31st Mar 2005 12:31
HSBC Holdings PLC31 March 2005 PART 2 Reconciliations of our managed basis segment results to managed basis and ownedbasis consolidated totals are as follows: MANAGED CREDIT ADJUSTMENTS/ BASIS CARD INTER- ALL RECONCILING CONSOLIDATED CONSUMER SERVICES NATIONAL OTHER ITEMS TOTALS----------------------------------------------------------------------------------------------------- (IN MILLIONS)THREE MONTHS ENDED JUNE 30, 2004 (RESTATED)Net interest income..... $ 1,915 $ 513 $ 196 $ (42) $ - $ 2,582Fee income.............. 85 335 24 (4) - 440Other revenues, excluding fee income................ (210) (56) 101 307 (34)(2) 108Intersegment revenues... 26 6 3 (1) (34)(2) -Provision for credit losses................ 734 319 93 (1) - 1,145Total costs and expenses.............. 647 284 173 217 - 1,321Net income.............. 256 120 34 45 (22) 433Receivables............. 92,196 18,355 11,380 337 - 122,268Assets.................. 94,799 20,405 12,342 24,471 (8,648)(4) 143,369 --------- --------- --------- --------- --------- ----------THREE MONTHS ENDED JUNE 30, 2003 (RESTATED)Net interest income..... $ 1,804 $ 472 $ 181 $ 77 $ - $ 2,534Fee income.............. 79 295 20 1 - 395Other revenues, excluding fee income................ 176 37 77 643 (40)(2) 893Intersegment revenues... 30 7 3 - (40)(2) -Provision for credit losses................ 1,183 383 85 3 2(3) 1,656Total costs and expenses.............. 594 269 127 257 - 1,247Net income.............. 175 94 44 313 (27) 599Receivables............. 83,992 17,439 10,186 958 - 112,575Assets.................. 86,352 20,087 11,172 27,037 (8,822)(4) 135,826 --------- --------- --------- --------- --------- ----------SIX MONTHS ENDED JUNE 30, 2004 (RESTATED)Net interest income..... $ 3,779 $ 1,041 $ 398 $ (62) $ - $ 5,156Fee income.............. 179 685 44 (6) - 902Other revenues, excluding fee income................ (391) (20) 189 657 (67)(2) 368Intersegment revenues... 48 14 7 (2) (67)(2) -Provision for credit losses................ 1,399 740 188 (2) 1(3) 2,326Total costs and expenses.............. 1,274 561 345 551 - 2,731Net income.............. 560 257 62 67 (43) 903 --------- --------- --------- --------- --------- ----------SIX MONTHS ENDED JUNE 30, 2003 (RESTATED)Net interest income..... $ 3,542 $ 950 $ 360 $ 36 $ - $ 4,888Fee income.............. 176 621 39 3 - 839Other revenues, excluding fee income................ 193 95 150 1,226 (77)(2) 1,587Intersegment revenues... 56 16 6 (1) (77)(2) -Provision for credit losses................ 2,123 775 170 2 3(3) 3,073Total costs and expenses.............. 1,159 538 265 706 - 2,668HSBC acquisition related costs incurred by Household............. - - - 198 - 198Net income.............. 392 222 75 351 (51) 989Operating net income(1)............. 392 222 75 518 (51) 1,156 --------- --------- --------- --------- --------- ---------- OWNED BASIS SECURITIZATION CONSOLIDATED ADJUSTMENTS TOTALS------------------------ ----------------------------- (IN MILLIONS)THREE MONTHS ENDED JUNE 30, 2004 (RESTATED)Net interest income..... $ (652)(5) $ 1,930Fee income.............. (198)(5) 242Other revenues, excluding fee income................ 702(5) 810Intersegment revenues... - -Provision for credit losses................ (148)(5) 997Total costs and expenses.............. - 1,321Net income.............. - 433Receivables............. (22,836)(6) 99,432Assets.................. (22,836)(6) 120,533 ---------- ----------THREE MONTHS ENDED JUNE 30, 2003 (RESTATED)Net interest income..... $ (720)(5) $ 1,814Fee income.............. (167)(5) 228Other revenues, excluding fee income................ 270(5) 1,163Intersegment revenues... - -Provision for credit losses................ (617)(5) 1,039Total costs and expenses.............. - 1,247Net income.............. - 599Receivables............. (24,268)(6) 88,307Assets.................. (24,268)(6) 111,558 ---------- ----------SIX MONTHS ENDED JUNE 30, 2004 (RESTATED)Net interest income..... $ (1,406)(5) $ 3,750Fee income.............. (395)(5) 507Other revenues, excluding fee income................ 1,400(5) 1,768Intersegment revenues... - -Provision for credit losses................ (401)(5) 1,925Total costs and expenses.............. - 2,731Net income.............. - 903 ---------- ----------SIX MONTHS ENDED JUNE 30, 2003 (RESTATED)Net interest income..... $ (1,446)(5) $ 3,442Fee income.............. (322)(5) 517Other revenues, excluding fee income................ 744(5) 2,331Intersegment revenues... - -Provision for credit losses................ (1,024)(5) 2,049Total costs and expenses.............. - 2,668HSBC acquisition related costs incurred by Household............. - 198Net income.............. - 989Operating net income(1)............. - 1,156 ---------- ---------- 43 --------------- (1) This non-GAAP financial measure is provided for comparison of our operating trends only and should be read in conjunction with our owned basis GAAP financial information. Operating net income excludes $167 million (after-tax) of HSBC acquisition related costs and other merger related items incurred by Household in 2003. See "Basis of Reporting" for additional discussion on the use of non-GAAP financial measures. (2) Eliminates intersegment revenues. (3) Eliminates bad debt recovery sales between operating segments. (4) Eliminates investments in subsidiaries and intercompany borrowings. (5) Reclassifies net interest income, fee income and provision for credit losses relating to securitized receivables to other revenues. (6) Represents receivables serviced with limited recourse. CREDIT QUALITY-------------------------------------------------------------------------------- Subject to receipt of regulatory approvals, we intend to transfer our domesticprivate label credit card portfolio to HSBC Bank USA. Contingent upon receivingregulatory approval for this asset transfer, we will adopt charge-off andaccount management guidelines in accordance with the Uniform Retail CreditClassification and Account Management Policy issued by the FFIEC for our entiredomestic private label and MasterCard and Visa portfolios. See "ExecutiveOverview" for further discussion. 