•	HSBC wonEuromoney’saward for Best at Treasury and Risk Management in Asia for the sixth consecutive year.

•	The Ministry of Finance of the State of Qatar selected HSBC as joint lead manager of its debut Islamic bond issue. The issue, launched in September, was fully compliant with Shariah law.

•	Corporate Finance and Advisory was the sole financial advisor to mainland China’s largest brewery, Tsingtao Brewer, in a strategic alliance with the world’s largest brewery, Anheuser-Busch. A mandatory convertible bond structure was used for the first time for a foreign investment in a mainland-listed company.

•	HSBC continued to be at the forefront of the development of local currency bond markets. The successful placing of the Republic of Philippines’ Peso74.3 billion retail treasury bond benefited from the streamlined documentation framework HSBC has developed for bond placement.

•	HSBC’s strength in Payments and Cash Management gained recognition, with HSBC named the Best Cash Management Bank in Asia byAsiaMoneyandFinanceAsia.Roll out across the region of the integrated payments and receivables proposition continued and was successfully completed in Hong Kong during 2003.

•	HSBC was voted the number one cash management bank in the Middle East in a 2003 poll ofEuromoneyreaders. The bank took top honours for the scope of its services and customer satisfaction. It was also recognised for

	its achievements in building new product lines, as well as integrating existing services to provide tailor made solutions to its customers.

•	HSBC was named the best-rated sub-custody provider in 21 different countries in the Global Custodian Survey. This strong performance was reflected in further client business for our sub-custody network.

•	HSBC Asset Management continued to enjoy strong growth in 2003. Assets in the HSBC Chinese Equity Fund and the HSBC Indian Equity Fund grew significantly, making them the world’s largest Chinese and Indian equity funds.

•	HSBC Asset Management, which began operating in India in 2002, achieved strong growth there in 2003, with funds under advice and management growing to US$1.8 billion. The client base increased to more than 50,000 from 18,000 in 2002.

Private Banking

•	HSBC Private Bank continued its expansion in Asia, working with strategic partners to strengthen offshore banking business for the mainland China market. Development of the private banking market in Japan, and exploration of the market in Malaysia, continued in partnership with HSBC’s local branch networks.

•	In Singapore, HSBC Private Bank was granted a wholesale banking licence in May 2003 which has allowed its range of services to be expanded.

North America

	HSBC’s North American business covers the United States, Canada, Mexico and Panama. Operations are primarily conducted in the US through HSBC Bank USA in New York State and Household, based in Chicago. HSBC’s Canadian and Mexican operations are run through HSBC Bank Canada and HSBC Mexico respectively.

General

•	Household’s membership of the HSBC Group provided it with a source of direct funding and improved access to the capital markets, lowering its funding costs and expanding its access to a worldwide pool of potential investors.

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H S B C H O L D I N G S P L C

Description of Business(continued)

•	In December 2003, upon receipt of regulatory approval, Household sold US$2.8 billion of its higher quality real estate secured receivables to HSBC Bank USA. The sale represented the first step in a strategy to lower the Group’s overall borrowing costs by utilising liquidity at HSBC Bank USA. Further asset transfers are planned in 2004, subject to regulatory approval.

•	The major power cut in northeast USA and southeast Canada in August resulted in minimal disruption for HSBC’s customers. The events management protocol and business continuity plans for all critical areas of the North American operations were successfully invoked with all transactions processed and settled within accepted customer service standards and with no financial losses.

•	The back-up site and production centre for HSBC’s Canadian IT operations were transferred to the Group’s state of the art facility in Amherst, New York, allowing for greater economies of scale in the use of technology.

•	In Mexico, significant new acquisitions in 2003 included the purchase for US$144 million of ING’s 49 per cent stake in the joint-venture insurance company jointly owned with HSBC Bank Mexico, and the acquisition of a pension fund company (AFORE Allianz Dresdner) from Allianz A.G. for US$175 million. These new acquisitions strengthened product offerings to HSBC’s extensive customer base and will lead to increased cross-selling.

•	On 31 December 2003, HSBC announced its agreement to sell to CIT Group Inc. substantially all of the factoring assets (approximately US$1 billion) and liabilities of HSBC Bank USA. Net assets amounted to approximately US$270 million. The sale agreement reflected HSBC’s strategic emphasis on its core US businesses.

•	In January 2004, HSBC rebranded all its Mexican banking operations as HSBC Bank Mexico.

Personal Financial Services

•	HSBC’s residential loan portfolio continued to grow in the US, with total originations by HSBC

	Bank USA increasing to US$30 billion in 2003 from US$21 billion in 2002.

•	Personal Internet Banking registrations in the US reached 520,000, an increase of 25 per cent in the year. In Canada, 28 per cent of customers are registered, up from 14 per cent in 2002.

•	The number of HSBCPremiercustomers in the US grew by 37 per cent from approximately 53,000 to over 73,000, with the launch ofPremierInternational Services helping to propel the growth. In Canada, the number ofPremiercustomers increased by 87 per cent to 28,500 in 2003.

•	clientCONNECT, an integrated customer relationship management system, was successfully rolled out to all branches in Canada and across the US, resulting in increased contacts and cross-sales.

•	The direct brokerage operation, Merrill Lynch HSBC Canada Inc., was rebranded as HSBC InvestDirect Inc. prior to becoming a division of HSBC Securities (Canada) Inc., thereby completing the reintegration of the direct investing channel into HSBC.

Consumer Finance

•	Significant progress was made in 2003 in integrating Household’s and HSBC’s technology teams and systems, including initiatives to consolidate data centres and convert HSBC’s credit card portfolios onto the Household system. Using the combined buying power of HSBC and Household, a number of supplier contracts, including tele-communications, were renegotiated. Efficiency savings were also achieved elsewhere through the integration of various functions including purchasing, human resources, facilities and finance.

•	A number of initiatives are being developed to expand business opportunities in consumer finance. These included broadening the range of products, such as offering mortgage insurance and HSBC banking services to existing Household customers; cross referring consumer finance and retail services customers between Household and HSBC; and automating HSBC’s auto finance loan process. Also, in the US, HSBC and Household initiated a customer referral programme and developed near-prime

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	and prime products to provide Household’s customers with a full range of options.

•	Household and HSBC in Mexico plan to introduce a remittance service between Household’s customers in the US and their families and friends in Mexico in 2004. This includes the provision of a web-based service enabling recipients in Mexico to use stored value cards to access funds from Automated Teller Machines, and a remittance service through HSBC branches and kiosks. Both services are expected to provide cross-selling opportunities.

•	In April 2003, Household’s private label credit card business acquired US$1.2 billion in receivables as a result of entering into a new relationship with a major retail merchant, Saks, Inc.

•	During 2003, Household’s US MasterCard/Visa credit card business acquired approximately US$0.9 billion of receivables in two separate transactions, taking advantage of weakness elsewhere in the sector.

Commercial Banking

•	Loans to small businesses in the US grew by 19 per cent in 2003 as HSBC moved up to second in the Small Business Association lender ranking in New York State.

•	HSBC Bank Canada was rated the highest for overall quality of customer service to the SME market among all banks included in an independent survey of SME owners, published by the Canadian Federation of Independent Business in October.

•	Business internet banking penetration in the US increased from 9 per cent to 15 per cent of commercial customers, with 28,500 now using it. The service was launched in Canada and reached 14 per cent of customers there.

Corporate, Investment Banking and Markets

•	HSBC made significant investments in its US relationship management function, strengthening its sector approach and improving coverage of major institutional and corporate clients. New business generated from its Corporate and Institutional Banking client base rose 80 per cent compared with 2002.

•	Capital markets platforms in the US were considerably strengthened through selective hiring, and this contributed to a significant rise in the number and value of mandates won.

•	Augmenting the investment in primary capabilities, HSBC’s market distribution capabilities in the US were enhanced by key hires in sales and origination, as co-ordination was improved across the region.

•	Renewed interest from US institutional account-holders resulted in a considerable increase in the volume of customer trades in Global Markets products, including foreign exchange, structured products, and debt. This partly reflected changes in relationships with other financial institutions which followed the regulatory reviews of certain US market practices in 2002.

•	HSBC’s service proposition in the US was enhanced by the introduction of e-platforms which enable clients to trade online in bonds via Trade Web, and in foreign exchange via FXAll.

Private Banking

•	Private Banking streamlined its operations in the US by successfully merging the management and support infrastructure of its domestic and international clients. The product range was broadened to include alternative investments, structured products and investment management products.

South America

HSBC’s operations in South America principally comprise HSBC Bank Brasil and HSBC Bank Argentina S.A.

In Brazil, HSBC has an extensive domestic network, with over 1,300 branches and offices, 3.4 million personal customers and over 240,000 business and institutional customers. HSBC operates the tenth largest insurance business in Brazil, offering a broad range of insurance products.

In Argentina, HSBC has over 4,000 employees and a total of 101 sales points. HSBC also has one of the largest insurance businesses in Argentina, HSBC La Buenos Aires and, through HSBC Máxima and HSBC New York Life, offers pensions and life assurance. Notwithstanding the financial crisis in Argentina, HSBC continues to provide a full range of

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H S B C H O L D I N G S P L C

Description of Business(continued)

financial services to its customers, and remains one of a few such market participants.

General

•	In February 2003, HSBC acquired from Bank of America the right to manage its mutual funds and managed accounts in Brazil, and by June, seventy-five funds amounting to US$0.4 billion had been transferred. Funds under management grew from US$7 billion in June 2002 to US$10 billion in December 2003.

•	In December, HSBC bought substantially all of Lloyds TSB Group plc’s on-shore and off-shore Brazilian businesses and assets. The new business, which is mainly consumer finance, added approximately US$1.7 billion of assets and over 7 million to the customer base.

•	HSBC Seguros’s health insurance portfolio was sold to Sul América Co. in June as part of HSBC’s strategic decision to focus on more profitable lines of business in Brazil.

•	In December, HSBC acquired the remaining 40 per cent of HSBC Salud (Argentina) S.A. following the exercise by New York Life Inc. of its put option. As the provision of prepaid health insurance is not considered to be a core business for HSBC, the Group agreed to sell the entire issued share capital of HSBC Salud to Swiss Medical Group on 23 December 2003.

•	In response to changes in the global re-insurance market, HSBC La Buenos Aires withdrew from serving the large corporate risk segment during 2003 in order to focus on commercial and middle market business.

Personal Financial Services

•	In August 2003, ExtraMoney was launched to 440,000 customers in Brazil, by which funds are advanced to employees of business customers and repayments made as a deduction from their payroll. ExtraMoney Senior, a personal credit product for retired Brazilian customers, was launched in September.

•	HSBC reinforced its presence in Brazil with several marketing initiatives, including the ‘Mata Tarifas’ campaign in April, which targeted customer acquisition and credit card sales and, in August, the ‘Verdades’ campaign, the biggest

	HSBC advertising drive in Brazil to date. The campaigns were successful and exceeded internal targets.

•	New customers increased by 23 per cent and the HSBCPremiersegment grew by 38 per cent, with seven specialised HSBCPremierbranches opening in 2003.

•	Sales of banking products increased by 16 per cent. Credit card sales continued to grow strongly in 2003 with a 31 per cent growth in cards in issuance. ‘Autofinance’ lending grew by 91 per cent in the year.

•	The number of active users of personal internet banking increased by 18 per cent in 2003 with transaction usage increasing 46 per cent.

•	HSBC selectively relaunched personal lending products in Argentina, as the domestic economy recovered from the depths reached in the currency crisis.

Commercial Banking

•	Small business clients in Brazil were segmented according to a relationship index and differentiated in terms of price and services.

•	In Brazil, loans increased 43 per cent in 2003 following successful sales campaigns and the roll out of a new receivables discount system.

•	Brazil ended 2003 with 211,000 credit card affiliations, consolidating its position as the 3^rdlargest bank in Brazil in the credit card acquirer business.

•	The number of active users of business internet banking increased by 41 per cent in 2003.

•	Joint initiatives between the bank and the insurance businesses were successfully undertaken in 2003, with growth of 15 per cent in sales of insurance products to Commercial Banking customers.

Corporate, Investment Banking and Markets

•	Standard & Poor’s awarded HSBC in Brazil the ‘Top Fixed Income Fund Manager’ prize for 2003.

Competitive environment

HSBC faces keen competition in all the markets it

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serves. It competes in the provision of commercial banking products and services with other major financial institutions, including commercial banks; savings and loan associations; credit unions; consumer finance companies; major retailers; brokerage firms; and investment companies. In investment banking, HSBC faces competition from both pure investment banks and the investment banking operations of other commercial banks.

Global factors

Consolidation in the banking industry: There is an increasing trend towards bank consolidation, at both national and international levels, creating more banks capable of competing directly with HSBC across a broader range of services.

Limited market growth: In HSBC’s largest current markets, the UK, US and Hong Kong, there is limited market growth in the provision of basic financial and banking services. There is, however, growth potential in the provision of a wider range of financial services to existing customers and also through expansion into new market segments.

Advances in technology: The rapid convergence of information and communication technologies is altering radically HSBC’s range of competitors. Specialist providers and non-financial organisations are now able to deliver a diverse range of financial services across a variety of electronic channels without the need for a traditional branch network. These innovations increase the pressure on established banks to enhance service quality while also investing in the provision of similar services. HSBC continues to adapt its business to provide customers with access to its full range of services in the manner they most prefer, with internet, interactive TV, mobile phone, WAP and telephone banking all complementing the branch system.

Regional factors

Europe

Overall market growth in the UK has remained relatively limited. However, the expanding demand for consumer credit in recent years has led to greater competition and the introduction of a wide array of new channels, products and entrants. Traditional banks now face competition in the retail market from

a variety of non-financial institutions including supermarkets, clothing and grocery retailers, car manufacturers and utilities, as well as from internet banks and specialist market providers.

The Competition Commission Report on the supply of banking services to small and medium-sized businesses came into effect during the year. In response, HSBC introduced an enhanced package of services for small and medium-sized customers and paid interest on all qualifying current accounts from 1 January 2003. Further initiatives included the introduction of a new instant access savings account and improved terms for start-up businesses.

On 11 February 2003, the Office of Fair Trade (‘OFT’) announced its preliminary conclusion that an agreement between MasterCard’s UK members, which includes HSBC Bank plc, on a common interchange fee charged on transactions made in the UK by credit and charge cards, infringed the Competition Act 1998. The OFT gave MasterCard a further opportunity to justify the existing agreement or suggest changes to it so that it will meet the conditions for an exemption under the Act. This matter is still under review.

In May, the OFT reported its initial findings from its review of payment systems in the UK. The review welcomed industry progress to agree proposals to shorten clearing cycles and stated that the OFT will continue to monitor the progress of these initiatives.

The OFT launched a study into store cards in September in response to concerns raised by the Treasury Select Committee. The study, which is expected to be released in early 2004, will review the application of competition law, marketing and sales practices, transparency issues and interest rates.

France

Like the other economies in the eurozone, the French banking sector was affected in 2003 by the poor economic environment but benefited from high volumes of sight deposits and slightly improved lending margins.

Consolidation in the banking industry saw one significant combination during the year and this trend is expected to continue. Non-bank competitors encroached further into traditional banking sectors with, as an example, the Post Office being granted approval to expand its mortgage activities.

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Description of Business(continued)

The rule forbidding the payment of interest on demand deposits was challenged in 2003 through the European Court of Justice in Luxembourg. While the outcome of the challenge is currently uncertain, it opens the possibility that this restriction could be lifted in the near future, potentially raising the cost of deposits.

A number of new tax efficient pension products were approved in a pension reform act which was enacted during the year. The expansion of the retirement market is likely to introduce both new opportunities for personal banking and new sources of competition.

Hong Kong

Banks in Hong Kong faced pressure on traditional core products due to the low interest rate environment and fierce pricing competition. To diversify income streams and enhance fee-based business, financial institutions actively promoted investment and insurance products, and increased public awareness of insurance protection products following the outbreak of SARS.

Competition for credit card, mortgage and consumer assets business remained intense in a highly liquid but relatively subdued lending market. An improvement in the economic outlook and proactive debt-restructuring by lenders led to a welcome drop in the level of bankruptcies in the second half of the year.

Several regulatory changes, including the new Securities and Futures Ordinance, deregulation of minimum brokerage commission, and consumer credit data-sharing, occurred in 2003. These changes opened the market further and intensified competition for quality customers and assets.

To pave the way for the full opening of mainland China’s financial sector, Hong Kong banks were active in key mainland cities and maintained regular dialogue with Chinese financial institutions. Various government announcements regarding the CEPA and the introduction of personal renminbi business in Hong Kong are expected to drive demand from mainland China and boost Hong Kong’s GDP.

As market leaders in Hong Kong, The Hongkong and Shanghai Banking Corporation and Hang Seng Bank are well placed to meet these competitive challenges.

Rest of Asia-Pacific (including Middle East)

The Asia-Pacific economies experienced mixed fortunes in the first half of 2003, due mainly to the impact of SARS, although growth rebounded in the second half of the year. The competitive environment varied greatly across the region, depending on the level of regulation, number of entrants, and the maturity of the markets. However, competition remained intense throughout Asia-Pacific across all customer groups served by HSBC. Additionally, in many countries in the region, the relatively young population and its increasing sophistication in financial services continued to provide further growth opportunities for HSBC.

North America

In the US, continuing mergers and acquisitions in the banking, insurance and securities industries are bringing consolidation and a blending of services. HSBC Bank USA also faced vigorous competition from a large number of non-bank suppliers of financial services that have found new and effective ways to meet the financial demands of customers. Many of these institutions are not subject to the same laws and regulations imposed on HSBC Bank USA.

These continuing trends will increase competitive pressures. Commercial banks appear to have recovered from portfolio credit problems experienced in 2001 and 2002, particularly in the technology, energy and telecommunications sectors.

Household competes with non-bank lenders for sub-prime and other consumers who do not conform to US banking industry requirements. Household’s consumer finance businesses are highly regulated, and are subject to laws relating to consumer protection, discrimination in extending credit, use of credit reports, privacy matters, disclosure of credit terms and correction of billing errors. They are also subject to regulations and legislation that limit operations in certain jurisdictions. Failure to comply with laws and regulations may limit the ability of Household’s licensed lenders to collect or enforce loan agreements made with consumers and may leave Household liable for damages and penalties.

There has been a significant amount of legislative activity in the US, nationally, locally and at the state level, aimed at curbing lending practices deemed to be ‘predatory’. In addition, states have sought to alter lending practices through consumer

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protection actions. Household continues to work with regulators and consumer groups to create appropriate safeguards to eliminate abusive practices while allowing middle-market borrowers to continue to have unrestricted access to credit for personal purposes. During 2003 Household implemented all the actions required under its 2002 settlement with the Attorneys General of 50 States and the District of Columbia.

The Canadian financial services industry continues to be dominated by the five largest banks in the country. However, the market remains highly competitive as other banks, insurance companies and financial institutions offer comparable products and services. This was aided by reform of the Bank Act of Canada in late 2001 which provided the stimulus for more competition. One of the key changes concerned the access provided in the national payments system. This change allowed non-deposit taking institutions to participate in cheque payments, credit card systems, debit card networks and automated bank machine networks.

Whilst merger activity amongst the largest banks in Canada remains a possibility, major financial institutions continue to look elsewhere for growth. During the year a number of Canadian banks and insurance companies completed strategic acquisitions of financial institutions in the US.

In Mexico, the banking industry has seen significant concentration in recent years with over 76 per cent of banking assets and 79 per cent of deposits owned by subsidiaries of five major foreign banks. Given that Mexico has a population of approximately 100 million, the majority of whom do not use the banking system, the growth opportunities in the retail sector are favourable in the medium to long term. With its extensive branch network and growing young customer base, HSBC is well positioned to take full advantage of this economic and competitive environment.

Currently there is strong regulatory pressure to reduce banking and pension management fees and commissions, constraining growth in non-funds income. Government regulators are also intent on increasing credit availability in the market, specifically lending for residential mortgages and small business loans.

Mexico’s economy is very closely linked to those of the US and Canada, and over 90 per cent of Mexico’s exports are to the North American market.

HSBC’s growing presence across the region provides a competitive advantage.

South America

There are over 165 banks in Brazil operating through a network of over 16,000 branches and offices. Consolidation in the banking industry continues, increasingly involving foreign banks (at the end of 2003 there were 45 banks in Brazil with foreign ownership interests). With a population of 178 million and an estimated 46 per cent of the eligible population ‘unbanked’, there are growth opportunities in the retail sector, in particular in the medium to long-term.

2003 saw continued consolidation in the Brazilian financial services industry, and HSBC Brazil, following its purchase of Lloyds TSB Group plc’s Brazilian businesses and assets, is well placed to take advantage of the economic development that is bringing new entrants to the financial system. This consolidation has heightened the focus on retail customer growth, and further highlighted the importance of customer service as a means of competitive differentiation. Competition at the top end of this retail market is particularly strong, and HSBC continues to focus on differentiating its product range and service quality.

In Argentina, international financial groups are HSBC’s main competitors, as most major banking and insurance players in the market are foreign controlled.

The fallout from the crisis in Argentina continues to have a profound impact on the financial services market. HSBC is one of a few participants providing a comprehensive range of financial services to its customers. The outlook for the financial services industry has improved but sustained improvement depends upon the resolution of outstanding government debt and, following that, the pending economic, fiscal and political reforms required to build confidence in the country’s prospects. HSBC will continue to monitor carefully developments to evaluate the opportunities and risks within the financial services industry in Argentina.

In 2003, competition between banks re-emerged as the economy started to grow and the population regained some confidence in the financial system. The local banks benefited from sharply increased deposits from the government who deposited surplus tax revenues in the system.

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H S B C H O L D I N G S P L C

Regulation and Supervision

HSBC’s operations throughout the world are regulated and supervised by approximately 370 different central banks and regulatory authorities in those jurisdictions in which HSBC has offices, branches or subsidiaries. HSBC estimates the cost of this regulation and supervision to be approximately US$400 million in 2003. These authorities impose certain reserve and reporting requirements and controls (for example, capital adequacy, depositor protection, and prudential supervision) on banks. In addition, a number of countries in which HSBC operates impose rules that affect, or place limitations on, foreign or foreign-owned or controlled banks and financial institutions. The rules include restrictions on the opening of local offices, branches or subsidiaries and the types of banking and non-banking activities that may be conducted by those local offices, branches or subsidiaries; restrictions on the acquisition of local banks or regulations requiri ng a specified percentage of local ownership; and restrictions on investment and other financial flows entering or leaving the country. The supervisory and regulatory regimes of the countries where HSBC operates will determine to some degree HSBC’s ability to expand into new markets, the services and products that HSBC will be able to offer in those markets and how HSBC structures specific operations.

The UK Financial Services Authority (‘FSA’) supervises HSBC on a consolidated basis. In addition, each operating bank within HSBC is regulated by local supervisors. The primary regulatory authorities are those in the UK, Hong Kong and the US, the Group’s principal areas of operation.

United Kingdom regulation and supervision

UK banking and financial institutions are subject to multiple regulations. The primary UK statute is the Financial Services and Markets Act 2000 (‘FSMA’). Other UK primary and secondary banking legislation is derived from European Union (‘EU’) directives relating to banking, securities, investment and sales of personal financial services.

The FSA is responsible for authorising and supervising UK banking institutions and regulates all investment business in the UK from retail life and pensions business to custody, branch share dealing, and treasury and capital markets activity. HSBC Bank is HSBC’s principal authorised institution in the UK.

FSA rules establish the minimum criteria for authorisation for banks and investment businesses in the UK. They also set out reporting (and, as applicable, consent) requirements with regard to large individual exposures and large exposures to related borrowers. The FSA will periodically obtain independent reports, usually from the auditors of the authorised institution, as to the adequacy of systems governing internal control as well as systems governing records and accounting. The FSA has the right to object, on prudential grounds, to persons who hold, or intend to hold, 10 per cent or more of the voting power of a financial institution.

The regulatory framework of the UK banking system has traditionally been based on co-operation between the FSA and authorised institutions. The FSA monitors authorised institutions through ongoing supervision and the review of routine andad hoc reports relating to financial and prudential matters. The FSA meets regularly with HSBC’s senior executives to discuss HSBC’s adherence to the FSA’s prudential guidelines. The FSA and senior executives in the UK also regularly discuss fundamental matters relating to HSBC’s business in the UK and internationally, including areas such as strategic and operating plans, risk control, loan portfolio composition and organisational changes.

In its capacity as supervisor of HSBC on a consolidated basis, the FSA receives information on the capital adequacy of, and sets requirements for, HSBC as a whole. Further details on capital measurement are included in ‘Capital Management’ on pages 173 to 174.

UK depositors and investors are covered by the Financial Services Compensation Scheme which deals with deposits with authorised institutions in the UK, investment business and contracts of insurance. Institutions authorised to accept deposits and conduct investment business are required to contribute to the funding of the scheme. In the event of the insolvency of an authorised institution, depositors are entitled to receive 100 per cent of the first £2,000 (US$3,600) of a claim plus 90 per cent of any further amount up to £33,000 (US$59,000) (the maximum amount payable being £31,700 (US$56,600)). Payments under the scheme in respect of investment business compensation are limited to 100 per cent of the first £30,000 (US$53,600) of a claim plus 90 per cent of any further amount up to £20,000 (US$35,700) (the maximum amount payable being £48,000 (US$85,700)).

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The European Union reached final agreement to a new directive regarding the taxation of savings income on 3 June 2003. Under the directive, each Member State, other than Austria, Belgium, and Luxembourg, will be required, beginning in 2005, to provide the tax authorities of each other Member State with details of payments of interest or other similar income paid by a person within its jurisdiction to individuals resident in such other Member State. Beginning on the same date, Austria, Belgium, and Luxembourg will impose a withholding tax on such income. The withholding tax rate will initially be 15 per cent, increasing to 20 per cent from 2008 and 35 per cent from 2011. Subject to future conditions being met, Austria, Belgium, and Luxembourg may cease to apply the withholding tax and instead comply with the automatic exchange of information rules applicable to the other Member States. Implementation of the directive is dependent upon Switzerland, Liechtenstein, San Marino and Andorra applying equivalent measures.

Hong Kong regulation and supervision

Banking in Hong Kong is subject to the provisions of the Banking Ordinance of Hong Kong (Chapter 155) (the ‘Banking Ordinance’), and to the powers, functions and duties ascribed by the Banking Ordinance to the Hong Kong Monetary Authority. The principal function of the Monetary Authority is to promote the general stability and effective working of the banking system in Hong Kong. The Monetary Authority is responsible for supervising compliance with the provisions of the Banking Ordinance. The Chief Executive of Hong Kong has the power to give directions to the Monetary Authority, which the Banking Ordinance requires the Monetary Authority and the Financial Secretary to follow.

The Monetary Authority has responsibility for authorising banks, and has discretion to attach conditions to its authorisation. The Monetary Authority requires that banks or their holding companies file regular prudential returns, and holds regular discussions with the management of the banks to review their operations. The Monetary Authority may also conduct ‘on site’ examinations of banks, and in the case of banks incorporated in Hong Kong, of any local and overseas branches and subsidiaries. The Monetary Authority requires all authorised institutions to have adequate systems of internal control and requires the institutions’ external

auditors, upon request, to report on those systems and other matters such as the accuracy of information provided to the Monetary Authority. In addition, the Monetary Authority may from time to time conduct tripartite discussions with banks and their external auditors.

The Monetary Authority, which may deny the acquisition of voting share capital of over 10 per cent in a bank, and may attach conditions to its approval thereof, can effectively control changes in the ownership and control of Hong Kong-incorporated financial institutions. In addition, the Monetary Authority has the power to divest controlling interests in a bank from a person if they are no longer deemed to be fit and proper, or if they may otherwise threaten the interests of depositors or potential depositors.

The Monetary Authority may revoke authorisation in the event of an institution's non-compliance with the provisions of the Banking Ordinance. These provisions require, among other things, the furnishing of accurate reports.

The Banking Ordinance requires that banks submit to the Monetary Authority certain returns and other information and establishes certain minimum standards and ratios relating to capital adequacy (see below), liquidity, capitalisation, limitations on shareholdings, exposure to any one customer, unsecured advances to persons affiliated with the bank and holdings of interests in land, with which banks must comply.

Hong Kong fully implemented the capital adequacy standards established by the Basel Accord in 1989. The Banking Ordinance currently provides that banks incorporated in Hong Kong maintain a capital adequacy ratio (calculated as the ratio, expressed as a percentage, of its capital base to its risk-weighted exposure) of at least 8 per cent. For banks with subsidiaries, the Monetary Authority is empowered to require that the ratio be calculated on a consolidated basis, or on both consolidated and unconsolidated bases. If circumstances require, the Monetary Authority is empowered to increase the minimum capital adequacy ratio (to up to 12 per cent for fully-licensed banks and 16 per cent for deposit-taking companies and restricted-licence banks), after consultation with the bank.

The marketing of, dealing in and provision of advice and asset management services in relation to securities in Hong Kong are subject to the provisions

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H S B C H O L D I N G S P L C

Regulation and Supervision(continued)

of the Securities and Futures Ordinance of Hong Kong (Chapter 571) (the ‘Securities and Futures Ordinance’). Entities engaging in activities regulated by the Securities and Futures Ordinance are required to be licensed. The Monetary Authority is the primary regulator for banks involved in the securities business, while the Securities and Futures Commission is the regulator for non-banking entities.

US regulation and supervision

HSBC is subject to extensive federal and state supervision and regulation in the US. Banking laws and regulations of the Federal Reserve Board, the Federal Deposit Insurance Corporation (‘FDIC’) and the State of New York Banking Department govern many aspects of HSBC’s US business.

HSBC and its US operations are subject to supervision, regulation and examination by the Federal Reserve Board because HSBC is a bank holding company under the US Bank Holding Company Act of 1956 (the ‘BHCA’) as a result of its ownership of HSBC Bank USA. HSBC Bank USA, is a New York state-chartered bank and a member of the Federal Reserve System. As such, HSBC Bank USA is subject to regulation, supervision and examination by both the Federal Reserve Board and the State of New York Banking Department. HSBC also owns Household Bank (SB), N.A. (‘Household Bank’), a nationally chartered ‘credit card bank’ subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (‘OCC’). The deposits of HSBC Bank USA and Household Bank are insured by the FDIC and both banks are subject to relevant FDIC regulation.

The BHCA and the International Banking Act of 1978 (‘IBA’) impose certain limits and requirements on the US activities and investments of HSBC and certain companies in which it holds direct or indirect investments. As a ‘qualifying foreign banking organisation’ under Federal Reserve Board regulations, HSBC may engage in the United States in certain limited non-banking activities and hold certain investments that would otherwise not be permissible under US law. Prior to 13 March 2000, however, the BHCA generally prohibited HSBC from acquiring, directly or indirectly, ownership or control of more than 5 per cent of the voting shares of any company engaged in the United States in activities other than banking and certain activities closely related to banking. On that date HSBC became a financial holding company (‘FHC’) under

the Gramm-Leach-Bliley Act amendments to the BHCA, enabling it to offer a more complete line of financial products and services. HSBC’s ability to engage in expanded financial activities as an FHC depends upon HSBC continuing to meet certain criteria set forth in the BHCA, including requirements that its US depository institution subsidiaries, HSBC Bank USA and Household Bank be ‘well-capitalised’ and ‘well-managed’, and that they have achieved at least a satisfactory record in meeting community credit needs during their most recent examination pursuant to the Community Reinvestment Act. These requirements also apply to Wells Fargo HSBC Trade Bank, N.A., in which HSBC has a 20 per cent voting interest in equity capital and a 40 per cent economic interest. Each of these depository institution subsidiaries achieved at least the required rating during their most recent examinations. In general under the BHCA, an FHC would be required, upon notice by the Federal Reserve Board, to enter into an agreement with the Federal Reserve Board to correct any failure to comply with the requirements to maintain FHC status. Until such deficiencies are corrected, the Federal Reserve Board may impose limitations on the US activities of an FHC and its subsidiaries as it deems appropriate. If such deficiencies are not corrected, the Federal Reserve Board may require an FHC to divest its control of any subsidiary bank or to cease to engage in certain financial activities.

HSBC is generally prohibited under the BHCA from acquiring, directly or indirectly, ownership or control of more than 5 per cent of any class of voting shares of, or substantially all the assets of, or exercising control over, any US bank or bank holding company without the prior approval of the Federal Reserve Board.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the ‘Riegle-Neal Act’) permits a US bank holding company or foreign banking organisation, with Federal Reserve Board approval, to acquire a bank located in a state other than the organisation’s US ‘home’ state, subject to certain restrictions, and a national or state-chartered bank to merge across state lines or to establish or acquire branches in other states, subject to various state law requirements or restrictions. In general, the Riegle-Neal Act provides a non-US bank with interstate branching and expansion rights similar to those of a US national or state-chartered bank located in its ‘home’ state.

