Annual Report and Accounts - 27 of 35

31st Mar 2009 16:56



3 Net income from financial instruments designated at fair value

Net income from financial instruments designated at fair value includes:

all gains and losses from changes in the fair value of financial assets and liabilities designated at fair value, including liabilities under investment contracts;

all gains and losses from changes in the fair value of derivatives that are managed in conjunction with financial assets and liabilities designated at fair value; and

interest income, interest expense and dividend income in respect of:

- financial assets and liabilities designated at fair value; and 

- derivatives managed in conjunction with the above,

except for interest arising from HSBC's issued debt securities and derivatives managed in conjunction with those debt securities, which is recognised in 'Interest expense'.

	2008		2007		2006
	US$m		US$m		US$m
Net income/(expense) arising on:
-  financial assets held to meet liabilities under insurance and  investment contracts	(5,064)		2,056		1,552
-  other financial assets designated at fair value	1,738		581		217
-  derivatives managed in conjunction with financial assets designated at fair value	77		(18)		57
	(3,249)		2,619		1,826
-  liabilities to customers under investment contracts	1,751		(940)		(1,008)
-  HSBC's long-term debt issued and related derivatives	6,679		2,812		(35)
-  changes in own credit spread on long-term debt	6,570		3,055		(388)
-  derivatives managed in conjunction with HSBC's issued debt securities	4,413		2,476		242
-  other changes in fair value	(4,304)		(2,719)		111
-  other financial liabilities designated at fair value	(1,368)		(395)		(125)
-  derivatives managed in conjunction with other financial liabilities designated at fair value	39		(13)		(1)
	7,101		1,464		(1,169)
Net income from financial instruments designated at fair value	3,852		4,083		657

4 Gains arising from dilution of interests in associates

	Gains arising   from dilution of HSBC's  interests		HSBC's  interests after   issue of  new shares		HSBC's  interests before   issue of  new shares
	US$m		%		%
2007
Industrial Bank1	187		12.78		15.98
Ping An Insurance	485		16.78		19.90
Bank of Communications2	404		18.60		19.90
Financiera Independencia S.A. de C.V.	11		18.68		19.90
Vietnam Technological and Commercial Joint Stock Bank	5		14.44		15.00
Gains arising from dilution of interests in associates	1,092

1 Investment held through Hang Seng Bank, a 62.14 per cent owned subsidiary of HSBC. The dilution gains therefore include a minority interest of US$71 million.

2 Subsequent to the dilution of its interests in Bank of Communications, HSBC increased its holding from 18.60 per cent to 19.01 per cent at 31 December 2007 (Note 21).

In 2007, certain HSBC associates issued new shares. HSBC did not subscribe and, as a result, its interests in the associates' equity decreased. The assets of each associate substantially increased as a result of the new share issue and, as a consequence, HSBC's share of the associates' underlying net assets increased notwithstanding the reduction in the Group's proportionate ownership interests. This increase is a gain arising from the dilution of the Group's interests in the associates, and is presented in the income statement. 

5 Net earned insurance premiums

	Non-life insurance		Life   insurance  (non-linked)		Life  insurance (linked)		Investment   contracts with DPF1		Total
	US$m		US$m		US$m		US$m		US$m
2008
Gross written premiums	1,776		6,257		1,825		2,802		12,660
Movement in unearned premiums	58		(171)		-		-		(113)
Gross earned premiums	1,834		6,086		1,825		2,802		12,547
Gross written premiums ceded to reinsurers	(260)		(878)		(564)		-		(1,702)
Reinsurers' share of movement in unearned premiums	(3)		27		(19)		-		5
Reinsurers' share of gross earned  premiums	(263)		(851)		(583)		-		(1,697)
Net earned insurance premiums	1,571		5,235		1,242		2,802		10,850
2007
Gross written premiums	1,853		4,892		2,350		1,890		10,985
Movement in unearned premiums	2		14		-		-		16
Gross earned premiums	1,855		4,906		2,350		1,890		11,001
Gross written premiums ceded  to reinsurers	(385)		(357)		(1,166)		-		(1,908)
Reinsurers' share of movement  in unearned premiums	(22)		-		5		-		(17)
Reinsurers' share of gross earned  premiums	(407)		(357)		(1,161)		-		(1,925)
Net earned insurance premiums	1,448		4,549		1,189		1,890		9,076

2006
Gross written premiums	1,824		3,640		848		8		6,320
Movement in unearned premiums	122		14		(1)		-		135
Gross earned premiums	1,946		3,654		847		8		6,455
Gross written premiums ceded  to reinsurers	(451)		(274)		(14)		-		(739)
Reinsurers' share of movement  in unearned premiums	(48)		-		-		-		(48)
Reinsurers' share of gross earned  premiums	(499)		(274)		(14)		-		(787)
Net earned insurance premiums	1,447		3,380		833		8		5,668

1 Discretionary participation features.

6 Net insurance claims incurred and movement in liabilities to policyholders 

	Non-life insurance		Life   insurance  (non-linked)		Life  insurance (linked)		Investment   contracts with DPF1		Total
	US$m		US$m		US$m		US$m		US$m
2008
Claims, benefits and surrenders paid	1,044		1,491		481		1,911		4,927
Movement in liabilities	-		3,989		458		(168)		4,279
Gross claims incurred and movement in liabilities	1,044		5,480		939		1,743		9,206
Reinsurers' share of claims, benefits and surrenders paid	(158)		(172)		(44)		-		(374)
Reinsurers' share of movement in liabilities	75		(620)		(1,398)		-		(1,943)
Reinsurers' share of claims incurred and movement in liabilities	(83)		(792)		(1,442)		-		(2,317)
Net insurance claims incurred and movement in liabilities to policyholders	961		4,688		(503)		1,743		6,889
2007
Claims, benefits and surrenders paid	1,017		940		790		1,080		3,827
Movement in liabilities	82		2,437		2,096		1,108		5,723
Gross claims incurred and movement  in liabilities	1,099		3,377		2,886		2,188		9,550
Reinsurers' share of claims, benefits  and surrenders paid	(207)		(169)		(45)		-		(421)
Reinsurers' share of movement  in liabilities	36		518		(1,075)		-		(521)
Reinsurers' share of claims incurred  and movement in liabilities	(171)		349		(1,120)		-		(942)
Net insurance claims incurred  and movement in liabilities to policyholders	928		3,726		1,766		2,188		8,608
2006
Claims, benefits and surrenders paid	889		814		495		-		2,198
Movement in liabilities	10		2,207		651		6		2,874
Gross claims incurred and movement  in liabilities	899		3,021		1,146		6		5,072
Reinsurers' share of claims, benefits  and surrenders paid	(228)		(154)		(9)		-		(391)
Reinsurers' share of movement  in liabilities	57		(54)		20		-		23
Reinsurers' share of claims incurred  and movement in liabilities	(171)		(208)		11		-		(368)
Net insurance claims incurred  and movement in liabilities to policyholders	728		2,813		1,157		6		4,704

1 Discretionary participation features.

7 Net operating income

Net operating income is stated after the following items of income, expense, gains and losses:

	2008		2007		2006
	US$m		US$m		US$m
Income
Interest recognised on impaired financial assets	1,040		404		284
Fees earned on financial assets or liabilities not held for trading nor  designated at fair value, other than fees included in effective interest  rate calculations on these types of assets and liabilities	14,511		15,140		11,182
Fees earned on trust and other fiduciary activities where HSBC holds  or invests assets on behalf of its customers	3,314		3,695		2,909
Income from listed investments	11,425		10,944		7,304
Income from unlisted investments	11,359		10,429		9,192
Losses from the alleged fraud at Bernard L Madoff Investment Securities LLC (charged against trading income)	(984)		-		-
Expense
Interest on financial instruments, excluding interest on financial  liabilities held for trading or designated at fair value	(45,525)		(50,876)		(38,158)
Fees payable on financial assets or liabilities not held for trading nor designated at fair value, other than fees included in effective  interest rate calculations on these types of assets and liabilities	(1,866)		(1,923)		(1,826)
Fees payable relating to trust and other fiduciary activities where  HSBC holds or invests assets on behalf of its customers	(159)		(163)		(103)
Gains/(losses)
Gain on disposal or settlement of loans and advances	94		64		24
Impairment of available-for-sale equity securities	(1,042)		(42)		-
Gains on disposal of property, plant and equipment, intangible assets  and non-financial investments	465		213		781
Gain on repurchase of 8 Canada Square	416		-		-
Loan impairment charges and other credit risk provisions	(24,937)		(17,242)		(10,573)
Net impairment charge on loans and advances	(24,131)		(17,177)		(10,547)
Impairment of available-for-sale debt securities	(737)		(44)		(21)
Impairment in respect of other credit risk provisions	(69)		(21)		(5)

