28th Feb 2005 11:30
HSBC Holdings PLC28 February 2005 -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One)(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to________ COMMISSION FILE NUMBER 1-8198 HSBC FINANCE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-1052062 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 2700 SANDERS ROAD PROSPECT HEIGHTS, ILLINOIS 60070 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (847) 564-5000 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- 8.875% Adjustable Conversion-Rate Equity New York Stock Exchange Security Units 6 3/4% Notes, due May 15, 2011 New York Stock Exchange 6.875% Notes, due January 30, 2033 New York Stock Exchange 6% Notes, due November 30, 2033 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ( ) Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Act). Yes ( ) No (X) As of February 25, 2005, there were 50 shares of the registrant's commonstock outstanding, all of which are owned by HSBC Investments (North America)Inc. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONI(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THEREDUCED DISCLOSURE FORMAT. DOCUMENTS INCORPORATED BY REFERENCE None.--------------------------------------------------------------------------------TABLE OF CONTENTS PART/ITEM NO. PAGE------------- ----PART I-----------------------------------------------------------------------------------Item 1. Business Introduction.............................................. 4 General................................................... 4 Restatement............................................... 6 Operations................................................ 7 Funding................................................... 10 Regulation and Competition................................ 11 Cautionary Statement on Forward-Looking Statements........ 13 Corporate Governance...................................... 14Item 2. Properties.................................................. 14Item 3. Legal Proceedings........................................... 15Item 4. Submission of Matters to a Vote of Security Holders (Omitted)................................................. 17 PART II-----------------------------------------------------------------------------------Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 17Item 6. Selected Financial Data..................................... 19Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Restatement............................................... 22 Executive Overview........................................ 23 Basis of Reporting........................................ 28 Critical Accounting Policies.............................. 34 Receivables Review........................................ 38 Results of Operations..................................... 40 Segment Results - Managed Basis........................... 46 Credit Quality............................................ 51 Liquidity and Capital Resources........................... 63 Off Balance Sheet Arrangements and Secured Financings..... 71 Risk Management........................................... 75 Glossary of Terms......................................... 80 Credit Quality Statistics................................. 83 Analysis of Credit Loss Reserves Activity................. 85 Net Interest Margin....................................... 87 Reconciliations to GAAP Financial Measures................ 90Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 106Item 8. Financial Statements and Supplementary Data................. 106Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 175Item 9A. Controls and Procedures..................................... 175Item 9B. Other Information........................................... 176 2PART/ITEM NO. PAGE------------- ----PART III-----------------------------------------------------------------------------------Item 10. Directors and Executive Officers of the Registrant.......... 176Item 11. Executive Compensation (Omitted)............................ 177Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Matters (Omitted).................. 177Item 13. Certain Relationships and Related Transactions (Omitted).... 177Item 14. Principal Accountant Fees and Services...................... 177 PART IV-----------------------------------------------------------------------------------Item 15. Exhibits and Financial Statement Schedules Financial Statements...................................... 178 Exhibits.................................................. 178Signatures .................................................................. 180 3 HSBC Finance Corporation-------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS.-------------------------------------------------------------------------------- INTRODUCTION-------------------------------------------------------------------------------- On March 28, 2003, Household International, Inc. ("Household") was acquired byHSBC Holdings plc ("HSBC") by way of merger with H2 Acquisition Corporation("H2"), a wholly owned subsidiary of HSBC, in a purchase business combination.Following the merger, H2 was renamed "Household International, Inc."Subsequently, HSBC transferred its ownership interest in Household to a whollyowned subsidiary, HSBC North America Holdings Inc., who subsequently contributedHousehold to its wholly owned subsidiary, HSBC Investments (North America) Inc. On December 15, 2004, Household merged with its wholly owned subsidiary,Household Finance Corporation ("HFC"). Following the merger, Household changedits name to HSBC Finance Corporation. The name change was a continuation of therebranding of the Household businesses to the HSBC brand. These actions weretaken to establish a single brand in North America to create a stronger platformto advance growth across all HSBC business lines. By operation of law, followingthe merger, all obligations of HFC became direct obligations of HSBC FinanceCorporation. GENERAL-------------------------------------------------------------------------------- HSBC Finance Corporation is the principal fund raising company for itssubsidiaries. Its subsidiaries primarily provide middle-market consumers withseveral types of loan products in the United States, the United Kingdom, Canada,the Republic of Ireland, the Czech Republic and Hungary. HSBC FinanceCorporation and its subsidiaries may also be referred to in this Form 10-K as"we," "us" or "our." We offer real estate secured loans, auto finance loans,MasterCard* and Visa* credit card loans, private label credit card loans andpersonal non-credit card loans. We also initiate tax refund anticipation loansin the United States and offer specialty insurance products in the UnitedStates, United Kingdom and Canada. We generate cash to fund our businessesprimarily by collecting receivable balances; issuing commercial paper, mediumand long term debt; borrowing from HSBC subsidiaries and customers; securitizingand selling consumer receivables; and borrowing under secured financingfacilities. We use the cash generated to invest in and support receivablegrowth, to service our debt obligations and to pay dividends to our parent. AtDecember 31, 2004, we had approximately 31,500 employees and over 58 millioncustomers. 