14th Nov 2005 11:41
HSBC Holdings PLC14 November 2005 -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q --------------------- (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to________ COMMISSION FILE NUMBER 1-8198 --------------------- HSBC FINANCE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-1052062 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 2700 SANDERS ROAD, PROSPECT HEIGHTS, ILLINOIS 60070 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (847) 564-5000 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE --------------------- Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) At October 31, 2005, there were 50 shares of the registrant's common stockoutstanding, all of which were owned indirectly by HSBC Holdings plc.-------------------------------------------------------------------------------- HSBC FINANCE CORPORATION FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION-----------------------------------------------------------------------------------Item 1. Consolidated Financial Statements Statement of Income......................................... 3 Balance Sheet............................................... 4 Statement of Changes in Shareholders' Equity................ 5 Statement of Cash Flows..................................... 6 Notes to Consolidated Financial Statements.................. 7Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements.................................. 20 Executive Overview.......................................... 20 Basis of Reporting.......................................... 25 Receivables Review.......................................... 31 Results of Operations....................................... 32 Segment Results - Managed Basis............................. 39 Credit Quality.............................................. 46 Liquidity and Capital Resources............................. 52 Risk Management............................................. 57 Reconciliations to GAAP Financial Measures.................. 59Item 4. Controls and Procedures..................................... 63 PART II. OTHER INFORMATION-----------------------------------------------------------------------------------Item 1. Legal Proceedings........................................... 63Item 6. Exhibits.................................................... 65Signature.................................................................... 66 2 PART I. FINANCIAL INFORMATION--------------------------------------------------------------------------------ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS HSBC Finance Corporation--------------------------------------------------------------------------------CONSOLIDATED STATEMENT OF INCOME THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------- 2005 2004 2005 2004---------------------------------------------------------------------------------------------------- (IN MILLIONS) Finance and other interest income.......................... $3.402 $2,779 $9,491 $7,944Interest expense: HSBC affiliates.......................................... 222 95 507 213 Non-affiliates........................................... 1,017 715 2,898 2,012 ------ ------ ------ ------NET INTEREST INCOME........................................ 2,163 1,969 6,086 5,719Provision for credit losses................................ 1,361 1,123 3,233 3,048 ------ ------ ------ ------NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES...... 802 846 2,853 2,671 ------ ------ ------ ------Other revenues: Securitization related revenue........................... 41 267 180 881 Insurance revenue........................................ 229 203 679 618 Investment income........................................ 33 36 99 107 Derivative income (expense).............................. (53) 72 283 248 Fee income............................................... 439 302 1,099 809 Taxpayer financial services revenue (expense)............ (1) (3) 260 209 Gain on receivable sales to HSBC affiliates.............. 99 10 308 25 Servicing fees from HSBC affiliates...................... 102 6 303 11 Other income............................................. 213 147 477 407 ------ ------ ------ ------TOTAL OTHER REVENUES....................................... 1,102 1,040 3,688 3,315 ------ ------ ------ ------Costs and expenses: Salaries and employee benefits........................... 513 472 1,536 1,414 Sales incentives......................................... 117 91 289 259 Occupancy and equipment expenses......................... 83 77 252 237 Other marketing expenses................................. 196 174 561 437 Other servicing and administrative expenses.............. 149 235 550 659 Support services from HSBC affiliates.................... 226 183 652 556 Amortization of intangibles.............................. 90 83 280 278 Policyholders' benefits.................................. 109 93 347 299 ------ ------ ------ ------TOTAL COSTS AND EXPENSES................................... 1,483 1,408 4,467 4,139 ------ ------ ------ ------Income before income tax expense........................... 421 478 2,074 1,847Income tax expense......................................... 140 153 695 619 ------ ------ ------ ------NET INCOME................................................. $ 281 $ 325 $1,379 $1,228 ====== ====== ====== ====== The accompanying notes are an integral part of the consolidated financialstatements. 3 HSBC Finance Corporation-------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET SEPTEMBER 30, DECEMBER 31, 2005 2004---------------------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT SHARE DATA) ASSETSCash........................................................ $ 744 $ 392Interest bearing deposits with banks........................ 398 603Securities purchased under agreements to resell............. 181 2,651Securities.................................................. 3,946 3,645Receivables, net............................................ 126,025 104,815Intangible assets, net...................................... 2,394 2,705Goodwill.................................................... 6,799 6,856Properties and equipment, net............................... 457 487Real estate owned........................................... 462 587Derivative financial assets................................. 662 4,049Other assets................................................ 4,506 3,400 -------- --------TOTAL ASSETS................................................ $146,574 $130,190 ======== ======== LIABILITIESDebt: Deposits.................................................. $ 36 $ 47 Commercial paper, bank and other borrowings............... 11,623 9,013 Due to affiliates......................................... 17,907 13,789 Long term debt (with original maturities over one year)... 93,181 85,378 -------- --------Total debt.................................................. 122,747 108,227Insurance policy and claim reserves......................... 1,298 1,303Derivative related liabilities.............................. 408 432Other liabilities........................................... 3,309 3,287 -------- -------- TOTAL LIABILITIES......................................... 127,762 113,249 SHAREHOLDERS' EQUITYRedeemable preferred stock, 1,501,100 shares authorized: Series A, $0.01 par value, 1,100 shares issued, held by HSBC Investments (North America) Inc. ................ 1,100 1,100 Series B, $0.01 par value, 575,000 shares issued....... 575 -Common shareholder's equity: Common stock, $0.01 par value, 100 shares authorized, 50 shares issued...................................... - - Additional paid-in capital............................. 14,661 14,627 Retained earnings...................................... 1,888 571 Accumulated other comprehensive income................. 588 643 -------- --------TOTAL COMMON SHAREHOLDER'S EQUITY........................... 17,137 15,841 -------- --------TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $146,574 $130,190 ======== ======== The accompanying notes are an integral part of the consolidated financialstatements. 4 HSBC Finance Corporation-------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2005 2004------------------------------------------------------------------------------- (IN MILLIONS) PREFERRED STOCK Balance at beginning of period............................ $ 1,100 $ 1,100 Issuance of Series B preferred stock...................... 575 - ------- ------- Balance at end of period.................................. $ 1,675 $ 1,100 ======= =======COMMON SHAREHOLDER'S EQUITY ADDITIONAL PAID-IN CAPITAL Balance at beginning of period......................... $14,627 $14,645 Issuance costs of Series B preferred stock............. (16) - Return of capital...................................... (16) (31) Employee benefit plans, including transfers and other................................................. 66 21 ------- ------- Balance at end of period............................... $14,661 $14,635 ------- ------- RETAINED EARNINGS Balance at beginning of period......................... $ 571 $ 1,303 Net income............................................. 1,379 1,228 Dividends: Preferred stock...................................... (62) (54) Common stock......................................... - (850) ------- ------- Balance at end of period............................... $ 1,888 $ 1,627 ------- ------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period......................... $ 643 $ 443 Net change in unrealized gains (losses) on: Derivatives classified as cash flow hedges........... 164 44 Securities available for sale and interest-only strip receivables......................................... (29) (38) Foreign currency translation adjustments............... (190) 16 ------- ------- Other comprehensive (loss) income, net of tax.......... (55) 22 ------- ------- Balance at end of period............................... $ 588 $ 465 ------- -------TOTAL COMMON SHAREHOLDER'S EQUITY........................... $17,137 $16,727 ------- -------COMPREHENSIVE INCOME Net income................................................ $ 1,379 $ 1,228 Other comprehensive (loss) income......................... (55) 22 ------- -------COMPREHENSIVE INCOME........................................ $ 1,324 $ 1,250 ======= ======= The accompanying notes are an integral part of the consolidated financialstatements. 5 HSBC Finance Corporation-------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2005 2004--------------------------------------------------------------------------------- (IN MILLIONS) CASH FLOWS FROM OPERATING ACTIVITIESNet income.................................................. $ 1,379 $ 1,228Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for credit losses............................... 3,233 3,048 Insurance policy and claim reserves....................... (146) (138) Depreciation and amortization............................. 369 367 Net change in interest-only strip receivables............. 217 410 Net change in other assets................................ (1,147) 47 Net change in other liabilities........................... 73 182 Other, net................................................ (261) (520) -------- --------Net cash provided by (used in) operating activities......... 3,717 4,624 -------- --------CASH FLOWS FROM INVESTING ACTIVITIESSecurities: Purchased................................................. (656) (1,152) Matured................................................... 480 1,179 Sold...................................................... 154 790Net change in interest bearing deposits with banks.......... 179 666Net change in short-term securities available for sale...... (335) 3,009Net change in securities purchased under agreements to resell.................................................... 2,470 (350)Receivables: Originations, net of collections.......................... (48,566) (42,123) Purchases and related premiums............................ (959) (597) Initial and fill-up securitizations....................... 7,388 24,250 Sales to affiliates....................................... 16,286 1,371Properties and equipment: Purchases................................................. (60) (55) Sales..................................................... 2 2 -------- --------Net cash provided by (used in) investing activities......... (23,617) (13,010) -------- --------CASH FLOWS FROM FINANCING ACTIVITIESDebt: Net change in short-term debt and deposits................ 2,596 5,343 Net change in time certificates........................... (2) (155) Net change in due to affiliates........................... 4,763 3,760 Long term debt issued..................................... 28,199 12,603 Long term debt retired.................................... (15,624) (12,581)Redemption of company obligated mandatorily redeemable preferred securities of subsidiary trusts................. (309) -Insurance: Policyholders' benefits paid.............................. (196) (124) Cash received from policyholders.......................... 288 194Shareholder's dividends..................................... (8) (850)Issuance of Series B preferred stock........................ 559 - -------- --------Net cash provided by (used in) financing activities......... 20,266 8,190 -------- --------Effect of exchange rate changes on cash..................... (14) 7 -------- --------Net change in cash.......................................... 352 (189)Cash at beginning of period................................. 392 463 -------- --------CASH AT END OF PERIOD....................................... $ 744 $ 274 ======== ======== The accompanying notes are an integral part of the consolidated financialstatements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION-------------------------------------------------------------------------------- HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC NorthAmerica Holdings Inc. ("HNAH"), which is a wholly owned subsidiary of HSBCHoldings plc ("HSBC"). The accompanying unaudited interim consolidated financialstatements of HSBC Finance Corporation and its subsidiaries have been preparedin accordance with accounting principles generally accepted in the United Statesof America ("U.S. GAAP") for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. In the opinion ofmanagement, all normal and recurring adjustments considered necessary for a fairpresentation of financial position, results of operations and cash flows for theinterim periods have been made. HSBC Finance Corporation may also be referred toin this Form 10-Q as "we," "us" or "our." These unaudited interim consolidatedfinancial statements should be read in conjunction with our Annual Report onForm 10-K for the year ended December 31, 2004 (the "2004 Form 10-K"). Certainreclassifications have been made to prior period amounts to conform to thecurrent period presentation. Our accounting and reporting policies areconsistent, in all material respects, with those used to prepare the 2004 Form10-K. The preparation of financial statements in conformity with U.S. GAAP requiresthe use of estimates and assumptions that affect reported amounts anddisclosures. Actual results could differ from those estimates. Interim resultsshould not be considered indicative of results in future periods. Interim financial statement disclosures required by U.S. GAAP regarding segmentsare included in the Management's Discussion and Analysis of Financial Conditionand Results of Operations ("MD&A") section of this Form 10-Q. 2. ACQUISITION-------------------------------------------------------------------------------- On August 4, 2005, we entered into a definitive agreement and plan of mergerwith Metris Companies Inc. ("Metris") to acquire Metris in an all-cashtransaction which values Metris at approximately $1.6 billion. We currentlyintend to issue approximately $1.2 billion in additional common equity to HSBCInvestments (North America) Inc. ("HINO") to fund a portion of the purchaseprice. This acquisition will expand our presence in the near-prime credit cardmarket and will strengthen our capabilities to serve the full spectrum of creditcard customers. The acquisition is subject to certain conditions includingresolution of the potential civil enforcement action of the Securities andExchange Commission against Metris, approval by the stockholders of Metris andvarious regulatory consents and is anticipated to close in the fourth quarter of2005. 7 3. SECURITIES-------------------------------------------------------------------------------- Securities consisted of the following available-for-sale investments: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIRSEPTEMBER 30, 2005 COST GAINS LOSSES VALUE--------------------------------------------------------------------------------------------------- (IN MILLIONS) Corporate debt securities............................ $2,511 $25 $(33) $2,503Money market funds................................... 296 - - 296U.S. government sponsored enterprises(1)............. 62 - (2) 60U.S. government and federal agency debt securities... 602 - (3) 599Non-government mortgage backed securities............ 130 - - 130Other................................................ 328 2 (5) 325 ------ --- ---- ------Subtotal............................................. 3,929 27 (43) 3,913Accrued investment income............................ 33 - - 33 ------ --- ---- ------Total securities available for sale.................. $3,962 $27 $(43) $3,946 ====== === ==== ====== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIRDECEMBER 31, 2004 COST GAINS LOSSES VALUE--------------------------------------------------------------------------------------------------- (IN MILLIONS) Corporate debt securities............................ $2,520 $27 $(14) $2,533Money market funds................................... 230 - - 230U.S. government sponsored enterprises(1)............. 49 - - 49U.S. government and federal agency debt securities... 344 - (3) 341Non-government mortgage backed securities............ 74 - (1) 73Other................................................ 385 1 (3) 383 ------ --- ---- ------Subtotal............................................. 3,602 28 (21) 3,609Accrued investment income............................ 