8 Employee compensation and benefits

	2008		2007		2006
	US$m		US$m		US$m
Wages and salaries	18,169		18,535		16,186
Social security costs	1,625		1,587		1,194
Post-employment benefits	998		1,212		1,120
	20,792		21,334		18,500

The average number of persons employed by HSBC during the year was as follows:

	2008		2007		2006
Europe	87,864		86,918		84,170
Hong Kong	30,030		27,702		27,328
Rest of Asia-Pacific	96,155		83,103		68,182
North America	53,090		58,117		57,654
Latin America	64,319		66,442		58,863
Total	331,458		322,282		296,197

Post-employment benefit plans

Income statement charge

	2008		2007		2006
	US$m		US$m		US$m
Defined benefit pension plans	477		694		602
- HSBC Bank (UK) Pension Scheme	255		490		342
- Other plans	222		204		260
Defined contribution plans	508		485		456
	985		1,179		1,058
Defined benefit healthcare plans	13		33		62
	998		1,212		1,120

Net liabilities recognised on balance sheet in respect of defined benefit plans

	2008		2007
	US$m		US$m
Defined benefit pension plans	3,154		1,968
- HSBC Bank (UK) Pension Scheme	392		808
- Other plans	2,762		1,160
Defined benefit healthcare plan	734		925
	3,888		2,893

HSBC pension plans

HSBC operates some 205 pension plans throughout the world, covering 86 per cent of HSBC's employees, with a total pension cost of US$985 million (2007: US$1,179 million; 2006: US$1,058 million), of which US$678 million (2007: US$626 million; 2006: US$668 million) relates to plans outside the UK.

Progressively, HSBC has been moving to defined contribution plans for all new employees. The pension cost for defined contribution plans, which cover 50 per cent of HSBC's employees, was US$508 million (2007: US$485 million; 2006: US$456 million).

Both HSBC's and, where relevant and appropriate, the trustees' long-term investment objectives for defined benefit plans are: 

to limit the risk of the assets failing to meet the liabilities of the plans over the long-term; and

to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the defined benefit plans.

Both HSBC and, where relevant and appropriate, the trustees, consider that the investment policy should be consistent with meeting their mutual overall long-term investment objectives. In pursuit of these long-term objectives, a benchmark is established for the allocation of the defined benefit plan assets between asset classes. In addition, each permitted asset class has its own benchmarks, such as stock market or property valuation indices and desired levels of out-performance where relevant. This is intended to be reviewed at least triennially within 18 months of the date at which the actuarial valuation is made, or more frequently if circumstances or local legislation so require. The process generally involves an extensive asset and liability review.

Most of the Group's defined benefit plans, which cover 36 per cent of HSBC's employees, are funded plans with assets which, in the case of most of the larger plans, are held in trust or similar funds separate from HSBC. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligations and related current service costs vary according to the economic conditions of the countries in which they are situated.

The largest plan exists in the UK, where the HSBC Bank (UK) Pension Scheme covers employees of HSBC Bank plc and certain other employees of HSBC. This plan comprises a funded defined benefit plan ('the principal plan') which is closed to new entrants, and a defined contribution plan which was established on 1 July 1996 for new employees. 

The principal plan holds a diversified portfolio of investments to meet future cash flow liabilities arising from accrued benefits as they fall due to be paid. The Trustee of the principal plan is required to produce a written Statement of Investment Principles ('SIP'). The SIP sets out the principles governing how decisions about investments are made.

In 2006, HSBC and the Trustee of the principal plan agreed to change the investment strategy in order to reduce the investment risk. This involved switching from a largely equity-based strategy to a strategy largely based on holding bonds together with a more diverse range of investments. The principal plan committed to undertake a programme including entering into swap arrangements whereby the principal plan is committed to making LIBOR-related interest payments in exchange for cash flows paid into the plan, based on a projection of the future benefit payments from the principal plan. The asset allocation for this strategy is:

	%
Equities	15.0
Bonds	50.0
Alternative assets1	10.0
Property	10.0
Cash	15.0
	100.0

1 Alternative assets include emerging market bonds, loans, and infrastructure assets.

At 31 December 2008, this strategy was substantially in place and details of the swap arrangements are included in Note 43.

The latest actuarial investigation of the principal plan was made at 31 December 2005. At that date, the market value of the HSBC Bank (UK) Pension Scheme's assets was US$18,072 million (including assets relating to the defined benefit plan, the defined contribution plan, and additional voluntary contributions). The market value of the plan assets represented 89 per cent of the amount expected to be required, on the basis of the assumptions adopted, to provide the benefits accrued to members after allowing for expected future increases in earnings, and the resulting deficit amounted to US$2,065 million. The method adopted for this investigation was the projected unit method. 

The expected cash flows from the plan were projected by reference to the Retail Price Index ('RPI') swap break-even curve at 31 December 2005. Salary increases were assumed to be 1 per cent per annum above RPI and inflationary pension increases, subject to a minimum of zero per cent and a maximum of 5 per cent, were assumed to be in line with RPI. The projected cash flows were discounted at the LIBOR swap curve at 31 December 2005 plus a margin for the expected return on the investment strategy of 110 basis points per annum. The mortality experience of the plan's pensioners over the three year period since the previous valuation was analysed and the mortality assumption set on the basis of this with allowances for medium cohort improvements on the PA92 series of tables from the valuation date.

In anticipation of the results of the 2005 investigation, on 22 December 2005 HSBC Bank plc made an additional contribution of US$1,746 million to the principal plan in order to reduce the deficit of the plan. Following receipt of the valuation results, HSBC agreed with the Trustee to meet a schedule of additional future funding payments, as set out below:

	US$m1		£m
2007	587		300
2012	678		465
2013	678		465
2014	678		465

1 The payment schedule has been agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the exchange rate effective as at 31 December 2008. The amount for 2007 was paid in March 2007, and is shown above at the exchange rate at that time.

HSBC considers that the contributions set out above are sufficient to meet the deficit as at 31 December 2005 over the agreed period.

HSBC Bank plc also decided to make ongoing contributions to the principal plan in respect of the accrual of benefits of defined benefit section members at the rate of 36 per cent of pensionable salaries from 1 January 2007, until the completion of the next actuarial valuation, due as at 31 December 2008. During 2006 HSBC paid contributions at the rate of 20 per cent of pensionable salaries. A further 2 per cent of pensionable salaries is being paid over the period 1 January 2007 to 31 December 2014 to make good the difference in contributions during 2006.

The Trustee and the bank will monitor progress towards closing the deficit and reassess the deficit in the light of the triennial valuation that is currently being performed as at 31 December 2008. This valuation process is currently underway and is due to be completed no later than 31 March 2010. Future funding commitments will be determined on conclusion of the actuarial valuation.

As part of the 31 December 2005 valuation, calculations were also carried out as to the amount of assets that might be needed to meet the liabilities if the plan was discontinued and the members' benefits bought out with an insurance company (although in practice this may not be possible for a plan of this size) or the Trustee continued to run the plan without the support of HSBC. The amount required under this approach was estimated at 31 December 2005 to be US$26,700 million. In estimating the solvency position for this purpose, a more prudent assumption about future mortality was made than for the assessment of the ongoing position and it was assumed that the Trustee would alter the investment strategy to be an appropriately matched portfolio of cash and interest and inflation swaps. An explicit allowance for expenses was also included.

The benefits payable from the defined benefit plan are expected to be as shown in the chart below:

Benefit payments (US$m)

In Hong Kong, the HSBC Group Hong Kong Local Staff Retirement Benefit Scheme covers employees of The Hongkong and Shanghai Banking Corporation and certain other employees of HSBC Group. The scheme comprises a funded defined benefit scheme (which provides a lump sum on retirement but is now closed to new members) and a defined contribution scheme. The latter was established on 1 January 1999 for new employees. The latest valuation of the defined benefit scheme was made at 31 December 2007. At that valuation date, the market value of the defined benefit scheme's assets was US$1,183 million. On an ongoing basis, the actuarial value of the scheme's assets represented 119 per cent of the actuarial present value of the benefits accrued to members, after allowing for expected future increases in salaries, and the resulting surplus amounted to US$192 million. On a wind-up basis, the scheme's assets represents 125 per cent of the members' vested benefits, based on current salaries, and the resulting surplus amounted to US$237 million. The attained age method has been adopted for the valuation and the major assumptions used in this valuation were a discount rate of 6 per cent per annum and long-term salary increases of 5 per cent per annum.