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.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 charge-offs in developing our loss reserveestimates. Loss reserve estimates are reviewed periodically and adjustments arereported in earnings when they become known. As these estimates are influencedby factors outside of our control, such as consumer payment patterns andeconomic conditions, there is uncertainty inherent in these estimates, making itreasonably possible that they could change. See Note 4, "Receivables," in theaccompanying consolidated financial statements for receivables by product typeand Note 5, "Credit Loss Reserves," for our credit loss reserve methodology andan analysis of changes in the credit loss reserves. The following table summarizes owned basis credit losses: JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003--------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)Owned credit loss reserves.................................. $ 3,795 $ 3,753 $ 3,659Reserves as a percent of: Receivables............................................... 3.82% 4.01% 4.14% Net charge-offs(1)........................................ 98.2 96.7 98.2 Nonperforming loans....................................... 103.0 96.7 94.6 --------------- (1) Quarter-to-date, annualized During the quarter ended June 30, 2004, credit loss reserves increased as theprovision for owned credit losses was $32 million greater than net charge-offsreflecting growth in our loan portfolio, partially offset by improved assetquality. In the quarter ended June 30, 2003, provision for owned credit losseswas $108 million greater than net charge-offs. Reserve levels at June 30, 2004reflect the factors discussed above. 44 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: JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003--------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)Managed credit loss reserves................................ $5,699 $5,912 $5,639Reserves as a percent of: Receivables............................................... 4.66% 5.01% 5.01% Net charge-offs(1)........................................ 104.2 102.5 104.9 Nonperforming loans....................................... 122.8 119.8 116.4 --------------- (1) Quarter-to-date, annualized 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. DELINQUENCY - OWNED BASIS The following table summarizes two-months-and-over contractual delinquency (as apercent of consumer receivables): JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003---------------------------------------------------------------------------------------------Real estate secured......................................... 3.39% 3.87% 4.27%Auto finance................................................ 2.12 1.68 2.49MasterCard/Visa............................................. 5.83 5.90 5.97Private label............................................... 5.00 5.38 5.45Personal non-credit card.................................... 8.92 9.64 9.39 ---- ---- ----Total....................................................... 4.57% 5.01% 5.38% ==== ==== ==== Total owned delinquency decreased $137 million and 44 basis points compared tothe prior quarter. This decrease is consistent with improvements in earlydelinquency roll rate trends we began to experience in the fourth quarter of2003 as a result of improvements in the economy and better underwriting,including both improved modeling and improved credit quality of originations.The overall decrease in our real estate secured portfolio reflects receivablegrowth and improved collection efforts which were partially offset by theseasoning and maturation of the portfolio. The decrease in private labeldelinquency reflects improved underwriting, collections and credit models. Thedecrease in personal non-credit card delinquency reflects the positive impact oftightened underwriting and reduced marketing in our branches as well as improvedcollection efforts. The increase in auto finance delinquency reflects normalseasonal patterns and a temporary impact due to changes in collections. Compared to a year ago, total delinquency decreased $200 million and 81 basispoints as all products reported lower delinquency levels. The improvements aregenerally the result of improvements in the economy and better underwriting. 45 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): JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003---------------------------------------------------------------------------------------------Real estate secured......................................... 1.04% 1.15% 1.03%Auto finance................................................ 3.05 4.65 5.30MasterCard/Visa............................................. 9.91 8.66 10.43Private label............................................... 5.06 5.29 6.41Personal non-credit card.................................... 10.59 11.17 9.87 ----- ----- -----Total....................................................... 4.02% 4.17% 4.34% ===== ===== =====Real estate secured net charge-offs and REO expense as a percent of average real estate secured receivables........ 