2004 DEVELOPMENTS - On September 30, 2004, we commenced rebranding the Household businesses to the HSBC brand. On that date, signs on each major facility were changed to HSBC, several business units began operating under the HSBC name and all communications converted from Household to HSBC. On December 15, after Household Finance Corporation was merged into Household International, Inc., the surviving company was renamed HSBC Finance Corporation. In 2005, the rebranding efforts will continue with name changes for our Canadian branch offices and our domestic auto finance business and credit card banking subsidiary. Our branch based consumer finance business will retain the HFC and Beneficial brands, accompanied by the endorsement signature, "Member HSBC Group." The move to a single brand in North America will promote increased awareness of HSBC, allowing all HSBC businesses in North America to align themselves to merchants and our suppliers and customers, resulting in a stronger platform for growth. Following the merger of HFC into HSBC Finance Corporation, HSBC Finance Corporation became the principal vehicle for funding the operations of its subsidiaries. With the merger, all previous obligations of HFC became direct obligations of HSBC Finance Corporation. The merger also --------------- * MasterCard is a registered trademark of MasterCard International, Incorporated and Visa is a registered trademark of Visa USA, Inc. 4 HSBC Finance Corporation-------------------------------------------------------------------------------- eliminates the need for separate financial statements by HFC that because of the substantial commonality of assets, were substantially the same as those of its parent, HSBC Finance Corporation. - On December 22, 2004, our affiliate, HSBC Bank USA, National Association ("HSBC Bank USA") received regulatory approval to purchase our domestic private label portfolio, including the retained interests associated with securitized private label credit card receivables. The sale of $12.2 billion of receivables ($15.6 billion on a managed basis) occurred on December 29, 2004 at a purchase price of $12.4 billion. We retained the related account relationships and entered into an agreement to sell additional domestic private label receivables originated under current and future private label accounts to HSBC Bank USA on a daily basis. Under a separate agreement with HSBC Bank USA, we will continue to service the portfolio for a fee. In the fourth quarter, we recorded a gain from the bulk sale of the portfolio, including retained securitization interests, of $663 million ($423 million after-tax). Included in this gain was a release of $505 million of owned credit loss reserves associated with the portfolio. In future periods, our net interest income, fee income and provision for credit losses for private label receivables will be substantially reduced, while other income will substantially increase as reduced securitization revenue associated with private label receivables will be more than offset by gains from continuing sales of private label receivables and receipt of servicing revenue on the portfolio from HSBC Bank USA. We anticipate that the net effect of these sales could result in a reduction to our 2005 net income by up to 10%. The amount of other income recorded will be dependent upon the volume of new receivables we originate during the year and will be subject to competitive factors as we sign agreements with new merchants and extend agreements with existing merchants. We and HSBC Bank USA will consider potential sales of some of our MasterCard and Visa receivables to HSBC Bank USA in the future based on the continuing evaluation of the capital and liquidity needs at each entity. - Upon receipt of regulatory approval for the sale of the domestic private label portfolio, we adopted charge-off and account management policies in accordance with the Uniform Retail Credit Classification and Account Management Policy issued by the Federal Financial Institutions Examination Council ("FFIEC Policies") for our domestic private label and MasterCard and Visa credit card portfolios. The adoption of FFIEC Policies resulted in a reduction to net income of approximately $121 million in the fourth quarter of 2004. We do not expect the adoption of FFIEC Policies for our domestic private label and MasterCard and Visa portfolios will have a significant impact on results of operations or cash flows in future periods. - In the third quarter, we announced our intention to structure all new collateralized funding transactions as secured financings. Because existing public MasterCard and Visa credit card transactions were structured as sales to revolving trusts that require replenishments of receivables to support previously issued securities, receivables will continue to be sold to the credit card trusts until the revolving periods end, the last of which is expected to occur in early 2008 based on current projections. Private label trusts that publicly issued securities will now be replenished by HSBC Bank USA as a result of the daily sale of new domestic private label credit card originated to HSBC Bank USA. We will continue to replenish, at reduced levels, certain non-public personal non-credit card and MasterCard and Visa securities issued to conduits and record the resulting replenishment gains for a period of time in order to manage liquidity. Termination of gain on sale treatment for new collateralized funding activity reduced our reported net income under U.S. GAAP in 2004 and will continue to in future periods. In 2004, our net interest-only strip receivables, excluding both the mark-to-market adjustment recorded in accumulated other comprehensive income and the private label portion purchased by HSBC Bank USA, decreased $466 million. There was no impact in 2004, however, on cash received from operations or on U.K. GAAP reported results. 