28th Apr 2008 15:59
HSBC Holdings PLC28 April 2008 GRUPO FINANCIERO HSBC, S.A. DE C.V. FIRST QUARTER 2008 FINANCIAL RESULTS^ - HIGHLIGHTS • Net income for the first quarter of 2008 was MXN2,207 million, up MXN796 million, or 56.4 per cent, compared with MXN1,411 million for the same period in 2007. • Total operating income (excluding loan impairment charges)* for the first quarter of 2008 was MXN9,638, up MXN1,567 million, or 19.4 per cent compared with MXN8,071 million for the same period in 2007. • Net loans and advances to customers were MXN191.4 billion at 31 March 2008, up MXN28.4 billion, or 17.5 per cent, compared with MXN162.9 billion at 31 March 2007. • Total customer demand and time deposits were MXN259.0 billion at 31 March 2008, up MXN44.7 billion, or 20.9 per cent, compared with MXN214.3 billion at 31 March 2007. • Cost efficiency ratio* improved to 54.0 per cent for the first quarter of 2008, compared with 59.8 per cent for the same period in 2007. • Return on equity was 23.4 per cent for the first quarter of 2008 compared with 16.5 per cent for the same period in 2007. HSBC Mexico S.A. (the bank) is Grupo Financiero HSBC, S.A. de C.V.'s (HSBC)primary subsidiary company and is subject to supervision by the Mexican Bankingand Securities Commission. The bank is required to file periodic financialinformation on a quarterly basis (in this case for the quarter ended 31March2008) and this information is publicly available. Given that this information isavailable in the public domain, Grupo Financiero HSBC, S.A. de C.V. has electedto file this release. ^ Results are prepared in accordance with Mexican GAAP (Generally AcceptedAccounting Principles). Beginning January 1, 2008, in accordance with FinancialInformation Standard B-10, "Effects of Inflation", the effects of inflation infinancial statements shall no longer be recognized. This is due to the changefrom an inflationary to a non-inflationary economic environment. The comparativefigures of the financial statements of periods prior to 2008 are expressed inmonetary units with purchasing power at December 31, 2007. Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly ownedsubsidiary of HSBC Holdings plc (HSBC Group). Commentary by Paul Thurston, CEO of Grupo Financiero HSBC: "Grupo Financiero HSBC continued to build our business in Mexico in the firstquarter of 2008, increasing our customer base, growing our business volumes, andinvesting for future growth. Net income of MXN2,207 million was up 56.4 per centon the same period in 2007. "Our aim is to become the leading financial services company in Mexico, and weare working hard to strengthen our customer service platform, improve ouroperating efficiency and manage our portfolio more effectively. Sustainablegrowth of our business will benefit our customers, employees, shareholders andthe local community, and contribute to the development of the Mexican economy. "By March 31, 2008, our customer base had increased by more than 1.1 millioncustomer accounts year-on-year, through growth in the number of Premiercustomers and the continued success of the Tu Cuenta packaged product. Customerdeposits grew by more than 20 per cent year on year. We are also increasingcross sales in key customer segments, and growing our insurance premium incomeby leveraging our bancassurance model to provide insurance solutions to moreexisting and potential customers. "We continued to invest in growing our consumer and commercial creditbusinesses. Compared to the same period in 2007, credit card balances increased61 per cent year-on-year to MXN28.3 billion while personal loan and payroll loanbalances increased by 48.1 per cent, to MXN8.2 billion. In our commercialbusiness, the commercial portfolio grew by 13.0 per cent to MXN71.3 billion. "Through continuing to attract new customers, and strengthening ourrelationships with existing customers, revenues continued to grow strongly, up19.4 per cent compared to the same period in 2007. This allowed us to absorb therelated increase in loan impairment charges, which are a consequence of theinvestment we are making in building our loan