1.47% 1.63% 1.46% Net charge-offs decreased 15 basis points compared to the quarter ended March31, 2004 as the lower delinquency levels we have been experiencing due to animproving economy are beginning to have an impact on charge-offs. The decreasein auto finance net charge-offs reflects a normal seasonal pattern related tohigher charge-offs in the first quarter. The increase in our MasterCard and Visaportfolio is primarily attributable to seasonal trends and the effect of a loweraverage receivable level. In addition to economic conditions, the decrease inour personal non-credit card portfolio is a result of improved credit qualityand portfolio stabilization. Total net charge-offs for the current quarter decreased from June 2003 netcharge-offs levels due to an improving economy and a decrease in the percentageof the portfolio comprised of personal non-credit card receivables, which have ahigher net charge-off rate than other products in our portfolio. In addition,auto finance, MasterCard and Visa and private label reported lower netcharge-off levels generally as a result of receivable growth and betterunderwriting, including both improved modeling and improved credit quality oforiginations. Auto finance net charge-offs also reflect improved used autoprices which resulted in lower loss severities. The increase in our personalnon-credit card portfolio reflects maturation of the portfolio as well asreduced originations. OWNED NONPERFORMING ASSETS JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003--------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)Nonaccrual receivables...................................... $2,833 $3,003 $3,021Accruing consumer receivables 90 or more days delinquent.... 849 876 844Renegotiated commercial loans............................... 2 2 2 ------ ------ ------Total nonperforming receivables............................. 3,684 3,881 3,867Real estate owned........................................... 624 656 486 ------ ------ ------Total nonperforming assets.................................. $4,308 $4,537 $4,353 ====== ====== ======Credit loss reserves as a percent of nonperforming receivables............................................... 103.0% 96.7% 94.6% Compared to March 31, 2004, the decrease in nonaccrual receivables and totalnonperforming assets is primarily attributable to a decrease in our real estatesecured portfolio due to improved credit quality and collection efforts.Accruing consumer receivables 90 or more days delinquent includes domesticMasterCard and Visa and private label credit card receivables, consistent withindustry practice. 46 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. As summarizedin the tables that follow, in the third quarter of 2003, we implemented certainchanges to our restructuring policies. These changes are intended to eliminateand/or streamline exception provisions to our existing policies and aregenerally effective for receivables originated or acquired after January 1,2003. Receivables originated or acquired prior to January 1, 2003 generally arenot subject to the revised restructure and customer account management policies.However, for ease of administration, in the third quarter of 2003 our mortgageservices business elected to adopt uniform policies for all products regardlessof the date an account was originated or acquired. Implementation of the uniformpolicy by mortgage services has the effect of only counting restructuresoccurring on or after January 1, 2003 in assessing restructure eligibility forpurposes of the limitation that no account may be restructured more than fourtimes in a rolling 60 month period. Resetting these counters will not impact theability of mortgage services to report historical restructure statistics. Otherbusiness units may also elect to adopt uniform policies in the future. Thechanges have not had, and are not expected to have a significant impact on ourbusiness model or on our results of operations as these changes are generallybeing phased in as new receivables are originated or acquired. Approximately two-thirds of all restructured receivables are secured products,which may have less loss severity exposure because of the underlying collateral.Credit loss reserves take into account whether loans have been restructured,rewritten or are subject to forbearance, an external debt management plan,modification, extension or deferment. Our credit loss reserves also take intoconsideration the loss severity expected based on the underlying collateral, ifany, for the loan. Our restructuring policies and practices vary by product and are described inthe table that follows. The fact that the restructuring criteria may be met fora particular account does not require us to restructure that account, and theextent to which we restructure accounts that are eligible under the criteriawill vary depending upon our view of prevailing economic conditions and otherfactors which may change from period to period. In addition, for some products,accounts may be restructured without receipt of a payment in certain specialcircumstances (e.g., upon reaffirmation of a debt owed to us in connection witha Chapter 7 bankruptcy proceeding). We use account restructuring as an accountand customer management tool in an effort to increase the value of our accountrelationships, and accordingly, the application of this tool is subject tocomplexities, variations and changes from time to time. These policies andpractices are continually under review and assessment to assure that they meetthe goals outlined above, and accordingly, we modify or permit exceptions tothese general policies and practices from time to time. In addition, exceptionsto these policies and practices may be made in specific situations in responseto legal or regulatory agreements or orders. In the policies summarized below, "hardship restructures" and "workoutrestructures" refer to situations in which the payment and/or interest rate maybe modified on a temporary or permanent basis. In each case, the contractualdelinquency status is reset to current. "External debt management plans" refersto situations in which consumers receive assistance in negotiating or schedulingdebt repayment through public or private agencies such as Consumers CreditCounseling Services. RESTRUCTURING POLICIES AND PRACTICES