5 HSBC Finance Corporation-------------------------------------------------------------------------------- - Funding synergies resulting from our acquisition by HSBC have continued to reduce our reliance on traditional sources to fund our growth. Because we are now a subsidiary of HSBC, our credit spreads relative to Treasuries have tightened compared to those we experienced during the months leading up to the announcement of our acquisition by HSBC. Primarily as a result of these tightened credit spreads, reduced liquidity requirements and lower costs due to shortening the maturity of our liabilities, principally through increased issuance of commercial paper, we recognized cash funding expense savings of approximately $350 million in 2004 and $125 million in 2003 compared to the funding costs we would have incurred using average spreads from the first half of 2002. It is anticipated that these tightened credit spreads and other funding synergies including asset transfers will eventually enable HSBC to realize annual cash funding expense savings, including external fee savings, in excess of $1 billion per year as our existing term debt matures over the course of the next few years. In April 2004, Fitch Ratings revised our Rating Outlook to Positive from Stable and raised our Support Rating to "1" from "2". In July 2004, Fitch Ratings raised our Senior Debt Rating to "A+" from "A" and raised our Senior Subordinated Debt Rating and our Preferred Stock Rating to "A" from "A-". In December 2004, Fitch Ratings again raised our Senior Debt Rating to "AA-" from "A+" and our commercial paper rating to "F1+." Also in December 2004, Moody's Investor Service revised our rating outlook to A1 Positive from A1 Stable. RESTATEMENT-------------------------------------------------------------------------------- HSBC Finance Corporation has restated its consolidated financial statements forthe previously reported quarterly periods ended March 31, 2004, June 30, 2004and September 30, 2004; and the period March 29, 2003 through December 31, 2003.This Form 10-K and the exhibits included herewith include all adjustmentsrelating to the restatement for all such prior periods. Amended Forms 10-Q forthe periods ended March 31, 2004, June 30, 2004 and September 30, 2004 thatreflect adjustments relating to the restatement will be filed with theSecurities and Exchange Commission on or before March 31, 2005. During the fourth quarter of 2004, as part of HSBC Finance Corporation'spreparation for the implementation of International Financial ReportingStandards ("IFRS") by HSBC from January 1, 2005, we undertook a review of ourhedging activities to confirm conformity with the accounting requirements ofIFRS, which differ in several respects from the hedge accounting requirementsunder U.S. GAAP as set out in Statement of Financial Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS133"). As a result of this review, management determined that there were somedeficiencies in the documentation required to support hedge accounting underU.S. GAAP. These documentation deficiencies arose following our acquisition byHSBC. As a consequence of the acquisition, pre-existing hedging relationships,including hedging relationships that had previously qualified under the"shortcut" method of accounting pursuant to SFAS 133, were required to bereestablished. At that time there was some debate in the accounting professionregarding the detailed technical requirements resulting from a businesscombination. We consulted with our independent accountants, KPMG LLP, inreaching a determination of what was required in order to comply with SFAS 133.Following this, we took the actions we believed were necessary to maintain hedgeaccounting for all of our historical hedging relationships in our consolidatedfinancial statements for the period ended December 31, 2003 and thoseconsolidated financial statements received an unqualified audit opinion. Management, having determined during the fourth quarter of 2004 that there werecertain documentation deficiencies, engaged independent expert consultants toadvise on the continuing effectiveness of the identified hedging relationshipsand again consulted with our independent accountants, KPMG LLP. As a result ofthis assessment, we concluded that a substantial number of our hedges met thecorrelation effectiveness requirement of SFAS 133 throughout the periodfollowing our acquisition by HSBC. However, we also determined in conjunctionwith KPMG LLP that, although a substantial number of the impacted hedgessatisfied the correlation effectiveness requirement of SFAS 133, there weretechnical deficiencies in the 6 HSBC Finance Corporation-------------------------------------------------------------------------------- documentation that could not be corrected retroactively or disregardednotwithstanding the proven effectiveness of the hedging relationships in placeand, consequently, that the requirements of SFAS 133 were not met and that hedgeaccounting was not appropriate during the period these documentationdeficiencies existed. We have therefore determined that we should restate allthe reported periods since our acquisition by HSBC to eliminate hedge accountingon all hedging relationships outstanding at March 29, 2003 and certain fairvalue swaps entered into after that date. During the period from acquisitionthrough December 31, 2004, we are reporting net income of $3.3 billion. Thecumulative impact of the loss of hedge accounting during this period is toincrease reported net income by $113 million. The resulting accounting does not reflect the economic reality of our hedgingactivity and has no impact on the timing or amount of operating cash flows orcash flows under any debt or derivative contract. It does not affect our abilityto make required payments on our outstanding debt obligations. Furthermore, therestatement has no impact on our results on a U.K. GAAP basis, which are used inmeasuring and rewarding performance of employees. Finally, our economic riskmanagement strategies have not required amendment. Full details of therestatement are set out in Note 3 in the accompanying consolidated financialstatements. OPERATIONS-------------------------------------------------------------------------------- Our operations are divided into three reportable segments: Consumer, Credit CardServices and International. Our Consumer segment includes our consumer lending,mortgage services, retail services, direct lending and auto finance businesses.Our Credit Card Services segment includes our domestic MasterCard and Visacredit card business. Our International segment includes our foreign operationsin the United Kingdom, Canada, the