2008 Interim Report Section 7

4th Aug 2008 18:13



North America 

Profit/(loss) before tax by country within customer groups and global businesses 

	Personal Financial Services US$m		Commercial  Banking  US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Total US$m
Half-year to 30 June 2008
US	(2,194)		167		(1,779)		48		277		(3,481)
Canada	127		237		119		4		7		494
Bermuda	17		26		35		6		10		94
	(2,050)		430		(1,625)		58		294		(2,893)
Half-year to 30 June 2007
US	1,336		215		292		50		(44)		1,849
Canada	145		222		120		4		2		493
Bermuda	7		40		24		6		16		93
	1,488		477		436		60		(26)		2,435
Half-year to 31 December 2007
US	(3,160)		162		(1,535)		106		1,512		(2,915)
Canada	120		244		119		4		3		490
Bermuda	6		37		15		4		18		80
Other	-		-		-		-		1		1
	(3,034)		443		(1,401)		114		1,534		(2,344)

Loans and advances to customers (net) by country

	At 30 June  2008 US$m		At 30 June 2007 US$m		At 31 December 2007 US$m
US	215,909		233,592		233,706
Canada	54,346		45,510		53,891
Bermuda	2,235		2,193		2,263
	272,490		281,295		289,860

Customer accounts by country

	At 30 June  2008 US$m		At 30 June 2007 US$m		At 31 December 2007 US$m
US	95,763		93,325		100,034
Canada	38,367		32,744		37,061
Bermuda	7,870		8,328		8,078
	142,000		134,397		145,173

Profit/(loss) before tax

	Half-year to
	30 June2008		30 June 2007		31 December 2007
North America	US$m		US$m		US$m
Net interest income	7,873		7,307		7,540
Net fee income	2,822		2,904		2,906
Net trading income/(expense)	(1,816)		622		(1,164)
Net income from financial instruments designated at fair value	368		81		1,669
Gains less losses from financial investments	106		53		192
Dividend income	40		64		41
Net earned insurance premiums	203		231		218
Other operating income	115		342		18
Total operating income	9,711		11,604		11,420
Net insurance claims incurred and movement in liabilities to policyholders	(112)		(124)		(117)
Net operating income before loan impairment charges and other  credit risk provisions	9,599		11,480		11,303
Loan impairment charges and other credit risk provisions	(7,166)		(3,820)		(8,336)
Net operating income	2,433		7,660		2,967
Total operating expenses	(5,334)		(5,235)		(5,321)
Operating profit/(loss)	(2,901)		2,425		(2,354)
Share of profit in associates and joint ventures	8		10		10
Profit/(loss) before tax	(2,893)		2,435		(2,344)
	%		%		%
Share of HSBC's profit before tax	(28.2)		17.2		(23.3)
Cost efficiency ratio	55.6		45.6		47.1
Period-end staff numbers (full-time equivalent)	48,069		56,693		52,722
Balance sheet data6
	US$m		US$m		US$m
Loans and advances to customers (net)	272,490		281,295		289,860
Loans and advances to banks (net)	19,794		18,643		16,566
Trading assets, financial instruments designated at fair value, and  financial investments16	133,262		149,004		133,998
Total assets	531,607		519,693		510,092
Deposits by banks	11,764		13,043		16,618
Customer accounts	142,000		134,397		145,173

For footnotes, see page 89.

Economic briefing

In the US, GDP growth was subdued during the early months of 2008, but appeared to develop some momentum in the second quarter in response to fiscal loosening. Housing activity again proved weak, with certain measures of house prices showing large declines in a number of regions, although tentative signs emerged of stability in housing sales, albeit at subdued levels. The rise in mortgage delinquencies remained of primary concern. Employment conditions weakened throughout the first half of 2008, with the unemployment rate rising from 5.0 per cent in December 2007 to 5.5 per cent in June 2008. Concerns over the labour market appeared to influence consumer confidence although, for the most part, consumer spending proved resilient. Consumer price inflation remained high throughout the first half of 2008, standing at 5.0 per cent in June 2008. This was largely due to rising energy prices; excluding food and energy, consumer price inflation averaged 2.4 per cent during the period. The Federal Reserve lowered short-term interest rates by 225 basis points to 2 per cent in the first half of 2008, in an attempt to mitigate the worst effects of the sub-prime related credit squeeze on financial markets and economic activity. Declines in the second quarter of 2008 left Standard & Poor's S&P500 stock market index about 13 per cent below its level at the end of 2007.

Canadian GDP increased by just 1.2 per cent during the first five months of 2008 compared with the equivalent period in 2007, despite robust growth in consumer and government expenditure. Labour market conditions suffered a slight deterioration, although the unemployment rate of 6.2 per cent in June 2008 was only marginally above the historical low of 5.8 per cent recorded in October 2007. The

headline rate of consumer price inflation fluctuated at around 2 per cent during the first half of 2008 before moving to a level of 3.1 per cent, year-on-year, in June, while the level of core inflation held below the 1.5 per cent mark. The Bank of Canada cut its overnight interest rate from 4.25 per cent at the end of 2007 to 3 per cent in April 2008.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2008 ('1H08') compared with half-year to 30 June 2007 ('1H07')
North America	1H07 as reported US$m		Disposals  and  dilution   gains1 US$m		Currency translation2 US$m		1H07 at 1H08 exchange rates US$m		Acqui- sitions1 US$m		Under- lying  change  US$m		1H08 as reported US$m		Re- ported change %		Under- lying change %
Net interest income	7,307		-		70		7,377		-		496		7,873		8		7
Net fee income	2,904		(52)		26		2,878		-		(56)		2,822		(3)		(2)
Other income/(expense)3	1,269		-		7		1,276		-		(2,372)		(1,096)		(186)		(186)
Net operating income4	11,480		(52)		103		11,531		-		(1,932)		9,599		(16)		(17)
Loan impairment charges and other cre risk provisions	(3,820)		-		(3)		(3,823)		-		(3,343)		(7,166)		(88)		(87)
Net operating income	7,660		(52)		100		7,708		-		(5,275)		2,433		(68)		(68)
Operating expenses	(5,235)		50		(52)		(5,237)		-		(97)		(5,334)		(2)		(2)
Operating profit/(loss)	2,425		(2)		48		2,471		-		(5,372)		(2,901)		(220)		(217)
Income from associates	10		-		-		10		-		(2)		8		(20)		(20)
Profit/(loss) before tax	2,435		(2)		48		2,481		-		(5,374)		(2,893)		(219)		(217)

For footnotes, see page 89.

Review of business performance

HSBC's North America operations reported a preߛtax loss of US$2.9 billion in the first half of 2008, compared with a pre-tax profit of US$2.4 billion in the first half of 2007, a decline of 219 per cent, and 217 per cent on an underlying basis. The pre-tax loss was US$549 million more than in the second half of 2007. 

The US economy was weak in the first half of 2008, with unemployment rising despite resilience in some sectors. It is now generally believed that the deterioration in the housing market will be deeper and longer in terms of its effect on housing prices, and that it will extend into 2009. Credit quality continued to deteriorate in much of the US loan book, including some increase in impairment in prime mortgage lending at the US retail bank, which is HSBC Bank USA, excluding its consumer finance operations. The US economy continued to weaken and credit conditions deteriorated in the first half of 2008. As a result, US$527 million of goodwill carried by North America Personal Financial Services was impaired. For further information see Note 20 to the Financial Statements. Loan impairment charges rose by 88 per cent and the Personal Financial Services business recorded a preߛtax loss of US$2.1 billion. Profit before tax in Canada was broadly in line with the first half of 2007 at US$494 million, as the economy remained relatively strong.

The turmoil in the global credit markets persisted into 2008 and became more pronounced, leading to a loss before tax of US$1.6 billion in Global Banking and Markets. Further write-downs in credit trading positions, structured credit derivatives, leveraged and acquisition finance loans, and exposures to monoline insurers were only partly offset by strong performances in foreign exchange, equities, rates, metals trading, and payments and cash management. Commercial Banking profits declined by 10 per cent, as revenues fell due to tighter deposit spreads despite strong growth in balances, while loan impairment charges increased from the low levels of 2007. Pre-tax profits in Private Banking declined, as lower fee income more than offset the reduction in operating expenses driven by lower staff costs. Profit before tax in Bermuda was in line with the first half of 2007.

The following commentary is on an underlying basis.

Personal Financial Services reported a preߛtax loss of US$2.1 billion, a decline of US$3.5 billion from the first half of 2007.

 Deteriorating economic conditions led to a significant rise in loan impairment charges as credit quality worsened. This more than offset the reduction in operating costs delivered by management actions in the consumer finance business such as closing branches, reduced marketing, discontinuing certain Taxpayer Financial Services products and relationships, restricting vehicle finance business and further tightening underwriting criteria across the loan portfolio. Impairment of goodwill was the primary driver of the 3 per cent rise in operating expenses. HSBC acted to mitigate the effect of the housing market decline on customers, with more loans modified and loan modification periods extended.

In the US, pre-tax losses in the first half of 2008 of US$2.2 billion compared with a US$1.3 billion profit in the same period in 2007. Losses were driven by increased loan impairment charges, as credit quality declined due to a combination of falling house prices, rising unemployment, higher fuel and food costs and tighter credit conditions. Portfolio seasoning also contributed to higher loan impairment charges. The turmoil in credit markets continued and debt securitisation activity remained very low. This severely reduced the number of refinancing options available to customers. Historically, customers facing financial hardship from unforeseen life events such as redundancy or ill-health have used mortgage refinancing to withdraw equity from their homes to meet their financial obligations. Reduced refinancing opportunities have increased the risk that these customers may default on some or all of their loan obligations. In response, management in the consumer finance business launched intensive programmes to limit foreclosures, modifying more than 33,000 loans. Losses incurred on repossessed properties were partly offset by one-off gains of US$129 million from the Visa IPO. Interest expense fell due to lower funding costs, while staff and marketing costs were lower following management action to reposition the business.

