HSBC Mexico: Third Quarter 2008 Results

31st Oct 2008 15:00



 

31 October 2008

GRUPO FINANCIERO HSBC, S.A. DE C.V.

THIRD QUARTER 2008 FINANCIAL RESULTS - HIGHLIGHTS

 

 

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 Banking and Securities Commission. The bank is required to file periodic financial information on a quarterly basis (in this case for the quarter ended 30 September 2008) and this information is publicly available. Given that this information is available in the public domain, Grupo Financiero HSBC, S.A. de C.V. has elected to file this release.

 

Results are prepared in accordance with Mexican GAAP (Generally Accepted Accounting Principles). With effect from January 1, 2008, in accordance with Financial Information Standard B-10, "Effects of Inflation", the effects of inflation in financial statements cannot be recognized. This is due to the change from an inflationary to a non-inflationary economic environment. The comparative figures of the financial statements of periods prior to 2008 are expressed in monetary units with purchasing power at December 31, 2007.

 

Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly owned subsidiary of HSBC Holdings plc (HSBC Group).

 

 * For comparative purposes, the monetary position result has been excluded from 2007 figures.

Overview

Grupo Financiero HSBC, S.A. de C.V's performance in the nine months to 30 September 2008 has been affected by the ongoing volatility in the global economy. As we reported at the end of the first half, economic deceleration, inflationary pressures, market volatility and the global credit squeeze continue to affect our business. 

Grupo Financiero HSBC's net income for the nine months ended 30 September 2008 was MXN3,613 million, MXN315 million less than for the same period in 2007. Our insurance subsidiary HSBC Seguros, accounted for 21.8 per cent of total net income. 

In line with the local market trend, credit quality, particularly in the credit card portfolio, continued to deteriorate in the third quarter of 2008, which has led to an increase in provisions. 

Net loans and advances to customers decreased by MXN 9.6 billion from MXN186.7 billion in September 2007 to MXN177.1 billion in September 2008, largely as a result of government loan prepayments and a reduction in the mortgage portfolio through securitization.

Net interest income in the nine months to 30 September 2008 increased by MXN2,545 million, reaching MXN19,062 million, a 15.4 per cent growth compared with the same period of 2007*. Enhanced product pricing contributed to this improved performance, especially in the credit card and commercial portfolios. 

Net fee income was MXN8,656 million for the nine months ended 30 September 2008, an increase of 9.1 per cent compared to the same period of 2007. This was driven mainly by increased trade services business, membership programs, credit cards, investment funds, trust services, points-of-sale and ATMs.

Trading income was MXN952 million for the nine months ended 30 September 2008, largely unchanged from the same period in 2007. Trading income levels were maintained primarily by strong performance in foreign exchange transactions. 

Administrative expenses increased MXN1,493 million or 9.8 per cent for the nine months ended 30 September 2008 compared to the same period of 2007. This increase is largely attributed to one off redundancy expenses, increased marketing expenses for packaged products, investment in technology infrastructure and higher costs associated with loan recoveries. These initiatives have been complemented by a change in the branch opening hours to improve service and our customer's banking experience by, for example, reducing waiting times. Despite these measures our cost efficiency ratio* improved 1.6 percentage points to reach 58.5 per cent. Excluding the effect of non-recurrent personnel expenses, the growth in administrative expenses reduces to 7.5 per cent compared to the same period of 2007 and the cost efficiency ratio would be 57.3* per cent.

Other net income and expenses for the nine months to 30 September increased by MXN1,290 million reaching MXN2,733 million compared with the same period in 2007. This is primarily due to non-recurring income arising from the sale of shares in VISA Inc. and the sale of Mexican Stock Exchange shares in the second quarter as a result of public offerings by those entities. 

Consistent with market trends, loan impairment charges increased by MXN3,710 million or 56.6 per cent in the nine months ended 30 September 2008, compared to the same period of 2007. This increase is due to higher delinquencies experienced in an environment of economic deceleration, especially in respect to consumer lending, particularly credit cards. 

HSBC's allowance for loan losses as a percentage of impaired loans was 122.1 per cent at 30 September 2008, compared to 144.8 per cent for the same period of 2007.

Adjustments to credit underwriting models have also been implemented in order to improve portfolio credit quality, achieve greater control and streamline collection processes in order to ensure improved risk management. In addition, regular reviews of the credit quality of new business continue and we ensure close control of customer acquisition channels. 

The government loan portfolio continued to decrease and is MXN16,505 million lower than 30 September 2007. This is due to customers paying early.