portfolios. "We continue to invest in building our business organically and improving ourbusiness platform. In the past 12 months, we have installed 373 additional ATMsand we are making significant investments to improve the technologicalinfrastructure. We are also investing in streamlining our processes andmodernising our branches, which will allow us to increase capacity and improvecustomer service. Revenue growth exceeded cost growth, which improved the costefficiency ratio to 54.0 per cent compared to 59.8 per cent in the first quarterof 2007. "Our net income was positively impacted by the receipt of the proceeds of thesale of stock in Visa Inc, resulting from that company's IPO, and this hassupported further investment in our business. "In the area of corporate responsibility, I am pleased to report that in March2008 HSBC Mexico was awarded, for the third consecutive year, the "SociallyResponsible Company" certification by the Mexican Philanthropy Centre (CEMEFI)and Aliarse. The Certification was granted to HSBC Mexico after a lengthy duediligence process, where HSBC Mexico had to document its commitment to thehighest standards of social responsibility in the areas of quality of lifewithin the company, business ethics, community involvement and conservation ofthe environment." Overview Grupo Financiero HSBC's net income for the first quarter of 2008 was MXN2,207million, MXN796 million higher than the net income recorded during the sameperiod in 2007. The Bank's results continue to show solid performance across a range of productlines. Net interest income, fees and trading income reflected continued growthduring the first quarter of 2008. The significant contribution of oursubsidiaries, particularly HSBC Seguros, added to the results of the Bank. Net interest income^ increased by MXN1,010 million to MXN6,251 million in thefirst quarter of 2008, which represents a 19.3 per cent increase on the sameperiod in 2007. This increase was driven by expansion of both the consumer andcommercial loan portfolios, and growth in time deposits. Net fee income was MXN2,932 million in the first quarter of 2008, an increase of17.5 per cent compared with the same period in 2007. Increased fee income fromcredit cards, trade services, membership programmes, investment funds, cardacquiring and ATMs contributed to this performance. Trading income was MXN455 million for the first quarter of 2008, whichrepresented a 36.2 per cent increase over the same period in 2007, withparticularly strong results achieved in retail foreign exchange business andbalance sheet management. Administrative expenses were MXN5,202 million in the first quarter of 2008, anincrease of 7.8 per cent compared with the same period of 2007, which reflects acombination of continued investment with benefits from productivity improvementsand effective expense control. Personnel expenses rose in line with our businessgrowth investment strategy. Other operating expenses increased as a result ofpromotion costs of the Tu Cuenta packaged product and investments to strengthenthe technological infrastructure. The cost efficiency ratio* has reduced by 5.8percentage points to 54.0 per cent, with revenue growth exceeding expensegrowth. Other income increased MXN1,083 million to MXN1,438 million in the first quarterof 2008 compared with the same period in 2007. This growth is primarily due toextraordinary income received from the sale of VISA Inc. stock, as a result ofthe company's global Initial Public Offering. Loan impairment charges increased by MXN1,355 million to MXN2,798 million in thefirst quarter of 2008 compared with the same period in 2007. The relatively highrequirement for impairment charges is due to a large extent to increasedreserves for credit cards, which is the result of the significant investment byHSBC in increasing its market share, as well as higher delinquencies in personaland auto loans. The annual increase in loan impairment charges is consistentwith the market trend and reflects the Group's organic growth strategy. Regular reviews are undertaken to improve the quality of new business, andensure close