14th Nov 2007 08:39
HSBC Holdings PLC14 November 2007 HSBC Finance Corporation-------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES-------------------------------------------------------------------------------- Debt due to affiliates and other HSBC related funding are summarized in thefollowing table: SEPTEMBER 30, DECEMBER 31, 2007 2006---------------------------------------------------------------------------------------- (IN BILLIONS)Debt issued to HSBC subsidiaries: Drawings on bank lines in the U.K. and Europe........... $ 3.9 $ 4.3 Term debt............................................... 10.4 10.6 Preferred securities issued by Household Capital Trust VIII to HSBC......................................... .3 .3 ----- ----- Total debt outstanding to HSBC subsidiaries............. 14.6 15.2 ----- -----Debt outstanding to HSBC clients: Euro commercial paper................................... 2.6 3.0 Term debt............................................... .9 1.2 ----- ----- Total debt outstanding to HSBC clients.................. 3.5 4.2Cash received on bulk and subsequent sales of domestic private label credit card receivables to HSBC Bank USA, net (cumulative)........................................ 18.0 17.9Real estate secured receivable activity with HSBC Bank USA: Cash received on sales (cumulative)..................... 3.7 3.7 Direct purchases from correspondents (cumulative)....... 4.2 4.2 Reductions in real estate secured receivables sold to HSBC Bank USA........................................ (5.3) (4.7) ----- -----Total real estate secured receivable activity with HSBC Bank USA................................................ 2.6 3.2 ----- -----Cash received from sale of European Operations to HBEU affiliate............................................... -(1) -(1)Cash received from sale of U.K. credit card business to HBEU.................................................... 2.7 2.7Capital contribution by HSBC Investments (North America) Inc. ("HINO") (cumulative).............................. 1.6 1.4 ----- -----Total HSBC related funding................................ $43.0 $44.6 ===== ===== -------- (1) Less than $100 million. Funding from HSBC, including debt issuances to HSBC subsidiaries and clients,represented 12 percent of our total and preferred stock funding at September 30,2007 and 13 percent at December 31, 2006. At September 30, 2007, we had a commercial paper back stop credit facility of$2.5 billion from HSBC supporting domestic issuances and a revolving creditfacility of $5.7 billion from HBEU to fund our operations in the U.K. AtSeptember 30, 2007, $3.9 billion was outstanding under the HBEU lines for theU.K. and no balances were outstanding under the domestic lines. At September 30,2007, we had derivative contracts with a notional value of $92.4 billion, orapproximately 96 percent of total derivative contracts, outstanding with HSBCaffiliates. At December 31, 2006, we had derivative contracts with a notionalvalue of $82.8 billion, or approximately 88 percent of total derivativecontracts, outstanding with HSBC affiliates. SECURITIES AND OTHER SHORT-TERM INVESTMENTS Securities totaled $3.2 billion atSeptember 30, 2007 and $4.7 billion at December 31, 2006. Securities purchasedunder agreements to resell totaled $1.5 billion at September 30, 2007 and $171million at December 31, 2006. Interest bearing deposits with banks totaled $511million at September 30, 2007 and $424 million at December 31, 2006. Thedecrease in securities is due to the reclassification of the assets of the U.K.Insurance Operations which at September 30, 2007 are classified as "Held forSale" and included within other assets as well as the use of money market fundsto pay down secured financings during 2007. The increase in 73 HSBC Finance Corporation-------------------------------------------------------------------------------- securities purchased under agreements to resell and interest bearing depositswith banks is due to the generation of additional liquidity. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS totaled $9.5 billion at September30, 2007 and $11.1 billion at December 31, 2006. Included in this total wasoutstanding Euro commercial paper sold to customers of HSBC of $2.6 billion atSeptember 30, 2007 and $3.0 billion at December 31, 2006. Commercial paperbalances were lower at September 30, 2007 as a result of lower short termfunding requirements during the quarter. Our funding strategy requires thatcommitted bank credit facilities will at all times exceed 80 percent ofoutstanding commercial paper and that the combination of bank credit facilitiesand undrawn committed conduit facilities will, at all times, exceed 115 percentof outstanding commercial paper. LONG TERM DEBT (with original maturities over one year) decreased to $125.4billion at September 30, 2007 from $127.6 billion at December 31, 2006. Thedecrease is due to lower funding requirements resulting from the lower assetlevels during the third quarter of 2007. Significant issuances during the ninemonths ended September 30, 2007 included the following: - $.4 billion of domestic and foreign medium-term notes - $2.4 billion of foreign currency-denominated