At 30 September 2008 the Bank's capital ratio was strong at 12.6 per cent. The Tier 1 capital ratio at the end of the reporting period was 11.2 percent.

In line with the policies and strategies, Grupo Financiero HSBC S.A. de C.V. management remains focused on maintaining sufficient liquidity levels in the current uncertain and volatile market environment. Our loan to deposit ratio is below 100 per cent and we continue to adopt a conservative approach to asset and liability management. Business highlights

Personal Financial Services (PFS) focused on implementing strategies to improve service quality both through our branch network and alternative distribution channels. Changes in branch opening hours were introduced and new ATMs were installed and existing ATMs were upgraded. New pricing strategies for products and services have been introduced which are leading to improved contribution to our results. Two new savings and investment product offerings were launched in September: "Cuenta Flexible HSBC" and "Cuenta Ahorro HSBC", which are tailored according to customer needs and offer a comprehensive package of services.

In addition the mortgage product "Hipoteca Cero" promotion was launched in the third quarter of 2008 which focuses on strengthening our long-term relationship with customers by providing a competitive solution. 

Commercial Banking (CMB) total operating income increased 2.5 per cent compared to same period in 2007. This growth was largely due to an increase in the loan portfolio, as we continue to support our customers within the limitations of a conservative approach to the credit quality of new business. 

We further developed our Small Medium Enterprises (SME) segment by establishing new distribution channels and focusing on the sale of packaged products, which is reflected in higher sales during the quarter.

Our market share in factoring services has increased from 22 to 26 per cent compared to the prior year as a result of the implementation, promotion and development of new products. 

Strategies have been implemented to offer greater convenience in our services by migrating our customer's transactions to direct channels such as telephone and Internet service centers. 

Global Banking and Markets

During the third quarter of 2008, some Mexican companies had to contend with margin calls and pronounced volatility in international markets. In spite of the difficult conditions the performance of Global Markets remained resilient and generated positive results in derivatives and foreign exchange activities.

During the period total income from Global Banking recorded a 14.5 per cent increase compared with the same period of 2007, driven primarily by fee income, continued success in Project Finance infrastructure transactions and in Debt Capital Markets activity. HSBC has attained a leading position in both of these strategically important areas. In addition, compared to the prior year, revenues were higher in Trade Services, Trust, and Factoring; and by growth in new business lines, such as Custodial Services.

Operating profit before provisions experienced growth surpassing 46 per cent over the same period of 2007 driven by the above factors, as well as by non-recurring income resulting from the partial sale of our equity stake in the Mexican Stock Exchange.

Subsequent events 

As a result of the recent turbulence in financial markets, particularly the volatility o the peso against the dollar, the financial outlook of our credit portfolio will be assessed under this new economic scenario. However the impact of this assessment is not considered material with regards to the Bank's financial position.  On 2 October 2008, the Bank issued MXN1,818 million subordinated debentures, which qualifies for Tier 2 capital. If this issue were included, our capital ratio would increase to 13.4 per cent.

About HSBC

Grupo Financiero HSBC, S.A. de C.V. is Mexico's fourth largest banking and financial services institution with 1,251 branches, 5,878 ATMs, approximately 9.2 million customer accounts and more than 20,200 employees. For more information, consult our website at www.hsbc.com.mx.

Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly owned subsidiary of HSBC Holdings plc. Headquartered in London, UK, the HSBC Group serves over 128 million customers worldwide through 9,500 offices in 85 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With assets of US$2,547 billion at 30 June 2008, HSBC is one of the world's largest banking and financial services organizations. HSBC is marketed worldwide as 'the world's local bank''.

 

* For comparative purposes, the monetary position result has been excluded from 2007 figures

For further information contact:

London

Richard Lindsay	Danielle Neben
Group Media Relations	Investor Relations
Telephone: +44 (0)20 7992 1555	Telephone: +44 (0)20 7992 1938

Mexico City

Roy Caple	Yordana Aparicio
Public Affairs	Investor Relations
Telephone: +52 (55) 5721 6060	Telephone: +52 (55) 5721 5192

  

