28th Feb 2005 11:31
HSBC Holdings PLC28 February 2005 Part 3 HSBC Finance Corporation-------------------------------------------------------------------------------- GLOSSARY OF TERMS Affinity Credit Card - A MasterCard or Visa account jointly sponsored by theissuer of the card and an organization whose members share a common interest(e.g., the AFL-CIO Union Plus(R) credit card program). Auto Finance Loans - Closed-end loans secured by a first or second lien on avehicle. Co-Branded Credit Card - A MasterCard or Visa account that is jointly sponsoredby the issuer of the card and another corporation (e.g., the GM Card(R)). Theaccount holder typically receives some form of added benefit for using the card. Consumer Net Charge-off Ratio - Net charge-offs of consumer receivables dividedby average consumer receivables outstanding. Contractual Delinquency - A method of determining aging of past due accountsbased on the status of payments under the loan. Delinquency status may beaffected by customer account management policies and practices such as therestructure of accounts, forbearance agreements, extended payment plans,modification arrangements, external debt management plans, loan rewrites anddeferments. Efficiency Ratio - Ratio of total costs and expenses less policyholders'benefits to net interest income and other revenues less policyholders' benefits. Fee Income - Income associated with interchange on credit cards and late andother fees from the origination or acquisition of loans. Foreign Exchange Contract - A contract used to minimize our exposure to changesin foreign currency exchange rates. Futures Contract - An exchange-traded contract to buy or sell a stated amount ofa financial instrument or index at a specified future date and price. HINO - HSBC Investments (North America) Inc., which is the immediate parent ofHSBC Finance Corporation. HNAH - HSBC North America Holdings Inc. and the immediate parent of HINO. HSBC - HSBC Holdings plc. HSBC Bank USA - HSBC Bank USA, National Association HTSU - HSBC Technology and Services (USA) Inc., which provides informationtechnology services to all subsidiaries of HNAH and other subsidiaries of HSBC. Goodwill - Represents the purchase price over the fair value of identifiableassets acquired less liabilities assumed from business combinations. Intangible Assets - Assets (not including financial assets) that lack physicalsubstance. Our acquired intangibles include purchased credit card relationshipsand related programs, merchant relationships in our retail services business,other loan related relationships, trade names, and technology, customer listsand other contracts. Interchange Fees - Fees received for processing a credit card transactionthrough the MasterCard or Visa network. Interest-only Strip Receivables - Represent our contractual right to receiveinterest and other cash flows from our securitization trusts after the investorsreceive their contractual return. Interest Rate Swap - Contract between two parties to exchange interest paymentson a stated principal amount (notional principal) for a specified period.Typically, one party makes fixed rate payments, while the other party makespayments using a variable rate. 80 HSBC Finance Corporation-------------------------------------------------------------------------------- LIBOR - London Interbank Offered Rate. A widely quoted market rate which isfrequently the index used to determine the rate at which we borrow funds. Liquidity - A measure of how quickly we can convert assets to cash or raiseadditional cash by issuing debt. Managed Basis - A non-GAAP method of reporting whereby net interest income,other revenues and credit losses on securitized receivables structured as salesare reported as if those receivables were still held on our balance sheet. Managed Receivables - The sum of receivables on our balance sheet and those thatwe service for investors as part of our asset securitization program. MasterCard and Visa Receivables - Receivables generated through customer usageof MasterCard and Visa credit cards. Net Interest Income - Interest income from receivables and noninsuranceinvestment securities reduced by interest expense. Net Interest Margin - Net interest income as a percentage of averageinterest-earning assets. Nonaccrual Loans - Loans on which we no longer accrue interest because ultimatecollection