HSBC Holdings PLC - 2004 Interim Results - Highlights

€¢Operating income up 35 per cent to US$25,028 million (US$18,507 million

in the first half of 2003).

For the half year (excluding goodwill amortisation):

€¢Operating profit before provisions up 41 per cent to US$12,685 million

(US$9,017 million in the first half of 2003).

€¢Group pre-tax profit up 49 per cent to US$10,251 million (US$6,879

million in the first half of 2003).

€¢Attributable profit up 48 per cent to US$7,229 million (US$4,873 million

in the first half of 2003).

€¢Return on average invested capital of 16.5 per cent (14.2 per cent in the

first half of 2003).

€¢Earnings per share up 40 per cent to US$0.67 (US$0.48 in the first half

of 2003).

For the half year (as reported):

€¢Operating profit before provisions up 41 per cent to US$11,802 million

(US$8,385 million in the first half of 2003).

€¢Group pre-tax profit up 53 per cent to US$9,368 million (US$6,112 million

in the first half of 2003).

€¢Attributable profit up 55 per cent to US$6,346 million (US$4,106 million

in the first half of 2003).

€¢Return on average shareholders' funds of 16.0 per cent (13.5 per cent in

the first half of 2003).

€¢Basic earnings per share up 41 per cent to US$0.58 (US$0.41 in the first

half of 2003).

Dividend and capital position:

€¢Second interim dividend of US$0.13 per share, which, together with the

first interim dividend of US$0.13 per share already paid, represents an

increase of 8 per cent over the first interim dividend for 2003.

€¢Tier 1 capital ratio of 9.3 per cent; total capital ratio of 12.4 per

cent.

Within this document, the Hong Kong Special Administrative Region of the

People's Republic of China has been referred to as 'Hong Kong'.

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

HSBC made a profit on ordinary activities before tax of US$9,368 million, a rise

of US$3,256 million, or 53 per cent, over the same period in 2003. Household

contributed US$1,900 million in the first half of the year compared with a

contribution, from the date of acquisition, of US$536 million in 2003.

Net interest income of US$15,106 million was US$3,885 million, or 35 per cent,

higher than for the same period in 2003 mainly due to the additional three

months' contribution from Household compared to the first half of 2003. On an

underlying basis and at constant currency, net interest income increased by 4

per cent.

Other operating income rose by US$2,636 million, or 36 per cent, to US$9,922

million over the same period in 2003. On an underlying basis and at constant

currency, the increase was 15 per cent and reflected strong growth in fees and

commissions across all customer groups as well as a strong performance within

Global Markets.

Operating expenses, excluding goodwill amortisation, of US$12,343 million were

US$2,853 million, or 30 per cent, higher than in the first half of 2003. On an

underlying basis and expressed in terms of constant currency, operating expenses

increased by 8 per cent.

HSBC's cost:income ratio, excluding goodwill amortisation, decreased to 49.3 per

cent in the first half of 2004 from 51.3 per cent in the same period in 2003.

The charge for bad and doubtful debts rose by US$429 million to US$2,803 million

in the first half of 2004 when compared with the same period in 2003. There were

two key drivers to this change. The increase included an additional quarter's

charge from Household amounting to US$1,294 million. Offsetting this, there were

substantially fewer large specific provisions required in the corporate sector,

and the improving economic environment and outlook in both the US and Hong Kong

generated lower requirements for both specific and general provisions, resulting

in higher levels of recoveries and releases in both categories.

Gains on disposal of investments of US$317 million were US$53 million higher

than in the first half of 2003.

The tier 1 capital and total capital ratios for the Group remained strong at 9.3

per cent and 12.4 per cent, respectively, at 30 June 2004.

The Group's total assets at 30 June 2004 were US$1,154 billion, an increase of

US$120 billion, or 12 per cent, since 31 December 2003.