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Balance Sheet

Figures in MXN millions	GROUP				BANK
	30 Sep. 2008		30Sep. 2007		30 Sep. 2008		30 Sep. 2007
Assets
Cash and deposits in banks	50,457		50,483		50,457		50,483
Investment in securities	62,802		53,180		62,150		52,066
Trading securities	33,678		23,072		33,368		21,959
Available-for-sale securities	25,022		26,107		24,680		26,106
Held to maturity securities	4,102		4,001		4,102		4,001
Securities and derivative operations	23,461		7,047		23,459		7,044
Repurchase agreements	49		47		47		45
Derivative transactions	23,412		7,000		23,412		6,999
Performing loans
Commercial loans	74,528		70,118		74,528		70,118
Loans to financial intermediaries	17,213		12,037		17,213		12,037
Consumer loans	46,637		47,279		46,637		47,279
Mortgage loans	18,380		21,292		18,380		21,292
Loans to government entities	22,472		38,977		22,472		38,977
Total performing loans	179,230		189,703		179,230		189,703
Impaired loans
Commercial loans	2,073		2,227		2,073		2,227
Consumer loans	6,163		3,168		6,163		3,168
Mortgage loans	1,565		1,323		1,565		1,323
Total impaired loans	9,801		6,718		9,801		6,718
Gross loans and advances to customers	189,031		196,421		189,031		196,421
Allowance for loan losses	(11,970	)	(9,730)		(11,970	)	(9,730	)
Net loans and advances to customers	177,061		186,691		177,061		186,691
Other receivable accounts	16,774		27,578		16,567		27,437
Foreclosed assets	91		71		91		71
Property, furniture and equipment, net	6,478		6,280		6,466		6,267
Long-term investments in equity securities	3,538		3,437		128		149
Deferred taxes	2,433		1,400		2,410		1,360
Goodwill	2,749		2,749		-		-
Other assets, deferred charges and intangibles	2,153		994		2,111		960
Total assets	347,997		339,910		340,900		332,528

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Balance Sheet
(continued)

Figures in MXN millions	GROUP				BANK
	30 Sep. 2008		30 Sep. 2007		30 Sep. 2008		30 Sep. 2007
Liabilities
Deposits	246,156		242,856		246,338		244,562
Demand deposits	121,825		125,524		122,007		127,230
Time deposits	120,068		112,999		120,068		112,999
Bonds	4,263		4,333		4,263		4,333
Bank deposits and other liabilities	7,782		8,380		7,782		8,380
On demand	-		-		-		-
Short-term	5,414		5,238		5,414		5,238
Long-term	2,368		3,142		2,368		3,142
Securities and derivative transactions	23,958		16,279		23,956		16,276
Repurchase agreements	65		50		63		47
Securities deliverable under loan  Transactions	-		9,037		-		9,037
Derivative transactions	23,893		7,192		23,893		7,192
Other payable accounts	30,483		32,683		30,131		32,511
Income tax and employee profit  sharing payable	1,932		1,971		1,875		1,923
Sundry creditors and other accounts  Payable	28,551		30,712		28,256		30,588
Subordinated debentures outstanding	2,205		2,241		2,205		2,241
Deferred credits	479		299		479		299
Total liabilities	311,063		302,738		310,891		304,269
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	15,464		15,686		14,124		14,708
Capital reserves	1,442		1,162		12,797		14,077
Retained earnings	11,582		18,827		-		-
Result from the Mark-to-Market of  available-for-sale securities	(1,037)		-		(1,077)		(40)
Cumulative effect of restatement	-		(3,989)		-		(3,605)
Gains on non-monetary asset  Valuation	-		(4,242)		-		1,186
Adjustment in the employee pension	(136)		-		(136)		-
Net income	3,613		3,928		2,540		3,090
Minority interest in capital	4		20		2		18
Total equity	36,934		37,172		30,009		28,259
Total liabilities and equity	347,997		339,910		340,900		332,528

  

	Consolidated Balance Sheet
(continued)

Figures in MXN millions	GROUP
	30 Sep. 2008		30 Sep. 2007
Memorandum accounts
Transactions on behalf of third parties	56,966		105,708
Customer current accounts	(28)		(5)
Customer bank	-		1
Settlement of customer securities and documents	(28)		(6)
Customer securities	26,813		78,083
Customer securities in custody	26,804		78,074
Pledged customers securities and documents	9		9
Transactions on behalf of customers	4,310		2,198
Customer repurchase transactions	4,310		2,198
Other transactions on behalf of customers	25,871		25,432
Investment on behalf of customers, net	25,871		25,432
Other memorandum accounts	617,548		416,967
Investment of the SAR funds	-		3,600
Integrated loan portfolio	198,785		205,251
Other memorandum accounts	418,763		208,116
Transactions for the group's own accounts	2,226,870		1,708,942
Accounts for the group's own registry	2,226,886		1,708,944
Guarantees granted	33		45
Irrevocable lines of credit granted	9,721		8,785
Goods in trust or mandate	192,544		134,690
Goods in custody or under administration	109,363		56,127
Amounts committed in transactions with Fobaproa	148		140
Amounts contracted in derivative operations	1,914,946		1,505,017
Securities in custody	-		4,010
Other contingent obligations	131		130
Repurchase/resale agreements
Securities receivable under repos	42,613		48,927
(less) Repurchase agreements	42,652		48,932
	(39	)	(5	)
Reverse repurchase agreements	14,552		5,160
(less) Securities deliverable under repos	14,529		5,157
	23		3