The HSBC North America (U.S.) Retirement Income Plan covers employees of HSBC Bank USA, HSBC Finance, and certain other employees of HSBC USA. It comprises a final average pay plan (now closed to new participants) and a cash balance plan. All new employees participate in the cash balance plan. The most recent actuarial valuation of the plan was made at 1 January 2008. At that date, the actuarial value of the plan's assets was equal to market value of US$2,616 million. The assets represented 105 per cent of the benefits accrued to members as valued under the provisions of the Pension Protection Act of 2006 that was effective for the plan year beginning 1 January 2008.The resulting surplus amounted to US$122 million. The method employed for this valuation was the projected unit method and the discount rate was determined using a full yield curve method, which resulted in an effective interest rate of 6.4 per cent per annum.

The HSBC Bank (UK) Pension Scheme, The HSBC Group Hong Kong Local Staff Retirement Benefit Scheme, and the HSBC North America (U.S.) Retirement Income Plan cover 35 per cent of HSBC's employees.

HSBC healthcare benefits plans

HSBC also provides post-employment healthcare benefits under plans in the UK, the US, Canada, Mexico, France and Brazil, the majority of which are unfunded. Post-employment healthcare benefits plans are accounted for in the same manner as defined benefit pension plans. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligation and related current service cost vary according to the economic conditions of the countries in which they are situated. Total healthcare cost was US$13 million (2007: US$33 million; 2006: US$62 million). 

Post-employment defined benefit plans' principal actuarial financial assumptions 

The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2008, were as follows. These assumptions will also form the basis for measuring periodic costs under the plans in 2009:

									Healthcare cost trend
	Discount   rate		Inflation rate		Rate of  increase forpensions1		Rate  of pay increase		Initial rate		Ultimate   rate		Year of   ultimate rate
	%		%		%		%		%		%
UK2	6.50		2.90		3.00		3.40		6.90		6.90		n/a
Hong Kong	1.19		n/a		n/a		5.00		n/a		n/a		n/a
US	6.05		2.50		n/a		3.50		8.90		5.00		2018
Jersey	6.50		2.90		2.90		4.65		n/a		n/a		n/a
Mexico	8.10		3.50		2.00		4.50		6.75		6.75		n/a
Brazil	10.75		4.50		4.50		5.50		10.00		5.50		2018
France	5.75		2.00		2.00		3.00		n/a		n/a		n/a
Canada	7.19		2.50		n/a		3.85		8.20		4.90		2012
Switzerland	2.60		1.50		n/a		2.39		n/a		n/a		n/a
Germany	5.75		2.00		2.00		3.00		n/a		n/a		n/a

1 Rate of increase for pensions in payment and deferred pension.

2 Rate of increase for pensions in the UK is currently for pensions in payment only. Pensions not yet in payment are assumed to increase at 2.80 per cent per annum.

The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2007, were as follows. These assumptions also formed the basis for measuring periodic costs under the plans in 2008:

									Healthcare cost trend
	Discount  rate		Inflation rate		Rate of  increase for pensions1		Rate  of pay increase		Initial rate		Ultimate   rate		Year of  ultimate rate
	%		%		%		%		%		%
UK	5.80		3.30		3.30		4.30		7.30		7.30		n/a
Hong Kong	3.45		n/a		n/a		5.02		n/a		n/a		n/a
US	6.55		2.50		n/a		3.75		9.60		5.00		2014
Jersey	5.80		3.30		3.30		5.05		n/a		n/a		n/a
Mexico	7.88		3.50		2.00		4.50		6.00		6.00		n/a
Brazil	10.75		4.50		4.50		4.50		10.50		5.50		2017
France	5.50		2.00		2.00		3.00		6.00		6.00		n/a
Canada	5.43		2.50		n/a		3.86		9.00		4.90		2012
Switzerland	3.30		1.50		n/a		2.38		n/a		n/a		n/a
Germany	5.50		2.00		2.00		3.00		n/a		n/a		n/a

1 Rate of increase for pensions in payment and deferred pension.

The principal actuarial financial assumptions used to calculate the Group's obligations under its defined benefit pension and post-employment healthcare plans at 31 December 2006, were as follows. These assumptions also formed the basis for measuring periodic costs under the plans in 2007:

									Healthcare cost trend
	Discount  rate		Inflation rate		Rate of  increase for pensions1		Rate  of pay increase		Initial rate		Ultimate  rate		Year of  ultimate rate
	%		%		%		%		%		%
UK	5.10		3.00		3.00		4.00		7.00		7.00		n/a
Hong Kong	3.75		n/a		n/a		3.00		n/a		n/a		n/a
US	5.90		2.50		n/a		3.75		10.50		5.00		2014
Jersey	5.10		3.00		3.00		4.75		n/a		n/a		n/a
Mexico	8.00		3.50		2.00		4.00		6.75		6.75		n/a
Brazil	10.75		4.50		4.50		4.50		11.00		5.50		2016
France	4.50		2.00		2.00		3.00		6.00		6.00		n/a
Canada	5.19		2.50		n/a		3.47		9.90		4.90		2012
Switzerland	2.25		1.50		n/a		2.25		n/a		n/a		n/a
Germany	4.50		2.00		2.00		3.00		n/a		n/a		n/a

1 Rate of increase for pensions in payment and deferred pension.

HSBC determines the discount rates to be applied to its obligations in consultation with the plans' local actuaries, on the basis of current average yields of high quality (AA rated or equivalent) debt instruments, with maturities consistent with those of the defined benefit obligations. In countries where there is no deep market in corporate bonds, government bond yields have been used. The yield curve has been extrapolated where the term of the liabilities is longer than the duration of available bonds and the discount rate used then takes into account the term of the liabilities and the shape of the yield curve.

When determining the discount rate with reference to a bond index, an appropriate index for the specific region has been used. The expected return on plan assets represents the best estimate of long-term future asset returns, which takes into account historical market returns plus additional factors such as the current rate of inflation and interest rates.

Mortality assumptions are increasingly significant in measuring the Group's obligations under its defined benefit pension and post-employment healthcare plans, particularly given the maturity of the plans. The mortality tables and average life expectancy at 65 used at 31 December 2008 were as follows:

	Mortality table	Life expectancy at age 65 for a male member currently:				Life expectancy at age 65 for a female member currently:
		Aged 65		Aged 45		Aged 65		Aged 45
UK	PA921	20.8		22.8		24.1		26.2
Hong Kong	n/a	n/a		n/a		n/a		n/a
US	RP 2000 fully generational	19.1		20.6		21.1		22.0
Jersey	90% of PNA002	23.0		25.0		25.4		27.3
Mexico	EMSSA-97, AA generational scale from RP 2000 series	18.3		19.8		21.0		21.9
Brazil	RP 2000 fully generational	19.1		20.6		21.1		22.0
France	TG 05	23.1		25.9		26.6		29.4
Canada pension plans	Between UP94 C2015 and UP94 C2027	18.5  and 19.4		18.5  and 19.4		21.1  and 21.6		21.1  and 21.6
Canada healthcare plan	UP94 C2025	19.3		19.3		21.5		21.5
Switzerland	BVG 20053	17.9		17.9		21.0		21.0
Germany	Heubeck 2005 G	18.0		20.7		22.1		24.7

PA92 with standard improvements to 2005 and medium cohort with 1 per cent minimum improvement thereafter.

PNA00 year of birth and medium cohort with 1 per cent improvement thereafter.

3.5 per cent load, additional 5.0 per cent load for future mortality improvements.

The mortality tables and average life expectancy at 65 used at 31 December 2007 were as follows:

	Mortality table	Life expectancy at age 65 for a male member currently:				Life expectancy at age 65 for a female member currently:
		Aged 65		Aged 45		Aged 65		Aged 45
UK	PA921	20.4		21.7		23.4		24.6
Hong Kong	n/a	n/a		n/a		n/a		n/a
US	RP 2000 fully generational	19.1		20.6		21.1		22.0
Jersey	PA922	21.9		23.0		24.8		25.8
Mexico	EMSSA-97	16.5		16.5		19.9		19.9
Brazil	RP 2000 fully generational	19.1		20.6		21.1		22.0
France	TG 05	22.9		25.7		26.4		29.3
Canada pension plans	Between UP94 C2015 and UP94 C2027	19.0 and 20.0		19.0 and 20.0		21.6 and 22.1		21.6 and 22.1
Canada healthcare plan	UP94 C2025	19.8		19.8		22.0		22.0
Switzerland	BVG 2005 (3% load)	17.9		17.9		21.0		21.0
Germany	Heubeck 2005 G	18.1		20.8		22.2		24.9

1 PA92 with standard improvements to 2005 and medium cohort improvements thereafter.

2 PA92 year of birth with medium cohort improvements.

Actuarial assumption sensitivities

The discount rate is sensitive to changes in market conditions arising during the reporting period. The mortality rates used are sensitive to experience from the plan member profile. The following table shows the effect of changes in these and the other key assumptions on the principal plan:

	HSBC Bank (UK) Pension Scheme
	2008		2007
	US$m		US$m
Discount rate
Change in pension obligation at year end from a 25bps increase	(559)		(989)
Change in pension obligation at year end from a 25bps decrease	595		1,063
Change in 2009 pension cost from a 25bps increase	(9)		(20)
Change in 2009 pension cost from a 25bps decrease	10		20
Rate of inflation
Change in pension obligation at year end from a 25bps increase	525		1,063
Change in pension obligation at year end from a 25bps decrease	(493)		(989)
Change in 2009 pension cost from a 25bps increase	45		82
Change in 2009 pension cost from a 25bps decrease	(41)		(76)
Rate of increase for pensions in payment and deferred pensions
Change in pension obligation at year end from a 25bps increase	349		823
Change in pension obligation at year end from a 25bps decrease	(328)		(758)
Change in 2009 pension cost from a 25bps increase	29		60
Change in 2009 pension cost from a 25bps decrease	(23)		(56)
Rate of pay increase
Change in pension obligation at year end from a 25bps increase	172		240
Change in pension obligation at year end from a 25bps decrease	(168)		(231)
Change in 2009 pension cost from a 25bps increase	16		22
Change in 2009 pension cost from a 25bps decrease	(15)		(20)
Investment return
Change in 2009 pension cost from a 25bps increase	36		56
Change in 2009 pension cost from a 25bps decrease	(36)		(56)
Mortality
Change in pension obligation from each additional year of longevity assumed	365		683

The following table shows the effect of changes in the discount rate and in mortality rates on plans other than the principal plan:

	Other plans
	2008		2007
	US$m		US$m
Change in defined benefit obligation at year end from a 25bps increase in discount rate	(255)		(312)
Change in 2009 defined benefit charge from a 25bps increase in discount rate	(4)		(8)
Increase in defined benefit obligation from each additional year of longevity assumed	91		137

Defined benefit pension plans

The calculation of the net liability under the Group's defined benefit pension plans is set out below together with the expected rates of return and plan assets used to measure the net defined benefit pension costs in each subsequent year.

	HSBC Bank (UK) Pension Scheme
	2008				2007
	Expected  rates of  return		Value		Expected  rates of return		Value
	%		US$m		%		US$m
Fair value of plan assets			14,865				22,704
Equities	8.1		2,242		8.3		4,580
Bonds	5.7		10,999		6.1		15,341
Property	6.9		1,184		7.3		1,878
Other	4.2		440		5.1		905
Defined benefit obligation			(15,257)				(23,512)
Present value of funded obligations			(15,257)				(23,512)
Present value of unfunded obligations			-				-
Net liability			(392)				(808)

	Other plans
	2008				2007
	Expected  rates of return1		Value		Expected   rates of return1		Value
	%		US$m		%		US$m
Fair value of plan assets			6,024				7,768
Equities	8.3		1,856		8.3		3,439
Bonds	5.0		3,261		5.4		3,452
Property	6.3		87		7.3		111
Other	3.8		820		5.7		766
Defined benefit obligation			(8,787)				(8,873)
Present value of funded obligations			(8,271)				(8,453)
Present value of unfunded obligations			(516)				(420)
Effect of limit on plan surpluses			(9)				(55)
Unrecognised past service cost			10				-
Net liability			(2,762)				(1,160)

1  The expected rates of return are weighted on the basis of the fair value of the plan assets.

Plan assets include US$52 million (2007: US$86 million) of equities issued by HSBC and US$2,206 million (2007: US$572 million) of other assets issued by HSBC. The fair value of plan assets includes derivatives entered into with the HSBC Bank (UK) Pension Scheme with a positive fair value of US$1,779 million at 31 December 2008 (2007: US$248 million positive fair value) and US$388 million positive fair value (2007: US$63 million positive fair value) in respect of the HSBC International Staff Retirement Benefits Scheme. Further details of these swap arrangements are included in Note 43.

Changes in the present value of defined benefit obligations

	HSBC Bank (UK) Pension Scheme				Other plans
	2008		2007		2008		2007
	US$m		US$m		US$m		US$m
At 1 January	23,512		24,332		8,873		7,916
Current service cost	387		454		357		347
Interest cost	1,227		1,247		466		398
Contributions by employees	2		-		40		37
Actuarial (gains)/losses	(3,032)		(2,395)		358		475
Benefits paid	(873)		(632)		(596)		(529)
Past service cost - vested immediately	-		-		9		6
Past service cost - unvested benefits	-		-		10		-
Disposals	-		-		(44)		-
Reduction in liabilities resulting from curtailments	-		-		(20)		(63)
Liabilities extinguished on settlements	-		-		(81)		(16)
Exchange differences	(5,966)		506		(585)		302
At 31 December	15,257		23,512		8,787		8,873

Changes in the fair value of plan assets

	HSBC Bank (UK) Pension Scheme				Other plans
	2008		2007		2008		2007
	US$m		US$m		US$m		US$m
At 1 January	22,704		20,587		7,768		7,116
Expected return on plan assets	1,359		1,211		549		486
Contributions by HSBC	462		1,058		238		211
- normal	462		471		223		199
- special	-		587		15		12
Contributions by employees	2		-		40		37
Experience gains/(losses)	(2,861)		29		(1,452)		157
Benefits paid	(873)		(632)		(576)		(467)
Assets distributed on settlements	-		-		(40)		(17)
Exchange differences	(5,928)		451		(503)		245
At 31 December	14,865		22,704		6,024		7,768

The actual return on plan assets for the year ended 31 December 2008 was a negative return of US$2,405 million (2007: positive US$1,883 million). HSBC expects to make US$588 million of contributions to defined benefit pension plans during 2009. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are:

	2009		2010		2011		2012		2013		2014-2018
	US$m		US$m		US$m		US$m		US$m		US$m
HSBC Bank (UK) Pension Scheme	729		766		804		845		887		5,149
Other significant plans	435		423		455		489		522		3,093

Total expense recognised in the income statement in 'Employee compensation and benefits'

	HSBC Bank (UK) Pension Scheme						Other plans
	2008		2007		2006		2008		2007		2006
	US$m		US$m		US$m		US$m		US$m		US$m
Current service cost	387		454		456		357		347		304
Interest cost	1,227		1,247		1,055		466		398		366
Expected return on plan assets	(1,359)		(1,211)		(1,169)		(549)		(486)		(421)
Past service cost	-		-		-		9		7		11
Gains on curtailments	-		-		-		(20)		(63)		-
(Gains)/losses on settlements	-		-		-		(41)		1		-
Total expense	255		490		342		222		204		260

Summary

	HSBC Bank (UK) Pension Scheme
	2008		2007		2006		2005		2004
	US$m		US$m		US$m		US$m		US$m
Defined benefit obligation	(15,257)		(23,512)		(24,332)		(20,587)		(19,998)
Fair value of plan assets	14,865		22,704		20,587		17,396		15,105
Net deficit	(392)		(808)		(3,745)		(3,191)		(4,883)
Experience gains/(losses) on plan liabilities	(49)		(64)		540		70		401
Experience gains/(losses) on plan assets	(2,861)		29		-		1,623		506
Gains/(losses) from changes in actuarial assumptions	3,081		2,459		(570)		(2,038)		(1,357)
Total net actuarial gains/(losses)	171		2,424		(30)		(345)		(450)

	Other plans
	2008		2007		2006		2005		2004
	US$m		US$m		US$m		US$m		US$m
Defined benefit obligation	(8,787)		(8,873)		(7,916)		(7,102)		(6,501)
Fair value of plan assets	6,024		7,768		7,116		6,356		5,823
Net deficit	(2,763)		(1,105)		(800)		(746)		(678)
Experience losses on plan liabilities	(52)		(354)		(167)		(113)		(42)
Experience gains on plan assets	(1,452)		157		203		78		3
Losses from changes in actuarial assumptions	(306)		(121)		(44)		(393)		(243)
Total net actuarial gains/(losses)	(1,810)		(318)		(8)		(428)		(282)

Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. Total cumulative actuarial losses recognised in equity at 31 December 2008 were US$1,076 million (2007: gains of US$563 million).

The total effect of the limit on plan surpluses recognised within actuarial losses in equity during 2008 was a US$41 million gain excluding exchange differences of US$5 million (2007: US$42 million loss excluding exchange differences of US$4 million).