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The US is a party to the 1988 Basel Capital Accord and US banking regulatory authorities have adopted risk-based capital requirements for US banks and bank holding companies that are generally consistent with the Accord. In addition, US bank regulatory authorities have adopted ‘leverage’ capital requirements that generally require US banks and bank holding companies to maintain a minimum amount of capital in relation to their balance sheet assets (measured on a non-risk-weighted basis).

The Federal Reserve Board has determined that, as a general matter, a US bank holding company that is owned and controlled by a foreign bank with FHC status is not required to comply with the Federal Reserve Board’s capital adequacy guidelines. HSBC may rely on the Federal Reserve Board’s flexibility with respect to the capital adequacy requirements applicable to such intermediate US bank holding companies.

HSBC Bank USA, Wells Fargo HSBC Trade Bank, N.A. and Household Bank, like other FDIC-insured banks, may be required to pay assessments to the FDIC for deposit insurance under the FDIC’s Bank Insurance Fund. Under the FDIC’s risk-based system for setting deposit insurance assessments, an institution’s assessments vary according to the level of capital an institution holds, its deposit levels and other factors.

The Federal Deposit Insurance Corporation Improvement Act of 1991 provides for extensive regulation of depository institutions (such as HSBC Bank USA, Wells Fargo HSBC Trade Bank, N.A. and Household Bank), including requiring federal banking regulators to take ‘prompt corrective action’ with respect to FDIC-insured banks that do not meet minimum capital requirements.

As at 31 December 2003, HSBC Bank USA, Wells Fargo HSBC Trade Bank, N.A. and Household Bank were each well-capitalised under Federal Reserve Board regulations.

The USA Patriot Act (‘Patriot Act’) signed into law in October 2001, imposes significant record keeping and customer identity requirements, expanded the US federal government’s powers to freeze or confiscate assets and increases the available penalties that may be assessed against financial institutions for failure to comply with obligations imposed on such institutions to detect, prevent and report money laundering and terrorist financing. Among other things, the Patriot Act requires the US

Treasury Secretary to develop and adopt final regulations with regard to the anti-money laundering compliance obligations of financial institutions (a term which, for this purpose, includes insured US depository institutions, US branches and agencies of foreign banks, US broker-dealers and numerous other entities). The US Treasury Secretary delegated this authority to a bureau of the US Treasury Department known as the Financial Crimes Enforcement Network (‘FinCEN’).

Many of the new anti-money laundering compliance requirements of the Patriot Act, as implemented by FinCEN, are generally consistent with the anti-money laundering compliance obligations previously imposed on HSBC Bank USA under the Bank Secrecy Act (which was amended in certain respects by the Patriot Act) and applicable Federal Reserve Board regulations. These include requirements to adopt and implement an anti-money laundering program, report suspicious transactions and implement due diligence procedures for certain correspondent and private banking accounts. Certain other specific requirements under the Patriot Act involve new compliance obligations. The passage of the Patriot Act and other recent events have resulted in heightened scrutiny of the Bank Secrecy Act and anti-money laundering compliance by federal and state bank examiners. On 30 April 2003, HSBC Bank USA entered into a written agreement with the Federal Reserve Bank of New York and the New York State Banking Department to enhance its compliance with anti-money laundering requirements. HSBC Bank USA has implemented certain improvements in its compliance, reporting, and review systems and procedures and is in the process of making additional improvements in these areas.

HSBC’s US consumer finance operations are also subject to extensive regulation in the US, and to laws relating to consumer protection; discrimination in extending credit; use of credit reports; privacy matters; disclosure of credit terms; and correction of billing errors. They also are subject to regulations and legislation that limit operations in certain jurisdictions. For example, limitations may be placed on the amount of interest or fees that a loan may bear, the amount that may be borrowed, the types of actions that may be taken to collect or foreclose upon delinquent loans or the information about a customer that may be shared. HSBC’s US consumer branch lending offices are generally licensed in those jurisdictions in which they operate. Such licences

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H S B C H O L D I N G S P L C

Regulation and Supervision(continued)

have limited terms but are renewable, and are revocable for cause. Failure to comply with applicable laws and regulations may limit the ability of these licensed lenders to collect or enforce loan agreements made with consumers and may cause the consumer lending subsidiary to be liable for damages and penalties.

HSBC’s US credit insurance operations are subject to regulatory supervision under the laws of the states in which they operate. Regulations vary from state to state but generally cover licensing of insurance companies; premiums and loss rates; dividend restrictions; types of insurance that may be sold; permissible investments; policy reserve requirements; and insurance marketing practices.

Certain US source payments to foreign persons may be subject to US withholding tax unless the foreign person is a qualified intermediary. A qualified intermediary is a financial intermediary who is qualified under the Internal Revenue Code and has completed the Qualified Intermediary Withholding Agreement with the Internal Revenue Service. Various HSBC operations outside the US are qualified intermediaries.

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H S B C H O L D I N G S P L C

Description of Property

At 31 December 2003, HSBC had some 9,700 operational properties worldwide, of which approximately 3,300 were located in Europe, 600 in Hong Kong and the rest of Asia Pacific, 3,700 in North America (including 1,500 in Mexico) and 1,700 in Brazil. Additionally, properties with a net book value of US$715 million were held for investment purposes. Of the total net book value of

HSBC properties, more than 73 per cent were owned or held under long-term leases. Further details are included in Note 25 of the ‘Notes on the Financial Statements’.

HSBC values its properties on an annual basis and updates their balance sheet values accordingly.

Legal Proceedings

HSBC, together with a number of its subsidiary undertakings, is named in and is defending legal actions in various jurisdictions arising from its

normal business. None of the above proceedings is regarded as material litigation.

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H S B C H O L D I N G S P L C

Financial Review

Summary


	Year ended 31 December

	2003						2002		2001

					Rest of
	Total		Household¹		HSBC
	US$m		US$m		US$m		US$m		US$m

Net interest income	25,598		8,305		17,293		15,460		14,725
Other operating income	15,474		1,878		13,596		11,135		11,163

Total operating income	41,072		10,183		30,889		26,595		25,888
Operating expenses excluding goodwill
amortisation	(21,082	)	(3,406	)	(17,676	)	(14,954	)	(14,605	)
Goodwill amortisation	(1,450	)	(381	)	(1,069	)	(854	)	(799	)

Operating profit before provisions	18,540		6,396		12,144		10,787		10,484
Provisions for bad and doubtful debts	(6,093	)	(4,575	)	(1,518	)	(1,321	)	(2,037	)
Provisions for contingent liabilities and
commitments	(35	)	–		(35	)	(39	)	(649	)
Loss from foreign currency redenomination
in Argentina	(9	)	–		(9	)	(68	)	(520	)

Amounts written off fixed asset investments	(106	)	–		(106	)	(324	)	(125	)

Operating profit	12,297		1,821		10,476		9,035		7,153

Share of operating loss in joint ventures	(116	)	–		(116	)	(28	)	(91	)
Share of operating profit in associates	221		–		221		135		164
Gains/(losses) on disposal of
– investments	451		6		445		532		754
– tangible fixed assets	(37	)	–		(37	)	(24	)	20

Profit on ordinary activities before tax	12,816		1,827		10,989		9,650		8,000
Tax on profit on ordinary activities	(3,120	)	(463	)	(2,657	)	(2,534	)	(1,988	)

Profit on ordinary activities after tax	9,696		1,364		8,332		7,116		6,012

Minority interests	(922	)	–		(922	)	(877	)	(1,020	)

Profit attributable to shareholders	8,774		1,364		7,410		6,239		4,992

Profit before tax excluding goodwill
amortisation	14,401		2,208		12,193		10,513		8,807
Profit attributable to shareholders excluding
goodwill amortisation	10,359		1,745		8,614		7,102		5,799


1	The results shown cover the period since the date of acquisition, 28 March 2003.

Year ended 31 December 2003 compared with year ended 31 December 2002

In the sections which follow, analysis of these results highlights the contributions from Household, acquired at the end of March 2003, and HSBC Mexico, acquired in November 2002, together with the impact of a weaker US dollar on translating revenues and costs arising in other currencies. These factors are important to an understanding of HSBC’s performance in 2003. It is also important to recognise the structural effect on reported financial performance of the acquisition of Household. In 2004, HSBC’s results will reflect a full year’s contribution from Household.

The shape of the Group’s profit and loss account changed as a result of the Household acquisition, reflecting the nature of its business model.Household generally serves non-conforming and sub-prime customers who, for a variety of reasons, have a higher delinquency and credit loss probability. These customers are charged a higher rate of interest to compensate for this additional risk of loss. As a consequence, Household’s net interest income is a much higher proportion of its total revenues than in the rest of HSBC, and a much higher proportion of Household’s pre-provision profitability is absorbed in bad and doubtful debt charges than is normally the case in the rest of HSBC.

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In the following discussion, the phrase ‘on an underlying basis’ is used to describe performance excluding the acquisitions of Household and HSBC Mexico.

HSBC made a profit on ordinary activities before tax of US$12,816 million in 2003, an increase of US$3,166 million, or 33 per cent, compared with 2002. Household and HSBC Mexico accounted for over 70 per cent of this increase. Household contributed US$1,827 million in its first nine months, while HSBC Mexico contributed US$441 million in its first full year.

Excluding goodwill amortisation, Household and HSBC Mexico contributed US$2,208 million and US$534 million respectively to profit before tax, which grew by US$3,888 million or 37 per cent to US$14,401 million. Underlying growth, on a constant currency basis, was 7 per cent. Goodwill amortisation increased by US$722 million to US$1,585 million in 2003, reflecting acquisitions, currency movements and the write down of goodwill attributed to a fund management company previously acquired as part of the CCF acquisition.

Net interest income of US$25,598 million in 2003 was US$10,138 million, or 66 per cent, higher than in 2002. Of this increase, Household contributed US$8,305 million and HSBC Mexico US$874 million. Excluding these acquisitions, and in terms of constant currency, net interest income was marginally higher. This reflected a number of offsetting factors. The net interest margin benefited from the change in asset mix, with growth of over 80 per cent in the year in personal lending, mainly in the US (including Household) and in Europe. However, deposit margins fell as interbank placements matured and were redeployed at lower yields. Growth in the volume of deposits raised only partially compensated for this, while the impact of the Competition Commission ruling on paying interest on qualifying small business accounts in the UK cost US$136 million. Net interest income declined in Hong Kong, reflecting spread compression o n the value of deposits and continued pressure on mortgage margins.

Other operating income of US$15,474 million was US$4,339 million, or 39 per cent, higher than in 2002. Household contributed US$1,878 million and HSBC Mexico US$599 million of this increase. The acquisitions of Household and HSBC Mexico reduced the proportion of fee revenues exposed to

stock market levels by bringing into the Group significant levels of account service fees (HSBC Mexico) and credit card fee income (Household). Fees from credit cards now constitute close to 24 per cent of total fees receivable compared with 13 per cent in 2002. This will increase in 2004 as Household is consolidated for a full year. On an underlying basis, and at constant currency, the increase was 9 per cent. Strong growth in dealing profits in HSBC Markets benefited from investment made in 2002 and 2003 to upgrade dealing room capabilities in the major centres and broaden the range of products offered to customers. Debt trading benefited from favourable credit spread movements. Foreign exchange revenues increased due to currency volatility and increased levels of corporate sales. In addition, higher income was earned from increased demand from corporate customers for structured tailored products. In constant currency, fees and commission income increased by 4 per cent on an underlying basis, reflecting growth in income from card transactions, insurance and lending.

Operating expenses, excluding goodwill amortisation, rose US$6,128 million, or 41 per cent, of which Household contributed US$3,406 million and HSBC Mexico US$881 million. Excluding the effect of these acquisitions, and expressed in terms of constant currency, operating expenses increased by 5 per cent, primarily due to increased employment costs. Pension costs and social taxes, together with restructuring costs, added over US$300 million to employment costs in 2003. HSBC’s cost:income ratio, excluding goodwill amortisation, decreased to 51.3 per cent from 56.2 per cent in 2002.

The charge for bad and doubtful debts was US$6,093 million in 2003, US$4,772 million higher than in 2002. This was essentially all attributable to the acquisitions, with Household accounting for US$4,575 million and HSBC Mexico US$110 million. On an underlying basis, and in constant currency, the increase in provisioning was around 2 per cent. Credit charges increased in line with the growth in personal lending, and the commercial customer base continued to perform well. New corporate provisions increased in Europe in the engineering and power sectors, and in Hong Kong in the electronics sector, but these were partly offset by a lower charge in North America reflecting the improved credit environment.

Other charges of US$44 million in 2003 were US$63 million, or 59 per cent, lower than in 2002.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Losses in Argentina, which continue to arise from judicial orders or ‘amparos’, were mitigated in 2003 following the receipt of ‘compensation bonds’ in part settlement of the original asymmetrical pesification.Amparos allow certain depositors relief from the mandatory pesification rules and recovery of their historical US dollar deposits at current exchange rates.

Amounts written off fixed asset investments of US$106 million were lower than in 2002, which was dominated by a US$143 million charge writing down the carrying value of HSBC’s stake in a major European life assurer.

The US$116 million share of operating losses in joint ventures principally reflected a write-down of HSBC’s share of goodwill attributed to a UK fund management company acquired as part of the CCF acquisition.

Gains on disposal of investments of US$451 million were US$81 million lower than in 2002. Gains on sales of investment debt securities were slightly lower than in the prior year. Gains in 2002 benefited from the sale of HSBC’s share of Lixxbail to its joint venture partner and the sale of HSBC’s 6.99 per cent share in Banco Santiago S.A.

Year ended 31 December 2002 compared with year ended 31 December 2001

The translation of revenues and costs arising in 2002, and consequently the results reported for the year, were affected by the weaker US dollar against other major currencies and significantly weaker South American currencies against all currencies. Both are important to an understanding of HSBC’s performance in 2002.

HSBC made a profit on ordinary activities before tax of US$9,650 million in 2002, an increase of US$1,650 million, or 21 per cent, compared with 2001. Profit before tax, excluding goodwill amortisation, increased by US$1,706 million, or 19 per cent.

Net interest income of US$15,460 million in 2002 was US$735 million, or 5 per cent, higher than in 2001. Net interest income in Europe and North America was higher than in 2001 by US$1.1 billion, of which US$0.2 billion arose from foreign exchange translation and US$85 million was contributed by HSBC Mexico. Underlying growth reflected higher levels of average interest-earning assets and the

benefits from lower funding costs. Net interest income in South America was US$0.4 billion lower than in 2001 of which US$0.3 billion was due to foreign exchange translation. Excluding this, the underlying reduction reflected a lower level of local debt securities in Brazil. In Argentina narrower spreads and the costs associated with the funding of the non-performing loan portfolio resulted in net interest expense in 2002.

Other operating income of US$11,135 million was in line with 2001 as growth in wealth management income was offset by falls in fees and commission income from securities market activities. Dealing profits were also lower against a backdrop of difficult trading conditions in the credit and equity markets.

Operating expenses, excluding goodwill amortisation, were US$349 million, or 2 per cent, higher than 2001 reflecting the cost structures of new acquisitions, investment in the expanding wealth management business, and costs associated with the enhancement of business processes. In constant currency, operating expenses were 4 per cent higher. HSBC’s cost:income ratio, excluding goodwill amortisation, decreased to 56.2 per cent from 56.4 per cent in 2001.

The charge for bad and doubtful debts was US$1,321 million in 2002, US$716 million lower than in 2001. The main component of the charge, which related to the personal sector, amounted to US$857 million, a rise of US$113 million, largely as a result of growth in lending and higher credit card provisioning in Hong Kong. New corporate provisions also increased in Europe but this was more than offset in Asia as the economic conditions in some Asian countries improved. The substantial reduction in the total charge in 2002 reflected the US$600 million general provision against Argentine exposure charged in 2001.

Other charges of US$107 million in 2002 were US$1,062 million, or 91 per cent, lower than in 2001. The 2001 charges included the loss of US$520 million arising from the foreign currency redenomination in Argentina and a charge of US$575 million in respect of the Princeton Note matter. The 2002 charge included US$68 million in losses in Argentina arising from judicial orders or ‘amparos’ (allowing certain depositors relief from the mandatory pesification rules and recovery of their historic US dollar deposits at current exchange rates),

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government decrees and renegotiation of banking contracts.

Amounts written off fixed asset investments were dominated by a US$143 million charge writing down the carrying value of a major European life assurer in which CCF had for some time held a strategic minority stake.

The US$28 million share of operating losses in joint ventures principally reflected HSBC’s share of the ongoing costs of Merrill Lynch HSBC for the first half of 2002. Following the acquisition by

HSBC of its joint venture partner’s share on 28 June 2002, these results were consolidated fully on a line by line basis.

Gains on disposal of investments ofUS$532 million included profit on the sale of CCF’s stake in Lixxbail to its joint venture partner, and HSBC’s 6.99 per cent stake in Banco Santiago S.A. In addition, disposal gains of US$170 million were realised from sales of investment debt securities made to adjust to changes in interest rate conditions. In aggregate, disposal gains on investments were US$222 million lower than in 2001.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Net interest income

Year ended 31 December

2003

2002

2001

Total

Household¹

Rest of HSBC

US$m

US$m

By geographical

region

Europe

7,540

29.5

438

5.3

7,102

41.0

6,343

41.0

5,563

37.8

Hong Kong

3,901

15.2

–

3,901

22.6

4,133

26.7

4,165

28.3

Rest of Asia-

Pacific

1,740

6.8

–

1,740

10.1

1,607

10.4

1,482

10.1

North America

11,777

46.0

7,867

94.7

3,910

22.6

2,732

17.7

2,450

16.6

South America

640

2.5

–

640

3.7

645

4.2

1,065

7.2

Net interest income

25,598

100.0

8,305

100.0

17,293

100.0

15,460

100.0

14,725

100.0


	Year ended 31 December

	2003	2002	2001
	US$m	US$m	US$m

Net interest income	25,598	15,460	14,725
Average interest-earning assets	778,415	608,749	579,665
Gross interest yield (per cent)²	5.13	4.70	6.08
Net interest spread (per cent)³	3.06	2.27	2.09
Net interest margin (per cent)⁴	3.29	2.54	2.54


1	Since the date of acquisition.
2	Gross interest yield is the average interest rate earned on average interest-earning assets (AIEA).
3	Net interest spread is the difference between the average interest rate earned on average interest-earning assets and the average interest rate paid on average interest-bearing funds.
4	Net interest margin is net interest income expressed as a percentage of average interest-earning assets.

Year ended 31 December 2003 compared with year ended 31 December 2002

Net interest income in 2003 was US$10,138 million, or 66 per cent higher than 2002, at US$25,598 million. Of this increase, Household contributed US$8,305 million, and HSBC Mexico US$874 million. Excluding these acquisitions, and at constant exchange rates, net interest income was only marginally higher than in 2002, as the impact of growth in interest-earning assets was offset by continuing margin compression from the effect of low interest rates worldwide. This impact is expected to continue in 2004 unless interest rates rise ahead of market expectations.

In Europe, net interest income wasUS$1,197 million, or 19 per cent, higher than in 2002. HFC Bank contributed US$438 million of this increase. Excluding this acquisition and at constant exchange rates, net interest income was slightly higher than in 2002, reflecting strong growth in average interest-earning assets. This was partly offset by the cost of paying interest on small and medium-sized business accounts in the UK and the impact of liquidity being redeployed at lower yields as assets matured. In North America, net interest income

increased by US$9,045 million. On an underlying basis, the growth was US$304 million, or 11 per cent, primarily reflecting the benefits of strong growth in mortgage lending and savings products, and good balance sheet management, which improved the mix of lending by exiting less profitable business. Benefit was also gained from the elimination of funding costs following the closure of certain arbitrage trading activities in the US. In Hong Kong, net interest income declined by 6 per cent, largely due to spread compression on the value of deposits and continued pressure on margins in the mortgage business. Continued pressure on margins depressed mortgage yields in an environment of very low credit demand. This was partly offset by a 7 per cent growth in average interest-earning assets, increased customer deposits and the redeployment of interbank placements in holdings of debt securities. Credit card lending also grew by 6 per cent, improving the m ix of assets.

In the rest of Asia-Pacific, net interest income increased by 8 per cent. In constant currency, this increase was 5 per cent, driven by growth in mortgages and credit card lending, and the beneficial effect of the acquisition of the retail deposit and loan

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business of AMP Bank Limited in the first half of 2003.

In South America, net interest income was broadly in line with last year. In constant currency, net interest income grew by 10 per cent. In Brazil, net interest income was marginally higher than in 2002, benefiting from the acquisition of the Brazilian businesses and assets of Lloyds TSB Group plc in December 2003. Excluding this, the favourable effect of higher levels of customer lending and deposits were fully offset by reduced spreads as interest rates fell during the year. Argentina recorded net interest income of US$14 million in 2003 compared with a net interest expense last year. As the domestic economy began to recover and the trade surplus grew, interest rates fell. The effect of the continuing reduction in average interest-earning assets was more than offset by the lower cost of funding the non-performing loan portfolio.

Overall, average interest-earning assets increased by US$169.7 billion, or 28 per cent, compared with 2002. Of the increase, Household contributed US$92.0 billion and HSBC Mexico US$17.8 billion. At constant exchange rates, underlying average interest-earning assets increased by 4 per cent. This growth was driven principally by higher mortgage balances and personal lending in the UK, France, the US, Canada, Malaysia, Australia and Singapore, and an increase in holdings of long-term securities in the US and debt securities in Hong Kong.

HSBC’s net interest margin was 3.29 per cent in 2003, compared with 2.54 per cent in 2002. The acquisitions of Household and HSBC Mexico increased net interest margin by 77 and 6 basis points respectively. On an underlying basis, HSBC’s net interest margin fell by 8 basis points to 2.46 per cent.

In Europe, the fall in net interest margin was primarily due to a decline in the benefit of net free funds, mainly as a result of paying interest on current account balances belonging to small and medium sized enterprises in the UK. In Hong Kong, HSBC’s net interest margin also declined because of lower spreads on deposits and lower yields on redeployed interbank placements. In Hang Seng Bank, net interest margin narrowed due to lower mortgage yields, narrower spreads on deposits and debt securities, and a lower contribution from net free funds, partly offset by switching liquidity from interbank placements to debt securities. In the rest of

Asia-Pacific, net interest margin fell in several countries, mainly from narrower spreads on deposits, lower yields on mortgages, the maturing of higher yielding assets, and a reduced contribution from net free funds. In the US, growth in mortgage balances and a shift in the treasury portfolio to higher yielding fixed rate investments led to an improvement in net interest margin.

Year ended 31 December 2002 compared with year ended 31 December 2001

Net interest income in 2002 was US$735 million, or 5 per cent, higher than 2001, at US$15,460 million. At constant exchange rates, net interest income was 6 per cent higher than 2001 reflecting growth in HSBC’s operations in Europe, North America and the rest of Asia Pacific, as well as the acquisition of HSBC Mexico at the end of November 2002.

In Europe, net interest income was US$780 million, or 14 per cent, higher than in 2001, mainly reflecting the growth in average interest-earning assets and the benefits of lower funding costs. In constant currency, growth was 10 per cent. In North America, net interest income increased by US$282 million, or 12 per cent, due to a combination of the increased level of average interest-earning assets, primarily residential mortgages, and wider margins on treasury activities as a steeper yield curve led to reduced funding costs. In addition, HSBC Mexico contributed US$85 million of net interest income to the North American region. In Hong Kong, notwithstanding modest loan growth and a reduced contribution from net free funds, net interest income was largely maintained as a strong performance in Global Markets, together with growth in credit card lending and in low cost deposits, offset continuing margin compression in the mortgage business.

In the rest of Asia-Pacific net interest income growth of 8 per cent was driven by higher credit card and personal lending together with the full year impact of the acquisition of NRMA Building Society (‘NRMA’) in Australia in 2001.

In South America the unsettled economic environment caused net interest income to fall by US$420 million to US$645 million. In Brazil, underlying net interest income was in line with 2001 as the benefit from higher levels of customer lending was offset by the impact of HSBC’s decision to reduce the level of local debt securities and to

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H S B C H O L D I N G S P L C

Financial Review(continued)

position the balance sheet more conservatively. In Argentina, the combination of narrower spreads and the high cost of local funding of the non-performing loan portfolio resulted in net interest expense in 2002.

Average interest-earning assets at US$609 billion increased by US$29 billion, or 5 per cent. Adjusting for the impact of foreign exchange translation and acquisitions, underlying growth was 3 per cent, driven principally by the placement of customer deposits in the UK, Taiwan, India, Korea, mainland China and the Middle East, together with personal lending growth in the UK, France, US, Canada, Singapore, Malaysia, Korea, Taiwan and India. The increase in average interest-earning assets from acquisitions was US$4 billion.

HSBC was able to maintain its net interest margin at 2.54 per cent, unchanged from 2001, as an 18 basis point widening in interest spread was offset by a similar reduction in the contribution from net free funds. Interest spreads benefited from a change in asset mix, with a higher proportion of personal lending, and from the increasing investment of surplus liquidity in higher yielding investment grade corporate debt securities, instead of interbank placements. In addition, margins benefited from the fall in short-term interest rates as relative returns earned on liquidity deployed in longer dated assets by Global Markets increased as the yield curve steepened. A reduced benefit from a higher level of net free funds mitigated this effect on the net interest margin.

In the UK, net interest margin fell as an improved contribution from Global Markets activities and the benefit of higher levels of personal customer lending were more than offset by reduced earnings from net free funds. In Hong Kong, The Hongkong and Shanghai Banking Corporation maintained its margin through improved Global Markets performance, higher net recoveries of suspended interest and an increased proportion of higher yielding credit card advances. These factors offset the impact of reduced spreads on deposits, a lower contribution from net free funds and narrower spreads in the competitive mortgage market. Hang Seng Bank suffered a fall in net interest margin, primarily from a combination of lower earnings on net free funds as interest rates fell and narrower spreads on mortgages. For Hang Seng Bank these drivers were much more significant than for The Hongkong and Shanghai Banking Corporation. In the US, t he net interest margin improved as the result of a strong performance in Global Markets activities, as a steeper yield curve reduced funding costs, and growth in average mortgage balances.

HSBC moved increasingly to differentiated product pricing in 2002. This competitive approach reflected the value to HSBC of its loyalest customers, but resulted in narrower spreads on a number of products, particularly mortgages and savings. The benefit of this strategy was seen in the mix and volume of HSBC’s core current account and savings products, particularly in the UK, Hong Kong and the US.

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Other operating income

Year ended 31 December

2003

2002

2001

Total

Household¹

Rest of HSBC

US$m

US$m

By geographical

region

Europe

7,555

47.4

198

10.5

7,357

52.6

6,272

54.8

6,056

53.0

Hong Kong

2,331

14.7

–

2,331

16.6

1,917

16.7

1,852

16.2

Rest of Asia-

Pacific

1,350

8.5

–

1,350

9.6

1,174

10.2

1,137

10.0

North America

3,982

25.1

1,680

89.5

2,302

16.4

1,502

13.1

1,495

13.1

South America

678

4.3

–

678

4.8

596

5.2

880

7.7

15,896

100.0

1,878

100.0

14,018

100.0

11,461

100.0

11,420

100.0

Intra-HSBC

elimination

(422

)

–

(422

)

(326

)

(257

)

Other operating

income

15,474

1,878

13,596

11,135

11,163

	Year ended 31 December

	2003				2002	2001

	Total		Household¹	Rest of HSBC
	US$m		US$m	US$m	US$m	US$m

By income category
Dividend income	222		12	210	278	186
Fees and commissions (net)	10,394		1,216	9,178	7,824	7,470

Dealing profits
– foreign exchange	1,239		–	1,239	1,167	1,120
– interest rate derivatives	330		–	330	47	159
– debt securities	251		–	251	75	311
– equities and other trading	358		–	358	24	95

	2,178		–	2,178	1,313	1,685

Operating leased assets rental income	553		4	549	490	465
General insurance underwriting (net)	473		62	411	313	373
Increase in value of long-term insurance	206	²	–	206	182	251
business
Other	1,448		584	864	735	733

	2,680		650	2,030	1,720	1,822

Total other operating income	15,474		1,878	13,596	11,135	11,163

1	Since the date of acquisition.
2	This figure has been reduced by the reversal of a US$42 million profit made on own shares, as a result of compliance with UITF Abstracts 37 and 38, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Analysis of fees and commissions receivable and payable

	Year ended 31 December

	2003						2002		2001

	Total		Household	¹	Rest of HSBC
	US$m		US$m		US$m		US$m		US$m
Account services	2,317		138		2,179		1,715		1,620
Credit facilities	966		–		966		752		628
Remittances	288		–		288		268		246
Cards	2,976		1,495		1,481		1,242		1,116
Imports/exports	609		–		609		556		524
Underwriting	175		–		175		173		135
Insurance	961		35		926		775		668
Mortgage servicing rights	75		–		75		77		78
Trust income	145		–		145		125		114
Broking income	873		–		873		773		928
Global custody	338		–		338		296		308
Maintenance income on operating leases	171		–		171		160		165
Funds under management	1,096		–		1,096		1,026		965
Unit trusts	358		–		358		284		481
Corporate finance	189		–		189		122		115
Other	1,023		6		1,017		901		665

Total fees and commissions receivable	12,560		1,674		10,886		9,245		8,756
Less: fees payable	(2,166	)	(458	)	(1,708	)	(1,421	)	(1,286	)

Net fees and commissions	10,394		1,216		9,178		7,824		7,470

1Since the date of acquisition.

Year ended 31 December 2003 compared with year ended 31 December 2002

Other operating income of US$15,474 million, was US$4,339 million, or 39 per cent, higher than in 2002. Of this increase, Household contributed US$1,878 million and HSBC Mexico contributed US$599 million. On an underlying basis, and at constant exchange rates, growth in other operating income was 9 per cent, principally as a result of higher dealing profits throughout HSBC’s operations.

The acquisitions of Household and HSBC Mexico reduced the proportion of fee revenues exposed to stock market fluctuations by bringing into the Group significant levels of account service fees (HSBC Mexico) and credit card fee income (Household). Fees from credit cards now constitute close to 24 per cent of total fees receivable compared with 13 per cent in 2002.

Fees and commission income, excluding Household and HSBC Mexico and at constant exchange rates, increased by 4 per cent compared with 2002. In Europe, fee income increased by US$664 million, or 15 per cent, of which HFC Bank contributed US$49 million. Excluding this acquisition and at constant exchange rates, fee income increased by 2 per cent, mainly from growth in sales of creditor protection insurance, cards

transactions and loan fees. Within the UK, personal loan protection premiums grew by 19 per cent, reflecting growth in mortgages and personal loans. However, this was partly offset by a decline in sales of investment and pension products, mainly reflecting uncertainty in the equity markets.

In North America, excluding US$1,167 million and US$453 million relating to Household and HSBC Mexico respectively, fee income was marginally higher than in 2002. Growth in income from securities advisory services, deposit-related service charges and card fees were partly offset by lower earnings from mortgage servicing.

In Hong Kong, fee income increased by US$119 million, primarily due to higher revenues from wealth management services. There was strong growth in fees from sales of unit trusts and capital guaranteed funds, which increased by US$1.6 billion in 2003. HSBC expanded its range of structured deposit products, further benefiting fee income. Revenues from securities and stockbroking also increased in line with a buoyant stock market in the second half of the year and increased market share. In addition, the insurance business generated strong results reflecting growth in new individual life business written.

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HSBC’s operations in the rest of Asia-Pacific increased fee income by US$81 million with strong growth in wealth management income, reflecting higher unit trust sales and funds under management. Fee income from credit cards rose in a number of countries.

In South America, fee income increased by 10 per cent at constant exchange rates, mainly in Brazil. The increase reflected good growth in credit-related revenue, account service fees and cards. In Argentina a decline in fee income was recorded.

Dealing profits of US$2,178 million were US$865 million, or 66 per cent, higher than in 2002 and reflected investment in and refocusing of HSBC’s markets businesses, primarily in the US and in Europe. In Asia a wider range of structured solutions were offered to customers which boosted revenues. Acquisitions were not significant contributors to growth in this area with HSBC Mexico contributing US$103 million. Within dealing profits, there was strong growth in fixed income earnings, predominantly in Europe and Hong Kong, as a result of favourable credit spreads and strong investor demand for yield enhancement products. Foreign exchange revenues increased in both Europe and North America, with volatility in the major currencies driving sales of hedging products and sales activity generally. In Hong Kong, a greater focus on tailored solutions generated a significant increase in corporate sales during the year.

Other operating income further benefited from expansion of the insurance businesses in Argentina and Hong Kong and growth in the rail leasing business in the UK.

Year ended 31 December 2002 compared with year ended 31 December 2001

Other operating income of US$11,135 million was in line with that of 2001, both in nominal terms and in constant currency. In both Europe and South America the nominal movements in other operating income were primarily due to currency translation. With the exception of equity market-related activities, namely broking income and custody fees, growth was achieved in virtually all elements of other operating income.

Net fees and commissions, at US$7,824 million, were US$354 million, or 5 per cent, higher than in 2001 and represented 29 per cent of total operating income in both 2002 and 2001. At constant exchange

rates, net fees and commissions were 4 per cent higher than in 2001.