bonds - $.9 billion of InterNotes(SM) (retail-oriented medium-term notes) - $4.0 billion of global debt - $8.5 billion of securities backed by real estate secured, auto finance, credit card and personal non-credit card receivables. For accounting purposes, these transactions were structured as secured financings. In the first quarter of 2006, we redeemed the junior subordinated notes, issuedto Household Capital Trust VI with an outstanding principal balance of $206million. In the fourth quarter of 2006 we redeemed the junior subordinatednotes, issued to Household Capital Trust VII with an outstanding principalbalance of $206 million. COMMON EQUITY In the first quarter of 2007, HINO made a capital contribution of$200 million. On November 8, 2007, HINO made an additional capital contributionof $750 million in exchange for one share of common stock. These capitalcontributions were to support ongoing operations and to maintain capital atlevels we believe are prudent in the current market conditions. SELECTED CAPITAL RATIOS In managing capital, we develop targets for tangibleshareholder's(s') equity to tangible managed assets ("TETMA"), tangibleshareholder's(s') equity plus owned loss reserves to tangible managed assets("TETMA + Owned Reserves") and tangible common equity to tangible managedassets. These ratio targets are based on discussions with HSBC and ratingagencies, risks inherent in the portfolio, the projected operating environmentand related risks, and any acquisition objectives. These ratios exclude theequity impact of SFAS No. 115, "Accounting for Certain Investments in Debt andEquity Securities," the equity impact of SFAS No. 133, "Accounting forDerivative Instruments and Hedging Activities," and the impact of the adoptionof SFAS No. 159, "The Fair Value Option for Financial Assets and Liabilities,"including the subsequent changes in fair value recognized in earnings associatedwith credit risk on debt for which we elected the fair value option. Preferredsecurities issued by certain non-consolidated trusts are also considered equityin the TETMA and TETMA + Owned Reserves calculations because of their long-termsubordinated nature and our ability to defer dividends. Managed assets includeowned assets plus loans which we have sold and service with limited recourse. Weand certain rating agencies also monitor our equity ratios excluding the impactof the HSBC acquisition purchase accounting adjustments. We do so because webelieve that the HSBC acquisition purchase accounting adjustments represent non-cash transactions which do not affect our business operations, cash flows orability to meet our debt obligations. Our targets may change from time to timeto accommodate changes in the operating environment or other considerations suchas those listed above. On October 2, 2007, Fitch changed the total outlook onour issuer default rating to "stable outlook" from "positive outlook". 74 HSBC Finance Corporation-------------------------------------------------------------------------------- SELECTED CAPITAL RATIOS are summarized in the following table: SEPTEMBER 30, DECEMBER 31, 2007 2006----------------------------------------------------------------------------------------TETMA(1).................................................. 7.33%(2) 7.16%TETMA + Owned Reserves(1)................................. 12.57 11.02Tangible common equity to tangible managed assets(1)...... 6.20 6.08Common and preferred equity to owned assets............... 10.60 11.21Excluding purchase accounting adjustments: TETMA(1)................................................ 7.87 7.81% TETMA + Owned Reserves(1)............................... 13.11 11.67 Tangible common equity to tangible managed assets(1).... 6.75 6.72 -------- (1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed assets represent non-U.S.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-U.S.GAAP financial measures and "Reconciliations to U.S. GAAP Financial Measures" for quantitative reconciliations to the equivalent U.S.GAAP basis financial measure.(2) On a proforma basis, if the capital contribution on November 8, 2007 of $750 million had instead been received on September 30, 2007, the TETMA ratio would have been 7.78 percent. 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 a source of funding and liquidity for us.Securitizations and secured financings have been used to limit our reliance onthe unsecured debt markets and often are more cost-effective than alternativefunding sources. Securitizations are treated as secured financings under both IFRS and U.K. GAAP.In order to align our accounting treatment with that of HSBC initially underU.K. GAAP and now under IFRS, we began to structure all new collateralizedfunding transactions as secured financings in the third quarter of 2004.However, because existing public 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 and the resulting replenishment gains recorded until the revolvingperiods end, the last of which is currently projected to occur in the fourthquarter of 2007. The termination of sale treatment on new collateralized fundingactivity reduced our reported net income under U.S. GAAP. There was 