Defined benefit healthcare plans

	2008				2007
	Expected  rates of return1		Value		Expected  rates of return1		Value
	%		US$m		%		US$m
Fair value of plan assets			128				146
Equities	11.6		39		13.0		44
Bonds	8.0		89		7.9		102
Defined benefit obligation			(839)				(1,038)
Present value of funded obligations			(172)				(191)
Present value of unfunded obligations			(667)				(847)
Unrecognised past service cost			(23)				(33)
Net liability			(734)				(925)

1  The expected rates of return are weighted on the basis of the fair value of the plan assets.

Changes in the present value of defined benefit obligations

	2008		2007
	US$m		US$m
At 1 January	1,038		1,106
Current service cost	19		25
Interest cost	65		67
Contributions by employees	2		2
Actuarial (gains)/losses	2		(109)
Benefits paid	(76)		(54)
Past service cost:
- vested immediately	-		(2)
- unvested benefits	-		(2)
Reduction in liabilities resulting from curtailments	(31)		(42)
Liabilities extinguished on settlements	(38)		(2)
Exchange differences	(142)		49
At 31 December	839		1,038

Changes in the fair value of plan assets

	2008		2007
	US$m		US$m
At 1 January	146		133
Expected return on plan assets	12		13
Contributions by HSBC	19		19
Experience losses	(14)		(6)
Benefits paid	(9)		(11)
Assets distributed on settlements	(12)		(2)
Exchange differences	(14)		-
At 31 December	128		146

The actual return on plan assets for the year ended 31 December 2008 was a negative return of US$2 million (2007: positive US$7 million).

HSBC expects to make US$4 million (2007: US$18 million) of contributions to post-employment healthcare benefit plans during 2009. Benefits expected to be paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are:

	2009		2010		2011		2012		2013		2014-2018
	US$m		US$m		US$m		US$m		US$m		US$m
Significant plans	44		48		50		52		54		294

Total expense recognised in the income statement in 'Employee compensation and benefits'

	2008		2007		2006
	US$m		US$m		US$m
Current service cost	19		25		19
Interest cost	65		67		64
Expected return on plan assets	(12)		(13)		(11)
Past service cost	(2)		(4)		(1)
Losses on curtailments	(31)		(42)		(8)
Losses on settlements	(26)		-		(1)
Total expense	13		33		62

Summary

	2008		2007		2006		2005		2004
	US$m		US$m		US$m		US$m		US$m
Defined benefit obligation	(839)		(1,038)		(1,106)		(1,004)		(982)
Fair value of plan assets	128		146		133		107		79
Net deficit	(711)		(892)		(973)		(897)		(903)
Experience gains/(losses) on plan liabilities	(34)		15		(12)		19		(15)
Experience gains/(losses) on plan assets	(14)		(6)		(1)		1		-
Gains/(losses) from changes in actuarial assumptions	32		94		(25)		(63)		20
Total net actuarial gains/(losses)	(16)		103		(38)		(43)		5

Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. Total cumulative net actuarial gains recognised in equity at 31 December 2008 were US$11 million (2007: gains of US$27 million).

The actuarial assumptions of the healthcare cost trend rates have a significant effect on the amounts recognised. A one percentage point change in assumed healthcare cost trend rates would have the following effects on amounts recognised in 2008:

	2008				2007
	1% increase		1% decrease		1% increase		1% decrease
	US$m		US$m		US$m		US$m
Increase/(decrease) of the aggregate of the current service cost and interest cost	9		(7)		14		(10)
Increase/(decrease) of defined benefit obligation	77		(62)		110		(100)

HSBC Holdings

Employee compensation and benefit expense in respect of HSBC Holdings' employees in 2008 amounted to US$218 million (2007: US$257 million). The average number of persons employed by HSBC Holdings during 2008 was 730 (2007: 595).

Employees of HSBC Holdings who are members of defined benefit pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement Benefits Scheme. HSBC Holdings pays contributions to plans in accordance with schedules determined by the Trustees following consultation with qualified actuaries.

Directors' emoluments

The aggregate emoluments of the Directors of HSBC Holdings, computed in accordance with Part I of Schedule 6 of the Companies Act 1985, were:

	2008		2007		2006
	US$000		US$000		US$000
Fees	2,529		2,626		2,660
Salaries and other emoluments	11,584		7,929		7,774
Bonuses	-		8,938		10,705
	14,113		19,493		21,139
Gains on the exercise of share options	23		13		3
Vesting of Long-Term Incentive awards	7,147		4,563		18,975

In addition, there were payments under retirement benefit agreements with former Directors of US$1,139,968 (2007: US$1,183,960). The provision at 31 December 2008 in respect of unfunded pension obligations to former Directors amounted to US$15,164,791 (2007: US$18,491,117).

During the year, aggregate contributions to pension schemes in respect of Directors were US$664,174 (2007: US$545,854 which included US$460,564 arising from a Director's waiver of bonus).

Discretionary bonuses for Directors are based on a combination of individual and corporate performance and are determined by the Remuneration Committee. Details of Directors' remuneration, share options and conditional awards under the Restricted Share Plan 2000 and the HSBC Share Plan are included in the 'Directors' Remuneration Report' on pages 315 to 328.

9 Auditors' remuneration

Auditors' remuneration in relation to the statutory audit amounted to US$54.9 million (2007: US$52.3 million; 2006: US$44.7 million). The following fees were payable by HSBC to the Group's principal auditor, KPMG Audit Plc and its associates (together 'KPMG'):

	2008		2007		2006
	US$m		US$m		US$m
Audit fees for HSBC Holdings' statutory audit1	2.1		3.0		2.7
- fees relating to current year	2.5		3.0		2.7
- fees relating to prior year	(0.4)		-		-
Fees payable to KPMG for other services provided to HSBC	88.3		79.1		64.1
Audit-related services:
- audit of HSBC's subsidiaries, pursuant to legislation2	48.6		45.2		40.4
- other services pursuant to legislation3	26.5		19.4		15.4
Tax services4	3.1		2.9		2.0
Other services:
- services relating to information technology5	0.6		0.4		0.6
- services related to corporate finance transactions6	1.4		1.8		1.6
- all other services7	8.1		9.4		4.1
Total fees payable	90.4		82.1		66.8

1 Fees payable to KPMG Audit Plc for the statutory audit of the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. They exclude amounts payable for the statutory audit of HSBC Holdings' subsidiaries which have been included in 'Fees payable to KPMG for other services provided to HSBC'.

2 Including fees payable to KPMG for the statutory audit of HSBC's subsidiaries.

3 Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews. Other services pursuant to legislation included no fees paid to KPMG in respect of work relating to preparation for reporting under section 404 of the Sarbanes-Oxley Act (2007: US$1.6 million; 2006: US$2.2 million). Other accounting firms were paid a total of US$1.2 million (2007: US$2.5 million; 2006: US$8.3 million) for work on this project.

4 Including tax compliance services and tax advisory services.

5 Including advice on IT security and business continuity and performing agreed-upon IT testing procedures.

6 Including fees payable to KPMG for transaction-related work, including US debt issuances.

7 Including other assurance and advisory services such as translation services, ad-hoc accounting advice and review of financial models.

No fees were payable by HSBC to KPMG for the following types of services: internal audit services, valuation and actuarial services, services related to litigation, and services related to recruitment and remuneration. The following fees were payable by HSBC's associated pension schemes to KPMG:

	2008		2007		2006
	US$000		US$000		US$000
Audit fees	720		612		581
Tax services	73		14		23
All other services	-		36		23
Total fees payable	793		662		627

No fees were payable by HSBC's associated pension schemes to KPMG for the following types of services: other services pursuant to legislation, services relating to information technology, internal audit services, valuation and actuarial services, services related to litigation, services related to recruitment and remuneration, and services related to corporate finance transactions.

In addition to the above, KPMG estimate they have been paid fees of US$4.8 million (2007: US$3.4 million; 2006: US$2.1 million) by parties other than HSBC but where HSBC is connected with the contracting party and therefore may be involved in appointing KPMG. These fees arise from services such as auditing mutual funds managed by HSBC and reviewing the financial position of corporate concerns which borrow from HSBC.

  Fees payable to KPMG for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a consolidated basis for HSBC Group. 

10 Share-based payments

During 2008, US$819 million was charged to the income statement in respect of share-based payment transactions settled in equity (2007: US$870 million; 2006: US$854 million). This expense, which was computed from the fair values of the share-based payment transactions when contracted, arose under employee share awards made in accordance with HSBC's reward structures.

Calculation of fair values

Fair values of share options/awards, measured at the date of grant of the option/award, are calculated using a binomial lattice model methodology that is based on the underlying assumptions of the Black-Scholes model. When modelling options/awards with vesting dependent on HSBC's Total Shareholder Return ('TSR') over a period, the TSR performance targets are incorporated into the model using Monte Carlo simulation. The expected life of options depends on the behaviour of option holders, which is incorporated into the option model on the basis of historic observable data. The fair values calculated are inherently subjective and uncertain due to the assumptions made and the limitations of the model used.