In Europe, fee income increased byUS$318 million, or 8 per cent (3 per cent in constant currency), as growth in wealth management income, particularly in general and life insurance, private client, pensions and investment advisory business more than offset the lower levels of equity market-related fees. In the UK, growth of 17 per cent was achieved in HSBC branded life, pensions and investment products sold through the tied salesforce. Sales of life protection products grew by 4 per cent and creditor protection insurance by 29 per cent.

In North America, fee income wasUS$24 million higher than in 2001, excluding the US$47 million increase arising from the acquisition of HSBC Mexico. Growth in fee income from the sale of annuities and mutual funds, and across a range of banking services, more than offset a lower level of broking income.

In Hong Kong, where the demand for credit products was muted, emphasis was placed on generating fee income. A combination of initiatives meant fee income was US$92 million higher than in 2001. This was primarily due to strong growth in fees from the sale of unit trusts, including the sale of US$2.8 billion of HSBC’s capital guaranteed funds, and fees from credit cards, insurance and underwriting business. In addition, higher levels of fee income were earned from structured finance transactions.

HSBC’s operations in the rest of Asia-Pacific grew fee income by US$43 million, with strong contributions from credit cards in Taiwan, Malaysia, Indonesia, the Middle East, Thailand and India.

In South America, fee income fell nominally by US$170 million, though by only US$27 million at constant exchange rates. Fee earning opportunities contracted in the subdued economic environment and, in addition, the Brazilian Government moved to prohibit the charging of fees against certain accounts.

Dealing profits at US$1,313 million were US$372 million, or 22 per cent, lower than in 2001. Within this category foreign exchange earnings grew 4 per cent to US$1,167 million and continued to demonstrate resilience across all market conditions. The deterioration was primarily in the area of interest rate trading, with earnings from debt securities

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H S B C H O L D I N G S P L C

Financial Review(continued)

US$236 million lower as credit spreads on corporate bonds widened sharply in response to an erosion of market confidence caused by low earnings growth and news of corporate scandals in the United States. Dealing profits were also affected by weaknesses in the equity markets.

Fees in debt capital markets grew strongly by 30 per cent, or US$40 million, as HSBC improved its position in European markets.

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Operating expenses

	Year ended 31 December

	2003								2002			2001

	Total			Household¹		Rest of HSBC
	US$m		%	US$m	%	US$m		%	US$m		%	US$m		%
By geographical
region
Europe	9,529		44.3	299	8.8	9,230		51.1	7,878		51.6	7,288		49.0
Hong Kong	2,212		10.3	–	–	2,212		12.2	2,139		14.0	2,140		14.4
Rest of Asia-Pacific	1,741		8.1	–	–	1,741		9.6	1,528		10.0	1,397		9.4
North America	6,947		32.3	3,107	91.2	3,840		21.2	2,675		17.5	2,540		17.1
South America	1,075		5.0	–	–	1,075		5.9	1,060		6.9	1,497		10.1

	21,504		100.0	3,406	100.0	18,098		100.0	15,280		100.0	14,862		100.0

Intra-HSBC elimination	(422	)		–		(422	)		(326	)		(257	)

	21,082			3,406		17,676			14,954			14,605

Goodwill amortisation
Europe	758		52.3	23	6.0	735		68.7	651		76.2	632		79.1
Hong Kong	3		0.2	–	–	3		0.3	–			–
Rest of Asia-Pacific	35		2.4	–	–	35		3.3	33		3.9	8		1.0
North America	643		44.3	358	94.0	285		26.7	146		17.1	145		18.1
South America	11		0.8	–	–	11		1.0	24		2.8	14		1.8

	1,450		100.0	381	100.0	1,069		100.0	854		100.0	799		100.0

Total operating expenses	22,532			3,787		18,745			15,808			15,404

	Year ended 31 December

	2003			2002	2001

			Rest of
	Total	Household¹	HSBC
	US$m	US$m	US$m	US$m	US$m
By expense category
Staff costs	12,111	1,794	10,317	8,609	8,553
Premises and equipment (excluding depreciation)	2,331	299	2,032	1,824	1,639
Other administrative expenses	5,243	1,203	4,040	3,331	3,279

Administrative expenses	19,685	3,296	16,389	13,764	13,471
Depreciation and amortisation
– tangible fixed assets	1,382	99	1,283	1,189	1,133
– intangible assets	15	11	4	1	1
– goodwill	1,450	381	1,069	854	799

Total operating expenses	22,532	3,787	18,745	15,808	15,404

	%	%	%	%	%
Cost:income ratio (excluding goodwill amortisation)	51.3	33.4	57.2	56.2	56.4

1 Since the date of acquisition.

	As at 31 December

	2003			2002	2001

			Rest of
	Total	Household	HSBC
Staff numbers (full-time equivalent)
Europe	73,943	4,075	69,868	72,260	73,326
Hong Kong	23,636	–	23,636	23,786	24,654
Rest of Asia-Pacific	31,827	–	31,827	28,630	26,259
North America	65,021	28,872	36,149	34,207	19,291
South America	28,292	–	28,292	25,522	27,519

Total staff numbers	222,719	32,947	189,772	184,405	171,049

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H S B C H O L D I N G S P L C

Financial Review(continued)

Year ended 31 December 2003 compared with year ended 31 December 2002

Growth in operating expenses of US$6,724 million, or 43 per cent, principally reflected the acquisitions of Household, US$3,787 million, and HSBC Mexico, US$964 million. Excluding the impact of these acquisitions and expressed in terms of constant currency, underlying operating expenses, excluding goodwill amortisation, were 5 per cent higher than in 2002. Virtually all of this growth was in staff costs, reflecting restructuring costs, higher social taxes and pension costs. In addition, Corporate, Investment Banking and Markets incurred higher costs reflecting expansion of the business and increased profitability. Notwithstanding this growth, the cost:income ratio of Corporate, Investment Banking and Markets improved by 3 per cent to 48.9 per cent. HSBC’s cost:income ratio excluding goodwill amortisation was 51.3 per cent for 2003, compared with 56.2 in 2002. Excluding Household, the cost:income ratio was 57.2 per cent.

In 2003, HSBC’s Group Service Centre in Malaysia became operational. Overall, the Group’s Global Resource centres now employ in excess of 7,000 employees.

In Europe, costs excluding goodwill amortisation increased by US$1,651 million compared with 2002, of which Household contributed US$299 million. At constant exchange rates and excluding Household and goodwill amortisation, expenses were 5 per cent higher than in 2002. This increase in expenses was primarily due to higher pension provision and employment costs, particularly in the UK, where social taxes were raised. Redundancy and property provisioning costs also increased, as HSBC restructured and relocated positions to the Group Service Centres in order to reduce its long-term staff costs. In addition, higher bonus accruals reflected stronger Global Markets revenues.

Operating expenses in Hong Kong, excluding goodwill amortisation, were marginally higher than in 2002. Increased staff costs were mainly attributable to higher performance-related bonuses, reflecting strong Global Markets performance, and provisions for restructuring costs. Marketing expenses also rose in Personal Financial Services as Hong Kong’s economy rebounded after SARS abated. These increases were partly offset by reductions in staff numbers in Hong Kong as HSBC

continued its policy of migrating back office processing functions to the Group Service Centres.

In the rest of Asia-Pacific, costs in 2003, excluding goodwill amortisation, increased by US$213 million, or 14 per cent, compared with 2002. At constant exchange rates, the increase was 9 per cent, primarily from recruitment to support business expansion, branch opening costs, acquisitions and provisions for restructuring. In addition, the continued migration of processing activities from other regions to the Group Service Centres in India, Malaysia and mainland China added to costs.

In North America, operating expenses, excluding goodwill amortisation, increased by US$284 million, or 11 per cent, in 2003 excluding Household and HSBC Mexico. This increase was largely driven by higher staff costs, namely pension and healthcare provisions, performance-related incentives, and expenses associated with long-term restructuring programmes. In the US during 2003, severance costs of US$47 million were recorded for expense reduction initiatives, global resourcing moves and Household integration efforts, a US$28 million increase over the prior year. In addition, costs rose from the first full year inclusion of HSBC’s high net worth personal tax advisory business. These increases were partly offset by the benefits obtained from discontinuing certain of HSBC’s government and agency securities arbitrage operations in the US, and from business disposals.

In South America, operating expenses, excluding goodwill amortisation, were broadly in line with 2002. At constant exchange rates and excluding goodwill amortisation, costs were 6 per cent higher than in 2002. The rise in Brazil was due to higher staff costs, driven by increases in labour claims, together with higher marketing costs and increased transaction taxes on higher operating income as the personal lending portfolio was expanded. In addition, the Group’s newly acquired businesses in Brazil added to cost growth. Costs in Argentina were down on 2002, mainly because of lower severance costs.

Year ended 31 December 2002 compared with year ended 31 December 2001

Operating expenses in 2002 were US$404 million, or 3 per cent, higher than in 2001. The increase reflected organic growth, acquisitions made during 2002, and the full year effect of acquisitions and the expansion of business activities in 2001, particularly

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in North America and the rest of Asia Pacific. In constant currency, excluding acquisitions made in 2002 and goodwill amortisation, cost growth was 2 per cent. Goodwill amortisation increased by US$55 million, of which US$10 million was goodwill amortised on GFBital for the one month of its ownership, and US$20 million was a non-recurring charge to write-off the balance of purchased goodwill on the Group’s insurance activities in Argentina.

In Europe, costs excluding goodwill amortisation increased by US$590 million in 2002 compared with 2001. At constant exchange rates, costs in 2002, excluding goodwill amortisation, were US$265 million or 3 per cent higher than in 2001. US$165 million of this increase was attributable to acquisitions and changes in Group structure. These comprised the full consolidation of the Merrill Lynch HSBC business from July 2002 (US$45 million), and the acquisition of Demirbank and the Benkar card business in Turkey (US$120 million). The move to the Group’s new headquarters in Canary Wharf, together with consequent increases in vacant space provisioning, added US$76 million. Costs in the UK based investment banking operations were lower as headcount was adjusted to reflect market conditions.

In Hong Kong, costs in 2002, excluding goodwill amortisation, were in line with 2001. A fall in staff costs, following the transfer of back office processing functions to Group Service Centres in

India and mainland China, and the non-recurrence of a pension top-up in Hang Seng Bank, offset increases in costs associated with business expansion.

In the rest of Asia-Pacific, costs excluding goodwill amortisation increased by US$131 million, or 9 per cent, in 2002 compared with 2001. This growth in costs primarily reflected a higher staff complement in Group Service Centres in India and mainland China, and the expansion of business in several countries in the region, in particular mainland China, Taiwan, the Middle East and Australia, the latter through the acquisition of NRMA.

Operating expenses in North America, excluding goodwill amortisation, increased by US$135 million, or 5 per cent, in 2002. This increase largely arose from the acquisition of GFBital and the costs associated with the establishment of the Wealth and Tax Advisory Services (‘WTAS’) business in the US. A reduction in the costs associated with ongoing development ofhsbc.comoffset additional costs from the closure of the institutional equity business in Canada and the restructuring of the merchant banking business in the US.

In South America, operating expenses, excluding goodwill amortisation, fell by US$437 million, or 29 per cent, during 2002. At constant exchange rates, operating expenses excluding goodwill amortisation were 4 per cent higher than in 2001. The increase related to industry-wide salary adjustments agreed with unions in Brazil and costs of severance as headcount reductions were made in the recessionary environment.

Bad and doubtful debts
	Year ended 31 December

	2003						2002				2001

	Total		Household¹		Rest of HSBC
	US$m	%	US$m	%	US$m	%	US$m		%		US$m	%
By geographical region
Europe	874	14.3	180	3.9	694	45.7	569		43.1		441	21.6
Hong Kong	400	6.6	–	–	400	26.4	246		18.6		197	9.7
Rest of Asia-Pacific	85	1.4	–	–	85	5.6	89		6.7		172	8.4
North America	4,676	76.7	4,395	96.1	281	18.5	300		22.7		300	14.7
South America
Hong Kong	58	1.0	–	–	58	3.8	313		23.7		327	16.1
–additional²	–	–	–	–	–	–	(196	)	(14.8	)	600	29.5

Total charge for bad and doubtful debts	6,093	100.0	4,575	100.0	1,518	100.0	1,321		100.0		2,037	100.0


1 Since the date of acquisition.
2 Additional general (recoveries)/provision against Argentine exposures.

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H S B C H O L D I N G S P L C

Financial Review(continued)

	Year ended 31 December

	2003						2002		2001

					Rest of
	Total		Household¹		HSBC
	US$m		US$m		US$m		US$m		US$m
Specific provisions
New provisions	7,777		4,773		3,004		2,678		2,566
Release of provisions no longer required	(953	)	(4	)	(949	)	(826	)	(817	)
Recoveries of amounts previously written off	(610	)	(307	)	(303	)	(180	)	(285	)

	6,214		4,462		1,752		1,672		1,464

General provisions
Argentine additional provision	–		–		–		(196	)	600
Other	(121	)	113		(234	)	(155	)	(27	)

	(121	)	113		(234	)	(351	)	573

Total	6,093		4,575		1,518		1,321		2,037

Customer non-performing loans	15,050		4,706		10,344		10,523		9,649
Customer bad and doubtful debt provisions	13,691		5,201		8,490		9,117		8,161


1Since the date of acquisition.

Year ended 31 December 2003 compared with year ended 31 December 2002

The acquisition of Household significantly affected the geographical and customer segment distribution of the Group’s lending activities and, more markedly, the distribution of its credit costs. At 31 December 2003, 76 per cent of customer lending was located, fairly equally, in Europe and North America, compared with 69 per cent in 2002, with Europe two-thirds of that total. At 31 December 2003, personal lending accounted for 56 per cent of the customer loan portfolio compared with 42 per cent at 31 December 2002.

Excluding the effect of foreign exchange translation and the acquisition of Household, over 90 per cent of loan growth in 2003, excluding the financial sector, was generated in personal lending, predominantly mortgages, credit cards and other personal products.

Over 90 per cent of the charge for bad and doubtful debts in 2003 related to lending to the personal sector, including consumer finance, compared with 65 per cent in 2002. Similarly, over 90 per cent of the charge related to lending in the US and Europe, compared with 66 per cent in 2002.

The charge for specific bad and doubtful debts adjusts the specific balance sheet provisions to the level that management deems adequate to absorb actual and inherent losses in the Group’s loan portfolio from homogenous portfolios of assets and individually identified customer loans. Following the acquisition of Household, the majority of specific

provisions are now determined on a portfolio basis. In addition, the acquisition of Household has resulted in a significant increase in the extent to which HSBC employs statistical calculations using roll rate methodology to determine specific provisions for bad and doubtful debts. Other than this, there have been no significant changes to HSBC’s procedures in determining the various components of the charge for specific bad and doubtful debts. The charge for specific provisions in 2003 was US$6,214 million compared with US$1,672 million in 2002, an increase of US$4,542 million. New specific provisions, which increased by US$5,099 million, principally reflected the acquisitions of Household (US$4,773 million) and HSBC Mexico (US$47 million). Excluding the effect of the acquisitions, new specific provisions rose by US$249 million, or 9 per cent, compared with 2002.

General provisions augment specific provisions and provide cover for loans which are impaired at the balance sheet date but which will not be individually identified as such until some time in the future. In determining the level of general provisions management takes into account historical loss experience, the estimated period between a loss occurring and that loss being identified and use their judgement as to whether current economic and credit conditions are likely to increase or reduce the actual level of inherent losses. There was a net general provision release of US$121 million in 2003, US$230 million lower than the net release of US$351 million in 2002. In Household and HSBC Mexico, general provisions were augmented by US$191 million due to growth in personal lending.

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Excluding this, the net release of general provisions of US$312 million was in line with that of 2002. This reflected improved underlying economic conditions, and progress made with refinancing and restructuring problem credits.

The aggregate customer bad and doubtful debt provisions at 31 December 2003 of US$13.7 billion represented 2.66 per cent of gross customer advances (net of suspended interest, reverse repos and settlement accounts) compared with 2.68 per cent at 31 December 2002. As in 2003, HSBC cross-border exposures did not necessitate significant provisions.

Non-performing loans (net of suspended interest) of US$15 billion at 31 December 2003 included US$5 billion relating to Household’s loan book. Excluding Household, and at constant exchange rates, there was a decrease in the level of non-performing loans (net of suspended interest) in 2003 compared with 2002 mainly as a result of the write-off of loans from the legacy portfolio acquired on the acquisition of HSBC Mexico.

Year ended 31 December 2002 compared with year ended 31 December 2001

HSBC’s customer loan portfolio continued to be well-spread both geographically and across personal and industrial sectors during 2002. The loan portfolio at constant exchange rates and excluding loans to the financial sector, grew by US$31.5 billion, or 11 per cent, during 2002 of which US$9.4 billion, or 3 per cent, arose from the acquisition of HSBC Mexico. The personal loan sector of the Group’s loan portfolio increased to 42 per cent of the aggregate at the end of 2002 compared with 40 per cent at the end of 2001. At constant exchange rates, there was growth of US$19.5 billion, mainly in Europe, North America and Asia. Of this increase, US$14.2 billion arose from residential mortgage lending.

Changes in the concentration risk and asset quality of HSBC’s loan portfolio arose from the incorporation of the domestic loan book of HSBC Mexico. 13 per cent of HSBC Mexico’s loan book of US$9.7 billion was non-performing, including significant proportions of residential mortgage loans

and unsecured personal loans. These assets became impaired during the Mexican economic crisis in the late 1990s. In addition, approximately 40 per cent of HSBC Mexico’s loan exposure was peso-denominated Mexican Government risk. HSBC Mexico also had impaired assets in the agricultural and other government-supported sectors. These loan assets were critically reviewed and provisions restated where necessary to conform with the requirements of both UK GAAP and US GAAP during the fair value exercise undertaken as at the date of acquisition of HSBC Mexico.

Excluding HSBC Mexico, there was a decrease in the level of non-performing loans during 2002 of US$350 million. This was due to a combination of write-offs, recoveries and upgradings in Hong Kong and a number of other Asian countries, partly offset by a rise of US$813 million in non-performing loans in Europe. The European increase came primarily from a small number of individual corporate loans in the telecommunications, private healthcare, leisure and manufacturing sectors and was not indicative of a general trend. Importantly, credit quality on consumer lending remained stable. In South America, in local currency terms, there was a sharp increase in the level of individual Argentinian non-performing loans as the effects of the economic crisis manifested themselves. By the end of 2002, almost three-quarters of the non-government loan book was classified as non-performing. The impact of this was recognised in the gen eral provision established at the end of 2001.

Aggregate customer bad and doubtful debt provisions at 31 December 2002 of US$9.1 billion represented 2.52 per cent of gross customer advances compared with 2.57 per cent at 31 December 2001.

As in 2001, HSBC’s cross-border exposures did not necessitate significant provisions.

There were no significant changes to the Group’s procedures for determining the various components of the provision for bad and doubtful debts.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Gains on disposal of investments

		Year ended 31 December

		2003	2002	2001
		US$m	US$m	US$m
Gains/(losses) on disposal of:
–	debt securities	161	170	170
–	equity investments	233	226	305
–	other participating interests	1	69	4
–	associates	1	47	257
–	subsidiaries	37	16	21
–	other	18	4	(3	)

		451	532	754

Year ended 31 December 2003 compared with year ended 31 December 2002

During 2003, HSBC made 26 business acquisitions and completed 14 business disposals.

HSBC’s profit on disposal of investments was US$451 million, US$81 million lower than in 2002. The profits in 2002 included gains of US$39 million on the sale of HSBC’s 50 per cent share of Lixxbail to its joint venture partner, and US$38 million on the sale of HSBC’s 6.99 per cent share in Banco Santiago S.A..

Realised gains on the sale of debt and equity investment securities during the period were broadly in line with 2002. The reductions in interest rates and improvement in equity markets drove growth of US$59 million in the unrecognised gains on HSBC’s debt and equity investment portfolios.

Year ended 31 December 2002 compared with year ended 31 December 2001

During 2002, HSBC made 23 business acquisitions and completed 20 business disposals.

HSBC’s European results includedUS$213 million of profits on the sales of securities from investment portfolios, principally as HSBC adjusted its exposure to changes in interest rates. HSBC also disposed of its 50 per cent stake in Lixxbail to its joint venture partner, generating a profit of US$39 million.

In the US, gains were taken in the first half of the year on the sale of a number of mortgage-backed and other debt securities as long-term portfolios were adjusted in response to exposures to interest rates and sovereign credit.

HSBC’s South American results included a gain of US$38 million on the sale of HSBC’s 6.99 per cent stake in Banco Santiago S.A..

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Taxation

	Year ended 31 December

	2003		2002		2001
	US$m		US$m		US$m
Current taxation
UK corporation tax charge	547		684		416
Overseas taxation	2,590		1,217		1,570
Joint ventures	1		(6	)	(13	)
Associates	19		17		26

	3,157		1,912		1,999

Deferred taxation
Origination and reversal of timing differences	(5	)	615		(176	)
Effect of (increased)/decreased tax rate on opening asset	(7	)	–		3
Adjustment in respect of prior periods	(25	)	7		162

	(37	)	622		(11	)

Total charge for taxation	3,120		2,534		1,988

Effective taxation (per cent)	24.3		26.3		24.9

Standard UK corporation tax rate (per cent)	30.0		30.0		30.0



	Year ended 31 December

	2003		2002		2001
	US$m		US$m		US$m
Analysis of overall tax charge
Taxation at UK corporate tax rate of 30 per cent (2002 and 2001: 30.0 per cent)	3,845		2,895		2,400
Impact of differently taxed overseas profits in principal locations	(366	)	(472	)	(616	)
Tax free gains	(17	)	(19	)	(102	)
Argentine losses	(25	)	87		336
Goodwill amortisation	476		261		263
Amortisation of acquisition accounting adjustments	(331	)	–		–
Prior period adjustments	(230	)	(90	)	(167	)
Other items	(232	)	(128	)	(126	)

Overall tax charge	3,120		2,534		1,988

Year ended 31 December 2003 compared with year ended 31 December 2002

HSBC Holdings and its subsidiary undertakings in the United Kingdom provided for UK corporation tax at 30 per cent, the rate for the calendar year 2003 (2002: 30 per cent).

HSBC’s effective tax rate of 24.3 per cent in 2003 was lower than the corporation tax rate of 30 per cent. The geographic mix of profits; fair value accounting adjustments, which are ignored for tax purposes; and prior period adjustments were the main factors which reduced the rate. These were partially offset by the effect of goodwill amortisation, which is also ignored for tax purposes, which increased the rate.

Overseas tax included Hong Kong profits tax of US$483 million (2002: US$408 million) provided at a rate of 17.5 per cent (2002: 16 per cent) on the profits assessable in Hong Kong. Other overseas taxation was provided for in the countries of operation at the appropriate rates of taxation.

Profits arising in North America represented a higher percentage of HSBC’s profits in 2003 compared with 2002 largely because of the acquisition of Household. US profits are taxed at a higher rate than the average for the rest of the Group and this change in mix raised the effective tax rate.

A number of fair value acquisition accounting adjustments relating to Household and HSBC Mexico resulted in net credits to the profit and loss account with no corresponding tax charge. A more detailed explanation of the acquisition accounting adjustments is disclosed in Note 8 of the ‘Notes to the Financial Statements’.

Prior period adjustments arose in 2003 which reduced HSBC’s overall tax charge. These related mainly to the recognition of deferred tax assets on losses, which became more likely to be utilised. The Group also reached agreement on a number of settlements. in respect of outstanding matters on prior year computations which allowed contingency reserves to be released.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Goodwill amortisation was higher than in the previous year, mainly due to the acquisition of Household.

At 31 December 2003 there were potential future tax benefits of US$963 million (2002: US$885 million). The potential benefits are in respect of trading losses, allowable expenditure charged to the profit and loss account but not yet allowable for tax, and capital losses which had not been recognised because realisation of the benefits was not considered more likely than not.

Year ended 31 December 2002 compared with year ended 31 December 2001

HSBC Holdings and its subsidiary undertakings in the United Kingdom provided for UK corporation tax at 30 per cent, the rate for the calendar year 2002 (2001: 30 per cent).

Overseas tax included Hong Kong profits tax of US$408 million (2001: US$450 million) provided at a rate of 16 per cent (2001: 16 per cent) on the profits assessable in Hong Kong. Other overseas taxation was provided for in the countries of operation at the appropriate rates of taxation.

HSBC’s effective tax rate of 26.3 per cent in 2002 was higher than that for 2001 (24.9 per cent), mainly as a result of changes in the geographic mix of profits and certain non-recurring items occurring in 2001 which reduced the 2001 rate.

In particular, profits arising in North America represented a higher percentage of HSBC’s profits in 2002 compared with 2001 because profits in the US were abnormally suppressed in 2001 by the provision relating to the Princeton Note settlement. US profits were taxed at a higher rate than the average for the rest of the Group and thus this change in mix raised the overall tax rate of the Group.

One-off tax-free gains arising in 2002 were less than those in 2001.

Partly offsetting these factors, no tax relief was assumed in respect of the bad debt provision and other losses relating to Argentina. These losses and provisions were lower in 2002 than in 2001. This had the effect of increasing the aggregate tax rate in both 2002 and 2001, though to a lesser extent in 2002.

In 2002, prior year adjustments which resulted in a reduction in the tax rate, mainly relating to audit settlements, were less than similar adjustments in 2001.

At 31 December 2002 there were potential future tax benefits of US$885 million (2001: US$906 million). The potential benefits were in respect of trading losses, allowable expenditure charged to the profit and loss account but not yet allowable for tax, and capital losses which had not been recognised because realisation of the benefits was not considered more likely than not.

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Asset deployment

		At 31 December

		2003		2002	¹
		US$m	%	US$m		%
Loans and advances to customers		528,977	51.6	352,344		47.1
Loans and advances to banks		117,173	11.5	95,496		12.7
Debt securities		205,722	20.1	175,730		23.5
Treasury bills and other eligible bills		20,391	2.0	18,141		2.4
Equity shares		12,879	1.3	7,664		1.0
Goodwill and intangible assets		28,640	2.8	17,192		2.3
Other		109,447	10.7	82,593		11.0

		1,023,229	100.0	749,160		100.0

Hong Kong Government certificates of indebtedness		10,987		9,445

		1,034,216		758,605

Loans and advances to customers include:
– reverse repos		17,777		12,545
– settlement accounts		8,594		8,385

Loans and advances to banks include:
– reverse repos		23,220		18,736
– settlement accounts		7,039		4,717

1	Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘ Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.

Year ended 31 December 2003 compared with year ended 31 December 2002

HSBC’s total assets (excluding Hong Kong Government certificates of indebtedness) at 31 December 2003 were US$1,023 billion, an increase of US$274 billion, or 37 per cent, since 31 December 2002. Of this increase, US$131 billion were assets (including the related goodwill) added as

at the date of the acquisition of Household. Excluding this and at constant exchange rates, total assets grew by US$92 billion or 11 per cent.

The impact of Household on asset mix by geography and customer type, which was operating primarily in North America in personal financial services, is also significant and is illustrated in the table below.


	31 December	31 December
	2003	2002
	%	%
Loans and advances to customers (gross)
Europe	39.6	46.5
North America	36.5	22.1
Hong Kong and rest of Asia-Pacific	22.9	30.4
South America	1.0	1.0

	100.0	100.0

Personal and consumer lending	56.2	42.3

At 31 December 2003, HSBC’s balance sheet remained highly liquid, reflecting continued strong growth in customer deposits. Notwithstanding the acquisition of Household, the proportion of assets deployed in customer advances rose modestly from 47 per cent to 52 per cent. As a result of the Household acquisition, lending in Europe and North America rose to over 75 per cent of the total lending portfolio.

Foreign exchange translation had a significant impact on reported growth within the balance sheet, as the US dollar weakened by 9.7 per cent and by 16.8 per cent over the year against sterling and the euro respectively.

At constant exchange rates, gross loans and advances to customers (excluding loans to the financial sector and settlement accounts) were US$145 billion higher than at 31 December 2002. Of this growth, US$108 billion related to loans outstanding at the time Household was acquired.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Growth in lending in 2003 was concentrated in the personal sector. Excluding loans outstanding at the time Household was acquired, and at constant exchange rates, personal lending increased by US$34 billion, or 21 per cent, compared with 31 December 2002. This was mainly as a result of increased mortgage lending in the UK and the US, the acquisitions in Brazil and New Zealand, and post-acquisition growth in Household, where lending grew at an annualised 11 per cent following acquisition.

Commercial and corporate lending, excluding lending to governments, grew by under 2 per cent as corporate demand for credit remained subdued and HSBC maintained its cautious lending criteria. Surplus funds from increased customer deposits in most geographic regions were increasingly deployed in investment securities in order to diversify risk concentration away from interbank lending.

In Europe, growth in assets was driven primarily by increased mortgage lending in the UK, the post-acquisition growth in personal lending in HFC Bank and higher balances from trading activities in the UK and France. In addition, there was strong growth in consumer credit in the UK and secured lending in Switzerland driven by private banking customers seeking to maximise the overall earnings potential of their investments by borrowing to reinvest in higher returning securities.

In Hong Kong there was only modest growth in customer lending against a backdrop of weak consumer demand, the impact of SARS and intense competition in the mortgage market. Additionally, loan balances under the Hong Kong Government Home Ownership Scheme continued to fall following the suspension of this programme in 2001. Encouragingly, however, there was a 5 per cent growth in commercial and corporate lending, particularly in the second half of the year, as business confidence improved post-SARS, and initiatives announced by the mainland government to eliminate restrictions on tourists entering Hong Kong took effect.

In the rest of Asia-Pacific, growth in assets was also driven by increased personal customer advances. At constant exchange rates, personal lending increased by 33 per cent compared with 31 December 2002, mainly as a result of increased mortgage lending in Australia and New Zealand, where HSBC acquired the AMP Bank’s mortgage

business, and in Korea, Singapore, India, Malaysia and Taiwan. Other personal lending increased in most countries in the region.

In North America, the increase in total assets (excluding that relating to the acquisition of Household) was primarily in residential mortgages and other personal lending in both the US and Canada, as customers took the opportunity to consolidate their debt and re-mortgage at the lower prevailing interest rates.

In South America, growth in total assets reflected the inclusion of the consumer lending portfolios of Losango and the ex-Lloyds TSB corporate lending portfolio.

At 31 December 2003, assets held by the Group as custodian amounted to US$1,869 billion. Custody is the safekeeping and administration of securities and financial instruments on behalf of others. Funds under management amounted to US$399 billion at 31 December 2003.

Debt securities and equity shares

Debt securities held on an accruals basis in the investment book at 31 December 2003 showed an aggregate unrecognised gain, net of off-balance sheet hedges, of US$1,160 million compared with an unrecognised gain of US$1,278 million at 31 December 2002. Equity shares included US$5,390 million held on investment account, compared with US$4,284 million at 31 December 2002, on which there was an unrecognised gain of US$827 million, compared with a gain of US$473 million at 31 December 2002.

Funds under management

Funds under management of US$399 billion were US$47 billion, or 13 per cent, higher than at 30 June 2003 and US$93 billion, or 30 per cent, higher than at the end of 2002. During the year both the asset management and private banking businesses reported net fund inflows. The weakening of the US dollar benefited the translation of sterling and euro-denominated funds, and contributed to the positive market performance which resulted from the upturn in global equity markets. As at 31 December 2003, HSBC’s asset management business, including affiliates, reported funds under management of US$193 billion, and the private banking business reported funds under management of US$169 billion.

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	2003		2002
	US$bn		US$bn
Funds under management
At 1 January 2003	306		284
Additions	136		116
Withdrawals	(94	)	(86	)
Value change	25		(26	)
Exchange and other	26		18

At 31 December 2003	399		306

Economic profit

HSBC’s internal performance measures include economic profit, a measure which compares the return on the financial capital invested in HSBC by its shareholders with the cost of that capital. HSBC prices its cost of capital internally and the difference between that cost and post-tax profit attributable to ordinary shareholders represents the amount of economic profit generated. Economic profit is used by management as one of the measures to decide where to allocate resources so that they will be most productive. Internally HSBC emphasises the trend in economic profit within business units rather than

absolute amounts in order to concentrate on external factors rather than measurement bases. As a result of this, HSBC has consistently used a benchmark cost of capital of 12.5 per cent on a consolidated basis. Given recent changes in interest rates and in the composition of HSBC, HSBC believes that its true cost of capital on a consolidated basis is now approximately 10 per cent, and this rate will be adopted from 2004 onwards within the Group’s new strategic plan. HSBC has used the figure of 12.5 per cent for the duration of the current five year strategic plan period, which expired at the end of last year, in order to ensure consistency and to help comparability.

On this basis, economic profit increased fourfold to US$934 million, compared with 2002, reflecting the benefit of Household and HSBC Mexico in 2003 as well as organic improvement. Measurement of economic profit involves a number of assumptions and, therefore, management believes that the trend over time is more relevant than the absolute economic profit reported for a single period.