control of customer acquisition channels, based on underwritingexperience, and to improve collection strategies. HSBC's allowance for loanlosses as a percentage of impaired loans was 134.0 per cent at 31 March 2008,compared to 141.6 per cent for the same period in 2007. A dividend of MXN4,350 million was declared during the first quarter of 2008(MXN3,500 million paid by the Bank and MXN850 million paid by HSBC Seguros). TheBank's capital ratio at March 31, 2008 of 13.0 per cent is above the applicableregulatory requirements. Business highlights Personal Financial Services (PFS) increased its new-to-bank customers andleveraged its customer relationship management capabilities to drive consumerloan growth. During the first quarter of 2008, credit card portfolio balanceshave increased 61.0 per cent and our cards base has grown by almost 237,000 newcredit card accounts compared with the same period last year. This translatedinto an increase in market share of almost 280 basis points compared with lastyear(1) reflecting the Group's organic portfolio growth strategy. Personal andpayroll loans were other areas in which strong increases were observed in thefirst quarter of 2008. Collection activities have been strengthened in line with the increase in thedelinquency level of consumer loans. Card acquisition continues to be carefullycontrolled. Net interest income recorded a positive increase as a result of larger volumesof consumer loans, particularly credit cards. Increased cross-sales in thebranch network meant greater income for HSBC Seguros, which increased itspremiums by 17.9 per cent in the first quarter of 2008 compared with the sameperiod in 2007. Commercial Banking (CMB) in Mexico continues to leverage its two-prongedstrategy to become the leading international business bank and the best bank forsmall businesses. Lending balances were 14.5 per cent higher than in the firstquarter of 2007, due mainly to strong growth in international trade volumes,local and global CMB customers, complemented by the good performance recorded infactoring, the real estate project segment and deposits. Organic growth in thesmall business segment led to higher delinquency; however, products withsignificant credit losses have been restructured or discontinued. Driven by HSBC Group's broad geographic presence and enhanced productcapabilities, our trade services market share increased by 5.3 percentage pointsyear-on-year, to reach 18.4 per cent(2). The strong performance recorded duringthe first quarter of 2008 was achieved through the bank being one of the firstproviders of factoring services in the market and with the launch of newapplications for an electronic account opening service. Global Banking and Markets continues its strategy to join up its business acrossthe American region and the Global network by connecting regional customers toother countries in the HSBC Group. Through the Group's global network, we areenabling major Mexican companies to access the international capital markets andwe can offer complex financial solutions, as part of the Group's emergingmarket-led, financing focused global banking and markets strategy. Increased income from trade services and an increase activity in project financeresulted from HSBC's strategic investments in new transactional infrastructureand growth in its local and global distribution capabilities, as well as agrowing penetration in Mexico's corporate market. Despite an extremely volatile market environment worldwide throughout 2008,Mexican financial markets have remained well anchored. Nevertheless GlobalMarkets has performed well, mainly driven by tactical portfolio investments aswell as strong cross selling to our Institutional and Corporate client base. About HSBC Grupo Financiero HSBC, S.A. de C.V. is Mexico's fourth largest banking andfinancial services institution with 1,359 branches, 5,855 ATMs, approximately9.0 million customer accounts and more than 22,000 employees. For moreinformation, consult our website at www.hsbc.com.mx. Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly ownedsubsidiary of HSBC Holdings plc. Headquartered in London, UK, the HSBC Groupserves over 125 million customers worldwide through 10,000 offices in 83countries and territories in Europe, the Asia-Pacific region, the Americas, theMiddle East and Africa. With assets of US$2,354 billion at 31 December 2007,HSBC is one of the world's largest banking and financial services organisations.With listings on the London, Hong Kong, New York, Paris and Bermuda stockexchanges, shares in HSBC Holdings plc are held by about 200,000 shareholders inover 100 countries and territories. HSBC is marketed worldwide as 'the world'slocal bank''. Consolidated Balance Sheet Figures in MXN GROUP BANKmillions 31Mar08 31Mar07 31Mar08 31Mar07 Assets Cash and deposits in banks 53,961 55,919 53,961 55,918 Investment in securities 64,293 54,705 62,971 53,594 Trading securities 30,874 18,317 29,939 17,206 Available-for-sale securities 29,469 32,366 29,082 32,366 Held to maturity securities 3,950 4,022 3,950 4,022 Securities and derivative operations 16,045 194 16,043 189 Repurchase agreements 47 89 45 84 Derivative transactions 15,998 105 15,998 105 Performing loans Commercial loans 71,358 63,165 71,358 63,165 Loans to financial intermediaries 13,595 6,264 13,595 6,264 Consumer loans 48,449 39,149 48,449 39,149 Mortgage loans 18,978 18,914 18,978 18,914 Loans to government entities 41,672 37,631 41,672 37,631 Loans to Fobaproa or IPAB - - - -Total performing loans 194,052 165,123 194,052 165,123Impaired loans Commercial loans 2,381 1,887 2,381 1,887 Consumer loans 4,294 2,109 4,294 2,109 Mortgage loans 1,196 1,265 1,196 1,265 Immediate collection, remittances and other - - - -Total impaired loans 7,871 5,261 7,871 5,261 Gross loans and advances to customers 201,923 170,384 201,923 170,384 Allowance for loan losses (10,549) (7,449) (10,549) (7,449)Net loans and advances to customers 191,374 162,935 191,374 162,935Other accounts receivable 21,172 30,187 21,109 27,461Foreclosed assets 89 67 89 67Property, furniture and equipment, net 6,402 6,268 6,390 6,254Long-term investments in equity securities 3,037 2,919 146 160Deferred taxes 1,142 - 1,087 -Goodwill 2,749 2,749 - -Other assets, deferred charges and intangibles 1,948 1,026 1,914 991 Total assets 362,212 316,969 355,084 307,569 LiabilitiesDeposits 263,256 218,644 263,393 220,342 Demand deposits 124,561 124,322 124,698 126,020 Time deposits 134,423 89,943 134,423 89,943 Bonds 4,272 4,379 4,272 4,379 Bank deposits and other liabilities 7,245 10,860 7,245 10,860 On demand - 2,067 - 2,067 Short-term 4,591 6,633 4,591 6,633 Long-term 2,654 2,160 2,654 2,160 Securities and derivative transactions 16,004 4,529 16,004 4,523Repurchase agreements 73 21 73 15Securities deliverable under loan transactions - 4,508 - 4,508Derivative transactions 15,931 - 15,931 - Other accounts payable 36,239 45,362 35,142 42,571Income tax and employee profit sharing payable 1,610 1,505 1,546 1,452Sundry creditors and other accounts 34,629 43,857 33,596 41,119 payable Subordinated debentures outstanding 2,211 2,266 2,211 2,266 Deferred taxes - 394 - 440 Deferred credits 438 123 438 123 Total liabilities 325,393 282,178 324,433 281,125 Equity Paid in capital 21,466 21,466 15,883 13,533 Capital stock 8,210 8,210 4,272 4,079 Additional paid in capital 13,256 13,256 11,611 9,454 Other reserves 15,351 13,304 14,767 12,892Capital reserves 1,162 875 10,577 9,496Retained earnings 11,863 19,114 2,196 4,581Result from the mark-to-market of available-for-sale securities - - 256 88Result from translation of foreign operations - - - -Cumulative effect of restatement - (3,989) - (3,594)Gains on non-monetary asset valuation 119 (4,107) - 1,182Adjustment in the employee pension - - (136) -Net income 2,207 1,411 1,874 1,139Minority interest in capital 2 21 1 19Total equity 36,819 34,791 30,651 26,444Total liabilities and equity 362,212 316,969 355,084 307,569 Figures in MXN millions GROUP 31Mar08 31Mar07 Memorandum accounts Transactions on behalf of third parties 107,098 93,619 Customer current accounts 61 (11)Customer bank 2 -Settlement of customer securities and documents 59 (11)Customer securities 78,053 67,229Customer