HISTORICAL RESTRUCTURING FOLLOWING CHANGES IMPLEMENTED IN THE POLICIES AND PRACTICES(1),(2),(3) THIRD QUARTER 2003 AND IN DECEMBER 2004 (1),(3)----------------------------------------------------------------------------------------------REAL ESTATE SECURED REAL ESTATE SECURED Real Estate - Overall Real Estate - Overall - Accounts may be restructured upon receipt - An account may be restructured if we of two qualifying payments within the 60 days receive two qualifying payments within the 60 days 47 RESTRUCTURING POLICIES AND PRACTICES HISTORICAL RESTRUCTURING FOLLOWING CHANGES IMPLEMENTED IN THE POLICIES AND PRACTICES(1),(2),(3) THIRD QUARTER 2003 AND IN DECEMBER 2004 (CONTINUED)(1),(3)--------------------------------------------------------------------------------------------------------- preceding the restructure; we may preceding the restructure restructure accounts in hardship, - Accounts will be limited to four restructures in a disaster or strike situations with one rolling 60 month period qualifying payment or no payments - Accounts generally are not eligible for restructure - Accounts that have filed for Chapter 7 until nine months after origination bankruptcy protection may be restructured - Accounts whose borrowers have filed for Chapter 7 upon receipt of a signed reaffirmation bankruptcy protection may be restructured upon receipt agreement of a signed reaffirmation agreement - Accounts subject to a Chapter 13 plan - Accounts whose borrowers are subject to a Chapter 13 filed with a bankruptcy court generally plan filed with a bankruptcy court generally may be require one qualifying payment to be restructured upon receipt of one qualifying payment restructured - Except for bankruptcy reaffirmation and filed Chapter - Except for bankruptcy reaffirmation and 13 plans, accounts will generally not be restructured filed Chapter 13 plans, agreed automatic more than once in a 12 month period payment withdrawal or - Accounts whose borrowers agree to pay by automatic hardship/disaster/strike, accounts are withdrawal are generally restructured upon receipt of generally limited to one restructure one qualifying payment(4) every 12 months - Accounts generally are not eligible for restructure until on books for at least six months REAL ESTATE SECURED REAL ESTATE SECURED Real Estate - Consumer Lending Real Estate - Mortgage Services(5) - Accounts whose borrowers agree to pay by - Accounts will generally not be eligible for automatic withdrawal are generally restructure until nine months after origination and restructured upon receipt of one six months after acquisition qualifying payment AUTO FINANCE AUTO FINANCE - Accounts may generally be extended upon receipt of two - Accounts may be extended if we receive qualifying payments within the 60 days preceding the one qualifying payment within the 60 days extension preceding the extension - Accounts may be extended by no more than three months - Accounts may be extended no more than at a time three months at a time and by no more - Accounts will be limited to four extensions in a than three months in any 12-month period rolling 60 month period, but in no case will an - Extensions are limited to six months over account be extended more than a total of six months the contractual life over the life of the account - Accounts that have filed for Chapter 7 - Accounts will be limited to one extension every six bankruptcy protection may be restructured months upon receipt of a signed reaffirmation - Accounts will not be eligible for extension until on agreement the books for at least six months - Accounts whose borrowers are subject to a - Accounts whose borrowers have filed for Chapter 7 Chapter 13 plan may be restructured upon bankruptcy protection may be restructured upon receipt filing of the plan with a bankruptcy of a signed reaffirmation agreement court - Accounts whose borrowers are subject to a Chapter 13 plan may be restructured upon filing of the plan with a bankruptcy court MASTERCARD AND VISA MASTERCARD AND VISA - Typically, accounts qualify for - Typically, accounts qualify for restructuring if we restructuring if we receive two or three receive two or three qualifying payments qualifying payments 48 RESTRUCTURING POLICIES AND PRACTICES HISTORICAL RESTRUCTURING FOLLOWING CHANGES IMPLEMENTED IN THE POLICIES AND PRACTICES(1),(2),(3) THIRD QUARTER 2003 AND IN DECEMBER 2004 (CONTINUED)(1),(3)--------------------------------------------------------------------------------------------------------- prior to the restructure, but accounts in prior to the restructure, but accounts in approved approved external debt management external debt management programs may generally be programs may generally be restructured restructured upon receipt of one qualifying payment. upon receipt of one qualifying payment - Generally, accounts may be restructured once every six - Generally, accounts may be restructured months once every six months PRIVATE LABEL(6) PRIVATE LABEL(6) - An account may generally be restructured - Accounts originated after October 1, 2002 for certain if we receive one or more qualifying merchants require receipt of two or three qualifying payments, depending upon the merchant payments to be restructured, except accounts in an - Restructuring is limited to once every approved, external debt management program may be six months (or longer, depending upon the restructured upon receipt of one qualifying payment. merchant) for revolving accounts and once - Accounts must be on the books for nine months and we every 12 months for closed-end accounts must receive the equivalent of two qualifying payments within the 60 days preceding the restructure - Accounts are not eligible for subsequent restructure until 12 months after a prior restructure and upon our receipt of three qualifying payments within the 90 days preceding the restructure