		Year ended 31 December

		2003				2002
		US$m		%	¹	US$m	⁴	^%	¹
Average shareholders' funds		67,585				50,266
Add:	cumulative goodwill written off and amortised	8,172				6,554
	dividends declared but not paid	1,773				953
Less:	property revaluation reserves	(1,824	)			(2,180	)

Average invested capital²		75,706				55,593

Profit after tax		9,696		12.8		7,116		12.8
Add:	goodwill amortisation	1,585		2.1		863		1.6
	depreciation charged on property revaluations	38		–		80		0.1
Less:	equity minority interest	(487	)	(0.6	)	(505	)	(0.9	)
	preference dividends	(435	)	(0.6	)	(372	)	(0.7	)

Return on invested capital³		10,397		13.7		7,182		12.9

Benchmark cost of capital		(9,463	)	(12.5	)	(6,949	)	(12.5	)

Economic profit/spread		934		1.2		233		0.4


1	Expressed as a percentage of average invested capital.
2	Average invested capital is measured as shareholders’ funds after adding back goodwill amortised and goodwill previously written-off directly to reserves and after deducting property revaluation reserves. This measure reflects capital initially invested and subsequent profit (excluding goodwill amortisation).
3	Return on invested capital is based on attributable profit excluding goodwill amortisation adjusted for depreciation attributable to revaluation surpluses.
4	Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240

Back to Contents

H S B C H O L D I N G S P L C

Financial Review(continued)

Analysis by customer group and by geographical region

By customer group:

Profit/(loss) excluding goodwill amortisation

Year ended 31 December 2003

Total

Personal Financial Services
US$m

Consumer Finance
US$m

⁴

Total
Personal Financial Services
US$m

Commercial Banking
US$m

Corporate, Investment Banking & Markets
US$m

Private
Banking
US$m

OtherUS$m

⁵

Inter-
segment
elimination
US$m

Total
US$m

Net interest income

8,654

8,289

16,943

4,196

3,899

574

(14

)

–

25,598

Dividend income

161

–

222

Net fees and commissions

3,623

1,219

4,842

2,256

2,315

822

159

–

10,394

Dealing profits

133

–

133

118

1,764

209

(46

)

–

2,178

Other income

865

674

1,539

597

810

892

(1,208

)

2,680

Other operating income

4,627

1,905

6,532

2,974

5,050

1,084

1,042

(1,208

)

15,474

Operating income

13,281

10,194

23,475

7,170

8,949

1,658

1,028

(1,208

)

41,072

Operating expenses

excluding goodwill

amortisation¹

(8,263

)

(3,397

)

(11,660

)

(3,778

)

(4,378

)

(1,149

)

(1,325

)

1,208

(21,082

)

Operating profit/(loss)

before provisions¹

5,018

6,797

11,815

3,392

4,571

509

(297

)

–

19,990

Provisions for bad and

doubtful debts

(1,058

)

(4,575

)

(5,633

)

(274

)

(297

)

113

–

(6,093

)

Provisions for contingent

liabilities and

commitments

(19

)

–

(19

)

(53

)

–

(35

)

Loss from foreign currency

redenomination in

Argentina

–

)

–

)

Amounts written off fixed

asset investments

(18

)

–

(18

)

–

(91

)

–

(106

)

Operating profit/(loss)¹

3,923

2,222

6,145

3,132

4,130

502

(162

)

–

13,747

Share of operating profit in

joint ventures²

–

Share of operating profit in

associates²

–

221

Gains on disposal of

investments and tangible

fixed assets

225

–

414

Profit/(loss) on ordinary

activities before tax³

4,008

2,225

6,233

3,158

4,443

563

–

14,401

Share of HSBC’s pre-tax

profits³

27.8

15.5

43.3

21.9

30.9

3.9

–

100.0

Cost:income ratio¹

62.2

33.3

49.7

52.7

48.9

69.3

128.9

51.3

US$m

Selected balance sheet

data⁶

Loans and advances to

customers (net)

173,613

116,409

290,022

103,495

115,092

18,109

2,259

528,977

Total assets⁷

206,721

145,383

352,104

128,093

462,998

54,510

25,524

1,023,229

Customer accounts

290,540

232

290,772

111,515

119,335

50,951

557

573,130

The following assets and

liabilities were

significant to customer

groups as noted:

Loans and advances to banks

(net)

101,277

Debt securities, treasury bills

and other eligible bills

186,139

Deposits by banks

65,882

Debt securities in issue

110,905

Goodwill amortisation:

1excluded from (1) above

249

379

628

263

272

282

1,450

2excluded from (2) above

–

135

–

)

135

3excluded from (3) above

250

379

629

263

407

282

1,585

For other footnotes, see page 65.

Back to Contents

Profit/(loss) excluding goodwill amortisation (continued)

	Year ended 31 December 2002

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Total	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income	7,429		3,835		3,700		549		(53	)	–		15,460

Dividend income	6		6		230		2		34		–		278
Net fees and commissions	2,979		1,934		2,164		623		124		–		7,824
Dealing profits	50		107		1,008		137		11		–		1,313
Other income	788		463		610		102		905		(1,148	)	1,720

Other operating income	3,823		2,510		4,012		864		1,074		(1,148	)	11,135

Operating income	11,252		6,345		7,712		1,413		1,021		(1,148	)	26,595

Operating expenses excluding goodwill amortisation¹	(6,973	)	(3,153	)	(3,899	)	(987	)	(1,090	)	1,148		(14,954	)

Operating profit/(loss) before provisions^1,8	4,279		3,192		3,813		426		(69	)	–		11,641

Provisions for bad and doubtful debts	(857	)	(269	)	(184	)	(5	)	(6	)	–		(1,321	)
Provisions for contingent liabilities and commitments	(42	)	19		12		(21	)	(7	)	–		(39	)
Loss from foreign currency redenomination in
Argentina	–		–		–		–		(68	)	–		(68	)
Amounts written off fixed asset investments	(2	)	3		(109	)	(22	)	(194	)	–		(324	)

Operating profit/(loss)^1,8	3,378		2,945		3,532		378		(344	)	–		9,889

Share of operating profit/(loss) in joint ventures²	(23	)	3		2		(1	)	–		–		(19	)
Share of operating profit in associates²	17		15		45		(10	)	68		–		135
Gains on disposal of investments
and tangible fixed assets	19		51		317		46		75		–		508

Profit/(loss) on ordinary activitiesbefore tax^3,8	3,391		3,014		3,896		413		(201	)	–		10,513

	%		%		%		%		%				%
Share of HSBC’s pre-tax profits^3,8	32.3		28.7		37.1		3.8		(1.9	)			100.0
Cost:income ratio^1,8	62.0		49.7		50.6		69.9		106.8				56.2

	US$m		US$m		US$m		US$m		US$m				US$m

Selected balance sheet data⁶
Loans and advances to customers
(net)	143,696		90,562		101,770		14,115		2,201				352,344
Total assets^7,9	171,496		113,525		394,542		48,346		21,251				749,160
Customer accounts	257,880		92,884		95,351		49,012		311				495,438
The following assets and liabilities
were significant to Corporate,
Investment Banking and Markets:
Loans and advances banks (net)					80,870
Debt securities, treasury bills and
other eligible bills					162,583
Deposits by banks					48,895

Goodwill amortisation:
1excluded from (1) above	186		168		236		264		–				854
2excluded from (2) above	–		–		8		–		1				9
3excluded from (3) above	186		168		244		264		1				863

For other footnotes, see page 65.

Back to Contents

HSBC HOLDINGS PLC

Financial Review(continued)

Profit/(loss) excluding goodwill amortisation (continued)

	Year ended 31 December 2001

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Total	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income	6,828		3,821		3,419		577		80		–		14,725

Dividend income	5		7		138		4		32		–		186
Net fees and commissions	2,877		1,751		2,140		602		100		–		7,470
Dealing profits	53		103		1,411		124		(6	)	–		1,685
Other income	806		422		568		87		996		(1,057	)	1,822

Other operating income	3,741		2,283		4,257		817		1,122		(1,057	)	11,163

Operating income	10,569		6,104		7,676		1,394		1,202		(1,057	)	25,888

Operating expenses excluding goodwill amortisation¹	(6,477	)	(3,116	)	(3,920	)	(919	)	(1,230	)	1,057		(14,605	)


Operating profit/(loss) before provisions¹	4,092		2,988		3,756		475		(28	)	–		11,283


Provisions for bad and doubtful debts	(767	)	(662)		(34	)	24		(598	)	–		(2,037	)

Provisions for contingent liabilities and commitments	(17	)	16		(14	)	(46)		(588	)	–		(649	)

Loss from foreign currency
redenomination in Argentina	–		–		–		–		(520	)	–		(520	)

Amounts written off fixed asset investments	(5	)	(1)		(72	)	(2)		(45	)	–		(125	)

Operating profit/(loss)¹	3,303		2,341		3,636		451		(1,779	)	–		7,952

Share of operating profit/(loss) in
joint ventures²	(99	)	6		10		–		–		–		(83	)
Share of operating profit in
associates²	43		28		33		–		60		–		164
Gains on disposal of investments
and tangible fixed assets	210		10		354		5		195		–		774

Profit/(loss) on ordinary activities before tax³	3,457		2,385		4,033		456		(1,524	)	–		8,807

	%		%		%		%		%				%
Share of HSBC’s pre-tax profits³	39.3		27.1		45.8		5.2		(17.4	)			100.0
Cost:income ratio¹	61.3		51.0		51.1		65.9		102.3				56.4

	US$m		US$m		US$m		US$m		US$m				US$m
Selected balance sheet data⁶

Loans and advances to customer (net)	113,844		81,999		99,260		12,137		1,409				308,649
Total assets^7,9	138,908		101,002		374,282		52,135		20,581				686,908
Customer accounts	228,931		81,038		88,618		51,199		205				449,991
The following assets and liabilities
were significant to Corporate,
Investment Banking and Markets:
Loans and advances to
banks (net)					83,312
Debt securities, treasury bills and
other eligible bills					155,330
Deposits by banks					49,785

Goodwill amortisation:
1excluded from (1) above	179		157		204		249		10				799
2excluded from (2) above	(1	)	2		6		–		1				8
3excluded from (3) above	178		159		210		249		11				807

For other footnotes, see page 65.

Back to Contents

Personal Financial Services

Profit/(loss) excluding goodwill amortisation

	Year ended 31 December

	2003						2002		2001

	Total
	Personal				Personal		Personal		Personal
	Financial		Consumer		Financial		Financial		Financial
	Services		Finance	⁴	Services		Services		Services
	US$m		US$m		US$m		US$m		US$m

Net interest income	16,943		8,289		8,654		7,429		6,828

Dividend income	18		12		6		6		5
Net fees and commissions	4,842		1,219		3,623		2,979		2,877
Dealing profits	133		–		133		50		53
Other income	1,539		674		865		788		806

Other operating income	6,532		1,905		4,627		3,823		3,741

Operating income	23,475		10,194		13,281		11,252		10,569

Operating expenses excluding goodwill amortisation¹	(11,660	)	(3,397	)	(8,263	)	(6,973		(6,477	)

Operating profit before provisions^1,8	11,815		6,797		5,018		4,279		4,092
Provisions for bad and doubtful debts	(5,633	)	(4,575	)	(1,058	)	(857	)	(767	)
Provisions for contingent
liabilities and commitments	(19	)	–		(19	)	(42	)	(17	)
Amounts written off fixed
asset investments	(18	)	–		(18	)	(2	)	(5	)

Operating profit^1,8	6,145		2,222		3,923		3,378		3,303

Share of operating profit/(loss) in joint ventures²	11		–		11		(23	)	(99	)
Share of operating profit in associates²	47		–		47		17		43
Gains on disposal of investments and
tangible fixed assets	30		3		27		19		210


Profit on ordinary activities before tax^3,8	6,233		2,225		4,008		3,391		3,457

By geographic region:
Europe	1,424		157		1,267		987		1,091
Hong Kong	1,740		–		1,740		1,705		1,631
Rest of Asia-Pacific	158		–		158		127		80
North America	2,938		2,068		870		605		593
South America	(27	)	–		(27	)	(33	)	62


Profit on ordinary activities before tax^3,8	6,233		2,225		4,008		3,391		3,457

	%		%		%		%		%
Share of HSBC’s pre-tax profits^3,8	43.3		15.5		27.8		32.3		39.3
Cost:income ratio^1,8	49.7		33.3		62.2		62.0		61.3
	US$m		US$m		US$m		US$m		US$m
Selected balance sheet data⁶
Loans and advances to
customers (net)	290,022		116,409		173,613		143,696		113,844
Total assets⁷	352,104		145,383		206,721		171,496		138,908
Customer accounts	290,772		232		290,540		257,880		228,931
The following liabilities were significant to
Consumer Finance:
Debt securities in issue			110,905

Goodwill amortisation:
1excluded from (1) above	628		379		249		186		179
2excluded from (2) above	1		–		1		–		(1	)
3excluded from (3) above	629		379		250		186		178

For other footnotes, see page 65.

Back to Contents

H S B C H O L D I N G S P L C

Financial Review (continued)

Commercial Banking and Corporate, Investment Banking and Markets

Profit/(loss) excluding goodwill amortisation


							Corporate, Investment Banking
	Commercial Banking						and Markets
	Year ended 31 December						Year ended 31 December

	2003		2002		2001		2003		2002		2001
	US$m		US$m		US$m		US$m		US$m		US$m

Net interest income	4,196		3,835		3,821		3,899		3,700		3,419

Dividend income	3		6		7		161		230		138
Net fees and commissions	2,256		1,934		1,751		2,315		2,164		2,140
Dealing profits	118		107		103		1,764		1,008		1,411
Other income	597		463		422		810		610		568

Other operating income	2,974		2,510		2,283		5,050		4,012		4,257

Operating income	7,170		6,345		6,104		8,949		7,712		7,676
Operating expenses excluding goodwill
amortisation¹	(3,778	)	(3,153	)	(3,116	)	(4,378	)	(3,899	)	(3,920	)

Operating profit before provisions^1,8	3,392		3,192		2,988		4,571		3,813		3,756
Provisions for bad and doubtful debts	(274	)	(269	)	(662	)	(297	)	(184	)	(34	)
Provisions for contingent liabilities and
commitments	14		19		16		(53	)	12		(14	)
Amounts written off fixed asset
investments	–		3		(1	)	(91	)	(109	)	(72	)

Operating profit^1,8	3,132		2,945		2,341		4,130		3,532		3,636
Share of operating profit in joint
ventures²	–		3		6		8		2		10
Share of operating profit in associates²	20		15		28		80		45		33
Gains on disposal of investments and
tangible fixed assets	6		51		10		225		317		354

Profit on ordinary activities beforetax^3,8	3,158		3,014		2,385		4,443		3,896		4,033

By geographic region:
Europe	1,303		1,344		986		1,623		1,438		1,438
Hong Kong	711		733		726		1,275		1,226		1,244
Rest of Asia-Pacific	450		423		277		732		706		725
North America	595		435		410		837		494		441
South America	99		79		(14	)	(24	)	32		185

Profit on ordinary activities beforetax^3,8	3,158		3,014		2,385		4,443		3,896		4,033

	%		%		%		%		%		%
Share of HSBC’s pre-tax profits^3,8	21.9		28.7		27.1		30.9		37.1		45.8
Cost:income ratio^1,8	52.7		49.7		51.0		48.9		50.6		51.1

	US$m		US$m		US$m		US$m		US$m		US$m
Selected balance sheet data⁶
Loans and advances to customers (net)	103,495		90,562		81,999		115,092		101,770		99,260
Total assets⁷	128,093		113,525		101,002		462,998		394,542		374,282
Customer accounts	111,515		92,884		81,038		119,335		95,351		88,618
The following assets and liabilities were
significant to Corporate, Investment
Banking and Markets:
Loans and advances to banks (net)							101,277		80,870		83,312
Debt securities, treasury bills and
other eligible bills							186,139		162,583		155,330
Deposits by banks							65,882		48,895		49,785


Goodwill amortisation:
1excluded from (1) above	263		168		157		272		236		204
2excluded from (2) above	–		–		2		135		8		6
3excluded from (3) above	263		168		159		407		244		210

For other footnotes, see page 65.

Back to Contents

Private Banking and Other

Profit/(loss) excluding goodwill amortisation

	Private Banking						Other⁵
	Year ended 31 December						Year ended 31 December

	2003		2002		2001		2003		2002		2001
	US$m		US$m		US$m		US$m		US$m		US$m
Net interest income	574		549		577		(14	)	(53	)	80

Dividend income	3		2		4		37		34		32
Net fees and commissions	822		623		602		159		124		100
Dealing profits	209		137		124		(46	)	11		(6	)
Other income	50		102		87		892		905		996

Other operating income	1,084		864		817		1,042		1,074		1,122

Operating income	1,658		1,413		1,394		1,028		1,021		1,202
Operating expenses excluding goodwill
amortisation¹	(1,149	)	(987	)	(919	)	(1,325	)	(1,090	)	(1,230	)


Operating profit/(loss) before provisions^1,8	509		426		475		(297	)	(69	)	(28	)
Provisions for bad and doubtful debts	(2	)	(5	)	24		113		(6	)	(598	)
Provisions for contingent liabilities and
commitments	(2	)	(21	)	(46	)	25		(7	)	(588	)
Loss from foreign currency
redenomination in Argentina	–		–		–		(9	)	(68	)	(520	)
Amounts written off fixed asset
investments	(3	)	(22	)	(2	)	6		(194	)	(45	)

Operating profit/(loss)^1,8	502		378		451		(162	)	(344	)	(1,779	)
Share of operating profit/(loss) in joint
ventures²	–		(1	)	–		–		–		–
Share of operating profit/(loss) in
associates²	–		(10	)	–		74		68		60
Gains on disposal of investments and
tangible fixed assets	61		46		5		92		75		195

Profit/(loss) on ordinary activities before tax^3,8	563		413		456		4		(201	)	(1,524	)

By geographic region:
Europe	339		236		310		173		155		357
Hong Kong	127		107		84		(123	)	(61	)	198
Rest of Asia-Pacific	36		25		(16	)	50		12		30
North America	63		57		81		(176	)	(207	)	(877	)
South America	(2	)	(12	)	(3	)	80		(100	)	(1,232	)

Profit on ordinary activities beforetax^3,8	563		413		456		4		(201	)	(1,524	)

	%		%		%		%		%		%
Share of HSBC’s pre-tax profits^3,8	3.9		3.8		5.2		–		(1.9	)	(17.4	)
Cost:income ratio^1,8	69.3		69.9		65.9		128.9		106.8		102.3

	US$m		US$m		US$m		US$m		US$m		US$m
Selected balance sheet data⁶
Loans and advances to customers (net)	18,109		14,115		12,137		2,259		2,201		1,409
Total assets^7,9	54,510		48,346		52,135		25,524		21,251		20,581
Customer accounts	50,951		49,012		51,199		557		311		205


Goodwill amortisation:
1excluded from (1) above	282		264		249		5		–		10
2excluded from (2) above	–		–		–		(1	)	1		1
3excluded from (3) above	282		264		249		4		1		11

For other footnotes, see page 65.

Back to Contents

H S B C H O L D I N G S P L C

Financial Review (continued)

By geographical region:

In the analysis of profit by geographical region which follows, operating income and operating expenses include intra-HSBC items of US$422 million in 2003, US$326 million in 2002 and US$257 million in 2001.

Profit/(loss) on ordinary activities before tax

	Year ended 31 December

	2003										2002				2001

	Total				Household¹⁰		Rest of HSBC
	US$m		%		US$m	%	US$m		%		US$m		%		US$m		%

Europe	3,969		30.9		134	7.3	3,835		34.9		3,500		36.3		3,542		44.3
Hong Kong	3,728		29.1		–	–	3,728		33.9		3,710		38.4		3,883		48.5
Rest of Asia-
Pacific	1,391		10.9		–	–	1,391		12.7		1,260		13.1		1,088		13.6
North America	3,613		28.2		1,693	92.7	1,920		17.5		1,238		12.8		503		6.3
South America	115		0.9		–	–	115		1.0		(58	)	(0.6	)	(1,016	)	(12.7	)

Total	12,816		100.0		1,827	100.0	10,989		100.0		9,650		100.0		8,000		100.0


Included within
the above:
Princeton
settlement¹¹	–		–		–	–	–		–		–		–		(575	)	(7.2	)
Argentina
provisions¹²	(9	)	(0.1	)	–	–	(9	)	(0.1	)	–		–		(1,120	)	(14.0	)

Profit/(loss) on ordinary activities before tax excluding goodwill amortisation

	Year ended 31 December

	2003										2002				2001

	Total				Household¹⁰		Rest of HSBC
	US$m		%		US$m	%	US$m		%		US$m		%		US$m		%

Europe	4,862		33.7		157	7.1	4,705		38.6		4,160		39.5		4,182		47.5
Hong Kong	3,730		25.9		–	–	3,730		30.6		3,710		35.3		3,883		44.1
Rest of Asia-
Pacific	1,426		9.9		–	–	1,426		11.7		1,293		12.3		1,096		12.4
North America	4,257		29.6		2,051	92.9	2,206		18.1		1,384		13.2		648		7.4
South America	126		0.9		–	–	126		1.0		(34	)	(0.3	)	(1,002	)	(11.4	)

Total	14,401		100.0		2,208	100.0	12,193		100.0		10,513		100.0		8,807		100.0


Included within
the above:
Princeton
settlement¹¹	–		–		–	–	–		–		–		–		(575	)	(6.5	)
Argentina
provisions¹²	(9	)	(0.1	)	–	–	(9	)	(0.1	)	–		–		(1,120	)	(12.7	)

Total assets

At 31 December

2003

2002⁸

Total

Household¹⁰

Rest of HSBC

US$m

US$m

Europe

425,312

41.6

10,665

7.2

414,647

47.4

341,569

45.6

Hong Kong⁷

197,487

19.3

197,487

22.5

180,433

24.1

Rest of Asia-Pacific

98,081

9.6

–

98,081

11.2

76,635

10.2

North America

289,800

28.3

136,727

92.8

153,073

17.5

142,032

19.0

South America

12,549

1.2

–

12,549

1.4

8,491

1.1

Total

1,023,229

100.0

147,392

100.0

875,837

100.0

749,160

100.0

For above footnotes, see page 65

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Basis of preparation and Footnotes to ‘Analysis by customer group and by geographical region’

Basis of preparation

The results are presented in accordance with the accounting policies used in the preparation of HSBC’s consolidated financial statements. HSBC’s operations are closely integrated and, accordingly, the presentation of customer group data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and head office functions, to the extent that these can be meaningfully attributed to operational business lines. While such allocations

have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity.

Where relevant, income and expense amounts presented include the results of intra-segment funding as well as inter-company and inter-business line transactions. All such transactions are undertaken on arm’s-length terms. Intra-segment funding and placements of surplus funds are generally undertaken at market interest rates.

Footnotes to ‘Analysis by customer group and by geographic region’

12,3,	Goodwill amortisation excluded from profit/(loss) is disclosed in the tables on pages 58 to 63.

4	Comprises Household’s consumer finance activities since the date of acquisition.

5	The main items reported under ‘Other’ are the income and expenses of wholesale insurance operations, certain property activities, unallocated investment activities including hsbc.com, centrally held investment companies and HSBC’s holding company and financing operations. The results include net interest earned on free capital held centrally and operating costs incurred by the head office operations in providing stewardship and central management services to HSBC. Net fees and commissions and other income of the Group’s wholesale insurance operations amounted to US$382 million in 2003 (2002:US$324 million; 2001: US$297 million).

6	Third party only.

7	Excluding Hong Kong Government certificates of indebtedness.

8	In 2003, North America implemented a revised funds transfer pricing system to transfer interest rate risk from the business units to Corporate, Investment Banking and Markets. The figures for 2002 have been restated to reflect the impact of transfer pricing had it been in place on a similar basis. The effect on the figures for 2001 is immaterial.

9	The figures for ‘Total assets’ for 2002 and 2001, and for total assets for ‘Other’ for 2002 and 2001, have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’ and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 of the ‘Notes on the Financial Statements’ on pages 239 to 240 .

10	Since the date of acquisition.

11	Deducted in arriving at the profit on ordinary activities before tax of North America.

12	Deducted in arriving at the profit on ordinary activities before tax of South America.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Europe

Profit/(loss) before tax excluding goodwill amortisation
	Year ended 31 December

	2003	2002		2001
	US$m	US$m		US$m

Personal Financial Services	1,267	987		1,091

United Kingdom	1,050	826		906
France	165	139		133
Other	52	22		52

Consumer Finance¹	157	–		–

United Kingdom	157	–		–
France	–	–		–
Other	–	–		–


Total Personal Financial Services	1,424	987		1,091

United Kingdom	1,207	826		906
France	165	139		133
Other	52	22		52

Commercial Banking	1,303	1,344		986

United Kingdom	939	929		742
France	257	325		186
Other	107	90		58

Corporate, Investment Banking and Markets	1,623	1,438		1,438

United Kingdom	1,234	1,118		1,188
France	129	147		52
Other	260	173		198

Private Banking	339	236		310

United Kingdom	73	88		114
France	21	8		33
Other	245	140		163

Other	173	155		357

United Kingdom	139	176		196
France	12	(130	)	83
Other	22	109		78

Total²	4,862	4,160		4,182

United Kingdom	3,592	3,137		3,146
France	584	489		487
Other	686	534		549


1Comprises Household since the date of acquisition.
2Goodwill amortisation excluded:
- arising on subsidiaries	758	651		632
- arising on associates and joint ventures	135	9		8
- total	893	660		640

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Profit before tax
	Year ended 31 December

	2003						2002		2001

					Rest of
	Total		Household	¹	HSBC
Europe	US$m		US$m		US$m		US$m		US$m
Net interest income	7,540		438		7,102		6,343		5,563

Dividend income	150		–		150		211		116
Net fees and commissions	5,192		49		5,143		4,528		4,210
Dealing profits	960		–		960		508		708
Other income	1,253		149		1,104		1,025		1,022

Other operating income	7,555		198		7,357		6,272		6,056

Total operating income	15,095		636		14,459		12,615		11,619

Staff costs	(5,576	)	(146	)	(5,430	)	(4,425	)	(4,227	)
Premises and equipment	(1,058	)	(56	)	(1,002	)	(966	)	(786	)
Other	(2,068	)	(70	)	(1,998	)	(1,763	)	(1,619	)
Depreciation and intangible asset amortisation.	(827	)	(27	)	(800	)	(724	)	(656	)

	(9,529	)	(299	)	(9,230	)	(7,878	)	(7,288	)
Goodwill amortisation	(758	)	(23	)	(735	)	(651	)	(632	)

Operating expenses	(10,287	)	(322	)	(9,965	)	(8,529	)	(7,920	)

Operating profit before provisions	4,808		314		4,494		4,086		3,699
Provisions for bad and doubtful debts	(874	)	(180	)	(694	)	(569	)	(441	)
Provisions for contingent liabilities and
commitments	(33	)	–		(33	)	(15	)	(30	)
Amounts written off fixed asset investments	(64	)	–		(64	)	(267	)	(90	)

Operating profit	3,837		134		3,703		3,235		3,138
Share of operating loss in joint venture	(127	)	–		(127	)	(26	)	(79	)
Share of operating profit/(loss) in associates	47		–		47		3		42
Gains on disposal of investments and
tangible fixed assets	212		–		212		288		441

Profit on ordinary activities before tax	3,969		134		3,835		3,500		3,542

	%		%		%		%		%
Share of HSBC’s pre-tax profits (excluding
goodwill amortisation)	33.7		1.0		32.7		39.5		47.5
Share of HSBC’s pre-tax profits	30.9		1.0		29.9		36.3		44.3
Cost:income ratio (excluding goodwill
amortisation)	63.1		47.0		63.8		62.4		62.7
Period-end staff numbers (full-time equivalent)	73,943		4,075		69,868		72,260		73,326

	US$m		US$m		US$m		US$m		US$m
Selected balance sheet data²
Loans and advances to customers (net)	210,605		8,452		202,153		164,701		133,380
Loans and advances to banks (net)	51,783		27		51,756		39,373		40,641
Debt securities, treasury bills and other
eligible bills	82,656		66		82,590		71,446		66,255
Total assets³	425,312		10,665		414,647		341,569		297,066
Deposits by banks	47,500		831		46,669		34,559		36,908
Customer accounts	242,724		231		242,493		197,362		169,371


1	Since the date of acquisition.
2	Third party only.
3	Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Year ended 31 December 2003 compared with year ended 31 December 2002

The UK economy expanded by 2.3 per cent in 2003. After a slow first six months, growth accelerated in the third quarter and that momentum continued into the final months of the year. Growth in consumer spending slowed during the course of the year but nevertheless remained robust and, in particular, the housing market and household appetite to borrow remained strong. However, low real income growth, together with the expectation of further rises in interest rates, are expected to dampen household activity in the forthcoming months. Elsewhere, there are a few encouraging signs that industrial activity in particular and corporate confidence in general is starting to improve from a low base. Going forward, stronger global demand, if maintained, should provide a boost to the corporate sector.

Having slipped into recession in the first half of the year, the eurozone economy returned to growth in the second half, expanding by 0.4 per cent quarter-on-quarter in the third quarter and by 0.3 per cent in the fourth quarter. Once again, however, it was stronger exports that drove the third quarter improvement, while the domestic economies remained subdued. Consumer spending was flat and investment contracted for the third consecutive quarter. The pick-up in exports occurred despite the appreciating euro, which rose more than 16 per cent against the dollar during the course of the year. In the fourth quarter, growth seemed to have been largely the result of inventory build up, with exports falling back after the strength of the third quarter, and with limited growth in consumer spending. Interest rates were cut twice during 2003, with the European Central Bank’s repo rate dropping by 75 basis points to 2 per cent. By contrast, however, longer-term interest rates have moved higher, rising by about 80 basis points between June and the end of December, as the bond market anticipated economic recovery.

In 2003, personal credit expansion in the UK was the major growth area as consumers took advantage of historically low interest rates, enabling HSBC to generate strong growth in mortgages and consumer lending. Conversely, sales of investment and pension products fell, reflecting a lack of confidence in equity markets. In this environment, HSBC grew its deposit base as customers sought flexibility and security for their savings, notwithstanding the low interest rates available. The

low interest rate environment also meant that the value of HSBC’s maturing liquidity reduced as it was redeployed in lower yielding assets.

The same factors, low interest rates and weak equity markets, increased the cost of pension provision by US$96 million in the UK. Employment costs also grew, notably in the UK, as social taxes were raised. In order to adjust for this higher cost environment, HSBC took steps to reduce its staff costs, announcing both 1,400 redundancies in the UK and the shift over the next three years of 4,000 positions to the Group Service Centres. In the short term these actions incurred both redundancy and excess property provisioning costs totalling over US$176 million.

European operations contributed pre-tax profit of US$3,969 million in 2003 compared with US$3,500 million last year. Excluding goodwill amortisation, European operations contributed pre-tax profit of US$4,862 million and represented around one-third of HSBC’s total profit on this basis. At constant exchange rates, and excluding the US$157 million contribution from HFC, which was the only major change in the composition of the Group in Europe, pre-tax profit, excluding goodwill amortisation, was 2 per cent higher than last year. Goodwill amortisation of US$893 million increased by US$233 million compared with 2002, mainly reflecting a goodwill write-down in respect of a UK fund management company previously acquired as part of the CCF acquisition, and exchange rate movements.

The commentaries that follow are based on constant exchange rates.

Pre-tax profit, before goodwill amortisation, of US$1,267 million inPersonal Financial Services, excluding Consumer Finance, was 16 per cent higher than in 2002, reflecting strong growth in UK mortgage and consumer lending, and in deposit-taking activities.

Net interest income increased by 10 per cent, driven by strong growth in mortgages and personal lending in the UK and, to a lesser extent, in France. The net interest margin fell modestly as rates remained at historically low levels. However, balance sheet growth more than compensated for this. UK mortgage balances increased by 25 per cent to US$37.4 billion, as borrowers continued to take advantage of the low interest rate environment to refinance their mortgages. In France, a similar

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pattern was seen, and CCF’s mortgage balances increased by 11 per cent over 2002. Gross new mortgage lending in the UK grew by 12 per cent to US$17.9 billion. First Direct contributed to this growth with a US$280 million, or 14 per cent, increase over 2002, reflecting the continuing success of its Offset mortgage product. Both HSBC and First Direct continued to win major awards for their mortgage products in 2003.

In the UK, personal lending balances, excluding mortgages and credit cards, grew by 15 per cent reflecting the success of targeted marketing campaigns and improved utilisation of customer relationship management systems. Card balances grew by 18 per cent to US$4.2 billion, due to strong consumer expenditure and targeted marketing campaigns, resulting in an overall increase in fee income from cards of 13 per cent.