Comment by Sir John Bond, Group Chairman

We delivered a solid performance in the first half of 2004. Indeed, the absolute

level of profits was the highest we have achieved in a six-month period. Our

results reflect sound underlying revenue growth, a disciplined management of

costs while investing for the future, and improved productivity. They are also a

measure of the progress we are making in harnessing the strengths of our

business across all geographical regions and all our customer groups.

We grew profit attributable to shareholders by 55 per cent to US$6.3 billion.

Excluding the amortisation of goodwill, profit attributable, which is the basis

used to benchmark dividend proposals, was US$7.2 billion, an increase of 48 per

cent. This represents US$0.67 per share, an increase of 40 per cent over the

first half of 2003. In line with the programme of dividends announced with our

2003 results, the Directors have approved a second interim dividend of US$0.13

per share which will be payable on 6 October 2004. This brings the total

dividend declared to date to US$0.26 per share, an increase of 8 per cent

against the dividend declared at the same stage last year.

The background to our results was one of improving economic conditions in many

of our most important markets compared with the first half of 2003, particularly

in the US and Hong Kong.

There was, thankfully, no repetition of the outbreak of SARS which had so

severely affected a number of countries in Asia in the first half of 2003. Hong

Kong's economy achieved a significantly higher rate of growth, buoyed by rising

business and consumer confidence and by measures taken by the Chinese

authorities to allow increased tourism from mainland China. Both the property

market and employment levels improved. These factors in turn contributed to

renewed activity in the stock market which encouraged greater investment flows,

particularly from private investors.

The US economy is expected to have achieved real GDP growth of around 5 per cent

in the first six months of 2004. Employment levels began to rise after three

years of decline. Over one million new jobs were created in the period as the

full effects of earlier monetary and fiscal stimuli began to feed through.

Rising property prices and tax cuts helped consumer spending to continue growing

at a healthy rate.

The UK economy was resilient, with employment levels remaining strong. Interest

rate rises during the first half appear not to have dampened consumer

confidence.

Against this background, we continued to invest in the future of HSBC and

implementation of our new five-year strategic plan is well under way. In the

first six months of 2004, we have taken a number of significant initiatives in

line with the plan.

We have started to reorganise our business in the UK to improve productivity and

customer contact. Some of the measures we are taking in the UK are painful but

they are essential, and there are already signs that they are yielding results

in terms of business growth. Meanwhile, our creation of 1,000 new

customer-facing roles will strengthen the service levels that we want HSBC to be

known for.

Elsewhere, we have expanded our network of branches in Asia and, on 24 June, we

confirmed that The Hongkong and Shanghai Banking Corporation Limited is in

discussions to acquire 19.9 per cent of Bank of Communications in China. Those

discussions have gone well and we have now reached agreement in principle on the

terms of our investment. We expect to make a further announcement shortly. We

have deployed a growing amount of work internationally through the further

development of our Group Service Centres. We have upgraded and expanded through

selective recruitment our markets and investment banking capabilities. Above

all, we are reconfiguring our business in response to the transforming effects

which technology has on our relationship with our customers.

We made good progress in all customer groups during this half-year. It is

particularly pleasing to note that we have achieved strong organic growth in

many of our established markets which have not benefited from our acquisition

activity over the past few years. For example, we increased pre-tax profits in

the Middle East by 27 per cent to US$159 million and in India by 36 per cent to

US$98 million. In Hong Kong, fees and commissions rose by 40 per cent to reach

US$904 million. This represents compound annual growth of 16 per cent since the

first half of 1999.

Personal Financial Services ('PFS')

Our priority in PFS is to meet the financial needs of our customers in an

efficient and informed way so that we build and retain strong, valued

relationships with them.

During the first half of the year, we continued to grow our customer base

profitably, with increasing numbers of customers choosing to access us online.

The progressive expansion of our customer relationship management systems, the

deployment of technologies and techniques from Household and the roll-out of

segmentation models all contributed to increased sales. In May, we gained our

one-millionth HSBC Premier customer, with cross-sales to this, our most valuable

customer segment, remaining very strong.

