14th Nov 2005 11:41
HSBC Holdings PLC14 November 2005 PART 2 CREDIT CARD SERVICES SEGMENT The following table summarizes results for ourCredit Card Services segment. INCREASE (DECREASE) -------------------THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income............................................... $ 138 $ 134 $ 4 3.0%Net interest income...................................... 531 519 12 2.3Securitization related revenue........................... (42) (77) 35 45.5Fee and other income..................................... 554 460 94 20.4Intersegment revenues.................................... 5 6 (1) (16.7)Provision for credit losses.............................. 465 364 101 27.7Total costs and expenses................................. 360 328 32 9.8Receivables.............................................. 19,971 18,509 1,462 7.9Assets................................................... 19,710 20,620 (910) (4.4)Net interest margin, annualized.......................... 10.27% 10.24% - -Return on average managed assets......................... 2.80 2.60 - - 42 HSBC Finance Corporation-------------------------------------------------------------------------------- INCREASE (DECREASE) -------------------NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income................................................. $ 452 $ 391 $ 61 15.6%Net interest income........................................ 1,545 1,561 (16) (1.0)Securitization related revenue............................. (161) (222) 61 27.5Fee and other income....................................... 1,465 1,271 194 15.3Intersegment revenues...................................... 16 20 (4) (20.0)Provision for credit losses................................ 1,120 1,105 15 1.4Total costs and expenses................................... 1,018 890 128 14.4Net interest margin, annualized............................ 10.27% 10.10% - -Return on average managed assets........................... 3.10 2.50 - - Our Credit Card Services segment reported higher net income during both thethree and nine month periods ended September 30, 2005. The increase in netincome during both periods was primarily due to higher fee and other incomepartially offset by higher provision for credit losses and higher costs andexpenses. Increases in fee and other income resulted from portfolio growth andhigher interchange fees, as well as increased gains from the daily sales of newvolume related to the MasterCard/Visa account relationships purchased from HSBCBank USA in July 2004. Higher costs and expenses were to support receivablegrowth and increases in marketing expenses. The increase in marketing expenseswas due to higher non-prime marketing expense and investments in new marketinginitiatives and for the year-to-date period, changes in contractual marketingresponsibilities in July 2004 associated with the domestic GM co-branded creditcard. The managed basis provision for credit losses increased in both periods.Excluding, in the third quarter of 2005, the credit loss provision recordedrelating to Katrina and the additional provision related to the increasedbankruptcy filings, our provision for credit losses declined in both periods dueto improved credit quality, partially offset by receivable growth. We increasedmanaged loss reserves by recording loss provision greater than net charge-off of$154 million in the third quarter of 2005 and $127 million year-to-date,compared to increasing managed loss reserves by recording loss provision greaterthan net charge-off of $15 million in the third quarter of 2004 and decreasingmanaged loss reserves year-to-date September 30, 2004 by recording lossprovision less than net charge-off of $6 million. We have been maintainingcredit loss reserves in anticipation of the impact the new bankruptcylegislation 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 additional$100 million credit loss provision relating to these filings in the thirdquarter. We currently expect that the higher levels of personal bankruptcyfilings we have been experiencing will result in significantly higher levels ofnet charge-offs in our domestic MasterCard/Visa portfolio during the fourthquarter of 2005. We believe that a portion of this increase is an accelerationof net charge-offs that would otherwise have been experienced in future periods.We will continue to evaluate the impact of the spike in bankruptcy filings onour credit loss reserves and currently believe that this could result in areduction in the allowance in the fourth quarter as charge-offs occur. 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 $55 million at the Credit Card Services Segment. As more information becomesavailable relating to the financial condition of our affected customers 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 days orlonger depending upon customer circumstances. These interest and fee waiverswere not material during the quarter for the Credit Card Services Segment. Net interest income, which increased during the current quarter, decreased inthe year-to-date period. The decrease reflects higher interest expense as aresult of a rising interest rate environment and lower investment 43 HSBC Finance Corporation-------------------------------------------------------------------------------- income due to lower investment levels, partially offset by higher finance andother interest income on our receivables. The increase in finance and otherinterest income on our receivables during the current quarter reflects increasedpricing on variable yield products and higher receivable balances partiallyoffset by higher interest expense. Net interest margin increased compared to theyear-ago periods primarily due to increases in subprime receivable levels,higher pricing on variable rate products as well as other repricing initiatives,lower average interest earning assets due to lower levels of low yieldinginvestment securities and the impact of lower amortization from receivableorigination costs resulting from changes in the contractual marketingresponsibilities in July 2004 associated with the GM co-branded credit card,partially offset by higher interest expense. Although our subprime receivablestend to have smaller balances, they generate higher returns both in terms of netinterest margin and fee income. Net interest margin for both periods waspositively impacted by the disposal of certain low yielding investmentsecurities as a result of the elimination of investments dedicated to our creditcard bank resulting from our acquisition by HSBC. Managed receivables of $20.0 billion increased 2 percent compared to $19.6billion at June 30, 2005. Compared to September 30, 2004, managed receivablesincreased 8 percent. The increase during both periods reflects organic growth inour HSBC branded prime, Union Privilege and non-prime portfolios, which waspartially offset by the continued decline in certain older acquired portfolios. The increase in ROMA in both periods reflects lower average managed assets aswell as the higher net income discussed above. The decrease in average managedassets is due to lower investment securities during 2005 as a result of theelimination of investments dedicated to our credit card bank resulting from ouracquisition by HSBC. In accordance with FFIEC guidance, our credit card services business has adopteda plan to phase in changes to the required minimum monthly payment amount andlimit certain fee billings for non-prime credit card accounts. Theimplementation of these new requirements began in July 2005 with therequirements to be fully phased in by December 31, 2005. Estimates of thepotential impact to the business are based on numerous assumptions and take intoaccount a number of factors which are difficult to predict, such as changes incustomer behavior, which will not be fully known or understood until the changeshave been in place for a period of time. It is anticipated that the changes willresult in decreased fee income and fluctuations in the provision for creditlosses beginning in 2006. Although we do not expect this will have a materialimpact on our consolidated results, the impact will be material to the CreditCard Services Segment in 2006. As previously disclosed, we sold our domestic private label portfolio to HSBCBank USA in December 2004. We and HSBC Bank USA will consider potentialtransfers of some of our MasterCard and Visa receivables to HSBC Bank USA in thefuture based upon continuing evaluation of capital and liquidity at each entity. INTERNATIONAL SEGMENT The following table summarizes results for ourInternational segment: INCREASE (DECREASE) -------------------THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %-------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income............................................... $ 12 $ 18 $(6) (33.3)%Net interest income...................................... 228 185 43 23.2Securitization related revenue........................... 2 (87) 89 100+Fee and other income..................................... 141 130 11 8.5Intersegment revenues.................................... 4 4 - -Provision for credit losses.............................. 137 19 118 100+Total costs and expenses................................. 216 181 35 19.3Receivables.............................................. 12,564 11,833 731 6.2Assets................................................... 13,574 12,770 804 6.3Net interest margin annualized........................... 7.22% 6.29% - -Return on average managed assets......................... .36 .57 - - 44 HSBC Finance Corporation-------------------------------------------------------------------------------- INCREASE (DECREASE) --------------------NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 AMOUNT %------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net (loss) income........................................... $(11) $ 80 $(91) (100+)%Net interest income......................................... 680 583 97 16.6Securitization related revenue.............................. 17 (92) 109 100+Fee and other income........................................ 412 369 43 11.7Intersegment revenues....................................... 11 10 1 10.0Provision for credit losses................................. 468 207 261 100+Total costs and expenses.................................... 649 527 122 23.1Net interest margin annualized.............................. 7.05% 6.76% - -Return on average managed assets............................ (.10) .86 - - Our International segment reported lower net income for the three months endedSeptember 30, 2005 and a net loss for the year-to-date period. The lower netincome and year-to-date net loss reflect higher provision for credit losses andhigher costs and expenses, partially offset by higher net interest income andincreased fee and other income. Applying constant currency rates, which uses theaverage rate of exchange for the three and nine month periods ended September30, 2004 to translate current period net income, net income as reported for thecurrent quarter would not have been materially different and the net loss higherby $2 million year-to-date. Net interest income increased during both periods due to higher receivablelevels, partially offset by higher cost of funds in the U.K. for theyear-to-date period due to a rising interest rate environment. Net interestmargin, annualized, increased during both the three and nine month periods dueto increased yields on credit cards due to repricing initiatives during thecurrent quarter and interest-free balances not being promoted as strongly as inthe past, partially offset by run-off of higher yielding receivables,competitive pricing pressures holding down yields on our personal loans in theU.K. and, for the year-to-date period, increased cost of funds. Securitizationrelated revenue increased during the quarter and year-to-date period due tolower amortization of prior period gains as a result of reduced securitizationlevels and, for the year-to-date period, higher levels of receivablereplenishments to support previously issued securities in the U.K. as well asthe recognition of residual balances associated with certain expiredsecuritization transactions. Fee and other income increased primarily due tohigher insurance revenues. Managed basis provision for credit losses increasedprimarily due to higher delinquency and charge-off levels in the U.K. due to ageneral increase in consumer bad debts in the U.K. market, including increasedbankruptcies. We increased managed loss reserves by recording loss provisiongreater than net charge-offs of $3 million for the current quarter and $111million year-to-date. We decreased managed loss reserves by recording lossprovision less than net charge-off of $74 million during the third quarter of2004 and $52 million for that year-to-date period. Total costs and expensesincreased primarily due to higher expenses to support receivable growth andcollection activities, higher policyholder benefits because of increasedinsurance sales volumes, and, for the nine month period, costs associated withbranch closures in the U.K. Compared to June 30, 2005, managed receivables were unchanged due to lowerretail sales volume following a slow down in retail consumer spending in theU.K. Compared to September 30, 2004, managed receivables increased 6 percent dueto strong growth in our real estate secured, personal non-credit card andMasterCard/ Visa portfolios as well as growth from the introduction of an autofinance program in Canada in the third quarter of 2004. Applying constantcurrency rates, managed receivables at September 30, 2005 would not have beenmaterially different using June 30, 2005 or September 30, 2004 exchange rates. The decrease in ROMA in both the three and nine month periods ended September30, 2005 reflects higher provision for credit losses due to higher delinquencyand charge-off levels in the U.K. and higher costs and expenses, as well ashigher average managed assets primarily due to receivable growth since September30, 2004. 45 HSBC Finance Corporation-------------------------------------------------------------------------------- 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 our 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. Reconciliation of Managed Basis Segment Results As discussed above, we monitorour operations on a managed basis. Therefore, an adjustment is required toreconcile the managed financial information to our reported financialinformation in our consolidated financial statements. This adjustmentreclassifies net interest income, fee income and loss provision intosecuritization related revenue. See Note 12, "Business Segments," in theaccompanying consolidated financial statements for a reconciliation of ourmanaged basis segment results to managed basis and owned basis consolidatedtotals. CREDIT QUALITY-------------------------------------------------------------------------------- CREDIT LOSS RESERVES We maintain credit loss reserves to cover probable losses of principal, interestand fees, including late, overlimit and annual fees. Credit loss reserves arebased on a range of estimates and are intended to be adequate but not excessive.We estimate probable losses for owned consumer receivables using a roll ratemigration analysis that estimates the likelihood that a loan will progressthrough the various stages of delinquency, or buckets, and ultimatelycharge-off. This analysis considers delinquency status, loss experience andseverity and takes into account whether loans are in bankruptcy, have beenrestructured or rewritten, or are subject to forbearance, an external debtmanagement plan, hardship, modification, extension or deferment. Our credit lossreserves also take into consideration the loss severity expected based on theunderlying collateral, if any, for the loan in the event of default. Delinquencystatus may be affected by customer account management policies and practices,such as the restructure of accounts, forbearance agreements, extended paymentplans, modification arrangements, external debt management programs, loanrewrites and deferments. If customer account management policies, or changesthereto, shift loans from a "higher" delinquency bucket to a "lower" delinquencybucket, this will be reflected in our roll rate statistics. To the extent thatrestructured accounts have a greater propensity to roll to higher delinquencybuckets, this will be captured in the roll rates. Since the loss reserve iscomputed based on the composite of all of these calculations, this increase inroll rate will be applied to receivables in all respective delinquency buckets,which will increase the overall reserve level. In addition, loss reserves onconsumer receivables are maintained to reflect our judgment of portfolio riskfactors that may not be fully reflected in the statistical roll ratecalculation. Risk factors considered in establishing loss reserves on consumerreceivables include recent growth, product mix, bankruptcy trends, geographicconcentrations, economic conditions, portfolio seasoning, account managementpolicies and practices, current levels of charge-offs and delinquencies andother items which can affect consumer payment patterns on outstandingreceivables, such as the impact of Katrina. While our credit loss reserves are available to absorb losses in the entireportfolio, we specifically consider the credit quality and other risk factorsfor each of our products. We recognize the different inherent losscharacteristics in each of our products as well as customer account managementpolicies and practices and risk management/collection practices. Charge-offpolicies are also considered when establishing loss reserve requirements toensure the appropriate reserves exist for products with longer charge-offperiods. We also consider key ratios such as reserves to nonperforming loans andreserves as a percent of net annualized charge-offs in developing our lossreserve estimates. Loss reserve estimates are reviewed periodically andadjustments are reported in earnings when they become known. As these estimatesare influenced by factors outside of our control, such as consumer paymentpatterns and economic conditions, there is uncertainty inherent in theseestimates, making it reasonably possible that they could change. See Note 4,"Receivables," in the 46 HSBC Finance Corporation-------------------------------------------------------------------------------- accompanying consolidated financial statements for receivables by product typeand Note 5, "Credit Loss Reserves," for an analysis of changes in the creditloss reserves. The following table summarizes owned basis credit loss reserves: SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Owned credit loss reserves................................ $4,220 $3,756 $3,953Reserves as a percent of: Receivables............................................. 3.28% 3.16% 3.71% Net charge-offs(1)...................................... 117.0 111.3 102.0 Nonperforming loans..................................... 110.0 107.6 104.1 --------------- (1) Quarter-to-date, annualized. Owned credit loss reserves at September 30, 2005 increased as compared to June30, 2005 and September 30, 2004 as the provision for owned credit losses duringthe current quarter was $459 million greater than net charge-offs reflectinghigher levels of owned receivables and, as previously discussed, additionalprovision due to increases in bankruptcy filings in both our domestic andforeign operations, which largely impacts our unsecured consumer products, andthe additional credit loss reserves resulting from Katrina. These increases werepartially offset by the impact of stable credit quality, the release of $505million of owned credit loss reserves in December 2004 associated with the solddomestic private label portfolio as well as a shift in mix to higher levels ofsecured receivables. During the three months ended September 30, 2004, provisionfor owned credit losses was $154 million greater than net charge-offs. Reservelevels at September 30, 2005 reflect the factors discussed above. The trends inthe reserve ratios reflect the fact that we are experiencing a shift in our loanportfolio to higher credit quality receivables, particularly real estate securedand auto finance receivables, partially offset by the impact of additionalcredit loss reserves for Katrina and increased bankruptcy filings. For securitized receivables, we also record a provision for estimated probablelosses that we expect to incur under the recourse provisions. The followingtable summarizes managed credit loss reserves: SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Managed credit loss reserves.............................. $4,571 $4,281 $5,199Reserves as a percent of: Receivables............................................. 3.37% 3.35% 4.11% Net charge-offs(1)...................................... 108.6 104.1 95.4 Nonperforming loans..................................... 110.3 110.2 111.1 --------------- (1) Quarter-to-date, annualized. Managed credit loss reserves at September 30, 2005 also increased compared toJune 30, 2005 as the increases in our owned credit loss reserves as discussedabove were offset by lower reserves on securitized receivables due to run-off.Managed credit loss reserves at September 30, 2005 decreased as compared toSeptember 30, 2004 as a result of improvements in credit quality, changes insecuritization levels and the sale of our domestic private label receivableportfolio in December 2004 as previously discussed, partially offset byadditional reserves resulting from receivable growth and Katrina and increasedbankruptcy filings. See "Basis of Reporting" for additional discussion on the use of non-GAAPfinancial measures and "Reconciliations to GAAP Financial Measures" forquantitative reconciliations of the non-GAAP financial measures to thecomparable GAAP basis financial measure. 47 HSBC Finance Corporation-------------------------------------------------------------------------------- DELINQUENCY - OWNED BASIS The following table summarizes two-months-and-over contractual delinquency (as apercent of consumer receivables): SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004---------------------------------------------------------------------------------------------------- Real estate secured....................................... 