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. There were no securitizations (excluding replenishments of certificateholderinterests) during the first nine months of 2007 or 2006. Secured financings aresummarized in the following table: THREE MONTHS ENDED SEPTEMBER 30 2007 2006--------------------------------------------------------------------------------- (IN MILLIONS)SECURED FINANCINGS:Real estate secured............................................. $ 950 $2,304Credit card..................................................... 678 2,640Auto finance.................................................... - 1,060Personal non-credit card........................................ 1,200 - ------ ------Total........................................................... $2,828 $6,004 ====== ====== 75 HSBC Finance Corporation-------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 2007 2006--------------------------------------------------------------------------------- (IN MILLIONS)SECURED FINANCINGS:Real estate secured............................................ $2,545 $ 2,654Credit card.................................................... 3,568 4,745Auto finance................................................... 1,069 2,004Personal non-credit card....................................... 1,310 2,500 ------ -------Total.......................................................... $8,492 $11,903 ====== ======= Our securitized receivables totaled $579 million at September 30, 2007 comparedto $949 million at December 31, 2006. As of September 30, 2007, outstandingsecured financings of $22.9 billion were secured by $30.7 billion of real estatesecured, auto finance, credit card and personal non-credit card receivables.Secured financings of $21.8 billion at December 31, 2006 were secured by $28.1billion of real estate secured, auto finance, credit card and personal non-credit card receivables. At September 30, 2007, securitizations structured assales represented less than 1 percent and secured financings represented 15percent of the funding associated with our managed funding portfolio. AtDecember 31, 2006, securitizations structured as sales represented 1 percent andsecured financings represented 14 percent of the funding associated with ourmanaged funding portfolio. COMMITMENTS We also enter into commitments to meet the financing needs of ourcustomers. In most cases, we have the ability to reduce or eliminate these openlines of credit. As a result, the amounts below do not necessarily representfuture cash requirements. SEPTEMBER 30, DECEMBER 31, 2007 2006---------------------------------------------------------------------------------------- (IN BILLIONS)Private label, and credit cards........................... $188 $186Other consumer lines of credit............................ 9 7 ---- ----Open lines of credit(1)................................... $197 $193 ==== ==== -------- (1) Includes an estimate for acceptance of credit offers mailed to potential customers prior to September 30, 2007 and December 31, 2006, respectively. At September 30, 2007, our Mortgage Services business had outstanding forwardsales commitments relating to real estate secured loans totaling $185 millionand unused commitments to extend credit relating to real estate secured loans tocustomers (as long as certain conditions are met), totaling less than $1million. 76 HSBC Finance Corporation-------------------------------------------------------------------------------- 2007 FUNDING STRATEGY Our current estimated domestic funding needs and sourcesfor 2007 are summarized in the table that follows: ACTUAL ESTIMATED JANUARY 1 OCTOBER 1 THROUGH THROUGH ESTIMATED SEPTEMBER 30, DECEMBER 31, FULL YEAR 2007 2007 2007--------------------------------------------------------------------------------------------- (IN BILLIONS)FUNDING NEEDS: Net asset growth............................... $(5) $ (5) - 2 $(10) - (3) Commercial paper, term debt and securitization maturities.................................. 30 2 - 6 32 - 36 Other.......................................... (2) (1) - 3 (3) - 1 --- --------- ----------- Total funding needs............................ $23 $(4) - 11 $ 19 - 34 === ========= ===========FUNDING SOURCES: External funding, including commercial paper and portfolio sales......................... $23 $ (5) - 8 $ 18 - 31 HSBC and HSBC subsidiaries..................... - 1 - 3 1 - 3 --- --------- ----------- Total funding sources.......................... $23 $(4) - 11 $ 19 - 34 === ========= =========== As previously discussed, we have experienced deterioration in the performance ofmortgage loan originations in our Mortgage Services business and in March 2007decided to discontinue new correspondent channel acquisitions by that businesssubject to fulfilling earlier commitments, which were immaterial. However, therecent turmoil in the mortgage lending industry, as previously discussed, hascaused us to re-evaluate our strategy. These actions, combined with normalportfolio attrition and risk mitigation efforts we began in the second half of2006, will result in negative growth in our aggregate portfolio in 2007. Asopportunities arise, we may also choose to sell selected portfolios, similar tothe $2.2 billion sale of real estate secured receivables completed during thesecond quarter of 2007. Future decisions to constrain growth in additionalportfolios as well as decisions to sell selected portfolios would also result innegative year over year growth in the balance sheet. RISK MANAGEMENT-------------------------------------------------------------------------------- CREDIT RISK Credit risk is the risk that financial loss arises from the failureof a customer or counterparty to meet its obligations under a contract. Ourcredit risk arises primarily from lending and treasury activities. Day-to-day management of credit risk is administered by Chief Credit Officers ineach business line who have solid reporting lines to both the business lineChief Executive Officer and the Chief Retail Credit Officer. Oversight isprovided by a corporate Chief Retail Credit Officer who reports to our ChiefOperating Officer and indirectly to the Group General Manager, Head of Creditand Risk for HSBC. We have established detailed policies to address the creditrisk that arises from our lending activities. Our credit and portfoliomanagement procedures focus on sound underwriting, effective collections andcustomer account management efforts for each loan. Our lending guidelines, whichdelineate the credit risk we are willing to take and the related terms, arespecific not only for each product, but also take into consideration variousother factors including borrower characteristics. We also have specific policiesto ensure the establishment of appropriate credit loss reserves on a timelybasis to cover probable losses of principal, interest and fees. See "CreditQuality" for a detailed description of our policies regarding the establishmentof credit loss reserves, our delinquency and charge-off policies and practicesand our customer account management policies and practices. Also see Note 2,"Summary of Significant Accounting Policies," in our 2006 Form 10-K for furtherdiscussion of our policies surrounding credit loss reserves. While we developour own policies and procedures for all of our lending activities, they areconsistent with HSBC standards and are regularly reviewed and updated both on anHSBC Finance Corporation and HSBC level. 77 HSBC Finance Corporation-------------------------------------------------------------------------------- At September 30, 2007, we had derivative contracts with a notional value ofapproximately $96.4 billion, including $92.4 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 liabilities.At September 30, 2007, we provided third party swap counterparties with $44million collateral. At December 31, 2006, third party counterparties hadprovided $158 million in collateral to us. Beginning with the second quarter of2006, when the fair value of our agreements with affiliate counterpartiesrequire the posting of collateral by the affiliate, it is provided in the formof cash and recorded on the balance sheet, consistent with third partyarrangements. At September 30, 2007, the fair value of our agreements withaffiliate counterparties required the affiliate to provide cash collateral of$2.8 billion which is offset against the fair value amount recognized forderivative instruments that have been offset under the same master nettingarrangement and recorded in our balance sheet as a component of derivativerelated assets. At December 31, 2006, the fair value of our agreements withaffiliate counterparties required the affiliate to provide cash collateral of$1.0 billion which is offset against the fair value amount recognized forderivative instruments that have been offset under the same master nettingarrangement and recorded in our balance sheet as a component of derivativerelated assets. LIQUIDITY RISK There have not been significant changes in our approach toliquidity risk since December 31, 2006. We continue to focus on ensuring a welldiversified funding base. We constantly monitor market conditions and focus onour ability to fund maturing liabilities. During the third quarter of 2007, wecontinued to access the commercial paper market and all other funding sourcesconsistent with our funding plans. MARKET RISK HSBC has certain limits and benchmarks that serve as guidelines indetermining the 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 PVBP limit as of September 30, 2007 was $2 million,which includes the risk associated with hedging instruments. Thus, for a onebasis point change in interest rates, the policy dictates that the value of thebalance sheet shall not increase or decrease by more than $2 million. As ofSeptember 30, 2007, we had a PVBP position of less than $1 million reflectingthe impact of a one basis point increase in interest rates. As of December 31,2006, we had a PVBP position of $1.1 million. The total PVBP position will not change as a result of the early adoption ofSFAS No. 159, however instruments previously accounted for on an accrual basiswill now be accounted for under the fair value option election. As a result, thePVBP risk for September 30, 2007, summarized in the table below, reflects arealignment of instruments from December 31, 2006, between accrual and mark-to-market. Total PVBP risk is lower as a result of normal risk management actions.The following table shows the components of PVBP: SEPTEMBER 30, DECEMBER 31, 2007 2006---------------------------------------------------------------------------------------- (IN MILLIONS)Risk related to our portfolio of balance sheet items marked-to-market........................................ $.1 $(1.8)Risk for all other remaining assets and liabilities....... - 2.9 --- -----Total PVBP risk........................................... $.1 $ 1.1 === ===== 78 HSBC Finance Corporation-------------------------------------------------------------------------------- We also monitor the impact that an immediate hypothetical increase or decreasein interest rates of 25 basis points applied at the beginning of each quarterover a 12 month period would have on our net interest income assuming a growingbalance sheet and the current interest rate risk profile. The following tablesummarizes such estimated impact: SEPTEMBER 30, DECEMBER 31, 2007 2006---------------------------------------------------------------------------------------- (IN MILLIONS)Decrease in net interest income following a hypothetical 25 basis points rise in interest rates applied at the beginning of each quarter over the next 12 months....... $169 $180Increase in net interest income following a hypothetical 25 basis points fall in interest rates applied at the beginning of each quarter over the next 12 months....... $128 $ 54 In the September 2007 scenario, as compared to December 2006, the timing of therepricing of the ARM portfolio is occurring earlier in the scenario, thus havinga greater impact on the results of the analysis for the twelve-month period.Further, a greater volume of ARMs will reset to higher rates and is expected toremain on book as a result of fewer refinancing options to subprime customers.As a result even in the declining rate scenario, the total benefit to netinterest income has increased significantly. These estimates include the impact of debt and the corresponding derivativeinstruments accounted for using the fair value option under SFAS No. 159. Theseestimates also assume we would not take any corrective actions in response tointerest rate movements and, therefore, exceed what most likely would occur ifrates were to change by the amount indicated. A principal considerationsupporting this analysis is the projected prepayment of loan balances for agiven economic scenario. Individual loan underwriting standards in combinationwith housing valuations and macroeconomic factors related to available mortgagecredit are the key assumptions driving these prepayment projections. While wehave utilized a number of sources to refine these projections, we cannotcurrently project prepayment rates with a high degree of certainty in alleconomic environments given recent, significant changes in both subprimemortgage underwriting standards and property valuations across the country. OPERATIONAL RISK There has been no significant change in our approach tooperational risk management since December 31, 2006. COMPLIANCE RISK There has been no significant change in our approach tocompliance risk management since December 31, 2006. REPUTATIONAL RISK There has been no significant change in our approach toreputational risk management since December 31, 2006. We are committed tooffering products that maintain high brand standards and provide value to ourcustomers. Consistent with this approach, we have taken a number of actions asdiscussed elsewhere in this Form 10-Q. 79 HSBC FINANCE CORPORATION RECONCILIATIONS TO U.S. GAAP FINANCIAL MEASURES SEPTEMBER 30, DECEMBER 31, 2007 2006---------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)TANGIBLE COMMON EQUITY:Common shareholder's equity............................... $ 17,737 $ 19,515Exclude: Fair value option adjustment............................ 168 - Unrealized (gains) losses on cash flow hedging instruments.......................................... 354 61 Minimum pension liability............................... 1 1 Unrealized gains on investments and interest-only strip receivables.......................................... 26 23 Intangible assets....................................... (2,029) (2,218) Goodwill................................................ (6,036) (7,010) -------- --------Tangible common equity.................................... 10,221 10,372HSBC acquisition purchase accounting adjustments.......... 900 1,105 -------- --------Tangible common equity, excluding HSBC acquisition purchase accounting adjustments......................... $ 11,121 $ 11,477 ======== ========TANGIBLE SHAREHOLDER'S(S') EQUITY:Tangible common equity.................................... $ 10,221 $ 10,372Preferred stock........................................... 575 575Mandatorily redeemable preferred securities of Household Capital Trusts.......................................... 1,275 1,275 -------- --------Tangible shareholder's(s') equity......................... 12,071 12,222HSBC acquisition purchase accounting adjustments.......... 