	Consolidated Balance Sheet
(continued)

Figures in MXN millions	BANK
	30 Sep. 2008		30 Sep. 2007
Memorandum accounts
Guarantees granted	33		45
Other contingent obligations	131		129
Irrevocable lines of credit granted	9,721		8,785
Goods in trust or mandate	192,544		134,691
Goods in custody or under administration	105,415		56,127
Third party investment banking operations, net	25,871		25,431
Amounts committed in transactions with Fobaproa	148		139
Amounts contracted in derivative operations	1,914,946		1,505,017
Investments of retirement savings system funds	-		3,600
Integrated loan portfolio	198,785		205,251
Other control accounts	418,617		199,079
	2,866,211		2,138,294
Securities receivable under repos	38,321		46,731
(less) Repurchase agreements	(38,342	)	(46,734	)
	(21	)	(3	)
Reverse repurchase agreements	10,242		2,961
(less) Securities deliverable under repos	(10,237	)	(2,961	)
	5		-
Securities deliverable under loan transactions	-		9,037
	-		9,037

  

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Income Statement

Figures in MXN millions	GROUP			BANK
	30 Sep. 2008		30 Sep. 2007			30 Sep. 2008		30 Sep. 2007
Figures in MXN millions	GROUP			BANK
	30 Sep. 2008		30 Sep. 2007			30 Sep. 2008		30 Sep. 2007
Interest income	28,469		24,526			28,411		24,379
Interest expense	(9,407	)	(8,009	)		(9,379	)	(7,977		)
Monetary position (margin), net	-		(641	)		-		(576		)
Net interest income	19,062		15,876			19,032		15,826
Loan impairment charges	(10,262	)	(6,552	)		(10,262	)	(6,552		)
Risk-adjusted net interest income	8,800		9,324			8,770		9,274
Fees and commissions receivable	9,518		8,835			8,894		8,234
Fees payable	(862	)	(903	)		(848	)	(890		)
Trading income	952		953			945		948
Total operating income	18,408		18,209			17,761		17,566
Administrative and personnel expenses	(16,770	)	(15,277	)		(16,195	)	(14,864		)
Net operating income	1,638		2,932			1,566		2,702
Other income	3,377		2,476			3,330		2,547
Other expenses	(644	)	(1,033	)		(846	)	(1,032		)
Net income before taxes	4,371		4,375			4,050		4,217
Income tax and employee profit sharing tax	(3,263	)	(2,547	)		(3,206	)	(2,504		)
Deferred income tax	1,666		1,343			1,656		1,356
Net income before subsidiaries	2,774		3,171			2,500		3,069
Undistributed income from subsidiaries	840		756			41		20
Income from ongoing operations	3,614		3,927			2,541		3,089
Minority interest	(1	)	1			(1	)	1
Net income	3,613		3,928			2,540		3,090

Grupo Financiero HSBC, S.A. de C.V.	Statement of Changes in Shareholders' Equity

GROUP

Figures in MXN millions	Capital contributed	Capital reserves	Retained earnings	Result from valuation of available-for-sale securities	Deficit in restatement of stock- holders' equity	Adjustment in the employees pension	Net income	Minority interest	Total equity
Balances at 31 December 2007	21,466	1,162	18, 827	-	(8,544)	-	5,615	2 2	38,528
Movements inherent to the shareholders' decision
Capitalisation of retained earnings	-	280	5,335	-	-	-	(5,615)	-	-
Cash dividend	-	-	(4,350)	-	-	-	-	-	(4,350)
Other movements	-	-	(8,230)	-	8,230	-	-	-	-
Total	-	280	(7,245)	-	8,230	-	(5,615)	-	(4,350)
Movements for the recognition of the comprehensive income
Net income	-	-	-	-	-	-	3,613	-	3,613
Other movements	-	-	-	(1,037)	314	(136)	-	-	(859)
Minority interest	-	-	-	-	-	-	-	2	2
Total	-	-	-	(1,037)	314	(136)	3,613	2	2,756
Balances at  30 September 2008	21,466	1,442	11,582	(1,037)	-	(136)	3,613	4	36,934