securities in custody 78,044 67,223Pledged customers securities and documents 9 6Transactions on behalf of customers 2,456 2,382Customer repurchase transactions 2,456 2,382Other transactions on behalf of customers 26,528 24,019Investment on behalf of customers, net 26,528 24,019Other memorandum accounts 599,291 365,426Investment of the SAR funds 3,540 3,631Integrated loan portfolio 212,720 178,253Other memorandum accounts 383,031 183,542 Transactions for the group's own accounts 1,867,574 1,081,708 Accounts for the group's own registry 1,867,602 1,081,639Guarantees granted 35 47Irrevocable lines of credit granted 10,761 7,819Goods in trust or mandate 170,020 114,691Goods in custody or under administration 57,914 57,607Amounts committed in transactions with Fobaproa 141 156Amounts contracted in derivative operations 1,628,602 897,145Securities in custody - 4,044Other contingent obligations 129 130 Repurchase/resale agreementsSecurities receivable under repos 46,160 46,940(less) Repurchase agreements 46,199 46,874 (39) 66 Reverse repurchase agreements 3,629 5,461(less) Securities deliverable under repos 3,618 5,458 11 3 Figures in MXN millions BANK 31Mar08 31Mar07 Guarantees granted 35 47Other contingent obligations 129 130Irrevocable lines of credit granted 10,761 7,819Goods in trust or mandate 170,020 114,691Goods in custody or under administration 53,969 57,608Third party investment banking operations, net 26,528 24,019Amounts committed in transactions with Fobaproa 141 156Amounts contracted in derivative operations 1,628,602 897,145Investments of retirement savings system funds 3,540 3,631Integrated loan portfolio 212,720 178,253Other control accounts 383,027 179,035 2,489,472 1,462,534 Securities receivable under repos 43,715 44,558(less) Repurchase agreements (43,743) (44,491) (28) 67 Reverse repurchase agreements 1,173 3,078(less) Securities deliverable under repos (1,173) (3,076) - 2 Securities deliverable under loan transactions - 4,508(less) Goods deliverable in guarantee for loan transactions - - - 4,508 Consolidated Income Statement Figures in MXN millions GROUP BANK 31Mar08 31Mar07 31Mar08 31 Mar07 Interest income 9,392 7,740 9,389 7,629Interest expense (3,141) (2,499) (3,143) (2,453)Monetary position (margin), net - (357) - (321) Net interest income 6,251 4,884 6,246 4,855 Loan impairment charges (2,798) (1,443) (2,798) (1,443) Risk-adjusted net interest income 3,453 3,441 3,448 3,412 Fees and commissions receivable 3,218 2,778 3,011 2,564 Fees payable (286) (282) (280) (279) Trading income 455 334 455 332 Total operating income 6,840 6,271 6,634 6,029 Administrative and personnel expenses (5,202) (4,826) (5,083) (4,675) Net operating income 1,638 1,445 1,551 1,354 Other income 1,673 560 1,694 572Other expenses (235) (205) (255) (205) Net income before taxes 3,076 1,800 2,990 1,721 Income tax and employee profit sharing tax (1,694) (597) (1,650) (575)Deferred income tax 531 (17) 521 (10) Net income before subsidiaries 1,913 1,186 1,861 1,136 Undistributed income from subsidiaries 294 225 13 2Income from ongoing operations 2,207 1,411 1,874 1,138 Minority interest - - - 1 Net income 2,207 1,411 1,874 1,139 Statement of Changes in Shareholders' Equity GROUP Capital Capital Retained Deficit in Net Total Minority contribute reserves earnings restatement of income Equity interest stock-holders' equity Figures in MXN millionsBalances at 31Dec07 21,466 1,162 18,827 (8,544) 5,615 2 38,528 Movements inherent to the shareholders' decisionCapitalisation of retained earnings - - 5,615 - (5,615) - -Cash dividend - - (4,350) - - - (4,350)Constitution of reserves - - - - - - -Other movements - - - - - - -Total - - 1,265 - (5,615) - (4,350) Movements for the recognition of the comprehensive income Net income - - - - 2,207 - 2,207Gains on non-monetary asset valuation - - (8,229) 8,663 - - 434Minority interest - - - - - - -Total - - (8,229) 8,663 2,207 - 2,641 Balances at 31Mar08 21,466 1,162 11,863 119 2,207 2 36,819 Capital Capital Retained Result from Deficit in Adjustment Net income Total Minority contribute reserves earnings valuation of restatement of in the Equity