36 - - 36 ------ --- ---- ------Total securities available for sale.................. $3,638 $28 $(21) $3,645 ====== === ==== ====== --------------- (1) Includes primarily mortgage-backed securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. A summary of gross unrealized losses and related fair values as of September 30,2005 and December 31, 2004, classified as to the length of time the losses haveexisted follows: LESS THAN ONE YEAR GREATER THAN ONE YEAR --------------------------------------- --------------------------------------- NUMBER GROSS AGGREGATE NUMBER GROSS AGGREGATE OF UNREALIZED FAIR VALUE OF OF UNREALIZED FAIR VALUE OFSEPTEMBER 30, 2005 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS--------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Corporate debt securities... 372 $(17) $873 244 $(16) $612U.S. government sponsored enterprises............... 14 (1) 40 28 (1) 60U.S. government and federal agency debt securities.... 13 (2) 72 27 (1) 51Other....................... 21 (3) 158 34 (2) 93 8 LESS THAN ONE YEAR GREATER THAN ONE YEAR --------------------------------------- --------------------------------------- NUMBER GROSS AGGREGATE NUMBER GROSS AGGREGATE OF UNREALIZED FAIR VALUE OF OF UNREALIZED FAIR VALUE OFDECEMBER 31, 2004 SECURITIES LOSSES INVESTMENTS SECURITIES LOSSES INVESTMENTS--------------------------------------------------------------------------------------------------------------- (IN MILLIONS) Corporate debt securities... 254 $(6) $636 218 $(8) $647U.S. government and federal agency debt securities.... - - - 61 (3) 278Non-government mortgage backed securities......... - - - 3 (1) 6Other....................... 21 (2) 114 42 (1) 130 The gross unrealized losses on our securities available for sale have increaseddue to a general increase in short- and medium-term interest rates during thenine months ended September 30, 2005. The contractual terms of these securitiesdo not permit the issuer to settle the securities at a price less than the parvalue of the investment. Since substantially all of these securities are ratedA- or better, and because we have the ability and intent to hold theseinvestments until maturity or a market price recovery, these securities are notconsidered other than temporarily impaired. 4. RECEIVABLES-------------------------------------------------------------------------------- Receivables consisted of the following: SEPTEMBER 30, DECEMBER 31, 2005 2004------------------------------------------------------------------------------------------ (IN MILLIONS) Real estate secured......................................... $ 78,130 $ 64,820Auto finance................................................ 10,137 7,544MasterCard(1)/Visa(1)....................................... 18,974 14,635Private label............................................... 2,777 3,411Personal non-credit card.................................... 18,484 16,128Commercial and other........................................ 220 317 -------- --------Total owned receivables..................................... 128,722 106,855Purchase accounting fair value adjustments.................. 98 201Accrued finance charges..................................... 1,665 1,394Credit loss reserve for owned receivables................... (4,220) (3,625)Unearned credit insurance premiums and claims reserves...... (546) (631)Interest-only strip receivables............................. 87 323Amounts due and deferred from receivable sales.............. 219 298 -------- --------Total owned receivables, net................................ 126,025 104,815Receivables serviced with limited recourse.................. 6,759 14,225 -------- --------Total managed receivables, net.............................. $132,784 $119,040 ======== ======== --------------- (1) MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. Receivables are carried at amortized cost which represents the principal amountoutstanding, net of any unearned income, charge-offs, unamortized deferred feesand costs on originated loans, purchase accounting fair value adjustments as aresult of our acquisition by HSBC and premiums or discounts on purchased loans.Receivables are further reduced by credit loss reserves and unearned creditinsurance premiums and claims reserves applied to credit risks on consumerreceivables. 9 Interest-only strip receivables are reported net of our estimate of probablelosses under the recourse provisions for receivables serviced with limitedrecourse. Our estimate of the recourse obligation totaled $351 million atSeptember 30, 2005 and $890 million at December 31, 2004. Interest-only stripreceivables also included fair value mark-to-market adjustments, which increasedthe balance by $57 million at September 30, 2005 and $76 million at December 31,2004. Receivables serviced with limited recourse consisted of the following: SEPTEMBER 30, DECEMBER 31, 2005 2004------------------------------------------------------------------------------------------ (IN MILLIONS) Real estate secured......................................... $ - $ 81Auto finance................................................ 1,474 2,679MasterCard/Visa............................................. 3,615 7,583Personal non-credit card.................................... 1,670 3,882 ------ -------Total....................................................... $6,759 $14,225 ====== ======= The combination of receivables owned and receivables serviced with limitedrecourse, which comprises our managed portfolio, is shown below: SEPTEMBER 30, DECEMBER 31, 2005 2004------------------------------------------------------------------------------------------ (IN MILLIONS) Real estate secured......................................... $ 78,130 $ 64,901Auto finance................................................ 11,611 10,223MasterCard/Visa............................................. 22,589 22,218Private label............................................... 2,777 3,411Personal non-credit card.................................... 20,154 20,010Commercial and other........................................ 220 317 -------- --------Total....................................................... $135,481 $121,080 ======== ======== 10 5. CREDIT LOSS RESERVES-------------------------------------------------------------------------------- An analysis of credit loss reserves was as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------- 2005 2004 2005 2004------------------------------------------------------------------------------------------------ (IN MILLIONS) Owned receivables: Credit loss reserves at beginning of period.......... $ 3,756 $ 3,795 $ 3,625 $ 3,793 Provision for credit losses.......................... 1,361 1,123 3,233 3,048 Charge-offs.......................................... (1,020) (1,068) (2,934) (3,176) Recoveries........................................... 118 99 325 271 Other, net........................................... 5 4 (29) 17 ------- ------- ------- ------- Credit loss reserves for owned receivables........... 4,220 3,953 4,220 3,953 ------- ------- ------- -------Receivables serviced with limited recourse: Credit loss reserves at beginning of period.......... 525 1,904 890 2,374 Provision for credit losses.......................... (23) (232) 59 169 Charge-offs.......................................... (165) (418) (637) (1,343) Recoveries........................................... 15 24 48 76 Other, net........................................... (1) (32) (9) (30) ------- ------- ------- ------- Credit loss reserves for receivables serviced with limited recourse.................................. 351 1,246 351 1,246 ------- ------- ------- -------Credit loss reserves for managed receivables........... $ 4,571 $ 5,199 $ 4,571 $ 5,199 ======= ======= ======= ======= The provision for credit losses on owned receivables and overall reserve levelsin 2005 reflect the impact of the bulk sale of our domestic private labelreceivables to HSBC Bank USA, National Association ("HSBC Bank USA") in December2004 as well as the impact of receivable growth and higher bankruptcy filings inthe period leading up to the effective date of the new bankruptcy law in theUnited States. The provision for credit losses and overall reserve levels atSeptember 30, 2005 includes an incremental provision of $180 million recorded inthe third quarter relating to Hurricane Katrina and an additional $100 millionprovision due to the spike in bankruptcies experienced in the period leading upto the October 17, 2005 effective date of new bankruptcy legislation in theUnited States. Reductions to the provision for credit losses and overall reserve levels onreceivables serviced with limited recourse in 2005 also reflect the impact ofthe bulk sale discussed above, as well as the impact of reduced securitizationlevels, including our decision to structure new collateralized fundingtransactions as secured financings. Further analysis of credit quality and credit loss reserves and our credit lossreserve methodology are presented in Item 2, "Management's Discussion andAnalysis of Financial Condition and Results of Operations" of this Form 10-Qunder the caption "Credit Quality." 11 6. INTANGIBLE ASSETS-------------------------------------------------------------------------------- Intangible assets consisted of the following: ACCUMULATED CARRYING GROSS AMORTIZATION VALUE---------------------------------------------------------------------------------------------- (IN MILLIONS) SEPTEMBER 30, 2005Purchased credit card relationships and related programs.... $1,686 $507 $1,179Retail services merchant relationships...................... 270 136 134Other loan related relationships............................ 326 95 231Trade names................................................. 717 13 704Technology, customer lists and other contracts.............. 282 136 146 ------ ---- ------Total....................................................... $3,281 $887 $2,394 ====== ==== ======DECEMBER 31, 2004Purchased credit card relationships and related programs.... $1,723 $355 $1,368Retail services merchant relationships...................... 270 95 175Other loan related relationships............................ 326 71 255Trade names................................................. 718 - 718Technology, customer lists and other contracts.............. 281 92 189 ------ ---- ------Total....................................................... $3,318 $613 $2,705 ====== ==== ====== Estimated amortization expense associated with our intangible assets for each ofthe following years is as follows: YEAR ENDING DECEMBER 31,---------------------------------------------------------------------------- (IN MILLIONS) 2005........................................................ $3272006........................................................ 2652007........................................................ 2472008........................................................ 1842009........................................................ 167Thereafter.................................................. 583 During the third quarter of 2005, we completed our annual impairment test ofintangible assets. As a result of our testing, we recorded an impairment chargerelated to a tradename in the U.K. For all other intangible assets, wedetermined that the fair value of each intangible asset exceeded its carryingvalue. Therefore, we have concluded that none of our remaining intangible assetsare impaired. 7. GOODWILL-------------------------------------------------------------------------------- Goodwill balances associated with our foreign businesses will change from periodto period due to movements in foreign exchange. Since the one-year anniversaryin the first quarter of 2004 of our acquisition by HSBC, no furtheracquisition-related adjustments to our goodwill balance will occur, except forchanges in estimates of the tax basis in our assets and liabilities or other taxestimates recorded at the date of our acquisition by HSBC, pursuant to Statementof Financial Accounting Standards Number 109, "Accounting for Income Taxes," andfor the movements in foreign exchange rates discussed above. We have increasedour goodwill balance by approximately $2 million for the three months endedSeptember 30, 2005 and reduced the goodwill balance by $11 million for the ninemonth period as a result of such changes in tax estimates. During the third quarter of 2005, we completed our annual impairment test ofgoodwill. For purposes of this test, we assigned the goodwill to our reportingunits (as defined in SFAS No. 142, "Goodwill and Other 12 Intangible Assets"). The fair value of each of the reporting units to whichgoodwill was assigned exceeded its carrying value including goodwill. Therefore,we have concluded that none of our goodwill is impaired. 8. INCOME TAXES-------------------------------------------------------------------------------- Our effective tax rates were as follows: THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2005 2004 2005 2004------------------------------------------------------------------------------------------- Effective tax rate.......................................... 33.3% 32.0% 33.5% 33.5% The increase in the effective tax rate in the third quarter of 2005 is primarilydue to the acceleration of tax from sales of leveraged leases, partially offsetby lower state tax rates. The year-to-date period reflects the leveraged leasetax increase, offset by the lower state tax. The effective tax rate differs fromthe statutory federal income tax rate primarily because of the effects of stateand local taxes and tax credits. 9. REDEEMABLE PREFERRED STOCK-------------------------------------------------------------------------------- We have 1,501,100 shares of preferred stock authorized for issuance. In June2005, we issued 575,000 shares of 6.36 percent Non-Cumulative Preferred Stock,Series B ("Series B Preferred Stock"). Dividends on the Series B Preferred Stockare non-cumulative and payable quarterly at a rate of 6.36 percent commencingSeptember 15, 2005. The Series B Preferred Stock may be redeemed at our optionafter June 23, 2010 at $1,000 per share, plus accrued dividends. The redemptionand liquidation value is $1,000 per share plus accrued and unpaid dividends. Theholders of Series B Preferred Stock are entitled to payment before any capitaldistribution is made to the common shareholder and have no voting rights exceptfor the right to elect two additional members to the board of directors in theevent that dividends have not been declared and paid for six quarters, or asotherwise provided by law. Additionally, as long as any shares of the Series BPreferred Stock are outstanding, the authorization, creation or issuance of anyclass or series of stock which would rank prior to the Series B Preferred Stockwith respect to dividends or amounts payable upon liquidation or dissolution ofHSBC Finance Corporation must be approved by the holders of at least two-thirdsof the shares of Series B Preferred Stock outstanding at that time. Relatedissuance costs of $16 million have been recorded as a reduction of additionalpaid-in capital. In August 2005, we declared an $8 million dividend on the Series B PreferredStock which was paid on September 15, 2005. In March 2003, we issued 1,100 shares of Series A Cumulative Preferred Stock toHSBC, which are now held by HINO. We currently intend to issue additional commonequity to HINO in exchange for the Series A Cumulative Preferred Stock on orbefore December 31, 2005. 10. RELATED PARTY TRANSACTIONS-------------------------------------------------------------------------------- In the normal course of business, we conduct transactions with HSBC and itssubsidiaries. These transactions include funding arrangements, purchases andsales of receivables, servicing arrangements, information technology services,item and statement processing services, banking and other miscellaneousservices. The 13 following tables present related party balances and the income and (expense)generated by related party transactions: SEPTEMBER 30, DECEMBER 31, 2005 2004------------------------------------------------------------------------------------------ (IN MILLIONS) ASSETS, (LIABILITIES) AND EQUITY:Derivative financial assets, net............................ $ 371 $ 3,297Other assets................................................ 1,927 604Due to affiliates........................................... (17,907) (13,789)Other liabilities........................................... (288) (168)Series A preferred stock.................................... 1,100 1,100 THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------- ------------- 2005 2004 2005 2004-------------------------------------------------------------------------------------------- (IN MILLIONS) INCOME/(EXPENSE):Interest expense on borrowings from HSBC and subsidiaries... $(222) $(95) $(507) $(213)Interest income on advances to HSBC affiliates.............. 15 - 26 -HSBC Bank USA: Real estate secured servicing revenues.................... 4 4 12 9 Real estate secured sourcing, underwriting and pricing revenues............................................... 1 1 3 3 Gain on daily sale of domestic private label receivable originations........................................... 91 - 283 - Gain on daily sale of MasterCard/Visa receivables......... 8 10 25 10 Gain on bulk sale of real estate secured receivables...... - - - 15 Taxpayer financial services loan origination fees......... - - (15) - Domestic private label receivable servicing fees.......... 92 - 273 - MasterCard/Visa receivable servicing fees................. 3 - 9 - Other processing, origination and support revenues........ 4 3 12 8Support services from HSBC affiliates, primarily HSBC Technology and Services (USA) Inc. ("HTSU")............... (226) (183) (652) (556)HTSU: Rental revenue............................................ 13 8 31 24 Administrative services revenue........................... 2 5 11 13 Servicing revenue......................................... 1 - 4 -Other income from HSBC affiliates........................... - 2 - 2Other servicing fees from HSBC affiliates................... 