2.51% 2.56% 3.27%Auto finance.............................................. 2.09 2.08 1.81MasterCard/Visa........................................... 4.46 4.14 5.84Private label............................................. 5.22 4.91 4.72Personal non-credit card.................................. 9.18 8.84 8.83 ---- ---- ----Total..................................................... 3.78% 3.73% 4.43% ==== ==== ==== Total owned delinquency as a percentage of consumer receivables increased 5basis points compared to the prior quarter. The increase in the delinquencyratio is primarily due to seasonal increases in delinquency in the thirdquarter, partially offset by the continuing strong economy, better underwritingand improved quality of originations. The overall decrease in the delinquencyratio of our real estate secured portfolio reflects receivable growth, therecent trend of better quality in new originations and a continuing strongeconomy. The increase in the MasterCard/Visa delinquency ratio reflects aseasonal increase in delinquencies during the third quarter, partially offset bychanges in receivable mix resulting from lower securitization levels. Theincreases in the delinquency ratio in our private label receivables (whichincludes our foreign private label portfolio that was not sold to HSBC Bank USAin December 2004) and our personal non-credit card portfolio also reflects theincreased bankruptcy filings in both the United States and the U.K. The increasein personal non-credit card delinquencies was partially offset by improvedcollection efforts and strong economic conditions in the U.S. Compared to a year ago, total delinquency decreased 65 basis points generally asa result of improvements in the U.S. economy, better underwriting, improvedcredit quality as well as higher levels of real estate secured receivables. Asdiscussed above, the increase in delinquency in our private label receivables(which includes our foreign private label portfolio that was not sold to HSBCBank USA in December 2004) and our personal non-credit card portfolio reflectsthe general increase in consumer bad debts in the U.K. market, includingincreased bankruptcies. The increase in the personal non-credit card portfolioalso reflects the increase in bankruptcy filings in the United States due to newbankruptcy legislation in the United States which became effective in October2005. Delinquency levels at September 30, 2004 include the domestic privatelabel portfolio which contributed approximately 5 basis points to totaldelinquency. 48 HSBC Finance Corporation-------------------------------------------------------------------------------- NET CHARGE-OFFS OF CONSUMER RECEIVABLES - OWNED BASIS The following table summarizes net charge-offs of consumer receivables (as apercent, annualized, of average consumer receivables): SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004---------------------------------------------------------------------------------------------------- Real estate secured....................................... .75% .78% 1.19%Auto finance.............................................. 3.25 2.61 3.66MasterCard/Visa........................................... 6.24 6.93 8.50Private label............................................. 5.35 4.36 4.79Personal non-credit card.................................. 8.01 7.77 9.50 ---- ---- ----Total..................................................... 2.93% 2.93% 3.77% ==== ==== ====Real estate secured net charge-offs and REO expense as a percent of average real estate secured receivables...... .88% .84% 1.31% Total net charge-offs as a percent, annualized, of average consumer receivableshas remained flat during the quarter ended September 30, 2005 compared to thequarter ended June 30, 2005 as the lower delinquency levels we have beenexperiencing due to an improving economy and which had a positive impact oncharge-offs, were offset by an increase in bankruptcy filings due to newbankruptcy legislation in the United States as well as increased bankruptcyfilings in the U.K. Our real estate secured portfolio experienced a decrease innet charge-offs reflecting the recent trend of better quality in neworiginations and continuing strong economic conditions. The increase in autofinance net charge-offs reflects a seasonal pattern of higher charge-offs in thethird quarter. The decrease in MasterCard/Visa charge-offs reflects changes inreceivable mix resulting from lower securitization levels and continued improvedcredit quality. The increase in net charge-offs for the private label portfolioreflects the general increase in consumer bad debts in the U.K. markets,including increased bankruptcies. The increase in net charge-offs in thepersonal non-credit card portfolio reflects the increase in bankruptcy filings,as discussed above. Total net charge-offs as a percentage, annualized, of average consumerreceivables for the current quarter decreased from the September 2004 netcharge-off levels. Principal factors behind the decrease were improvedcollections and better underwriting, including both improved modeling andimproved credit quality of new originations, stable economic conditions, as wellas the sale of our domestic private label portfolio in December 2004. These werepartially offset by the increased bankruptcy filings discussed above. TheSeptember 2004 net charge-off ratio includes the domestic private labelportfolio which contributed 14 basis points to the ratio. The decrease in autofinance net charge-offs also reflects improved used auto prices which resultedin lower loss severities. OWNED NONPERFORMING ASSETS SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Nonaccrual receivables.................................... $3,273 $3,008 $2,891Accruing consumer receivables 90 or more days delinquent.............................................. 563 482 905Renegotiated commercial loans............................. -- 1 1 ------ ------ ------Total nonperforming receivables........................... 3,836 3,491 3,797Real estate owned......................................... 462 459 601 ------ ------ ------Total nonperforming assets................................ $4,298 $3,950 $4,398 ====== ====== ======Credit loss reserves as a percent of nonperforming receivables............................................. 110.0% 107.6% 104.1% 49 HSBC Finance Corporation-------------------------------------------------------------------------------- Compared to June 30, 2005, the increase in total nonperforming receivables isprimarily attributable to seasonal trends in delinquency as well as increasedbankruptcy filings experienced in both our domestic and foreign operations.Compared to September 30, 2004, the decrease in total nonperforming assets isdue to improved credit quality, continued improvement in the economy, collectionefforts as well as the impact of the bulk sale of our domestic private labelreceivable portfolio in December 2004. Consistent with industry practice,accruing consumer receivables 90 or more days delinquent includes domesticMasterCard and Visa and for September 30, 2004, our domestic private labelcredit card receivables. ACCOUNT MANAGEMENT POLICIES AND PRACTICES Our policies and practices for the collection of consumer receivables, includingour customer account management policies and practices, permit us to reset thecontractual delinquency status of an account to current, based on indicia orcriteria which, in our judgment, evidence continued payment probability. Suchpolicies and practices vary by product and are designed to manage customerrelationships, maximize collection opportunities and avoid foreclosure orrepossession if reasonably possible. If the account subsequently experiencespayment defaults, it will again become contractually delinquent. The tables below summarize approximate restructuring statistics in our managedbasis domestic portfolio. We report our restructuring statistics on a managedbasis only because the receivables that we securitize are subject tounderwriting standards comparable to our owned portfolio, are generally servicedand collected without regard to ownership and result in a similar credit lossexposure for us. As previously reported, we use certain assumptions andestimates to compile our restructure statistics. We continue to enhance ourability to capture and segment restructure data across all business units. Whencomparing restructuring statistics from different periods, the fact that ourrestructure policies and practices will change over time, that exceptions aremade to those policies and practices, and that our data capture methodologieshave been enhanced, should be taken into account. 50 HSBC Finance Corporation-------------------------------------------------------------------------------- TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD - DOMESTIC PORTFOLIO(1)(MANAGED BASIS) SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005(3) 2005(3) 2004---------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Never restructured........................................ 88.9% 88.0% 86.5%Restructured: Restructured in the last 6 months....................... 4.0 4.2 4.8 Restructured in the last 7-12 months.................... 2.9 3.3 3.6 Previously restructured beyond 12 months................ 4.2 4.5 5.1 ------- ------- ------- Total ever restructured(2).............................. 11.1 12.0 13.5 ------- ------- -------Total..................................................... 100.0% 100.0% 100.0% ======= ======= =======TOTAL RESTRUCTURED BY PRODUCT - DOMESTIC PORTFOLIO(1)(MANAGED BASIS)Real estate secured....................................... $ 8,205 $ 8,277 $ 8,895Auto finance.............................................. 1,593 1,585 1,420MasterCard/Visa........................................... 484 526 628Private label(3).......................................... 24 24 756Personal non-credit card.................................. 3,353 3,396 3,688 ------- ------- -------Total..................................................... $13,659 $13,808 $15,387 ======= ======= =======(AS A PERCENT OF MANAGED RECEIVABLES)Real estate secured....................................... 10.9% 12.0% 15.8%Auto finance.............................................. 14.0 14.9 14.4MasterCard/Visa........................................... 2.5 2.7 3.5Private label(3).......................................... 7.0 7.1 5.0Personal non-credit card.................................. 20.6 21.6 24.3 ------- ------- -------Total(2).................................................. 