PERSONAL NON-CREDIT CARD PERSONAL NON-CREDIT CARD - Accounts may be restructured if we - Accounts may be restructured upon receipt of two receive one qualifying payment within the qualifying payments within the 60 days preceding the 60 days preceding the restructure; may restructure restructure accounts in a - Accounts will be limited to one restructure every six hardship/disaster/strike situation with months one qualifying payment or no payments - Accounts will be limited to four restructures in a - If an account has never been more than 90 rolling 60 month period days delinquent, it may be generally - Accounts will not be eligible for restructure until restructured up to three times per year six months after origination - If an account has ever been more than 90 days delinquent, generally it may be restructured with one qualifying payment no more than four times over its life; however, generally the account may thereafter be restructured if two qualifying payments are received - Accounts subject to programs for hardship or strike may require only the receipt of reduced payments in order to be restructured; disaster may be restructured with no payments --------------- (1) We employ account restructuring and other customer account management policies and practices as flexible customer account management tools. In addition to variances in criteria by product, criteria may also vary within a product line (for example, in our private label credit card business, criteria may vary from merchant to merchant). Also, we continually review our product lines and assess restructuring criteria and they are subject to modification or exceptions from time to time. Accordingly, the description of our account restructuring policies or practices provided in this table should be taken only as general guidance to the restructuring approach taken within each product line, and not as assurance that accounts not meeting these criteria will never be restructured, that every account meeting these criteria will in fact be restructured or that these criteria will not change or that exceptions will not be made in individual cases. In addition, in an effort to determine optimal customer account management strategies, management may run more conservative tests on some or all accounts in a product line for fixed periods of time in order to evaluate the impact of alternative policies and practices. 49 (2) For our United Kingdom business, all portfolios have a consistent account restructure policy. An account may be restructured if we receive two or more qualifying payments within two calendar months, limited to one restructure every 12 months, with a lifetime limit of three times. In hardship situations an account may be restructured if a customer makes three consecutive qualifying monthly payments within the last three calendar months. Only one hardship restructure is permitted in the life of a loan. There were no changes to the restructure policies of our United Kingdom business in 2003. (3) Generally, policy changes will not be applied to the entire portfolio on the date of implementation and may be applied to new, or recently originated or acquired accounts. However, for ease of administration, in the third quarter of 2003 our mortgage services business elected to adopt uniform policies for all products regardless of the date an account was originated or acquired. Implementation of the uniform policy has the effect of only counting restructures occurring on or after January 1, 2003 in assessing restructure eligibility for the purpose of the limitation that no account may be restructured more than four times in a rolling 60 month period. Resetting these counters will not impact the ability of mortgage services to report historical restructure statistics. Other business units may also elect to adopt uniform policies. Unless otherwise noted, the revisions to the restructure policies and practices implemented in the third quarter 2003 will generally be applied only to accounts originated or acquired after January 1, 2003 and the historical restructuring policies and practices are effective for all accounts originated or acquired prior to January 1, 2003. The changes have not had, and are not expected to have a significant impact on our business model or results of operations as these changes are generally being phased in as receivables are originated or acquired. (4) Our mortgage services business implemented this policy for all accounts effective March 1, 2004. (5) Prior to January 1, 2003, accounts that had made at least six qualifying payments during the life of the loan and that agreed to pay by automatic withdrawal were generally restructured with one qualifying payment. (6) For our Canadian business, private label is limited to one restructure every four months. For private label accounts in our Canadian business originated or acquired after January 1, 2003, two qualifying payments must be received, the account must be on the books for at least six months, at least six months must have elapsed since the last restructure, and there may be no more than four restructures in a rolling 60 month period. In addition to our restructuring policies and practices, we employ othercustomer account management techniques, which we typically use on a more limitedbasis, that are similarly designed to manage customer relationships, maximizecollection opportunities and avoid foreclosure or repossession if reasonablypossible. These additional customer account management techniques include, atour discretion, actions such as extended payment arrangements, approved externaldebt management plans, forbearance, modifications, loan rewrites and/ordeferment pending a change in circumstances. We typically use these customeraccount management techniques with individual borrowers in transitionalsituations, usually involving borrower hardship