interest available- stock-holders' employees for-sale equity pension securitiesBalances at31Dec07 15,883 14,077 - (217) (2,421) (136) 4,656 1 31,843 Movements inherent to the shareholders' decisionSubscription shares - - - - - - - - -Constitution of reserves - - - - - - - - -Transfer of result of Prior years - - 4,656 - - - (4,656) - -Cash dividend - (3,500) - - - - - - (3,500)Other movements - - - - - - - - -Total - (3,500) 4,656 - - - (4,656) - (3,500) Movements for the recognition of the comprehensive incomeNet income - - - - - - 1,874 - 1,874Result from valuation of available- for-sale securities - - - 434 - - - - 434Cumulative effect of restatement - - (2,460) 39 2,421 - - - -Adjustment in the employees pension - - - - - - - - -Others - - - - - - - - -Total - - (2,460) 473 2,421 - 1,874 - 2,308 Balances at 31March08 15,883 10,577 2,196 256 - (136) 1,874 1 30,651 Consolidated Statement of Changes in Financial Position GROUP Figures in MXN millions 31Mar08 31Mar07 Operating activities:Net income 2,207 1,411Items included in operations not requiring (providing) funds:Result from mark-to-market valuations (546) 84Allowances for loan losses 2,798 1,443Depreciation and amortisation 259 260Deferred taxes (531) 17Minority interest - 1Undistributed income from subsidiaries, net (294) (225)Total operating items not requiring funds 3,893 2,991 Changes in items related to operations:(Decrease) / Increase in deposits (3,701) (8,735)(Increase) / Decrease in loan portfolio (4,690) (3,601)(Increase) / Decrease in securities and derivative transactions, net (253) (1,982)(Increase) / Decrease in financial instruments 12,282 4,479(Decrease) / Increase in bank deposits and other liabilities (363) (2,595)Funds provided by operating activities 7,168 (9,443) Financing activities:Subordinated debentures outstanding 3 (24)Cash dividend (4,350) -(Decrease) / Increase in other payable accounts 9,920 27,910 Funds used or provided in financing activities 5,573 27,886 Investing activities:(Increase) / Decrease in property, furniture and equipment, net 1,170 (339)(Increase) / Decrease in deferred charges or credits, net 348 (97)(Increase) / Decrease in foreclosed assets (8) (13)(Increase) / Decrease in other receivable accounts (9,155) (19,250) Funds used in investing activities (7,645) (19,699)(Decrease) / Increase in cash and equivalents 5,096 (1,256)Cash and equivalents at beginning of period 48,865 57,175Cash and equivalents at end of period 53,961 55,919 BANK Operating activities:Net income 1,874 1,139Items included in operations not requiring (providing) funds:Result from mark-to-market valuations (546) 84Allowances for loan losses 2,798 1,443Depreciation and amortisation 259 259Deferred taxes (521) 11Undistributed income from subsidiaries, net (13) 22Value loss estimation for foreclosed assets 2 2Minority interest - (1) Total operating items not requiring funds 3,853 2,959 Changes in items related to operations:Increase in deposits (3,632) (8,686)(Increase) / Decrease in loan portfolio (4,690) (3,601)(Increase) / Decrease in securities and derivative transactions, net 120 (1,957)(Increase) / Decrease in financial instruments 13,296 4,262(Decrease) / Increase in bank deposits and other liabilities (363) (2,595) Funds provided by operating activities 8,584 (9,618) Financing activities:Subordinated debentures outstanding 3 (24)Cash Dividend (3,500) -(Decrease) / Increase in other payable accounts 8,978 25,211Contributions or reimbursements of capital contributed - -Funds used or provided by financing activities 5,481 25,187 Investing activities:(Increase) in property, furniture and equipment, net (146) (172)(Increase) / Decrease in deferred charges or credits, net 359 (11)(Increase) / Decrease in foreclosed assets (9) (13)(Increase) / Decrease in other receivable accounts (9,172) (16,629)Funds used in investing activities (8,968) (16,825)(Decrease) / Increase in cash and equivalents 5,097 (1,256)Cash and equivalents at beginning of period 48,864 57,174Cash and equivalents at end of period 53,961 55,918 Differences between Mexican GAAP and International Financial Reporting Standards (IFRS) Grupo Financiero HSBC HSBC Holdings plc, the parent of Grupo Financiero HSBC S.A. de C.V. reports itsresults under International Financial Reporting Standards (IFRS). There followsa reconciliation of the results of Grupo Financiero HSBC S.A. de C.V. fromMexican GAAP to IFRS for the first quarter ended 31 March 2008 and anexplanation of the key reconciling items. 