900 1,105 -------- --------Tangible shareholder's(s') equity, excluding HSBC acquisition purchase accounting adjustments............. $ 12,971 $ 13,327 ======== ========TANGIBLE SHAREHOLDER'S(S') EQUITY PLUS OWNED LOSS RESERVES:Tangible shareholder's(s') equity......................... $ 12,071 $ 12,222Owned loss reserves....................................... 8,634 6,587 -------- --------Tangible shareholder's(s') equity plus owned loss reserves................................................ 20,705 18,809HSBC acquisition purchase accounting adjustments.......... 900 1,105 -------- --------Tangible shareholder's(s') equity plus owned loss reserves, excluding HSBC acquisition purchase accounting adjustments............................................. $ 21,605 $ 19,914 ======== ========TANGIBLE MANAGED ASSETS:Owned assets.............................................. $172,737 $179,218Receivables serviced with limited recourse................ 579 949 -------- --------Managed assets............................................ 173,316 180,167Exclude: Intangible assets....................................... (2,029) (2,218) Goodwill................................................ (6,036) (7,010) Derivative financial assets............................. (502) (298) -------- --------Tangible managed assets................................... 164,749 170,641HSBC acquisition purchase accounting adjustments.......... (7) 64 -------- --------Tangible managed assets, excluding HSBC acquisition purchase accounting adjustments......................... $164,742 $170,705 ======== ========EQUITY RATIOS:Common and preferred equity to owned assets............... 10.60% 11.21%Tangible common equity to tangible managed assets......... 6.20 6.08Tangible shareholder's(s') equity to tangible managed assets ("TETMA")........................................ 7.33 7.16Tangible shareholder's(s') equity plus owned loss reserves to tangible managed assets ("TETMA + Owned Reserves")... 12.57 11.02Excluding HSBC acquisition purchase accounting adjustments: Tangible common equity to tangible managed assets....... 6.75 6.72 TETMA................................................... 7.87 7.81 TETMA + Owned Reserves.................................. 13.11 11.67 ======== ======== 80 HSBC Finance Corporation-------------------------------------------------------------------------------- ITEM 4. CONTROLS AND PROCEDURES-------------------------------------------------------------------------------- We maintain a system of internal and disclosure controls and procedures designedto ensure that information required to be disclosed by HSBC Finance Corporationin the reports we file or submit under the Securities Exchange Act of 1934, asamended, (the "Exchange Act"), is recorded, processed, summarized and reportedon a timely basis. Our Board of Directors, operating through its auditcommittee, which is composed entirely of independent outside directors, providesoversight to our financial reporting process. We conducted an evaluation, with the participation of the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this report.Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this report so as to alert them in a timelyfashion to material information required to be disclosed in reports we fileunder the Exchange Act. There have been no significant changes in our internal and disclosure controlsor in other factors which could significantly affect internal and disclosurecontrols subsequent to the date that we carried out our evaluation. HSBC Finance Corporation continues the process to complete a thorough review ofits internal controls as part of its preparation for compliance with therequirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404requires our management to report on, and our external auditors to attest to,the effectiveness of our internal control structure and procedures for financialreporting. As a non-accelerated filer under Rule 12b-2 of the Exchange Act, ourfirst report under Section 404 will be contained in our Form 10-K for the periodended December 31, 2007. 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 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 lenders 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 inlawsuits pending against them in these states. The cases, in particular,generally allege inadequate disclosure or misrepresentation of financing terms.In some suits, other parties are also named as defendants. Unspecifiedcompensatory and punitive damages are sought. Several of these suits purport tobe class actions or have multiple plaintiffs. The judicial climate in thesestates is such that the outcome of all of these cases is unpredictable. Althoughour subsidiaries believe they have substantive legal defenses to these claimsand are prepared to defend each case vigorously, a number of such cases havebeen settled or otherwise resolved for amounts that in the aggregate are notmaterial to our operations. Insurance carriers have been notified asappropriate, and from time to time reservations of rights letters have beenreceived. DISCRIMINATION LITIGATION Since July of 2007, HSBC Finance Corporation and/or one or more of itssubsidiaries has been named as a defendant in three class actions filed in theCentral District of California and the District of Massachusetts: NationalAssociation