circumstances or temporarysetbacks that are expected to affect the borrower's ability to pay thecontractually specified amount for some period of time. These actions vary byproduct and are under continual review and assessment to determine that theymeet the goals outlined above. For example, under a forbearance agreement, wemay agree not to take certain collection or credit agency reporting actions withrespect to missed payments, often in return for the borrower's agreeing to payus an extra amount in connection with making future payments. In some cases,these additional customer account management techniques may involve us agreeingto lower the contractual payment amount and/or reduce the periodic interestrate. When we use a customer account management technique, we may treat theaccount as being contractually current and will not reflect it as a delinquentaccount in our delinquency statistics. However, if the account subsequentlyexperiences payment defaults, it will again become contractually delinquent. Wegenerally consider loan rewrites to involve an extension of a new loan, and suchnew loans are not reflected in our delinquency or restructuring statistics. 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 serviced andcollected without regard to ownership and result in a similar credit lossexposure for us. As previously reported, in prior periods we used certainassumptions and estimates to compile our restructure statistics. We also statedthat we continue to enhance our ability to capture and segment restructure dataacross all business units. In the tables that follow, the restructure statisticspresented for June 30, 2004 have been compiled using enhanced systemic countersand refined assumptions and estimates. As a result of the systems enhancements,for June 30, 2004 and subsequent periods we exclude from our reported statisticsloans that had been reported as contractually delinquent that have been reset toa current status because we have determined that the loan should not have beenconsidered delinquent (e.g., payment application processing errors). Statisticsreported for all periods prior to June 30, 2004 include such loans. Whencomparing restructuring statistics from different periods, the fact that ourrestructure policies and practices will 50 change over time, that exceptions are made to those policies and practices, andthat our data capture methodologies have been enhanced, should be taken intoaccount. Further, to the best of our knowledge, most of our competitors do notdisclose account restructuring, reaging, loan rewriting, forbearance,modification, deferment or extended payment information comparable to theinformation we have disclosed, and the lack of such disclosure by other lendersmay limit the ability to draw meaningful conclusions about our business basedsolely on data or information regarding account restructuring statistics orpolicies. TOTAL RESTRUCTURED BY RESTRUCTURE PERIOD - DOMESTIC PORTFOLIO(1)(MANAGED BASIS) JUNE 30, MARCH 31, JUNE 30, 2004 2004 2003--------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)Never restructured.......................................... 86.1% 84.7% 83.7%Restructured: Restructured in the last 6 months......................... 4.8 6.2 7.2 Restructured in the last 7-12 months...................... 4.0 3.9 3.8 Previously restructured beyond 12 months.................. 5.1 5.2 5.3 ------- ------- ------- Total ever restructured(2)................................ 13.9 15.3 16.3 ------- ------- -------Total....................................................... 100.0% 100.0% 100.0% ======= ======= ======= TOTAL RESTRUCTURED BY PRODUCT - DOMESTIC PORTFOLIO(1)(MANAGED BASIS) Real estate secured......................................... $ 8,885 $ 9,506 $ 9,225Auto finance................................................ 1,304 1,255 1,360MasterCard/Visa............................................. 639 505 580Private label............................................... 830 990 1,146Personal non-credit card.................................... 3,727 3,913 4,202 ------- ------- -------Total....................................................... $15,385 $16,169 $16,513 ======= ======= =======(AS A PERCENT OF MANAGED RECEIVABLES)Real estate secured......................................... 16.5% 18.9% 19.2%Auto finance................................................ 14.0 13.9 17.3MasterCard/Visa............................................. 3.6 2.8 3.5Private label............................................... 5.6 7.0 8.3Personal non-credit card.................................... 25.0 26.3 26.8 ------- ------- -------Total(2).................................................... 13.9% 15.3% 16.3% ======= ======= ======= --------------- (1) Excludes foreign businesses, commercial and other. (2) Total including foreign businesses was 13.0 percent at June 30, 2004, 14.4 percent at March 31, 2004, and 15.3 percent at June 30, 2003. The amount of domestic and foreign managed receivables in forbearance,modification, rewrites or other account management techniques for which we havereset delinquency and that is not included in the restructured or delinquencystatistics was approximately $.5 billion or .4 percent of managed receivables atJune 30, 2004, $1.0 billion or .8 percent of managed receivables at March 31,2004 and $1.1 billion or 1.0 percent of managed receivables at June 30, 2003.For periods prior to June 30, 2004, all credit card approved consumer creditcounseling accommodations are included in the reported statistics. As a resultof 51 our systems enhancements, we are now able to segregate which credit cardapproved consumer credit counseling accommodations included resetting thecontractual delinquency status to current after January 1, 2003. Such accountsare included in the June 30, 2004 restructure statistics in the table above.Credit card credit