The improved economic environment, combined with collaborative initiatives

between PFS and Household, has allowed us to expand profitably our personal

credit business. At the same time, improved stock market sentiment and rising

equity prices reinvigorated retail interest in investment products.

€¢In the UK, we achieved record mortgage sales through our 'One great rate'

campaign, which allowed customers to choose between a fixed or variable rate

mortgage offered at the same price. This led to an 18 per cent growth in

mortgage balances. Last month, Moneyfacts named HSBC the best value mortgage

lender in the UK. Also in the UK, we achieved strong growth in current

accounts and, through more effective marketing, in savings, personal lending

and credit card balances. Our fee income benefited from increased sales of

repayment protection products.

€¢First Direct in the UK acquired more current account customers than any

other direct bank in the first half of the year and it remains the country's

top bank for service and customer recommendation.

€¢In Hong Kong, sales of unit trusts and capital-protected investment

products reached record levels. Retail brokerage flows were also strong in

Hong Kong and in Canada. In insurance, HSBC led the market in new regular

premium life sales in the first quarter of 2004, with a market share of 24.9

per cent. Insurance income in total grew by 50 per cent, or US$71 million,

over the same period in 2003. We also benefited from an improved personal

credit environment leading to lower provisioning requirements.

€¢In Hong Kong, a mature credit card market, we concentrated on card usage

and, as a result, spending on HSBC-issued cards grew by 43 per cent.

€¢With the launch of HSBC Premier in April 2004, Mexico became the 32nd

country to offer this service. Deposit growth has accelerated with current

account balances up 15 per cent to US$5.5 billion since June 2003.

Acquisitions in the insurance and pensions businesses in the second half of

2003 also contributed to the overall strong revenue growth within our PFS

franchise. HSBC Mexico's market share of international remittances from the

US has increased substantially and collaborative efforts with Household

effectively position us to further capitalise on this high growth market.

€¢Our Middle East business has refocused its sales activities and this has

resulted in good all-round growth, particularly in the cards business where

the base has increased by 35 per cent. The June launch of HSBC Amanah as the

dedicated brand for our Shariah-compliant products and services is being

well received in the Middle East as well as in Indonesia, Malaysia,

Singapore, the UK and the US.

€¢In South America, the integration of the Losango consumer finance

business acquired at the end of 2003 has progressed well. The combined

customer base and enhanced capabilities have resulted in significantly

increased personal business in the region.

€¢We continue to innovate for the benefit of our customers and to introduce

new products and services to our key markets. Amongst our most recent

initiatives are a new retirement service in France, and new

insurance-linked, capital-protected investment products in Hong Kong. In the

US, we have introduced free current account services and also launched our

first marketing initiatives aimed specifically at the fast-growing Hispanic

and Latino communities.

Consumer Finance

The integration of Household into HSBC is virtually complete. The potential we

saw in providing wider access to Household's technology and marketing skills and

from using its experience in consumer credit management and retail services in

the rest of our Group is now being realised.

The roll-out of Household's WHIRL credit card system will enable us to

accelerate the geographical build up of cards in a number of countries.

Household's experience in retail services was crucial in helping HSBC win the

competitive tender for Marks and Spencer's financial services business in July.

Household is also supporting the development of our consumer credit business in

Mexico and Brazil by providing staff and access to its technology and collection

processes.

Driven by improved economic conditions and the benefits of integration with

HSBC, Household's performance in the first half of 2004 was strong.

€¢Compared with a year ago, Household achieved underlying growth in

customer loans of 13 per cent despite increased competition in the sector.

€¢Delinquency trends were positive across all products and maturities.

€¢The combination of HSBC and Household has opened a 'near prime' real

estate secured lending opportunity which offers continuing lending growth at

attractive margins.

€¢Funding synergies continue to afford Household access to wider sources of

funds at competitive rates.

Commercial Banking ('CMB')

Our commercial banking customer base remains a core area of focus and

development. During the first half of 2004, we expanded sales support covering

this segment and made further progress in building cross-border business and

referrals. We also enhanced our business internet banking service and invested

further in customer relationship management systems and related marketing

support. The results were encouraging.