2 2 5 2Stock based compensation expense with HSBC.................. (14) (12) (50) (37) The notional value of derivative contracts outstanding with HSBC subsidiariestotaled $64.3 billion at September 30, 2005 and $62.6 billion at December 31,2004. Affiliate swap counterparties provide collateral in the form of securitiesas required, which are not recorded on our balance sheet. At September 30, 2005,the fair value of our agreements with affiliate counterparties was below thelevel requiring payment of collateral. As such, at September, 30, 2005, we werenot holding any swap collateral from HSBC affiliates in the form of securities.At December 31, 2004, affiliate swap counterparties had provided collateral inthe form of securities, which were not recorded on our balance sheet, totaling$2.2 billion. We have extended a line of credit of $2 billion to HSBC USA Inc. at interestrates comparable to third-party rates for a line of credit with similar terms.The balance outstanding under this line was $1.0 billion at September 30, 2005and $.6 billion at December 31, 2004 and is included in other assets. Interestincome 14 associated with this line of credit is recorded in interest income and reflectedas interest income on advances to HSBC affiliates in the table above. We extended a revolving line of credit of $.5 billion to HTSU on June 28, 2005at interest rates comparable to third-party rates for a line of credit withsimilar terms. The balance outstanding under this line of credit was $.4 billionat September 30, 2005 and is included in other assets. Interest incomeassociated with this line of credit is recorded in interest income and reflectedas other income from HSBC affiliates in the table above. We extended a promissory note of $.5 billion to HSBC Securities (USA) Inc.("HSI") on June 27, 2005 at interest rates comparable to third-party rates for aline of credit with similar terms. This promissory note was repaid during July2005. We extended an additional promissory note of $.5 billion to HSI onSeptember 29, 2005. This promissory note, which is included in other assets atSeptember 30, 2005, was repaid during October 2005. Interest income associatedwith this line of credit is recorded in interest income and reflected as otherincome from HSBC affiliates in the table above. We extended a line of credit of $.4 billion to HSBC Investments (North America)Inc. on March 31, 2005 which was repaid during the second quarter of 2005. Thisline of credit was at interest rates comparable to third-party rates for a lineof credit with similar terms. Interest income associated with this line ofcredit is recorded in interest income and reflected as other income from HSBCaffiliates in the table above. Due to affiliates includes amounts owed to subsidiaries of HSBC (other thanpreferred stock). This funding was at interest rates (both the underlyingbenchmark rate and credit spreads) comparable to third-party rates for debt withsimilar maturities. At September 30, 2005, we had revolving credit facilities of $2.5 billion fromHSBC domestically and $10.0 billion from HSBC in the U.K., of which $6.6 billionwas outstanding under the U.K. lines and no balances were outstanding on thedomestic lines. As of December 31, 2004, $7.4 billion was outstanding under theU.K. lines and no balances were outstanding on the domestic lines. Annualcommitment fee requirements to support availability of these lines are paid on aquarterly basis. Expense recognized for commitment fees totaled $.4 million forthe three months ended September 30, 2005 and 2004, and $1.2 million for thenine months ended September 30, 2005 and 2004. Commitment fee expense isincluded as a component of interest expense -- HSBC affiliates. In the first quarter of 2004, we sold approximately $.9 billion of real estatesecured receivables from our mortgage services business to HSBC Bank USA andrecorded a pre-tax gain of $15 million on the sale. Under a separate servicingagreement, we have agreed to service all real estate secured receivables sold toHSBC Bank USA including all future business it purchases from ourcorrespondents. As of September 30, 2005, we were servicing $5.0 billion of realestate secured receivables for HSBC Bank USA. We also received fees from HSBCBank USA pursuant to a service level agreement under which we sourced,underwrote and priced $.4 billion of real estate secured receivables purchasedby HSBC Bank USA during the three months ended September 30, 2005 and $.7billion during the three months ended September 30, 2004. We sourced, underwroteand priced $1.5 billion of real estate secured receivables purchased by HSBCBank USA during the nine months ended September 30, 2005 and $2.2 billion duringthe nine months ended September 30, 2004. The servicing fee revenue associatedwith these receivables is recorded in servicing fees from HSBC affiliates andare reflected as real estate secured servicing revenues in the above table. Feesreceived for sourcing, underwriting and pricing the receivables have beenrecorded as other income and are reflected as real estate secured sourcing,underwriting and pricing revenues from HSBC Bank USA in the above table.Purchases of real estate secured receivables from our correspondents by HSBCBank USA were discontinued effective September 1, 2005 given HSBC Bank USA'sincreasing ability to originate similar product. We continue to service thereceivables HSBC Bank USA previously purchased from these correspondents. In December 2004, we sold our domestic private label receivable portfolio,including the retained interests associated with our securitized domesticprivate label receivables, to HSBC Bank USA. We continue to service the soldprivate label receivables and receive servicing fee income from HSBC Bank USAfor these services. As of September 30, 2005, we were servicing $15.9 billion ofdomestic private label receivables for HSBC Bank USA. Servicing fee income fromHSBC Bank USA received for the three month period ended 15 September 30, 2005 of $92 million and $273 million for the nine months endedSeptember 30, 2005 is included in the table. We continue to maintain the relatedcustomer account relationships and, therefore, sell new domestic private labelreceivable originations to HSBC Bank USA on a daily basis. We sold $5,887million of private label receivables to HSBC Bank USA during the three monthsended September 30, 2005 and $14,825 million in the year-to-date period. Thegains associated with the sale of these receivables are reflected in the tableabove and are recorded in gain on receivable sales to HSBC affiliates. Under several service level agreements, we also provide other services to HSBCBank USA. These services include credit card servicing and processing activitiesthrough our credit card services business, loan origination and servicingthrough our auto finance business and other operational and administrativesupport. Fees received for these services are reported as servicing fees fromHSBC affiliates and are included in the table above. During 2003, Household Capital Trust VIII issued $275 million in mandatorilyredeemable preferred securities to HSBC. Interest expense recorded on theunderlying junior subordinated notes totaled $4 million during both three monthperiods ended September 30, 2005 and 2004 and $12 million for both nine monthperiods ended September 30, 2005 and 2004. The interest expense for theHousehold Capital Trust VIII is included in interest expense -- HSBC affiliatesin the consolidated statement of income and is reflected as interest expense onborrowings from HSBC and subsidiaries in the table above. During the third quarter of 2004, our Canadian business began to originate andservice auto loans for an HSBC affiliate in Canada. Fees received for theseservices of $2 million for the three months ended September 30, 2005 and $5million for the nine months ended September 30, 2005 are included in servicingfees from affiliates and are reflected in other servicing fees from HSBCaffiliates in the above table. Effective October 1, 2004, HSBC Bank USA became the originating lender for loansinitiated by our taxpayer financial services business for clients of variousthird party tax preparers. We purchase the loans originated by HSBC Bank USAdaily for a fee. Origination fees paid to HSBC Bank USA totaled $15 millionduring the nine months ended September 30, 2005. These origination fees areincluded as an offset to taxpayer financial services revenue and are reflectedas taxpayer financial services loan origination fees in the above table. On July 1, 2004, HSBC Bank Nevada, National Association ("HOBN"), formerly knownas Household Bank (SB), N.A., purchased the account relationships associatedwith $970 million of MasterCard and Visa credit card receivables from HSBC BankUSA for approximately $99 million, which are included in intangible assets. Thereceivables continue to be owned by HSBC Bank USA. Originations of new accountsand receivables are made by HOBN and new receivables are sold daily to HSBC BankUSA. We sold $514 million of credit card receivables to HSBC Bank USA during thethree months ended September 30, 2005 and $1,461 million in the year-to-dateperiod. The gains associated with the sale of these receivables are reflected inthe table above and are recorded in gain on receivable sales to HSBC affiliates. Effective January 1, 2004, our technology services employees, as well astechnology services employees from other HSBC entities in North America, weretransferred to HTSU. In addition, technology related assets and softwarepurchased subsequent to January 1, 2004 are generally purchased and owned byHTSU. Technology related assets owned by HSBC Finance Corporation prior toJanuary 1, 2004 currently remain in place and were not transferred to HTSU. Inaddition to information technology services, HTSU also provides certain itemprocessing and statement processing activities to us pursuant to a masterservice level agreement. Support services from HSBC affiliates includes servicesprovided by HTSU as well as banking services and other miscellaneous servicesprovided by HSBC Bank USA and other subsidiaries of HSBC. We also receiverevenue from HTSU for rent on certain office space, which has been recorded as areduction of occupancy and equipment expenses, and for certain administrativecosts, which has been recorded as other income. In addition, we utilize a related HSBC entity to lead manage substantially allongoing debt issuances. Fees paid to HSBC and its subsidiaries for such servicestotaled approximately $19 million for the three months ended September 30, 2005and $45 million for the nine months ended September 30, 2005. Fees paid for suchservices totaled approximately $2 million for the three months ended September30, 2004 and $8 million for 16 the nine months ended September 30, 2004. These fees are amortized over the lifeof the related debt as a component of interest expense in the table above. Employees of HSBC Finance Corporation participate in one or more stockcompensation plans sponsored by HSBC. Our share of the expense of these planswas $14 million for the three months ended September 30, 2005 and $12 millionfor the prior year quarter. Our share of the expense of these plans was $50million for the nine months ended September 30, 2005 and $37 million for theyear-ago period. These expenses are recorded in salary and employee benefits andare reflected in the above table. 11. PENSION AND OTHER POSTRETIREMENT BENEFITS-------------------------------------------------------------------------------- In November 2004, sponsorship of the U.S. defined benefit pension plan of HSBCFinance Corporation and the U.S. defined benefit pension plan of HSBC Bank USAwas transferred to HNAH. Effective January 1, 2005, the two separate plans weremerged into a single defined benefit pension plan which facilitates thedevelopment of a unified employee benefit policy and unified employee benefitplan administration for HSBC affiliates operating in the U.S. As a result, thepension liability relating to our U.S. defined benefit plan of $49 million, netof tax, was transferred to HNAH as a capital transaction in the first quarter of2005. Components of net periodic benefit cost related to our defined benefit pensionplans and our postretirement benefits other than pensions were as follows: OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- --------------THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 2005 2004------------------------------------------------------------------------------------------------ (IN MILLIONS) Service cost - benefits earned during the period............ $ 5 $ 14 $ 1 $ 1Interest cost............................................... 11 13 4 3Expected return on assets................................... (14) (23) - -Recognized (gains) losses................................... 1 (1) - - ---- ---- --- ---Net periodic benefit cost................................... $ 3 $ 3 $ 5 $ 4 ==== ==== === === OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- --------------NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 2005 2004------------------------------------------------------------------------------------------------ (IN MILLIONS) Service cost - benefits earned during the period............ $ 37 $ 41 $ 4 $ 3Interest cost............................................... 47 40 12 10Expected return on assets................................... (65) (67) - -Recognized (gains) losses................................... 3 (4) - - ---- ---- --- ---Net periodic benefit cost................................... $ 22 $ 10 $16 $13 ==== ==== === === 12. BUSINESS SEGMENTS-------------------------------------------------------------------------------- We have three reportable segments: Consumer, Credit Card Services andInternational. Our Consumer segment consists of our consumer lending, mortgageservices, retail services and auto finance businesses. Our Credit Card Servicessegment consists of our domestic MasterCard and Visa credit card business. OurInternational segment consists of our foreign operations in the United Kingdom,Canada, Ireland and the remainder of Europe. There have been no changes in thebasis of our segmentation or any changes in the measurement of segment profit ascompared with the presentation in our 2004 Form 10-K. 17 We have historically monitored our operations and evaluated trends on a managedbasis (a non-GAAP financial measure), which assumes that securitized receivableshave not been sold and are still on our balance sheet. This is because thereceivables that we securitize are subjected to underwriting standardscomparable to our owned portfolio, are generally serviced by operating personnelwithout regard to ownership and result in a similar credit loss exposure for us.In addition, we fund our operations, and make decisions about allocatingresources such as capital on a managed basis. When reporting on a managed basis,net interest income, provision for credit losses and fee income related toreceivables securitized are reclassified from securitization related revenue inour owned statement of income into the appropriate caption. Fair value adjustments related to purchase accounting and related amortizationhave been allocated to Corporate, which is included in the "All Other" captionwithin our segment disclosure. Reconciliations of our managed basis segmentresults to managed basis and owned basis consolidated totals are as follows: MANAGED CREDIT ADJUSTMENTS/ BASIS OWNED BASIS CARD RECONCILING CONSOLIDATED SECURITIZATION CONSOLIDATED CONSUMER SERVICES INTERNATIONAL ALL OTHER ITEMS TOTALS ADJUSTMENTS TOTALS------------------------------------------------------------------------------------------------------------------------------------ (IN MILLIONS) THREE MONTHS ENDED SEPTEMBER 30, 2005Net interest income............. $ 1,733 $ 531 $ 228 $ (152) $ - $ 2,340 $ (177)(3) $ 2,163Securitization related revenue.... (171) (42) 2 (6) - (217) 258(3) 41Fee and other income............. 307 554 141 152 (35)(1) 1,119 (58)(3) 1,061Intersegment revenues........... 27 5 4 (1) (35)(1) - - -Provision for credit losses............. 735 465 137 - 1(5) 1,338 23(3) 1,361Total costs and expenses........... 647 360 216 260 - 1,483 - 1,483Net income........... 308 138 12 (154) (23) 281 - 281Receivables.......... 102,733 19,971 12,564 213 - 135,481 (6,759)(4) 128,722Assets............... 103,424 19,710 13,574 25,180 (8,555)(2) 153,333 (6,759)(4) 146,574 -------- -------- ------- ------- ------- -------- -------- --------THREE MONTHS ENDED SEPTEMBER 30, 2004Net interest income............. $ 1,956 $ 519 $ 185 $ (110) $ - $ 2,550 $ (581)(3) $ 1,969Securitization related revenue.... (547) (77) (87) (31) - (742) 1,009(3) 267Fee and other income............. 187 460 130 227 (35)(1) 969 (196)(3) 773Intersegment revenues........... 26 6 4 (1) (35)(1) - - -Provision for credit losses............. 506 364 19 1 1(5) 891 232(3) 1,123Total costs and expenses........... 619 328 181 280 - 1,408 - 1,408Net income........... 294 134 18 (98) (23) 325 - 325Receivables.......... 95,946 18,509 11,833 324 - 126,612 (20,175)(4) 106,437Assets............... 98,099 20,620 12,770 25,030 (8,616)(2) 147,903 (20,175)(4) 127,728 -------- -------- ------- ------- ------- -------- -------- --------NINE MONTHS ENDED SEPTEMBER 30, 2005Net interest income............. $ 5,125 $ 1,545 $ 680 $ (506) $ - $ 6,844 $ (758)(3) $ 6,086Securitization related revenue.... (557) (161) 17 (41) - (742) 922(3) 180Fee and other income............. 884 1,465 412 1,073 (103)(1) 3,731 (223)(3) 3,508Intersegment revenues........... 80 16 11 (4) (103)(1) - - -Provision for credit losses............. 1,698 1,120 468 - 6(5) 3,292 (59)(3) 3,233Total costs and expenses........... 1,893 1,018 649 907 - 4,467 - 4,467Net income........... 1,182 452 (11) (173) (71) 1,379 - 1,379 -------- -------- ------- ------- ------- -------- -------- -------- 18 MANAGED CREDIT ADJUSTMENTS/ BASIS OWNED BASIS CARD RECONCILING CONSOLIDATED SECURITIZATION CONSOLIDATED CONSUMER SERVICES INTERNATIONAL ALL OTHER ITEMS TOTALS ADJUSTMENTS TOTALS------------------------------------------------------------------------------------------------------------------------------------ (IN MILLIONS) NINE MONTHS ENDED SEPTEMBER 30, 2004Net interest income............. $ 5,735 $ 1,561 $ 583 $ (173) $ - $ 7,706 $ (1,987)(3) $ 5,719Securitization related revenue.... (1,089) (222) (92) (124) - (1,527) 2,408(3) 881Fee and other income............. 516 1,271 369 969 (101)(1) 3,024 (590)(3) 2,434Intersegment revenues........... 74 20 10 (3) (101)(1) - - -Provision for credit losses............. 1,905 1,105 207 (1) 1(5) 3,217 (169)(3) 3,048Total costs and expenses........... 1,892 890 527 830 - 4,139 - 4,139Net income........... 855 391 80 (32) (66) 1,228 - 1,228 -------- -------- ------- ------- ------- -------- -------- -------- --------------- (1) Eliminates intersegment revenues. (2) Eliminates investments in subsidiaries and intercompany borrowings. (3) Reclassifies net interest income, fee income and provision for credit losses relating to securitized receivables to other revenues. (4) Represents receivables serviced with limited recourse. (5) Eliminates bad debt recovery sales between operating segments. 