11.1% 12.0% 13.5% ======= ======= ======= --------------- (1) Excludes foreign businesses, commercial and other. (2) Total including foreign businesses was 10.5 percent at September 30, 2005, 11.3 percent at June 30, 2005, and 12.6 percent at September 30, 2004. (3) Reflects consumer lending retail sales contracts which have historically been classified as private label. See "Credit Quality Statistics" for further information regarding owned basisand managed basis delinquency, charge-offs and nonperforming loans. The amount of domestic and foreign managed receivables in forbearance,modification, credit card services approved consumer credit counselingaccommodations, rewrites or other customer account management techniques forwhich we have reset delinquency and that is not included in the restructured ordelinquency statistics was approximately $.4 billion or .3 percent of managedreceivables at September 30, 2005, $.4 billion or .3 percent of managedreceivables at June 30, 2005 and $.5 billion or .4 percent of managed assets atSeptember 30, 2004. In addition to the above, we have granted an initial 30 or 60 day paymentdeferral (based on product) to customers living in the FEMA designatedIndividual Assistance disaster areas. This deferral may be extended for a periodof up to 90 days or longer based on a customer's specific circumstances,consistent with our natural disaster policies. In certain cases thesearrangements have resulted in a customer's delinquency status 51 HSBC Finance Corporation-------------------------------------------------------------------------------- being reset by 30 days. These extended payment arrangements totaled $.7 billionor .4% of managed receivables at September 30, 2005 and are not reflected asrestructures in the table above or included in the other customer accountmanagement techniques described in the paragraph above. LIQUIDITY AND CAPITAL RESOURCES-------------------------------------------------------------------------------- We continue to focus on balancing our use of affiliate and third-party fundingsources to minimize funding expense while maximizing liquidity. As discussedbelow, we supplemented unsecured debt issuance during the nine months endedSeptember 30, 2005 with proceeds from the sale of our domestic private labelreceivable portfolio to HSBC Bank USA in December 2004, debt issued toaffiliates, higher levels of commercial paper and the issuance of Series Bpreferred stock. Because we are now a subsidiary of HSBC, our credit spreads relative toTreasuries have tightened compared to those we experienced during the monthsleading up to the announcement of our acquisition by HSBC. Primarily as a resultof these tightened credit spreads, we recognized cash funding expense savings ofapproximately $407 million in the nine months ended September 30, 2005 ($155million in the three months ended September 30, 2005) and approximately $235million in the nine months ended September 30, 2004 ($95 million in the threemonths ended September 30, 2004) compared to the funding costs we would haveincurred using average spreads and funding mix from the first half of 2002. Itis anticipated that these tightened credit spreads and other funding synergiesincluding asset transfers will eventually enable HSBC to realize annual cashfunding expense savings, including external fee savings, in excess of $1 billionper year as our existing term debt matures over the course of the next fewyears. The portion of these savings to be realized by HSBC Finance Corporationwill depend in large part upon the amount and timing of various initiativesbetween HSBC Finance Corporation and other HSBC subsidiaries. Debt due to affiliates and other HSBC related funding are summarized in thefollowing table: SEPTEMBER 30, DECEMBER 31, 2005 2004------------------------------------------------------------------------------------------ (IN BILLIONS) Debt issued to HSBC subsidiaries: Drawings on bank lines in the U.K......................... $ 6.6 $ 7.5 Term debt................................................. 11.0 6.0 Preferred securities issued by Household Capital Trust VIII................................................... .3 .3 ----- ----- Total debt issued to HSBC subsidiaries.................... 17.9 13.8 ----- -----Debt issued to HSBC clients: Euro commercial paper..................................... 3.4 2.6 Term debt................................................. 1.2 .8 ----- ----- Total debt issued to HSBC clients......................... 4.6 3.4Preferred stock held by HSBC Investments (North America) Inc. ..................................................... 1.1 1.1Cash received on bulk and subsequent sales of domestic private label receivables to HSBC Bank USA, net (cumulative).............................................. 14.5 12.4Real estate secured receivable activity with HSBC Bank USA: Cash received on sales (cumulative)....................... 3.7 3.7 Direct purchases from correspondents (cumulative)......... 4.2 2.8 Run-off of real estate secured receivable activity with HSBC Bank USA.......................................... (2.9) (1.5) ----- -----Total real estate secured receivable activity with HSBC Bank USA....................................................... 5.0 5.0 ----- -----Total HSBC related funding.................................. $43.1 $35.7 ===== ===== 52 HSBC Finance Corporation-------------------------------------------------------------------------------- At September 30, 2005, funding from HSBC, including debt issues to HSBCsubsidiaries and clients and preferred stock held by HSBC Investments (NorthAmerica) Inc. ("HINO") but excluding cash received on asset sales to HSBCsubsidiaries, represented 18 percent of our total managed debt and preferredstock funding. At December 31, 2004, funding from HSBC, including debt issues toHSBC subsidiaries and clients and preferred stock held by HINO but excludingcash received on asset sales to HSBC subsidiaries, represented 15 percent of ourtotal managed debt and preferred stock funding. In addition to the HSBC related funding received, we have extended lines ofcredit and promissory notes to other HSBC subsidiaries at interest ratescomparable to third-party rates for notes with similar terms. At September 30,2005, $1.9 billion was outstanding under these agreements compared to $.6billion outstanding at December 31, 2004. Proceeds from the December 2004 domestic private label bulk receivable sale toHSBC Bank USA of $12.4 billion were used to pay down short-term domesticborrowings, including outstanding commercial paper balances, and to fundoperations. Excess liquidity from the sale was used to temporarily fundavailable for sale investments at December 31, 2004. As of September 30, 2005, we had revolving credit facilities of $2.5 billionfrom HSBC domestically and $10 billion from HSBC subsidiaries in the U.K. Therehave been no draws on the domestic line. At September 30, 2005, $6.6 billion wasoutstanding under the U.K. lines. We had derivative contracts with a notionalvalue of $64.3 billion, or approximately 96 percent of total derivativecontracts, outstanding with HSBC affiliates at September 30, 2005. We hadderivative contracts with a notional value of $62.6 billion, or approximately 87percent of total derivative contracts, outstanding with HSBC affiliates atDecember 31, 2004. SECURITIES totaled $3.9 billion at September 30, 2005 and $3.6 billion atDecember 31, 2004. Securities purchased under agreements to resell totaled $181million at September 30, 2005 and $2.7 billion at December 31, 2004. Interestbearing deposits with banks totaled $398 million at September 30, 2005 and $603million at December 31, 2004. Our total investment balances at December 31, 2004were high as a result of the timing of the bulk sale of the domestic privatelabel receivable portfolio to HSBC Bank USA on December 29, 2004. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS totaled $11.6 billion at September30, 2005 and $9.0 billion at December 31, 2004. The increase at September 30,2005 was a result of a plan to increase our commercial paper issuances as aresult of lowering the coverage ratio of bank credit facilities to outstandingcommercial paper from 100% to 80%. This plan also assumes that the combinationof bank credit facilities and undrawn committed conduit facilities will, at alltimes, exceed 115% of outstanding commercial paper. This plan, which wasreviewed with the relevant rating agencies, resulted in an increase in ourmaximum outstanding commercial paper balance to in excess of $12.0 billion.Additionally, at December 31, 2004, we were carrying lower levels of commercialpaper as the proceeds from the sale of the domestic private label loan portfolioto HSBC Bank USA were used to reduce the outstanding balances. Included in thistotal was outstanding Euro commercial paper sold to customers of HSBC of $3.4billion at September 30, 2005 and $2.6 billion at December 31, 2004. LONG TERM DEBT (with original maturities over one year) increased to $93.2billion at September 30, 2005 from $85.4 billion at December 31, 2004.Significant third party issuance during the nine months ended September 30, 2005included the following: - $7.6 billion of domestic and foreign medium-term notes - $4.4 billion of foreign currency-denominated bonds - $1.3 billion of InterNotes(SM) (retail-oriented medium-term notes) - $9.6 billion of global debt - $5.4 billion of securities backed by real estate secured, auto finance, and MasterCard/Visa receivables. For accounting purposes, these transactions were structured as secured financings. 53 HSBC Finance Corporation-------------------------------------------------------------------------------- In June 2005, we redeemed the junior subordinated notes issued to the HouseholdCapital Trust V with an outstanding principal balance of $309 million. PREFERRED SHARES In June 2005, we issued 575,000 shares of Series B PreferredStock for $575 million. Dividends on the Series B Preferred Stock arenon-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. In August 2005, we declared an $8 million dividend on theSeries B Preferred Stock 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. COMMON EQUITY We currently intend to issue additional common equity to HINO inexchange for the Series A Cumulative Preferred Stock on or before December 15,2005. In addition, in connection with our pending purchase of Metris, wecurrently intend to issue approximately $1.2 billion in additional common equityto HINO to fund a portion of the $1.6 billion purchase price. The acquisition ofMetris is subject to certain conditions and is anticipated to close in thefourth quarter of 2005. SELECTED CAPITAL RATIOS are summarized in the following table: SEPTEMBER 30, DECEMBER 31, 2005 2004------------------------------------------------------------------------------------------ TETMA(1),(2)................................................ 6.97% 6.27%TETMA + Owned Reserves(1),(2)............................... 9.91 9.04Tangible common equity to tangible managed assets(1)........ 5.33 4.67Common and preferred equity to owned assets................. 12.83 13.01Excluding purchase accounting adjustments: TETMA(1),(2).............................................. 8.10 7.97 TETMA + Owned Reserves(1),(2)............................. 11.04 10.75 Tangible common equity to tangible managed assets(1)...... 