  

Grupo Financiero HSBC, S.A. de C.V.	Statement of Change in Shareholders' Equity
(continued)

BANK

Figures in MXN millions	Capital contributed	Capital reserves	Retained earnings	Result from valuation of available-for-sale securities	Deficit in restatement of stock- holders' equity	Adjustment in the employees pension	Net income	Minority interest	Total equity
Balances at 31 December 2007	15,883	14,077	-	(217)	(2,421)	(136)	4,656	1	31,843
Movements inherent to the shareholders' decision
Constitution of reserves	-	4,656	(4,656)	-	-	-	-	-	-
Transfer of result of Prior years	-	-	4,656	-	-	-	(4,656)	-	-
Cash dividend	-	(3,500)	-	-	-	-	-	-	(3,500)
Total	-	1,156	-	-	-	-	(4,656)	-	(3,500)
Movements for the recognition of the comprehensive income
Net income	-	-	-	-	-	-	2,540	-	2,540
Result from valuation of available- for-sale securities	-	24	-	(898)	-	-	-	-	(874)
Cumulative effect of restatement	-	(2,460)	-	38	2,421	-	-	-	(1)
Minority interest	-	-	-	-	-	-	-	1	1
Total	-	(2,436)	-	(860)	2,421	-	2,540	1	1,666
Balances at  30 September 2008	15,883	12,797	-	(1,077)	-	(136)	2,540	2	30,009

  

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Statement of Changes in Financial Position

GROUP

Figures in MXN millions

	30 Sep. 2008		30 Sep. 2007
Operating activities:
Net income	3,613		3,928
Items included in operations not requiring (providing) funds:
Result from mark-to-market valuations	275		(73	)
Allowances for loan losses	10,262		6,552
Depreciation and amortisation	807		780
Deferred taxes	(1,666	)	(1,343	)
Minority interest	1		(1	)
Undistributed income from subsidiaries, net	(828	)	(756	)
Others	(9	)	19
Total operating items not requiring funds	12,455		9,106
Changes in items related to operations:
(Decrease) / increase in deposits	(20,801	)	15,479
Decrease/Increase in loan portfolio	2,160		(32,467	)
Increase / (decrease) in securities and derivative transactions, net	282		2,915
Increase in financial instruments	12,952		6,160
Increase / (decrease) in bank deposits and other liabilities	174		(5,075	)
Funds provided by operating activities	7,222		(3,882	)
Financing activities:
Subordinated debentures outstanding	(3	)	(49	)
Cash dividend	(4,350	)	-
Increase in other payable accounts	4,165		15,230
Funds provided in financing activities	(188	)	15,181
Investing activities:
Decrease / (increase) in property, furniture and equipment, net	(712	)	(994	)
Decrease / (increase) in deferred charges or credits, net	233		(354	)
Increase in foreclosed assets	-		(34	)
Increase in other receivable accounts	(4,963	)	(16,609	)
Funds used in investing activities	(5,442	)	(17,991	)
Increase / (decrease) in cash and equivalents	1,592		(6,692	)
Cash and equivalents at beginning of period	48,865		57,175
Cash and equivalents at end of period	50,457		50,483

  

Grupo Financiero HSBC, S.A. de C.V.	Consolidated Statement of Changes in Financial Position
(continued)