13. NEW ACCOUNTING PRONOUNCEMENTS-------------------------------------------------------------------------------- In December 2004, the FASB issued FASB Statement No. 123 (Revised), "Share-BasedPayment," ("SFAS No. 123R"). SFAS No. 123R requires public entities to measurethe cost of stock-based compensation based on the grant date fair value of theaward as well as other additional disclosure requirements. On March 28, 2005,the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107which amended the compliance date to allow public companies to comply with theprovisions of SFAS No. 123R at the beginning of their next fiscal year thatbegins after June 15, 2005, instead of the next reporting period as originallyrequired by SFAS No. 123R. Because we currently apply the fair value method ofaccounting for all equity based awards, the adoption of SFAS 123R will not havea significant effect on the results of our operations or cash flows. In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes andError Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3"("SFAS No. 154") which requires companies to apply voluntary changes inaccounting principles retrospectively whenever it is practicable. Theretrospective application requirement replaces APB 20's requirement to recognizemost voluntary changes in accounting principle by including the cumulativeeffect of the change in net income during the period the change occurs.Retrospective application will be the required transition method for newaccounting pronouncements in the event that a newly-issued pronouncement doesnot specify transition guidance. SFAS No. 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005. In November 2005, the Financial Accounting Standards Board (FASB) issued StaffPosition Nos. FAS 115-1 and FAS 124-1 ("FSP 115-1 and FSP 124-1"), "The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments,"in response to Emerging Issues Task Force 03-1, "The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments." FSP115-1 and FSP 124-1 provide guidance regarding the determination as to when aninvestment is considered impaired, whether that impairment isother-than-temporary, and the measurement of an impairment loss. FSP 115-1 andFSP 124-1 also include accounting considerations subsequent to the recognitionof an other-than-temporary impairment and require certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. These requirements are effective for annual reporting periodsbeginning after December 15, 2005. Adoption of the impairment guidance containedin FSP 115-1 and FSP 124-1 is not expected to have a material impact on ourfinancial position or results of operations. 19 HSBC Finance Corporation-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS-------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results ofOperations ("MD&A") should be read in conjunction with the consolidatedfinancial statements, notes and tables included elsewhere in this report andwith our Annual Report on Form 10-K for the year ended December 31, 2004 (the"2004 Form 10-K"). MD&A may contain certain statements that may beforward-looking in nature within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Our results may differ materially from thosenoted in the forward-looking statements. Words such as "believe", "expects","estimates", "targeted", "anticipates", "goal" and similar expressions areintended to identify forward-looking statements but should not be considered asthe only means through which these statements may be made. Statements that arenot historical facts, including statements about management's beliefs andexpectations, are forward-looking statements which involve inherent risks anduncertainties and are based on current views and assumptions. A number offactors could cause actual results to differ materially from those contained inany forward-looking statements, such as the impact of natural disasters on thecollectibility of our receivables in the affected areas. For a list ofadditional important factors that may affect our actual results, see CautionaryStatement on Forward Looking Statements in Part I, Item 1 of our 2004 Form 10-K. EXECUTIVE OVERVIEW-------------------------------------------------------------------------------- HSBC Finance Corporation is an indirect wholly owned subsidiary of HSBC Holdingsplc ("HSBC"). HSBC Finance Corporation may also be referred to in MD&A as "we","us", or "our". In addition to owned basis reporting, we also monitor ouroperations and evaluate trends on a managed basis (a non-GAAP financialmeasure), which assumes that securitized receivables have not been sold and arestill on our balance sheet. See "Basis of Reporting" for further discussion ofthe reasons we use this non-GAAP financial measure. Net income was $281 million for the quarter ended September 30, 2005, a decreaseof 14 percent, compared to net income of $325 million in the prior year quarter.The decrease was driven by an increase in the provision for credit losses due toHurricane Katrina and higher bankruptcy filings in the period leading up to theeffective date of new bankruptcy legislation in the United States. The increasein the provision for credit losses as well as higher costs and expenses waspartially offset by higher other revenues and higher net interest income. Netincome was $1,379 million for the first nine months of 2005, an increase of 12percent, compared to net income of $1,228 million for the first nine months of2004. The increase was due to higher other revenues and higher net interestincome, partially offset by higher costs and expenses and a higher provision forcredit losses as discussed above. The increase in other revenues during thecurrent quarter was primarily due to higher fee and other income, higher gainson receivable sales to affiliates and higher affiliate servicing fees, partiallyoffset by lower securitization related revenue and lower derivative income. Theincrease in other revenues during the nine month period was primarily due tohigher fee and other income, higher derivative income as well as higher gains onaffiliate receivable sales and higher affiliate servicing fees, partially offsetby lower securitization related revenue. The higher gains on affiliatereceivable sales and higher affiliate servicing revenue were largely driven bythe gains on daily sales of domestic private label receivable originations andfees earned for servicing the domestic private label receivable portfolio soldto HSBC Bank USA, National Association ("HSBC Bank USA") in December 2004.Derivative income decreased in the current quarter due to increases in interestrates. The upward shift in the forward yield curve decreased the value of ourportfolio of interest rate swaps which do not currently qualify for hedgeaccounting under SFAS No. 133. The increase in year-to-date derivative incomereflects the combined impact of increases in interest rates and changes in theportfolio mix of interest rate swaps which do not currently qualify for hedgeaccounting under SFAS No. 133 and ineffectiveness recorded as a result of thedesignation of a significant number of our non-hedging derivative portfolio aseffective hedges under the long-haul method of accounting beginning in thesecond quarter of 2005. Fee income was higher in both periods as a result ofhigher credit 20 HSBC Finance Corporation-------------------------------------------------------------------------------- card fees due to higher volume in our MasterCard((1)) and Visa(1) portfolios.Other income was higher in both periods primarily due to higher ancillary creditcard revenue and, for the three month period, higher gains on assets sales,including the partial sale of a real estate investment. The increases in otherrevenues were partially offset by lower securitization related revenue in bothperiods due to reduced securitization activity. The increases in net interest income were due to growth in average receivablesand an improvement in the overall yield on the portfolio, partly offset by ahigher cost of funds. Yields on variable rate products increased in line withmarket movements, and also reflect various repricing initiatives. In addition,there was a net increase in yields due to a change in receivables mix in theowned balance sheet. Increased levels of higher yielding MasterCard/Visa andauto finance receivables were held on the balance sheet due to lowersecuritization activity, but the effect of this on yields was largely offset bygrowth in lower yielding real estate secured receivables and a significantdecline in the level of private label receivables as discussed above. Interestexpense increased due to a combination of growth in the loan book and asignificantly higher cost of funds. Our net interest margin was 6.81 percent forthe three months ended September 30, 2005 and 6.77 percent for the nine monthsended September 30, 2005 compared to 7.29 percent for the three months endedSeptember 30, 2004 and 7.41 percent in the nine months ended September 30, 2004.Net interest margin decreased in both periods as the improvement in overallyields on our receivables discussed above, was more than offset by the higherfunding costs. In August 2005, Hurricane Katrina ("Katrina") caused destruction and loss toindividuals, businesses and public infrastructure. As of September 30, 2005, wehad $1.4 billion, or 1.1 percent ($1.5 billion or 1.1 percent on a managedbasis) of consumer receivables outstanding with customers living in the FederalEmergency Management Agency ("FEMA") designated Individual Assistance disasterareas(2) with approximately $1 billion of these receivables secured by realestate. Assessment of the impact of Katrina on the collectibility of thesereceivables is continuing, but is complicated by the number of customers thathave been displaced from their primary residence. Preliminary estimates of thepotential impact to our businesses take into account a number of factors onwhich we are still gathering information, such as: - how the current and long-term financial impact of the disaster on our customers will affect future payment patterns; - the condition and value of any collateral supporting the amounts outstanding; and - the availability of insurance to cover losses on the underlying collateral. Based on the information currently available, we have recorded an incrementalprovision for credit losses of $180 million at September 30, 2005, representingour best estimate of Katrina's impact on our loan portfolio. As these estimatesare influenced by factors outside of our control, there is uncertainty inherentin these estimates, making it reasonably probable that they will change. As moreinformation becomes available relating to the financial condition of ouraffected customers, the physical condition of the collateral for loans which aresecured by real estate and the resultant impact on customer payment patterns, wewill continue to review our estimate of credit loss exposure relating to Katrinaand any adjustments will be reported in earnings when they become known. In aneffort to assist our customers affected by the disaster, we have initiatedvarious programs including extended payment arrangements and interest and feewaivers for up to 90 days for certain products depending upon customercircumstances. These interest and fee waivers totaled $7 million during thequarter. We currently anticipate additional interest and fee waivers ofapproximately $14 million during the fourth quarter of 2005. The increase in provision for credit losses in both periods was driven byincreased loss exposure caused by Hurricane Katrina as well as increased lossprovision resulting from higher bankruptcy filings in the period --------------- (1) MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of VISA USA, Inc. (2) Customers in the Individual Assistance Counties, as defined by FEMA on the list last updated and published on September 9, 2005. 21 HSBC Finance Corporation-------------------------------------------------------------------------------- leading up to the October 17, 2005 effective date of the new bankruptcylegislation in the United States. We have been maintaining credit loss reservesin anticipation of the impact this new legislation would have on netcharge-offs. However, the magnitude of the spike in bankruptcies experiencedimmediately before the new legislation became effective was larger thananticipated. As a result, we recorded an additional credit loss provision of$100 million during the third quarter. We currently expect that the higherlevels of personal bankruptcy filings we have been experiencing will result insignificantly higher levels of net charge-offs, predominantly in our domesticMasterCard/Visa portfolio, during the fourth quarter of 2005 in the region of$200 million. We believe that a portion of this increase is an acceleration ofnet charge-offs that would otherwise have been experienced in future periods. Wewill continue to evaluate the impact of the spike in bankruptcy filings on ourcredit loss reserves and currently believe that this could result in a reductionin the allowance in the fourth quarter as charge-offs occur. Excluding in thethird quarter of 2005, the $180 million credit loss provision recorded relatingto Katrina as well as the additional $100 million credit loss provision relatedto increased bankruptcy filings, our provision for credit losses declined inboth periods as improved credit quality and a shift in mix to higher levels ofsecured receivables, primarily as a result of the sale of our domestic privatelabel receivable portfolio to HSBC Bank USA in December 2004, was partiallyoffset by receivable growth. Total costs and expenses increased due to receivables growth and increases inmarketing expenses, partially offset by lower other servicing and administrativeexpenses. Amortization of purchase accounting fair value adjustments increased net incomeby $38 million for the quarter ended September 30, 2005 and $59 million for thenine months ended September 30, 2005 compared to $43 million for the quarterended September 30, 2004 and $103 million for the nine months ended September30, 2004. As part of ongoing integration efforts with HSBC, we have been working with HSBCto determine if management efficiencies could be achieved by transferring all ora portion of our U.K. and other European operations to HSBC Bank plc, a U.K.based subsidiary of HSBC, and/or one or more unrelated third parties. As of thedate of this filing, a decision has not been made regarding the transfer of allor a portion of the U.K. and other European operations. We anticipate that adecision regarding this potential transfer will be reached in the fourth quarterof 2005; however, any transfer is subject to approval by regulatory authoritiesand boards of directors of the affected entities. Return on average owned assets ("ROA") was .79 percent for the three monthsended September 30, 2005 and 1.35 percent for the nine months ended September30, 2005 compared to 1.04 percent for the three months ended September 30, 2004and 1.36 percent for the nine months ended September 30, 2004. ROA remained flatduring the year-to-date period as the higher net income discussed above keptpace with average owned basis asset growth during the period. The decrease inthe three month period ended September 30, 2005 reflects the impact of higherprovision for credit losses during the quarter due to the impact of Katrina andincreased bankruptcy filings. Return on averaged managed assets ("ROMA") (anon-GAAP financial measure which assumes that securitized receivables have notbeen sold and are still on our balance sheet) was .75 percent for the threemonths ended September 30, 2005 and 1.26 percent for the nine months endedSeptember 30, 2005 compared to .89 percent for the three months ended September30, 2004 and 1.14 percent for the nine months ended September 30, 2004. ROMAincreased during the year-to-date period as the higher net income discussedabove outpaced average managed basis asset growth during the period. Thedecrease in the current quarter reflects the impact of higher provision forcredit losses as discussed above. See "Basis of Reporting" for additionaldiscussion on the use of non-GAAP financial matters and "Reconciliations to GAAPFinancial Measures" for quantitative reconciliations to the equivalent GAAPbasis financial measures. 22 HSBC Finance Corporation-------------------------------------------------------------------------------- The financial information set forth below summarizes selected financialhighlights of HSBC Finance Corporation as of September 30, 2005 and 2004 and forthe three and nine month periods ended September 30, 2005 and 2004. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ----------------- 2005 2004 2005 2004---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) NET INCOME:................................................ $ 281 $ 325 $1,379 $1,228OWNED BASIS RATIOS: Return on average owned assets........................... .79% 1.04% 1.35% 1.36% Return on average common shareholder's equity ("ROE").... 6.03 7.07 10.58 9.18 Net interest margin...................................... 6.81 7.29 6.77 7.41 Consumer net charge-off ratio, annualized................ 2.93 3.77 3.00 3.98 Efficiency ratio(1)...................................... 43.54 45.10 43.70 43.96MANAGED BASIS RATIOS:(2) Return on average managed assets ("ROMA")................ .75% .89% 1.26% 1.14% Net interest margin...................................... 6.94 7.88 7.01 8.13 Risk adjusted revenue.................................... 7.34 6.50 7.32 6.69 Consumer net charge-off ratio, annualized................ 3.21 4.38 3.37 4.61 Efficiency ratio(1)...................................... 43.86 48.99 43.43 43.13 AS OF SEPTEMBER 30, 2005 2004--------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) RECEIVABLES: Owned basis............................................... $128,722 $106,437 Managed basis(2).......................................... 135,481 126,612TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOS: Owned basis............................................... 3.78% 4.43% Managed basis(2).......................................... 