Republic of Ireland, the Czech Republic andHungary. Information about businesses or functions that fall below the segmentreporting quantitative threshold tests such as our insurance services, taxpayerfinancial services and commercial operations, as well as our treasury andcorporate activities, which include fair value adjustments related to purchaseaccounting and related amortization, are included under the "All Other" captionwithin our segment disclosure. We monitor our operations and evaluate trends on a managed basis (a non-GAAPfinancial measure), which assumes that securitized receivables have not beensold and are still on our balance sheet. We manage and evaluate our operationson a managed basis because the receivables that we securitize are subjected tounderwriting standards comparable to our owned portfolio, are serviced byoperating personnel without regard to ownership and result in a similar creditloss exposure for us. In addition, we fund our operations, review our operatingresults and make decisions about allocating resources, such as employees andcapital, on a managed basis. Because HSBC reports results on a U.K. GAAP basis,management also separately monitors earnings excluding goodwill amortization andnet income under U.K. GAAP (non-GAAP financial measures). GENERAL We generally serve non-conforming and nonprime consumers. Such customers areindividuals who have limited credit histories, modest incomes, highdebt-to-income ratios, high loan-to-value ratios (for real estate securedproducts) or have experienced credit problems caused by occasionaldelinquencies, prior charge-offs, bankruptcy or other credit related actions.These customers generally have higher delinquency and credit loss probabilitiesand are charged a higher interest rate to compensate for the additional risk ofloss (where the loan is not adequately collateralized to mitigate suchadditional risk of loss) and the anticipated additional collection initiativesthat may have to be undertaken over the life of the loan. We also originate andpurchase near-prime real estate secured and auto loans. In our MasterCard andVisa, retail services and international businesses, we also serve primeconsumers either through co-branding or merchant relationships. We use our centralized underwriting, collection and processing functions toadapt our credit standards and collection efforts to national or regional marketconditions. Our underwriting, loan administration and collection functions aresupported by highly automated systems and processing facilities. Our centralizedcollection system is augmented by personalized early collection efforts. 7 HSBC Finance Corporation-------------------------------------------------------------------------------- We service each customer with a view to understanding that customer's personalfinancial needs. We recognize that individuals may not be able to timely meetall of their financial obligations. Our goal is to assist consumers intransitioning through financially difficult times which may lead to them doingmore business with our lending subsidiaries. As a result, our policies andpractices are designed to be flexible to maximize the collectibility of ourloans while not incurring excessive collection expenses on loans that have ahigh probability of being ultimately uncollectible. Proactive credit management,"hands-on" customer care and targeted product marketing are means we use toretain customers and grow our business. CONSUMER Our consumer lending business is one of the largest subprime home equityoriginators in the United States as ranked by Inside B&C Lending. This businesshas 1,344 branches located in 46 states, and approximately 2.8 million activecustomer accounts, $48.9 billion in managed receivables and 12,800 employees. Itis marketed under both the HFC and Beneficial brand names, each of which caterto a slightly different type of customer in the middle-market population. Bothbrands offer secured and unsecured loan products, such as first and second lienposition closed-end mortgage loans, open-end home equity loans, personalnon-credit card loans, including personal homeowner loans (a secured highloan-to-value product that we underwrite and treat like an unsecured loan), andsales finance contracts. These products are marketed through our retail branchnetwork, direct mail, telemarketing, strategic alliances and Internet sourcedapplications and leads. Our mortgage services business purchases non-conforming first and second lienposition residential mortgage loans, including open-end home equity loans, froma network of over 200 unaffiliated third-party lenders (i.e., correspondents).This business has approximately $28.8 billion in managed receivables, 280,000active customer accounts and 2,700 employees. Purchases are primarily "bulk"acquisitions (i.e., pools of loans) but also include "flow" acquisitions (i.e.,loan by loan), and are made based on our specific underwriting guidelines. As ofDecember 31, 2004, mortgage services serviced approximately $5 billion ofreceivables for other parties, including HSBC Bank USA. Under agreements withHSBC Bank USA, we source, underwrite, price and service loans purchased by HSBCBank USA from certain correspondents. We offer forward commitments to selectedcorrespondent lenders to strengthen our relationship with these lenders and tocreate a sustainable growth channel for this business. Decision One MortgageCompany, LLC ("Decision One"), a subsidiary of HSBC Finance Corporation, waspurchased in 1999 to assist us in understanding the product needs of mortgagebrokers and trends in the mortgage lending industry. Through more than 20 branchlocations, Decision One directly originates mortgage loans sourced by mortgagebrokers and sells all loans to secondary market purchasers, including to ourmortgage services business. Our retail services business is one of the largest providers of third-partyprivate label financing in the United States based on managed receivablesoutstanding. On December 29, 2004, our entire domestic private label portfolioof approximately $15.6 billion of managed receivables was sold to HSBC Bank USAand agreements were entered into to sell all future receivables to HSBC Bank USAon a daily basis and to service the portfolio for HSBC Bank USA for a fee. As aresult, we now sell all receivables upon origination but service the entireportfolio on behalf of HSBC Bank USA. Our retail services business has over 70active merchant relationships and we service approximately 15.5 million activecustomer accounts and have 2,100 employees. At December 31, 2004, the servicedprivate label portfolio consisted