HSBC’sPremier service was further enhanced and the number of customers using this service in the UK grew by 57 per cent to over 280,000. Significant growth was achieved in HSBCPremier savings accounts in 2003, which contributed to an overall increase in UK personal savings balances of 20 per cent to US$35.7 billion. UK personal current account balances grew by 13 per cent to US$18.0 billion.

Other operating income was broadly in line with 2002. The strong growth in mortgages and personal loans boosted sales of repayment protection products in the UK, producing a 19 per cent increase in personal loan protection premiums. HSBC maintained its position as the leading provider of income protection products in the UK, with a market share of 17 per cent at the end of September 2003. Lack of customer confidence in equity markets led to a decline in sales of investments and pension products. This trend also adversely affected the value of HSBC’s long-term assurance business in the UK. However, weakness in investment product sales reflected market conditions rather than competitive positioning and the bank was awarded the coveted ‘Five Star Award’ from Money Management magazine for its regular premium stakeholder pensions in the UK again in 2003.

HSBC Turkey benefited from additional card fee income following the acquisition of Benkar in September 2002, contributing to an overall increase in its other operating income of 51 per cent.

Operating expenses, excluding goodwill amortisation, increased by 2 per cent. This was

largely due to restructuring costs and external factors in the UK, including higher social taxes and the amortisation of the UK pension scheme deficit reported at the end of 2002. The relocation of the bank’s headquarters to Canary Wharf contributed to higher premises costs, following the upgrade of equipment and infrastructure. Additional costs were also incurred migrating the card issuing business in the UK to the more efficient platform used by Household in the US. Costs in France were largely unchanged compared with 2002.

Low interest rates, stable employment and a gradual upturn in economic conditions in the UK provided the environment for continuing low levels of credit charges. The charge for bad and doubtful debts at US$267 million was 14 per cent higher than in 2002, a satisfactory performance in view of the growth of over 20 per cent in UK personal lending. Overall, credit quality improved.

InConsumer Finance, HFC Bank, which joined HSBC in the UK in March as part of the Household acquisition, contributed US$157 million to pre-tax profit, before goodwill amortisation, in its first nine months of ownership. Integration with the HSBC Group is running on schedule.

InCommercial Banking, pre-tax profits, before amortisation of goodwill, declined by 13 per cent compared with 2002 mainly reflecting lower net interest income and a higher cost base.

Net interest income decreased by 3 per cent to US$1,961 million. Following the recommendations of the UK’s Competition Commission, HSBC applied credit interest to all qualifying small and medium-sized customer accounts, increasing interest expense by US$136 million. The move did, however, lead HSBC to strengthen its product proposition within those market segments in the UK, and business current account balances consequently rose by 21 per cent to just over US$10 billion. In addition, HSBC’s popular ‘Start-up Stars’ competition continued to raise the profile of the bank’s small business proposition in the UK and helped to attract over 102,000 new business start-ups and over 23,000 customer transfers. Enhanced customer targeting and the introduction of risk-based relationship pricing improved HSBC’s competitive position in the UK market, increasing lending balances by over US$2.2 billio n and net interest income by 10 per cent.

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H S B C H O L D I N G S P L C

Financial Review (continued)

Overall, deposit balances in the UK grew by 9 per cent to just over US$9 billion, increasing market share and partly offsetting the effects of reduced deposit book spreads. Balances grew as a consequence of the introduction of the new Business Money Manager account, launched in response to customer demand for flexible savings accounts. The new product attracted an average of 1,700 new accounts per week and generated US$95 million of net interest income.

In France, overall net interest income was broadly in line with 2002. The subdued economic climate saw businesses adopt a more conservative investment policy that was reflected in a 3 per cent rise in sight deposits. Short-term higher spread lending fell by 8 per cent, but was partly offset by growth in medium and longer-term lending, which increased by 4 per cent.

In the UK, other operating income was marginally higher than 2002. Overdraft fees rose by 12 per cent, or US$19 million, reflecting the further benefit of improved account management initiatives introduced last year, whilst loan fees increased significantly in line with the growth in customer numbers.

In France, higher income was generated through a volume-led increase in banking transaction fees and the introduction of a variety of guaranteed investment funds during the year. The former was achieved after specific initiatives directed towards middle market enterprises (‘MME’s). The successful launch of several structured financial products led to higher trading fees within CCF and the take-up of Asset Management products increased by 9 per cent.

Overall, wealth management income declined as continued uncertainty in equity markets led to a fall in sales of savings and investment products.

Operating expenses, excluding goodwill amortisation, were 7 per cent higher than last year at US$2,113 million. This was largely due to an increase in staff costs in the UK. Pension costs rose to compensate for the scheme deficit and one-off redundancy costs were incurred as migration was planned to the Group’s global processing capabilities. The costs of distributing and supporting business services and products within the UK increased in line with the growth in volumes and continued investment was made in electronic delivery channels across Europe.

At US$204 million, the overall charge for bad and doubtful debts was 9 per cent lower than in 2002. In the UK there was a release of general provision which recognised the gradual improvement in the economic outlook for businesses over the year. Offsetting this there was a higher specific charge, reflecting a number of large provisions across various industries. Additionally, the charge in France increased due to lower recoveries in two of the regional banks. Underlying credit quality in France remained stable.

Corporate, Investment Banking and Marketsreported pre-tax profit, before amortisation of goodwill, of US$1,623 million, an increase of 2 per cent compared with last year. In Global Markets Europe, performance was strong. This reflected income growth in foreign exchange, derivatives and debt securities, partly offset by higher bad debt provisions in Corporate Banking. HSBC also absorbed the costs of restructuring and repositioning the equities and investment banking businesses.

In Global Markets UK, earnings from deploying the excess liquidity of the bank declined as long-term assets matured and proceeds were reinvested at lower rates. Overall, net interest income was 5 per cent lower than in 2002.

Other operating income increased by 9 per cent, reflecting a substantial growth in dealing profits that more than offset lower fee and commission income. Foreign exchange revenues remained strong as volatility in the major currency pairs prompted customers to hedge their currency exposures. Continued weakening of the US dollar provided a clear trend in the markets for position taking. Fixed income earnings showed a strong year-on-year growth reflecting a combination of tightening credit spreads and strong investor demand for yield in the low interest rate environment, which boosted sales of corporate bonds. In line with a greater business focus on risk management products, revenues from trading increased, reflecting the benefit successful interest rate positioning and continued growth in customer mandates from corporate customers. Additional growth in revenue resulted from a strong presence in each of the euro vani lla and structured derivatives markets.

Fees and commission income decreased by 6 per cent. Difficult operating conditions in equity markets resulted in lower commissions and new-issue fees, but these were partly offset by higher fees from

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merger and advisory business as greater focus was given to HSBC’s core customer sectors and regions. Fees from debt capital markets activities were also strong. Generally, fees benefited from the high level of activity in the primary markets, as customers sought long-term financing at low interest rates.

Staff costs rose, with higher bonuses reflecting increased profitability in specific product lines. Restructuring and research costs of US$24 million were also incurred to build and reshape HSBC’s investment banking and equities businesses. Premises and equipment expenses were lower as a result of savings in rental payments from the London office move to Canary Wharf.

Credit experience was generally satisfactory although new specific provisions were higher, mainly due to a single name in the engineering sector which was extensively restructured in the second half of the year. Corporate weakness in the power generation sector was also dealt with through raising additional specific provisions, although these were partly offset by recoveries in the transport and telecommunications sectors, as balance sheets were strengthened.

Gains on investment disposals were lower than in 2002, mainly due to a reduction in profits from the disposal of venture capital investments in CCF.

Against the background of a recovery from recent lows in European stock markets,Private Banking activities continued to grow during 2003. Pre-tax profit, excluding goodwill amortisation, increased by 48 per cent as a result of strong growth in dealing income, lower costs and the non-recurrence of contingencies and write downs in 2002.

Net interest income was broadly in line with 2002. A 30 per cent increase in lending balances was driven by clients seeking to maximise the overall earnings potential of their investments by borrowing to reinvest in higher returning securities. These additional earnings were mostly offset by a decline in yield on free funds as lower interest rates prevailed throughout the year.

Net fees and commissions increased by 2 per cent to US$556 million. The low interest rate environment improved the attractiveness of investment markets, particularly for sophisticated investors with access to structured products which

offered potentially higher returns than from cash deposits. Consequently, funds under management increased by US$20 billion to US$91 billion, with a move by clients away from liquid positions bringing in some US$9 billion of new client funds. A strong rise in discretionary mandates together with client demand for structured products and Household’s commercial paper contributed to the increase. Transaction and safe custody fees rose in line with the growth in client funds while an increased focus on product enrichment produced strong growth in income from structured products. In Germany, fee income was boosted by the placement of two new property funds. However, income in France was weaker as stock market activity remained subdued.

Volatility in the major currencies resulted in higher volumes of client transactions in the foreign exchange markets, and combined with proprietary equity gains in 2003, contributed to the 37 per cent improvement in dealing profits to US$94 million.

Total operating expenses, before goodwill amortisation, fell by 4 per cent to US$709 million. This was achieved through cost savings realised following the merger of three banks in Switzerland in 2002 and lower property expenses.

Provisions for contingent liabilities and commitments were lower than in 2002, which included amounts provided for litigation. Amounts written off fixed asset investments were lower than in 2002 following a specific write down of a debt security in 2002. Gains on disposal of investments and tangible fixed assets increased by 22 per cent to US$61 million, principally reflecting a gain on a long-term private placement transaction.

Year ended 31 December 2002 compared with year ended 31 December 2001

The UK registered strong consumer-led GDP growth of 1.7 per cent in 2002. Structural disparities within the UK economy widened further as consumer and government spending masked an industrial recession. A combination of low interest rates, and a rising incidence of equity withdrawal as house prices rose, boosted consumer expenditure, particularly in the latter half of the year. Unemployment remained low as the jobs shake-out in manufacturing was absorbed by growth in the public sector.

Economic activity slowed further in 2002, as early indicators pointing to a standard cyclical recovery in economic activity diminished and the

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H S B C H O L D I N G S P L C

Financial Review(continued)

momentum from rate cuts in 2001 was lost.Industrial production and investment contracted in all major economies, although this was offset to varying degrees by consumer and government expenditure. Initial optimism that the fourth quarter of 2001 marked the low point in the eurozone’s economic cycle was largely misplaced as constraints imposed by the EMU’s growth and stability pact limited the degree of fiscal loosening available to members.

European operations contributed US$3,500 million to HSBC’s pre-tax profit in 2002. Europe’s pre-tax profits, before goodwill amortisation, were US$4,160 million, and represented 40 per cent of HSBC’s profits on this basis. Goodwill amortisation of US$660 million was broadly in line with 2001. Operating performance was strong with pre-provision profit rising 9 per cent to US$4,737 million before goodwill amortisation. In constant currency terms, the growth was 6 per cent. This growth was driven essentially by the core personal and commercial banking businesses in the UK and France and by Global Markets UK’s performance. There was no material benefit in 2002 from disposal gains as after making provisions for amounts to be written off fixed asset investments, the net gain was only US$21 million. The comparable figure in 2001 was US$351 million, a result dominated by the sale of the Group’s stake in British Interactive Broadcasting.

The impact of acquisitions on the 2002 profit before tax was modest at US$51 million. The acquisitions of Demirbank in October 2001 and Benkar in September 2002, however, represented a major expansion of HSBC’s business in Turkey. These businesses were successfully integrated during 2002, and by the end of the year over 500,000 customers in Turkey were being served through a combination of call centres, internet banking and a network of 163 branches.

Internal restructuring took place to enhance operational efficiency. In June 2002, HSBC acquired Merrill Lynch’s 50 per cent share of the Merrill Lynch HSBC joint venture. The business was integrated into HSBC Bank in December 2002.

The commentaries on the Europe results that follow are based on constant exchange rates.

In Personal Financial Services, pre-tax profit, before goodwill amortisation, of US$987 million was 13 per cent lower than in 2001. However, after adjusting for the US$200 million profit from the sale

of the Group’s stake in British Interactive Broadcasting in 2001, profit increased by 6 per cent. The underlying increase was driven by strong growth in lending and savings products and increased spreads, as funding costs reflected the low interest rate environment across Europe. Higher operating expenses, due in part to the full year impact of acquisitions, one-off property costs and vacant space provisions, partly offset the growth in income.

Net interest income, at US$2,541 million, was 14 per cent higher than in 2001. UK mortgage balances increased by 24 per cent and gross new lending by 57 per cent as HSBC increased its market share from 4 per cent to 6 per cent in a buoyant housing market. HSBC’s UK mortgage balances have almost doubled over the past five years through a combination of innovative products and competitive pricing. ‘HomeStart’, an innovative mortgage allowing first time buyers to pay only the interest costs during the first three years, was a major contributor to growth during the year.

In the UK, personal current account balances increased by 11 per cent as customers preferred to hold cash in the uncertain investment climate. The launch of a new Bonus Savings Account, and improved utilisation of customer relationship management systems, contributed to growth of 19 per cent in personal savings balances and 16 per cent in personal lending balances.

In France, CCF’s net interest income of US$386 million was 7 per cent higher than in 2001. Net interest income grew strongly, driven by growth in personal lending and sight deposits as customers preferred liquidity and security in the face of falling equity markets. In Turkey, net interest income increased substantially reflecting the full year’s contribution of Demirbank and the acquisition of Benkar in September 2002.

Other operating income at US$1,767 million was 3 per cent lower than in 2001. This reflected lower income from equity market-related activity and sales of investment products, largely offset by strong growth in sales of life, critical illness and income protection products. Credit card income particularly benefited from the inclusion of a full year’s income for Demirbank, and three months contribution from Benkar.

In the UK, sales of HSBC branded life, critical illness and income protection products, through the tied sales-force, were 7 per cent higher than in 2001.

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Life protection sales grew by 42 per cent on the back of strong mortgage growth and there was a 26 per cent rise in sales of creditor protection insurance, driven by the growth in personal lending. The bank continued to deepen customer relationships through a broader range of products with particular focus on wealth management. The bank’s combined market share for its principal investment products, Open Ended Investment Companies and ISAs, was maintained at over 5 per cent during the year despite the difficult investment market conditions. However, overall wealth management income fell, principally as a result of the fall in the investment markets and adjustments to the value of long-term assurance business. In France, a similar pattern was seen. Good growth was achieved in fee income on credit facilities, cards and from sales of investment protection products. This was partly offset by lower stockbroking fees.

Operating expenses, excluding goodwill amortisation, increased by 8 per cent, and included a full year’s costs for Demirbank, the acquisition of Benkar and the integration of Merrill Lynch HSBC. Excluding these, costs rose by 3 per cent, due in part to one-off property and vacant space costs relating to the relocation of the bank’s headquarters to Canary Wharf in the second half of 2002, and increased marketing and IT costs, as further investment was made in both front office and customer contact systems. Non-staff costs increased, reflecting the cost of outsourcing HSBC Bank’s cash and cheque processing services and the impact of offshore processing. Utilisation of HSBC’s service centres in China and India increased with some 700 staff positions and 20 new processes transferred to India during the year. In France, CCF’s staff costs were broadly unchanged on 2001, despite the full year impact of Banque Hervet, and was achieved in part through a small reduction in headcount.

The charge for bad and doubtful debts at US$215 million was 3 per cent higher than in 2001. Increased provisions in CCF were partly offset by a lower charge in the UK where credit quality remained stable and improved debt counselling services proved effective.

Losses from joint ventures fell significantly, reflecting the full consolidation of Merrill Lynch HSBC from the second half of 2002.

Commercial Banking reported pre-tax profit, before goodwill amortisation, of US$1,344 million,

an increase of 32 per cent compared with 2001. The increase reflected higher net interest income and fee income together with lower provisions for bad and doubtful debts.

Net interest income rose by 11 per cent. Term lending balances grew by 9 per cent, with a corresponding increase in income of 10 per cent, as a result of customer segmentation and the introduction of tiered pricing in the UK. A general move away from equity investments towards deposits helped increase balances by 9 per cent. The customer base rose by 7 per cent, on the back of an increased share of the business start-up market and relatively low attrition levels. During 2002, over 87,000 business start-up accounts were opened, an increase on last year of some 26,000 accounts or 42 per cent. This was attributed to effective marketing, particularly the ‘Start-Up Stars’ campaign.

CCF’s net interest income also grew with the rise in customer stocks, leading to an increase in sight deposits of 8 per cent and growth in the loan book of 4 per cent,combined with an improvement in spreads.

Other operating income increased by 11 per cent. UK overdraft fees rose by 28 per cent, reflecting improved account management. Fee income from UK invoice financing activities grew by 7 per cent, with an increase of 13 per cent in the number of clients opting for credit protection. This reflected greater economic uncertainty, particularly in the manufacturing sector. Along with other specialisms, such as vehicle and equipment finance, the invoice finance salesforce was integrated into the network, improving the level of cross sale introductions and contributing to a 10 per cent increase in its client base. Sales of business protection products such as key man insurance and partnership protection grew by 11 per cent in the UK. These were sold along with pension and inve stment products aimed at assisting businesses in managing wealth and offering protection.

Underlying operating expenses rose by 5 per cent in 2002. The UK experienced increased premises costs with the opening of the new headquarters at Canary Wharf in the latter half of 2002 and the rationalisation of the property portfolio, resulting in one-off property and vacant space costs. IT costs increased Europe-wide from the systems modifications necessitated by the introduction of the Euro.

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H S B C H O L D I N G S P L C

Financial Review(continued)

In order to increase customer choice, further investment was made in alternative sales channels such as business telephone banking and business internet banking. A business outbound centre was established at Leicester in the UK. January 2002 saw the launch of business internet banking (www.bib.hsbc.com) to the UK’s business customers, with 35,000 registering in its first year.Dedicated business-banking centres were set-up in Swansea, Edinburgh and Hyderabad, handling calls from approximately 134,000 registered users.

The net charge for bad and doubtful debts reduced by 23 per cent, mainly due to a fall in CCF, where lower provisions combined with higher releases and recoveries in 2002. The UK saw an improvement in the risk profile of commercial customers leading to a net release of the general provisions held. Against this, new specific provisions were required in the private health, leisure and manufacturing sectors and the overall charge remained flat.

Gains on disposal of investments of US$40 million mainly reflected the sale of CCF’s holding in Lixxbail.

2002 included full year contributions from Banque Hervert in France and Demirbank in Turkey. Both performed in line with expectations and integrated well into HSBC.

Corporate, Investment Banking and Marketsreported pre-tax profit, before amortisation of goodwill, of US$1,438 million in 2002, unchanged from 2001. Growth in net interest income was offset by lower dealing profits and a higher charge for bad debts.

Net interest income increased by 15 per cent compared with 2001, primarily because of earnings on money market business, which benefited from the steeper yield curve following interest rate cuts during 2002. The impact of this diminished during the second half of the year as maturing liquidity was redeployed in lower yielding assets. Net interest income also grew as Global Markets increased the proportion of liquid assets held in high quality corporate and institutional bonds relative to interbank placement. Increased equity swap activity also generated additional cash deposits.

Net fees and commissions were broadly in line with 2001. Markets in global new equity issues and financial advisory services continued to be

depressed, and trading volumes on stock markets remained at subdued levels, adversely affecting commission revenues. However, fee income from fixed income products designed for corporate clients increased, and HSBC achieved the number one ranking in bond issuance for UK and French corporates in all currencies.

Dealing profits decreased by 38 per cent. Dealing losses were generated on interest rate derivatives undertaken to hedge the interest rate risk arising on holdings of corporate bonds, although this was offset by increased net interest income on the bonds. Also, foreign exchange revenues grew by 11 per cent following expansion in emerging markets business and currency options. In the UK, increased activity in equity swap transactions generated dealing losses, which were offset by a rise in dividend income.

Operating expenses were in line with 2001. Increased revenue-related costs in Global Markets were offset by a significant reduction in staff costs following a restructuring of Investment Banking to reflect market conditions.

The charge for bad and doubtful debts, at US$153 million, reflected an increase in specific provisions for a small number of telecommunications related exposures in the UK.

InPrivate Banking, HSBC continued to restructure and strengthen its operations with the integration of HSBC Guyerzeller and CCF’s private banking operations outside France with HSBC Private Banking Holdings (Suisse). The comments below assume that this structure was in place during 2001.

Despite the decline in the European stock markets, growth in clients’ funds under management continued, in part due to a significant increase in client referrals from Personal Financial Services.

Net interest income fell by 10 per cent compared with 2001 as lower interest rates reduced earnings on Private Banking’s investment portfolio and free funds. Part of the portfolio was repositioned at the beginning of the year into lower yielding but higher grade securities in anticipation of difficult credit markets.

Transaction and safe custody fees increased in line with the US$4 billion growth in funds under management to US$71 billion, despite falls in world stock markets. Investment fees benefited strongly

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from the success of the Hermitage Fund, which offered clients access to Russian investment opportunities. In France, fee income was affected by lower stock market indices while interest arbitrage activities on securities boosted net interest income at the expense of dealing income. The latter was further undermined by mark-to-market losses.

Dealing profits fell by 13 per cent compared with 2001, mainly in France and HSBC Guyerzeller, reflecting difficult market conditions.

Underlying operating expenses excluding goodwill amortisation were in line with last year.

The credit for provisions for bad and doubtful debts in 2002 was smaller than in 2001, when a larger reduction in general provisions was booked following a reassessment of provisions required.

Amounts written off fixed asset investments were higher than last year following a write down of a specific debt instrument of a company in the telecommunications sector.

The share of loss in associated undertakings of US$10 million in 2002 reflected a drop in the value of a partially owned private equity company.

The gain on disposal of investments and tangible assets increased to US$48 million. The increase reflected debt instruments sold during the year and the liquidation of a Russian Recovery fund established in 2000 to manage previously written down Russian debt instruments.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Profit/(loss) excluding goodwill amortisation by customer group

Year ended 31 December 2003

Total

Corporate,

Personal

Investment

Inter-

Financial

Consumer

Financial

Commercial

Banking &

Private

segment

Services

Finance

⁴

Services

Banking

Markets

Banking

Other

elimination

Total

Europe

US$m

Net interest income

3,082

438

3,520

1,961

1,509

334

216

–

7,540

Dividend income

–

138

–

150

Net fees and commissions

1,789

1,838

1,335

1,204

556

259

–

5,192

Dealing profits

–

839

(26

)

–

960

Other income

129

149

278

294

539

371

(239

)

1,253

Other operating income

1,959

198

2,157

1,647

2,720

662

608

(239

)

7,555

Operating income

5,041

636

5,677

3,608

4,229

996

824

(239

)

15,095

Operating expenses

excluding goodwill

amortisation¹

(3,471

)

(299

)

(3,770

)

(2,113

)

(2,471

)

(709

)

(705

)

239

(9,529

)

Operating profit before

provisions¹

1,570

337

1,907

1,495

1,758

287

119

–

5,566

Provisions for bad and

��

doubtful debts

(267

)

(180

)

(447

)

(204

)

(218

)

–

(874

)

Provisions for contingent

liabilities and

commitments

(29

)

–

(29

)

(52

)

–

(33

)

Amounts written off fixed

asset investments

)

–

)

–

(42

)

(18

)

–

(64

)

Operating profit¹

1,273

157

1,430

1,301

1,446

278

140

–

4,595

Share of operating profit in

joint ventures²

–

Share of operating profit

in associates²

–

Gains/(losses) on disposal

of investments and

tangible fixed assets

)

–

)

156

–

212

Profit on ordinary

activities before tax³

1,267

157

1,424

1,303

1,623

339

173

–

4,862

Share of HSBC’s pre-tax

profits³

8.8

1.1

9.9

9.0

11.3

2.4

1.1

33.7

Cost:income ratio¹

68.9

47.0

66.4

58.6

58.4

71.2

85.6

63.1

US$m

Selected balance sheet

data⁵

Loans and advances to

customers (net)

76,439

8,452

84,891

52,947

61,085

11,681

210,605

Total assets

92,890

10,526

103,416

67,107

209,885

40,964

3,940

425,312

Customer accounts

102,192

231

102,423

45,558

63,556

31,187

–

242,724

The following assets and

liabilities were significant

to the customer groups

noted:

Loans and advances to

banks (net)

43,699

Debt securities, treasury

bills and other eligible

bills

67,692

Deposits by banks

44,261

Debt securities in issue

3,232

Goodwill amortisation:

excluded from (1) above

123

146

160

192

257

758

excluded from (2) above

–

135

–

135

excluded from (3) above

123

146

160

327

257

893

Comprises Household since the date of acquisition.

Third party only.

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Profit/(loss) excluding goodwill amortisation by customer group(continued)

		Year ended 31 December 2002

						Corporate,
		Personal				Investment						Inter-
		Financial		Commercial		Banking &		Private				segment
		Services		Banking		Markets		Banking		Other		elimination		Total
Europe		US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income		2,541		1,800		1,444		300		258		–		6,343

Dividend income		3		4		202		2		–		–		211
Net fees and commissions		1,570		1,128		1,137		471		222		–		4,528
Dealing profits		31		18		385		63		11		–		508
Other income		163		303		508		16		316		(281	)	1,025

Other operating income		1,767		1,453		2,232		552		549		(281	)	6,272

Operating income		4,308		3,253		3,676		852		807		(281	)	12,615

Operating expenses excluding
	goodwill amortisation¹	(3,076	)	(1,759	)	(2,197	)	(618	)	(509	)	281		(7,878	)

Operating profit before
	provisions¹	1,232		1,494		1,479		234		298		–		4,737

Provisions for bad and doubtful
	debts	(215	)	(204	)	(153	)	7		(4	)	–		(569	)
Provisions for contingent liabilities
	and commitments	(23	)	11		(3	)	(21	)	21		–		(15	)
Amounts written off fixed asset
	investments	(1	)	3		(72	)	(22	)	(175	)	–		(267	)

Operating profit¹		993		1,304		1,251		198		140		–		3,886

Share of operating profit/(loss) in
	joint ventures²	(22	)	3		2		–		–		–		(17	)
Share of operating profit/(loss) in
	associates²	(1	)	(3	)	3		(10	)	14		–		3
Gains/(losses) on disposal of
	investments and tangible fixed
	assets	17		40		182		48		1		–		288

Profit on ordinary activities
	before tax³	987		1,344		1,438		236		155		–		4,160

		%		%		%		%		%				%
Share of HSBC’s pre-tax profits³		9.4		12.8		13.7		2.2		1.4				39.5
Cost:income ratio¹		71.4		54.1		59.8		72.5		63.1				62.4
		US$m		US$m		US$m		US$m		US$m				US$m
Selected balance sheet data⁴
Loans and advances to customers
	(net)	58,421		43,104		54,099		9,077		–				164,701
Total assets⁵		72,817		56,934		172,665		35,920		3,233				341,569
Customer accounts		84,486		35,614		45,818		31,444		–				197,362
The following assets and liabilities
	were significant to Corporate,
	Investment Banking and Markets:
	Loans and advances to
	banks (net)					31,402
	Debt securities, treasury bills and
	other eligible bills					53,897
	Deposits by banks					31,741


Goodwill amortisation:
1	excluded from (1) above	112		133		169		238		(1	)			651
2	excluded from (2) above	–		–		8		–		1				9
3	excluded from (3) above	112		133		177		238		–				660

4	Third party only.
5	Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.

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H S B C H O L D I N G S P L C

Financial Review(continued)



		Year ended 31 December 2001

						Corporate,
		Personal				Investment						Inter-
		Financial		Commercial		Banking &		Private				segment
		Services		Banking		Markets		Banking		Other		elimination		Total
Europe		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Net interest income		2,136		1,551		1,213		334		329		–		5,563

Dividend income		2		5		105		4				–		116
Net fees and commissions		1,535		963		1,086		452		174		–		4,210
Dealing profits		22		12		603		71		–		–		708
Other income		189		274		486		18		271		(216	)	1,022

Other operating income		1,748		1,254		2,280		545		445		(216	)	6,056

Operating income		3,884		2,805		3,493		879		774		(216	)	11,619

Operating expenses excluding
	goodwill amortisation¹	(2,715	)	(1,606	)	(2,133	)	(608	)	(442	)	216		(7,288	)

Operating profit before
	provisions¹	1,169		1,199		1,360		271		332		–		4,331

Provisions for bad and doubtful
	debts	(199	)	(244	)	(33	)	35		–		–		(441	)
Provisions for contingent liabilities
	and commitments	(17	)	11		(5	)	(15	)	(4	)	–		(30	)
Amounts written off fixed asset
	investments	(5	)	(2	)	(54	)	(2	)	(27	)	–		(90	)

Operating profit¹		948		964		1,268		289		301		–		3,770

Share of operating profit/(loss) in
	joint ventures²	(87	)	6		10		–		–		–		(71	)
Share of operating profit/(loss) in
	associates²	27		15		1		1		(2	)	–		42
Gains/(losses) on disposal of
	investments and tangible fixed
	assets	203		1		159		20		58		–		441

Profit on ordinary activities
	before tax³	1,091		986		1,438		310		357		–		4,182


		%		%		%		%		%				%
Share of HSBC’s pre-tax profits³		12.4		11.2		16.3		3.5		4.1				47.5
Cost:income ratio¹		69.9		57.3		61.1		69.2		57.1				62.7
		US$m		US$m		US$m		US$m		US$m				US$m
Selected balance sheet data⁴
Loans and advances to customers
	(net)	43,170		35,792		46,608		7,808		2				133,380
Total assets⁵		58,170		49,054		150,033		37,756		2,053				297,066
Customer accounts		68,384		28,361		41,840		30,777		9				169,371
The following assets and liabilities
	were significant to Corporate,
	Investment Banking and Markets:
	Loans and advances to
	banks (net)					26,927
	Debt securities, treasury bills and
	other eligible bills					51,703
	Deposits by banks					33,967


Goodwill amortisation:
1	excluded from (1) above	122		123		163		222		2				632
2	excluded from (2) above	(1	)	2		6		–		1				8
3	excluded from (3) above	121		125		169		222		3				640

4	Third party only.
5	Figures for 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.

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Hong Kong
Profit/(loss) before tax excluding goodwill amortisation
	Year ended 31 December

	2003		2002		2001
	US$m		US$m		US$m
Personal Financial Services	1,740		1,705		1,631
Commercial Banking	711		733		726
Corporate, Investment Banking and Markets	1,275		1,226		1,244
Private Banking	127		107		84
Other	(123	)	(61	)	198

Total¹	3,730		3,710		3,883

1Goodwill amortisation excluded:
arising on subsidiaries	3		–		–
arising on associates and joint ventures	(1	)	–		–
total	2		–		–


Profit before tax

	Year ended 31 December

	2003		2002	³	2001	³
Hong Kong	US$m		US$m		US$m
Net interest income	3,901		4,133		4,165

Dividend income	31		25		26
Net fees and commissions	1,383		1,264		1,172
Dealing profits	321		133		218
Other income	596		495		436

Other operating income	2,331		1,917		1,852

Total operating income	6,232		6,050		6,017

Staff costs	(1,276	)	(1,249	)	(1,279	)
Premises and equipment	(240	)	(233	)	(234	)
Other	(502	)	(459	)	(428	)
Depreciation and intangible asset amortisation	(194	)	(198	)	(199	)

	(2,212	)	(2,139	)	(2,140	)
Goodwill amortisation	(3	)	–		–

Operating expenses	(2,215	)	(2,139	)	(2,140	)

Operating profitbeforeprovisions	4,017		3,911		3,877

Provisions for bad and doubtful debts	(400	)	(246	)	(197	)
Provisions for contingent liabilities and commitments	(6	)	(14	)	6
Amounts written off fixed asset investments	31		(10	)	(18	)

Operating profit	3,642		3,641		3,668
Share of operating profit in associates	18		11		17
Gains on disposal of investments and tangible fixed assets	68		58		198

Profit on ordinary activities before tax	3,728		3,710		3,883

	%		%		%
Share of HSBC’s pre-tax profits (excluding goodwill amortisation) .	25.9		35.3		44.1
Share of HSBC’s pre-tax profits	29.1		38.4		48.5
Cost:income ratio (excluding goodwill amortisation)	35.5		35.4		35.6
Period-end staff numbers (full-time equivalent)	23,636		23,786		24,654

	US$m		US$m		US$m
Selected balance sheet data¹
Loans and advances to customers (net)	73,988		69,948		67,359
Loans and advances to banks (net)	38,640		33,359		42,516
Debt securities, treasury bills and other eligible bills	66,158		60,083		49,625
Total assets^2,3	197,487		180,433		175,652
Deposits by banks	4,777		2,379		3,271
Customer accounts	164,024		148,904		146,544

1	Third party only.
2	Excluding Hong Kong Government certificates of indebtedness.
3	Figures for 2002 and 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Year ended 31 December 2003 compared with year ended 31 December 2002

The Hong Kong economy faced challenging conditions during the first half of 2003. Slower growth in major export markets, rising unemployment and a weak property market dampened consumer demand, whilst the outbreak of the SARS virus had a significant adverse impact on the entertainment, leisure and tourism sectors. However, by the third quarter there was clear evidence of a bounce-back with GDP growing 6.4 per cent quarter-on-quarter, more than reversing the 3.7 per cent dip in the second quarter of 2003. The growth rate benefited significantly from the release of demand deferred during the SARS period. Growth also drew support from stronger export demand and improving sentiment after the central government unveiled a series of economic measures to help Hong Kong, including the relaxation of controls on mainland residents travelling to Hong Kong. Local consumer spending grew for the first time in two years and even more encouraging was a pick-up in investment reflecting an improved business outlook.