6.46 6.38 --------------- (1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed assets represent non-GAAP financial ratios that are used by HSBC Finance Corporation management and certain rating agencies to evaluate capital adequacy and may differ from similarly named measures presented by other companies. See "Basis of Reporting" for additional discussion on the use of non-GAAP financial measures and "Reconciliations to GAAP Financial Measures" for quantitative reconciliations to the equivalent GAAP basis financial measure. (2) Beginning in the third quarter of 2005, and with the agreement of certain rating agencies, we have refined our definition of TETMA and TETMA + Owned Reserves to exclude the Adjustable Conversion-Rate Equity Security Units as this more accurately reflects the impact of these items on our equity. Prior period amounts have been revised to reflect the current period presentation. SECURITIZATIONS AND SECURED FINANCINGS Securitizations (collateralized fundingtransactions structured to receive sale treatment under Statement of FinancialAccounting Standards No. 140, "Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities, a Replacement of FASBStatement No. 125," ("SFAS No. 140") and secured financings (collateralizedfunding transactions which do not receive sale treatment under SFAS No. 140) ofconsumer receivables have been used to limit our reliance on the unsecured debtmarkets. In a securitization, a designated pool of non-real estate consumer receivablesis removed from the balance sheet and transferred through a limited purposefinancing subsidiary to an unaffiliated trust. This unaffiliated trust is aqualifying special purpose entity ("QSPE") as defined by SFAS No. 140 and,therefore, is not consolidated. The QSPE funds its receivable purchase throughthe issuance of securities to investors, entitling them to receive specifiedcash flows during the life of the securities. The receivables transferred to theQSPE serve as collateral for the securities. At the time of sale, aninterest-only strip receivable is recorded, representing the present value ofthe cash flows we expect to receive over the life of the securitizedreceivables, net of estimated credit losses and debt service. Under the terms ofthe securitizations, we receive annual 54 HSBC Finance Corporation-------------------------------------------------------------------------------- servicing fees on the outstanding balance of the securitized receivables and therights to future residual cash flows on the sold receivables after the investorsreceive their contractual return. Cash flows related to the interest-only stripreceivables and servicing the receivables are collected over the life of theunderlying securitized receivables. In a secured financing, a designated pool of receivables are conveyed to awholly owned limited purpose subsidiary, which in turn transfers the receivablesto a trust that sells interests to investors. Repayment of the debt issued bythe trust is secured by the receivables transferred. The transactions arestructured as secured financings under SFAS No. 140. Therefore, the receivablesand the underlying debt of the trust remain on our balance sheet. We do notrecognize a gain in a secured financing transaction. Because the receivables andthe debt remain on our balance sheet, revenues and expenses are reportedconsistent with our owned balance sheet portfolio. Using this source of fundingresults in similar cash flows as issuing debt through alternative fundingsources. Under IFRS and prior to 2005 under U.K. GAAP, our securitizations are treated assecured financings. In order to align our accounting treatment with that ofHSBC, starting in the third quarter of 2004 we began to structure all newcollateralized funding transactions as secured financings. However, becauseexisting public MasterCard and Visa credit card transactions were structured assales to revolving trusts that require replenishments of receivables to supportpreviously issued securities, receivables will continue to be sold to thesetrusts until the revolving periods end, the last of which is currently projectedto occur in 2008. Private label trusts that publicly issued securities are nowreplenished by HSBC Bank USA as a result of the daily sale of new domesticprivate label credit card originations to HSBC Bank USA. We will continue toreplenish at reduced levels certain non-public personal non-credit card andMasterCard and Visa securities issued to conduits and record the resultingreplenishment gains for a period of time in order to manage liquidity. Since oursecuritized receivables have varying lives, it will take time for thesereceivables to pay-off and the related interest-only strip receivables to bereduced to zero. The termination of sale treatment on new collateralized fundingactivity reduced our reported net income under U.S. GAAP. There is no impact,however, on cash received from operations. Because we believe the market forsecurities backed by receivables is a reliable, efficient and cost-effectivesource of funds, we will continue to use secured financings of consumerreceivables as a source of our funding and liquidity. As previously discussed, securitization levels were much lower in the ninemonths ended September 30, 2005 as a result of the use of alternate fundingsources, including funding from HSBC subsidiaries, and our decision to structureall new collateralized funding transactions as secured financings beginning inthe third quarter of 2004. 55 HSBC Finance Corporation-------------------------------------------------------------------------------- Securitizations (excluding replenishments of certificateholder interests) andsecured financings are summarized in the following table: THREE MONTHS ENDED SEPTEMBER 30, 2005 2004----------------------------------------------------------------------------- (IN MILLIONS) INITIAL SECURITIZATIONS:Auto finance................................................ $ - $ -MasterCard/Visa............................................. - -Private label............................................... - -Personal non-credit card.................................... - - ------ ------Total....................................................... $ - $ - ====== ======SECURED FINANCINGS:Real estate secured......................................... $1,321 $1,549Auto finance................................................ 945 750MasterCard/Visa............................................. 750 - ------ ------Total....................................................... $3,016 $2,299 ====== ====== NINE MONTHS ENDED SEPTEMBER 30, 2005 2004----------------------------------------------------------------------------- (IN MILLIONS) INITIAL SECURITIZATIONS:Auto finance................................................ $ - $ -MasterCard/Visa............................................. - 550Private label............................................... - 190Personal non-credit card.................................... - - ------ ------Total....................................................... $ - $ 740 ====== ======SECURED FINANCINGS:Real estate secured......................................... $2,240 $3,299Auto finance................................................ 1,943 750MasterCard/Visa............................................. 1,250 - ------ ------Total....................................................... $5,433 $4,049 ====== ====== Our securitized receivables totaled $6.8 billion at September 30, 2005 comparedto $14.2 billion at December 31, 2004. As of September 30, 2005, securedfinancings of $7.7 billion were secured by $13.0 billion of real estate secured,auto finance and MasterCard/Visa receivables. Secured financings of $7.3 billionat December 31, 2004 were secured by $10.3 billion of real estate secured andauto finance receivables. At September 30, 2005, securitizations structured assales represented 5 percent and secured financings represented 6 percent of thefunding associated with our managed funding portfolio. At December 31, 2004,securitizations structured as sales represented 12 percent and securedfinancings represented 6 percent of the funding associated with our managedfunding portfolio. 56 HSBC Finance Corporation-------------------------------------------------------------------------------- 2005 FUNDING STRATEGY As discussed previously, the acquisition by HSBC hasimproved our access to the capital markets as well as expanded our access to aworldwide pool of potential investors. Our current estimated domestic fundingneeds and sources for 2005 are summarized in the table that follows: ACTUAL ESTIMATED JANUARY 1 OCTOBER 1 THROUGH THROUGH ESTIMATED SEPTEMBER 30, DECEMBER 31, FULL YEAR 2005 2005 2005--------------------------------------------------------------------------------------------------- (IN BILLIONS) FUNDING NEEDS: Net asset growth....................................... $16 $ 3 - 6(1) $19 - 22 Commercial paper, term debt and securitization maturities.......................................... 26 2 - 12 28 - 38 Other.................................................. 1 1 - 3(1) 2 - 4 --- ------- -------- Total funding needs, including growth.................. $43 $6 - 21 $49 - 64 === ======= ========FUNDING SOURCES: External funding, including HSBC clients............... $38 $6 - 20 $44 - 58 HSBC and HSBC subsidiaries............................. 5 0 - 1 5 - 6 --- ------- -------- Total funding sources.................................. $43 $6 - 21 $49 - 64 === ======= ======== --------------- (1) Capital requirements resulting from the acquisition of Metris are included in Other. RISK MANAGEMENT-------------------------------------------------------------------------------- CREDIT RISK There have been no significant changes in our approach to creditrisk management since December 31, 2004. At September 30, 2005, we had derivative contracts with a notional value ofapproximately $67.1 billion, including $64.3 billion outstanding with HSBCaffiliates. Most swap agreements, both with unaffiliated and affiliated thirdparties, require that payments be made to, or received from, the counterpartywhen the fair value of the agreement reaches a certain level. Generally,third-party swap counterparties provide collateral in the form of cash which isrecorded in our balance sheet as other assets or derivative related liabilitiesand totaled $343 million at September 30, 2005. Affiliate swap counterpartiesprovide collateral in the form of securities as required, which are not recordedon our balance sheet. At September 30, 2005, the fair value of our agreementswith affiliate counterparties was below the level requiring payment ofcollateral. As such at September, 30, 2005, we were not holding any swapcollateral from HSBC affiliates in the form of securities. LIQUIDITY RISK There have been no significant changes in our approach toliquidity risk since December 31, 2004. MARKET RISK HSBC has certain limits and benchmarks that serve as guidelines indetermining appropriate levels of interest rate risk. One such limit isexpressed in terms of the Present Value of a Basis Point ("PVBP"), whichreflects the change in value of the balance sheet for a one basis point movementin all interest rates. Our total PVBP limit as of September 30, 2005 was $2million, which includes risk associated with hedging instruments. Thus, for aone basis point change in interest rates, the policy dictates that