of approximately 16 percent of receivables inthe furniture industry, 33 percent in the consumer electronics industry, 27percent in the powersport vehicle (snowmobiles, personal watercraft, ATV's andmotorcycles) industry and approximately 10 percent in the department storeindustry. Private label financing products are generated through merchant retaillocations, merchant catalog and telephone sales, direct mail and Internetapplications. Our auto finance business purchases, from a network of approximately 5,200active dealer relationships, retail installment contracts of consumers who donot have access to traditional, prime-based lending sources. We also originateand refinance auto loans through direct mail solicitations, alliance partners,consumer lending customers and the Internet. At December 31, 2004, this businesshad approximately $10.1 billion in managed 8 HSBC Finance Corporation-------------------------------------------------------------------------------- receivables, approximately 735,000 active customer accounts and 2,000 employees.Approximately 36% of auto finance receivables are secured by new vehicles. CREDIT CARD SERVICES Our Credit Card Services business includes our MasterCard and Visa receivablesin the United States, including The GM Card(R), the AFL-CIO Union Plus(R)*("UP") credit card, Household Bank, Orchard Bank, and HSBC branded cards. Thisbusiness has approximately $19.7 billion in managed receivables, 14 millionactive customer accounts and 4,700 employees. According to The Nilson Report,this business is the sixth largest issuer of MasterCard or Visa credit cards inthe United States (based on receivables). The GM Card(R), a co-branded creditcard issued as part of our alliance with General Motors Corporation ("GM"),enables customers to earn discounts on the purchase or lease of a new GMvehicle. The UP card program with the AFL-CIO provides benefits and services tomembers of various national and international labor unions. The Household Bankand Orchard Bank branded credit cards offer specialized credit card products toconsumers underserved by traditional providers or are marketed in conjunctionwith merchant relationships established through our retail services business.HSBC branded cards are targeted through direct mail at the prime market. Inaddition, Credit Card Services services $1.0 billion of receivables held by asubsidiary of HSBC Bank USA. New receivables and accounts related to the HSBCBank USA portfolio are originated by Household Bank (SB), N.A., and receivablesare sold daily to HSBC Bank USA. Our MasterCard and Visa business is generated primarily through direct mail,telemarketing, Internet applications, application displays, promotional activityassociated with our affinity and co-branding relationships, mass-mediaadvertisement (The GM Card(R)) and merchant relationships sourced through ourretail services business. We also cross-sell our credit cards to our existingconsumer lending and retail services customers as well as our taxpayer financialservices customers. Although our relationships with GM and the AFL-CIO enable us to access aproprietary customer base, in accordance with our agreements with theseinstitutions, we own all receivables originated under the programs and areresponsible for all credit and collection decisions as well as the funding forthe programs. These programs are not dependent upon any payments, guarantees orcredit support from these institutions. As a result, we are not directlydependent upon GM or the AFL-CIO for any specific earnings stream associatedwith these programs. We believe we have a strong working relationship with GMand the AFL-CIO and in 2004, we jointly agreed with the AFL-CIO to extend theterm of this successful Affinity Card Program. These agreements do not expire inthe near term. INTERNATIONAL Our United Kingdom business is a mid-market consumer lender focusing on customerservice through its branch locations, and consumer electronics through itsretail finance operations and telemarketing. This business offers secured andunsecured lines of credit, secured and unsecured closed-end loans, retailfinance products, insurance products and credit cards (including the GM Card(R)from Vauxhall and marbles(TM), an Internet enabled credit card). We operate inEngland, Scotland, Wales, Northern Ireland and the Republic of Ireland. Loans held by our United Kingdom, inclusive of the Republic of Ireland,operation are originated through a branch network consisting of 216 HFC Bank andBeneficial Finance branches, merchants, direct mail, broker referrals, theInternet and outbound telemarketing. This business has approximately $10.7billion in managed receivables, 3.5 million customer accounts and 4,000employees. Our Canadian business offers real estate secured and unsecured lines of credit,secured and unsecured closed-end loans, insurance products, private label creditcards, retail finance products and auto loans to Canadian --------------- * The Union Plus MasterCard and Visa credit card program is an affinity arrangement with Union Privilege under which credit cards are offered to members of unions affiliated with the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). 9 HSBC Finance Corporation-------------------------------------------------------------------------------- consumers. In addition, through its trust operations, our Canadian businessaccepts deposits. These products are marketed through 115 branch offices in 10provinces, through direct mail, 80 merchant relationships and the Internet. AtDecember 31, 2004, this business had approximately $2.4 billion in managedreceivables, 1.0 million customer accounts and 1,200 employees. We opened offices in the Czech Republic and Hungary in 2002 and 2001,respectively, to facilitate the expansion plans of one of our U.K. merchantalliances. These offices have approximately $104 million in managed receivablesand 340 employees. ALL OTHER Our insurance services operation distributes credit life, disability andunemployment, accidental death and disability, term life, whole life, annuities,disability, long term care and a variety of other specialty insurance productsto our customers. Such products currently are offered throughout the UnitedStates and Canada and are target offered to customers based upon theirparticular needs. Insurance is directly written by or reinsured with one or moreof our subsidiaries. HSBC Taxpayer Financial Services is the leading U.S. provider of tax-relatedfinancial products to consumers through nearly 25,000 unaffiliated professionaltax preparer locations and tax preparation software providers. Serving more