The significant weighted average assumptions used to estimate the fair value of the options granted were as follows:

	1-year Savings- Related Share Option Plan		3-year Savings- Related Share Option Plans		5-year Savings- Related Share Option Plans
2008
Risk-free interest rate1 (%)	4.5		4.5		4.5
Expected life2 (years)	1		3		5
Expected volatility3 (%)	25		25		25
Share price at grant date (£)	8.80		8.80		8.80
2007
Risk-free interest rate1 (%)	5.6		5.5		5.4
Expected life2 (years)	1		3		5
Expected volatility3 (%)	17		17		17
Share price at grant date (£)	9.24		9.24		9.24
2006
Risk-free interest rate1 (%)	4.7		4.8		4.7
Expected life2 (years)	1		3		5
Expected volatility3 (%)	17		17		17
Share price at grant date (£)	9.54		9.54		9.54

1 The risk-free rate was determined from the UK gilts yield curve for the UK Savings-Related Share Option Plans. A similar yield curve was used for the International Savings-Related Share Option Plans. 

2 Expected life is not a single input parameter but a function of various behavioural assumptions. 

3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded options over HSBC shares of similar maturity to those of the employee options. 

Expected dividends are incorporated into the valuation model for share options and awards, where applicable. The expected US dollar denominated dividend growth was determined to be 7 per cent for the first year (2007: 10 per cent for first 3 years) and 8 per cent thereafter (2007: 8 per cent), in line with consensus analyst forecasts. 

The HSBC Share Plan

The HSBC Share Plan was adopted by HSBC Holdings in 2005. Under this plan, Performance Share awards, restricted share awards and share option awards may be made. The aim of the HSBC Share Plan is to align the interests of executives with the creation of shareholder value and recognise individual performance and potential. Awards are also made under this plan for recruitment and retention purposes. 

Performance Share awards

Performance Shares are awarded to executive Directors and other senior executives after taking into account individual performance in the previous year. For awards made prior to 2008, each award is divided into two equal parts for testing attainment against pre-determined benchmarks. One half of the award is subject to a TSR measure, based on HSBC's ranking against a comparator group of 28 major banks; the other half is subject to an earnings per share target. For each element of the award, shares are released to the employee on a sliding scale from 30 to 100 per cent of the award, depending on the scale of achievement against the benchmarks, providing that the minimum criteria for each performance measure has been met. 

For awards made during 2008 and prospectively, each award is divided into three parts for testing attainment against pre-determined benchmarks. 40 per cent of the award is subject to a TSR measure, based on HSBC's ranking against a comparator group of 26 major banks; 40 per cent is subject to an economic profit measure, calculated as the average annual difference between return on invested capital and HSBC's benchmark cost of capital; and 20 per cent is subject to an earnings per share target. For the TSR and EPS elements of the awards, shares are released to the employee on a sliding scale from 20 to 100 per cent of the award, depending on the scale of achievement against the benchmarks. For the economic profit element of the awards, shares are released to the employee on a sliding scale from zero to 100 per cent, depending on the scale of achievement against the benchmark. In all cases, shares are only released when the minimum criteria for each performance measure has been met.

In determining whether HSBC Holdings has achieved such sustained improvement the Remuneration Committee will take account of all relevant factors, in particular, comparisons against the TSR comparator group in areas such as revenue growth and mix, cost efficiency, credit performance, cash return on cash invested, dividend performance and TSR.

	2008		2007
	Number		Number
	(000s)		(000s)
Outstanding at 1 January	12,318		10,367
Additions during the year	5,664		3,263
Released in the year	(2,246)		-
Forfeited in the year	(4,117)		(1,312)
Outstanding at 31 December	11,619		12,318

The weighted average fair value of shares awarded by HSBC for performance share awards in 2008 was US$13.61 (2007: US$13.24). 

Restricted share awards

Restricted shares are awarded to other employees on the basis of their performance, potential and retention requirements, to aid recruitment or as a part-deferral of annual bonuses. Shares are awarded without corporate performance conditions and generally vest between one and three years from the date of award, providing the employees have remained continually employed by HSBC for this period. 

	2008		2007
	Number		Number
	(000s)		(000s)
Outstanding at 1 January	79,256		43,420
Additions during the year	72,120		52,790
Released in the year	(17,092)		(8,781)
Forfeited in the year	(12,078)		(8,173)
Outstanding at 31 December	122,206		79,256

The weighted average fair value of shares awarded by HSBC for restricted share awards in 2008 was US$14.64 (2007: US$17.92). 

Share options

Share options were granted in 2005 under the HSBC Share Plan to employees in France on the basis of their performance in the previous year. The share options are subject to the corporate performance conditions, which consist of an absolute earnings per share measure and a TSR measure based on HSBC Holdings' ranking against a comparator group of 28 major banks. The options may vest after three years and are exercisable up to the tenth anniversary of the date of grant, after which they will lapse.

	2008				2007
	Number		Weighted   average exercise   price		Number		Weighted   average   exercise   price
	(000s)		£		(000s)		£
Outstanding at 1 January	524		8.85		628		8.84
Forfeited and expired in the year	(224)		8.79		(104)		8.79
Outstanding at 31 December	300		8.89		524		8.85

No options were granted in 2008 (2007: nil). The weighted average remaining contractual life of options outstanding at the balance sheet date was 2.1 years (2007: 2.4 years). The exercise price range of options outstanding at the balance sheet date was £8.79-£9.17. All of the options were exercisable. The options exercisable at the balance sheet date were 300 (2007: nil).

Savings-related share option plans

Savings-related share option plans invite eligible employees to enter into savings contracts to save up to £250 per month (or its equivalent in US dollars, Hong Kong dollars or euros), with the option to use the savings to acquire shares. The aim of the plans is to align the interests of all employees with the creation of shareholder value. The options are exercisable within three months following the first anniversary of the commencement of a one-year savings contract or within six months following either the third or the fifth anniversaries of the commencement of three-year or five-year savings contracts, respectively. The exercise price is set at a 20 per cent (2007: 20 per cent) discount to the market value immediately preceding the date of invitation (except for the one-year options granted under the US sub-plan where a 15 per cent discount is applied). 

	2008				2007
	Number		Weighted averageexercise price		Number		Weighted   average   exercise   price
	(000s)		£		(000s)		£
Outstanding at 1 January	89,739		6.83		87,837		6.58
Granted in the year	32,951		6.82		30,105		7.43
Exercised in the year	(30,126)		6.10		(17,951)		6.58
Forfeited and expired in the year	(18,163)		7.04		(10,252)		6.58
Outstanding at 31 December	74,401		6.97		89,739		6.83

The weighted average fair value of options granted during the year was US$3.89 (2007: US$4.24). The weighted average share price at the date the share options were exercised was US$15.48 (2007: US$17.93). The exercise price range and weighted average remaining contractual life for options outstanding at the balance sheet date were as follows:

	2008		2007
Exercise price range (£)	5.35-7.67		5.35-7.93
Weighted average remaining contractual life (years)	1.87		1.67
Of which exercisable:
Number (000s)	1,751		541
Weighted average exercise price (£)	6.03		6.44

HSBC Holdings Restricted Share Plan 2000

Performance share awards made under the HSBC Holdings Restricted Share Plan 2000 (the 'Restricted Share Plan')

Performance share awards under the Restricted Share Plan were granted to senior executives from 2000 to 2004. The aim of the plan was to align the interests of executives with the creation of shareholder value. This was achieved by setting certain TSR targets against a peer group of major banks which would normally have to be attained in order for the awards to vest. In addition to these performance conditions, none of the outstanding awards will vest unless the Remuneration Committee is satisfied that, during the performance period, HSBC has achieved sustained growth. Following adoption of the HSBC Share Plan in 2005, no further awards will be made under this Plan other than from reinvested scrip dividends.

	2008		2007
	Number		Number
	(000s)		(000s)
Outstanding at 1 January	4,811		12,328
Additions during the year1	159		301
Released in the year	(11)		(2,332)
Forfeited in the year	(4,959)		(5,486)
Outstanding at 31 December	-		4,811

1 Additions during the year comprised reinvested scrip dividends.

There was no weighted average remaining vesting period at 31 December 2008 (2007: 0.2 years).

Restricted share awards made under the Restricted Share Plan

Restricted share awards under the Restricted Share Plan were granted to eligible employees from 2000 to 2005, after taking into account the employees' performance in the previous year, their potential and retention requirements. Restricted shares were also awarded as part-deferral of annual bonuses or for recruitment purposes. Shares were awarded without corporate performance conditions and generally vest between one and three years from the date of award, providing the employees have remained continuously employed by HSBC for the period.

	2008 Number		2007 Number
	(000s)		(000s)
Outstanding at 1 January	19,299		38,670
Additions during the year1	934		199
Released in the year	(16,405)		(17,156)
Forfeited in the year	(1,111)		(2,414)
Outstanding at 31 December	2,717		19,299

1 Additions during the year comprised reinvested scrip dividends and reinstatement of awards.

The weighted average remaining vesting period as at 31 December 2008 was 0.5 years (2007: 0.3 years).