counseling accommodations that did not include resettingcontractual delinquency status are not reported in the table above or the June30, 2004 statistics in this paragraph. LIQUIDITY AND CAPITAL RESOURCES-------------------------------------------------------------------------------- The funding synergies resulting from our merger with HSBC have allowed us toreduce our reliance on traditional sources to fund our growth. We continue tofocus on balancing our use of affiliate and third-party funding sources tominimize funding expense while maximizing liquidity. As discussed below, wedecreased third-party debt and initial securitization levels during the firstsix months of 2004 as we used proceeds from the sale of real estate securedreceivables to HSBC Bank USA and debt issued to affiliates to assist in thefunding of our businesses. Because we are now a subsidiary of HSBC, our credit spreads relative toTreasuries have tightened. We recognized cash funding expense savings, primarilyas a result of these tightened credit spreads and lower costs due to shorteningthe maturity of our liabilities primarily through increased issuance ofcommercial paper, in excess of $140 million for the first six months of 2004 andless than $30 million for the prior-year period compared to the funding costs wewould have incurred using average spreads from the first half of 2002. It isanticipated that these tightened credit spreads and other funding synergies willeventually enable HSBC to realize annual cash funding expense savings, includingexternal fee savings, in excess of $1 billion per year as our existing term debtmatures over the course of the next few years. The portion of these savings tobe realized by Household will depend in large part upon the amount and timing ofthe proposed domestic private label credit card portfolio transfer to HSBC BankUSA and other initiatives between Household and HSBC subsidiaries. SECURITIES totaled $6.9 billion at June 30, 2004 and $11.1 billion at December31, 2003. Included in the June 30, 2004 balance was $2.6 billion dedicated toour credit card bank and $3.1 billion held by our insurance subsidiaries.Included in the December 31, 2003 balance was $2.4 billion dedicated to ourcredit card bank and $3.1 billion held by our insurance subsidiaries. Oursecurities balance at December 31, 2003 was unusually high as a result of thecash received from the $2.8 billion real estate secured loan sale to HSBC BankUSA on December 31, 2003 as well as excess liquidity. COMMERCIAL PAPER, BANK AND OTHER BORROWINGS totaled $10.3 billion at June 30,2004 and $9.1 billion at December 31, 2003. Included in this total wasoutstanding Euro commercial paper sold to customers of HSBC of $3.4 billion atJune 30, 2004 and $2.8 billion at December 31, 2003. 52 DUE TO AFFILIATES and other HSBC related funding are summarized in the followingtable: JUNE 30, DECEMBER 31, 2004 2003------------------------------------------------------------------------------------- (IN BILLIONS)Debt issued to HSBC subsidiaries: Domestic short-term borrowings......................... $ - $ 2.6 Drawings on bank lines in the U.K. .................... 4.7 3.4 Term debt.............................................. 3.8 1.3 Preferred securities issued by Household Capital Trust VIII.................................................. .3 .3 ----- ----- Total debt issued to HSBC subsidiaries................. 8.8 7.6 ----- -----Debt issued to HSBC clients: Euro commercial paper.................................. 3.4 2.8 Term debt.............................................. .7 .4 ----- ----- Total debt issued to HSBC clients...................... 4.1 3.2Preferred stock issued to HSBC.............................. 1.1 1.1Real estate secured receivable activity with HSBC Bank USA: Cash received on sales (cumulative).................... 3.7 2.8 Direct purchases from correspondents (cumulative)...... 1.5 - ----- -----Total real estate secured receivable activity with HSBC Bank USA....................................................... 5.2 2.8 ----- -----Total HSBC related funding.................................. $19.2 $14.7 ===== ===== Proceeds from the December 2003 sale of $2.8 billion of real estate securedloans to HSBC Bank USA, which at year-end 2003 had been temporarily held assecurities available for sale, were used to pay-down domestic short-termborrowings in the first quarter of 2004. Proceeds from the March 2004 realestate secured receivable sale were used to pay-down commercial paper balanceswhich had been used as temporary funding in the first quarter of 2004 and tofund various debt maturities. As of June 30, 2004, we had revolving credit facilities with HSBC of $2.5billion domestically and $7.5 billion in the U.K. There have been no draws onthe domestic line. We also had derivative contracts with a notional value of$58.7 billion, or approximately 83 percent of total derivative contracts,outstanding with HSBC affiliates. In July, an additional $4.0 billion creditfacility was provided by an HSBC affiliate in Geneva to allow temporaryincreases in commercial paper issuance to help give greater flexibility inmanaging liquidity surrounding the contemplated private label credit card sale. LONG TERM DEBT (with original maturities over one year) decreased to $78.3billion at June 30, 2004 from $79.6 billion at December 31, 2003. Significantissuances during the first six months of 2004 included the following: - $2.3 billion of domestic medium-term notes - $1.3 billion of foreign currency-denominated bonds (including $.3 billion which was issued to customers of HSBC) - $.7 billion of InterNotes(SM) (retail-oriented medium-term notes) - $1.3 billion of global debt - $1.7 billion of securities backed by home equity loans. For accounting purposes, these transactions were structured as secured financings. 