HSBC’s operations in Hong Kong performed well in these circumstances and reported a pre-tax profit of US$3,728 million, broadly in line with 2002. Excluding goodwill amortisation, profit before tax was US$3,730 million and represented 26 per cent of HSBC’s total profit on that basis. Goodwill amortisation was US$2 million in 2003.

Personal Financial Services in Hong Kong reported a pre-tax profit, before goodwill amortisation, of US$1,740 million, 2 per cent higher than in 2002. Given the pressure on net interest income as a consequence of muted credit demand and the impact of lower interest rates on the value of deposits, there was continued focus on the insurance business and wealth management. Sales of unit trusts and of capital guaranteed funds were particularly successful.

Net interest income fell by US$161 million or 7 per cent compared with 2002, largely due to a reduction in spreads on the value of deposits taken in the low interest rate environment and continued pressure on yields in the mortgage business, although there was some benefit from lower cost of funds.

Partly offsetting the decline in net interest income, other operating income at US$1,182 million was 13 per cent higher than in 2002. HSBC’s

position as one of Hong Kong’s leading providers of insurance and wealth management services was sustained amid keen competition. Income from wealth management initiatives, including commissions on sales of unit trust products, funds under management, and securities transactions, grew by 38 per cent to US$408 million. This was achieved by strong growth in sales of unit trusts and capital guaranteed funds, which increased by US$1.6 billion, or 32 per cent, over 2002.

Net fee income from credit cards was broadly in line with 2002. Despite fierce competition in the market, HSBC maintained its position as the largest credit card issuer in Hong Kong with some 3.1 million cards in circulation, 9 per cent higher than in 2002.

During the year, HSBC continued to place significant emphasis upon the growth and development of its insurance business. HSBC increased sales of regular premium individual life insurance by 59 per cent, growing its market share from 13.9 per cent to 18.6 per cent. Income from the insurance business, including the Mandatory Provident Fund, grew by 53 per cent or US$118 million.

Operating expenses, excluding goodwill amortisation, were 5 per cent lower than in 2002, with savings in staff costs partly offset by higher marketing costs. Headcount reduced as HSBC continued to migrate a wide range of back office and call centre functions to the Group Service Centres in Guangzhou and Shanghai. The Group Service Centres in mainland China now provide about half the operational support for credit card operations in Hong Kong.

Provisions for bad and doubtful debts were broadly in line with last year. The charge for specific provisions for bad and doubtful debts decreased compared with 2002, mainly due to a reduced charge for unsecured lending (including credit cards), in line with lower personal bankruptcy filings and improved economic conditions in the latter half of the year. This was partly offset by higher provisions against mortgage lending. 2002 benefited from a higher release of general provision. As the economy grows and property prices stop falling the environment for personal credit is expected to improve in 2004.

Commercial Banking in Hong Kong contributed a pre-tax profit, before amortisation of

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goodwill, of US$711 million, a fall of US$22 million, or 3 per cent.

Net interest income declined by 7 per cent largely due to lower recoveries of suspended interest and the effect of lower spreads on deposits. There was good volume growth in the loan book, despite the impact of SARS and the war in Iraq. This was offset by narrower spreads caused by limited local investment and market pressure as banks competed for quality business. Loan growth was driven by increased demand for finance to support record trade flows between mainland China and the rest of the world, especially in the US. This was particularly evidenced in the manufacturing and transportation sectors. Several new business banking/trade service centres were opened to focus on the business needs of small and medium-sized customersand start-ups.

Other operating income rose by US$57 million, or 14 per cent, reflecting growth in cash management and trade services. Both benefited from the increase in trade flows and closer liaison between branches of the bank in Hong Kong and mainland China. This was developed in order to service the growth of investment in the Pearl River delta by Hong Kong-based customers. Additionally, Hang Seng Bank opened its first branch in Macau aimed at assisting customers setting-up offices in the territory. Results of this alignment were particularly successful, with referrals significantly higher than anticipated. Trade finance benefited from a campaign specifically aimed at the increase in export trade business which occurs during the peak summer season. Insurance income rose as a consequence of business expansion, increasing by 36 per cent.

Operating expenses were in line with 2002. Staff costs increased marginally as headcount rose to support the insurance business expansion. This was offset by lower legal and professional fees.

Overall, credit quality remained stable reflecting improved economic conditions in the latter part of the year. There was a lower release in general provisions in 2003 as last year benefited from a reduction in latent losses.

Corporate, Investment Banking and Marketsreported pre-tax profit, before amortisation of goodwill, of US$1,275 million, 4 per cent higher than in 2002. Exceptional Global Markets performance was partly offset by a shift from net recovery to net charge for bad and doubtful debts.

Net interest income of US$1,157 million was broadly in line with last year. Reduced corporate lending spreads, which remained under pressure throughout the year, and weak loan demand, were mitigated by a strong Global Markets performance. Global Markets benefited from successful interest rate positioning and an increased value of funds was switched to debt securities from interbank placements in order to enhance yields.

Other operating income grew strongly to US$648 million, an increase of US$184 million or 40 per cent. This was achieved through a significant increase in dealing profits to US$205 million. HSBC significantly expanded its derivatives capabilities and higher income was earned from both successful positioning and a growing demand from corporate customers for structured tailored solutions. Increased sales of structured transactions, offering yield enhancement products to retail clients, generated further revenue. Debt securities trading achieved a strong turnaround in income during the year, as losses caused by widening credit spreads in 2002 did not recur. Foreign exchange profits rose compared with 2002, with a significant increase in corporate sales. Trading profits were generated as the bank took advantage of US dollar volatility, and the general weakening of the US dollar during the year. This was partly offset by lower Corporate and Investment Banking fees and commissions reflecting a decrease in income from credit facilities.

Operating expenses, before goodwill amortisation, increased by 5 per cent to US$491 million, with the significant increase in Global Markets’ profitability reflected in higher performance-related staff costs.

There was a net charge for bad and doubtful debts of US$52 million compared with a release of US$68 million in 2002. This was primarily due to new specific provisions raised against two corporate accounts.

HSBC’sPrivate Banking activities in Hong Kong reported pre-tax profit, before goodwill amortisation, of US$127 million, an increase of 19 per cent over 2002. Funds under management grew by 12 per cent to US$56 billion, benefiting from US$7 billion of net new funds as clients moved away from liquid positions into the investment markets.

Net interest income declined by US$7 million, or 8 per cent, to US$84 million. Lower margins from

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H S B C H O L D I N G S P L C

Financial Review(continued)

free funds and the investment portfolio reflected falling interest rates while the flattening of the yield curve during the year meant that the significant income earned on longer dated assets in 2002 was not repeated. This more than offset the impact of an increase in lending balances as clients borrowed on margin against their investments to reinvest in higher returning securities.

A general improvement in investment markets in the second half of the year saw greater client activity across a range of products. Brokerage, trust services and safekeeping all benefited from the upturn in the markets, and associated fee and commission income increased by 19 per cent to US$87 million. Greater market activity also stimulated higher sales of tailored structured products for clients and higher volumes of debt securities and derivatives transactions, resulting in a 68 per cent increase in dealing profits. Overall, other operating income increased by 31 per cent to US$164 million.

Total operating expenses grew by US$9 million or 8 per cent, reflecting a rise in headcount to support increased client activity and the migration of regional support from Singapore to Hong Kong during the year. There was also higher performance-related remuneration in line with increased profits.

Year ended 31 December 2002 compared with year ended 31 December 2001

Hong Kong continued to suffer from deflation in 2002 and domestic demand remained subdued. An improvement in trade failed to stimulate demand, as unemployment increased and salaries fell.

Against this backdrop, HSBC’s operations in Hong Kong reported an operating profit, before provisions, of US$3,911 million, an increase of US$34 million, or 1 per cent, compared with 2001, largely through income growth from wealth management products. Pre-tax profit of US$3,710 million was US$173 million, or 4 per cent, lower than in 2001 due to a higher bad debt charge and lower investment disposal gains and represented 35 per cent of HSBC’s pre-tax profit on this basis. There was no goodwill amortisation in Hong Kong during 2002 and 2001.

Personal Financial Services reported pre-tax profit, before goodwill amortisation, of US$1,705 million, US$74 million, or 5 per cent, higher than 2001. The improvement was driven by growth in revenues from wealth management products and

increased card fee income. Significantly higher personal bankruptcy filings during the year resulted in additional provisions for credit card accounts compared with 2001.

Net interest income at US$2,364 million was broadly in line with 2001. The benefits of increased credit card and mortgage lending together with improved spreads from lower funding costs were largely offset by competitive pricing on residential mortgages and a lower benefit from free funds.

In another year of fierce competition for quality assets and increasing consumer loan write-offs in Hong Kong, HSBC maintained a strong performance. Including cards issued by Hang Seng Bank, HSBC remained the largest personal credit card issuer in Hong Kong with 2.8 million cards in circulation and led the market in cardholder spending and balances. The implementation in 2001 of an enhanced card processing system and continued migration of work to HSBC’s Group Service Centres in Guangzhou enabled operational efficiency to be further improved.

Other operating income at US$1,048 million grew by 19 per cent, compared with 2001, driven by growth in revenues from initiatives related to investment products and the insurance business. Sales of unit trusts and capital guaranteed funds were strong, including the sale of over US$4.9 billion of funds during the year, a rise of 36 per cent compared with 2001. Revenues from insurance and underwriting also increased significantly.

HSBC had grown to be one of the leading distributors of retail funds in Hong Kong by the end of the year. In 2002’s uncertain investment market, HSBC achieved significant growth in the sale of unit trusts through the promotion of 14 guaranteed/capital secured funds designed to meet customers’ demands for capital protection. In the low interest rate environment, HSBC also introduced a range of alternative deposit products. There was strong growth in funds under management, which rose 68 per cent compared with 2001.

The insurance business remained a key focus in HSBC’s strategy in Hong Kong. Significant growth in personal insurance was achieved, outpacing market growth and giving HSBC a larger market share of new business.

Costs in Hong Kong were in line with 2001. The increased cost of continuing marketing initiatives and

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higher IT costs supporting business growth were funded by a reduction in staff costs. Costs fell as back office processing functions were transferred to HSBC’s Group Service Centres in India and China, and pension top-up fees in Hang Seng Bank in 2001 were not repeated.

Customer demand for remote services continue to grow and the bank responded with further investment in internet banking. According to various surveys in 2002, HSBC has the largest online banking market share in Hong Kong, with over 470,000 registered users. The e-channel proposition was enhanced during 2002 introducing a number of new solutions and a new investment page. Online@hsbc won a number of awards in 2002, offering more than 50 services, including a range of insurance personal loans, and payment services. Hang Seng Bank’s comprehensive range of internet banking services had similarly become an important part of its multi-channel delivery network. By the end of 2002, more than 250,000 customers had registered for its Personal e-Banking Services, and internet transactions had grown to more than 14 per cent of total transactions.

The provision for bad and doubtful debts rose by 44 per cent to US$362 million as significantly higher personal bankruptcy filings resulted in a higher charge for both credit cards and other retail lending. However, provisions against the mortgage portfolio fell as delinquency rates reduced.

Commercial Banking in Hong Kong contributed a pre-tax profit, before amortisation of goodwill, of US$733 million, broadly in line with 2001.

Net interest income decreased byUS$69 million, or 10 per cent, as low interest rates reduced the value of interest-free balances. In addition, there were lower balances and reduced spreads on deposits, partly offset by a higher release of suspended interest.

Net fees and commissions increased by US$16 million, or 6 per cent, due to higher levels of fee income on investment funds as a result of cross-selling initiatives with HSBC Asset Management and Treasury. Insurance and trade services income also increased. Operating expenses were US$33 million, or 8 per cent, lower than 2001 due to rationalisation of sales teams within the area and the transfer of back office processing functions to Group Service Centres.

The net release of provisions for bad and doubtful debts was higher than 2001 mainly due to releases of general provisions reflecting a reduction in latent losses.

Corporate, Investment Banking and Marketsreported pre-tax profit, before amortisation of goodwill, of US$1,226 million, broadly in line with 2001.

Net interest income was 5 per cent higher than in 2001 reflecting the benefit of a strong performance in Global Markets as the accrual books were well positioned for the low interest rate environment. This was partly offset by lower net interest income from Corporate and Institutional Banking business, as lower spreads on deposits in HSBC combined with reduced spreads on lending and subdued loan demand in Hang Seng Bank. There was also a considerable reduction in the benefit of net free funds as average interest rates fell.

Other operating income was US$83 million, or 15 per cent, lower as growth in fee income was more than offset by lower dealing profits. Dealing profits fell by US$108 million as debt securities used for interest rate trading purposes generated net interest income while corresponding derivative positions produced dealing losses in the current low interest rate environment. In addition, there were dealing losses on debt securities trading due to widening credit spreads following a series of corporate scandals in the US. Growth in fee income reflected higher income from structured finance and from corporate finance transactions.

Operating expenses were in line with 2001.

The net release of provisions during 2002 was US$68 million, reflecting releases of specific provisions against corporate customers. In addition, there was a release of general provisions reflecting a reduction in latent losses.

HSBC’sPrivate Banking activities in Hong Kong reported pre-tax profits, before goodwill amortisation, in 2002 of US$107 million, an increase of 27 per cent over 2001. Funds under management grew by 23 per cent to US$50 billion at 31 December 2002, benefiting from net new funds from clients, which more than offset the effect of falling stock prices.

Net interest income at US$91 million was 17 per cent higher than in 2001. The steeper yield curve, reflecting the fall in short-term interest rates

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H S B C H O L D I N G S P L C

FinancialReview(continued)

compared with long-term rates, increased margins as surplus funds were deployed in longer-dated assets. Higher income also resulted from the growth of the investment portfolio.

Other operating income increased by 18 per cent to US$125 million. Fees and commission income for the period was US$73 million, an increase of 9 per cent over 2001. This growth was driven by higher insurance referral fees and fund management income. Dealing income rose to US$44 million, an

increase of US$11 million, primarily due to a higher volume of client transactions in the debt securities and derivatives markets and increased sales of client-tailored structured products.

Operating expenses, excluding goodwill amortisation, of US$109 million increased by US$12 million, or 12 per cent, compared with 2001. The increase was predominantly driven by costs associated with the reorganisation of Private Banking activities in Hong Kong.

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Profit/(loss) excluding goodwill amortisation by customer group

Year ended 31 December 2003

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Services

Banking

Markets

Banking

Other

elimination

Total

Hong Kong

US$m

Net interest income

2,203

602

1,157

(145

)

–

3,901

Dividend income

–

Net fees and commissions

630

315

382

(31

)

–

1,383

Dealing profits

205

(29

)

–

321

Other income

510

107

313

(395

)

596

Other operating income

1,182

454

648

164

278

(395

)

2,331

Operating income

3,385

1,056

1,805

248

133

(395

)

6,232

Operating expenses excluding

goodwill amortisation¹

(1,286

)

(372

)

(491

)

(118

)

(340

)

395

(2,212

)

Operating profit/(loss) before

provisions¹

2,099

684

1,314

130

(207

)

–

4,020

Provisions for bad and doubtful

debts

(366

)

(52

)

–

(400

)

Provisions for contingent liabilities

and commitments

–

)

–

)

Amounts written off fixed asset

investments

–

Operating profit/(loss)¹

1,733

707

1,267

128

(190

)

–

3,645

Share of operating profit in

associates²

–

Gains/(losses) on disposal of

investments and tangible fixed

assets

)

–

Profit/(loss) on ordinary activities

before tax³

1,740

711

1,275

127

(123

)

–

3,730

Share of HSBC’s pre-tax profits³

12.1

5.0

8.9

0.9

(1.0

)

25.9

Cost:income ratio¹

38.0

35.2

27.2

47.6

255.6

35.5

US$m

Selected balance sheet data⁴

Loans and advances to customers

(net)

33,494

12,760

23,441

2,357

1,936

73,988

Total assets⁵

36,410

17,783

120,890

7,555

14,849

197,487

Customer accounts

111,145

31,490

13,286

7,862

241

164,024

The following assets and liabilities

were also significant to Corporate,

Investment Banking and Markets:

Loans and advances to

banks (net)

34,165

Debt securities, treasury bills and

other eligible bills

57,831

Deposits by banks

4,665

Goodwill amortisation:

excluded from (1) above

–

excluded from (2) above

–

)

excluded from (3) above

–

)

Third party only.

Excluding Hong Kong Government certificates of indebtedness

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H S B C H O L D I N G S P L C

Financial Review(continued)


Profit/(loss) excluding goodwill amortisation by customer group (continued)

		Year ended 31 December 2002⁶

						Corporate,
		Personal				Investment						Inter-
		Financial		Commercial		Banking &		Private				segment
		Services		Banking		Markets		Banking		Other		elimination		Total
Hong Kong		US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income		2,364		648		1,161		91		(131	)	–		4,133

Dividend income		3		2		3		–		17		–		25
Net fees and commissions		543		284		399		73		(35	)	–		1,264
Dealing profits		45		25		21		44		(2	)	–		133
Other income		457		86		41		8		362		(459	)	495

Other operating income		1,048		397		464		125		342		(459	)	1,917

Operating income		3,412		1,045		1,625		216		211		(459	)	6,050

Operating expenses excluding
goodwill amortisation¹		(1,351	)	(371	)	(469	)	(109	)	(298	)	459		(2,139	)

Operating profit/(loss) before
provisions¹		2,061		674		1,156		107		(87	)	–		3,911

Provisions for bad and doubtful
debts		(362	)	54		68		–		(6	)	–		(246	)
Provisions for contingent liabilities
and commitments		–		1		–		–		(15	)	–		(14	)
Amounts written off fixed asset
investments		–		–		(4	)	–		(6	)	–		(10	)

Operating profit/(loss)¹		1,699		729		1,220		107		(114	)	–		3,641

Share of operating profit in
associates²		3		–		–		–		8		–		11
Gains on disposal of investments
and tangible fixed assets		3		4		6		–		45		–		58

Profit/(loss) on ordinary activities
before tax³		1,705		733		1,226		107		(61	)	–		3,710

		%		%		%		%		%				%
Share of HSBC’s pre-tax profits³		16.2		6.9		11.7		1.0		(0.5	)			35.3
Cost:income ratio¹		39.6		35.5		28.9		50.5		141.2				35.4

		US$m		US$m		US$m		US$m		US$m				US$m
Selected balance sheet data⁴
Loans and advances to customers
(net)		34,447		10,797		20,703		1,917		2,084				69,948
Total assets^5,6		36,369		15,097		108,063		7,346		13,558				180,433
Customer accounts		103,413		27,019		11,154		7,142		176				148,904
The following assets and liabilities
	were also significant to Corporate,
	Investment Banking and Markets:
Loans and advances to
	banks (net)					29,284
Debt securities, treasury bills and
	other eligible bills					53,689
	Deposits by banks					2,170

Goodwill amortisation:
1	excluded from (1) above	–		–		–		–		–		–		–
2	excluded from (2) above	–		–		–		–		–		–		–
3	excluded from (3) above	–		–		–		–		–		–		–
4	Third party only.
5	Excluding Hong Kong Government certificates of indebtedness.
6	Figures for 2002 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.

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		Year ended 31 December 2001

						Corporate,
		Personal				Investment						Inter-
		Financial		Commercial		Banking &		Private				segment
		Services		Banking		Markets		Banking		Other		elimination		Total
Hong Kong		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Net interest income		2,355		717		1,105		78		(90	)	–		4,165

Dividend income		3		2		4		–		17		–		26
Net fees and commissions		478		268		376		67		(17	)	–		1,172
Dealing profits		39		23		129		33		(6	)	–		218
Other income		357		81		38		6		439		(485	)	436

Other operating income		877		374		547		106		433		(485	)	1,852

Operating income		3,232		1,091		1,652		184		343		(485	)	6,017

Operating expenses excluding
	goodwill amortisation¹	(1,353	)	(404	)	(494	)	(97	)	(277	)	485		(2,140	)

Operating profit before
	provisions¹	1,879		687		1,158		87		66		–		3,877

Provisions for bad and doubtful
	debts	(252	)	30		23		(1	)	3		–		(197	)
Provisions for contingent liabilities
	and commitments	–		4		11		–		(9	)	–		6
Amounts written off fixed asset
	investments	–		–		(2	)	–		(16	)	–		(18	)

Operating profit¹		1,627		721		1,190		86		44		–		3,668

Share of operating profit in
	associates²	2		–		(1	)	(2	)	18		–		17
Gains on disposal of investments
	and tangible fixed assets	2		5		55		–		136		–		198

Profit on ordinary activities
	before tax³	1,631		726		1,244		84		198		–		3,883

		%		%		%		%		%				%
Share of HSBC’s pre-tax profits³		18.6		8.2		14.1		1.0		2.2				44.1
Cost:income ratio¹		41.9		37.0		29.9		52.7		80.8				35.6

		US$m		US$m		US$m		US$m		US$m				US$m
Selected balance sheet data⁴
Loans and advances to customers
	(net)	34,248		9,790		20,183		1,232		1,906				67,359
Total assets^5,6		35,765		13,843		106,791		6,573		12,680				175,652
Customer accounts		102,536		25,659		11,749		6,590		10				146,544
The following assets and liabilities
	were also significant to Corporate,
	Investment Banking and Markets:
	Loans and advances to
	banks (net)					37,558
	Debt securities, treasury bills and
	other eligible bills					44,528
	Deposits by banks					3,359

Goodwill amortisation:
1	excluded from (1) above	–		–		–		–		–				–
2	excluded from (2) above	–		–		–		–		–				–
3	excluded from (3) above	–		–		–		–		–				–
4	Third party only.
5	Excluding Hong Kong Government certificates of indebtedness.
6	Figures for 2001 have been restated to reflect the adoption of UITF Abstracts 37 ‘Purchases and sales of own shares’, and 38 ‘Accounting for ESOP trusts’, details of which are set out in Note 1 in the ‘Notes on the Financial Statements’ on pages 239 to 240.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Rest of Asia-Pacific (including the Middle East)

Profit before tax excluding goodwill amortisation
	Year ended 31 December

	2003	2002	2001
	US$m	US$m	US$m
Personal Financial Services	158	127	80
Commercial Banking	450	423	277
Corporate, Investment Banking and Markets	732	706	725
Private Banking	36	25	(16	)
Other	50	12	30

Total¹	1,426	1,293	1,096


1 Goodwill amortisation excluded:
– arising on subsidiaries	35	33	8
– arising on associates and joint ventures	–	–	–
– total	35	33	8

	Year ended 31 December

	2003	2002	2001
	US$m	US$m	US$m
Australia and New Zealand	96	34	22
Brunei	28	34	24
India	94	85	86
Indonesia	75	73	(26	)
Japan	39	44	18
Mainland China	42	50	33
Malaysia	149	129	141
Middle East (excluding Saudi Arabia)	236	225	201
Philippines	16	32	31
Saudi Arabia	133	103	86
Singapore	198	223	270
South Korea	69	60	53
Taiwan	80	80	44
Thailand	54	39	51
Other	117	82	62

	1,426	1,293	1,096

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Profit before tax

	Year ended 31 December

	2003		2002		2001
Rest of Asia-Pacific (including the Middle East)	US$m		US$m		US$m
Net interest income	1,740		1,607		1,482

Dividend income	4		3		3
Net fees and commissions	805		724		681
Dealing profits	421		364		395
Other income	120		83		58

Other operating income	1,350		1,174		1,137

Total operating income	3,090		2,781		2,619

Staff costs	(952	)	(826	)	(771	)
Premises and equipment	(164	)	(156	)	(143	)
Other	(527	)	(454	)	(401	)
Depreciation and intangible asset amortisation	(98	)	(92	)	(82	)

	(1,741	)	(1,528	)	(1,397	)
Goodwill amortisation	(35	)	(33	)	(8	)

Operating expenses	(1,776	)	(1,561	)	(1,405	)

Operating profit before provisions	1,314		1,220		1,214
Provisions for bad and doubtful debts	(85	)	(89	)	(172	)
Provisions for contingent liabilities and commitments	(1	)	18		(43	)
Amounts written off fixed asset investments	(2	)	(2	)	(11	)

Operating profit	1,226		1,147		988
Share of operating loss in joint ventures	–		–		(5	)
Share of operating profit in associates	149		113		99
Gains on disposal of investments and tangible fixed assets	16		–		6

Profit on ordinary activities before tax	1,391		1,260		1,088

	%		%		%
Share of HSBC’s pre-tax profits (excluding goodwill amortisation)	9.9		12.3		12.4
Share of HSBC’s pre-tax profits	10.9		13.1		13.6
Cost:income ratio (excluding goodwill amortisation)	56.3		54.9		53.3
Period-end staff numbers (full-time equivalent)	31,827		28,630		26,259

	US$m		US$m		US$m
Selected balance sheet data¹
Loans and advances to customers (net)	47,952		37,078		30,666
Loans and advances to banks (net)	12,944		10,708		11,253
Debt securities, treasury bills and other eligible bills	25,980		21,622		13,623
Total assets	98,081		76,635		62,355
Deposits by banks	6,967		5,362		4,010
Customer accounts	65,441		54,172		45,498

1 Third party only.

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H S B C H O L D I N G S P L C

FinancialReview(continued)

Year ended 31 December 2003 compared with year ended 31 December 2002

The rest of the Asia-Pacific economies experienced mixed fortunes in the first half of 2003 but performed better in the second half of the year on the back of strong exports (particularly to China), strong commodity prices and improving domestic demand. Inflation and interest rates remained very low and many of the region’s central banks implemented programmes to limit currency appreciation against the US dollar.

HSBC’s operations in the rest of Asia-Pacific region reported pre-tax profit of US$1,391 million, an increase of US$131 million, or 10 per cent, over 2002. Excluding goodwill amortisation, pre-tax profit was US$1,426 million and represented 10 per cent of HSBC’s total equivalent profit. At constant exchange rates, pre-tax profit, before goodwill amortisation, increased by 8 per cent over 2002. Goodwill amortisation of US$35 million was marginally higher than last year due to an acquisition in Singapore.

The commentaries that follow are based on constant exchange rates.

InPersonal Financial Services pre-tax profit, before goodwill amortisation, of US$158 million, increased by 25 per cent compared with 2002 and was broadly double that achieved in 2001.

Net interest income grew by 15 per cent compared with 2002, reflecting strong asset growth in a number of countries across the region. The impact on deposit taking business of lower margins in generally low interest rate environments was more than offset by increased customer deposits and the growth in mortgage lending. The latter increased by 38 per cent mainly due to growth in Korea, Singapore, Malaysia and India. Net interest income also benefited from the acquisition of the mortgage business of AMP Bank Limited in New Zealand in the first half of 2003. Strong growth in card balances contributed to a 34 per cent increase in net interest income in Indonesia.

Other operating income grew by 25 per cent to US$345 million. The acquisition of Keppel Insurance, which was renamed HSBC Insurance (Singapore) Pte Ltd, contributed US$17 million to this increase during the year. HSBC continued to expand its wealth management initiatives and a number of structured deposit products were launched

across the region. Wealth management income grew by 10 per cent, reflecting strong growth in unit trust sales and funds under management, particularly in Taiwan, Korea, Indonesia and India, while fee income from credit cards rose in a number of markets across the region. At 31 December 2003, the bank’s card base in Asia, outside Hong Kong, exceeded 3.7 million, 20 per cent higher than at the end of 2002. An enhanced credit card processing system was implemented in five countries in the region, applying state-of-the-art technology to risk and fraud management.

Operating expenses, excluding goodwill amortisation, of US$835 million were 18 per cent higher than in 2002. This reflected increased costs to support business expansion and provisions for restructuring costs of US$34 million. The acquisition of HSBC Insurance (Singapore) Pte Ltd in the year accounted for US$6 million of the increase.Headcount in the region increased by 2,500 compared with last year, as HSBC continued to migrate a number of processing activities to the Group Service Centres in India, Malaysia and mainland China, and as a result of business expansion in the region.

Provisions for bad and doubtful debts were 38 per cent higher than in 2002. Provisions against personal lending increased in Singapore, India, Korea and Australia in line with growth in advances.

Commercial Bankingreported pre-tax profits, before goodwill amortisation, of US$450 million, an increase of 4 per cent, compared with 2002.

Net interest income was in line with 2002. There were lower margins in most countries across the region, in particular Malaysia, Indonesia and Singapore. Consolidation in the financial services sector increased competition in Singapore, whilst Indonesia was impacted by a lower interest rate environment. In addition, Malaysia suffered lower margins on lending. These effects were offset by increased income in both the Middle East and Australia. In the Middle East an intensive marketing campaign led to an expansion in term lending in addition to a growth in overdraft balances. Net interest income in Australia was boosted by the full year contribution from the acquisition of State Street Bank’s trade finance portfolio in July 2002.

Other operating income rose by 12 per cent to US$296 million. HSBC Bank Middle East reported a strong performance despite a subdued first quarter as

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a result of the war in Iraq. In addition, insurance income in Singapore increased as a result of the acquisition of Keppel Insurance, as detailed previously.

Operating expenses increased by 5 per cent to US$334 million, mainly due to restructuring costs in India and Singapore and the impact of the acquisition in Singapore.

Credit experience continued to be very good, benefiting from ongoing success in recovering historical troubled debt. The net release of provisions increased 46 per cent to US$52 million in 2003 with higher net releases of specific provisions in Malaysia than last year. This was partly offset by an increase in specific provisions in Indonesia.

Corporate, Investment Banking and Marketsreported pre-tax profit, before amortisation of goodwill, of US$732 million, which was broadly in line with 2002.

Net interest income fell by 7 per cent compared with last year, with reductions in Singapore, and to a lesser extent in the Middle East, as higher yielding assets matured and the proceeds were reinvested at lower rates. This was partly offset by an increase in net interest income from corporate banking business in India, Korea and mainland China.

Dealing profits increased, primarily in Taiwan, Japan and Thailand, reflecting a broader product offering, more customer-focused sales activity and successful positioning to take advantage of directional trends in the generally more volatile market conditions. Higher fee income was generated from brokerage and corporate finance transactions in the Middle East.

Operating expenses, before goodwill amortisation, of US$526 million, increased by 3 per cent, mainly due to restructuring costs in India and Singapore.

There was a net release of US$5 million for bad and doubtful debts compared with a net charge of US$26 million in 2002, at constant exchange rates. A specific provision raised against a New Zealand corporate customer in 2002 was recovered during the year.

HSBC’sPrivate Banking activities in the rest of Asia-Pacific reported pre-tax profit, before goodwill amortisation, of US$36 million in 2003, an increase of 46 per cent, compared with 2002. This

was achieved through strong growth in dealing profits, which rose by 55 per cent to US$38 million, and more than compensated for a reduction of 7 per cent in net interest income.

The fall in net interest income reflected significant income earned in 2002 from the deployment of liquidity into longer dated assets which benefited from the fall in short-term interest rates. With the flattening of the yield curve this was not repeated in 2003.

Dealing profits benefited from a higher volume of client transactions in the debt securities and derivatives markets and increased sales of client-tailored structured products.

Operating expenses, excluding goodwill amortisation, increased by 25 per cent to US$47 million, primarily to support business growth.

Year ended 31 December 2002 compared with year ended 31 December 2001

Following the slowdown across the region in 2001, the growth in mainland China, Malaysia and South Korea was export-led, whilst consumer spending drove growth in Australia and New Zealand. Interest rates and inflationary pressures remained low across the region. Improving economic fundamentals in Thailand, Malaysia and Singapore positioned those economies to benefit from a recovery in direct investment in the future. The Japanese economy remained fragile, with consumer growth rates slowing during the year despite an improvement in GDP during the second half of 2002 driven by increased exports and domestic consumption.

HSBC’s operations in the rest of the Asia-Pacific region contributed US$1,220 million to operating profit before provisions, broadly in line with 2001. Pre-tax profit, before goodwill amortisation, of US$1,293 million was 18 per cent higher than in 2001. This amounted to 12 per cent of HSBC’s pre-tax profit, before goodwill amortisation. The increase in pre-tax profit resulted largely from lower bad debt charges, particularly in the Middle East and Indonesia. Goodwill amortisation increased from US$8 million to US$33 million in 2002 reflecting acquisitions in Taiwan and Indonesia.

The commentaries that follow are based on constant exchange rates.

Pre-tax profit, before goodwill amortisation, of US$127 million forPersonal Financial Services

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H S B C H O L D I N G S P L C

Financial Review(continued)

was 59 per cent higher than in 2001, driven by significant growth in credit cards and other personal lending, partly offset by increased costs due to business expansion and global processing costs.