In Canada, profit before tax declined by 18 per cent to US$127 million as higher net interest income due to growth in lending and deposits following effective marketing campaigns was more than offset by an increase in loan impairment charges in the consumer finance business. This was driven by deteriorating delinquency trends in mortgages and private label cards, as the consumer credit environment became more challenging in Western Canada. An expansion of the branch network of the Canadian retail bank, HSBC Bank Canada, and an increase in employee numbers resulted in increased administrative and staff costs. 

Net interest income was in line with the first half of 2007, notwithstanding a 3 per cent fall in average loan balances. Spreads widened due to a significant reduction in funding costs following central bank rate cuts, together with the mix effect from an increased proportion of higher yielding credit and private label cards. These factors were partly offset by a decline in US lending balances, increased impaired loans and lower prepayment volumes. 

In the US, net interest income was unchanged. US average deposit balances rose by 5 per cent, as online savings account and retail network savings and current account balances increased. At 30 June 2008, online savings account balances were US$13 billion, with customer numbers rising to over 860,000, attracted by the effect of promotional rates. The number of Premier customers rose by 17 per cent in the twelve months since 30 June 2007 to 215,000, due to marketing campaigns and sales efficiency improvements. Deposit spreads narrowed, reflecting a significant decline in base rates and the change in product mix to higher yielding savings accounts.

Average US mortgage balances declined by 11 per cent to US$112 billion, primarily due to the winding down of the mortgage services portfolio, the tightening of credit criteria for new lending and portfolio sales at the US retail bank and consumer finance business. The slowdown in the US housing market intensified in the first half of 2008, with prices, sales and new housing construction all declining and thereby reducing loan demand. 

In the consumer finance business, spreads across the total mortgage loan portfolio widened as funding costs declined due to a 325 basis point reduction in US short-term interest rates compared with 30 June 2007.

Average mortgage balances in the branch-based consumer lending business increased by 5 per cent to US$50 billion due to growth in the second half of 2007. During the first six months of 2008, liquidations exceeded new originations, the latter declining sharply as a result of the closure of some 400 branches during 2007, with another 100 closed in 2008, and further tightening of underwriting standards. This was partly offset by lower run-off rates as a result of the decline in loan prepayments. Yields declined due to deteriorating credit quality as the volume of impaired loans increased and loan terms were modified downwards. A slowdown in the rate of liquidations mitigated the effect of lower originations but also led to lower prepayment penalty income and reduced revenues from amortisation of deferred loan origination fees. Yields on new lending rose despite tighter underwriting criteria which led to a change in mix towards higher quality assets that typically price at a lower level. Spreads widened as funding costs declined.

In mortgage services, average mortgage balances declined by 28 per cent to US$34 billion, largely due to liquidations in the normal course of business following the cessation of new originations in 2007. The pace of decline was partly moderated by lower loan prepayments due to fewer refinancing opportunities for customers. Spreads narrowed as lower funding costs were more than offset by a fall in yields as deteriorating credit quality led to lower levels of early repayment due to reduced prepayment penalty income.

Average mortgage balances held by the US retail bank declined by 10 per cent to US$28 billion as the bank continued to sell a majority of its new residential mortgage loan originations to government-sponsored enterprises and private investors, and allow its residential mortgage loan portfolio to run off including a US$4 billion portfolio sale in the first half of 2008. Spreads widened as yields declined by less than funding costs in the falling rate environment. 

Average credit and private label card balances at 30 June 2008 were US$49 billion. Lending growth slowed to 4 per cent as HSBC reduced marketing and tightened underwriting standards during the second half of 2007 and into 2008. Spreads widened as yields declined less than funding costs. Yields declined, driven by changes in product mix in credit and private label cards. Partly offsetting this was the effect of card balances at their contractual floor.

Vehicle finance average balances were broadly flat. Growth in the near-prime portfolio was the result of expansion in the customer direct loan programme, partly offset by lower originations in the dealer network portfolio due to action taken in the second half of 2007 to improve the credit quality of new lending. In the first quarter of 2008, HSBC discontinued dealer relationships in several states, primarily in the Northeast, and withdrew some products. Spreads widened as yields increased and cost of funds declined. Yields increased due to an increased proportion of higher yielding consumer finance loans, partly offset by changes in product mix towards lower yielding, lower risk loans. 

In late July 2008 HSBC decided to cease originating new business within a 90-day period in the North America vehicle finance business of HSBC Finance Corporation. While credit quality in the vehicle finance business had improved during the first half of 2008, management considered that the business was sub-scale and did not have sufficient market strength for it to provide an acceptable level of risk adjusted returns. HSBC will manage an orderly run-off of the portfolio of US$12.5 billion. The estimated costs associated with the decision to exit the vehicle finance business are US$25 million, a substantial portion of which are expected to be recognised in the second half of 2008.

Personal non-credit card average balances declined by US$865 million as a result of actions taken to tighten underwriting standards in 2007. Despite a fall in funding costs, spreads narrowed as yields declined.

In Canada, net interest income rose by 11 per cent, primarily due to a 10 per cent increase in average lending balances, reflecting house price appreciation since the first half of 2007 and robust economic growth. Deposit balances rose, primarily reflecting growth in customer numbers. Premier customer numbers increased by more than 25,000 to over 93,000. Yields fell across most lending products as falling base rates were passed on to floating rate customers, while yields on deposits rose as competition increased. Spreads tightened across the majority of the portfolio as wider credit spreads meant base rate cuts were not fully reflected in funding costs.

Average deposit balances in Canada rose by 9 per cent, driven by strong growth in the direct savings account as HSBC increased its share of the market. Average balances in the high rate and direct savings accounts more than doubled to US$2.9 billion driven by a combination of new customer acquisition and higher average balances on existing accounts. Deposit spreads tightened as yields on deposits rose, despite lower base rates due to an increase in the mix of higher yielding savings accounts and as competition between deposit taking institutions intensified. Yields on surplus funds were broadly unchanged. 

Average lending balances in Canada were 10 per cent higher, driven by demand for credit in a relatively robust economy. Lending in consumer finance rose, due to growth in the private label card portfolio, following a significant new relationship in the second half of 2007. In the Canadian retail bank, lending rose driven by mortgages and other personal lending as economic growth continued. Yields declined across most products as interest rate cuts were immediately passed on to floating rate borrowers while overall spreads tightened despite lower base rates as credit spreads widened.

Fee income declined by 8 per cent, mainly due to changes to fee billing practices in the credit card business and the withdrawal of some products in Taxpayer Financial Services. In the US, fees fell by 9 per cent. Fee income from credit cards declined due to changes in overlimit fee billings implemented during the fourth quarter of 2007 and first half of 2008 to improve the customer proposition. A decline in credit quality, changes to the portfolio mix and higher balances led to an increase in the level of uncollectible fees in the credit card and private label portfolios. Fees for late payment rose due to an increase in overdue balances, changes in the merchant mix and amendments to terms. Enhancement services revenue rose as higher takeߛup rates led to increased fees from debt protection products and total insurance fee income increased by 34 per cent to US$390 million. Taxpayer Financial Services revenue decreased as a result of discontinuing pre-season and pre-file loan products for the 2008 tax season and the decision to reduce the number of relationships with third parties. 

At the US retail bank, net fee income rose by 29 per cent to US$372 million, driven by higher service charges on deposits and increased credit card fees from higher transaction volume.

Fee income in Canada rose by 4 per cent. In the Canadian retail bank, the rise was driven by higher service charges, due to repricing; investment administration fees, as a result of growth in funds under management; foreign exchange fees, arising from increased client volumes resulting from volatility in the Canadian dollar to US dollar exchange rate; and Global Immigrant Investor Programme fees, due to growth in volumes. Fee income in consumer finance fell by 7 per cent from a low base in the first half of 2007.

Trading losses declined to US$16 million from US$97 million in the first half of 2007, due to the closure of the Decision One brokerage business. 

The Visa IPO provided a US$92 million gain on financial investments. 

Other operating income declined by 189 per cent, primarily due to losses on repossessed properties as volumes increased and values fell with the decline in house prices. In the consumer finance business, total foreclosed properties rose to nearly 11,000 from over 9,600 at 31 December 2007 although, following operational enhancements, the time which foreclosed assets remained on the market fell from 183 days to 171 days.

Other operating income in Canada fell, largely reflecting a net loss on the sale of a mortgage brokerage business within consumer finance. Other operating income fell in the Canadian retail bank due to the non-recurrence of a gain on the sale of shares in the Montreal stock exchange in the first half of 2007. 

Loan impairment charges rose by 84 per cent on the first half of 2007 to US$7.0 billion, driven by a weakening US economy, continued deterioration in the consumer finance loan portfolio and a decline in the credit quality of prime and second lien mortgages held by HSBC Bank USA. Charges were US$1.2 billion lower than in the second half of 2007. US loan impairment charges rose by 85 per cent as delinquencies increased across much of the loan book. Part of the increase reflected the continued seasoning of the 2005, 2006 and early 2007 portfolios. The first half of 2008 saw a further weakening in the US economy and house price declines accelerated, reducing the amount of equity available for refinancing. Credit market turmoil meant the secondary market for securitised loans remained closed. Consequently, customers continued to experience difficulties in refinancing their loans. Bankruptcy levels increased as a rise in unemployment and increased fuel and food costs added to the financial pressures facing customers. Although the vast majority of mortgage customers continued to meet their commitments, delinquencies rose and loss severities increased.