3.87 4.59 --------------- (1) Ratio of total costs and expenses less policyholders' benefits to net interest income and other revenues less policyholders' benefits. (2) Managed basis reporting is a non-GAAP financial measure. See "Basis of Reporting" for additional discussion on the use of this non-GAAP financial measure and "Reconciliations to GAAP Financial Measures" for quantitative reconciliations to the equivalent GAAP basis financial measure. Owned receivables were $128.7 billion at September 30, 2005, $118.8 billion atJune 30, 2005, and $106.4 billion at September 30, 2004. With the exception ofprivate label, we experienced growth in all our receivable products compared toJune 30, 2005 and September 30, 2004, with real estate secured receivables beingthe primary contributor to the growth. Real estate secured receivables do notinclude purchases of correspondent receivables directly by HSBC Bank USA of $1.5billion in the first eight months of 2005 and $2.1 billion since September 30,2004, a portion of which we otherwise would have purchased. Purchases of realestate secured receivables from our correspondents by HSBC Bank USA werediscontinued effective September 1, 2005 given HSBC Bank USA's increasingability to originate similar product. Lower securitization levels alsocontributed to the increase in owned receivables over both periods. Our owned basis two-months-and-over-contractual delinquency ratio increasedslightly compared to the prior quarter but decreased compared to the prior yearquarter. The decrease as compared to the prior year quarter is consistent withimprovements in the delinquency trends we experienced beginning in 2004 as aresult of improvements in the economy and better underwriting, improved creditquality of originations as well as higher levels of real estate securedreceivables. The sale of our domestic private label portfolio in December 23 HSBC Finance Corporation-------------------------------------------------------------------------------- 2004 also contributed to the decrease in the delinquency ratio compared with theprior year quarter. The increase compared to the prior quarter is primarily dueto a seasonal increase in delinquency during the third quarter. Dollars ofdelinquency increased compared to the prior quarter due to the higher levels ofowned receivables including lower securitizations, maturation of the portfolioas well as a seasonal increase in delinquency in the third quarter. Owned net charge-offs as a percentage of average consumer receivables for thequarter decreased from the prior year quarter as the lower delinquency levels wehave been experiencing continue to have a positive impact on charge-offs. Alsocontributing to the decrease in net charge-offs as a percentage of averageconsumer receivables compared to the prior year quarter were improvedcollections and the sale of our domestic private label receivable portfolio inDecember 2004, partially offset by an increase in bankruptcy filings due to newbankruptcy legislation in the United States which became effective in October2005. Our owned basis efficiency ratio improved compared to the prior year periodsprimarily as a result of higher net interest income and other revenues due tohigher levels of owned receivables. This was partially offset by higher costsand expenses and the impact of the bulk sale of our domestic private labelportfolio in December 2004. Excluding the results of our domestic private labelportfolio from all periods, the improvement in our owned basis efficiency ratiowas 473 basis points for the three month period ended September 30, 2005 and 285basis points for the year to date period. Excluding the results of our domesticprivate label portfolio from all periods, our managed basis efficiency ratioalso showed significant improvement compared to the prior year quarter for thereasons discussed above. During 2005, we supplemented unsecured debt issuances with proceeds from thesale of our domestic private label receivable portfolio to HSBC Bank USA inDecember 2004, debt issued to affiliates, increased levels of secured financingsand higher levels of commercial paper compared to December 31, 2004. Because weare now a subsidiary of HSBC, our credit ratings have improved and our creditspreads relative to Treasuries have tightened compared to those we experiencedduring the months leading up to the announcement of our acquisition by HSBC.Primarily as a result of tightened credit spreads, we recognized cash fundingexpense savings in excess of approximately $407 million during the nine monthsended September 30, 2005 ($155 million during the three months ended September30, 2005) and approximately $235 million during the nine months ended September30, 2004 ($95 million during the three months ended September 30, 2004) comparedto the funding costs we would have incurred using average spreads and fundingmix from the first half of 2002. It is anticipated that these tightened creditspreads and other funding synergies including asset transfers will eventuallyenable HSBC to realize annual cash funding expense savings, including externalfee savings, in excess of $1 billion per year as our existing term debt maturesover the course of the next few years. Securitization of consumer receivables has been a source of funding andliquidity for us. In order to align our accounting treatment with that of HSBCinitially under U.K. GAAP and now under International Financial ReportingStandards ("IFRS"), starting in the third quarter of 2004 we began to structureall new collateralized funding transactions as secured financings. However,because existing public MasterCard and Visa credit card transactions werestructured as sales to revolving trusts that require replenishments ofreceivables to support previously issued securities, receivables will continueto be sold to these trusts until the revolving periods end, the last of which iscurrently projected to occur in 2008. Private label trusts that publicly issuedsecurities are now replenished by HSBC Bank USA as a result of the daily sale ofnew domestic private label credit card originations to HSBC Bank USA. We willcontinue to replenish at reduced levels certain non-public personal non-creditcard and MasterCard and Visa securities issued to conduits and record theresulting replenishment gains for a period of time in order to manage liquidity.Since our securitized receivables have varying lives, it will take several yearsfor these receivables to pay-off and the related interest-only strip receivablesto be reduced to zero. The termination of sale treatment on new collateralizedfunding activity reduced our reported net income under U.S. GAAP. In the ninemonth period ended September 30, 2005, our net interest-only strip receivables,excluding the mark-to-market adjustment recorded in accumu- 24 HSBC Finance Corporation-------------------------------------------------------------------------------- lated other comprehensive income decreased $217 million, compared to a decreaseof $410 million during the nine month period ended September 30, 2004. There isno impact, however, on cash received from operations. BASIS OF REPORTING-------------------------------------------------------------------------------- Our consolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States ("U.S. GAAP"). Unless noted,the discussion of our financial condition and results of operations included inMD&A is presented on an owned basis of reporting. MANAGED BASIS REPORTING We have historically monitored our operations andevaluated trends on a managed basis (a non-GAAP financial measure), whichassumes that securitized receivables have not been sold and remain on ourbalance sheet. This is because the receivables that we securitize are subjectedto underwriting standards comparable to our owned portfolio, are serviced byoperating personnel without regard to ownership and result in a similar creditloss exposure for us. In addition, we fund our operations and make decisionsabout allocating resources such as capital on a managed basis. When reporting on a managed basis, net interest income, provision for creditlosses and fee income related to receivables securitized are reclassified fromsecuritization related revenue in our owned statement of income into theappropriate caption. Additionally, charge-off and delinquency associated withthese receivables are included in our managed basis credit quality statistics. Debt analysts, rating agencies and fixed income investors also evaluate ouroperations on a managed basis for the reasons discussed above and havehistorically requested managed basis information from us. We believe thatmanaged basis information enables such investors and other interested parties tobetter understand the performance and quality of our entire managed loanportfolio and is important to understanding the quality of originations and therelated credit risk inherent in our owned and securitized portfolios. As thelevel of our securitized receivables falls over time, managed basis and ownedbasis results will eventually converge. EQUITY RATIOS Tangible shareholder's equity to tangible managed assets("TETMA"), tangible shareholder's equity plus owned loss reserves to tangiblemanaged assets ("TETMA + Owned Reserves") and tangible common equity to tangiblemanaged assets are non-GAAP financial measures that are used by HSBC FinanceCorporation's management and certain rating agencies to evaluate capitaladequacy. These ratios may differ from similarly named measures presented byother companies. The most directly comparable GAAP financial measure is commonand preferred equity to owned assets. We and certain rating agencies also monitor our equity ratios excluding theimpact of purchase accounting adjustments. We do so because we believe that thepurchase accounting adjustments represent non-cash transactions which do notaffect our business operations, cash flows or ability to meet our debtobligations. Preferred securities issued by certain non-consolidated trusts are consideredequity in the TETMA and TETMA + Owned Reserves calculations because of theirlong-term subordinated nature and the ability to defer dividends. Previously,our Adjustable Conversion-Rate Equity Security Units, adjusted for purchaseaccounting adjustments, were also considered equity in these calculations.Beginning in the third quarter of 2005, and with the agreement of certain ratingagencies, we have refined our definition of TETMA and TETMA + Owned Reserves toexclude the Adjustable Conversion-Rate Equity Security Units as this moreaccurately reflects the impact of these items on our equity. Prior periodamounts have been revised to reflect the current period presentation. 25 HSBC Finance Corporation-------------------------------------------------------------------------------- INTERNATIONAL FINANCIAL REPORTING STANDARDS Because HSBC reports results inaccordance with IFRS and IFRS results are used in measuring and rewardingperformance of employees, our management also separately monitors net incomeunder IFRS (a non-U.S. GAAP financial measure). The following table reconcilesour net income on a U.S. GAAP basis to net income on an IFRS basis: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2005---------------------------------------------------------------------------------------------------- (IN MILLIONS) Net income - U.S. GAAP basis............................... $281 $1,379Adjustments, net of tax: Securitizations.......................................... 65 233 Derivatives and hedge accounting (including fair value adjustments).......................................... 38 48 Intangible assets........................................ 47 145 Purchase accounting adjustments.......................... (20) 27 Loan origination......................................... (12) (45) Loan impairment.......................................... (8) (1) Pension costs............................................ 2 5 Other.................................................... (5) 3 ---- ------Net income - IFRS basis.................................... $388 $1,794 ==== ====== Differences between U.S. GAAP and IFRS are as follows: SECURITIZATIONS IFRS - The recognition of securitized assets is governed by a three-step process. The process may be applied to the whole asset, or a part of an asset: - If the rights to the cash flows have been transferred to a third party, those securitized assets should be derecognized. - If the rights to the cash flows are retained but there is a contractual obligation to pay the cash flows to another party, the securitized assets should be derecognized if certain conditions are met, for example, where there is no obligation to pay amounts to the eventual recipient unless an equivalent amount is collected from the original asset. - If it is determined that some significant risks and rewards of ownership have been transferred, but some significant risks and rewards have also been retained, it must be determined whether or not control has been retained. If it has not been retained, the asset should be derecognized. If control has been retained, an entity shall continue to recognize the asset to the extent of its continuing involvement. US GAAP - SFAS 140 'Accounting for Transfers and Servicing of Finance Assets and Extinguishments of Liabilities' requires that receivables that are sold to a special purpose entity and securitized can only be derecognized and a gain or loss on sale recognized if the originator has surrendered control over those securitized assets. - Control has been surrendered over transferred assets if and only if all of the following conditions are met: - The transferred assets have been put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. - Each holder of interests in the transferee (i.e. holder of issued notes) has the right to pledge or exchange their beneficial interests, and no condition constrains this right and provides more than a trivial benefit to the transferor. 26 HSBC Finance Corporation-------------------------------------------------------------------------------- - The transferor does not maintain effective control over the assets through either an agreement that obligates the transferor to repurchase or to redeem them before their maturity or through the ability to unilaterally cause the holder to return specific assets, other than through a clean-up call. - If these conditions are not met the securitized assets should continue to be consolidated. - Where HSBC retains an interest in the securitized assets, such as a servicing right or the right to residual cash flows from the special purpose entity, HSBC recognizes this interest at fair value on sale of the assets. DERIVATIVES AND HEDGE ACCOUNTINGIFRS - Derivatives are recognized initially, and are subsequently remeasured, at fair value. Fair values are obtained from quoted market prices in active markets, or by using valuation techniques, including recent market transactions, where an active market does not exist. Valuation techniques include discounted cash flow models and option pricing models as appropriate. All derivatives are classified as assets when their fair value is positive, or as liabilities when their fair value is negative. - Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not designated at fair value through profit and loss. These embedded derivatives are measured at fair value with changes in fair value recognized in the income statement. - Derivative assets and liabilities on different transactions are only netted if the transactions are with the same counterparty, a legal right of set-off exists, and the cash flows are intended to be settled on a net basis. - The method of recognizing the resulting fair value gains or losses depends on whether the derivative is held for trading, or is designated as a hedging instrument, and if so, the nature of the risk being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognized in the income statement. Where derivatives are designated as hedges, HSBC classifies them as either: (i) hedges of the change in fair value of recognized assets or liabilities or firm commitments ('fair value hedge'); (ii) hedges of the variability in highly probable future cash flows attributable to a recognized asset or liability, or a forecast transaction ('cash flow hedge'); or (iii) hedges of net investments in a foreign operation ('net investment hedge'). Hedge accounting is applied to derivatives designated as hedging instruments in a fair value, cash flow or net investment hedge provided certain criteria are met. Hedge Accounting: - It is HSBC's policy to document, at the inception of a hedging relationship, the relationship between the hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge. Such policies also require documentation of the assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risks. Interest on designated qualifying hedges is included in 'Net interest income'. Fair value hedge: - Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the income statement, together with changes in the fair value of the asset or liability or group thereof that are attributable to the hedged risk. - If the hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to the income statement over the residual period to maturity. 