than8.2 million customers annually, this business leverages the annual U.S. incometax filing process to provide products that offer consumers quick and convenientaccess to funds in the amount of their anticipated tax refund. This businessgenerated a loan volume of approximately $13.3 billion in 2004. To help ensure high standards of responsible lending, we provideindustry-leading compliance programs for our tax preparer business partners. Keyelements of our compliance efforts include mandatory online compliance andsales-practice training, expanded tax preparer due diligence processes, andon-going sales practice monitoring to help ensure that our customers are treatedfairly and that they understand their financial choices. Additionally, access tofree consumer financial education resources and a 48-hour satisfaction guaranteeare offered to customers, which further enhances our compliance and customerservice efforts. Our commercial operations are very limited in scope and are expected to continueto decline. We have less than $300 million in commercial receivables. FUNDING-------------------------------------------------------------------------------- Our continued success and prospects for growth are largely dependent upon accessto the global capital markets. Numerous factors, internal and external, mayimpact our access to, and the costs associated with, these markets. Thesefactors may include our debt ratings, overall economic conditions, overallcapital markets volatility and the effectiveness of our management of creditrisks inherent in our customer base. The merger with HSBC has improved our access to the capital markets and loweredour funding costs. In addition to providing several important sources of directfunding, our affiliation with HSBC is also expanding our access to a worldwidepool of potential investors. While these new funding synergies have reduced ourreliance on traditional sources to fund our growth, we are focused on balancingour use of affiliate and third-party funding sources to minimize funding expensewhile maximizing liquidity. Because we are now a subsidiary of HSBC and ourcredit ratings have improved, our credit spreads relative to Treasuries havetightened relative to those we experienced during the months leading up to theannouncement of our acquisition by HSBC. Primarily as a result of thesetightened credit spreads, reduced liquidity requirements and lower costs due toshortening the maturity of our liabilities mainly through the issuance ofcommercial paper, we recognized cash funding expense savings of approximately$350 million in 2004 and $125 million in 2003 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 synergiesincluding assets transfers will 10 HSBC Finance Corporation-------------------------------------------------------------------------------- eventually 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. For a detailed listing of the ratings that have been assigned to HSBC FinanceCorporation and our significant subsidiaries as of December 31, 2004, seeExhibit 99.1 to this Form 10-K. We fund our operations globally and domestically, using a combination of capitalmarket and affiliate debt, preferred equity, securitizations and sales ofconsumer receivables and borrowings under secured financing facilities. We willcontinue to fund a large part of our operations in the global capital markets,primarily through the use of secured financings, commercial paper, medium-termnotes and long-term debt. We will also continue to sell certain receivables toHSBC Bank USA. We will continue to use derivative financial instruments to hedgeour currency and interest rate risk exposure. A description of our use ofderivative financial instruments, including interest rate swaps and foreignexchange contracts, and other quantitative and qualitative information about ourmarket risk is set forth in Item 7. "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" ("2004 MD&A") under the caption"Risk Management" and Note 16 of our consolidated financial statements ("2004Financial Statements"). Additional information on our sources and availability of funding are set forthin the "Liquidity and Capital Resources" and "Off Balance Sheet Arrangements"sections of our 2004 MD&A. REGULATION AND COMPETITION-------------------------------------------------------------------------------- REGULATION CONSUMER LENDING. Our consumer finance businesses operate in a highly regulatedenvironment. These businesses are subject to laws relating to consumerprotection, discrimination in extending credit, use of credit reports, privacymatters, disclosure of credit terms and correction of billing errors. They alsoare subject to certain regulations and legislation that limit operations incertain jurisdictions. For example, limitations may be placed on the amount ofinterest or fees that a loan may bear, the amount that may be borrowed, thetypes of actions that may be taken to collect or foreclose upon delinquent loansor the information about a customer that may be shared. Our consumer branchlending offices are generally licensed in those jurisdictions in which theyoperate. Such licenses have limited terms but are renewable, and are revocablefor cause. Failure to comply with these laws and regulations may limit theability of our licensed lenders to collect or enforce loan agreements made withconsumers and may cause our lending subsidiaries to be liable for damages andpenalties. There also continues to be a significant amount of legislative activity,nationally, locally and at the state level, aimed at curbing lending practicesdeemed to be "predatory". In addition, states have sought to alter lendingpractices through consumer protection actions brought by state attorneys generaland other state regulators. Legislative activity in this area is expected tocontinue targeting certain abusive practices such as loan "flipping" (making aloan to refinance another loan where there is no tangible benefit to theborrower), fee "packing" (addition of unnecessary, unwanted and unknown fees toa borrower), "equity stripping" (lending without regard to the borrower'sability to repay or making it impossible for the borrower to refinance withanother lender), and outright fraud. HSBC Finance Corporation does not condoneor endorse any of these practices. We continue to work with regulators andconsumer groups to create appropriate safeguards to avoid these abusivepractices while allowing our borrowers to continue to have access to credit forpersonal purposes, such as the purchase of homes, automobiles and consumergoods. As part of this effort we have adopted a set of lending