HSBC continued to act to mitigate, where appropriate, the effects of the housing market decline on customers. In the first half of 2008, in the consumer finance business some 33,000 loans with an aggregate balance of approximately US$5.1 billion were modified. On a selective basis, longer term modifications were offered, typically for either two or five years.

Loan impairment charges in the mortgage services business more than doubled to US$1.9 billion. Rising delinquencies were partly offset by a decline in lending balances as the portfolio moved further into run-off.

In the consumer lending business, loan impairment charges rose by 69 per cent to US$2.1 billion as market conditions deteriorated. The decline was most severe in first lien loans in those states most affected by the housing market downturn. In addition, in the first half of 2008 delinquencies increased markedly in those states experiencing significant rises in unemployment. In response, credit criteria were tightened and an additional 100 branches were closed in the first half of 2008.

At HSBC Bank USA, the credit quality of residential mortgages deteriorated in the Home Equity Line of Credit and Home Equity Loan portfolios, while prime first lien mortgages also experienced higher levels of delinquency. 

Credit and private label card loan impairment charges rose by 58 per cent to US$2.3 billion due to higher levels of non-prime balances, portfolio seasoning, increased bankruptcy filings, and the deterioration in the economy. Strategic initiatives were implemented to mitigate deteriorating credit trends on cards, including increased collection capacity, closure of inactive accounts, reductions in credit limits, a tightened approval process and restricted balance transfer volumes. 

Impairment charges on the personal non-credit card portfolio rose by 40 per cent to US$1.2 billion. The deterioration in credit quality was more pronounced in some regions driven by the weakening US economy, rising unemployment rates and higher levels of bankruptcy filings. Loan impairment charges at the vehicle finance business rose by 44 per cent to US$335 million as economic deterioration led to higher loan defaults, while reduced demand for used cars, particularly larger vehicles, led to higher losses when repossessed vehicles were sold at auction.

In Canada, loan impairment charges rose by 52 per cent to US$125 million due to deteriorating delinquency rates in private label cards and mortgages, within the consumer finance business particularly in Western Canada, as the credit environment became more challenging. Loan impairment charges in the Canadian retail bank rose by US$9 million, largely driven by the vehicle finance business as a result of portfolio seasoning and higher fuel prices.

Operating expenses increased by 3 per cent to US$3.9 billion because of the goodwill impairment. Excluding this, costs declined. In the US, the management actions in 2007 to close the Decision One mortgage brokerage unit, cease correspondent acquisitions and reduce the consumer lending branch network led to a decline in staff costs. In addition, costs fell due to staff cuts from the reduction in size of the vehicle finance business and ongoing global cost reduction campaigns in processing and support functions. Other operating expenses declined as marketing on credit and private label cards was curtailed to limit growth in loan balances. Branch closures in the consumer finance business and reduced mortgage services activity also led to lower operating costs. At the US retail bank, a rise in staff and other operating costs reflected increased investment in branch expansion and higher federal deposit insurance expenses. These costs were more than offset by the release of a litigation provision relating to a legal settlement prior to the Visa IPO in the second half of 2007.

Operating expenses rose by 5 per cent in Canada. Staff costs rose by a percentage point due to increased headcount in the Canadian retail bank following expansion in the branch network, which was partly offset by lower costs in consumer finance as a result of reduced headcount following branch closures in 2007 and the sale of a mortgage brokerage business in 2008. Other administrative and support costs rose, as investments made in the business, including expanding the branch network and online banking resulted in higher premises and depreciation costs.

Commercial Banking pre-tax profit declined by 15 per cent to US$430 million as loan impairment charges rose in the deteriorating economic environment. 

Revenue increased, lifted by asset sales from HSBC Finance and fee income in Canada, partly offset by a fall in net interest income due to tighter spreads on deposits.

In the US, profit before tax fell by 22 per cent, with performance driven by tighter deposit spreads and increased loan impairment charges.

In Canada, profit before tax fell by 6 per cent to US$237 million as increased fee income was more than offset by higher loan impairment charges due to increased delinquency rates in the export and manufacturing sectors as a result of the slowing US economy, higher energy costs and a stronger Canadian dollar. 

In Bermuda, profit before tax declined by 29 per cent due to lower net interest income as deposit spreads tightened following base rate cuts, and higher costs.

Net interest income declined by 2 per cent. In the US, net interest income fell by 3 per cent, as tighter deposit spreads in the declining rate environment more than offset a rise in deposit and loan volumes. The US retail bank continued its strategy of balancing growth between its established business in New York State and its expansion in the West Coast, Chicago and the Southeast. Average deposit balances rose by 11 per cent and loan balances increased by 11 per cent.

In the US, average loan balances to the middle market segment rose by 29 per cent to US$8.1 billion, outpacing the small business segment, where loans rose by 4 per cent in the face of increased competitive pressures. Management action led to a 3 per cent decline in commercial real estate activity compared with the first half of 2007, with increased repayments and reduced replacement business as the US retail bank took the opportunity to manage down lending exposures due to lower risk appetite and a deterioration in market conditions. Lending spreads widened on small business loans due to lower funding costs, but this was more than offset by tighter spreads on middle market and commercial real estate loans as yields declined due to a move towards higher credit quality customers, although spreads improved markedly in the second quarter.

Average deposit balances with small businesses in the US rose by 8 per cent to US$13 billion, due to strong growth in markets outside New York. Middle market deposits rose 23 per cent while commercial real estate deposit growth was subdued due to the exiting from selected associated lending relationships. The rise in balances was more than offset by narrower deposit spreads in the declining rate environment and competitive pricing pressures.

In Canada, net interest income was broadly in line with the first half of 2007 at US$337 million, as balance sheet growth offset tightening lending spreads. Average deposit balances rose by 8 per cent due to higher cash management balances, driven by an increase in account numbers following an expansion of the product offering. Deposit spreads remained constant as deposit rates and yields on surplus funds were unchanged despite lower base rates as credit spreads widened. 

Average lending balances rose by 13 per cent, driven by lending growth, particularly in floating rate products, in the buoyant Western Canada region. Elsewhere, lending growth was experienced across all regions as the economy remained robust. Lending spreads tightened as interest rate cuts were immediately passed on to floating rate borrowers, in contrast to the wholesale cost of funding, which was adversely affected by wider credit spreads.

In Bermuda, net interest income decreased by 19 per cent, driven by tighter deposit spreads on current accounts as base rates declined. Average deposit balances rose by 23 per cent, reflecting continued strong demand from the insurance and construction sectors.

Net fee income rose by 20 per cent. In the US, fees increased by 7 per cent due to higher deposit service charges as a result of the successful expansion of cash management product offerings, higher debit card fees and increased loan syndication and agency fees for commercial real estate. In Canada, fee income rose by 36 per cent, driven by an increase in revenue as volumes of trade related money market instruments rose and higher fund transfer commissions as client activity increased.

Other operating income was higher due to increased gains from sales of assets in the legacy HSBC Finance commercial portfolio. 

In the US, loan impairment charges more than doubled to US$106 million as the deteriorating economic outlook and customer downgrades prompted an increase in impairment allowances in the middle market and commercial real estate portfolios, as well as higher impairment charges for small business loans. While impairment allowances in middle market and commercial real estate increased, the level of write-offs on these portfolios improved, resulting in a small level of recoveries .

Loan impairment charges in Canada rose by US$38 million from the low levels reported in 2007 due to asset growth and higher delinquency rates in the manufacturing and export sectors, the result of the slowing US economy, higher energy costs and stronger Canadian dollar.

Operating expenses in the US were broadly unchanged as a decline in staff costs was offset by a rise in branch network-related costs. Staff costs fell due to lower incentive compensation and a decrease in headcount due to the consolidation of lending support functions. Administrative expenses rose by 9 per cent, mainly due to marketing spend. 

Operating expenses in Canada were in line with the first half of 2007. Staff costs were broadly unchanged as higher salaries and benefits from growth in headcount due to continued investment in the business were offset by lower performance related pay. Other operating expenses fell due to lower capital taxes.

Global Banking and Markets reported a loss before tax of US$1.6 billion, compared with a profit of US$436 million in the first half of 2007. The disruption in global credit markets led to US$2.3 billion of write-downs in Credit and structured credit trading exposures and in monoline exposures and leveraged loans. Aside from these write-downs, pre-tax profit grew compared with the first half of 2007, as the performance of other trading businesses improved and net interest income and net fee income increased.

Total operating losses of US$843 million were driven by the write-downs noted above. These losses were partly mitigated by increased income in other trading product areas, and in Balance Sheet Management.

Net interest income increased by 58 per cent as Balance Sheet Management benefited from the falling short-term US interest rates. Strong deposit balance growth in payments and cash management also contributed.

Net fee income rose by 31 per cent. Global Asset Management benefited from the market turmoil as institutional clients moved assets into less volatile cash funds. Advisory fee income also rose in capital markets, chiefly due to earnings from the Visa IPO.

Trading losses of US$1.7 billion were primarily driven by the write-downs noted above. Due to the credit market turmoil, the fair value of credit instruments such as mortgage loans and structured credit instruments deteriorated as the credit and liquidity disruption that began in the US sub-prime market spread into other mortgage and mortgage-related products. Trading in new US mortgages and related products was discontinued in late 2007. HSBC transacts with monoline insurers to buy protection against losses from defaults, primarily on credit products. For a description of the background to monoline write-downs, see page 36. The market turmoil also caused the market value of some leveraged and acquisition finance loans to fall due to general credit and liquidity disruption. More information on these write-downs and the underlying assets is available on page 113. 