27 HSBC Finance Corporation-------------------------------------------------------------------------------- Cash flow hedge: - The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in equity. Any gain or loss relating to an ineffective portion is recognized immediately in the income statement. - Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. - When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Net investment hedge: - Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in equity; the gain or loss relating to the ineffective portion is recognized immediately in the income statement. Gains and losses accumulated in equity are included in the income statement on the disposal of the foreign operation. Hedge effectiveness testing: - To qualify for hedge accounting, IAS 39 requires that at the inception of the hedge and throughout its life, each hedge must be expected to be highly effective (prospective effectiveness). Actual effectiveness (retrospective effectiveness) must also be demonstrated on an ongoing basis. - The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method an HSBC entity adopts for assessing hedge effectiveness will depend on its risk management strategy. - For fair value hedge relationships, HSBC entities utilize the cumulative dollar offset method or regression analysis as effectiveness testing methodologies. For cash flow hedge relationships, HSBC entities utilize the change in variable cash flow method or the cumulative dollar offset method using the hypothetical derivative approach. - For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness, the changes in fair value or cash flows must offset each other in the range of 80 per cent to 125 per cent for the hedge to be deemed effective. Derivatives that do not qualify for hedge accounting: - All gains and losses from changes in the fair value of any derivatives that do not qualify for hedge accounting are recognized immediately in the income statement. These gains and losses are reported in 'Trading income', except where derivatives are managed in conjunction with financial instruments designated at fair value, in which case gains and losses are reported in 'Net income from financial instruments designated at fair value'. US GAAP - The accounting under SFAS No. 133 'Accounting for Derivative Instruments and Hedging Activities' is generally consistent with that under IAS 39 as described above (from January 1, 2005); however see below for discussion of the designation of financial assets and liabilities at fair value. - SFAS No. 133 permits the 'shortcut method' of hedge effectiveness testing for certain transactions. Under this method, it may be assumed, at inception of the hedge, there is no ineffectiveness in the hedging of interest rate risk with an interest rate swap provided specific criteria are met. 28 HSBC Finance Corporation-------------------------------------------------------------------------------- DESIGNATION OF FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT ANDLOSS IFRS - Under IAS 39, a financial instrument, other than one held for trading, is classified in this category if it meets the criteria set out below, and is so designated by management. An entity may designate financial instruments at fair value where the designation: - eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring financial assets or financial liabilities or recognizing the gains and losses on them on different bases; or - applies to a group of financial assets, financial liabilities or both that is managed and its performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and where information about that group of financial instruments is provided internally on that basis to key management personnel; or - relates to financial instruments containing one or more embedded derivatives that significantly modify the cash flows resulting from those financial instruments. - Financial assets and financial liabilities so designated are recognized initially at fair value, with transaction costs taken directly to the income statement, and are subsequently remeasured at fair value. This designation, once made, is irrevocable in respect of the financial instruments to which it is made. Financial assets and financial liabilities are recognized using trade date accounting. - Gains and losses from changes in the fair value of such assets and liabilities are recognized in the income statement as they arise, together with related interest income and expense and dividends, within 'Net income from financial instruments designated at fair value'. US GAAP - There are no provisions to make such an election in US GAAP similar to that in IAS 39. - Generally, for financial assets to be measured at fair value with gains and losses recognized immediately in the income statement under US GAAP, they must meet the definition of trading securities in SFAS 115 'Accounting for Certain Investments in Debt and Equity Securities'. Financial liabilities are generally reported at amortized cost under US GAAP. GOODWILL, PURCHASE ACCOUNTING AND INTANGIBLES IFRS - IFRS 3 'Business Combinations' requires that goodwill should not be amortized but should be tested for impairment at least annually at the reporting unit level by applying a test based on recoverable amount. - The book value of goodwill existing at December 31, 2003 under UK GAAP is carried forward under IFRS from January 1, 2004, subject to limited adjustments. - Prior to 1998, goodwill under UK GAAP was written off against equity. HSBC did not elect to reinstate this goodwill on its balance sheet upon transition to IFRS. - After 1998, goodwill was capitalized and amortized over its useful life. - Where quoted securities are issued as part of the purchase consideration in an acquisition, the fair value of those securities for the purpose of determining the cost of acquisition is the market price of the securities at the date of acquisition. US GAAP - Goodwill acquired up to June 30, 2001 was capitalized and amortized over its useful life but not more than 25 years. The amortization of previously acquired goodwill ceased from December 31, 2001. - Where quoted securities are issued as part of the purchase consideration in an acquisition, the fair value of those securities for the purpose of determining the cost of acquisition is the average market price of the securities for a reasonable period before and after the date that the terms of the acquisition are agreed and announced. 29 HSBC Finance Corporation-------------------------------------------------------------------------------- LOAN ORIGINATION IFRS - Certain loan fee income and incremental directly attributable loan origination costs are amortized to the profit and loss account over the life of the loan as part of the effective interest calculation under IAS 39. US GAAP - Certain loan fee income and direct but not necessarily incremental loan origination costs, including an apportionment of overheads, are amortized to the profit and loss account over the life of the loan as an adjustment to interest income (SFAS 91 'Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases'.) LOAN IMPAIRMENT IFRS - Where there is evidence of impairment, based on statistical models using historic loss rates adjusted for economic conditions, portfolios of loans are written down to their net recoverable amount. The net recoverable amount is the present value of the estimated future recoveries discounted at the portfolio's original effective interest rate and includes reasonably estimable recoveries on loans individually identified for write-off pursuant to HSBC's credit guidelines. US GAAP - Where the delinquency status of loans in a portfolio is such that there is no realistic prospect of recovery of these amounts, the loans are written off in full, or to recoverable value where collateral exists. The delinquency status, for example, the number of days payment is overdue, where write-off occurs is applied consistently across similar loan products as described in HSBC's credit guidelines. Where local regulators mandate the delinquency status at which write-off must occur for different retail products and these reasonably reflect estimable recoveries on individual loans, this basis of measuring impairment is reflected in US GAAP accounting. Cash recoveries relating to pools of such written-off loans, if any, are reported as loan recoveries upon collection. PENSION COSTS IFRS - IAS 19, "Employee Benefits" requires pension liabilities to be assessed based on current actuarial assumptions and methods and pension assets to be measured at fair value. The net pension surplus or deficit, representing the difference between plan assets and liabilities, is recognized on the balance sheet. - As permitted by IAS 19 (revised 2004), HSBC elects to record all actuarial gains and losses on the pension surplus or deficit in the year they occur within the Statement of Recognized Income and Expense. US GAAP - SFAS 87 'Employers' Accounting for Pensions' prescribes a similar method of actuarial valuation for pension liabilities and measurement of plan assets at fair value as IAS 39. - Where the accumulated benefit obligation (the value of benefits accrued based on employee service up to the balance sheet date) exceeds the value of plan assets, HSBC recognizes an additional minimum pension liability equal to this excess, as long as the excess is greater than any accrual already established for unfunded pension costs. - SFAS 87 does not permit recognition of all actuarial gains and losses in a performance statement other than the primary income statement. Under US GAAP, HSBC elects to use the 'corridor method', whereby actuarial gains and losses outside a certain range are recognized in the income statement, in equal amounts over the remaining service lives of current employees. That range is equal to 10% of the 30 HSBC Finance Corporation-------------------------------------------------------------------------------- greater of plan assets and plan liabilities. The remaining additional minimum pension liability is recognized directly in Other Comprehensive Income. QUANTITATIVE RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIALMEASURES For a reconciliation of managed basis net interest income, fee incomeand provision for credit losses to the comparable owned basis amounts, see Note12, "Business Segments," to the accompanying consolidated financial statements.For a reconciliation of our owned loan portfolio by product to our managed loanportfolio, see Note 4, "Receivables," to the accompanying consolidated financialstatements. For additional quantitative reconciliations of non-GAAP financialmeasures presented herein to the equivalent GAAP basis financial measures, see"Reconciliations to GAAP Financial Measures." RECEIVABLES REVIEW-------------------------------------------------------------------------------- The following table summarizes owned receivables at September 30, 2005 andincreases (decreases) over prior periods: INCREASES (DECREASES) FROM ----------------------------------- JUNE 30, SEPTEMBER 30, 2005 2004 SEPTEMBER 30, ---------------- ---------------- 2005 $ % $ %--------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Real estate secured........................... $ 78,130 $6,200 8.6% $19,404 33.0%Auto finance.................................. 10,137 1,140 12.7 3,314 48.6MasterCard/Visa............................... 18,974 1,553 8.9 7,308 62.6Private label................................. 2,777 (128) (4.4) (11,223) (80.2)Personal non-credit card(1)................... 18,484 1,229 7.1 3,596 24.2Commercial and other.......................... 220 (33) (13.0) (114) (34.1) -------- ------ ----- ------- -----Total owned receivables....................... $128,722 $9,961 8.4% $22,285 20.9% ======== ====== ===== ======= ===== --------------- (1) Personal non-credit card receivables are comprised of the following: INCREASES (DECREASES) FROM ---------------------------------- JUNE 30, SEPTEMBER 30, 2005 2004 SEPTEMBER 30, --------------- ---------------- 2005 $ % $ %---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Domestic personal non-credit card............... $10,323 $1,175 12.8% $3,182 44.6%Union Plus personal non-credit card............. 374 (13) (3.4) (136) (26.7)Personal homeowner loans........................ 3,996 142 3.7 461 13.0Foreign personal non-credit card................ 3,791 (75) (1.9) 89 2.4 ------- ------ ---- ------ -----Total personal non-credit card.................. $18,484 $1,229 7.1% $3,596 24.2% ======= ====== ==== ====== ===== RECEIVABLE INCREASES (DECREASES) SINCE SEPTEMBER 30, 2004 Driven by growth inour correspondent and branch businesses, real estate secured receivablesincreased over the year-ago period. Real estate secured receivable levels do notinclude HSBC Bank USA's purchase of receivables directly from correspondentstotaling $1.5 billion in the first eight months of 2005 and $2.1 billion sinceSeptember 30, 2004, a portion of which we otherwise would have purchased.Purchases of real estate secured receivables from our correspondents by HSBCBank USA were discontinued effective September 1, 2005 given HSBC Bank USA'sincreasing ability to originate similar product. Growth in real estate securedreceivables was also supplemented by purchases from a single correspondentrelationship which totaled $1.9 billion since September 30, 2004. Real estatesecured receivable levels in our branch-based consumer lending business continueto increase, as sales volumes remain high. Also contributing to the increasewere purchases of $2.0 billion from a portfolio 31 HSBC Finance Corporation-------------------------------------------------------------------------------- acquisition program since the prior year quarter. The increases in the realestate secured receivable levels have been partially offset by run-off of thehigher yielding real estate secured receivables, including second lien loans,largely due to refinancing activity. Auto finance receivables increased over theyear-ago period due to newly originated loans acquired from our dealer network,growth in the consumer direct loan program, lower securitization levels and theintroduction of an auto finance program in Canada in the second quarter of 2004.MasterCard and Visa receivables reflect domestic organic growth especially inour HSBC branded prime, Union Privilege and non-prime portfolios, growth in theU.K. over the year ago period, as well as lower securitization levels. Thedecrease in private label receivables largely reflects the sale of our domesticprivate label receivable portfolio to HSBC Bank USA in December 2004. Personalnon-credit card receivables increased from the year-ago period as we began toincrease the availability of this product domestically in the second half of2004 as a result of the improving U.S. economy and continued improvements in ourunderwriting standards. Personal non-credit card receivables also increased dueto lower securitization levels. The rate of increase in owned receivables wasimpacted by the sale of $12.2 billion in domestic private label receivables toHSBC Bank USA in December 2004. Had this sale not taken place, owned receivableswould have increased by $34.5 billion or 32 percent since September 30, 2004. RECEIVABLE INCREASES (DECREASES) SINCE JUNE 30, 2005 Both our correspondent andbranch businesses reported growth in their real estate secured portfolios asdiscussed above. Real estate secured receivable levels do not include purchasesof correspondent receivables directly by HSBC Bank USA of $.4 billion in Julyand August of 2005, a portion of which we otherwise would have purchased. Growthin our auto finance, MasterCard and Visa and personal non-credit card portfoliosreflect lower levels of securitizations. Growth in our MasterCard and Visaportfolio also reflects organic growth in our HSBC branded prime, UnionPrivilege and non-prime portfolios. Our foreign private label portfoliodecreased due to lower retail sales volumes in the U.K. as well as the impact ofchanges in the foreign exchange rates since June 30, 2005. Personal non-creditcard receivables increased from the prior quarter resulting from the success ofseveral large direct mail campaigns that occurred during the current quarter. RESULTS OF OPERATIONS-------------------------------------------------------------------------------- Unless noted otherwise, the following discusses amounts reported in our ownedbasis statement of income and dollars represent pre-tax amounts. NET INTEREST INCOME The following table summarizes net interest income: INCREASE (DECREASE) -------------------THREE MONTHS ENDED SEPTEMBER 30, 2005 (1) 2004 (1) AMOUNT %--------------------------------------------------------------------------------------------------- Finance and other interest income........... $3,402 10.71% $2,779 10.30% $623 22.4%Interest expense............................ 1,239 3.90 810 3.01 429 53.0 ------ ----- ------ ----- ---- -----Net interest income......................... $2,163 6.81% $1,969 7.29% $194 9.9% ====== ===== ====== ===== ==== ===== INCREASE (DECREASE) -------------------NINE MONTHS ENDED SEPTEMBER 30, 2005 (1) 2004 (1) AMOUNT %--------------------------------------------------------------------------------------------------- Finance and other interest income........... $9,491 10.56% $7,944 10.29% $1,547 19.5%Interest expense............................ 3,405 3.79 2,225 2.88 1,180 53.0 ------ ----- ------ ----- ------ -----Net interest income......................... $6,086 6.77% $5,719 7.41% $ 367 6.4% ====== ===== ====== ===== ====== ===== --------------- (1) % Columns: comparison to average owned interest-earning assets, annualized. The increases in net interest income during the quarter and year-to-date periodswere due to higher average receivables and a higher overall yield, partiallyoffset by higher interest expense. Overall yields increased as increased yieldson variable rate products in line with market movements and other repricinginitiatives more 32 HSBC Finance Corporation-------------------------------------------------------------------------------- than offset a decline in real estate secured and auto finance yields. Changes inreceivable mix also contributed to the increase as the impact of increasedlevels of higher yielding MasterCard/Visa and auto finance receivables due tolower securitization levels was partially offset by growth in lower yieldingreal estate secured receivables. Receivable mix was also significantly impactedby lower levels of private label receivables as a result of the sale of ourdomestic private label portfolio in December 2004. The lower real estate andauto finance yields during 2005 reflect strong receivable and refinancinggrowth, which has occurred in an economic cycle with historically low marketrates, high liquidation of older, higher yielding loans, product expansion intonear-prime customer segments and competitive pricing pressures due to excessmarket capacity. The higher interest expense, which contributed to lower netinterest margin, was due to a larger balance sheet and a significantly highercost of funds due to a rising interest rate environment. In addition, as part ofour overall liquidity management strategy, we continue to extend the maturity ofour liability profile which results in higher interest expense. Our purchaseaccounting adjustments include amortization of fair value adjustments to bothour external debt obligations and receivables. Amortization of purchaseaccounting fair value adjustments increased net interest income by $132 millionfor the three months ended September 30, 2005 and $392 million for the ninemonths ended September 30, 2005 compared to $174 million for the three monthsended September 30, 2004 and $549 million for the nine months ended September30, 2004. Net interest margin, annualized, decreased during the three and nine monthsended September 30, 2005 as compared to the year-ago period as the improvementin the overall yield on our receivable portfolio, as discussed above, was morethan offset by the higher funding costs. The following table shows the impact ofthese items on owned basis net interest margin at September 30, 2005: THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2005 2005------------------------------------------------------------------------------------------- Net interest margin - September 30, 2004.................... 7.29% 7.41%Impact to net interest margin resulting from: Bulk sale of domestic private label portfolio in December 2004................................................... (.29) (.27) Receivable pricing........................................ .25 .13 Receivable mix............................................ .21 .14 Cost of funds............................................. (.78) (.78) Investment securities mix................................. .05 .07 Other..................................................... .08 .07 ---- ----Net interest margin - September 30, 2005.................... 6.81% 6.77% ==== ==== Our net interest income on a managed basis includes finance income earned on ourowned receivables as well as on our securitized receivables. This finance incomeis offset by interest expense on the debt recorded on our balance sheet as wellas the contractual rate of return on the instruments issued to investors whenthe receivables were securitized. Managed basis net interest income was $2.3billion in the three months ended September 30, 2005, a decrease of 12 percentfrom $2.6 billion in the three months ended September 30, 2004. For the ninemonths ended September 30, 2005, managed basis net interest income was $6.8billion, down 12 percent from $7.7 billion in the nine months ended September30, 2004. Managed basis net interest margin, annualized, was 6.94 percent in thecurrent quarter and 7.01 percent in the year-to-date period, compared to 7.88percent and 8.13 percent in the year-ago periods. The decrease in the currentquarter was due to a higher mix of real estate secured receivables due tosignificantly lower levels of private label receivables and higher funding costsdue to a larger balance sheet and a rising interest rate environment, partiallyoffset by higher yields on our receivables due to pricing increases for variablerate products and other repricing initiatives. For the year-to-date period, thedecrease reflects lower yields on our receivables, particularly in real estatesecured and auto finance receivables, and a higher mix of real estate securedreceivables due to significantly lower levels of private label receivables,partially offset by the pricing increases 33 HSBC Finance Corporation-------------------------------------------------------------------------------- discussed above. As discussed above, the lower real estate and auto financeyields during 2005 reflect strong receivable and refinancing growth, which hasoccurred in an economic cycle with historically low market rates, highliquidation of older, higher yielding loans, product expansion into near-primecustomer segments and competitive pricing pressures due to excess marketcapacity. The following table shows the impact of these items on our netinterest margin on a managed basis at September 30, 2005: THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2005 2005------------------------------------------------------------------------------------------- Net interest margin - September 30, 2004.................... 7.88% 8.13%Impact to net interest margin resulting from: Bulk sale of domestic private label portfolio in December 2004................................................... (.22) (.21) Receivable pricing........................................ .32 .11 Receivable mix............................................ (.22) (.23) Cost of funds............................................. (.92) (.91) Investment securities mix................................. .05 .07 Other..................................................... .05 .05 ---- ----Net interest margin - September 30, 2005.................... 6.94% 7.01% ==== ==== Net interest margin on a managed basis is greater than on an owned basis becausethe managed basis portfolio includes relatively more unsecured loans, which havehigher yields. Managed basis risk adjusted revenue (a non-GAAP financial measure whichrepresents net interest income, plus other revenues, excluding securitizationrelated revenue and the mark to market and ineffectiveness related to ourderivative instruments, less net charge-offs as a percentage of average interestearning assets) increased to 7.34 percent in the current quarter from 6.50percent in the year-ago quarter. Managed basis risk adjusted revenue increasedto 7.32 percent in the year-to-date period from 6.69 percent in the year-agoperiod. Managed basis risk adjusted revenue increased due to higher otherrevenues as well as the result of the positive credit and delinquency trends dueto the improving U.S. economy. Ongoing improvements in underwriting, riskmanagement and collections as well as product expansion into near-prime customersegments led to lower charge-offs which more than compensated for the decline innet interest margin discussed above. See "Basis of Reporting" for additionaldiscussion on the use of non-GAAP financial measures. PROVISION FOR CREDIT LOSSES The following table summarizes provision for creditlosses: INCREASE (DECREASE) ------------------- 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Three months ended September 30,........................... $1,361 $1,123 $238 21.2%Nine months ended September 30,............................ 3,233 3,048 185 6.1 Our provision for credit losses increased during the third quarter of 2005primarily due to increased credit loss exposure as a result of Katrina andhigher bankruptcy filings in the period leading up to the October 17, 2005effective date of new bankruptcy legislation in the United States. We have beenmaintaining credit loss reserves in anticipation of the impact this newlegislation would have on net charge-offs. However, the magnitude of the spikein bankruptcies experienced immediately before the new legislation becameeffective was larger than anticipated. As a result, we recorded an additionalcredit loss provision of $100 million during the third quarter. We currentlyexpect that the higher levels of personal bankruptcy filings we have beenexperiencing will result in significantly higher levels of net charge-offs,predominantly in our domestic MasterCard/Visa portfolio, during the fourthquarter of 2005 in the region of $200 million. We believe that a portion of thisincrease is an acceleration of net charge-offs that would otherwise have beenexperienced in future periods. We will continue to evaluate the impact of thespike in bankruptcy filings on our credit loss reserves and currently believethat this could result in a reduction in the allowance in the fourth quarter ascharge-offs occur. 34 HSBC Finance Corporation-------------------------------------------------------------------------------- Excluding the $180 million credit loss provision recorded in the third quarterrelated to Katrina as well as the additional $100 million of credit lossprovision related to increased bankruptcy filings, our provision for creditlosses declined in both periods as improved credit quality and a shift in mix tohigher levels of secured receivables primarily as a result of the sale of ourdomestic private label portfolio in December 2004 was partially offset byincreased requirements due to receivable growth, including lower securitizationlevels. The provision as a percent of average owned receivables, annualized, was4.41 percent in the current quarter and 3.71 percent year-to-date, compared to4.36 percent and 4.16 percent in the year-ago periods. In 2005, credit lossreserves increased as the provision for owned credit losses was $459 milliongreater than net charge-offs in the third quarter of 2005 and $624 million inthe year-to-date period. In 2004, provision for owned credit losses was $154million greater than net charge-offs in the third quarter of 2004 and $143million in the year-to-date period. The provision for credit losses may varyfrom quarter to quarter depending on the product mix and credit quality of loansin our portfolio. See "Credit Quality" included in this MD&A for furtherdiscussion of factors affecting the provision for credit losses. OTHER REVENUES The following table summarizes other revenues: INCREASE (DECREASE) --------------------THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %--------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Securitization related revenue............................. $ 41 $ 267 $(226) (84.6)%Insurance revenue.......................................... 229 203 26 12.8Investment income.......................................... 33 36 (3) (8.3)Derivative income (expense)................................ (53) 72 (125) (100+)Fee income................................................. 439 302 137 45.4Taxpayer financial services revenue (expense).............. (1) (3) 2 66.7Gains on receivable sales to HSBC affiliates............... 99 10 89 100+Servicing fees from HSBC affiliates........................ 102 6 96 100+Other income............................................... 213 147 66 44.9 ------ ------ ----- -----Total other revenues....................................... $1,102 $1,040 $ 62 6.0% ====== ====== ===== ===== INCREASE (DECREASE) --------------------NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Securitization related revenue............................ $ 180 $ 881 $(701) (79.6)%Insurance revenue......................................... 679 618 61 9.9Investment income......................................... 99 107 (8) (7.5)Derivative income......................................... 283 248 35 14.1Fee income................................................ 1,099 809 290 35.8Taxpayer financial services revenue....................... 260 209 51 24.4Gains on receivable sales to HSBC affiliates.............. 308 25 283 100+Servicing fees from HSBC affiliates....................... 303 11 292 100+Other income.............................................. 477 407 70 17.2 ------ ------ ----- -------Total other revenues...................................... $3,688 $3,315 $ 373 11.3% ====== ====== ===== ======= 35 HSBC Finance Corporation-------------------------------------------------------------------------------- Securitization related revenue is the result of the securitization of ourreceivables and includes the following: INCREASE (DECREASE) -------------------THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %----------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net initial gains(1)........................................ $ - $ - $ - -%Net replenishment gains(1).................................. 38 112 (74) (66.1)Servicing revenue and excess spread......................... 3 155 (152) (98.1) --- ---- ----- ------Total....................................................... $41 $267 $(226) (84.6)% === ==== ===== ====== INCREASE (DECREASE) -------------------NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %----------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net initial gains(1)........................................ $ - $ 25 $ (25) (100.0)%Net replenishment gains(1).................................. 135 344 (209) (60.8)Servicing revenue and excess spread......................... 45 512 (467) (91.2) ---- ---- ----- ------Total....................................................... $180 $881 $(701) (79.6)% ==== ==== ===== ====== --------------- (1) Net of our estimate of probable credit losses under the recourse provisions. The decreases in securitization related revenue were due to decreases in thelevel and product mix of receivables securitized and higher run-off due toshorter expected lives. However, because existing public MasterCard and Visacredit card transactions were structured as sales to revolving trusts thatrequire replenishments of receivables to support previously issued securities,receivables will continue to be sold to these trusts until the revolving periodsend, the last of which is currently projected to occur in 2008. Private labeltrusts that publicly issued securities are now replenished by HSBC Bank USA as aresult of the daily sales of new domestic private label receivable originationsto HSBC Bank USA. We will continue to replenish at reduced levels certainnon-public personal non-credit card and MasterCard and Visa securities issued toconduits and record the resulting replenishment gains for a period of time inorder to manage liquidity. Since our securitized receivables have varying lives,it will take time for these receivables to pay-off and the related interest-onlystrip receivables to be reduced to zero. While the termination of sale treatmenton new collateralized funding activity since the third quarter of 2004 and thereduction of sales under replenishment agreements reduced our reported netincome under U.S. GAAP, there is no impact on cash received from operations. Our interest-only strip receivables, net of the related loss reserve andexcluding the mark-to-market adjustment recorded in accumulated othercomprehensive income, decreased $43 million in the current quarter and $217million year-to-date, compared to a decrease of $122 million and $410 million inthe year-ago periods, as securitized receivables continued to decrease. Insurance revenue increased in both periods as we have experienced higher salesvolumes for many of our insurance products in both our U.K. and domesticoperations. Investment income includes income on securities available for sale in ourinsurance business and realized gains and losses from the sale of securities.Investment income decreased in both periods as a result of decreases in incomedue to lower average balances and lower gains from security sales, partiallyoffset by higher yields. 36 HSBC Finance Corporation-------------------------------------------------------------------------------- Derivative income (expense), which includes realized and unrealized gains andlosses on derivatives which do not qualify as effective hedges under SFAS No.133 as well as the ineffectiveness on derivatives associated with our qualifyinghedges, is summarized in the tables below: THREE MONTHS ENDED SEPTEMBER 30, 2005 2004---------------------------------------------------------------------------- (IN MILLIONS) Net realized gains.......................................... $ 13 $19Mark-to-market on derivatives which do not qualify as effective hedges.......................................... (114) 53Ineffectiveness associated with qualifying hedges........... 48 - ----- ---Total....................................................... $ (53) $72 ===== === NINE MONTHS ENDED SEPTEMBER 30, 2005 2004--------------------------------------------------------------------------- (IN MILLIONS) Net realized gains.......................................... $ 46 $ 36Mark-to-market on derivatives which do not qualify as effective hedges.......................................... 211 211Ineffectiveness associated with qualifying hedges........... 26 1 ---- ----Total....................................................... $283 $248 ==== ==== Derivative income decreased in the current quarter due to increases in interestrates. The upward shift in the forward yield curve decreased the value of ourportfolio of interest rate swaps which do not qualify for hedge accounting underSFAS No. 133. This was largely the result of a significant increase in thenotional value of our pay variable interest rate swaps entered into during thethird quarter in connection with long term debt issuances which gave rise toincome volatility during the period before hedging documentation was put inplace. The increase in year-to-date derivative income reflects the combinedimpact of increases in interest rates and changes in the portfolio mix ofinterest rate swaps which do not qualify for hedge accounting under SFAS No. 133and recorded ineffectiveness as a result of the designation of a significantnumber of our non-hedging derivative portfolio as effective hedges under thelong-haul method of accounting beginning in the second quarter of 2005. As partof our overall risk management strategy to reduce earnings volatility, asignificant number of our pay fixed/receive variable interest rate swaps whichhad not previously qualified for hedge accounting under SFAS No. 133, have beendesignated as effective hedges using the long-haul method of accounting, andcertain other interest rate swaps were terminated. This will significantlyreduce the volatility of the mark-to-market on the previously non-qualifyingderivatives which have been designated as effective hedges going forward, butwill result in the recording of ineffectiveness under the long-haul method ofaccounting under SFAS No. 133. In order to further reduce earnings volatilitythat would otherwise result from changes in interest rates, we continue toevaluate the steps required to regain hedge accounting treatment under SFAS No.133 for the remaining swaps which do not currently qualify for hedge accounting.Additionally, we are working to improve the process at the inception of newhedging relationships in order to reduce the delay which currently existsbetween executing the swap and establishing hedge accounting. These derivativesremain economic hedges of the underlying debt instruments. Fee income increased during both periods due to higher credit card fees,particularly relating to our non-prime credit card portfolio, due to higherlevels of MasterCard and Visa credit card receivables and improved interchangerates, partially offset by lower private label credit card fees and higherreward program expenses. The lower private label credit card fees were theresult of the sale of our domestic private label portfolio to HSBC Bank USA inDecember 2004. See "Segment Results -- Managed Basis" for additional informationon fee income on a managed basis. Taxpayer financial services ("TFS") revenue, which was essentially flat duringthe current quarter, increased during the year-to-date period due to increasedloan volume during the 2005 tax season and a gain of $24 million on the sale ofcertain bad debt recovery rights to a third party in the first quarter of 2005. 37 HSBC Finance Corporation-------------------------------------------------------------------------------- Gains on receivable sales to HSBC affiliates relate to the daily sales ofdomestic private label receivable originations and certain MasterCard/Visaaccount originations and the bulk sales of real estate secured receivables toHSBC Bank, USA. The increases primarily relate to our agreement with HSBC BankUSA in December 2004 to sell all new domestic private label receivableoriginations on a daily basis. Servicing fees from HSBC affiliates represents revenue received under servicelevel agreements under which we service MasterCard/Visa credit card and domesticprivate label receivables as well as real estate secured and auto financereceivables for HSBC affiliates. The increases primarily relate to the servicingfees we receive from HSBC Bank USA for servicing the domestic private labelreceivables beginning in December 2004. Other income increased during both the three and nine month periods endedSeptember 30, 2005 primarily due to higher ancillary credit card revenue and,for the three month period, higher gains on asset sales, including the partialsale of a real estate investment. COSTS AND EXPENSES The following table summarizes total costs and expenses: INCREASE (DECREASE) -------------------THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Salaries and employee benefits............................. $ 513 $ 472 $41 8.7%Sales incentives........................................... 