HSBC Holdings Group Share Option Plan

The HSBC Holdings Group Share Option Plan was a long-term incentive plan under which certain HSBC employees between 2000 and 2005 were awarded share options. The aim of the plan was to align the interests of those higher performing employees with the creation of shareholder value. This was achieved by setting certain TSR targets which would normally have to be attained in order for the awards to vest. Options were granted at market value and are normally exercisable between the third and tenth anniversaries of the date of grant, subject to vesting conditions. Options granted after May 2005 are made under the HSBC Share Plan.

	2008				2007
	Number		Weighted averageexercise price		Number		Weighted   average   exercise   price
	(000s)		£		(000s)		£
Outstanding at 1 January	152,216		8.15		168,786		8.09
Exercised in the year	(3,734)		7.38		(8,351)		7.64
Forfeited and expired in the year	(5,889)		8.28		(8,219)		8.02
Outstanding at 31 December	142,593		8.16		152,216		8.15

The weighted average share price at the date the share options were exercised was US$14.65 (2007: US$18.08). The number of options, weighted average exercise price, and weighted average remaining contractual life of options outstanding at the balance sheet date, analysed by exercise price range, were as follows:

	2008				2007
Exercise price range (£)	6.00-8.00		8.01-10.00		6.00-8.00		8.01-10.00
Number (000s)	25,947		116,646		29,312		122,904
Weighted average exercise price (£)	6.91		8.44		6.92		8.44
Weighted average remaining contractual life (years)	4.33		4.34		5.33		5.34
Of which exercisable:
Number (000s)	25,947		116,646		29,312		61,650
Weighted average exercise price (£)	6.91		8.44		6.92		8.59

HSBC Holdings Executive Share Option Scheme

The HSBC Holdings Executive Share Option Scheme was a long-term incentive plan under which certain senior HSBC employees were awarded share options before the adoption of the HSBC Holdings Group Share Option Plan in 2000. The aim of the plan was to align the interests of those higher performing senior employees with the creation of shareholder value. This was achieved by setting certain TSR targets to be attained in order for the awards to vest. Options were granted at market value and were exercisable between the third and tenth anniversaries of the date of grant, subject to vesting conditions. No awards have been made under this plan since 2000 and the remaining unexercised options are summarised below:

	2008				2007
	Number		Weighted   average   exercise   price		Number		Weighted   average   exercise   price
	(000s)		£		(000s)		£
Outstanding at 1 January	18,239		6.85		22,037		6.82
Exercised in the year	(4,051)		6.58		(3,377)		6.65
Expired in the year	(224)		7.70		(421)		6.84
Outstanding at 31 December	13,964		6.92		18,239		6.85

The weighted average share price at the date the share options were exercised was US$14.65 (2007: US$18.08). 

The number of options, weighted average exercise price and weighted average remaining contractual life of options outstanding at the balance sheet date, analysed by exercise price range, were as follows:

	2008		2007
Exercise price range (£)	6.01-7.87		6.01-7.87
Number (000s)	13,964		18,239
Weighted average exercise price (£)	6.92		6.85
Weighted average remaining contractual life (years)	0.75		1.66
Of which exercisable:
Number (000s)	13,964		18,239
Weighted average exercise price (£)	6.92		6.85

HSBC France and subsidiary company plans

Before its acquisition by HSBC in 2000, HSBC France and certain of its subsidiaries operated employee share plans under which share options were granted over their respective shares. 

Options over HSBC France shares granted between 1994 and 1999 vested upon announcement of HSBC's agreement to acquire HSBC France and were therefore included in the valuation of HSBC France. 

HSBC France granted 909,000 options in 2000 after the public announcement of the acquisition and these options did not vest as a result of the change in control. The options were subject to continued employment and vested on 1 January 2002. The HSBC France shares obtained on exercise of the options are exchangeable for HSBC's ordinary shares of US$0.50 each in the same ratio as the Exchange Offer for HSBC France shares (13 ordinary shares of US$0.50 for each HSBC France share). Options were granted at market value and are exercisable within 10 years of the date of grant.

	2008				2007
	Number		Exercise   price		Number		Exercise   price
	(000s)		€		(000s)		€
Outstanding at 1 January	604		142.5		648		142.5
Exercised in the year	-		142.5		(42)		142.5
Outstanding and exercisable at 31 December	604		142.5		604		142.5

The weighted average share price at the date the share options were exercised was nil (2007: US$18.08). The remaining contractual life for options outstanding at the balance sheet date was 1.3 years (2007: 2.3 years).

At the date of its acquisition in 2000, certain of HSBC France's subsidiary companies also operated employee share option plans under which options could be granted over their respective shares. On exercise of certain of these options, the subsidiary shares are exchanged for HSBC ordinary shares. The total number of HSBC ordinary shares exchanged under such arrangements in 2008 was 12,810 (2007: 113,240). 

HSBC Finance

Upon acquisition, HSBC Finance share options previously granted were converted to share options over HSBC ordinary shares of US$0.50 each at a rate of 2.675 HSBC share options (the same ratio as the Exchange Offer for HSBC Finance) for each HSBC Finance share option. Options granted under HSBC Finance's own share option schemes prior to the announcement of the acquisition by HSBC in November 2002 vested as options over HSBC shares upon acquisition by HSBC. Options granted after the announcement of the acquisition in November 2002 but prior to its completion on 28 March 2003 generally vest equally over four years and expire ten years from the date of grant. 

	2008				2007
	Number		Exercise   price		Number		Exercise   price
	(000s)		US$		(000s)		US$
Outstanding at 1 January	2,455		10.66		3,126		10.66
Exercised in the year	(12)		10.66		(671)		10.66
Expired in the year	(41)		10.66		-		10.66
Outstanding and exercisable at 31 December	2,402		10.66		2,455		10.66

The weighted average share price at the date the share options were exercised was US$14.65 (2007: US$18.08). The remaining contractual life for options outstanding at the balance sheet date was 3.9 years (2007: 4.9 years). 

11 Tax expense

	2008		2007		2006
	US$m		US$m		US$m
Current tax
UK corporation tax charge - on current year profit	1,738		1,372		772
UK corporation tax charge - adjustments in respect of prior years	(67)		(46)		(122)
Overseas tax - on current year profit	1,732		3,976		4,600
Overseas tax - adjustments in respect of prior years	(29)		(97)		(48)
	3,374		5,205		5,202
Deferred tax
Origination and reversal of temporary differences	(504)		(1,247)		(51)
Effect of changes in tax rates	(89)		(35)		-
Adjustments in respect of prior years	28		(166)		64
	(565)		(1,448)		13
Tax expense	2,809		3,757		5,215

The UK corporation tax rate applying to HSBC Holdings and its subsidiaries changed from 30 per cent to 28 per cent with effect from 1 April 2008 (2007: 30 per cent; 2006: 30 per cent). Overseas tax included Hong Kong profits tax of US$846 million (2007: US$1,137 million; 2006: US$751 million). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong changed from 17.5 per cent to 16.5 per cent with effect from 1 January 2008 (2007: 17.5 per cent; 2006: 17.5 per cent). Other overseas subsidiaries and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

The following table reconciles the tax expense which would apply if all profits had been taxed at the UK corporation tax rate:

	2008				2007				2006
	US$m		%		US$m		%		US$m		%
Analysis of tax expense
Taxation at UK corporation tax rate of  28.5% (2007 and 2006: 30%)1	2,652		28.5		7,264		30.0		6,626		30.0
Goodwill impaired	3,010		32.3		-		-		-		-
Effect of taxing overseas profits in  principal locations at different rates	(1,339)		(14.4)		(1,460)		(6.0)		(568)		(2.6)
Tax-free gains	(1,016)		(10.9)		(296)		(1.2)		(199)		(0.9)
Adjustments in respect of prior period liabilities	(67)		(0.7)		(309)		(1.3)		(106)		(0.5)
Low income housing tax credits2	(103)		(1.1)		(107)		(0.4)		(108)		(0.5)
Effect of profit in associates and joint ventures	(473)		(5.1)		(450)		(1.9)		(253)		(1.1)
Effect of previously unrecognised  temporary differences3	(98)		(1.1)		(485)		(2.0)		(122)		(0.6)
Release of deferred tax consequent on restructuring of Group interests	-		-		(359)		(1.5)		-		-
Impact of gains arising from dilution of interests in associates4	-		-		(253)		(1.0)		-		-
Other items	243		2.7		212		0.8		(55)		(0.2)
Overall tax expense	2,809		30.2		3,757		15.5		5,215		23.6

1 The change in the UK corporation tax rate from 30 per cent to 28 per cent with effect from 1 April 2008 gave rise to a blended tax rate for 2008 of 28.5 per cent.