best practiceinitiatives. Increased legislative and regulatory focus is also expected on taxrefund anticipation loans. It is possible that broad legislative initiativeswill be passed which will impose additional costs and rules on our businesses.Although we have the ability to react quickly to new laws and regulations, it istoo early to estimate the effect, if any, these activities will have on us in aparticular locality or nationally. BANKING INSTITUTIONS. Our credit card banking subsidiary, Household Bank (SB),N.A. ("Household Bank"), is a nationally-chartered 'credit card bank' which isalso a member of the federal reserve system. Household 11 HSBC Finance Corporation-------------------------------------------------------------------------------- Bank is subject to regulation, supervision and examination by the Office of theComptroller of the Currency ("OCC"). The deposits of Household Bank are insuredby the FDIC, which renders it subject to relevant FDIC regulation. As a result of our acquisition by HSBC, HSBC Finance Corporation and itssubsidiaries became subject to supervision, regulation and examination by theBoard of Governors of the Federal Reserve Board (the "Federal Reserve Board").HSBC is a bank holding company under the U.S. Bank Holding Company Act of 1956(the "BHCA") as a result of its ownership of HSBC Bank USA. On January 1, 2004,HSBC formed a new company to hold all of its North American operations,including HSBC Finance Corporation and its subsidiaries. This company, HSBCNorth American Holdings Inc. ("HNAH") is also a "bank holding company" under theBHCA, by virtue of its ownership and control of HSBC Bank USA. HSBC and HNAH areregistered as financial holding companies ("FHC") under the Gramm-Leach-BlileyAct amendments to the BHCA, enabling them to offer a more complete line offinancial products and services. The United States is a party to the 1988 Basel Capital Accord and U.S. bankingregulatory authorities have adopted risk-based capital requirements for UnitedStates banks and bank holding companies that are generally consistent with theAccord. In addition, U.S. bank regulatory authorities have adopted 'leverage'capital requirements that generally require United States banks and bank holdingcompanies to maintain a minimum amount of capital in relation to their balancesheet assets (measured on a non-risk-weighted basis). Household Bank is subjectto these capital requirements. Household Bank, like other FDIC-insured banks, may be required to payassessments to the FDIC for deposit insurance under the FDIC's Bank InsuranceFund. Under the FDIC's risk-based system for setting deposit insuranceassessments, an institution's assessments vary according to the level of capitalan institution holds, its deposit levels and other factors. The Federal Deposit Insurance Corporation Improvement Act of 1991 provides forextensive regulation of depository institutions such as Household Bank,including requiring federal banking regulators to take 'prompt correctiveaction' with respect to FDIC-insured banks that do not meet minimum capitalrequirements. At December 31, 2004, Household Bank was well-capitalized underapplicable OCC and FDIC regulations. Our principal United Kingdom subsidiary (HFC Bank Limited, formerly known as HFCBank plc) is subject to oversight and regulation by the U.K. Financial ServicesAuthority ("FSA") and the Central Bank Financial Services Authority of Ireland.We have indicated our intent to the FSA to maintain the regulatory capital ofthis institution at specified levels. We do not anticipate that any capitalcontribution will be required for our United Kingdom bank in the near term. Inthe Republic of Ireland we are regulated by the Irish Financial ServicesRegulatory Authority. In May 2005, new consumer protection laws will beeffective in the U.K. that may impact profitability and operations. Thesechanges will not have a material impact on our results. We also maintain a trust company in Canada, which is subject to regulatorysupervision by the Office of the Superintendent of Financial Institutions. INSURANCE. Our credit insurance business is subject to regulatory supervisionunder the laws of the states and provinces in which it operates. Regulationsvary from state to state, and province to province, but generally coverlicensing of insurance companies, premium and loss rates, dividend restrictions,types of insurance that may be sold, permissible investments, policy reserverequirements, and insurance marketing practices. Our insurance operations in the United Kingdom are subject to regulatorysupervision by the FSA. COMPETITION The consumer financial services industry in which we operate is highlyfragmented and intensely competitive. We generally compete with banks, thrifts,insurance companies, credit unions, mortgage lenders and brokers, financecompanies, securities brokers and dealers, and other domestic and foreignfinancial institutions in the 12 HSBC Finance Corporation-------------------------------------------------------------------------------- United States, Canada and the United Kingdom. We compete by expanding ourcustomer base through portfolio acquisitions or alliance and co-brandingopportunities, offering a variety of consumer loan products and maintaining astrong service orientation. CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS-------------------------------------------------------------------------------- Certain matters discussed throughout this Form 10-K constitute forward-lookingstatements within the meaning of the Private Securities Litigation Reform Act of1995. In addition, we may make or approve certain statements in future filingswith the SEC, in press releases, or oral or written presentations byrepresentatives of HSBC Finance Corporation that are not statements ofhistorical fact and may also constitute forward-looking statements. Words suchas "believe", "expects", "estimates", "targeted", "anticipates", "goal" andsimilar expressions are intended to identify forward-looking statements butshould not be considered as the only means through which these statements may bemade. These matters or statements will relate to our future financial condition,results of operations, plans, objectives, performance or business developmentsand will involve known and unknown risks, uncertainties and other factors thatmay cause our actual results, performance or achievements to be materiallydifferent from that which was expressed or implied by such forward-lookingstatements. Forward-looking statements are based on our current views andassumptions and speak only as of the date they are made. HSBC