Other trading product areas continued to perform strongly, including foreign exchange and Rates, up by 99 per cent and 355 per cent, respectively, compared with the same period in 2007. Rates trading benefited from reduced market liquidity, which provided opportunities for wider spreads, and from increased market volatility. Foreign exchange trading income increased on higher customer trading and a strengthening of major currencies against the US dollar. Metals trading revenues benefited from higher prices in gold and platinum. Income from the equities business grew from increased customer trading volumes, which were driven by equity market volatility, and through capital markets fees.

Market conditions led to lower Principal Investments activity, resulting in a decline in Other operating income, and Gains less losses from financial investments fell as income from the disposal of securities declined. 

Loan impairment charges rose because of weaker credit fundamentals which have resulted in a higher number of downgrades, particularly in comparison with the releases in the first half of 2007.

Operating expenses fell due to a 7 per cent reduction in staff numbers following the restructuring of a number of businesses during the second half of 2007 and first half of 2008 in response to market conditions. This included the closure of the mortgage-backed securities business in the US. The financial performance also led to lower performance-related costs, which further reduced operating expenses.

Private Banking reported a pre-tax profit of US$58 million in line with the first half of 2007, as unchanged revenues were offset by increased operating expenses. The cost efficiency ratio worsened by 4.8 percentage points to 74.2 per cent, with a number of new hires in the US and Canada.

Net interest income decreased by 5 per cent to US$112 million. Higher volumes of domestic savings and foreign time deposit accounts were driven by clients moving their assets under management to safer cash products, and new client relationships. However, this was offset by compressed spreads in the US due to a reduction in short-term US dollar interest rates.

Other revenues grew 5 per cent to US$117 million, driven mainly by an 11 per cent increase in net fee income. In the US, improved revenue sharing between customer groups led to increased asset management and custody fees and higher brokerage income. In Bermuda, HSBC also reported a rise in fee income, benefiting from improved brokerage and trust income fees, with the introduction of new tariffs.

Client assets increased by 1 per cent to US$58.8 billion compared with 31 December 2007, primarily in domestic custody and trust accounts, with net new money of US$1.4 billion offset by negative market movements.

Operating expenses were 7 per cent higher at US$170 million. A 7 per cent rise in staff costs was due to increased headcount relating to business expansion.

Within Other, profit before tax of US$294 million was reported compared with a loss of US$26 million in the first half of 2007.

Fair value movements on HSBC's own debt resulted in gains of US$354 million, primarily due to the widening credit spreads in the first quarter. Costs at HSBC.com and HSBC Technology USA Inc, the providers of technology services in North America, decreased by 3 per cent to US$696 million. Related recharges are reported in other operating income.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2008 ('1H08') compared with half-year to 31 December 2007 ('2H07')
North America	2H07 as reported US$m		Disposals  and  dilution   gains1 US$m		Currency translation2 US$m		2H07 at 1H08 exchange rates US$m		Acqui- sitions1 US$m		Under- lying  change  US$m		1H08 as reported US$m		Re- ported change %		Under- lying change %
Net interest income	7,540		-		3		7,543		-		330		7,873		4		4
Net fee income	2,906		(52)		1		2,855		-		(33)		2,822		(3)		(1)
Other income/(expense)3	857		(18)		1		840		-		(1,936)		(1,096)		(228)		(230)
Net operating income4	11,303		(70)		5		11,238		-		(1,639)		9,599		(15)		(15)
Loan impairment charges and other credit risk provisions	(8,336)		-		2		(8,334)		-		1,168		(7,166)		14		14
Net operating income	2,967		(70)		7		2,904		-		(471)		2,433		(18)		(16)
Operating expenses	(5,321)		48		(3)		(5,276)		-		(58)		(5,334)		-		(1)
Operating loss	(2,354)		(22)		4		(2,372)		-		(529)		(2,901)		(23)		(22)
Income from associates	10		-		-		10		-		(2)		8		(20)		(20)
Loss before tax	(2,344)		(22)		4		(2,362)		-		(531)		(2,893)		(23)		(22)

For footnotes, see page 89.

Analysis by customer group and global business 

Profit/(loss) before tax 

	Half-year to 30 June 2008
North America	Personal Financial Services US$m		Commercial Banking US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Inter- segment elimination9 US$m		Total US$m
Net interest income	6,609		758		330		112		209		(145)		7,873
Net fee income/(expense)	2,145		192		426		98		(39)		-		2,822
Trading income/(expense) excluding net interest income	(51)		4		(2,001)		11		(154)		-		(2,191)
Net interest income/ (expense) on trading activities	35		-		292		-		(97)		145		375
Net trading income/  (expense)7	(16)		4		(1,709)		11		(251)		145		(1,816)
Net income from financial instruments designated at fair value	4		2		7		1		354		-		368
Gains less losses from financial investments	105		3		(4)		-		2		-		106
Dividend income	8		-		31		-		1		-		40
Net earned insurance premiums	203		-		-		-		-		-		203
Other operating income/ (expense)	(100)		88		76		7		715		(671)		115
Total operating income/(expense)	8,958		1,047		(843)		229		991		(671)		9,711
Net insurance claims8	(112)		-		-		-		-		-		(112)
Net operating income4/ (expense)	8,846		1,047		(843)		229		991		(671)		9,599
Loan impairment charges and other credit risk provisions	(6,952)		(156)		(57)		(1)		-		-		(7,166)
Net operating income/(expense)	1,894		891		(900)		228		991		(671)		2,433
Total operating expenses	(3,944)		(468)		(725)		(170)		(698)		671		(5,334)
Operating profit/(loss)	(2,050)		423		(1,625)		58		293		-		(2,901)
Share of profit in associates and joint ventures	-		7		-		-		1		-		8
Profit/(loss) before tax	(2,050)		430		(1,625)		58		294		-		(2,893)
	%		%		%		%		%				%
Share of HSBC's profit before tax	(20.0)		4.2		(15.9)		0.6		2.9				(28.2)
Cost efficiency ratio	44.6		44.7		(86.0)		74.2		70.4				55.6
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	201,941		37,756		27,137		5,656		-				272,490
Total assets	236,672		44,023		243,132		6,846		934				531,607
Customer accounts	66,281		36,881		23,709		15,020		109				142,000
Loans and advances to banks (net)12					18,624
Trading assets12,13					158,218
Financial instruments designated at fair value12					-
Financial investments12					35,902
Deposits by banks12					10,909
Trading liabilities12,13					152,093

For footnotes, see page 89.

Profit/(loss) before tax

	Half-year to 30 June 2007
North America	Personal Financial Services US$m		Commercial Banking US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Inter- segment elimination9 US$m		Total US$m
Net interest income/ (expense)	6,545		740		202		117		(18)		(279)		7,307
Net fee income/(expense)	2,332		152		320		140		(40)				2,904
Trading income/(expense) excluding net interest income	(184)		3		483		6		(62)				246
Net interest income on trading activities	87				10						279		376
Net trading income/ (expense)7	(97)		3		493		6		(62)		279		622
Net income from financial instruments designated at fair value	-		-		3		-		78		-		81
Gains less losses from financial investments	9		-		42		2		-		-		53
Dividend income	35		1		28		-		-		-		64
Net earned insurance premiums	231		-		-		-		-		-		231
Other operating income	114		58		109		14		735		(688)		342
Total operating income	9,169		954		1,197		279		693		(688)		11,604
Net insurance claims8	(124)		-		-		-		-		-		(124)
Net operating income4	9,045		954		1,197		279		693		(688)		11,480
Loan impairment (charges)/ recoveries and other credit risk provisions	(3,774)		(46)		12		(12)		-		-		(3,820)
Net operating income	5,271		908		1,209		267		693		(688)		7,660
Total operating expenses	(3,783)		(443)		(771)		(207)		(719)		688		(5,235)
Operating profit/(loss)	1,488		465		438		60		(26)		-		2,425
Share of profit/(loss) in associates and joint ventures	-		12		(2)		-		-		-		10
Profit/(loss) before tax	1,488		477		436		60		(26)		-		2,435
	%		%		%		%		%				%
Share of HSBC's profit before tax	10.5		3.4		3.1		0.4		(0.2)				17.2
Cost efficiency ratio	41.8		46.4		64.4		74.2		103.8				45.6
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	219,735		34,831		21,462		5,267		-				281,295
Total assets	246,117		41,227		223,435		6,386		2,528				519,693
Customer accounts	58,724		33,513		27,661		14,392		107				134,397
Loans and advances to banks (net)12					16,289
Trading assets12,13					146,387
Financial instruments designated at fair value12					-
Financial investments12					33,790
Deposits by banks12					10,927
Trading liabilities12,13					131,111

For footnotes, see page 89.

Analysis by customer group and global business (continued)

Profit/(loss) before tax 

	Half-year to 31 December 2007
North America	Personal Financial Services US$m		Commercial Banking US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Inter- segment elimination9 US$m		Total US$m
Net interest income	6,630		818		176		156		1		(241)		7,540
Net fee income/(expense)	2,239		186		381		139		(39)		-		2,906
Trading income/(expense) excluding net interest income	(165)		(5)		(1,354)		5		(16)		-		(1,535)
Net interest income/ (expense) on trading activities	47		-		127		-		(44)		241		371
Net trading income/ (expense)7	(118)		(5)		(1,227)		5		(60)		241		(1,164)
Net expense from financial instruments designated at fair value	-		-		8		-		1,661		-		1,669
Gains less losses from financial investments	167		(1)		23		-		3		-		192
Dividend income	12		-		29		-		-		-		41
Net earned insurance premiums	218		-		-		-		-		-		218
Other operating income/ (expense)	(119)		30		58		20		745		(716)		18
Total operating income	9,029		1,028		(552)		320		2,311		(716)		11,420
Net insurance claims8	(117)		-		-		-		-		-		(117)
Net operating income/ (expense)4	8,912		1,028		(552)		320		2,311		(716)		11,303
Loan impairment (charges)/ recoveries and other credit risk provisions	(8,135)		(145)		(58)		2		-		-		(8,336)
Net operating income	777		883		(610)		322		2,311		(716)		2,967
Total operating expenses	(3,811)		(450)		(791)		(208)		(777)		716		(5,321)
Operating profit/(loss)	(3,034)		433		(1,401)		114		1,534		-		(2,354)
Share of profit in associates and joint ventures	-		10		-		-		-		-		10
Profit/(loss) before tax	(3,034)		443		(1,401)		114		1,534		-		(2,344)
	%		%		%		%		%				%
Share of HSBC's profit before tax	(30.2)		4.4		(13.9)		1.1		15.3				(23.3)
Cost efficiency ratio	42.8		43.8		143.3		65.0		33.6				47.1
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	218,676		38,930		26,186		6,068		-				289,860
Total assets	240,734		43,920		217,808		6,541		1,089				510,092
Customer accounts	61,824		36,306		30,732		16,187		124				145,173
Loans and advances to banks (net)12					14,938
Trading assets12,13					149,926
Financial instruments designated at fair value12					-
Financial investments12					33,273
Deposits by banks12					14,825
Trading liabilities12,13					126,139

For footnotes, see page 89.