53 SELECTED CAPITAL RATIOS are summarized in the following table: JUNE 30, DECEMBER 31, 2004 2003--------------------------------------------------------------------------------------- (RESTATED) (RESTATED)TETMA(1).................................................... 7.81% 7.03%TETMA + Owned Reserves(1)................................... 10.69 9.89Tangible common equity to tangible managed assets(1)........ 5.79 5.04Common and preferred equity to owned assets................. 15.33 14.69Excluding purchase accounting adjustments: TETMA(1).................................................. 9.65 8.94 TETMA + Owned Reserves(1)................................. 12.54 11.81 Tangible common equity to tangible managed assets(1)...... 7.67 6.98 --------------- (1) TETMA, TETMA + Owned Reserves and tangible common equity to tangible managed assets represent non-GAAP financial ratios that are used by Household 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. In April 2004, Fitch Ratings revised our Rating Outlook to Positive from Stableand raised our Support Rating to "1" from "2". In addition, Fitch affirmed our"A" senior long-term and "F1" commercial paper ratings. We are committed tomaintaining at least a mid-single "A" rating and as part of that effort willcontinue to review appropriate capital levels with our rating agencies. SECURITIZATIONS AND SECURED FINANCINGS Securitizations (which are structured toreceive sale treatment under Statement of Financial Accounting Standards No.140, "Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities, a Replacement of FASB Statement No. 125," ("SFASNo. 140")) and secured financings (which do not receive sale treatment underSFAS No. 140) of consumer receivables are used to limit our reliance on theunsecured debt markets and often are more cost-effective than alternativefunding sources. In a securitization, a designated pool of non-real estate consumer receivablesis removed from the balance sheet and transferred to an unaffiliated trust. Thisunaffiliated trust is a qualifying special purpose entity ("QSPE") as defined bySFAS No. 140 and, therefore, is not consolidated. The QSPE funds its receivablepurchase through the issuance of securities to investors, entitling them toreceive specified cash flows during the life of the securities. The receivablestransferred to the QSPE serve as collateral for the securities. At the time ofsale, an interest-only strip receivable is recorded, representing the presentvalue of the cash flows we expect to receive over the life of the securitizedreceivables, net of estimated credit losses. Under the terms of thesecuritizations, we receive annual servicing fees on the outstanding balance ofthe securitized receivables and the rights to future residual cash flows on thesold receivables after the investors receive their contractual return. Cashflows related to the interest-only strip receivables and servicing thereceivables are collected over the life of the underlying securitizedreceivables. In a secured financing, a designated pool of receivables, typically real estatesecured, are conveyed to a wholly owned limited purpose subsidiary which in turntransfers the receivables to a trust which sells interests to investors.Repayment of the debt issued by the trust is secured by the receivablestransferred. The transactions are structured as secured financings under SFASNo. 140. Therefore, the receivables and the underlying debt of the trust remainon our balance sheet. We do not recognize a gain in a secured financingtransaction. Because the receivables and the debt remain on our balance sheet,revenues and expenses are reported consistently with our owned balance sheetportfolio. Using this source of funding results in similar cash flows as issuingdebt through alternative funding sources. 54 Receivables securitized (excluding replenishments of certificateholderinterests) are summarized in the following table: THREE MONTHS ENDED JUNE 30 2004 2003--------------------------------------------------------------------------- (IN MILLIONS)Auto finance................................................ $300 $ 596MasterCard/Visa............................................. 500 -Private label............................................... 190 250Personal non-credit card.................................... - 305 ---- ------Total....................................................... $990 $1,151 ==== ====== SIX MONTHS ENDED JUNE 30 2004 2003----------------------------------------------------------------------------- (IN MILLIONS)Auto finance................................................ $ 300 $1,007MasterCard/Visa............................................. 550 320Private label............................................... 190 250Personal non-credit card.................................... - 815 ------ ------Total....................................................... $1,040 $2,392 ====== ====== Securitization levels were much lower in the first half of 2004 as we usedfunding from HSBC, including proceeds from receivable sales to HSBC Bank USA, toassist in the funding of our operations. Our securitized receivables totaled $22.8 billion at June 30, 2004, compared to$26.2 billion at December 31, 2003. As of June 30, 2004, closed-end real estatesecured receivables totaling $7.9 billion secured $6.0 billion of outstandingdebt related to securitization transactions which were structured as securedfinancings. At December 31, 2003, closed-end real estate secured receivablestotaling $8.0 billion secured $6.7 billion of outstanding debt related tosecured financing transactions. Securitizations structured as sales represented19 percent of the funding associated with our managed portfolio at June 30, 2004and 21 percent at December 31, 2003. Secured financings represented 5 percent ofthe funding associated with our managed portfolio at June 30, 2004 and 5 percentRelated Shares:
HSBC Holdings