2 Low income housing tax credits arise in the US and are designed to encourage the provision of rental housing for low income households.

3 The effect of previously unrecognised temporary differences principally relates to the recognition of trading losses (2007 and  2006: capital losses).

4 The gains arising from the dilution of HSBC's interests in associates were not subject to tax and, as such, there is a reconciling item which reduces the effective tax rate for 2007 (see Note 4).

In addition to the amount charged to the income statement, the aggregate amount of current and deferred tax, relating to items that are taken directly to total equity, was a US$1,879 million increase in total equity (2007: US$226 million reduction in total equity; 2006: US$44 million reduction in total equity).

The 2007 Finance Act reduction in the UK corporation tax rate from 30 per cent to 28 per cent, enacted in 2007 but commencing in 2008, resulted in a one-off re-measurement of deferred tax assets and liabilities at 31 December 2007. It gave rise to a credit to the Group's tax charge of US$28 million in 2007.

Deferred taxation

HSBC

	2008		2007
	US$m		US$m
At 1 January	3,425		2,145
Income statement credit	565		1,448
Equity:
- available-for-sale investments	582		(8)
- cash flow hedges	92		470
- share-based payments	-		(65)
- actuarial gains/(losses)	433		(642)
Foreign exchange and other adjustments	59		77
At 31 December	5,156		3,425

The amount of deferred taxation accounted for in the consolidated balance sheet, before offsetting balances within countries, comprised the following deferred tax assets and liabilities:

	2008		2007
	US$m		US$m
Deferred tax assets
Retirement benefits	927		822
Loan impairment allowances	5,891		4,484
Unused tax losses	282		272
Accelerated capital allowances	99		97
Available-for-sale investments	518		77
Cash flow hedges	1,145		570
Share-based payments	245		326
Other short-term temporary differences	457		900
	9,564		7,548
Deferred tax liabilities
Assets leased to customers	916		1,285
Revaluation of property	374		507
Accelerated capital allowances	167		206
Other short-term temporary differences	419		202
Provision for tax on profit remitted from overseas	78		102
Available-for-sale investments	121		198
Cash flow hedges	280		96
Fee income	930		943
Other temporary differences	1,123		584
	4,408		4,123
Net deferred tax assets before offsetting balances within countries	5,156		3,425

After offsetting balances within countries, the balances as disclosed in the consolidated balance sheet are as follows:

	2008		2007
	US$m		US$m
Deferred tax assets	7,011		5,284
Deferred tax liabilities	(1,855)		(1,859)
	5,156		3,425

The amount of temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised in the balance sheet is US$878 million (2007: US$923 million). Of this amount, US$805 million (2007: US$750 million) has no expiry date and US$73 million (2007: US$173 million) is scheduled to expire within 10 years (2007: 10 years).

Deferred tax is not recognised in respect of the Group's investments in subsidiaries, branches, associates and interests in joint ventures where remittance is not contemplated or where no additional tax is expected to arise. The aggregate amount of temporary differences associated with such investments is US$38,443 million (2007: US$29,947 million; 2006: US$22,424 million).

Of the total net deferred tax assets of US$7.0 billion at 31 December 2008 (2007: US$5.3 billion), US$5.0 billion (2007: US$3.7 billion) arises in respect of HSBC's US operations where there has been a recent history of losses. The recognition of the deferred tax assets in respect of HSBC's US operations is dependent on the capacity to carry back up to US$1.9 billion of net operating losses arising in 2009 (2007 capacity: US$7.3 billion) but mainly relies on the projection of future taxable profits. Management's forecasts support the assumption that it is probable that the results of future operations will generate sufficient taxable income to utilise the deferred tax assets. These forecasts rely on continued liquidity and capital support to the US operations from HSBC, including tax planning strategies implemented in relation to such support.

HSBC Holdings

	Deferred tax  asset/(liability)
	2008		2007
	US$m		US$m
Temporary differences:
- short-term timing differences	1		1
- fair valued assets and liabilities	30		(14)
- share-based payments	11		20
	42		7

12 Dividends

Dividends to shareholders of the parent company were as follows:

	2008						2007						2006
	Per  share  US$		Total US$m		Settled in scrip US$m		Per  share  US$		Total US$m		Settled in scrip US$m		Per  share  US$		Total US$m		Settled in scrip US$m
Dividends declared on ordinary shares
In respect of previous year:
- fourth interim dividend	0.390		4,620		2,233		0.360		4,161		2,116		0.310		3,513		1,542
In respect of current year:
- first interim dividend	0.180		2,158		256		0.170		1,986		712		0.150		1,712		248
- second interim dividend	0.180		2,166		727		0.170		1,997		912		0.150		1,724		515
- third interim dividend	0.180		2,175		380		0.170		2,007		614		0.150		1,730		223
	0.930		11,119		3,596		0.870		10,151		4,354		0.760		8,679		2,528
Quarterly dividends on preference shares classified as equity
March dividend	15.50		22				15.50		22				15.50		22
June dividend	15.50		23				15.50		23				15.50		23
September dividend	15.50		22				15.50		22				15.50		22
December dividend	15.50		23				15.50		23				15.50		23
	62.00		90				62.00		90				62.00		90
Quarterly coupons on capital  securities classified as equity1
July coupon	0.541		47				-		-				-		-
October coupon	0.508		45				-		-				-		-
	1.049		92				-		-				-		-

1 During April 2008, HSBC Holdings issued US$2,200 million of Perpetual Subordinated Capital Securities ('Capital Securities'), which are classified as equity under IFRSs. 

The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended 31 December 2008 of US$0.10 per ordinary share, a distribution of US$1,214 million. The fourth interim dividend will be payable on 6 May 2009 to shareholders on the Register at the close of business on 20 March 2009. No liability is recorded in the financial statements in respect of the fourth interim dividend for 2008.

On 15 January 2009, HSBC paid a further coupon on the Capital Securities of US$0.508 per security, a distribution of US$45 million. No liability is recorded in the balance sheet at 31 December 2008 in respect of this coupon payment. 

13 Earnings per share

Basic earnings per ordinary share was calculated by dividing the profit attributable to ordinary shareholders of the parent company of US$5,546 million (2007: US$19,043 million; 2006: US$15,699 million) by the weighted average number of ordinary shares, excluding own shares held, outstanding in 2008 of 11,812 million (2007: 11,545 million; 2006: 11,210 million).

	2008		2007		2006
	US$m		US$m		US$m
Profit attributable to shareholders of the parent company	5,728		19,133		15,789
Dividend payable on preference shares classified as equity	(90)		(90)		(90)
Coupon payable on capital securities classified as equity	(92)		-		-
Profit attributable to the ordinary shareholders of the parent company	5,546		19,043		15,699

Diluted earnings per ordinary share was calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares (including share options outstanding not yet exercised), by the weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be issued on ordinary conversion of dilutive potential ordinary shares in 2008 of 11,915 million (2007: 11,661 million; 2006: 11,320 million). The effect of dilutive potential ordinary shares on the weighted average number of ordinary shares outstanding was as follows:

	Number of shares (millions)
	2008		2007		2006
Weighted average number of ordinary shares outstanding	11,812		11,545		11,210
Weighted average number of dilutive potential ordinary shares	103		116		110
- Savings-related Share Option Plan	11		20		27
- Executive Share Option Scheme	3		5		10
- Group Share Option Plan	4		16		28
- Restricted and performance share awards	83		67		32
- HSBC France share options	1		5		8
- HSBC Finance share options	1		3		5
Weighted average number of ordinary shares outstanding assuming  dilution	11,915		11,661		11,320

The weighted average number of dilutive potential ordinary shares excludes 145 million employee share options that were anti-dilutive (2007: 19 million; 2006: 20 million).

14 Segmental analysis

In the following segmental analysis, the benefit of shareholders' funds impacts the analysis only to the extent that these funds are actually allocated to businesses in the segment by way of intra-HSBC capital and funding structures.

By geographical region

Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank, HSBC Bank Middle East, HSBC Finance and HSBC Bank USA, by the location of the branch responsible for reporting the results or advancing the funds. Due to the nature of HSBC's structure, the analysis of profits shown below includes intra-HSBC items between geographical regions with the elimination shown in a separate column. The Rest of Asia-Pacific geographical segment includes the Middle East, India and Australasia. Shared costs are included in segments on the basis of the actual recharges made.

By customer groups and global businesses

HSBC's operations include a number of shared support services and GMO functions. The costs of these functions are allocated to customer groups and global businesses, where appropriate, on a systematic and consistent basis. In addition, a number of income and expense items include the effect of financial transactions entered into in the ordinary course of business between customer groups co-operating within the integrated HSBC Group. The analysis on pages 389 to 392 includes inter-segment amounts within each customer group with the elimination shown in a separate column. 

ENDACSILFSSVFIIVIA

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