Latin America

Profit/(loss) before tax by country within customer groups and global businesses

	Personal Financial Services US$m		Commercial  Banking  US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Total US$m
Half-year to 30 June 2008
Brazil	262		200		193		6		(1)		660
Mexico	151		127		106		1		-		385
Argentina	21		43		55		-		-		119
Panama	31		18		13		1		-		63
Other	3		23		16		-		(3)		39
	468		411		383		8		(4)		1,266
Half-year to 30 June 2007
Brazil	101		116		141		4		(2)		360
Mexico	251		169		50		5		-		475
Argentina	10		33		49		-		3		95
Panama	17		11		10		1		-		39
Other	9		23		3		-		(4)		31
	388		352		253		10		(3)		1,000
Half-year to 31 December 2007
Brazil	192		170		156		5		(4)		519
Mexico	263		164		63		6		9		505
Argentina	26		42		41		-		(3)		106
Panama	28		7		6		6		-		47
Other	(4)		5		(2)		(2)		4		1
	505		388		264		15		6		1,178

Loans and advances to customers (net) by country

	At 30 June  2008 US$m		At 30 June 2007 US$m		At 31 December 2007 US$m
Brazil	23,721		14,104		18,491
Mexico	18,557		16,063		18,059
Argentina	2,704		2,026		2,485
Panama	4,294		4,059		4,158
Other	4,976		4,354		4,730
	54,252		40,606		47,923

Customer accounts by country

	At 30 June  2008 US$m		At 30 June 2007 US$m		At 31 December 2007 US$m
Brazil	35,285		23,660		26,231
Mexico	22,562		19,916		22,307
Argentina	3,300		2,659		2,779
Panama	5,338		4,678		5,062
Other	5,294		4,336		4,913
	71,779		55,249		61,292

Profit before tax

	Half-year to
	30 June2008		30 June 2007		31 December 2007
Latin America	US$m		US$m		US$m
Net interest income	3,362		2,534		3,042
Net fee income	1,139		998		1,155
Net trading income	358		285		263
Net income from financial instruments designated at fair value	156		157		163
Gains less losses from financial investments	168		98		155
Gains arising from dilution of interests in associates	-		-		11
Dividend income	6		6		3
Net earned insurance premiums	900		731		863
Other operating income	130		153		75
Total operating income	6,219		4,962		5,730
Net insurance claims incurred and movement in liabilities to policyholders	(764)		(676)		(751)
Net operating income before loan impairment charges and other  credit risk provisions	5,455		4,286		4,979
Loan impairment charges and other credit risk provisions	(1,170)		(775)		(922)
Net operating income	4,285		3,511		4,057
Total operating expenses	(3,023)		(2,516)		(2,886)
Operating profit	1,262		995		1,171
Share of profit in associates and joint ventures	4		5		7
Profit before tax	1,266		1,000		1,178
	%		%		%
Share of HSBC's profit before tax	12.3		7.1		11.7
Cost efficiency ratio	55.4		58.7		58.0
Period-end staff numbers (full-time equivalent)	63,851		66,875		64,404
Balance sheet data6
	US$m		US$m		US$m
Loans and advances to customers (net)	54,252		40,606		47,923
Loans and advances to banks (net)	17,192		13,345		12,675
Trading assets, financial instruments designated at fair value, and  financial investments	27,929		22,107		24,715
Total assets	117,019		88,925		99,056
Deposits by banks	4,705		4,727		4,092
Customer accounts	71,779		55,249		61,292

For footnote, see page 89.

Economic briefing

Economic growth in Mexico moderated during the first half of 2008, partly in response to the slowdown in activity within the US. GDP rose by 2.6 per cent in the first quarter of the year on the equivalent period in 2007, compared with 3.3 per cent for the whole of 2007. Inflationary pressures intensified, with the headline rate of consumer price inflation experiencing sharp gains, rising from an annual rate of 3.8 per cent in December 2007 to 5.3 per cent in June 2008, mostly from higher food and energy prices. In response to these inflationary pressures, the Bank of Mexico raised its overnight interest rate by 25 basis points in June 2008.

The Brazilian economy continued to expand strongly with first quarter GDP rising by 5.8 per cent year-on-year, driven by strong domestic demand and consumer spending. Conditions within the labour market continued to improve, supporting consumer confidence, with the rate of unemployment well below levels observed a year earlier. Inflation continued to accelerate, with the headline annual rate of consumer price inflation rising to 6.1 per cent in June 2008 from 4.5 per cent in December 2007. Rising food prices were the most prominent cause, but core inflation (excluding food and energy) also rose, reflecting buoyant domestic conditions. Rising import demand was also expected to trigger a deterioration in the current account position during 2008 as a whole. With inflation near the upper limit of the Central Bank of Brazil's tolerance range, a modest tightening of monetary policy was initiated and the Selic target rate was increased from 11.25 per cent in April 2008 to 12.25 per cent in June 2008.

Argentina's growth continued at a high level during the first quarter of the year, with overall GDP 

rising by 8.4 per cent year-on-year compared with an average of 8.6 per cent for 2007 as a whole, even though industrial action within the agricultural sector is believed to have adversely affected activity levels during the period. Some further slowing of activity is expected to occur during the remainder of 2008 while inflationary pressures remain of concern. The reported headline rate of consumer price inflation rose from 8.5 per cent in December 2007 to 9.3 per cent in June 2008, although changes in methodologies make comparisons between the periods difficult.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2008 ('1H08') compared with half-year to 30 June 2007 ('1H07')
Latin America	1H07 as reported US$m		Disposals  and  dilution   gains1 US$m		Currency translation2 US$m		1H07 at 1H08 exchange rates US$m		Acqui- sitions1 US$m		Under- lying  change  US$m		1H08 as reported US$m		Re- ported change %		Under- lying change %
Net interest income	2,534		-		286		2,820		-		542		3,362		33		19
Net fee income	998		-		102		1,100		-		39		1,139		14		4
Other income3	754		-		82		836		-		118		954		27		14
Net operating income4	4,286		-		470		4,756		-		699		5,455		27		15
Loan impairment charges and other credit risk provisions	(775)		-		(97)		(872)		-		(298)		(1,170)		(51)		(34)
Net operating income	3,511		-		373		3,884		-		401		4,285		22		10
Operating expenses	(2,516)		-		(283)		(2,799)		-		(224)		(3,023)		(20)		(8)
Operating profit	995		-		90		1,085		-		177		1,262		27		16
Income from associates	5		-		-		5		-		(1)		4		(20)		(20)
Profit before tax	1,000		-		90		1,090		-		176		1,266		27		16

For footnotes, see page 89.

Review of business performance

HSBC's operations in Latin America reported a preߛtax profit of US$1.3 billion compared with US$1.0 billion in the first half of 2007, representing an increase of 27 per cent. 

During the first half of 2008, HSBC continued in its efforts to grow the business organically in Mexico and Brazil while integrating recently acquired businesses in Argentina and Central America. The Visa IPO resulted in gains on the redemption of shares held by the Group. Credit quality in maturing portfolios continued to be an area of focus for management, especially in the Personal Financial Services credit card business in Mexico. The Premier relaunch in 2007 resulted in an increase in customer numbers and income in the first six months of 2008. The insurance business's contribution to the performance of the region increased in the first half of 2008, largely due to growth in premiums, mainly on term life and motor products, which exceeded expense growth. In Commercial Banking, HSBC continued in its strategy to be the leading international bank through its extended network of International Banking Centres, increased focus on trade finance and growth in referrals of international business opportunities. As part of HSBC's strategy to be the best bank for small businesses, Brazil introduced an initiative in the second half of 2007, called Empreendedor Direto with the aim of providing more focus on micro businesses. Global Banking and Markets benefited from favourable market conditions which increased revenues and from foreign exchange rate volatility which drove higher trading revenues. 

On an underlying basis, pre-tax profits rose by 16 per cent. Increased revenues were partly offset by higher loan impairment charges, mainly driven by the cards business in Mexico, and increased operating costs across the region. The cost efficiency ratio improved by 3.4 percentage points to 55.4 per cent.

The following commentary is on an underlying basis.

Personal Financial Services reported a pre-tax profit of US$468 million, an 11 per cent increase on the first half of 2007. Growth in revenue was driven by continued organic balance sheet growth, especially in cards and personal loans in Mexico and vehicle finance and payrolls in Brazil. This was augmented by gains from the redemption of shares in the Visa IPO and interest on the recovery of transactional taxes paid in previous years in Brazil. Following the global relaunch of Premier in a number of countries in 2007, there were increases in both the number of Premier customers and the average income per customer in the region. The growth in balance sheet volumes in Mexico and Brazil, coupled with higher delinquency rates, drove an increase in loan impairment charges. Increased operating expenditure was partially offset by a recovery of transactional taxes in Brazil following a court ruling. The cost efficiency ratio improved by 4.7 percentage points as revenues grew faster than costs.