is unlikely. Options - A contract giving the owner the right, but not the obligation, to buyor sell a specified item at a fixed price for a specified period. Owned Receivables - Receivables held on our balance sheet. Personal Homeowner Loan ("PHL") - A high loan-to-value real estate loan that hasbeen underwritten and priced as an unsecured loan. These loans are reported aspersonal non-credit card receivables. Personal Non-Credit Card Receivables - Unsecured lines of credit or closed-endloans made to individuals. Portfolio Seasoning - Relates to the aging of origination vintages. Losspatterns emerge slowly over time as new accounts are booked. Private Label Credit Card - A line of credit made available to customers ofretail merchants evidenced by a credit card bearing the merchant's name. Product Vintage Analysis - Refers to loss curves on specific product originationpools by date of origination. Real Estate Secured Loan - Closed-end loans and revolving lines of creditsecured by first or second liens on residential real estate. Receivables Serviced with Limited Recourse - Receivables we have securitized intransactions structured as sales and for which we have some level of potentialloss if defaults occur. Return on Average Common Shareholder's(s') Equity - Net income less dividends onpreferred stock divided by average common shareholder's(s') equity. Return on Average Managed Assets - Net income divided by average managed assets. Return on Average Owned Assets - Net income divided by average owned assets. Secured Financing - The process where interests in a dedicated pool of financialassets are sold to investors. Generally, the receivables are transferred througha limited purpose financing subsidiary to a trust that issues interests that aresold to investors. These transactions do not receive sale treatment under SFASNo. 140. The receivables and related debt remain on our balance sheet. Securitization - The process where interests in a dedicated pool of financialassets, typically credit card, auto or personal non-credit card receivables, aresold to investors. Generally, the receivables are sold to a trust that 81 HSBC Finance Corporation-------------------------------------------------------------------------------- issues interests that are sold to investors. These transactions are structuredto receive sale treatment under SFAS No. 140. The receivables are then removedfrom our balance sheet. Securitization Revenue - Includes income associated with current and priorperiod securitizations structured as sales of receivables with limited recourse.Such income includes gains on sales, net of our estimate of probable creditlosses under the recourse provisions, servicing income and excess spreadrelating to those receivables. Tangible Common Equity - Common shareholder's(s') equity (excluding unrealizedgains and losses on investments and cash flow hedging instruments and anyminimum pension liability) less acquired intangibles and goodwill. Tangible Shareholder's(s') Equity - Tangible common equity, preferred stock,company obligated mandatorily redeemable preferred securities of subsidiarytrusts (including amounts due to affiliates) and senior debt which containsmandatorily redeemable obligations to purchase HSBC common stock in 2006 (theAdjustable Conversion-Rate Equity Security Units), adjusted for purchaseaccounting adjustments. Tangible Managed Assets - Total managed assets less acquired intangibles,goodwill and derivative financial assets. Taxpayer Financial Services ("TFS") Income - Our taxpayer financial servicesbusiness provides consumer tax refund lending in the United States. This incomeprimarily consists of fees received from the consumer for origination of a shortterm loan which will be repaid from their federal income tax return refund. Whole Loan Sales - Sales of loans to third parties without recourse. Typically,these sales are made pursuant to our liquidity or capital management plans. 82 HSBC FINANCE CORPORATION AND SUBSIDIARIES CREDIT QUALITY STATISTICS - OWNED BASIS 2004 2003 2002 2001 2000--------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)OWNED TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOSReal estate secured.................................... 2.96% 4.33% 3.91% 2.63% 2.58%Auto finance........................................... 