the value ofthe balance sheet shall not increase or decrease by more than $2 million. OurPVBP position at both September 30, 2005 and December 31, 2004 was less than $1million. While the total PVBP position was not impacted by the loss of hedge accountingfor certain derivative financial instruments at the time of our acquisition byHSBC, the portfolio of ineffective hedges remaining at September 30, 2005represent PVBP risk of $($1.7) million. The interest rate risk remaining for allother assets and liabilities, including effective hedges, results in anoffsetting PVBP risk of $2.3 million. Therefore, 57 HSBC Finance Corporation-------------------------------------------------------------------------------- at September 30, 2005 we had a net PVBP position of less than $1 million, whichis within our PVBP limit of $2 million. We also monitor the impact that a hypothetical increase or decrease in interestrates of 25 basis points applied at the beginning of each quarter over a 12month period would have on our net interest income. The following tablesummarizes such estimated impact: SEPTEMBER 30, DECEMBER 31, 2005 2004------------------------------------------------------------------------------------------ (IN MILLIONS) Decrease in net interest income following a hypothetical 25 basis points rise in interest rates applied on a quarterly basis over the next 12 months............................. $179 $176Increase in net interest income following a hypothetical 25 basis points fall in interest rates applied on a quarterly basis over the next 12 months............................. $119 $169 These estimates include both the net interest income impact of the derivativepositions we have entered into which are considered to be effective hedges underSFAS No. 133 and the impact of economic hedges of certain underlying debtinstruments which do not qualify for hedge accounting as if they were effectivehedges under SFAS No. 133. These estimates also assume we would not take anycorrective actions in response to interest rate movements and, therefore, exceedwhat most likely would occur if rates were to change by the amount indicated. Net interest income at risk has changed as a result of the loss of hedgeaccounting on our portfolio of economic hedges. At September 30, 2005, our netinterest income sensitivity to a hypothetical 25 basis point rise in ratesapplied on a quarterly basis over the next 12 months is a decrease of $188million as opposed to the amount reported above, and the sensitivity to ahypothetical 25 basis point fall in rates applied on a quarterly basis over thenext 12 months is an increase of $128 million as opposed to the amount reportedabove. At December 31, 2004, our net interest income sensitivity to ahypothetical 25 basis point rise in rates applied on a quarterly basis over thenext 12 months is a decrease of $190 million as opposed to the amount reportedabove, and the sensitivity to a hypothetical 25 basis point fall in ratesapplied on a quarterly basis over the next 12 months is an increase of $186million as opposed to the amount reported above. This sensitivity only considerschanges in interest rates and does not consider changes from other variables,such as exchange rates that may impact margin. The decrease in exposure torising interest rates results primarily from the reclassification of the payfixed/receive floating interest rate swaps, which do not qualify for hedgeaccounting under SFAS No. 133. As part of our overall risk management strategyto reduce earnings volatility, in the second and third quarters of 2005, 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.These derivatives remain economic hedges of the underlying debt instruments. Wewill continue to manage our total interest rate risk on a basis consistent withthe risk management process employed since the acquisition. OPERATIONAL RISK There has been no significant change in our approach tooperational risk management since December 31, 2004. 58 HSBC FINANCE CORPORATION RECONCILIATIONS TO GAAP FINANCIAL MEASURES THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2005 2004--------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) RETURN ON AVERAGE ASSETS:Net income................................ $ 281 $ 325 $ 1,379 $ 1,228 ======== ======== ======== ========Average assets: Owned basis............................. $141,765 $124,512 $136,185 $120,456 Serviced with limited recourse.......... 7,779 21,542 10,288 23,462 -------- -------- -------- -------- Managed basis........................... $149,544 $146,054 $146,473 $143,918 ======== ======== ======== ========Return on average owned assets............ .79% 1.04% 1.35% 1.36%Return on average managed assets.......... .75 .89 1.26 1.14RETURN ON AVERAGE COMMON SHAREHOLDER'S EQUITY:Net income................................ $ 281 $ 325 $ 1,379 $ 1,228Dividends on preferred stock.............. (25) (18) (62) (54) -------- -------- -------- --------Net income available to common shareholders............................ $ 256 $ 307 $ 1,317 $ 1,174 ======== ======== ======== ========Average common shareholder's equity....... $ 16,973 $ 17,367 $ 16,605 $ 17,057Return on average common shareholder's equity.................................. 6.03% 7.07% 10.58% 9.18%NET INTEREST INCOME:Net interest income: Owned basis............................. $ 2,163 $ 1,969 $ 6,086 $ 5,719 Serviced with limited recourse.......... 177 581 758 1,987 -------- -------- -------- -------- Managed basis........................... $ 2,340 $ 2,550 $ 6,844 $ 7,706 ======== ======== ======== ========Average interest-earning assets: Owned basis............................. $127,038 $107,955 $119,848 $102,957 Serviced with limited recourse.......... 7,779 21,542 10,288 23,462 -------- -------- -------- -------- Managed basis........................... $134,817 $129,497 $130,136 $126,419 ======== ======== ======== ========Owned basis net interest margin........... 6.81% 7.29% 6.77% 7.41%Managed basis net interest margin......... 6.94 7.88 7.01 8.13MANAGED BASIS RISK ADJUSTED REVENUE:Net interest income....................... $ 2,340 $ 2,550 $ 6,844 $ 7,706Other revenues, excluding securitization related revenue and the mark-to-market on derivatives which do not qualify as effective hedges and ineffectiveness associated with qualifying hedges under SFAS No. 133............................ 1,185 916 3,494 2,812Less: Net charge-offs..................... (1,052) (1,363) (3,198) (4,172) -------- -------- -------- --------Risk adjusted revenue..................... $ 2,473 $ 2,103 $ 7,140 $ 6,346 ======== ======== ======== ========Average interest-earning assets........... $134,817 $129,497 $130,136 $126,419Managed basis risk adjusted revenue....... 7.34% 6.50% 7.32% 6.69% 59 HSBC FINANCE CORPORATION RECONCILIATIONS TO GAAP FINANCIAL MEASURES THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------------- ----------------------------- SEPTEMBER 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2005 2004 2005 2004--------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) CONSUMER NET CHARGE-OFF RATIO:Consumer net charge-offs: Owned basis.................. $ 902 $ 844 $ 969 $ 2,602 $ 2,905 Serviced with limited recourse.................. 150 184 394 589 1,267 -------- -------- -------- -------- -------- Managed basis................ $ 1,052 $ 1,028 $ 1,363 $ 3,191 $ 4,172 ======== ======== ======== ======== ========Average consumer receivables: Owned basis.................. $123,163 $115,354 $102,821 $115,815 $ 97,328 Serviced with limited recourse.................. 7,779 10,203 21,542 10,288 23,462 -------- -------- -------- -------- -------- Managed basis................ $130,942 $125,557 $124,363 $126,103 $120,790 ======== ======== ======== ======== ========Owned basis consumer net charge-off ratio............. 2.93% 2.93% 3.77% 3.00% 3.98%Managed basis consumer net charge-off ratio............. 3.21 3.28 4.38 3.37 4.61 ======== ======== ======== ======== ========RESERVES AS A PERCENT OF NET CHARGE-OFFSLoss reserves: Owned basis.................. $ 4,220 $ 3,756 $ 3,953 $ 4,220 $ 3,953 Serviced with limited recourse.................. 351 525 1,246 351 1,246 -------- -------- -------- -------- -------- Managed basis................ $ 4,571 $ 4,281 $ 5,199 $ 4,571 $ 5,199 ======== ======== ======== ======== ========Net charge-offs: Owned basis.................. $ 902 $ 844 $ 969 $ 2,609 $ 2,905 Serviced with limited recourse.................. 150 184 394 589 1,267 -------- -------- -------- -------- -------- Managed basis................ $ 1,052 $ 1,028 $ 1,363 $ 3,198 $ 4,172 ======== ======== ======== ======== ========Owned basis reserves as a percent of net charge-offs... 117.0% 111.3% 102.0% 121.3% 102.1%Managed basis reserves as a percent of net charge-offs... 108.6 104.1 95.4 107.2 93.5EFFICIENCY RATIO:Total costs and expenses less policyholders' benefits...... $ 1,374 $ 1,326 $ 1,315 $ 4,120 $ 3,840 ======== ======== ======== ======== ========Net interest income and other revenues less policyholders' benefits: Owned basis.................. $ 3,156 $ 3,043 $ 2,916 $ 9,427 $ 8,735 Serviced with limited recourse.................. (23) 52 (232) 59 169 -------- -------- -------- -------- -------- Managed basis................ $ 3,133 $ 3,095 $ 2,684 $ 9,486 $ 8,904 ======== ======== ======== ======== ========Owned basis efficiency ratio... 43.54% 43.58% 45.10% 43.70% 43.96%Managed basis efficiency ratio........................ 43.86 42.84 48.99 43.43 43.13 60 HSBC FINANCE CORPORATION RECONCILIATIONS TO GAAP FINANCIAL MEASURES SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2005 2005 2004--------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) TWO-MONTHS-AND-OVER-CONTRACTUAL DELINQUENCY:Consumer two-months-and-over-contractual delinquency: Owned basis............................................ $ 4,861 $ 4,419 $ 4,702 Serviced with limited recourse......................... 376 484 1,092 -------- -------- -------- Managed basis.......................................... $ 5,237 $ 4,903 $ 5,794 ======== ======== ========Consumer receivables: Owned basis............................................ $128,524 $118,532 $106,130 Serviced with limited recourse......................... 6,759 8,980 20,175 -------- -------- -------- Managed basis.......................................... $135,283 $127,512 $126,305 ======== ======== ========Consumer two-months-and-over-contractual delinquency: Owned basis............................................ 3.78% 3.73% 4.43% Managed basis.......................................... 3.87 3.85 4.59RESERVES AS A PERCENT OF RECEIVABLES:Loss reserves: Owned basis............................................ $ 4,220 $ 3,756 $ 3,953 Serviced with limited recourse......................... 351 525 1,246 -------- -------- -------- Managed basis.......................................... $ 4,571 $ 4,281 $ 5,199 ======== ======== ========Receivables: Owned basis............................................ $128,722 $118,761 $106,437 Serviced with limited recourse......................... 