In Mexico, pre-tax profits decreased by 42 per cent, largely driven by higher loan impairment charges on credit cards and personal loans following balance sheet growth and increased delinquency. Net operating income before loan impairment charges rose by 17 per cent on higher interest generated by the growth in credit card balances and a gain on the redemption of Visa shares. Operating costs grew by 12 per cent. 

In Brazil, profit before tax grew by 111 per cent on higher income driven by balance sheet growth, partially offset by a decrease in fee income due to regulatory changes. Profit before tax also benefited from the refinement of the income recognition methodology in respect of long-term insurance contracts and a gain on redemption of Visa shares. A recovery of transactional taxes paid in earlier years and interest thereon increased interest income and resulted in lower operating expenses.

In Argentina, profit before tax grew by 116 per cent. Balance sheet growth drove an increase in net interest income which was partly offset by higher costs and loan impairment charges. 

Net interest income rose by 17 per cent to US$2,376 million.

In Mexico, net interest income rose by 26 per cent, driven by higher balance sheet volumes and improved spreads. Despite a slowdown in credit card sales, average loan balances continued to grow. Average total loans grew by 12 percentage points. Spreads widened by 417 basis points on personal loans and by 316 basis points on credit cards due to re-pricing initiatives implemented during the second half of 2007.

Average demand deposit balances rose by 7 per cent. Average balances of time deposits grew by 14 per cent, driven by competitive pricing. HSBC's market share for deposits remained stable.

In Brazil, net interest rose by 9 per cent. A favourable economic scenario and increased household income drove higher consumption and demand for credit. As a result, vehicle finance loans increased by 39 per cent and payroll loans by 57 per cent. Average card balances grew by 25 per cent, following market growth and new deals on co-branded cards combined with marketing promotions to improve card usage. This was partially offset by a decrease of 3 per cent in personal instalment loans due to increased competition in the market.

Spreads widened on cards and overdrafts as a result of lower funding costs and repricing initiatives, in line with market trends, but narrowed on vehicle finance and payroll loans due to increased competition. Overall, spreads were lower, reflecting the business strategy of seeking reduced credit risk by focusing on secured loans.

Net interest income also increased as a result of a favourable court decision, which granted HSBC the right to recover transactional taxes paid in excess on insurance transactions, and interest accrued thereon. 

In Argentina, net interest income grew by 69 per cent. Average loan volumes increased by 39 per cent as personal loans, credit cards and car loan balances all rose. These increases resulted from higher sales of pre-approved facilities, supported by a new credit policy for personal loans, and marketing campaigns. Spreads improved on car loans and overdrafts as a result of repricing initiatives. The overall spread on lending products narrowed by 28 basis points. The average term deposit portfolio increased by 11 per cent following several initiatives including improved incentives for staff in the branch network, the appointment of a number of Premier executives and the implementation of campaigns to support growth through the internet. The number of Premier customers increased by 30 per cent. The overall spread increased by 94 basis points.

Net fee income increased by 2 per cent to US$712 million, mainly in Mexico where fee income rose by 14 per cent. Credit card annual fees increased by 29 per cent, reflecting an increase of almost 35,000 in the number of cards in force. Collection fees and late-payment fees increased following the application of stricter guidelines in June 2007. Income from deposit accounts continued to rise, as a result of an increase in membership fees and the introduction of a flexible pricing option. Income from eߛchannels rose by 6 per cent on higher usage. 

In Brazil, fee income fell by 15 per cent, following a ruling by the Brazilian Central Bank removing certain fees, such as charges on early loan repayments and returned cheques. The effect was compounded by a lower number of transactions, which reduced current account fees, and the discontinuation of commission paid by the Brazilian social security agency for pension payment services. This was partly offset by a rise in pension administration fees and higher cards income driven by growth in cards in force. 

In Argentina, net fee income decreased by 18 per cent, mainly because lower commissions were earned from the pension fund business following pension-related reform introduced by the government. Higher general insurance sales resulted in increased commissions paid. This was partially offset by higher commission income on vehicle loans and credit cards, reflecting volume growth. 

Gains from financial investments increased by US$74 million, mainly because of a gain on redemption of Visa shares following the global IPO. Gains were recorded in Mexico (US$55 million), Panama (US$12 million), Brazil (US$11 million) and other Central American countries (US$5 million). Brazil also recorded a gain of US$16 million on the sale of shares in a local stock exchange. A gain of US$33 million on a similar sale of shares was registered in the first half of 2007. 

Other operating income fell, mainly because, in the first half of 2007, results benefited from a oneߛoff refinement of the income recognition methodology used in respect of long-term insurance contracts in Mexico. This was partially offset by a similar adjustment in Brazil in the first half of 2008 which resulted in a non-recurrent gain of US$45 million. 

Net insurance premiums rose by 8 per cent to US$802 million. In Mexico, growth of 20 per cent was mainly driven by higher gross premiums on life and motor products. Sales of life products grew faster than non-life products due to an increased focus by HSBC on life insurance sales through the branch network and other distribution channels, in particular, the telemarketing of personal accident insurance. In Brazil, net insurance premiums rose by 9 per cent. Pension-related business grew, driven by sales initiatives which generated organic growth in both regular and additional contributions. 

In Argentina, insurance premium growth was driven by the general insurance business from a mixture of higher premiums and increased sales. Vehicle insurance products generated the largest increases, mainly because of higher prices. Overall, premium income on life insurance decreased due to the cessation of part of the business related to the pension fund portfolio as a consequence of changes in government legislation.

Loan impairment charges rose by 35 per cent, to US$1.1 billion. In Mexico, loan impairment charges rose by 76 per cent, largely from portfolio growth and higher delinquency in the credit card portfolio following HSBC's targeted expansion in the market in previous years. The increase in loan impairment charges is a cost of building higher market share through organic growth in an area where HSBC was previously under-represented. Personal instalment loans also contributed to the increase in loan impairment charges. 

Loan impairment charges in Brazil rose by 8 per cent, reflecting strong asset growth and higher delinquency levels in vehicle finance, and store loans which were partly offset by the gain on sale of an impaired loan portfolio. The impaired loan to total customer loans ratio, improved by 1.2 percentage points. Credit models were updated during the first half of 2008 to reflect recent underwriting experience and were supplemented by improved collection strategies.

In Argentina, growth in loan impairment charges of 68 per cent was driven by increased customer advances and higher delinquency levels on the consumer finance portfolio.

Operating expenses increased by 5 per cent to US$2.1 billion.

In Mexico, operating expenses grew by 12 per cent. Staff costs rose as a result of the annual salary review in earlier 2008, partly offset by lower staff numbers. Non-staff costs rose on the increased use of the cash-back facility on the Tu Cuenta product. This was partly offset by a decrease in contract personnel as a result of a refinement in asset growth strategy in the latter part of 2007.

In Brazil, expenses decreased by 5 per cent, as a result of the recognition of a tax credit related to a court decision granting the right to recover excess taxes paid on insurance transactions. Transactional taxes reduced further, due to the removal of tax on withdrawals in 2008. Additional costs were incurred in support of growth in the credit card business and improved operational processes for both debit and credit cards. Staff costs increased marginally, mainly driven by increased performance-related incentives, in line with profit growth and union-agreed pay rises. This increase was partially offset by a restructuring exercise initiated in the first half of 2007 which reduced staff numbers.

In Argentina, expenses grew by 29 per cent. Staff costs rose on higher salaries following pay reviews. Non-staff costs increased in the form of utility and general administration costs due to higher prices following inflation adjustments by suppliers. 

Commercial Banking reported pre-tax profits of US$411 million, an increase of 8 per cent over the first half of 2007. Revenues grew as the business continued to expand in the region in line with HSBC's objective to be the leading international bank and the best bank for small businesses. The regional network of International Banking Centres based in Argentina, Brazil and Mexico significantly increased their number of successful international referrals. Loan impairment charges rose by 26 per cent. Operating expenses increased by 11 per cent. The cost efficiency ratio improved by 0.2 percentage points. 

In Mexico, a decline in profit before tax of 27 per cent was mainly the result of a one-off writeback of loan impairment charges in 2007, following a review of credit models. 

In Brazil, pre-tax profits rose by 44 per cent, driven by higher net interest income on strong balance sheet growth and lower loan impairment charges as delinquency levels improved. 

In Argentina, profit before tax rose by 33 per cent, as net interest and fee income rose on business growth. 

Net interest income increased by 10 per cent to US$800 million, mainly as a result of balance sheet growth. 

In Mexico, net interest income rose by 2 per cent on increased volumes in medium-sized business loans, in both local currency and US dollars, and real estate loans, which were driven by market growth in the construction sector. Loans denominated in US dollars rose due to higher demand as a result of the lower dollar rates. The spread for small and medium business loans widened following a repricing strategy. US dollar denominated loan spreads narrowed by 137 basis points due to higher funding costs. 

Average balances on total deposits increased by 18 per cent as customers held higher balances for longer periods. Regulations prohibiting government treasuries from holding balances in non-interest bearing accounts resulted in a shift in commercial balances from demand to term deposits, putting pressure on the overall yield. Spreads on deposits denominated in US dollars narrowed in a falling rate environment.