2.07 2.51 3.96 2.92 2.46MasterCard/Visa........................................ 4.88 5.76 5.97 5.67 4.90Private label.......................................... 4.13 5.42 6.36 5.99 5.60Personal non-credit card............................... 8.69 10.01 8.95 8.44 7.62 ------ ------ ------ ------ ------Total consumer......................................... 4.07% 5.36% 5.34% 4.43% 4.19% ====== ====== ====== ====== ======RATIO OF OWNED NET CHARGE-OFFS TO AVERAGE OWNED RECEIVABLES FOR THE YEARReal estate secured.................................... 1.10% .99% .91% .52% .42%Auto finance........................................... 3.43 4.91 6.00 4.00 3.29MasterCard/Visa(1)..................................... 8.85 9.18 9.46 8.17 6.55Private label(1)....................................... 6.17 5.75 6.28 5.59 5.34Personal non-credit card............................... 9.75 9.89 8.26 6.81 7.02 ------ ------ ------ ------ ------Total consumer(1)...................................... 4.00 4.06 3.81 3.32 3.18Commercial............................................. - .46 (.40) 2.10 2.69 ------ ------ ------ ------ ------Total.................................................. 3.98% 4.05% 3.79% 3.31% 3.18% ====== ====== ====== ====== ======REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES.............. 1.38% 1.42% 1.29% .84% .70% ------ ------ ------ ------ ------NONACCRUAL OWNED RECEIVABLESDomestic: Real estate secured.................................. $1,489 $1,777 $1,367 $ 907 $ 686 Auto finance......................................... 155 104 80 69 45 Private label........................................ 24 43 38 39 48 Personal non-credit card............................. 908 898 902 782 610Foreign................................................ 432 316 264 215 226 ------ ------ ------ ------ ------Total consumer......................................... 3,008 3,138 2,651 2,012 1,615Commercial and other................................... 4 6 15 15 42 ------ ------ ------ ------ ------Total.................................................. $3,012 $3,144 $2,666 $2,027 $1,657 ====== ====== ====== ====== ======ACCRUING CONSUMER OWNED RECEIVABLES 90 OR MORE DAYS DELINQUENTDomestic: MasterCard/Visa...................................... $ 469 $ 443 $ 343 $ 352 $ 272 Private label........................................ - 429 491 462 355Foreign................................................ 38 32 27 30 22 ------ ------ ------ ------ ------Total.................................................. $ 507 $ 904 $ 861 $ 844 $ 649 ====== ====== ====== ====== ======REAL ESTATE OWNEDDomestic............................................... $ 583 $ 627 $ 424 $ 395 $ 333Foreign................................................ 4 4 3 4 4 ------ ------ ------ ------ ------Total.................................................. $ 587 $ 631 $ 427 $ 399 $ 337 ====== ====== ====== ====== ======RENEGOTIATED COMMERCIAL LOANS.......................... $ 2 $ 2 $ 1 $ 2 $ 12 ====== ====== ====== ====== ====== --------------- (1) The adoption of FFIEC charge-off policies for our domestic private label and MasterCard/Visa portfolios in December 2004 increased private label net charge-offs by $155 million (119 basis points) and MasterCard/Visa net charge-offs by $3 million (2 basis points) and total consumer net charge-offs by $158 million (16 basis points) for the year ended December 31, 2004. 83 HSBC FINANCE CORPORATION AND SUBSIDIARIES CREDIT QUALITY STATISTICS - MANAGED BASIS(1) 2004 2003 2002 2001 2000---------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)MANAGED TWO-MONTH-AND-OVER CONTRACTUAL DELINQUENCY RATIOSReal estate secured............................... 2.97% 4.35% 3.94% 2.68% 2.63%Auto finance...................................... 2.96 3.84 3.65 3.16 2.55MasterCard/Visa................................... 3.98 4.16 4.12 4.10 3.49Private label..................................... 4.13 4.94 6.03 5.48 5.48Personal non-credit card.......................... 9.30 10.69 9.41 8.87 7.97 ------ ------ ------ ------ ------Total consumer.................................... 4.24% 5.39% 5.24% 4.46% 4.20% ====== ====== ====== ====== ======RATIO OF MANAGED NET CHARGE-OFFS TO AVERAGE MANAGED RECEIVABLES FOR THE YEARReal estate secured............................... 1.10% 1.00% .92% .53% .45%Auto finance...................................... 