€¢Underlying revenue grew by 9 per cent, more than double the rate of cost

growth, driven by higher fee and commission income as we expanded sales of

trade finance, credit and insurance services.

€¢Cross-border business referrals into China and between the US and Canada

grew strongly. Two further regional cross-border initiatives - between the

UK, France and Germany, and between Brazil and Argentina - were launched.

€¢Supporting this growth, we added specialist Business Banking Centres in

Hong Kong and relationship-managed more top tier customers through our

Corporate Banking Centres in the UK, France and Canada.

€¢Trade finance activity was particularly strong in the Middle East and

Asia with significant growth recorded in our businesses in Japan, Malaysia

and China.

€¢We have grown business internet banking customer numbers by over 50 per

cent since June 2003 and seen a significant increase in revenues. Internet

banking transaction volumes increased in Mexico, and in the UK we achieved

particular success in enrolling new customers.

€¢Joint initiatives between Household's retail services business and HSBC's

corporate customers generated a growing number of leads. New business was

booked in Canada, the US, and in Brazil, where new business from the Losango

acquisition is well ahead of expectations.

Corporate, Investment Banking and Markets ('CIBM')

The planned investment to upgrade the product and service capabilities of our

CIBM businesses is on track. During the first half of 2004, over 700 people were

recruited and our restructuring saw a similar number of staff departures. Some

90 per cent of planned senior hires have now been made. Growing revenues have

helped to fund this investment.

€¢In our Global Markets business, revenues were higher than in the first

half of 2003. We added to our trading and sales capabilities in areas such

as derivatives and structured products, contributing to the growth in

revenues. New hires significantly enhanced our capabilities in convertibles,

asset-backed securities, mortgage-backed securities and emerging market

debt. Equities sales and trading, now integrated with our Global Markets

business, was profitable in the first half on higher revenue, compared with

a loss in the first half of 2003.

€¢Corporate and Institutional Banking continued to invest in people and

infrastructure, appointing new business heads in a number of key countries,

upgrading client relationship managers to improve client servicing and

enhancing management information systems. Improved economic conditions led

to restructuring and refinancing activity internationally that allowed HSBC

to recover provisions against impaired loans.

€¢Within Global Transaction Banking our custody business has benefited

significantly from strong market sentiment and investment flows across

markets within Asia-Pacific. The custody and funds administration businesses

of HSBC and Bank of Bermuda were integrated quickly and successfully. Major

mandates won during the first half of 2004 included the outsourcing by

Gartmore of its back office operation.

€¢Our Debt Finance and Advisory business performed well. Worldwide, our

share of international bond issuance rose to 4.5 per cent from 3.8 per cent

in the same period in 2003. In Asia, we maintained our position as the

leading arranger and underwriter. We made significant progress in Europe and

the Americas, arranging major financing transactions for clients, including

a US$11.8 billion multi-tranche financing for Network Rail and a US$1.5

billion issue for Petroleos Mexicanos (PEMEX).

€¢Even at this early stage of the development of our Global Investment

Banking advisory business there was an encouraging improvement in the scope

of mandates awarded. Significant appointments included acting as financial

adviser to Saudi Arabian Oil Co. on its acquisition of a stake in Showa

Shell Sekiyu K.K. (Japan) from the Royal Dutch/Shell Group, and acting as

joint global co-ordinator of Ping An Insurance Co.'s US$1.84 billion initial

public offering, the largest IPO in Hong Kong in the period.

Private Banking

Private Banking achieved broadly based growth across the business. Revenue

growth comfortably exceeded cost growth and contributed to a pre-tax profit of

US$345 million which, adjusting for acquisitions and business transfers,

represented an underlying increase of 29 per cent.

The rebranded business, HSBC Private Bank, expanded its range of services in

Singapore following the receipt of a wholesale banking licence in 2003. It also

grew in Malaysia, where we established an onshore presence, and in Sweden and

Greece where we opened representative offices.