In Brazil, the favourable economic scenario led to an increase in the demand for credit. Sales and repricing initiatives, combined with longer loan maturity periods and improved geographical coverage, contributed to robust growth in lending balances and an increase in net interest income of 15 per cent. The strong growth was mostly in working capital, receivables-backed loans and trade finance. Spreads were slightly lower in the overall portfolio as a consequence of market competition and HSBC's business strategy of seeking reduced credit risk and focusing on secured loans and trade products. Spreads on overdrafts increased driven by a decline in base rates.

Sales through direct channels grew by 76 per cent, mostly in guaranteed accounts, discounted trade notes and investments. This was primarily driven by the launch of Empreendedor Direto in the second half of 2007.

In Argentina, net interest income grew by 49 per cent. Growth in both assets and liabilities was mainly driven by customer acquisitions following wider geographical coverage from the integration of Banca Nazionale's commercial network. Overdraft balances grew on increased economic activity. Higher volumes of receivables finance were driven by focused marketing campaigns. The leasing portfolio grew by 40 per cent. Spreads on overdrafts widened, while spreads on receivables finance and leasing decreased.

Demand deposits grew by 22 per cent and term deposits grew by 9 per cent following a three month marketing campaign in 2008. Spreads in demand deposits widened on higher base rates but were partially offset by slightly lower spreads on term deposits due to a more competitive market environment. Overall, spreads on customer deposits widened by 133 basis points. 

Net fee income was 5 per cent higher at US$271 million. In Brazil, this largely arose from increases in collection bill fees, mainly due to higher transaction volumes and repricing initiatives to align with local market prices. Standby letters of credit, bank guarantees and assets under management also contributed to this increase, driven by higher volumes as the business focused on cross-sales using customer relationship management tools. These tools enabled relationship managers to offer suitable products to customers which were more in line with their particular banking preferences. 

In Mexico, fee income decreased by 3 per cent. Increased usage by non-HSBC customers following the recent extension of the network drove an increase of 76 per cent in automated teller machine ('ATM') fees. Higher prices resulted in income growth on payments and cash management. These factors were offset by lower income on remittances, which fell in line with decreased volumes in the more competitive environment, coupled with the effects of the weakening US economy.

Higher fee income in Argentina was mainly due to increased account services commissions on greater customer activity and repricing of fees.

Trading income rose by 85 per cent to US$37 million, mainly in Brazil due to higher volumes of treasury products and spot foreign exchange deals which benefited from increased demand in the favourable economic conditions.

Loan impairment charges increased by 26 per cent to US$110 million due to higher loan impairment charges in Mexico, partially offset by lower ones Brazil. 

In Mexico, higher loan impairment charges on commercial and real estate loans were mainly driven by organic growth in the portfolio. In 2007, net releases of loan allowances were reported in Mexico due to changes made to the credit models to more accurately represent the most recent behaviour in the underlying commercial loan portfolios. The risk profile of the loan portfolio remained stable during the first half of 2008.

In Brazil, loan impairment charges decreased by 18 per cent despite a 38 per cent growth in average lending balances. This was driven by improved delinquency levels in the small and medium enterprises segment and the absence of any new significant individual loan impairment charges in the current period.

Operating expenses increased by 11 per cent to US$643 million.

In Mexico, operating expenses increased by 10 per cent. Staff costs decreased as the effects of the annual salary review and higher performance-related compensation were offset by refinements in the allocation of statutory profit sharing compensation. Other operating expenses increased, primarily driven by higher operational losses.

Operating expenses in Brazil rose by 9 per cent. Staff costs grew as a result of higher remuneration and performance-related incentives aligned with business growth, and union-agreed pay rises. These factors were partly offset by lower headcount following business restructuring, resulting in increased efficiency. Other operating costs also grew due to higher litigation expenses, mainly driven by civil claims, and transactional taxes increased on higher volumes. 

In Argentina, expenses increased by 65 per cent, mainly driven by higher indirect costs. Staff costs rose on following pay reviews in line with labour union agreements. Other costs also grew in the inflationary environment. 

Global Banking and Markets reported a pre-tax profit of US$383 million, representing an increase of 36 per cent compared with the first half of 2007. In Mexico, pre-tax profits increased by 100 per cent, mainly as a result of higher net interest income. In Brazil, pre-tax profits grew by 12 per cent due to higher foreign exchange trading revenues. In Argentina, growth was driven by an increase in net interest income and foreign exchange trading income. The cost efficiency ratio for the region improved by 0.5 percentage points. 

Total operating income rose by 33 per cent to US$726 million, mainly due to growth in foreign exchange trading in Brazil, reflecting the success of HSBC's strategy to provide a wider product range with a focus on structured derivatives, particularly to Commercial Banking customers, and due to an increase in income earned in Balance Sheet Management.

In Mexico, pre-tax profits increased due to strong growth in net interest income as favourable market conditions led to a robust performance from Balance Sheet Management. Trading income declined, despite growth in foreign exchange, as the Mexican financial markets continued to exhibit low levels of volatility. 

In Brazil, pre-tax profits were 12 per cent higher, due to strong growth in foreign exchange trading and an increase in securities services deposits as clients moved funds into Brazil for investment. A significant increase in operating expenses was due to an investment in new IT systems to support volume growth as well as growth in staff numbers as HSBC enhanced its capabilities, including the establishment of a new global research team. 

In Argentina, pre-tax profits improved by 14 per cent. Higher revenues were driven by growth in net interest income and an increase in foreign exchange trading income due to market volatility. This was partly offset by higher operating expenses, driven by high levels of inflation, an increase in staff costs following labour union agreements.

Net interest income rose by 68 per cent to US$337 million, predominantly from growth in Mexico. Balance Sheet Management performed well, driven by favourable market conditions in Mexico and Argentina, due to an increase in balance sheet volumes and wider spreads. In addition, the strong equity markets in Brazil led to an increase in securities services deposits as clients moved funds into the country for investment. 

Net fee income grew by 5 per cent to US$131 million, largely in Mexico where increased loan facility fees were driven by higher lending volumes. Fee income increased in securities services, partly in Brazil, as a result of the increase in deposits discussed above. The development of the retail equity trading platform in Brazil also contributed to the increase in fee income. 

Trading income was 29 per cent higher at US$137 million, driven by solid growth in foreign exchange trading in Brazil, due to a wider product offering which was particularly targeted at Commercial Banking customers. In Mexico, trading income declined, despite growth in foreign exchange, as the Mexican financial markets continued to exhibit low volatility, resulting in challenging trading conditions. Trading income in Argentina increased as a result of strong performance in foreign exchange in the volatile markets.

Gains less losses from financial investments decreased by 25 per cent to US$45 million, due to a lower value of disposals in Mexico, Brazil and Argentina compared with the first half of 2007.

A small release of loan impairment charges was in line with the first half of 2007.

Operating expenses increased by 33 per cent to US$309 million. A significant rise in operating expenses in Brazil was partly caused by higher IT costs due to investment in new systems to support volume growth and automate processes on complex products. Staff numbers increased in Global Markets, as HSBC enhanced its customer proposition, including the establishment of a new global research team. Performance costs also rose in line with improved performance in Global Markets. Operating expenses in Argentina increased, mainly driven by an increase in staff costs following a labour union pay agreement. Other costs grew in the inflationary environment.

Private Banking reported a pre-tax profit of US$8 million, a decrease of 20 per cent. An improved performance in Brazil was offset by higher expenditure in the region. As a result, the cost efficiency ratio worsened by 9.6 percentage points to 78.4 per cent.

Revenues grew by 16 per cent to US$37 million, with improvements in both net interest income and fee income. Balance sheet growth across the region drove the 44 per cent increase in net interest income, while improvements in securities trading in Brazil underpinned the rise in net fee income. This was offset by lower brokerage fees in Mexico, however, due to a general slowdown in the market.

Client assets were US$12.6 billion, compared with US$11.6 billion at 31 December 2007, due to new product offerings in Brazil. Inward referrals from other customer groups contributed US$444 million to total client assets, flat when compared with the first half of 2007.

Operating expenses grew by 32 per cent to US$29 million, driven by a rise in staff costs to support business expansion and increased bonuses.

Amounts reported in Other were largely in line with the first half of 2007.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2008 ('1H08') compared with half-year to 31 December 2007 ('2H07')
Latin America	2H07 as reported US$m		Disposals  and  dilution   gains1 US$m		Currency translation2 US$m		2H07 at 1H08 exchange rates US$m		Acqui- sitions1 US$m		Under- lying  change  US$m		1H08 as reported US$m		Re- ported change %		Under- lying change %
Net interest income	3,042		-		170		3,212		-		150		3,362		11		5
Net fee income	1,155		-		60		1,215		-		(76)		1,139		(1)		(6)
Other income3	782		(11)		43		814		-		140		954		22		17
Net operating income4	4,979		(11)		273		5,241		-		214		5,455		10		4
Loan impairment charges and other credit risk provisions	(922)		-		(49)		(971)		-		(199)		(1,170)		(27)		(20)
Net operating income	4,057		(11)		224		4,270		-		15		4,285		6		0
Operating expenses	(2,886)		-		(164)		(3,050)		-		27		(3,023)		(5)		1
Operating profit	1,171		(11)		60		1,220		-		42		1,262		8		3
Income from associates	7		-		(1)		6		-		(2)		4		(43)		(33)
Profit before tax	1,178		(11)		59		1,226		-		40		1,266		7		3

For footnotes, see page 89.