117 91 26 28.6Occupancy and equipment expenses........................... 83 77 6 7.8Other marketing expenses................................... 196 174 22 12.6Other servicing and administrative expenses................ 149 235 (86) (36.6)Support services from HSBC affiliates...................... 226 183 43 23.5Amortization of intangibles................................ 90 83 7 8.4Policyholders' benefits.................................... 109 93 16 17.2 ------ ------ --- ------Total costs and expenses................................... $1,483 $1,408 $75 5.3% ====== ====== === ====== INCREASE (DECREASE) -------------------NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Salaries and employee benefits............................. $1,536 $1,414 $ 122 8.6%Sales incentives........................................... 289 259 30 11.6Occupancy and equipment expenses........................... 252 237 15 6.3Other marketing expenses................................... 561 437 124 28.4Other servicing and administrative expenses................ 550 659 (109) (16.5)Support services from HSBC affiliates...................... 652 556 96 17.3Amortization of intangibles................................ 280 278 2 .7Policyholders' benefits.................................... 347 299 48 16.1 ------ ------ ----- ------Total costs and expenses................................... $4,467 $4,139 $ 328 7.9% ====== ====== ===== ====== Salaries and employee benefits increased during both the three and nine monthperiods ended September 30, 2005 as a result of additional staffing, primarilyin our consumer lending, mortgage services and international businesses tosupport growth. Sales incentives increased during both the three and nine month periods endedSeptember 30, 2005 due to higher sales volumes during the quarter in ourconsumer lending and mortgage services businesses. Occupancy and equipment expenses increased during both periods as higheroccupancy expense and higher repairs and maintenance costs were partially offsetby lower depreciation. 38 HSBC Finance Corporation-------------------------------------------------------------------------------- Other marketing expenses includes payments for advertising, direct mail programsand other marketing expenditures. The increase in both the three and nine monthperiods ended September 30, 2005 was primarily due to increased domestic creditcard marketing expenses due to higher non-prime marketing expense andinvestments in new marketing initiatives and for the year-to-date period,changes in contractual marketing responsibilities in July 2004 associated withthe General Motors ("GM") co-branded credit card. Other servicing and administrative expenses decreased in both the three and ninemonth periods ended September 30, 2005 due to lower legal and other professionalexpenses. Additionally, during the year-to-date period we experienced lower REOexpenses as well as a lower estimate of exposure relating to accrued financecharges associated with certain loan restructures which were partially offset byhigher systems costs. Support services from HSBC affiliates, which includes technology and otherservices charged to us by HSBC Technology and Services (USA) Inc. ("HTSU"),increased primarily due to growth. Amortization of intangibles increased during the three month period endedSeptember 30, 2005 due to the impairment related to a tradename in the U.K.,partially offset by lower intangible amortization related to our purchasedcredit card relationships in the quarter due to a contract renegotiation relatedto one of our co-branded credit card partners. Amortization of intangibles washigher in the year-to-date period as higher intangible amortization related toour purchased credit card relationships and the write off related to a tradenamein the U.K. were partially offset by lower intangible amortization related toour TFS business. Policyholders' benefits increased during both periods due to a continuingincrease in insurance sales volume in both our U.K. and domestic operations,partially offset by lower amortization of fair value adjustments relating to ourinsurance business. The increase over the year-ago periods for our domesticoperations is also attributable to the termination of a reinsurance contract inthe third quarter of 2004. The following table summarizes our owned basis efficiency ratio: 2005 2004--------------------------------------------------------------------------- Three months ended September 30............................. 43.54% 45.10%Nine months ended September 30.............................. 43.70 43.96 Our owned basis efficiency ratio improved during both the three and nine monthperiods ended September 30, 2005 primarily as a result of higher net interestincome and other revenues due to higher levels of owned receivables. This waspartially offset by higher costs and expenses and the impact of the bulk sale ofour domestic private label portfolio in December 2004. Excluding the results ofour domestic private label portfolio from all periods, the improvement in ourowned basis efficiency ratio was 473 basis points for the three month periodended September 30, 2005 and 285 basis points for the year to date period. SEGMENT RESULTS - MANAGED BASIS-------------------------------------------------------------------------------- We have three reportable segments: Consumer, Credit Card Services andInternational. Our Consumer segment consists of our consumer lending, mortgageservices, retail services and auto finance businesses. Our Credit Card Servicessegment consists of our domestic MasterCard and Visa credit card business. OurInternational segment consists of our foreign operations in the United Kingdom,Canada, Ireland and the remainder of Europe. There have been no changes in the basis of our segmentation or any changes inthe measurement of segment profit as compared with the presentation in our 2004Form 10-K. We have historically monitored our operations and evaluated trends on a managedbasis (a non-GAAP financial measure), which assumes that securitized receivableshave not been sold and are still on our balance sheet. This is because thereceivables that we securitize are subjected to underwriting standardscomparable to our owned portfolio, are generally serviced by operating personnelwithout regard to ownership and result in a 39 HSBC Finance Corporation-------------------------------------------------------------------------------- similar credit loss exposure for us. In addition, we fund our operations andmake decisions about allocating resources such as capital on a managed basis.When reporting on a managed basis, net interest income, provision for creditlosses and fee income related to receivables securitized are reclassified fromsecuritization related revenue in our owned statement of income into theappropriate caption. CONSUMER SEGMENT The following table summarizes results for our Consumersegment: INCREASE (DECREASE) -------------------THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income.............................................. $ 308 $ 294 $ 14 4.8%Net interest income..................................... 1,733 1,956 (223) (11.4)Securitization related revenue.......................... (171) (547) 376 68.7Fee and other income.................................... 307 187 120 64.2Intersegment revenues................................... 27 26 1 3.8Provision for credit losses............................. 735 506 229 45.3Total costs and expenses................................ 647 619 28 4.5Receivables............................................. 102,733 95,946 6,787 7.1Assets.................................................. 103,424 98,099 5,325 5.4Net interest margin, annualized......................... 7.02% 8.20% - -Return on average managed assets........................ 1.24 1.22 - - INCREASE (DECREASE) -------------------NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income................................................ $1,182 $ 855 $327 38.2%Net interest income....................................... 5,125 5,735 (610) (10.6)Securitization related revenue............................ (557) (1,089) 532 48.9Fee and other income...................................... 884 516 368 71.3Intersegment revenues..................................... 80 74 6 8.1Provision for credit losses............................... 1,698 1,905 (207) (10.9)Total costs and expenses.................................. 1,893 1,892 1 .1Net interest margin, annualized........................... 7.27% 8.33% - -Return on average managed assets.......................... 1.66 1.22 - - Our Consumer segment reported higher net income during both the three and ninemonth periods ended September 30, 2005. The increase in net income was primarilydue to higher fee and other income and improved securitization related revenue,partially offset by lower net interest income and, for the three month period,higher provision for credit losses and higher costs and expenses. The increasein fee and other income is due to gains on the daily sales of domestic privatelabel receivable originations to HSBC Bank USA and receipt of servicing revenuefor servicing this portfolio, partially offset by lower fee income related tothe sold receivables. Securitization related revenue improved due to loweramortization of prior period gains as a result of reduced securitization levels.Costs and expenses were higher in the quarter due to higher salary expense,increased REO expense and higher support services from affiliates, partiallyoffset by a lower estimate of exposure relating to accrued finance chargesassociated with certain loan restructures. On a year-to-date basis, costs andexpenses were flat as higher salary expense and higher support services fromaffiliates were offset by lower REO expenses as well as a lower estimate ofexposure relating to accrued finance charges associated with certain loanrestructures. Net interest income and net interest margin, annualized, decreased during boththe three and nine month periods ended September 30, 2005 compared to theyear-ago periods primarily due to a shift in mix to lower 40 HSBC Finance Corporation-------------------------------------------------------------------------------- yielding real estate secured receivables resulting from significantly lowerlevels of private label receivables primarily resulting from the sale of ourprivate label portfolio in December 2004 as well as organic growth of realestate secured receivables. Also contributing to the decrease were lower yieldson real estate secured and auto finance receivables as a result of competitivepressure on pricing and product expansion into near-prime consumer segments, aswell as the run-off of higher yielding real estate secured receivables,including second lien loans, largely due to refinance activity. Our auto financebusiness experienced lower yields as we have targeted higher credit qualitycustomers. Although higher credit quality receivables generate lower yields,such receivables are expected to result in lower operating costs, delinquencyratios and charge-off. The decreases in yield for our consumer segmentreceivable portfolio were partially offset by higher pricing on our variablerate products. A higher cost of funds due to a rising interest rate environmentalso contributed to the decrease in net interest margin. Our managed basis provision for credit losses, which includes both provision forowned basis receivables and over-the-life provision for receivables servicedwith limited recourse, decreased during the year-to-date period due to lower netcharge-off levels as a result of improved credit quality and the impact of thesale of the domestic private label receivable portfolio in December 2004, aswell as lower securitization levels. We have experienced lower dollars of netcharge-offs in our owned portfolio during the three and nine month periods endedSeptember 30, 2005 due to the sale of $12.2 billion of owned domestic privatelabel receivables in December 2004 and as a result of improved credit quality.These factors more than offset increased requirements associated with receivablegrowth and the impact from Katrina, as discussed more fully below, and hasresulted in a decrease to our owned provision for credit losses in theyear-to-date period and, excluding the increase associated with Katrina, in thethree month period. Over-the-life provision for credit losses for securitizedreceivables recorded in any given period reflect the level and product mix ofsecuritizations in that period. Subsequent charge-offs of securitizedreceivables result in a decrease in the over-the-life reserves without anycorresponding increase to managed loss provision. The combination of thesefactors resulted in a decrease in managed loss reserves and managed lossprovision during the year. Managed loss provision was higher, however, in thequarter as the prior year quarter's provision for receivables serviced withlimited recourse reflects a higher benefit from the release of over-the-livereserves due to lower securitization levels which was offset by higheramortization of prior period gains. In the three months ended September 30,2005, the provision for credit losses was greater than net charge-offs by $129million while net charge-offs were greater than the provision for credit lossesby $137 million for the year-to-date period. For 2004, we decreased managed lossreserves as net charge-offs were greater than the provision for credit losses by$414 million and $895 million in the year-ago periods. Our managed basis provision for credit losses also reflects an estimate ofincremental credit loss exposure relating to Katrina. Based on the informationcurrently available, we have recorded an incremental provision for credit lossesof $125 million at the Consumer Segment. As more information becomes availablerelating to the financial condition of our affected customers, the physicalcondition of the collateral for loans which are secured by real estate and theresultant impact on customer payment patterns, we will continue to review ourestimate of credit loss exposure relating to Katrina and any adjustments will bereported in earnings when they become known. In an effort to assist ourcustomers affected by the disaster, we have initiated various programs includingextended payment arrangements and interest and fee waivers for up to 90 daysdepending upon customer circumstances. These interest and fee waivers were notmaterial during the quarter for the Consumer Segment. Managed receivables increased 8 percent to $102.7 billion at September 30, 2005as compared to $95.3 billion at June 30, 2005. Growth during the quarter wasdriven by higher real estate secured receivables in both our correspondent andbranch-based consumer lending businesses. Real estate secured receivable levelsdo not include direct purchases of receivables by HSBC Bank USA fromcorrespondents totaling $.4 billion, a portion of which we otherwise would havepurchased. Also contributing to the increase was $.3 billion from a portfolioacquisition program during the third quarter of 2005. We also experienced growthin auto finance receivables as a result of newly originated loans acquired fromour dealer network as well as through the 41 HSBC Finance Corporation-------------------------------------------------------------------------------- consumer direct loan program. Personal non-credit card receivables alsoincreased resulting from the success of several large direct mail campaigns thatoccurred during the quarter. Compared to September 30, 2004, managed receivables increased 7 percent. Therate of increase in managed receivables was impacted by the sale of $15.6billion in domestic private label receivables to HSBC Bank USA in December 2004.Had this sale not taken place, managed receivables would have increased by $22.4billion or 23 percent at September 30, 2005. We continued to experience stronggrowth in our real estate secured portfolio in the third quarter of 2005. Realestate secured receivable levels do not include $2.1 billion of correspondentreceivables purchased directly by HSBC Bank USA since September 30, 2004, aportion of which we otherwise would have purchased. Growth in real estatesecured receivables was also supplemented by purchases from a singlecorrespondent relationship which totaled $1.9 billion since September 30, 2004.Also contributing to the increase were purchases of $2.0 billion from aportfolio acquisition program since the prior year quarter. Our auto financeportfolio also reported strong growth as a result of newly originated loansacquired from our dealer network as well as increases through the consumerdirect loan program. Personal non-credit card receivables increased from theyear-ago period as we began to increase the availability of this productdomestically in the second half of 2004 as a result of the improving U.S.economy. The increase in return on average managed assets reflects the higher net incomediscussed above. Additionally, for both the three and nine month periods endedSeptember 30, 2005, ROMA reflects higher average managed assets. In accordance with Federal Financial Institutions Examination Council ("FFIEC")guidance, in the first quarter of 2006, the required minimum monthly paymentamounts for domestic private label credit card accounts will change. Aspreviously discussed, we sell new domestic private label receivable originationsto HSBC Bank USA on a daily basis. Estimates of the potential impact to thebusiness are based on numerous assumptions and take into account a number offactors which are difficult to predict, such as changes in customer behavior,which will not be fully known or understood until the changes are implemented.Based on current estimates, we anticipate that these changes will reduce thepremium associated with these daily sales beginning in 2006. It is not expectedthis reduction will have a material impact on either the results of the ConsumerSegment or our consolidated results. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HSBC Holdings