6,759 8,980 20,175 -------- -------- -------- Managed basis.......................................... $135,481 $127,741 $126,612 ======== ======== ========Reserves as a percent of receivables: Owned basis............................................ 3.28% 3.16% 3.71% Managed basis.......................................... 3.37 3.35 4.11RESERVES AS A PERCENT OF NONPERFORMING LOANS:Loss reserves: Owned basis............................................ $ 4,220 $ 3,756 $ 3,953 Serviced with limited recourse......................... 351 525 1,246 -------- -------- -------- Managed basis.......................................... $ 4,571 $ 4,281 $ 5,199 ======== ======== ========Nonperforming loans: Owned basis............................................ $ 3,836 $ 3,491 $ 3,797 Serviced with limited recourse......................... 309 395 881 -------- -------- -------- Managed basis.......................................... $ 4,145 $ 3,886 $ 4,678 ======== ======== ========Reserves as a percent of nonperforming loans: Owned basis............................................ 110.0% 107.6% 104.1% Managed basis.......................................... 110.3 110.2 111.1 61 HSBC FINANCE CORPORATION RECONCILIATIONS TO GAAP FINANCIAL MEASURES SEPTEMBER 30, DECEMBER 31, 2005 2004------------------------------------------------------------------------------------------------ (DOLLARS ARE IN MILLIONS) TANGIBLE COMMON EQUITY:Common shareholder's equity................................. $ 17,137 $ 15,841Exclude: Unrealized (gains) losses on cash flow hedging instruments............................................ (283) (119) Minimum pension liability................................. 4 4 Unrealized gains on investments and interest-only strip receivables............................................ (24) (53) Intangible assets......................................... (2,394) (2,705) Goodwill.................................................. (6,799) (6,856) -------- --------Tangible common equity...................................... 7,641 6,112Purchase accounting adjustments............................. 1,617 2,227 -------- --------Tangible common equity, excluding purchase accounting adjustments............................................... $ 9,258 $ 8,339 ======== ========TANGIBLE SHAREHOLDERS' EQUITY:Tangible common equity...................................... $ 7,641 $ 6,112Preferred stock............................................. 1,675 1,100Mandatorily redeemable preferred securities of Household Capital Trusts............................................ 681 994 -------- --------Tangible shareholder's equity............................... 9,997 8,206Purchase accounting adjustments............................. 1,611 2,208 -------- --------Tangible shareholders' equity, excluding purchase accounting adjustments............................................... $ 11,608 $ 10,414 ======== ========TANGIBLE SHAREHOLDERS' EQUITY PLUS OWNED LOSS RESERVES:Tangible shareholders' equity............................... $ 9,997 $ 8,206Owned loss reserves......................................... 4,220 3,625 -------- --------Tangible shareholders' equity plus owned loss reserves...... 14,217 11,831Purchase accounting adjustments............................. 1,611 2,208 -------- --------Tangible shareholders' equity plus owned loss reserves, excluding purchase accounting adjustments................. $ 15,828 $ 14,039 ======== ========TANGIBLE MANAGED ASSETS:Owned assets................................................ $146,574 $130,190Receivables serviced with limited recourse.................. 6,759 14,225 -------- --------Managed assets.............................................. 153,333 144,415Exclude: Intangible assets......................................... (2,394) (2,705) Goodwill.................................................. (6,799) (6,856) Derivative financial assets............................... (662) (4,049) -------- --------Tangible managed assets..................................... 143,478 130,805Purchase accounting adjustments............................. (91) (202) -------- --------Tangible managed assets, excluding purchase accounting adjustments............................................... $143,387 $130,603 ======== ========EQUITY RATIOS:Common and preferred equity to owned assets................. 12.83% 13.01%Tangible common equity to tangible managed assets........... 5.33 4.67Tangible shareholders' equity to tangible managed assets ("TETMA")................................................. 6.97 6.27Tangible shareholders' equity plus owned loss reserves to tangible managed assets ("TETMA + Owned Reserves")........ 9.91 9.04Excluding purchase accounting adjustments: Tangible common equity to tangible managed assets......... 6.46 6.38 TETMA..................................................... 8.10 7.97 TETMA + Owned Reserves.................................... 11.04 10.75 ======== ======== 62 ITEM 4. CONTROLS AND PROCEDURES-------------------------------------------------------------------------------- DISCLOSURE CONTROLS We conducted an evaluation, with the participation of theChief Executive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport. Our disclosure controls and procedures are designed to ensure thatinformation required to be disclosed by HSBC Finance Corporation in the reportswe file under the Securities Exchange Act of 1934, as amended (the "ExchangeAct"), is recorded, processed, summarized and reported on a timely basis. Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this report so as to alert them in a timely fashionto material information required to be disclosed in reports we file under theExchange Act. INTERNAL CONTROLS There have not been any changes in our internal control overfinancial reporting during the fiscal quarter to which this report relates thathave materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS-------------------------------------------------------------------------------- GENERAL We are parties to various legal proceedings resulting from ordinary businessactivities relating to our current and/or former operations. Certain of theseactions are or purport to be class actions seeking damages in very largeamounts. These actions assert violations of laws and/or unfair treatment ofconsumers. Due to the uncertainties in litigation and other factors, we cannotbe certain that we will ultimately prevail in each instance. We believe that ourdefenses to these actions have merit and any adverse decision should notmaterially affect our consolidated financial condition. CONSUMER LENDING LITIGATION During the past several years, the press has widely reported certain industryrelated concerns that may impact us. Some of these involve the amount oflitigation instituted against finance and insurance companies operating incertain states and the large awards obtained from juries in those states. Likeother companies in this industry, some of our subsidiaries are involved in anumber of lawsuits pending against them in these states. The cases, inparticular, generally allege inadequate disclosure or misrepresentation offinancing terms. In some suits, other parties are also named as defendants.Unspecified compensatory and punitive damages are sought. Several of these suitspurport to be class actions or have multiple plaintiffs. The judicial climate inthese states is such that the outcome of all of these cases is unpredictable.Although our subsidiaries believe they have substantive legal defenses to theseclaims and are prepared to defend each case vigorously, a number of such caseshave been settled or otherwise resolved for amounts that in the aggregate arenot material to our operations. Appropriate insurance carriers have beennotified of each claim, and a number of reservations of rights letters have beenreceived. Certain of the financing of merchandise claims have been partiallycovered by insurance. CREDIT CARD LITIGATION On November 15, 2004, a matter entitled American Express Travel Related ServicesCompany, Inc. v. Visa U.S.A. Inc., et al. was filed in the U.S. District Courtfor the Southern District of New York. This case alleges that HSBC FinanceCorporation, Household Bank (SB), N.A. and others violated Sections 1 and 2 ofthe Sherman Act by conspiring to monopolize and unreasonably restrain trade byallegedly implementing and enforcing an agreement requiring any United Statesbank that issues Visa or MasterCard general cards to refuse to issue such cardsfrom competitors, such as American Express and Discover. Plaintiff seeks adeclaration that defendants in this action (including Visa, MasterCard and otherbanks belonging to those associations), have violated the antitrust laws, andrequests an injunction restraining the defendants, their directors, officers,employees, agents, successors, owners and members from "continuing ormaintaining in any 63 manner, directly or indirectly, the rules, policies, and agreements at issue,"and seeks "full compensation for damages it has sustained, from each Defendant,jointly, severally," for each of plaintiff's claims, in an amount "to be trebledaccording to law, plus interest, attorneys' fees and costs of suit". On February18, 2005, the Defendants filed a motion to dismiss the complaint for failure tostate a cause of action. At this time, we are unable to quantify the potentialimpact from this action, if any. On June 22, 2005, a matter entitled Photos Etc. Corporation, et al. v. VISAU.S.A. Inc., et al. was filed in the U.S. District Court for the District ofConnecticut as case number 305CV1007. This purported class action named asdefendants VISA, MasterCard and a number of alleged members of thoseassociations, including HSBC Finance Corporation and two other HSBC entities.The case seeks certification of a class of retail merchants that operatecommercial businesses throughout the United States and alleges the defendantsengage in an anti-competitive conspiracy to fix the level of "interchange fees"charged by the associations. This and other similar suits filed in variousfederal courts have been consolidated for pre-trial matters in the U.S. DistrictCourt for the Eastern District of New York. At this time, we are unable toquantify the potential impact from this action, if any. SECURITIES LITIGATION In August 2002, we restated previously reported consolidated financialstatements. The restatement related to certain MasterCard and Visa co-brandingand affinity credit card relationships and a third party marketing agreement,which were entered into between 1992 and 1999. All were part of our Credit CardServices segment. In consultation with our prior auditors, Arthur Andersen LLP,we treated payments made in connection with these agreements as prepaid assetsand amortized them in accordance with the underlying economics of theagreements. Our current auditor, KPMG LLP, advised us that, in its view, thesepayments should have either been charged against earnings at the time they weremade or amortized over a shorter period of time. The restatement resulted in a$155.8 million, after-tax, retroactive reduction to retained earnings atDecember 31, 1998. As a result of the restatement, and other corporate events,including, e.g., the 2002 