for the Advancement of Colored People ("NAACP") v. AmeriquestMortgage Company, et al. including HSBC Finance Corporation (C.D. Ca., No.SACV07-0794AG(ANx)), Toruno v. HSBC Finance Corporation and Decision OneMortgage Company, LLC (C.D. Ca., No. CV07-05998JSL(RCx) and Suyapa Allen v.Decision One Mortgage Company, LLC, HSBC Finance Corporation, et al. (D. Mass.,C.A. 07-11669). Each suit alleges that the named entities racially discriminatedagainst their customers by using loan pricing policies 81 HSBC Finance Corporation-------------------------------------------------------------------------------- and procedures that have resulted in a disparate impact against minoritycustomers. Violations of various federal statutes, including the Fair HousingAct and the Equal Credit Opportunity Act, are claimed. The NAACP suit has notyet been served, and responsive pleadings are not yet due in the other suits. Atthis time, we are unable to quantify the potential impact from these actions, ifany. CREDIT CARD SERVICES LITIGATION Since June 2005, HSBC Finance Corporation, HSBC North America, and HSBC, as wellas other banks and the Visa and Master Card associations, were named asdefendants in four class actions filed in Connecticut and the Eastern Districtof New York; Photos Etc. Corp. et al. v. Visa U.S.A., Inc., et al. (D. Conn. No.3:05-CV-01007 (WWE)): National Association of Convenience Stores, et al. v. VisaU.S.A., Inc., et al. (E.D.N.Y. No. 05-CV 4520 (JG)); Jethro Holdings, Inc., etal. v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-4521 (JG)); and AmericanBooksellers Ass'n v. Visa U.S.A., Inc. et al. (E.D.N.Y. No. 05-CV-5391 (JG)).Numerous other complaints containing similar allegations (in which no HSBCentity is named) were filed across the country against Visa, MasterCard andother banks. These actions principally allege that the imposition of a no-surcharge rule by the associations and/or the establishment of the interchangefee charged for credit card transactions causes the merchant discount fee paidby retailers to be set at supracompetitive levels in violation of the Federalantitrust laws. In response to motions of the plaintiffs on October 19, 2005,the Judicial Panel on Multidistrict Litigation (the "MDL Panel") issued an orderconsolidating these suits and transferred all of the cases to the EasternDistrict of New York. The consolidated case is: In re Payment Card InterchangeFee and Merchant Discount Antitrust Litigation, MDL 1720, E.D.N.Y. Aconsolidated, amended complaint was filed by the plaintiffs on April 24, 2006.Discovery has begun. At this time, we are unable to quantify the potentialimpact 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 SecuritiesExchange Act of 1934. The parties stipulated that plaintiffs will not seek tocertify a class with respect to the claims brought under sec. 11 and sec. 15 ofthe Securities 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 collection, sales andlending practices, 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 82 HSBC Finance Corporation-------------------------------------------------------------------------------- plaintiffs justifiably relied on such statement, the false statement(s) causedthe plaintiffs' damages, and that some or all of the defendants should be liablefor those alleged statements. On February 28, 2006, the Court also dismissed allalleged sec. 10 claims that arose prior to July 30, 1999, shortening the classperiod by 22 months. The bulk of fact discovery concluded on January 31, 2007.Expert discovery is expected to conclude on December 21, 2007. Separately, oneof the defendants, Arthur Andersen LLP, entered into a settlement of the claimsagainst Arthur Andersen. This settlement received Court approval in April 2006.At this time we are unable to quantify the potential impact from this action, ifany. With respect to this securities litigation, we believe that we have not, and ourofficers and directors have not, committed any wrongdoing and there will be nofinding of improper activities that may result in a material liability to us orany of our officers or directors. ITEM 6. EXHIBITS-------------------------------------------------------------------------------- Exhibits included in this Report: 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 83 HSBC Finance Corporation-------------------------------------------------------------------------------- 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. Date: November 14, 2007 HSBC FINANCE CORPORATION (Registrant) /s/ Beverley A. Sibblies ---------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer 84 HSBC Finance Corporation-------------------------------------------------------------------------------- EXHIBIT INDEX-------------------------------------------------------------------------------- 12 Statement of Computation of Ratio of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.1 Debt and Preferred Stock Securities Ratings 85 HSBC Finance Corporation-------------------------------------------------------------------------------- EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS NINE MONTHS ENDED SEPTEMBER 30, 2007 2006-------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)Net income.................................................... $ (498) $2,007Income tax expense............................................ 