Good progress has been made in integrating Bank of Bermuda's Private Client

Services business with HSBC's. As a result, HSBC Private Bank's Global Wealth

Solutions business is now one of the world's largest international private trust

and fiduciary administrators, operating from 23 locations.

€¢Positive flows into the HSBC Private Bank Funds and our alternative

investment capability have attracted US$3.8 billion of new assets since 30

June 2003. Total client assets invested in hedge funds increased to US$18

billion.

€¢Strategic Investment Solutions has attracted US$610 million in client

assets since its launch in July 2003, reflecting client demand for open

architecture products.

€¢Lending to clients, their families and related structures has grown by 30

per cent since 30 June 2003.

Credit Quality

One important aspect of the improving economic climate has been the favourable

effect on credit quality, particularly in the US and Hong Kong. Improving levels

of employment, steadily rising property prices and resilient consumer confidence

are all key factors in our evaluation of portfolio provisioning requirements. As

a result of our assessment of the current benign credit environment, and

historic loss rates, some US$245 million of general provisions were released in

North America and Hong Kong.

In the UK, we paid considerable attention to our consumer portfolios given the

level of sensitivity within these businesses to rises in either interest rates

or unemployment. Although there is some evidence of deterioration, our

experience of arrears, repossessions and losses has continued to compare

favourably with industry averages. This reflects HSBC's long-standing traditions

of lending conservatively and providing early support for customers who find

themselves in difficulties.

Corporate credit experience remained highly favourable compared with historical

trends. Improved sentiment in the corporate sectors afforded further

restructuring opportunities which allowed us to recover provisions as companies

refinanced.

There were no concentrations of industry or geographical exposures emerging in

the first half of 2004 that were of significance in terms of credit risk

exposure.

Bank of Bermuda

The acquisition of Bank of Bermuda was completed in February this year, and

integration is proceeding well. We are delighted with the reaction of customers

who see our investment as strengthening our capabilities in funds administration

and trust services, as well as bringing additional products to an important

commercial banking presence in Bermuda. The current trend in the fund management

industry to offer an increasing number of alternative investment strategies is

accelerating the move towards outsourcing fund administration. Our combined

strengths have already been successful in attracting sizeable new mandates.

Similarly, in supporting Bermuda's reinsurance industry, HSBC's capital strength

is allowing Bank of Bermuda to expand its coverage of this important sector. The

synergies we identified at the time of the acquisition are on track and we

expect the integration process to be substantially completed by the end of 2004.

Outlook

When I described the outlook for our businesses on reporting our full year

results for 2003, there were many questions and uncertainties. How sustainable

were the early signs of recovery in the United States and Hong Kong? Could China

manage to slow its economy softly? When global interest rates began to rise,

would the rate of change be gradual and predictable? Had consumer indebtedness

in Western markets reached unmanageable levels? What would be the impact of the

continued threat of international terrorism? Would the growing burden of

regulation stifle innovation or investment?

As our results for the first half of this year demonstrate, my colleagues have

found opportunities within this challenging environment to deliver our strongest

ever performance in a six-month period. Although trading conditions in our

Global Markets business in the second quarter were less buoyant than in the

first, there are no obvious signs of significant deterioration. The current

operating environment remains favourable.

However, the global imbalances which brought about such uncertainties remain. It

would be unwise to relax, particularly when the last 18 months have seen a

significant build-up of capital reserves within the financial services industry

and while capital investment in the West has remained muted. The risk of market

disruption rises as financial institutions use increasingly similar technology

to manage risk. The possibility of volatility also increases as the investment

sector becomes more highly geared in search of better returns.

We remain focused on these issues. Our strength lies in the broad

diversification of our revenues by geography and by customer group. It also

rests on delivering the revenue growth and cost control objectives of our

current strategic plan. That is the challenge before us now. I know that my

colleagues around the world, talented and industrious as they are, are committed

to meeting it.

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