FinanceCorporation undertakes no obligation to update any forward-looking statement toreflect subsequent circumstances or events. The important factors, many of which are out of our control, which could affectour actual results and could cause our results to vary materially from thoseexpressed in public statements or documents are: - changes in laws and regulations, including attempts by local, state and national regulatory agencies or legislative bodies to control alleged "predatory" lending practices through broad or targeted initiatives aimed at lenders operating in consumer lending markets; - increased competition from well-capitalized companies or lenders with access to government sponsored organizations for our consumer segment which may impact the terms, rates, costs or profits historically included in the loan products we offer or purchase; - changes in accounting or credit policies, practices or standards, as they may be internally modified from time to time or changes as may be required by regulatory agencies or the Financial Accounting Standards Board; - changes to operational practices from time to time, such as determinations to sell receivables from our private label and mortgage services businesses and the potential MasterCard and Visa receivable sale, structuring more securitizations as secured financings, or changes to our customer account management policies and practices and risk management/collection practices; - changes in overall economic conditions, including the interest rate environment in which we operate, the capital markets in which we fund our operations, the market values of consumer owned real estate throughout the United States, recession, employment and currency fluctuations; - consumer perception of the availability of credit, including price competition in the market segments we target and the ramifications or ease of filing for personal bankruptcy; - the effectiveness of models or programs to predict loan delinquency or loss and initiatives to improve collections in all business areas, and changes we may make from time to time in these models, programs and initiatives; - continued consumer acceptance of our distribution systems and demand for our loan or insurance products; - changes associated with, as well as the difficulty in, integrating systems, operational functions and cultures, as applicable, of any organization or portfolio acquired by HSBC Finance Corporation; - a reduction of our debt ratings by any of the nationally recognized statistical rating organizations that rate these instruments to a level that is below our current rating; 13 HSBC Finance Corporation-------------------------------------------------------------------------------- - the costs, effects and outcomes of regulatory reviews or litigation relating to our nonprime loan receivables or the business practices or policies of any of our business units, including, but not limited to, additional compliance requirements; - increased funding costs resulting from instability in the capital markets and risk tolerance of fixed income investors; - the costs, effects and outcomes of any litigation matter that is determined adversely to HSBC Finance Corporation or its businesses; - the ability to attract and retain qualified personnel to support the underwriting, servicing, collection and sales functions of our businesses; - failure to obtain expected funding from HSBC subsidiaries and clients; and - the inability of HSBC Finance Corporation to manage any or all of the foregoing risks as well as anticipated. CORPORATE GOVERNANCE-------------------------------------------------------------------------------- HSBC Finance Corporation maintains a website at www.household.com on which wemake available, as soon as reasonably practicable after filing with orfurnishing to the SEC, our annual report on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, and any amendments to these reports. Ourwebsite also contains our Corporate Governance Standards and committee chartersfor the Audit, Compensation, Executive and Nominating and Governance Committeesof our Board of Directors. We will provide printed copies of this information atno charge upon written request. Requests should be made to HSBC FinanceCorporation, 2700 Sanders Road, Prospect Heights, Illinois 60070, Attention:Corporate Secretary. CERTIFICATIONS In addition to certifications from our Chief Executive Officer and ChiefFinancial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of2002 (attached to this report on Form 10-K as Exhibits 31 and 32), we have alsofiled a certification with the New York Stock Exchange (the "NYSE") from ourChief Executive Officer certifying that he is not aware of any violation by HSBCFinance Corporation of the NYSE corporate governance listing standards in effectas of February 21, 2005. ITEM 2. PROPERTIES.-------------------------------------------------------------------------------- Our operations are located throughout the United States, in 10 provinces inCanada and in the United Kingdom, with principal facilities located inLewisville, Texas; New Castle, Delaware; Brandon, Florida; Jacksonville,Florida; Tampa, Florida; Chesapeake, Virginia; Virginia Beach, Virginia;Hanover, Maryland; Bridgewater, New Jersey; Rockaway, New Jersey; Las Vegas,Nevada; Charlotte, North Carolina; Portland, Oregon; Pomona, California;Chicago, Illinois; Elmhurst, Illinois; Franklin Park, Illinois; Mount Prospect,Illinois; Prospect Heights, Illinois; Schaumburg, Illinois; Vernon Hills,Illinois; Wood Dale, Illinois; Carmel, Indiana; Salinas, California; San Diego,California; London, Kentucky; Sioux Falls, South Dakota; Toronto, Ontario andMontreal, Quebec, Canada; and Windsor, Berkshire, United Kingdom. Substantially all branch offices, divisional offices, corporate offices,regional processing and regional servicing center spaces are operated underlease with the exception of the headquarters building for our United Kingdomoperations, a credit card processing facility in Las Vegas, Nevada; a processingcenter in Vernon Hills, Illinois; servicing facilities in London, Kentucky, Mt.Prospect, Illinois, and Chesapeake, Virginia; offices in Birmingham, UnitedKingdom; and an airplane hanger in Wheeling, Illinois. We believe that suchproperties are in good condition and meet our current and reasonably anticipatedneeds. 14 HSBC Finance Corporation-------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS.-------------------------------------------------------------------------------- GENERAL We are parties to various legal proceedings resulting from ordinary businessRelated Shares:
HSBC Holdings