31Mar08 Figures in MXN millions Grupo Financiero HSBC - Net Income Under Mexican GAAP 2,207 Differences arising on the valuation of pensions and post retirement healthcare benefits ^ 19Differences arising on acquisition costs relating to long-term investment contracts ^ (11)Differences arising from the deferral of fees received and paid on the origination of loans 20Differences arising from the recognition and provisioning for loan impairments ^ (197)Differences arising from purchase accounting adjustments ^ (6)Other differences in accounting principles ^ (214) HSBC Mexico net income under IFRS 1,818US dollar equivalent (millions) 168Add back tax expense 481 HSBC Mexico profit before tax under IFRS 2,299 US dollar equivalent (millions) 213Exchange rate used for conversion 10.81 ^ Net of tax at 28 per cent. Summary of key differences between Grupo Financiero's results as reported underMexican GAAP and IFRS Retirement benefits Mexican GAAP Obligations are recognised in the Income Statement of each year based onactuarial computations of the present value of those obligations using theprojected unit credit method and real interest rates. Unrecognised past service costs are amortised on an estimated service life ofthe employees. IFRS Obligations are recognised in the Income Statement of each year based onactuarial computations of the present value of those obligations using theprojected unit credit method. Actuarial gains and losses are recognised in stockholders equity as they arise. Unrecognised past service cost are recognised in the Income Statement as theyarise. Acquisition costs of long-term investment contracts Mexican GAAPAll costs related to the acquisition of long-term investment contracts areexpensed as they are incurred. IFRSIncremental costs relating to the acquisition of long-term investment contractsare deferred and amortised over the expected life of the contract. Fees paid and received on origination of loans Mexican GAAPAll fees received on loan origination are deferred and amortised over the lifeof the loan. However, this policy was introduced 1 January 2007, all fees havingpreviously been recognised up front. IFRSFees and expenses received or paid on origination of a loan that are directlyattributable to the origination of that loan are accounted for under theeffective interest rate method over the expected life of the loan. This policyhas been in effect since 1 January 2005. Loan impairment charges Mexican GAAPLoan impairment charges are calculated following the rules issued by the MexicanMinistry of Finance and the National Banking and Securities Commission. Suchrules establish authorised methodologies for determining the amount of provisionfor each type of loan. IFRSLoan loss provisions for collectively assessed loans are determined based on aroll-rate methodology reflecting history of losses for each category of loan,past due payments and collateral values. For individually assessed loans, loanloss provisions are calculated based on the discounted cash flow value of thecollateral. Purchase accounting adjustments These arise from valuations made by HSBC on acquiring Grupo Financiero Bital inNovember 2002 on various assets and liabilities that differed from the valuationin the local Mexican GAAP books. ^ For comparative purposes, the monetary position result has been excluded from2007 figures. ^For comparative purposes the monetary position result has been excluded from2007 figures. (1) Source: HSBC analysis, based on Mexican Banks Association (ABM) figures asof February 2008 for the six largest banks. (2) Source: HSBC Analysis, based on Mexican Banking and Securities CommissionStatistical Bulletin, figures at December 2007. 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