5.80 7.00 6.63 5.31 4.80MasterCard/Visa(2)................................ 7.29 7.26 7.12 6.63 5.58Private label(2).................................. 6.03 5.62 5.75 5.18 5.35Personal non-credit card.......................... 10.20 9.97 8.32 6.79 6.97 ------ ------ ------ ------ ------Total consumer(2)................................. 4.61 4.67 4.28 3.73 3.64Commercial........................................ - .46 (.40) 2.10 2.69 ------ ------ ------ ------ ------Total............................................. 4.59% 4.66% 4.26% 3.72% 3.63% ====== ====== ====== ====== ======REAL ESTATE CHARGE-OFFS AND REO EXPENSE AS A PERCENT OF AVERAGE REAL ESTATE SECURED RECEIVABLES..................................... 1.38% 1.42% 1.29% .83% .71% ------ ------ ------ ------ ------NONACCRUAL MANAGED RECEIVABLESDomestic: Real estate secured............................. $1,496 $1,791 $1,391 $ 941 $ 734 Auto finance.................................... 302 338 272 202 116 Private label................................... 24 43 38 39 48 Personal non-credit card........................ 1,263 1,464 1,320 1,106 902Foreign........................................... 469 367 311 263 270 ------ ------ ------ ------ ------Total consumer.................................... 3,554 4,003 3,332 2,551 2,070Commercial and other.............................. 4 6 15 15 42 ------ ------ ------ ------ ------Total............................................. $3,558 $4,009 $3,347 $2,566 $2,112 ====== ====== ====== ====== ======ACCRUING CONSUMER MANAGED RECEIVABLES 90 OR MORE DAYS DELINQUENTDomestic: MasterCard/Visa................................. $ 570 $ 601 $ 513 $ 527 $ 421 Private label................................... - 582 633 503 417Foreign........................................... 38 32 27 30 22 ------ ------ ------ ------ ------Total............................................. $ 608 $1,215 $1,173 $1,060 $ 860 ====== ====== ====== ====== ====== --------------- (1) These non-GAAP financial measures are provided for comparison of our operating trends and should be read in conjunction with our owned basis GAAP financial information. Refer to "Reconciliations to GAAP Financial Measures" for a discussion of non-GAAP financial information and for quantitative reconciliations to the equivalent GAAP basis financial measure. (2) The adoption of FFIEC charge-off policies for our domestic private label and MasterCard/Visa portfolios in December 2004 increased private label net charge-offs by $197 million (112 basis points) and MasterCard/Visa net charge-offs by $5 million (2 basis points) and total consumer net charge-offs by $202 million (17 basis points) for the year ended December 31, 2004. 84 HSBC FINANCE CORPORATION AND SUBSIDIARIES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - OWNED RECEIVABLES 2004 2003 2002 2001 2000------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)TOTAL OWNED CREDIT LOSS RESERVES AT JANUARY 1............... $ 3,793 $ 3,333 $ 2,663 $ 2,112 $ 1,757 ------- ------- ------- ------- -------PROVISION FOR CREDIT LOSSES................................. 4,334 3,967 3,732 2,913 2,117 ------- ------- ------- ------- -------CHARGE-OFFSDomestic: Real estate secured....................................... (629) (496) (430) (194) (123) Auto finance.............................................. (204) (148) (159) (94) (61) MasterCard/Visa(1)........................................ (1,082) (936) (736) (646) (432) Private label(1).......................................... (788) (684) (650) (591) (537) Personal non-credit card.................................. (1,350) (1,354) (1,193) (893) (724)Foreign..................................................... (355) (257) (223) (237) (233) ------- ------- ------- ------- -------Total consumer.............................................. (4,408) (3,875) (3,391) (2,655) (2,110)Commercial and other........................................ (1) (3) (2) (12) (17) ------- ------- ------- ------- -------Total owned receivables charged off......................... (4,409) (3,878) (3,393) (2,667) (2,127) ------- ------- ------- ------- -------RECOVERIESDomestic: Real estate secured....................................... 18 10 7 5 5 Auto finance.............................................. 6 5 7 1 1 MasterCard/Visa........................................... 103 87 59 52 25 Private label............................................. 