Analysis by customer group and global business 

Profit/(loss) before tax 

	Half-year to 30 June 2008
Latin America	Personal Financial Services US$m		Commercial Banking US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Inter- segment elimination9 US$m		Total US$m
Net interest income/  (expense)	2,376		800		337		13		(2)		(162)		3,362
Net fee income	712		271		131		19		6		-		1,139
Trading income excluding net interest income	16		34		130		1		1		-		182
Net interest income on trading activities	4		3		7		-		-		162		176
Net trading income7	20		37		137		1		1		162		358
Net income/(expense) from financial instruments designated at fair value	162		-		(6)		-		-		-		156
Gains less losses from financial investments	111		11		45		2		(1)		-		168
Dividend income	4		-		2		-		-		-		6
Net earned insurance premiums	802		47		56		-		(5)		-		900
Other operating income	98		20		24		2		7		(21)		130
Total operating income	4,285		1,186		726		37		6		(21)		6,219
Net insurance claims8	(706)		(22)		(36)		-		-		-		(764)
Net operating income4	3,579		1,164		690		37		6		(21)		5,455
Loan impairment (charges)/ recoveries and other credit risk provisions	(1,060)		(110)		2		-		(2)		-		(1,170)
Net operating income	2,519		1,054		692		37		4		(21)		4,285
Total operating expenses	(2,055)		(643)		(309)		(29)		(8)		21		(3,023)
Operating profit/(loss)	464		411		383		8		(4)		-		1,262
Share of profit in associates and joint ventures	4		-		-		-		-		-		4
Profit/(loss) before tax	468		411		383		8		(4)		-		1,266
	%		%		%		%		%				%
Share of HSBC's profit  before tax	4.6		4.0		3.7		0.1		(0.1)				12.3
Cost efficiency ratio	57.4		55.2		44.8		78.4		133.3				55.4
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	24,431		19,073		10,704		44		-				54,252
Total assets	39,883		24,505		52,290		300		41				117,019
Customer accounts	34,368		17,021		19,072		1,318		-				71,779
Loans and advances to banks (net)12					13,812
Trading assets12,13					12,303
Financial instruments designated at fair value12					106
Financial investments12					11,781
Deposits by banks12					2,812
Trading liabilities12,13					7,878

For footnotes, see page 89.

Profit/(loss) before tax 

	Half-year to 30 June 2007
Latin America	Personal Financial Services US$m		Commercial Banking US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Inter- segment elimination9 US$m		Total US$m
Net interest income	1,821		656		181		8		1		(133)		2,534
Net fee income	636		234		109		16		3		-		998
Trading income/(expense) excluding net interest income	32		17		83		1		(1)		-		132
Net interest income on  trading activities	6		1		13		-		-		133		153
Net trading income/(expense)7	38		18		96		1		(1)		133		285
Net income from financial instruments designated  at fair value	153		-		4		-		-		-		157
Gains less losses from financial investments	30		13		55		-		-		-		98
Dividend income	4		1		1		-		-		-		6
Net earned insurance premiums	658		32		41		-		-		-		731
Other operating income	134		12		8		4		8		(13)		153
Total operating income	3,474		966		495		29		11		(13)		4,962
Net insurance claims8	(626)		(17)		(33)		-		-		-		(676)
Net operating income4	2,848		949		462		29		11		(13)		4,286
Loan impairment (charges)/ recoveries and other credit risk provisions	(701)		(74)		2		-		(2)		-		(775)
Net operating income	2,147		875		464		29		9		(13)		3,511
Total operating expenses	(1,764)		(523)		(211)		(19)		(12)		13		(2,516)
Operating profit/(loss)	383		352		253		10		(3)		-		995
Share of profit in associates and joint ventures	5		-		-		-		-		-		5
Profit/(loss) before tax	388		352		253		10		(3)		-		1,000
	%		%		%		%		%				%
Share of HSBC's profit  before tax	2.7		2.5		1.8		0.1		-				7.1
Cost efficiency ratio	61.9		55.1		45.7		65.5		109.1				58.7
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	19,529		12,744		8,306		27		-				40,606
Total assets	32,024		17,520		39,260		96		25				88,925
Customer accounts	26,195		14,546		13,778		511		219				55,249
Loans and advances to banks (net)12					10,625
Trading assets12,13					9,541
Financial instruments designated at fair value12					199
Financial investments12					9,163
Deposits by banks12					2,862
Trading liabilities12,13					6,609

For footnotes, see page 89.  Analysis by customer group and global business (continued) 

Profit/(loss) before tax 

	Half-year to 31 December 2007
Latin America	Personal Financial Services US$m		Commercial Banking US$m		Global Banking and Markets US$m		Private Banking US$m		Other US$m		Inter- segment elimination9 US$m		Total US$m
Net interest income	2,162		751		229		12		2		(114)		3,042
Net fee income ..	736		251		141		24		3		-		1,155
Trading income excluding net interest income	35		22		81		1		1		-		140
Net interest income on trading activities	4		-		5		-		-		114		123
Net trading income7	39		22		86		1		1		114		263
Net income from financial instruments designated at fair value	161		-		2		-		-		-		163
Gains less losses from financial investments	90		38		27		1		(1)		-		155
Gains arising from dilution  of interests in associates	-		-		-		-		11		-		11
Dividend income	1		1		1		-		-		-		3
Net earned insurance premiums	790		34		39		-		-		-		863
Other operating income	11		57		23		4		4		(24)		75
Total operating income	3,990		1,154		548		42		20		(24)		5,730
Net insurance claims8	(704)		(20)		(27)		-		-		-		(751)
Net operating income4	3,286		1,134		521		42		20		(24)		4,979
Loan impairment (charges)/ recoveries and other credit risk provisions	(791)		(138)		11		-		(4)		-		(922)
Net operating income	2,495		996		532		42		16		(24)		4,057
Total operating expenses	(1,994)		(609)		(270)		(27)		(10)		24		(2,886)
Operating profit	501		387		262		15		6		-		1,171
Share of profit in associates and joint ventures	4		1		2		-		-		-		7
Profit before tax	505		388		264		15		6		-		1,178
	%		%		%		%		%				%
Share of HSBC's profit before tax	5.0		3.9		2.6		0.1		0.1				11.7
Cost efficiency ratio	60.7		53.7		51.8		64.3		50.0				58.0
Balance sheet data6
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to  customers (net)	21,680		16,243		9,935		65		-				47,923
Total assets	34,829		20,928		43,012		260		27				99,056
Customer accounts	30,628		15,524		13,950		1,190		-				61,292
Loans and advances to banks (net)12					10,339
Trading assets12,13					10,384
Financial instruments designated at fair value12					225
Financial investments12					10,155
Deposits by banks12					2,830
Trading liabilities12,13					6,984

For footnotes, see page 89. 

Footnotes to the Business Review

The footnotes below refer to the reconciliations of reported and underlying profit before tax, and the analyses of customer groups and global businesses on pages 13 to 27 and the geographical regions on pages 28 to 89.

1 Columns headed 'Acquisitions' and, in 2007, 'Disposals and dilution gains', comprise the net increment or decrement in profits in the current half-year (compared with the previous half-years) which are attributable to acquisitions or disposals of subsidiaries made, or dilution gains, in the relevant periods. Acquisitions and disposals are determined based on the review and analysis of the events in each period.

2 'Currency translation' is the effect of translating the results of subsidiaries and associates for the previous half-years at the average rates of exchange applicable in the current half-year.

3 Other income in this context comprises net trading income (see 7 below), net income from financial instruments designated at fair value, gains less losses from financial investments, gains arising from dilution of interests in associates, dividend income, net earned insurance premiums and other operating income less net insurance claims incurred and investment in liabilities to policyholders.

4 Net operating income before loan impairment charges and other credit risk provisions.

5 The main items reported under 'Other' are certain property activities, unallocated investment activities including hsbc.com, centrally held investment companies, gains arising from the dilution of interests in associates, movements in the fair value of own debt designated at fair value (the rest of the Group's debt is included in Global Banking and Markets), and HSBC's holding company and financing operations. The results also include net interest earned on free capital held centrally, operating costs incurred by the head office operations in providing stewardship and central management services to HSBC, and costs incurred by the Group Service Centres and Shared Service Organisations and associated recoveries. At 30 June 2008, gains arising from the dilution of interests in associates were nil (first half of 2007: US$1.076 million; second half of 2007: US$16 million) and fair value gains on HSBC's debt designated at fair value were US$749 million (first half of 2007: US$2,909 million; second half of 2007: US$84 million).

6 Third party only.

7 In the customer group analyses, net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities classified as held for trading, together with related external and internal interest income and interest expense, and dividends received; in the statutory presentation internal interest income and expense are eliminated.

8 Net insurance claims incurred and movement in liabilities to policyholders.

9 Inter-segment elimination comprises (i) the costs of shared services and Group Service Centres included within 'Other' which are recovered from customer groups, and (ii) the intra-segment funding costs of trading activities undertaken within Global Banking and Markets. HSBC's balance sheet management business reported within Global Banking and Markets, provides funding to the trading businesses. To report Global Banking and Markets' net trading income on a fully funded basis, net interest income and net interest income/(expense) on trading activities are grossed up to reflect internal funding transactions prior to their elimination in the inter-segment column.

10 Equities includes a total gain of US$107 million in the first half of 2007 from the disposal of HSBC's investments in Euronext N.V. and the Montreal Exchange.

11 'Other' in Global Banking and Markets includes net interest earned on free capital held in the global business not assigned to products.

12 Assets and liabilities which were significant to Global Banking and Markets.

13 Trading assets and trading liabilities include derivatives.

14 Global Banking and Markets in Europe includes venture capital gains of US$187 million in the first half of 2008 (US$548 million in the first half of 2007: US$443 million in the second half of 2007).

15 France primarily comprises the domestic operations of HSBC France and the Paris branch of HSBC Bank plc.

16 Trading assets, financial instruments designated at fair value and financial investments held in Europe, and by Global Banking and Markets in North America, include financial assets which may be repledged or resold by counterparties.

ENDMSCUUUPGRUPRGQC

---

Related Shares:

HSBC Holdings