settlement with 50 states and the District of Columbiarelating to real estate lending practices, HSBC Finance Corporation, and itsdirectors, certain officers and former auditors, have been involved in variouslegal proceedings, some of which purport to be class actions. A number of theseactions allege violations of federal securities laws, were filed between Augustand October 2002, and seek to recover damages in respect of allegedly false andmisleading statements about our common stock. These legal actions have beenconsolidated into a single purported class action, Jaffe v. HouseholdInternational, Inc., et al., No. 02 C 5893 (N.D. Ill., filed August 19, 2002),and a consolidated and amended complaint was filed on March 7, 2003. On December3, 2004, the court signed the parties' stipulation to certify a class withrespect to the claims brought under sec.10 and sec.20 of the Securities ExchangeAct of 1934. The parties stipulated that plaintiffs will not seek to certify aclass with respect to the claims brought under sec.11 and sec.15 of theSecurities Act of 1933 in this action or otherwise. The amended complaint purports to assert claims under the federal securitieslaws, on behalf of all persons who purchased or otherwise acquired oursecurities between October 23, 1997 and October 11, 2002, arising out of allegedfalse and misleading statements in connection with our sales and lendingpractices, the 2002 state settlement agreement referred to above, therestatement and the HSBC merger. The amended complaint, which also names asdefendants Arthur Andersen LLP, Goldman, Sachs & Co., and Merrill Lynch, Pierce,Fenner & Smith, Inc., fails to specify the amount of damages sought. In May2003, we, and other defendants, filed a motion to dismiss the complaint. OnMarch 19, 2004, the Court granted in part, and denied in part the defendants'motion to dismiss the complaint. The Court dismissed all claims against MerrillLynch, Pierce, Fenner & Smith, Inc. and Goldman Sachs & Co. The Court alsodismissed certain claims alleging strict liability for alleged misrepresentationof material facts based on statute of limitations grounds. The claims thatremain against some or all of the defendants essentially allege the defendantsknowingly made a false statement of a material fact in conjunction with thepurchase or sale of securities, that the plaintiffs justifiably relied on suchstatement, the false statement(s) caused the plaintiffs' damages, and that someor all of the defendants should be liable for those alleged statements. Allfactual discovery must be completed by May 12, 2006 and expert witness discoverymust be completed by July 24, 2006. 64 On June 27, 2003, a case entitled, West Virginia Laborers Pension Trust Fund v.Caspersen, et al., was filed in the Chancery Division of the Circuit Court ofCook County, Illinois as case number 03CH10808. This purported class actionnamed as defendants the directors of Beneficial Corporation at the time of the1998 merger of Beneficial Corporation into a subsidiary of HSBC FinanceCorporation, and claimed that those directors' due diligence of HSBC FinanceCorporation at the time they considered the merger was inadequate. The Complaintclaimed that as a result of some of the securities law and other violationsalleged in the Jaffe case, HSBC Finance Corporation common shares lost value.Pursuant to the merger agreement with Beneficial Corporation, we assumed thedefense of this litigation. In September of 2003, the defendants filed a motionto dismiss which was granted on June 15, 2004 based upon a lack of personaljurisdiction over the defendants. The plaintiffs appealed that decision. On May11, 2005, the appellate court affirmed the trial court's ruling. The time forany further appeals has expired. In addition, on June 30, 2004, a case entitled,Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Caspersen, et al.,was filed in the Superior Court of New Jersey, Law Division, Somerset County asCase Number L9479-04. Other than the change in plaintiff, the suit issubstantially identical to the foregoing West Virginia Laborer's Pension TrustFund case, and is brought by the same principal law firm that brought that suit.The defendants' motion to dismiss was granted on February 10, 2005 and theplaintiffs have appealed that ruling. With respect to these securities litigation matters, we believe that we havenot, and our officers and directors have not, committed any wrongdoing and ineach instance there will be no finding of improper activities that may result ina material liability to us or any of our officers or directors. ITEM 6. EXHIBITS-------------------------------------------------------------------------------- Exhibits included in this Report: 3 Amended and Restated Certificate of Incorporation of HSBC Finance Corporation and amendments thereto, including Amended Certificate of Designations of Series A Cumulative Preferred Stock of HSBC Finance Corporation and Certificate of Designations of Series B Cumulative Preferred Stock (previously filed as Exhibit 3.1 to HSBC Finance Corporation's Current Report on Form 8-K, dated June 16, 2005, filed with the Securities and Exchange Commission on June 22, 2005). 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Debt and Preferred Stock Securities Ratings. 65 SIGNATURE-------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized. HSBC FINANCE CORPORATION (Registrant) /s/ Beverley A. Sibblies -------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer Date: November 14, 2005 66 EXHIBIT INDEX-------------------------------------------------------------------------------- 3 Amended and Restated Certificate of Incorporation of HSBC Finance Corporation and amendments thereto, including Amended Certificate of Designations of Series A Cumulative Preferred Stock of HSBC Finance Corporation and Certificate of Designations of Series B Cumulative Preferred Stock (previously filed as Exhibit 3.1 to HSBC Finance Corporation's Current Report on Form 8-K, dated June 16, 2005, filed with the Securities and Exchange Commission on June 22, 2005). 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends. 31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Debt and Preferred Stock Securities Ratings. EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS NINE MONTHS ENDED SEPTEMBER 30, ----------------- 2005 2004------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS) Net income.................................................. $1,379 $1,228Income tax expense.......................................... 695 619 ------ ------Income before income tax expense............................ 2,074 1,847 ------ ------Fixed charges: Interest expense.......................................... 3,405 2,225 Interest portion of rentals(1)............................ 45 39 ------ ------Total fixed charges......................................... 3,450 2,264 ------ ------Total earnings as defined................................... $5,524 $4,111 ====== ======Ratio of earnings to fixed charges.......................... 1.60 1.82Preferred stock dividends(2)................................ 93 81Ratio of earnings to combined fixed charges and preferred stock dividends........................................... 1.56 1.75 --------------- (1) Represents one-third of rentals, which approximates the portion representing interest. (2) Preferred stock dividends are grossed up to their pretax equivalents. EXHIBIT 31 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Siddharth N. Mehta, Chairman and Chief Executive Officer of HSBC FinanceCorporation, certify that: 1. I have reviewed this report on Form 10-Q of HSBC Finance Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ SIDDHARTH N. MEHTA -------------------------------------- Siddharth N. Mehta Chairman and Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Beverley A. Sibblies, Senior Vice President and Chief Financial Officer ofHSBC Finance Corporation, certify that: 1. I have reviewed this report on Form 10-Q of HSBC Finance Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ BEVERLEY A. SIBBLIES -------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer EXHIBIT 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Qfor the period ending September 30, 2005 as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Siddharth N. Mehta,Chairman and Chief Executive Officer of HSBC Finance Corporation, certify,pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ SIDDHARTH N. MEHTA -------------------------------------- Siddharth N. Mehta Chairman and Chief Executive Officer November 14, 2005 This certification accompanies each Report pursuant to Section 906 of theSarbanes-Oxley Act of 2002 and shall not, except to the extent required by theSarbanes-Oxley Act of 2002, be deemed filed by HSBC Finance Corporation forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended. Signed originals of these written statements required by Section 906 of theSarbanes-Oxley Act of 2002 have been provided to HSBC Finance Corporation andwill be retained by HSBC Finance Corporation and furnished to the Securities andExchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of HSBC Finance Corporation on Form 10-Qfor the period ending September 30, 2005 as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, Beverley A. Sibblies,Senior Vice President and Chief Financial Officer of HSBC Finance Corporation,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ BEVERLEY A. SIBBLIES -------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer November 14, 2005 This certification accompanies each Report pursuant to Section 906 of theSarbanes-Oxley Act of 2002 and shall not, except to the extent required by theSarbanes-Oxley Act of 2002, be deemed filed by HSBC Finance Corporation forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended. Signed originals of these written statements required by Section 906 of theSarbanes-Oxley Act of 2002 have been provided to HSBC Finance Corporation andwill be retained by HSBC Finance Corporation and furnished to the Securities andExchange Commission or its staff upon request. EXHIBIT 99.1 DEBT AND PREFERRED STOCK SECURITIES RATINGS STANDARD & MOODY'S POOR'S INVESTORS DOMINION BOARD CORPORATION SERVICE FITCH, INC. RATING SERVICE------------------------------------------------------------------------------------------------------- AT SEPTEMBER 30, 2005HSBC Finance Corporation Senior debt.................................. A A1 AA- AA (low) Senior subordinated debt..................... A- A2 A+ * Commercial paper............................. A-1 P-1 F-1+ R-1 (middle) Series B preferred stock..................... BBB+ A3 A+ *HFC Bank Limited Senior debt.................................. A A1 AA- * Commercial paper............................. A-1 P-1 F-1+ *HSBC Bank Nevada, National Association Senior debt.................................. A A1 AA- *HSBC Financial Corporation Limited Senior notes and term loans.................. * * * AA (low) Commercial paper............................. * * * R-1 (middle) --------------- * Not rated by this agency. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HSBC Holdings