Net interest income grew by 21 per cent, generated by strong growth in credit card advances and personal lending across the region, in particular in Taiwan, Singapore and India. In Malaysia, growth resulted from acquisition of the ABN AMRO mortgage portfolio in the first half of 2002, together with a significant increase in credit card advances. In Australia, the inclusion of a full year’s income from the acquisition of NRMA in November 2001 contributed to the increase in net interest income.

HSBC’s credit card business recorded a 25 per cent increase in balances in 2002. In the difficult economic environment, HSBC’s focus switched from the acquisition of customers to their retention. Investment was made in staff, training and systems to support expected growth in the credit card business in 2003.

Other operating income rose by 30 per cent over 2001. Net fees grew by 25 per cent to US$211 million, largely due to the significant increase in credit card income, principally in Malaysia, the Middle East and Indonesia, and growth in account service fees. In Australia, fee income for 2002 more than doubled, following HSBC’s acquisition of NRMA Building Society in 2001 and the acquisition of HSBC Stockbroking Australia. The financial planning services team in the Middle East, which provides savings, retirement education and protection planning services throughout the region, reported a 19 per cent growth in fee and commission income.

HSBC’s strong presence in mainland China was supported by a wide range of business capabilities. With further liberalisation of China’s financial market, banking regulations were relaxed to permit foreign banks to provide foreign currency services to mainland Chinese companies and citizens, and HSBC became the first foreign bank to offer them, at 10 locations across the country. In December 2002, HSBC launched online personal banking services to local citizens and international customers in mainland China.

Operating costs, before goodwill amortisation, increased by 20 per cent compared with 2001. This growth primarily reflected a higher staff complement in the Group Service Centres in India and mainland

China and business expansion in the Middle East, Australia and Taiwan. During the year, The Hongkong and Shanghai Banking Corporation opened eight new branches in the region.

The year saw continued expansion of internet banking services across the region, with substantial increases in both online customer activity and the range of services offered. The number of personal internet banking customers rose to over 249,000, covering 8 per cent of the personal banking customer base in 12 countries.

Provisions for bad and doubtful debts increased by 13 per cent to US$104 million, following increased credit card lending in India, Indonesia and Taiwan, partly offset by lower provisioning requirements in Indonesia and the Middle East, led by improved credit control procedures.

Commercial Banking reported pre-tax profits, before goodwill amortisation, of US$423 million, an increase of 58 per cent, compared with 2001.

Net interest income declined by 11 per cent compared with 2001, as a result of subdued commercial loan demand and lower lending margins, particularly in Mauritius, Singapore and Indonesia. Net fees and commissions were slightly higher than in 2001, reflecting the acquisition of the trade finance portfolio from State Street Bank Australia in July.

Operating expenses, excluding goodwill amortisation, were in line with 2001. HSBC continued to expand its utilisation of Group Service Centres, with new centres opening in Shanghai and Bangalore in addition to existing facilities in Hyderabad and Guangzhou. By the end of the year, 12,400 calls from UK business telephone banking customers were being answered each week in the Bangalore call centre.

There was a net release of provisions for bad and doubtful debts in 2002, mainly in Indonesia, Singapore, Taiwan and Thailand. These releases were partly offset by additional provisions in India and Mauritius. In 2001, significant specific provisions were raised in Indonesia in view of the deteriorating political and economic environment.

Corporate, Investment Banking and Marketsreported pre-tax profit, before amortisation of goodwill, of US$706 million, broadly in line with 2001.

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Net interest income grew by 16 per cent, to US$561 million, due to strong Global Markets performance in most areas across the region. In particular, the accrual books were well positioned for the low interest rate environment.

Other operating income was 7 per cent lower, mainly due to reduced dealing profits. In the Philippines and Singapore, income from interest rate derivatives and debt securities trading was lower. Operating expenses were broadly in line with 2001.

With the exception of a significant recovery relating to a historic Olympia and York exposure in 2001, the overall charge for bad and doubtful debts was essentially unchanged in 2002 as business responded to the economic upturn, though provisioning experience differed across the region. There was a release of provisions for contingent liabilities in Japan and Thailand in 2002, while a provision was raised in respect of a customer in Australia in 2001.

HSBC’sPrivate Banking activities in the rest of Asia-Pacific reported pre-tax profits, before goodwill amortisation, of US$25 million, compared with losses of US$16 million reported in 2001.

Most of the improvement arose from the non-recurrence of a US$31 million provision in 2001 for contingent liabilities and commitments in Lebanon, relating to an operation which was subsequently closed.

Operating income rose by 16 per cent to US$65 million, driven by strong growth in dealing profits. An active Eurobond market in the first half of the year stimulated customer trades.

Operating expenses, excluding goodwill amortisation, decreased by 14 per cent to US$37 million. While higher staff costs reflected higher bonuses in line with the growth in operating income, this was more than offset by lower costs following the reorganisation of Private Banking’s activities in Asia.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Profit/(loss) excluding goodwill amortisation by customer group

Year ended 31 December 2003

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Rest of Asia-Pacific

Services

Banking

Markets

Banking

Other

elimination

Total

(including the Middle East)

US$m

Net interest income

754

419

541

)

–

1,740

Dividend income

–

Net fees and commissions

239

220

324

–

805

Dealing profits

301

–

421

Other income

–

(58

)

120

Other operating income

345

296

646

(58

)

1,350

Operating income

1,099

715

1,187

(58

)

3,090

Operating expenses excluding

goodwill amortisation¹

(835

)

(334

)

(526

)

(47

)

(57

)

(1,741

)

Operating profit before

provisions¹

264

381

661

–

1,349

Provisions for bad and doubtful

debts

(145

)

–

(85

)

Provisions for contingent liabilities

and commitments

–

)

–

)

Amounts written off fixed asset

investments

–

)

–

)

–

)

Operating profit¹

119

432

664

–

1,261

Share of operating loss in joint

ventures²

–

Share of operating profit in

associates²

–

149

Gains on disposal of investments

and tangible fixed assets

–

Profit on ordinary activities

before tax³

158

450

732

–

1,426

Share of HSBC’s pre-tax profits³

1.1

3.1

5.1

0.2

0.4

9.9

Cost:income ratio¹

76.0

46.7

44.3

58.0

86.4

56.3

US$m

Selected balance sheet data⁴

Loans and advances to customers

(net)

17,848

13,383

15,129

1,481

111

47,952

Total assets

20,128

14,402

56,495

2,813

4,243

98,081

Customer accounts

26,592

13,006

22,146

3,693

65,441

The following assets and liabilities

were also significant to Corporate,

Investment Banking and Markets:

Loans and advances to

banks (net)

10,452

Debt securities, treasury bills and

other eligible bills

23,279

Deposits by banks

6,405

Goodwill amortisation:

1 excluded from (1) above

–

2 excluded from (2) above

–

3 excluded from (3) above

–

4 Third party only.

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		Year ended 31 December 2002

Rest of Asia-Pacific (including the Middle East)		Personal Financial Services US$m		Commercial Banking US$m		Corporate, Investment Banking & Markets US$m		Private Banking US$m		Other US$m		Inter- segment elimination US$m		Total US$m

Net interest income		633		417		561		35		(39	)	–		1,607

Dividend income		–		–		–		–		3		–		3
Net fees and commissions		211		213		293		6		1		–		724
Dealing profits		27		37		278		24		(2	)	–		364
Other income		31		9		18		–		63		(38	)	83

Other operating income		269		259		589		30		65		(38	)	1,174

Operating income		902		676		1,150		65		26		(38	)	2,781

Operating expenses excluding goodwill amortisation¹		(683	)	(309	)	(478	)	(37	)	(59	)	38		(1,528	)

Operating profit/(loss) before provisions¹		219		367		672		28		(33	)	–		1,253

Provisions for bad and doubtful debts		(104	)	31		(18	)	(3	)	5		–		(89	)
Provisions for contingent liabilities and commitments		–		5		13		–		–		–		18
Amounts written off fixed asset investments		–		–		(2	)	–		–		–		(2	)

Operating profit/(loss)¹		115		403		665		25		(28	)	–		1,180

Share of operating loss in joint ventures²		–		–		–		–		–		–		–
Share of operating profit in associates²		13		18		42		–		40		–		113
Gains/(losses) on disposal of investments
	and tangible fixed assets	(1	)	2		(1	)	–		–		–		–

Profit on ordinary activities before tax³		127		423		706		25		12		–		1,293

		%		%		%		%		%				%
Share of HSBC’s pre-tax profits³		1.2		4.1		6.7		0.2		0.1				12.3
Cost:income ratio¹		75.7		45.7		41.6		56.9		226.9				54.9

		US$m		US$m		US$m		US$m		US$m				US$m
Selected balance sheet data⁴
Loans and advances to customers (net)		11,812		10,795		12,963		1,392		116				37,078
Total assets		13,471		11,624		46,380		2,336		2,824				76,635
Customer accounts		22,613		11,600		16,506		3,413		40				54,172
The following assets and liabilities were also
	significant to Corporate, Investment Banking
	and Markets: Loans and advances to banks (net)					9,249
Debt securities, treasury bills and other eligible bills						19,094
	Deposits by banks					4,830

Goodwill amortisation:
1	excluded from (1) above	1		3		29		–		–				33
2	excluded from (2) above	–		–		–		–		–				–
3	excluded from (3) above	1		3		29		–		–				33
4	Third party only.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Profit/(loss) excluding goodwill amortisation by customer group (continued)

		Year ended 31 December 2001

Rest of Asia-Pacific (including the Middle East)		Personal Financial Services US$m		Commercial Banking US$m		Corporate, Investment Banking & Markets US$m		Private Banking US$m		Other US$m		Inter- segment elimination US$m		Total US$m

Net interest income		524		464		483		30		(19	)	–		1,482

Dividend income		–		–		–		–		3		–		3
Net fees and commissions		169		203		303		10		(4	)	–		681
Dealing profits		24		36		319		16		–		–		395
Other income		14		10		17		–		58		(41	)	58
Other operating income		207		249		639		26		57		(41	)	1,137

Operating income		731		713		1,122		56		38		(41	)	2,619

Operating expenses excluding goodwill amortisation¹		(567	)	(288	)	(492	)	(43	)	(48	)	41		(1,397	)

Operating profit/(loss) before provisions¹		164		425		630		13		(10	)	–		1,222

Provisions for bad and doubtful debts		(93	)	(171	)	94		2		(4	)	–		(172	)
Provisions for contingent liabilities and commitments		–		8		(20	)	(31	)	–		–		(43	)
Amounts written off fixed asset investments		–		1		(11	)	–		(1	)	–		(11	)

Operating profit/(loss)¹		71		263		693		(16	)	(15	)	–		996

Share of operating loss in joint ventures²		(5	)	–		–		–		–		–		(5	)
Share of operating profit in associates²		14		13		33		–		39		–		99
Gains/(losses) on disposal of investments
	and tangible fixed assets	–		1		(1	)	–		6		–		6

Profit/(loss) on ordinary activities before tax³		80		277		725		(16	)	30		–		1,096

		%		%		%		%		%				%
Share of HSBC’s pre-tax profits³		0.9		3.2		8.2		(0.2	)	0.3				12.4
Cost:income ratio¹		77.6		40.4		43.9		76.8		126.3				53.3

		US$m		US$m		US$m		US$m		US$m				US$m
Selected balance sheet data⁴
Loans and advances to customers (net)		8,794		10,250		10,058		1,194		100				30,666
Total assets		10,146		11,094		32,704		4,526		3,885				62,355
Customer accounts		20,585		10,365		12,211		2,278		59				45,498
The following assets and liabilities were also
	significant to Corporate, Investment Banking
	and Markets: Loans and advances to banks (net)					9,610
Debt securities, treasury bills and other eligible bills						10,933
Deposits by banks						3,463

Goodwill amortisation:
1	excluded from (1) above	–		2		2		–		4				8
2	excluded from (2) above	–		–		–		–		–				–
3	excluded from (3) above	–		2		2		–		4				8
4	Third party only.

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North America

Profit/(loss) before tax excluding goodwill amortisation

		Year ended 31 December

		2003		2002³		2001
		US$m		US$m		US$m

Personal Financial Services		870		605		593
USA		446		519		546
Canada		66		59		61
Mexico		345		23		–
Other		13		4		(14	)
Consumer Finance²		2,068		–		–
USA		2,002		–		–
Canada		66		–		–
Mexico		–		–		–
Other		–		–		–

Total Personal Financial Services		2,938		605		593
USA		2,448		519		546
Canada		132		59		61
Mexico		345		23		–
Other		13		4		(14	)
Commercial Banking		595		435		410
USA		292		281		273
Canada		162		162		101
Mexico		121		9		14
Other		20		(17	)	22
Corporate, Investment Banking and Markets		837		494		441
USA		651		447		368
Canada		121		47		68
Mexico		66		3		–
Other		(1	)	(3	)	5
Private Banking		63		57		81
USA		63		53		80
Canada		–		–		–
Mexico		–		–		–
Other		–		4		1
Other		(176	)	(207	)	(877	)
USA		(193	)	(209	)	(883	)
Canada		–		(1	)	–
Mexico		–		–		–
Other		17		3		6

Total¹		4,257		1,384		648
USA		3,261		1,091		384
Canada		415		267		230
Mexico		532		35		14
Other		49		(9	)	20

1	Goodwill amortisation excluded:
	– arising on subsidiaries	643		146		145
	–arising on associates and joint ventures	1		–		–
	– total	644		146		145
2	Comprises Household since the date of acquisition.
3	In 2003, North America implemented a revised funds transfer pricing system to transfer interest rate risk from the business units to Corporate, Investment Banking and Markets. The figures for 2002 have been restated to reflect the impact of transfer pricing had it been in place on a similar basis. The effect on the figures for 2001 is immaterial.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Profit before tax

	Year ended 31 December

	2003						2002		2001

					Rest of
	Total		Household¹		HSBC
North America	US$m		US$m		US$m		US$m		US$m

Net interest income	11,777		7,867		3,910		2,732		2,450

Dividend income	34		12		22		24		29
Net fees and commissions	2,676		1,167		1,509		984		913
Dealing profits	340		–		340		161		346
Other income	932		501		431		333		207

Other operating income	3,982		1,680		2,302		1,502		1,495

Total operating income	15,759		9,547		6,212		4,234		3,945


Staff costs	(3,723	)	(1,648	)	(2,075	)	(1,537	)	(1,440	)
Premises and equipment	(745	)	(243	)	(502	)	(356	)	(323	)
Other	(2,241	)	(1,133	)	(1,108	)	(651	)	(653	)
Depreciation and intangible asset amortisation	(238	)	(83	)	(155	)	(131	)	(124	)

	(6,947	)	(3,107	)	(3,840	)	(2,675	)	(2,540	)
Goodwill amortisation	(643	)	(358	)	(285	)	(146	)	(145	)

Operating expenses	(7,590	)	(3,465	)	(4,125	)	(2,821	)	(2,685	)

Operating profit before provisions	8,169		6,082		2,087		1,413		1,260

Provisions for bad and doubtful debts	(4,676	)	(4,395	)	(281	)	(300	)	(300	)
Provisions for contingent liabilities and
commitments	3		–		3		3		(582	)
Amounts written off fixed asset investments	(9	)	–		(9	)	(9	)	(5	)

Operating profit	3,487		1,687		1,800		1,107		373

Share of operating profit/(loss) in joint
ventures	11		–		11		(2	)	(7	)
Share of operating profit in associates	6		–		6		8		5
Gains on disposal of investments and
tangible fixed assets	109		6		103		125		132

Profit on ordinary activities before tax	3,613		1,693		1,920		1,238		503

	%		%		%		%		%
Share of HSBC’s pre-tax profits (excluding
goodwill amortisation)	29.6		14.3		15.3		13.2		7.4
Share of HSBC’s pre-tax profits	28.2		13.2		15.0		12.8		6.3
Cost:income ratio (excluding goodwill
amortisation)	44.1		32.5		61.8		63.2		64.4

Period-end staff numbers (full-time equivalent)	65,021		28,872		36,149		34,207		19,291

	US$m		US$m		US$m		US$m		US$m
Selected balance sheet data²
Loans and advances to customers (net)	191,450		108,124		83,326		77,589		73,088
Loans and advances to banks (net)	11,884		–		11,884		10,391		7,979
Debt securities, treasury bills and other
eligible bills	49,168		8,633		40,535		39,270		45,661
Total assets	289,800		136,727		153,073		142,032		138,738
Deposits by banks	10,354		3		10,351		9,972		8,113
Customer accounts	93,996		1		93,995		90,137		81,055


1	Since the date of acquisition.
2	Third party only.

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Year ended 31 December 2003 compared with year ended 31 December 2002

Fuelled by fiscal stimuli and a further interest rate reduction, the US economy steadily gained momentum in 2003. GDP expanded at an annualised rate of 8.2 per cent in the third quarter, the strongest rate since 1984. A strong revival in profits growth boosted investment spending while consumer spending remained strong, supported by tax cuts, a buoyant housing market, and equity releases from refinancing mortgages at record low interest rates. By the end of the year there was some evidence of the long-awaited recovery in the labour market, with the economy adding jobs, albeit modestly. In June the Federal Reserve cut its Fed Funds rate by 25 basis points to 1 per cent. Subsequently, 10-year bond yields rose by 100 basis points from their mid-June low of 3.1 per cent. Equity markets recovered strongly following the end of the Iraq war: by the end of December the S&P 500 had risen by 39 per cent from its March low and was at its highest level si nce July 2002. This supported consumer confidence. However, with the US current account deficit continuing to deteriorate, the US dollar remained under downward pressure, falling to US$1.26 against the euro by the end of the year.

Canada’s central bank was the first of the G7 countries to embark on a policy of raising interest rates in 2003. In response to inflationary pressures in the early part of the year, overnight lending rates were raised on two occasions, by a total of 50 basis points. However, with the Canadian dollar strengthening against the US dollar, inflation worries easing, and concerns about subdued GDP growth, the Central Bank reversed the earlier interest rate rises to take the overnight rate back down to 2.75 per cent in September. Many of the reasons for the disappointing growth were temporary, such as SARS, BSE, forest fires and the Ontario power blackout, and their immediate impact abated. Consumer spending growth remained robust all year, but the ongoing impact of the strong Canadian dollar appears set to continue, restraining export growth.

The Mexican economy continued to lag behind the US recovery, largely because, apart from technology, the US manufacturing sector remained subdued. However, the impact of stronger US growth is expected to benefit Mexico in the near term, boosting exports and growth. Meanwhile, political conflicts delayed the passage of critical reform legislation, threatening approval of the 2004 budget.

This notwithstanding, a solid macro-economic foundation has been established and is expected to be maintained.

On 28 March 2003, HSBC completed its acquisition of Household for a consideration of US$14.8 billion, expanding significantly its existing North American business. The addition of Household’s substantial consumer lending portfolio increased the proportion of HSBC’s assets in North America from 19 per cent to 28 per cent of the Group.

Household’s results for the period from 29 March to 31 December 2003 are tabulated separately under Consumer Finance in order to highlight their significance to HSBC’s overall performance in North America. HSBC’s results at the pre-tax level and before amortising goodwill also benefited from a US$534 million contribution from HSBC Mexico in its first full year. The integration of both Household and HSBC Mexico progressed well, with synergy benefits and business opportunities generally meeting or exceeding expectations.

The following discussion of HSBC’s North American performance highlights the impact of the additions of Household and HSBC Mexico. The phrase ‘on an underlying basis’ is used to describe performance excluding these acquisitions.

HSBC’s operations in North America contributed US$3,613 million to HSBC’s profit before tax, an increase of US$2,375 million, compared with 2002. Excluding goodwill amortisation, pre-tax profit was US$4,257 million, compared with US$1,384 million in 2002, which was equivalent to 30 per cent of HSBC’s total pre-tax profit on this basis. On an underlying basis, HSBC’s pre-tax profit, before goodwill amortisation, of US$1,672 million was US$320 million, or 24 per cent, higher than in 2002. Goodwill amortisation was US$644 million in 2003, compared with US$146 million last year, predominantly reflecting the acquisition of Household and, to a lesser extent, HSBC Mexico.

The commentaries that follow are based on constant exchange rates.

Personal Financial Services, excluding Consumer Finance, generated pre-tax profit, before goodwill amortisation, of US$870 million in 2003, 40 per cent higher than last year. HSBC Mexico contributed US$350 million to pre-tax profit for the

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H S B C H O L D I N G S P L C

FinancialReview(continued)

year. On an underlying basis, pre-tax profit, before goodwill amortisation, was 13 per cent lower than in 2002 mainly due to lower earnings from mortgage servicing and higher staff costs.

Net interest income increased by 53 per cent to US$2,116 million mainly as a result of the inclusion of HSBC Mexico. The first full year’s result for HSBC Mexico was strong and ahead of expectations. Growth in Mexico from a relatively weak performance in 2002 reflected an improvement in net interest income driven by a greater level of low cost deposits and an expanding consumer loan portfolio. Interest spreads benefited from a change in asset mix, with over 25 per cent growth in higher yielding assets, including motor vehicle finance, credit cards and payroll loans.

On an underlying basis, growth in net interest income of 7 per cent was mainly driven by growth of US$2.5 billion in residential mortgage balances in the US and Canada. In both countries, the low interest rate environment proved attractive to new homebuyers and encouraged existing homeowners to refinance their mortgages. In the US, net interest income further benefited from improved spreads on mortgages and an improved mix of loans and savings deposits.

Other operating income of US$825 million was 62 per cent higher than in 2002. Operations in Mexico contributed US$461 million to other operating income in the year. Transaction volumes on core banking related products, such as credit cards, deposit-related services and ATMs, grew significantly. HSBC Mexico led the market with a 34 per cent share in domestic interbank ATM transactions across Mexico, delivering fee revenue of US$92 million. In addition, a growing level of fee income was generated from bancassurance sales and international remittances.

On an underlying basis, other operating income fell by 23 per cent. This was primarily caused by a fall in mortgage banking-related income in the US. Total servicing-related income decreased by US$210 million compared with 2002. This decrease was driven by accelerated amortisation and large write-downs of mortgage servicing rights (‘MSR’s) as many customers refinanced mortgages in order to take advantage of the low interest rate environment. MSR income also declined as a result of significant losses on derivative instruments used to protect the economic value of MSRs.

In addition, the June/July time period was one of the more difficult periods related to derivative activity. Specifically, in June, positions were taken in derivative instruments to further reduce HSBC’s exposure to these losses as mortgage rates continued to fall. However, in July extreme interest rate volatility ensued and there was a significant rise in interest rates resulting in a substantial loss in the value of the derivative instruments. These losses were only partly offset by subsequent falls in interest rates, and gains from the sale of certain mortgage-backed securities available-for-sale that were used as on-balance sheet economic hedges of the MSRs.

While the value of MSRs generally declines in a falling interest rate environment as mortgages are repaid, the effect of this decline is often mitigated by income from refinancing mortgage loans and subsequent sales to mortgage agencies. Total loan volumes sold in 2003 were US$20.1 billion compared with US$12.4 billion in 2002. Market conditions during 2003 permitted favourable pricing which allowed HSBC to earn higher gains on loans sold as well as a higher spread on refinanced loans. As a result, sales-related income for 2003 increased by US$82 million compared with 2002.

Overall, the US mortgage banking business contributed US$210 million to pre-tax profit in 2003, compared with US$251 million in 2002. In the US, HSBC generated increases in deposit-related service charges and in card fees, though sales of investment products fell reflecting a lack of confidence in the equity markets. Increased fees in Canada reflected higher insurance sales and increased commissions from retail broking activities as the equity markets rebounded in 2003.

Growth in operating expenses, excluding goodwill amortisation, of 65 per cent to US$1,965 million was substantially attributable to the addition of HSBC Mexico, which contributed US$758 million to the overall cost base in 2003. In Mexico, savings in operating expenses were achieved from merging HSBC Mexico with HSBC’s existing operations in the country. These savings funded investment to improve technology support for HSBC Mexico’s branch network.

On an underlying basis, operating expenses, excluding goodwill amortisation, increased by 7 per cent. Pension costs rose due to falls in the long-term rates of return on assets, and higher profitability drove increased staff incentive payments. Following

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the integration with Household, long-term restructuring programmes, including the rationalisation of staff functions, were initiated, adding US$20 million of costs in the year.

Operations in Mexico contributedUS$67 million to the overall net charge for bad and doubtful debts of US$142 million. On an underlying basis, credit provisions in Personal Financial Services were broadly in line with the prior year, a good performance in view of strong growth in personal lending. Overall credit quality improved, reflecting the improved economic environment.

Consumer Finance contributedUS$2,068 million to pre-tax profit, before goodwill amortisation, in the nine months since Household became a member of HSBC. The integration of Household into HSBC delivered anticipated benefits in improved funding costs, and technology and administrative cost savings. Significant progress has been made in exporting Household’s core skills, particularly in the areas of credit risk management, sales-focused organisation and customer-centred technology, to other parts of the Group. Further synergies are planned in card processing, IT contingency rationalisation, purchasing, call-centre operations and the shared use of HSBC’s Group Service Centres. Household’s business model is being taken to selected markets overseas and established alongside existing HSBC operations to meet the growing global demand for consumer finance.

Net interest margin benefited by US$531 million from purchase accounting adjustments relating to the acquisition of Household in the nine months in which Household was part of the HSBC Group. This comprised of a US$946 million benefit in respect of debt funding, offset by the amortisation of purchase accounting adjustments relating to loans and advances to customers totalling US$415 million. Purchase accounting adjustments restated the book value of debt to fair value at that date and, therefore, reflected the improvement in spread already in the market as well as falling interest rates. They are being amortised in line with the residual maturity of the debt. Assuming credit spreads remain consistent, savings on future debt issues will replace the fair value adjustments relating to credit spreads. Since acquisition, Household’s funding costs on new issues have, in fact, fallen as the credit spreads sought by the market decreased, reflecting the improvement in Household’s credit rating on joining the HSBC

Group. During 2003, net interest income benefited by US$124 million as a result of such savings.

All consumer portfolios grew during the year, except for personal unsecured loans, with the strongest growth in the real estate secured and private label portfolios. The secured real estate portfolio growth was driven by the correspondent business while the private label portfolio benefited from a number of new relationships added during the year. Growth in MasterCard and Visa loans benefited from portfolio acquisitions made during the year in advantageous circumstances and growth in the General Motors portfolio. The motor vehicle finance business also benefited from new originations from strategic alliances during the year.

Included within operating expenses were one-off retention payments arising on the change of control amounting to US$52 million. Headcount increased to support business expansion, particularly in the consumer lending and mortgage services businesses.

The charge for bad and doubtful debts in 2003 reflected receivables growth, increases in personal bankruptcy filings and the weak US economy. However, in the second half of the year credit quality stabilised and improvement was seen in a number of key indicators, including early stage delinquency, charge-offs, bankruptcy filings and collection activities. The improvement reflected resumed domestic economic growth which is forecast to continue into 2004.

Commercial Banking in North America reported pre-tax profit, before goodwill amortisation, of US$595 million, an increase of 32 per cent, compared with 2002. On an underlying basis, HSBC generated pre-tax profit, before goodwill amortisation, of US$498 million, 12 per cent higher than last year.

Net interest income on an underlying basis was marginally lower than 2002. In Canada, income growth was generated from increased balances on loans and deposits. There were increases in commercial real estate lending where growth in market share was concentrated primarily in New York. Service delivered to SMEs was enhanced as part of the strategy to focus on that market. Notably, the credit application process was re-engineered to make it easier for customers and the number of relationship managers doubled. As a result, lending to SMEs increased by 17 per cent. Net interest income further benefited from steady growth in

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H S B C H O L D I N G S P L C

FinancialReview(continued)

deposit balances and lower funding costs. Offsetting this was the impact of business disposals as HSBC disposed of its equipment leasing portfolio in the first half of 2003 following a re-evaluation of its core businesses.

On an underlying basis, other operating income rose by 20 per cent, reflecting income on the sale of the factoring business and increases in fees related to commercial real estate lending, deposit taking and trade.

The inclusion of Household’s commercial portfolio reduced other operating income by US$17 million. These losses were more than offset by tax credits, resulting in an overall benefit to post tax profits of US$40 million.

HSBC Mexico contributed US$325 million to total operating income in the Commercial Banking segment in North America, reflecting a strong position in customer deposits. In addition, a growing level of fee income was generated from payments and cash management, loan and credit card fees.

Of the total increase in operating expenses, US$163 million was attributable to HSBC Mexico. Underlying operating expenses, excluding goodwill amortisation, increased by 9 per cent to US$614 million. This was driven by higher pension and incentive compensation expenses. In Canada, staff costs increased, primarily due to increased variable incentive payments.

Credit quality remained satisfactory. On an underlying basis, provisions for bad and doubtful debts fell by 40 per cent to US$88 million, reflecting the improved credit environment in North America in 2003. Low interest rates, declining credit spreads and positive economic sentiment all contributed to this improvement.

Corporate, Investment Banking and Marketsreported pre-tax profit, before amortisation of goodwill, of US$837 million, an increase of 70 per cent, compared with 2002. On an underlying basis, the Corporate, Investment Banking and Markets business generated pre-tax profit, before amortisation of goodwill, of US$772 million, 58 per cent higher than in 2002. In generally favourable trading conditions, Global Markets achieved higher customer sales from structured finance and hedging products as institutional and corporate borrowers took advantage of low interest rates to raise finance or fix the cost of existing facilities.

HSBC’s North American securities trading and debt capital markets business was substantially restructured and refocused towards the end of 2002 and this was reflected positively in its 2003 financial performance. Government and agency securities arbitrage activities were wound down. Corporate bond trading returned to profitability, contrasting with the heavy losses suffered in 2002 as a result of widening credit spreads, particularly in the telecommunications and auto sectors. The turnaround in performance added US$67 million to profit before tax. Investment in relationship management generated new business from major institutional and corporate clients. Global Markets also expanded its structured credit derivatives trading in response to the evolving requirements of its institutional customer base, allowing these clients to risk manage their portfolios more actively, thereby generating fees and trading revenues for HSBC.

Underlying net interest income of US$685 million, increased by 28 per cent, compared with 2002. This was partly attributable to the restructuring initiatives in the securities trading and debt capital markets business. As part of this restructuring, large arbitrage trading portfolios, which had historically contributed dealing profits but incurred significant funding costs, were eliminated. Net interest income further benefited from good balance sheet management and effective interest rate positioning in the US and Canada.

Underlying total other operating income, at US$738 million improved by 32 per cent. Strong foreign exchange and domestic dollar book trading activity contributed to increased revenues, driven by historically low interest rates and volatile currency markets. Derivatives trading revenues increased, reflecting the growth in demand for the structuring of tailored products for corporate and institutional customers.

HSBC Mexico generated other operating income of US$90 million, of which US$64 million was accounted for by dealing profits. Volatility in the Mexican markets enabled the Group to increase trading volumes and capitalise on favourable market movements. These positive market conditions led to increased profits from foreign exchange and fixed income.

Underlying operating expenses, before goodwill amortisation, of US$706 million, increased by 9 per cent. Investment in the core business added to the

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expenditure but was partly funded by lower costs in the securities trading and debt capital markets business, elements of which were wound down.

Credit experience on major corporate customers in the US was better in 2003. Many accounts which were potentially problematic at the end of 2002 were successfully refinanced and restructured in the strong debt market at the start of 2003. Elsewhere, credit quality remained satisfactory and consequently, on an underlying basis, there was a net release of US$7 million for bad and doubtful debts.

Profits on disposal of investments, on an underlying basis, were US$57 million, a decline of 53 per cent compared with 2002, which included a higher level of securities disposals arising from the restructuring of investment portfolios.

HSBC’sPrivate Banking operations in North America contributed US$63 million to pre-tax profits, before goodwill amortisation, an increase of 11 per cent compared with 2002.

During the year the North American business continued its evolution from a deposit-based business to broader wealth advisory service, with a resulting shift from net interest income to fees and commissions. Despite this, net interest income was 3 per cent higher than 2002, reflecting an improved funding environment in 2003.

An increase in net fees and commissions and other income of US$52 million, or 37 per cent, mainly reflected the benefit from increased investment activity by clients and a greater emphasis on fee-based non-discretionary advisory and structured products. In addition, WTAS (HSBC’s tax advisory service for high net-worth clients), in its first full year of operation, contributed to this increase.

The inclusion of WTAS was the principal contributor to the US$48 million increase in operating expenses, before goodwill amortisation. Cost savings from the alignment of international and domestic client servicing units offset higher staff and restructuring costs. Excluding this operating expenses were essentially flat year-on-year.

Year ended 31 December 2002 compared with year ended 31 December 2001

The United States economy showed signs of improvement in 2002 following a deterioration in 2001, as low interest rates and fiscal stimulus helped

to boost the housing, manufacturing and consumer sectors. GDP growth was 2.4 per cent compared with 1.1 per cent in 2001. However, growth prospects remained unclear, as equity markets remained subdued, and levels of corporate and consumer debt remained high. The dollar weakened throughout the year, reflecting investor concerns about investment returns from the US.