79 72 48 61 54 Personal non-credit card.................................. 120 82 92 76 62Foreign..................................................... 50 34 49 62 58 ------- ------- ------- ------- -------Total consumer.............................................. 376 290 262 257 205Commercial and other........................................ - 1 2 - - ------- ------- ------- ------- -------Total recoveries on owned receivables....................... 376 291 264 257 205OTHER, NET.................................................. (469) 80 67 48 160 ------- ------- ------- ------- -------OWNED CREDIT LOSS RESERVESDomestic: Real estate secured....................................... 645 670 551 284 173 Auto finance.............................................. 181 172 126 77 51 MasterCard/Visa........................................... 1,205 806 649 594 541 Private label............................................. 28 519 527 499 425 Personal non-credit card.................................. 1,237 1,348 1,275 1,032 734Foreign..................................................... 316 247 172 137 142 ------- ------- ------- ------- -------Total consumer.............................................. 3,612 3,762 3,300 2,623 2,066Commercial and other........................................ 13 31 33 40 46 ------- ------- ------- ------- -------TOTAL OWNED CREDIT LOSS RESERVES AT DECEMBER 31............. $ 3,625 $ 3,793 $ 3,333 $ 2,663 $ 2,112 ======= ======= ======= ======= =======RATIO OF OWNED CREDIT LOSS RESERVES TO:Net charge-offs............................................. 89.9%(2) 105.7% 106.5% 110.5% 109.9%Receivables: Consumer.................................................. 3.39 4.09 4.02 3.31 3.10 Commercial................................................ 8.90 6.80 6.64 7.12 7.43 ------- ------- ------- ------- ------- Total..................................................... 3.39% 4.11% 4.04% 3.33% 3.14% ======= ======= ======= ======= =======Nonperforming loans: Consumer.................................................. 102.7% 93.2% 94.0% 91.9% 91.2% Commercial................................................ 535.9 469.8 229.7 278.7 85.4 ------- ------- ------- ------- ------- Total..................................................... 103.0% 93.7% 94.5% 92.7% 91.1% ======= ======= ======= ======= ======= --------------- (1) Includes $3 million of MasterCard and Visa and $155 million of private label charge-off relating to the adoption of FFIEC charge-off policies in December 2004. (2) In December 2004 we adopted FFIEC charge-off policies for our domestic private label and MasterCard/Visa portfolios and subsequently sold the domestic private label receivable portfolio. These events had a significant impact on this ratio. Reserves as a percentage of net charge-offs excluding domestic private label net charge-offs and charge-off relating to the adoption of FFIEC was 109.2% at December 31, 2004. 85 HSBC FINANCE CORPORATION AND SUBSIDIARIES ANALYSIS OF CREDIT LOSS RESERVES ACTIVITY - MANAGED RECEIVABLES(1) 2004 2003 2002 2001 2000------------------------------------------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)TOTAL MANAGED CREDIT LOSS RESERVES AT JANUARY 1............. $ 6,167 $ 5,092 $ 3,811 $ 3,194 $ 2,667 ------- ------- ------- ------- -------PROVISION FOR CREDIT LOSSES................................. 4,522 6,242 5,655 4,018 3,252 ------- ------- ------- ------- -------CHARGE-OFFSDomestic: Real estate secured....................................... (631) (500) (437) (203) (140) Auto finance.............................................. (561) (567) (478) (287) (188) MasterCard/Visa(2)........................................ (1,551) (1,462) (1,274) (1,148) (881) Private label(2).......................................... (1,066) (918) (764) (640) (606) Personal non-credit card.................................. (1,919) (1,862) (1,600) (1,196) (1,030)Foreign..................................................... (423) (330) (280) (282) (276) ------- ------- ------- ------- -------Total consumer.............................................. (6,151) (5,639) (4,833) (3,756) (3,121)Commercial and other........................................ (1) (3) (2) (12) (17) ------- ------- ------- ------- -------Total managed receivables charged off....................... (6,152) (5,642) (4,835) (3,768) (3,138) ------- ------- ------- ------- -------RECOVERIESDomestic: Real estate secured....................................... 18 10 7 5 5 Auto finance.............................................. 15 12 17 4 4 MasterCard/Visa........................................... 132 127 96 81 50 Private label............................................. 101 92 56 62 57 Personal non-credit card.................................. 154 106 122 101 79Foreign..................................................... 58 40 59 72 69 ------- ------- ------- ------- -------Total consumer.............................................. 478 387 357 325 264Commercial and other........................................ - 1 2 - - ------- ------- ------- ------- -------Total recoveries on managed receivables..................... 478 388 359 325 264OTHER, NET.................................................. (500) 87 102 42 149 ------- ------- ------- ------- -------MANAGED CREDIT LOSS RESERVESDomestic: Real estate secured....................................... 646 671 561 304 196 Auto finance.............................................. 516 846 759 449 324 MasterCard/Visa........................................... 1,306 1,114 957 975 849 Private label............................................. 28 886 791 603 599 Personal non-credit card.................................. 1,635 2,244 1,697 1,217 958Foreign..................................................... 371 375 294 223 222 ------- ------- ------- ------- -------Total consumer.............................................. 4,502 6,136 5,059 3,771 3,148Commercial and other........................................ 13 31 33 40 46 ------- ------- ------- ------- -------TOTAL MANAGED CREDIT LOSS RESERVES AT DECEMBER 31........... $ 4,515 $ 6,167 $ 5,092 $ 3,811 $ 3,194 ======= ======= ======= ======= =======RATIO OF MANAGED CREDIT LOSS RESERVES TO:Net charge-offs............................................. 79.6%(3) 117.4% 113.8% 110.7% 111.1%Receivables: Consumer.................................................. 3.73 5.19 4.73 3.77 3.62 Commercial................................................ 8.90 6.80 6.64 7.12 7.43 ------- ------- ------- ------- ------- Total..................................................... 3.73% 5.20% 4.74% 3.78% 3.65% ======= ======= ======= ======= =======Nonperforming loans: Consumer.................................................. 108.2% 117.6% 112.3% 104.5% 107.4% Commercial................................................ 535.9 469.8 229.7 278.7 85.4 ------- ------- ------- ------- ------- Total..................................................... 108.4% 118.0% 112.6% 105.0% 107.0% ======= ======= ======= ======= ======= --------------- (1) These non-GAAP financial measures are provided for comparison of our operating trends and should be read in conjunction with our owned basis GAAP financial information. Refer to "Reconciliations to GAAP Financial Measures" for a discussion of non-GAAP financial information and for quantitative reconciliations to the equivalent GAAP basis financial measure. (2) Includes $5 million of MasterCard and Visa and $197 million of private label charge-off relating to the adoption of FFIEC charge-off policies in December 2004. (3) As previously discussed, the adoption of FFIEC charge-off policies for our domestic private label and MasterCard/Visa portfolios and subsequent sale of the domestic private label receivable portfolio in December 2004 had a significant impact on this ratio. Reserves as a percentage of net charge-offs excluding domestic private label net charge-offs and charge-off relating to the adoption of FFIEC was 96.0% at December 31, 2004. 86 HSBC FINANCE CORPORATION AND SUBSIDIARIES NET INTEREST MARGIN - 2004 COMPARED TO 2003 (OWNED BASIS) FINANCE AND INTEREST INCOME/ INTEREST INCREASE/ (DECREASE) DUE TO: AVERAGE OUTSTANDING(1) AVERAGE RATE EXPENSE ------------------- --------------------- ----------- -------------------- VOLUME RATE 2004 2003 2004 2003 2004 2003 VARIANCE VARIANCE(2) VARIANCE(2)------------------------------------------------------------------------------------------------------------------------ (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS)Receivables: Real estate secured............ $ 56,303 $ 49,852 8.8% 9.7% $ 4,974 $ 4,852 $ 122 $ 594 $(472) Auto finance......... 