BANK

Figures in MXN millions	30 Sep. 2008			30 Sep. 2007
Operating activities:
Net income	2,540			3,090
Items included in operations not requiring (providing) funds:
Result from mark-to-market valuations	275			(73	)
Allowances for loan losses	10,262			6,552
Depreciation and amortisation	804			777
Deferred taxes	(1,656		)	(1,356	)
Undistributed income from subsidiaries, net	(29		)	(9	)
Value loss estimation for foreclosed assets	(9		)	19
Minority interest	1			(1	)
Total operating items not requiring funds	12,188			8,999
Changes in items related to operations:
(Decrease) / increase in deposits	(20,687		)	15,535
Decrease/(Increase) in loan portfolio	2,160			(32,466	)
(Increase) / decrease in securities and derivative transactions, net	(87		)	3,041
Increase in financial instruments	12,746			5,719
Increase / (decrease) in bank deposits and other liabilities	174			(5,075	)
Funds provided by operating activities	6,494			(4,247	)
Financing activities:
Subordinated debentures outstanding	(3		)	(49	)
Cash Dividend	(3,500		)	-
Increase in other payable accounts	3,967			15,235
Contributions or reimbursements of capital contributed	(14		)	-
Funds provided by financing activities	450			15,186
Investing activities:
Increase in property, furniture and equipment, net	(735		)	(665	)
Decrease / (increase) in deferred charges or credits, net	212			(355	)
Increase in foreclosed assets	-			(35	)
Increase in other receivable accounts	(4,828		)	(16,575	)
Funds used in investing activities	(5,351)			(17,630	)
Increase / (decrease) in cash and equivalents	1,593			(6,691	)
Cash and equivalents at beginning of period	48,864			57,174
Cash and equivalents at end of period	50,457			50,483

Grupo Financiero HSBC, S.A. de C.V.	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 its results under International Financial Reporting Standards (IFRS). There follows a reconciliation of the results of Grupo Financiero HSBC S.A. de C.V. from Mexican GAAP to IFRS for the first quarter ended 30 September 2008 and an explanation of the key reconciling items.

		30 Sept.
	Figures in MXN millions	2008
	Grupo Financiero HSBC - Net Income Under Mexican GAAP	3,613
	Differences arising on the valuation of pensions and post retirement healthcare benefits	67
	Differences arising on acquisition costs relating to long-term investment contracts	(28	)
	Differences arising from the deferral of fees received and paid on the origination of loans	86
	Differences arising from the recognition and provisioning for loan impairments	323
	Differences arising from purchase accounting adjustments	(18	)
	Differences arising from the recognition of the present value in-force of long-term  insurance contracts	24
	Other differences in accounting principles	14
	HSBC México net income under IFRS	4,081
	US dollar equivalent (millions)	388
	Add back tax expense	1,191
	HSBC México profit before tax under IFRS	5,272
	US dollar equivalent (millions)	502
	Exchange rate used for conversion	10.5

 Net of tax at 28 per cent.

Summary of key differences between Grupo Financiero's results as reported under Mexican GAAP and IFRS

Retirement benefits

Mexican GAAP

Obligations are recognised in the Income Statement of each year based on actuarial computations of the present value of those obligations using the projected unit credit method and real interest rates.

Unrecognised past service costs are amortised on an estimated service life of the employees.

IFRS

Obligations are recognised in the Income Statement of each year based on actuarial computations of the present value of those obligations using the projected 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 they arise.

Acquisition costs of long-term investment contracts

Mexican GAAP

All costs related to the acquisition of long-term investment contracts are expensed as they are incurred.

IFRS

Incremental costs relating to the acquisition of long-term investment contracts are deferred and amortised over the expected life of the contract.

Fees paid and received on origination of loans

Mexican GAAP

All fees received on loan origination are deferred and amortised over the life of the loan. However, this policy was introduced 1 January 2007, all fees having previously been recognised up front.

IFRS

Fees and expenses received or paid on origination of a loan that are directly attributable to the origination of that loan are accounted for under the effective interest rate method over the expected life of the loan. This policy has been in effect since 1 January 2005.

Loan impairment charges

Mexican GAAP

Loan impairment charges are calculated following the rules issued by the Mexican Ministry of Finance and the National Banking and Securities Commission. Such rules establish authorised methodologies for determining the amount of provision for each type of loan.

IFRS

Loan loss provisions for collectively assessed loans are determined based on a roll-rate methodology reflecting history of losses for each category of loan, past due payments and collateral values. For individually assessed loans, loan loss provisions are calculated based on the discounted cash flow value of the collateral.

Purchase accounting adjustments

These arise from valuations made by HSBC on acquiring Grupo Financiero Bital in November 2002 on various assets and liabilities that differed from the valuation in the local Mexican GAAP books.

Recognition of present value of in-force long-term life insurance contracts

Mexican GAAP

The present value of future earnings is not recognised. Premiums are accounted for on a received basis and reserves are calculated in accordance with guidance as set out by the Insurance Regulator (Comisión Nacional de Seguros y Fianzas).

IFRS

A value is placed on insurance contracts that are classified as long-term insurance business and are in-force at the balance sheet date. The present value of in-force long-term insurance business is determined by discounting future earnings expected to emerge from business currently in force using appropriate assumptions in assessing factors such as recent experience and general economic conditions.

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