The Canadian economy continued to outperform its fellow G7 members, with GDP growth of 3.3 per cent in 2002. This was driven by strong growth in employment, and increased levels of retail sales. However, in response to fears about strong consumer spending and increasing inflation, interest rates showed upward pressure. It was expected that the Canadian economy would be slowed by the performance of the US economy during 2003.

Economic growth in Mexico also remained subdued, relying on the US economy for 25 per cent of its GDP. However, growth in industrial output was an encouraging sign for Mexico’s future prospects. Although the devaluation in the value of the peso had increased inflationary pressures, the economic indicators in 2002 did not appear to present cause for concern with regard to Mexico’s creditworthiness.

HSBC’s operations in North America contributed US$1,413 million to operating profit before provisions, up US$153 million, or 12 per cent, compared with 2001. Profit before tax increased by US$735 million to US$1,238 million. Goodwill amortisation at US$146 million was in line with 2001. Operating performance was driven by strong growth in net interest income in 2002, which benefited from low funding costs as interest rates remained at historically low levels. The 2001 results bore the exceptional costs of the Princeton Note Settlement.

The commentaries that follow are based on constant exchange rates.

Personal Financial Services in North America reported a pre-tax profit, before goodwill amortisation, of US$605 million, 3 per cent higher than in 2001. The continued growth in the mortgage business and higher brokerage and insurance sales contributed to a significant increase in operating income. This was partially offset by higher IT costs reflecting increased business volumes and systems development.

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H S B C H O L D I N G S P L C

FinancialReview(continued)

Net interest income rose by 8 per cent to US$1,352 million of which US$60 million reflected the inclusion of HSBC Mexico for the period following its acquisition. Excluding HSBC Mexico, the rise in net interest income reflected growth in deposits and record mortgage banking activity. Customers sought to minimise risks from volatile equity markets, while homeowners took advantage of the low interest rate environment to re-mortgage at lower rates. The increase in spreads arising from lower funding costs was partly offset by a lower benefit from net free funds.

Excluding HSBC Mexico, which contributed US$40 million, other operating income was 15 per cent higher than in 2001, driven by growth in brokerage and wealth management products and successful re-pricing of account service charges. Brokerage revenues increased by 32 per cent over 2001, due in part to sales of annuity products and increased transaction volumes. Insurance revenue also grew strongly. By the end of 2002, more than 1,500 professionals were licensed to sell insurance and a number of annuity products through the retail network in the US.

HSBC in Canada was rated highest for overall quality of customer service among the banks included in the ‘2002 Customer Service Index’, an independent study conducted annually by Market Facts of Canada. HSBC Bank Canada introduced ‘clientCONNECT’, a sales and service initiative designed to improve client relationships. The bank also completed the rollout of a Call Management programme designed to remove routine tasks from branches and enable staff to concentrate on deepening relationships with customers.

Operating expenses, before goodwill amortisation, increased by 19 per cent to US$1,172 million, of which US$72 million reflected the impact of HSBC Mexico. The underlying increase of 11 per cent was mainly due to increased revenue-related staff costs and higher IT and marketing expenses. As part of its strategy of providing customers with multiple choices for product and service delivery, HSBC offered a comprehensive internet banking service in the US. By the end of the year, more than 405,000 customers had registered, up from approximately 275,000 at the end of 2001. The HSBC Bank USA website, us.hsbc.com, where customers can apply for accounts, conduct financial planning and link to online services, received approximately 50,000 visits every day during 2002.

Commercial Banking in North America reported pre-tax profit, before goodwill amortisation, of US$435 million, an increase of 6 per cent, compared with 2001. HSBC Mexico accounted for US$6 million of this increase.

Net interest income was broadly in line with 2001. The effect of including HSBC Mexico was offset by reduced net interest income in the US, reflecting lower lending levels. On an underlying basis, other operating income rose 8 per cent to US$287 million, as a result of higher fees from deposit services, credit and trade finance activity. A repricing initiative on deposit account services resulted in higher fee income in both the US and Canada. Dealing profits fell in HSBC’s Mexican operation following a decline in gains on exchange valuations on the loan portfolio.

Operating expenses, on an underlying basis, were slightly lower than in 2001 in both the US and Canada, mainly due to operating cost controls and one-off costs incurred in 2001. Provisions for bad and doubtful debts were broadly in line with last year. Despite the uncertain economic climate, the US and Canada experienced fewer problem credits for larger companies, though this was partly offset by higher provisions in Panama.

Corporate, Investment Banking and Marketsreported pre-tax profit, before amortisation of goodwill, of US$494 million, an increase of 15 per cent, compared with 2001. This was primarily driven by improved spreads in Global Markets in the low interest rate environment. HSBC’s US securities trading and debt capital markets business reported a pre-tax loss of US$100 million. A significant widening of credit spreads in the first half of the year resulted in losses on bond holdings.

Net interest income increased by 53 per cent to US$539 million. The principal driver of growth was significantly reduced funding costs as the steeper yield curve led to a 54 basis point increase in spread. Global Markets benefited from the lower funding costs. Net interest income in the debt capital markets business weakened due to increased funding costs on corporate bond trading portfolios.

Other operating income at US$557 million was 17 per cent lower than in 2001, mainly due to dealing losses. Difficult conditions in the capital markets prevented a recurrence of 2001’s strong dealing profits and profits on domestic US dollar trading fell. Partially offsetting the dealing losses were higher

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levels of other income from bank note servicing and increased numbers of structured transactions for corporate customers. In Canada, HSBC's operations reported reduced equity market-related fees. HSBC withdrew from the institutional equity trading and research business in the first half of 2002. Other operating income in the debt capital markets business fell by US$46 million, largely resulting from losses on corporate bond trading.

Total operating expenses, before amortisation of goodwill, were broadly in line with 2001. In the US securities trading and debt capital markets business, revenue-related pay decreased due to the losses incurred in 2002.

Provisions for bad and doubtful debts decreased by 18 per cent. HSBC Bank USA’s charge for bad and doubtful debts fell, predominantly due to the non-recurrence of specific provisions raised in 2001

against corporate customers. The charge in Canada increased following a provision for an exposure in the telecommunications sector.

Profits on the disposal of investments declined by 10 per cent reflecting reduced sales of securities.

HSBC’sPrivate Banking operations in North America contributed US$57 million to pre-tax profits before goodwill amortisation. Net interest income at US$117 million was US$10 million lower than in 2001 as lower interest rates reduced the benefit of free funds. Other operating income, including fees and commissions, increased by US$20 million, or 16 per cent, reflecting the inclusion of WTAS, which became operational in the second half of 2002. Operating expenses, before goodwill amortisation, increased by US$52 million, partly as a result of the launch of WTAS.

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H S B C H O L D I N G S P L C

Financial Review(continued)

Profit/(loss) excluding goodwill amortisation by customer group

Year ended 31 December 2003

Total

Corporate,

Personal

Investment

Inter-

Financial

Consumer

Financial

Commercial

Banking &

Private

segment

Services

Finance⁴

Services

Banking

Markets

Banking

Other

elimination

Total

North America

US$m

Net interest income

2,116

7,851

9,967

1,046

743

121

(100

)

–

11,777

Dividend income

–

Net fees and commissions

720

1,170

1,890

292

351

155

(12

)

–

2,676

Dealing profits

–

301

–

340

Other income

525

611

152

156

(56

)

932

Other operating income

825

1,707

2,532

462

828

194

(56

)

3,982

Operating income

2,941

9,558

12,499

1,508

1,571

315

(78

)

(56

)

15,759

Operating expenses

excluding goodwill

amortisation¹

(1,965

)

(3,098

)

(5,063

)

(786

)

(777

)

(254

)

(123

)

(6,947

)

Operating profit/(loss)

beforeprovisions¹

976

6,460

7,436

722

794

(201

)

–

8,812

Provisions for bad and

doubtful debts

(142

)

(4,395

)

(4,537

)

(133

)

–

(4,676

)

Provisions for contingent

liabilities and

commitments

–

)

–

Amounts written off fixed

asset investments

–

)

–

)

Operating profit/(loss)¹

834

2,065

2,899

593

779

(203

)

–

4,130

Share of operating profit

in joint ventures²

–

Share of operating profit

in associates²

–

Gains on disposal of

investments and tangible

fixed assets

–

109

Profit /(loss) on ordinary

activities before tax³

870

2,068

2,938

595

837

(176

)

–

4,257

Share of HSBC’s pre-tax

profits³

6.0

14.4

20.4

4.1

5.8

0.4

(1.1

)

29.6

Cost:income ratio¹

66.8

32.4

40.5

52.1

49.5

80.6

(157.7

)

44.1

US$m

Selected balance sheet

data⁵

Loans and advances to

customers (net)

43,608

107,957

151,565

23,553

13,758

2,574

–

191,450

Total assets

53,082

134,857

187,939

27,444

70,223

3,108

1,086

289,800

Customer accounts

48,576

48,577

20,032

17,239

8,148

–

93,996

The following assets and

liabilities were also

significant to the customer

groups noted:

Loans and advances to

banks (net)

11,577

Debt securities, treasury

bills and other eligible

bills

36,026

Deposits by banks

9,958

Debt securities in issue

107,673

Goodwill amortisation:

excluded from (1) above

117

356

474

100

–

643

excluded from (2) above

–

excluded from (3) above

118

356

474

100

–

644

Comprises Household since the date of acquisition.

Third party only.

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		Year ended 31 December 2003

						Corporate,
		Personal				Investment						Inter-
		Financial		Commercial		Banking &		Private				segment
		Services		Banking		Markets		Banking		Other		elimination		Total
	North America	US$m		US$m		US$m		US$m		US$m		US$m		US$m
	Net interest income	1,352		844		539		117		(120	)	–		2,732

	Dividend income	–		–		24		–		–		–		24
	Net fees and commissions	437		222		268		61		(4	)	–		984
	Dealing profits	(63	)	18		204		9		(7	)	–		161
	Other income	126		61		61		78		29		(22	)	333

	Other operating income	500		301		557		148		18		(22	)	1,502

	Operating income	1,852		1,145		1,096		265		(102	)	(22	)	4,234

	Operating expenses excluding
	goodwill amortisation¹	(1,172	)	(567	)	(649	)	(206	)	(103	)	22		(2,675	)

	Operating profit/(loss)before
	provisions^1,5	680		578		447		59		(205	)	–		1,559

	Provisions for bad and doubtful
	debts	(76	)	(150	)	(66	)	(2	)	(6	)	–		(300	)
	Provisions for contingent liabilities
	and commitments	–		2		2		–		(1	)	–		3
	Amounts written off fixed asset
	investments	–		–		(9	)	–		–		–		(9	)

	Operating profit/(loss)^1,5	604		430		374		57		(212	)	–		1,253

	Share of operating profit in joint
	ventures²	(1	)	–		–		(1	)	–		–		(2	)
	Share of operating profit
	in associates²	2		–		–		–		6		–		8
	Gains /(losses) on disposal of
	investments and tangible
	fixed assets	–		5		120		1		(1	)	–		125

	Profit /(loss) on ordinaryactivities
	before tax^3,5	605		435		494		57		(207	)	–		1,384

		%		%		%		%		%				%
	Share of HSBC’s pre-tax profits^3,5	5.8		4.1		4.7		0.5		(1.9	)			13.2
	Cost:income ratio¹	63.3		49.5		59.2		77.7		(101.0	)			63.2
		US$m		US$m		US$m		US$m		US$m				US$m
	Selected balance sheetdata⁴
	Loans and advances to customers
	(net)	37,922		25,361		12,604		1,701		1				77,589
	Total assets	46,777		29,166		63,161		2,707		221				142,032
	Customer accounts	46,002		17,717		19,396		6,969		53				90,137
	The following assets and liabilities
	were also significant to Corporate,
	Investment Banking and Markets:
	Loans and advances to
	banks (net)					9,948
	Debt securities, treasury bills
	and other eligible bills					34,926
	Deposits by banks					9,545

Goodwill amortisation:
1	excluded from (1) above	55		32		34		25		–				146
2	excluded from (2) above	–		–		–		–		–				–
3	excluded from (3) above	55		32		34		25		–				146
4	Third party only.
5	In 2003, North America implemented a revised funds transfer pricing system to transfer interest rate risk from the business units to Corporate, Investment Banking and Markets. The figures for 2002 have been restated to reflect the impact of transfer pricing had it been in place on a similar basis. The effect on the results for 2001 is immaterial.

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FinancialReview(continued)

Profit/(loss) excluding goodwill amortisation by customer group(continued)

		Year ended 31 December 2001

						Corporate,
		Personal				Investment						Inter-
		Financial		Commercial		Banking &		Private				segment
		Services		Banking		Markets		Banking		Other		elimination		Total
North America		US$m		US$m		US$m		US$m		US$m		US$m		US$m
Net interest income		1,247		869		354		127		(147	)	–		2,450
Dividend income		–		–		29		–		–		–		29
Net fees and commissions		368		190		291		64		–		–		913
Dealing profits		(38	)	28		357		1		(2	)	–		346
Other income		71		48		10		63		30		(15	)	207
Other operating income		401		266		687		128		28		(15	)	1,495

Operating income		1,648		1,135		1,041		255		(119	)	(15	)	3,945
Operating expenses excluding goodwill amortisation¹		(988	)	(572	)	(648	)	(154	)	(193	)	15		(2,540	)
Operating profit/(loss) before provisions¹		660		563		393		101		(312	)	–		1,405
Provisions for bad and doubtful debts		(70	)	(149	)	(80	)	(4	)	3		–		(300	)
Provisions for contingent liabilities and commitments		–		(7	)	–		–		(575	)	–		(582	)
Amounts written off fixed asset investments		–		–		(5	)	–		–		–		(5	)

Operating profit/(loss)¹		590		407		308		97		(884	)	–		518
Share of operating loss in joint ventures²		(7	)	–		–		–		–		–		(7	)
Share of operating profit in associates²		–		–		–		–		5		–		5
Gains/(losses) on disposal of investments and tangible fixed assets		10		3		133		(16	)	2		–		132

Profit/(loss) on ordinary activities before tax³		593		410		441		81		(877	)	–		648

		%		%		%		%		%				%
Share of HSBC’s pre-tax profits³		6.7		4.7		5.1		0.9		(10.0	)			7.4
Cost:income ratio¹		60.0		50.4		62.2		60.4		(162.2	)			64.4

		US$m		US$m		US$m		US$m		US$m				US$m
Selected balance sheet data⁴
Loans and advances to customers (net)		26,013		24,754		20,515		1,805		1				73,088
Total assets		32,302		25,713		77,556		3,031		136				138,738
Customer accounts		35,066		15,392		19,315		11,203		79				81,055
The following assets and liabilities were also significant to Corporate, Investment Banking and Markets:
Loans and advances to banks (net)						7,549
Debt securities, treasury bills and other eligible bills						45,230
Deposits by banks						7,791

Goodwill amortisation:
1	excluded from (1) above	50		32		36		27		–				145
2	excluded from (2) above	–		–		–		–		–				–
3	excluded from (3) above	50		32		36		27		–				145
4	Third party only.

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South America

Profit/(loss) before tax excluding goodwill amortisation

	Year ended 31 December

	2003		2002		2001
	US$m		US$m		US$m
Personal Financial Services	(27	)	(33	)	62
Brazil	(31	)	11		34
Argentina	3		(45	)	29
Other	1		1		(1	)
Commercial Banking	99		79		(14	)
Brazil	65		54		46
Argentina	34		27		(59	)
Other	–		(2	)	(1	)
Corporate, Investment Banking and Markets	(24	)	32		185
Brazil	49		125		146
Argentina	(72	)	(101	)	29
Other	(1	)	8		10
Private Banking	(2	)	(12	)	(3	)
Brazil	(1	)	(1	)	(2	)
Argentina	–		–		–
Other	(1	)	(11	)	(1	)
Other	80		(100	)	(1,232	)
Brazil	1		(62	)	(88	)
Argentina	83		(91	)	(1,151	)
Other	(4	)	53		7

Total¹	126		(34	)	(1,002	)
Brazil	83		127		136
Argentina	48		(210	)	(1,152	)
Other	(5	)	49		14

1 Goodwill amortisation excluded:
- arising on subsidiaries	11		24		14
- arising on associates and joint ventures	–		–		–
- total	11		24		14

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FinancialReview(continued)

Profit/(loss) before tax

	Year ended 31 December

	2003		2002		2001
South America	US$m		US$m		US$m
Net interest income	640		645		1,065
Dividend income	3		15		12
Net fees and commissions	338		324		494
Dealing profits	136		147		18
Other income	201		110		356
Other operating income	678		596		880

Total operating income	1,318		1,241		1,945


Staff costs	(584	)	(572	)	(836	)
Premises and equipment	(124	)	(113	)	(153	)
Other	(327	)	(330	)	(435	)
Depreciation and intangible asset amortisation	(40	)	(45	)	(73	)

	(1,075	)	(1,060	)	(1,497	)
Goodwill amortisation	(11	)	(24	)	(14	)

Operating expenses	(1,086	)	(1,084	)	(1,511	)


Operating profit/(loss) before provisions	232		157		434
Provisions for bad and doubtful debts	(58	)	(117	)	(927	)
Provisions for contingent liabilities and commitments	2		(31	)	–
Loss from foreign currency redenomination in Argentina	(9	)	(68	)	(520	)
Amounts written off fixed asset investments	(62	)	(36	)	(1	)

Operating profit/(loss)	105		(95	)	(1,014	)
Share of operating profit in associated undertakings	1		–		1
Gains/(losses) on disposal of investments and tangible fixed assets	9		37		(3	)

Profit/(loss) on ordinary activities before tax	115		(58	)	(1,016	)

	%		%		%
Share of HSBC’s pre-tax profits (excluding goodwill amortisation)	0.9		(0.3	)	(11.4	)
Share of HSBC’s pre-tax profits	0.9		(0.6	)	(12.7	)
Cost:income ratio (excluding goodwill amortisation)	81.6		85.4		77.0

Period-end staff numbers (full-time equivalent)	28,292		25,522		27,519

	US$m		US$m		US$m
Selected balance sheet data¹
Loans and advances to customers (net)	4,982		3,028		4,156
Loans and advances to banks (net)	1,922		1,665		2,252
Debt securities, treasury bills and other eligible bills	2,151		1,450		3,386
Total assets	12,549		8,491		13,097
Deposits by banks	828		661		1,338
Customer accounts	6,945		4,863		7,523

1 Third party only.

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Year ended 31 December 2003 compared with year ended 31 December 2002

2003 was a year of recovery across the region following the economic and political uncertainty experienced during 2002.

In Brazil, the turnaround in 2003 was noteworthy. After a difficult start, the new Government demonstrated prudent control of macroeconomic policy including, importantly, inflation. A difficult and costly disinflationary programme was put into effect with the central bank’s reference rate reaching 26.5 per cent in June. The programme was successful within a surprisingly short time horizon. Inflation fell from 17.3 per cent to 9.3 per cent, and reference interest rates ended the year at 16.5 per cent. Actions to reduce Brazil’s two key vulnerabilities, its fiscal and external deficits, were effective. On the fiscal front, Brazil’s Congress approved public sector social security reforms and 2003 was the fifth consecutive year IMF fiscal targets were achieved. On the external front, Brazil is expected to register its first current account surplus in over a decade.

Buoyed by a surge in exports and large trade surpluses, the Argentinian economy recovered at a fast pace. Inflation remained under control and the Argentine peso appreciated from 3.60 to the US dollar in May 2002 to 2.93 at December 2003. Unemployment fell and tax revenues and collections increased.

Fundamental legal uncertainty persists, particularly regarding the position of pension fund assets following pesification, the ability of utilities to raise prices, and the position of holders of pesified and defaulted government bonds. Although the financial system is emerging slowly from near collapse, questions about the sustainability of the recovery persist and a resolution of the historic sovereign debt default is a pre-condition for stability and sustained new investment.

HSBC’s operations in South America reported a pre-tax profit of US$115 million, compared with a loss of US$58 million in 2002. Excluding goodwill amortisation, pre-tax profit was US$126 million, compared with a loss of US$34 million in 2002. Key to this improvement was a turnaround in Argentina, from a loss of US$210 million to a modest profit of US$48 million. This followed the release of part of the general provision previously raised against customer advances, as the economy improved and, in

December 2003, compensation bonds with a face value of US$109 million were received from the Argentine government. These have been included at an estimated fair value of US$63 million in the results of the Other segment. Goodwill amortisation at US$11 million was US$13 million lower than in 2002, which included a goodwill write-off relating to the purchase of insurance subsidiaries.

The commentaries that follow are based on constant exchange rates.

InPersonal Financial Services there was a pre-tax loss, before goodwill amortisation, of US$27 million, an improvement against the loss suffered in 2002. The acquisition of Lloyds TSB Group’s businesses and assets in Brazil contributed US$7 million to this overall improvement. Lending growth was stronger in Brazil, while higher bad debt recoveries benefited operations in Argentina.

Net interest income was broadly in line with last year. The benefit from higher personal lending balances in Brazil was offset by lower interest income from the insurance businesses in Argentina, largely due to lower CER, an inflation adjustment applied to all pesified loans.

Other operating income of US$316 million was 51 per cent higher than in 2002, largely due to a strong performance in Brazil. Growth in customer lending volumes generated an increase in credit-related fee income and account service fees. Following strong marketing support, fee income from cards in Brazil grew by 24 per cent, driven by a 30 per cent increase in cards in circulation to 1.4 million. Other operating income also improved in Argentina, reflecting a strong performance in the insurance business.

Operating expenses, excluding goodwill amortisation, were broadly in line with 2002. In Brazil, costs increased by 15 per cent, largely due to higher staff costs, notably labour claims, together with higher costs from marketing initiatives taken in 2003 and an increase in the transactional taxation charge on higher operating income. Costs in Argentina were significantly lower than prior year, mainly due to lower severance costs.

The provision for bad and doubtful debts of US$138 million was 50 per cent higher than in 2002. In Brazil, specific provisions increased, predominantly in the first half of 2003, reflecting the prevailing economic conditions. High inflation,

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H S B C H O L D I N G S P L C

FinancialReview(continued)

interest rates and unemployment reduced customers’ repayment capacity. However, credit quality began to show signs of improvement in the second half of the year.

Commercial Banking in South America contributed pre-tax profit, before amortisation of goodwill, of US$99 million, 23 per cent higher than in 2002.

Net interest income increased by 39 per cent, to US$168 million. In Argentina, net interest income benefited from lower Argentine peso rates paid on deposits and recoveries of interest suspended on non-performing loans. In Brazil, successful marketing campaigns led to a significant growth in income from overdrafts and working capital products. Other growth areas included discounted receivables and vehicle leasing, supported by the introduction of pre-approved facilities.

Other operating income increased by 23 per cent to US$115 million. Credit related fee income in Brazil increased, reflecting the expansion in the current account customer base by 8 per cent. Fees earned on foreign exchange rose from a higher volume of transactions. In response to aggressive pricing by competitors, the introduction of a new fee pricing structure in the first half of 2003 stimulated an increase in the volume of loan fees and funds under management leading to higher fee income.

At US$173 million, total operating expenses, before goodwill amortisation, were 25 per cent higher than 2002. The cost increases partly reflected increased business volumes as well as the impact of various initiatives which had been delayed pending evidence of improvement in economic conditions. These included increased advertising, the implementation of a sales structure to support business development, and investment in new products and delivery channels. These were partly funded by the centralisation of support processes which resulted in a reduction of associated costs and reduced the administrative workload for relationship managers, leaving them more time for their customers.

Corporate, Investment Banking and Marketsreported a loss, before amortisation of goodwill, of US$24 million, broadly in line with 2002, at constant exchange rates. Profit before tax and amortisation of goodwill in Brazil was US$49 million, compared with US$104 million in 2002. Argentina recorded a

loss of US$72 million compared with a loss of US$143 million in 2002.

Net interest expense was US$51 million, an increase of 16 per cent compared with 2002. In Brazil, net interest income decreased due to lower spreads in Global Markets, partly offset by the impact of downward yield curve movements which allowed the funding of long positions at lower rates. In corporate banking, a lack of attractive risks restricted lending growth. In Argentina, the lower cost of funding non-performing assets and a lower level of suspended interest resulted in a decrease in net interest expense.

Dealing profits were broadly in line with 2002. In Brazil, higher dealing profits reflected gains resulting from a fall in interest rates. Brokerage, custody and clearing businesses also grew significantly, taking advantage of market opportunities. These factors were offset in part by lower foreign exchange income in Argentina.

Staff costs were higher than in 2002, mainly in Brazil, reflecting improved performance in specific products.

Provisions for bad and doubtful debts rose in difficult market conditions. Higher interest rates, currency weakness, and a reduced availability of foreign currency funding all contributed to problems encountered by corporate customers in the first half of 2003 in Brazil. Although the situation improved during the year, new specific provisions were raised against two sizeable corporate accounts as a consequence of business failure in one case and fraud in the other.

Private Banking’spre-tax loss, before goodwill amortisation, of US$2 million compared with a loss of US$12 million in 2002. A lower bad debt charge reflected an improvement in the overall credit quality of the segment.

Within theOther customer group, there was a US$113 million release of general provision raised in respect of Argentina. This release followed a period of improved market conditions and collections within the lending portfolios.

Provisions for contingent liabilities and commitments reflected court decisions (amparos) relating to formally frozen US dollar denominated customer deposits required to be settled at the prevailing market rate.

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Year ended 31 December 2002 compared with year ended 31 December 2001

2002 was a year of uncertainty in both Brazil and Argentina. Although the Argentine government had been in talks with the International Monetary Fund and World Bank for over a year, an agreement on the resumption of lending had yet to be reached. The Argentine economy experienced its fourth successive year of recession with a large contraction in GDP, falling 12 per cent, and unemployment continuing to rise. However, some stability was introduced towards the end of 2002, as the peso began to appreciate from its lows as fears of hyperinflation began to recede and a significant trade surplus emerged. Elections were expected to take place in the second quarter of 2003.

Brazil avoided major fall-out from the collapse of the Argentine economy and steadily improved its current account position by growing its trade surplus with the rest of the world. Uncertainty over the outcome of presidential elections held in the second half of 2002 led to a sharp depreciation in the value of the real and upward pressure on interest rates in the first half of the year. The newly elected government quickly stated its commitment to fiscal discipline, leading to improved stability, lower interest rates and a stronger currency towards the end of 2002.

HSBC’s operations in South America reported an operating profit before provisions, of US$157 million, compared with US$434 million in 2001. Excluding goodwill amortisation, operating profit before provisions was US$181 million, compared with US$448 million in 2001. At constant exchange rates, operating profit before provisions and excluding goodwill amortisation was 43 per cent lower than in 2001. Losses before tax excluding goodwill amortisation improved substantially to US$34 million, compared with a loss of US$1,002 million in 2001. Goodwill amortisation was US$24 million compared with US$14 million. The increase reflects the write-off by HSBC of the remaining goodwill that arose on the purchase of its insurance subsidiaries.

The commentaries that follow are based on constant exchange rates.

InPersonal Financial Services there was a pre-tax loss, before goodwill amortisation, of US$33 million, compared with a profit of US$62 million in 2001.

Net interest income of US$539 million was 31 per cent higher than in 2001. Competitive pricing initiatives and targeted marketing campaigns led to strong growth in personal lending products in Brazil, particularly personal overdrafts and credit cards. In Argentina, margins deteriorated reflecting the effect of the severe economic conditions and the impact of non-performing loans.

Other operating income decreased by 12 per cent compared with 2001. In Brazil, the decline in fee income reflected competitive pricing initiatives and the loss of revenue from account fees, as the Brazilian government had outlawed the levying of fees on certain accounts. This was partly offset by strong growth in credit-related fee income. Net revenues from the insurance businesses in Argentina fell considerably as HSBC was obliged to renegotiate a number of contracts as a result of the mismatch between premiums and claims arising from the pesification of assets and liabilities.

Operating expenses, before goodwill amortisation, rose by 33 per cent to US$691 million, as savings from a reduction in headcount were offset by related severance payments. Staff costs were higher in Brazil, partly due to an increase in inflation-linked pension costs and an industry-wide union-agreed salary increase. Other administration expenses increased as a result of higher levels of transactional taxation, including an additional tax imposed on foreign companies.

The provision for bad and doubtful debts of US$100 million was slightly lower than in 2001. New provisions raised in Brazil to reflect the increased level of personal lending were more than offset by a number of releases, particularly in the credit card portfolio, reflecting the bank’s pro-active management of its personal loan book.

Commercial Banking in South America contributed pre-tax profit, excluding goodwill amortisation, of US$79 million, compared with a small reported loss in 2001.

Net interest income was broadly in line with 2001. Other operating income increased, reflecting strong growth in credit-related fee income in Brazil. Total operating expenses before goodwill amortisation rose by 36 per cent, to US$147 million, in 2002. Staff costs increased, mainly due to higher pension and salary costs in Brazil and severance payments in Argentina.

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FinancialReview(continued)

The favourable movement in provisions for bad and doubtful debts reflected improved economic conditions in Argentina together with releases in Brazil.

Corporate, Investment Banking and Marketsreported pre-tax profit, excluding goodwill amortisation, of US$32 million.

In Brazil, profit before tax, excluding goodwill amortisation was US$125 million, an increase of 15 per cent at constant exchange rates. In Argentina, loss before tax was US$101 million, compared with a small profit in 2001.

The net interest expense was attributable to the high cost of funding non-performing assets in Argentina, and a reduction in government bond securities in Brazil, as HSBC sought to minimise its exposure in the uncertain economic climate. Dealing profits increased, primarily due to income from interest rate derivatives trading and foreign exchange trading in Brazil. In Argentina, foreign exchange dealing profits improved as some resumption in

activity was permitted. Fee income declined in investment banking services in Brazil.

Operating expenses rose in constant currency terms, reflecting higher pension contributions in Brazil and severance payments in Argentina. Provisions for bad and doubtful debts mainly reflected a specific provision in Brazil against a corporate exposure.

Private Banking’s operationsrecorded apre-tax loss, before goodwill amortisation, of US$12 million compared with a loss of US$3 million in 2001. Adverse economic conditions in Uruguay, combined with the deterioration in the Argentine peso, were primarily responsible for the increased loss.

Within theOther customer group, provisions for contingent liabilities and commitments reflected court decisions (amparos) which required formerly frozen US dollar denominated customer deposits to be settled at the prevailing market rate.

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Profit/(loss) excluding goodwill amortisation by customer group

Year ended 31 December 2003

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Services

Banking

Markets

Banking

Other

elimination

Total

South America

US$m

Net interest income

499

168

(51

)

–

640

Dividend income

–

Net fees and commissions

245

(69

)

–

338

Dealing profits

118

–

136

Other income

119

(38

)

201

Other operating income

316

115

208

(38

)

678

Operating income

815

283

157

(38

)

1,318

Operating expenses excluding

goodwill amortisation¹

(706

)

(173

)

(113

)

(21

)

(100

)

(1,075

)

Operating profit before

provisions¹

109

110

)

(17

)

–

243

Provisions for bad and doubtful

debts

(138

)

(11

)

(26

)

116

–

(58

)

Provisions for contingent liabilities

and commitments

–

)

–

Loss from foreign currency

redenomination in Argentina

–

)

–

)

Amounts written off fixed asset

investments

(17

)

–

(44

)

–

)

–

(62

)

Operating profit/(loss)¹

(36

)

(26

)

–

116

Share of operating profit in

associates²

–

Gains/(losses) on disposal of

investments and tangible fixed

assets

–

)

–

Profit/(loss) on ordinary activities

before tax³

(27

)

(24

)

–

126

Share of HSBC’s pre-tax profits³

(0.2

)

0.7

(0.2

)

0.0

0.6

0.9

Cost:income ratio¹

86.6

61.1

72.0

116.7

120.5

81.6

US$m

Selected balance sheet data⁴

Loans and advances to customers

(net)

2,224

852

1,679

211

4,982

Total assets

4,211

1,357

5,505

1,406

12,549

Customer accounts

2,035

1,429

3,108

312

6,945

The following assets and liabilities

were also significant to Corporate,

Investment Banking and Markets:

Loans and advances to

banks (net)

1,384

Debt securities, treasury bills

and other eligible bills

1,311

Deposits by banks

593

Customer accounts

Goodwill amortisation:

1 excluded from (1) above

–

2 excluded from (2) above

–

3 excluded from (3) above

–

4 Third party only.

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H S B C H O L D I N G S P L C

FinancialReview(continued)

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Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

	Page

Board of Directors and Senior Management	184

Report of the Directors	189

Directors’ Remuneration Report	213

Statements of Directors’ Responsibilities in Relation to Financial Statements	230

Independent Auditors’ Report	231

Financial Statements	233

Notes on the Financial Statements	239

Taxation of Shares and Dividends	367

Shareholder Information	370

Organisational Structure	375

SEC 20-F Cross-Reference Sheet and Glossary	376

Index	379

HSBC (HSBC) 20-F2003 FY Annual report (foreign)

Content analysis