166 1,167 ------ ------Income before income tax expense.............................. (332) 3,174 ------ ------Fixed charges: Interest expense............................................ 6,131 5,318 Interest portion of rentals(1).............................. 42 44 ------ ------Total fixed charges........................................... 6,173 5,362 ------ ------Total earnings as defined..................................... $5,841 $8,536 ====== ======Ratio of earnings to fixed charges............................ .95 1.59Preferred stock dividends(2).................................. 44 43Ratio of earnings to combined fixed charges and preferred stock dividends............................................. .94 1.58 -------- (1) Represents one-third of rentals, which approximates the portion representing interest. (2) Preferred stock dividends are grossed up to their pretax equivalents. HSBC Finance Corporation-------------------------------------------------------------------------------- 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, Brendan P. McDonagh, Chief Executive Officer of HSBC 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 statementof a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange 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 onour most recent evaluation, to the registrant's auditors and the audit committeeof the registrant's board of directors (or persons performing the equivalentfunctions): 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, 2007 /s/ BRENDAN P. MCDONAGH ---------------------------------------- Brendan P. McDonagh Chief Executive Officer HSBC Finance Corporation-------------------------------------------------------------------------------- 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 statementof a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange 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 onour most recent evaluation, to the registrant's auditors and the audit committeeof the registrant's board of directors (or persons performing the equivalentfunctions): 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, 2007 /s/ BEVERLEY A. SIBBLIES ---------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer HSBC Finance Corporation-------------------------------------------------------------------------------- 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 The certification set forth below is being submitted in connection with the HSBCFinance Corporation (the "Company") Quarterly Report on Form 10-Q for the periodending September 30, 2007 as filed with the Securities and Exchange Commissionon the date hereof (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "ExchangeAct") and Section 1350 of Chapter 63 of Title 18 of the United States Code. I, Brendan P. McDonagh, Chief Executive Officer of the Company, certify that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HSBC Finance Corporation. November 14, 2007 /s/ BRENDAN P. MCDONAGH ---------------------------------------- Brendan P. McDonagh Chief Executive Officer HSBC Finance Corporation-------------------------------------------------------------------------------- CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The certification set forth below is being submitted in connection with the HSBCFinance Corporation (the "Company") Quarterly Report on Form 10-Q for the periodending September 30, 2007 as filed with the Securities and Exchange Commissionon the date hereof (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "ExchangeAct") and Section 1350 of Chapter 63 of Title 18 of the United States Code. I, Beverley A. Sibblies, Senior Vice President and Chief Financial Officer ofthe Company, certify that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of HSBC Finance Corporation. November 14, 2007 /s/ BEVERLEY A. SIBBLIES ---------------------------------------- Beverley A. Sibblies Senior Vice President and Chief Financial Officer 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. HSBC Finance Corporation-------------------------------------------------------------------------------- EXHIBIT 99.1 DEBT AND PREFERRED STOCK SECURITIES RATINGS STANDARD & MOODY'S POOR'S INVESTORS CORPORATION SERVICE FITCH, INC. DBRS, INC.-------------------------------------------------------------------------------------------------AS OF SEPTEMBER 30, 2007HSBC Finance Corporation Senior debt............................... AA- Aa3 AA- AA (low) Senior subordinated debt.................. A+ A1 * * Commercial paper.......................... A-1+ P-1 F1+ R-1 (middle) Series B preferred stock.................. A A2 A+ *HFC Bank Limited Senior debt............................... AA- Aa3 AA- * Commercial paper.......................... A-1+ P-1 F1+ *HSBC Financial Corporation Limited Senior notes and term loans............... AA- Aa3 AA- AA (low) Commercial paper.......................... * * * R-1 (middle) -------- (*) Not rated by this agency. < /PRE > < /BODY > < /HTML > This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
HSBC Holdings