5,785 2,920 12.2 12.9 706 378 328 351 (23) MasterCard/Visa...... 11,575 9,517 14.8 14.8 1,712 1,406 306 304 2 Private label........ 13,029 11,942 10.8 11.6 1,407 1,379 28 121 (93) Personal non-credit card............... 14,194 14,009 15.7 16.5 2,234 2,314 (80) 30 (110) Commercial and other.............. 354 430 2.5 2.2(6) 9 10 (1) (2) 1 Purchase accounting adjustments........ 319 397 - - (201) (200) (1) (1) - -------- -------- ---- ---- ------- ------- ----- ------ ----- Total receivables...... 101,559 89,067 10.7 11.4 10,841 10,139 702 1,401 (699)Noninsurance investments.......... 4,853 5,280 2.1 2.0 104 103 1 (6) 7 -------- -------- ---- ---- ------- ------- ----- ------ -----Total interest-earning assets (excluding insurance investments)......... $106,412 $ 94,347 10.3% 10.9% $10,945 $10,242 $ 703 $1,261 $(558)Insurance investments.......... 3,165 3,160Other assets........... 14,344 12,590 -------- --------TOTAL ASSETS........... $123,921 $110,097 ======== ========Debt: Deposits............. $ 88 $ 992 1.9% 3.6% $ 2 $ 36 $ (34) $ (24) $ (10) Commercial paper..... 11,403 6,357 1.8 1.6 210 103 107 91 16 Bank and other borrowings......... 38 1,187 1.9(6) 3.9 1 46 (45) (29) (16) Due to affiliates.... 8,752 3,014 3.9 2.4 343 73 270 204 66 Long term debt (with original maturities over one year)..... 79,834 73,383 3.3 3.6 2,587 2,670 (83) 223 (306) -------- -------- ---- ---- ------- ------- ----- ------ -----Total debt............. $100,115 $ 84,933 3.1% 3.4% $ 3,143 $ 2,928 $ 215 $ 492 $(277)Other liabilities...... 5,703 9,836 -------- --------Total liabilities...... 105,818 94,769Preferred securities... 1,100 1,119Common shareholder's(s') equity............... 17,003 14,209 -------- --------TOTAL LIABILITIES AND SHAREHOLDER'S(S') EQUITY............... $123,921 $110,097 ======== ========NET INTEREST MARGIN - OWNED BASIS(3)(5).... 7.3% 7.8% $ 7,802 $ 7,314 $ 488 $ 769 $(281) ==== ==== ======= ======= ===== ====== =====INTEREST SPREAD - OWNED BASIS(4)............. 7.2% 7.5% ==== ==== --------------- (1) Nonaccrual loans are included in average outstanding balances. (2) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components. (3) Represents net interest income as a percent of average interest-earning assets (4) Represents the difference between the yield earned on interest-earning assets and the cost of the debt used to fund the assets (5) The net interest margin analysis includes the following for foreign businesses: 2004 2003------------------------------------------------------------------------------Average interest-earning assets............................. $10,728 $8,779Average interest-bearing liabilities........................ 9,127 7,957Net interest income......................................... 712 660Net interest margin......................................... 6.6% 7.5% (6) Average rate does not recompute from the dollar figures presented due to rounding. 87 HSBC FINANCE CORPORATION AND SUBSIDIARIES NET INTEREST MARGIN - 2003 COMPARED TO 2002 (OWNED BASIS) FINANCE AND AVERAGE INTEREST INCOME/ OUTSTANDING(1) AVERAGE RATE INTEREST EXPENSE -------------------- ----------------- --------------------- 2003 2002 2003 2002 2003 2002------------------------------------------------------------------------------------------------- (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS)Receivables: Real estate secured.......... $ 49,852 $47,258 9.7% 10.7% $ 4,852 $ 5,051 Auto finance................. 2,920 2,529 12.9 14.7 378 373 MasterCard/Visa.............. 9,517 7,569 14.8 14.8 1,406 1,119 Private label................ 11,942 10,775 11.6 12.2 1,379 1,314 Personal non-credit card..... 14,009 13,968 16.5 18.1 2,314 2,526 Commercial and other......... 430 483 2.2(6) 2.1 10 10 Purchase accounting adjustments................ 397 - - - (200) - -------- ------- ---- ---- ------- -------Total receivables.............. 89,067 82,582 11.4 12.6 10,139 10,393Noninsurance investments....... 5,280 5,302 2.0 2.5 103 132 -------- ------- ---- ---- ------- -------Total interest-earning assets (excluding insurance investments)................. $ 94,347 $87,884 10.9% 12.0% $10,242 $10,525Insurance investments.......... 3,160 3,191Other assets................... 12,590 5,229 -------- -------TOTAL ASSETS................... $110,097 $96,304 ======== =======Debt: Deposits..................... $ 992 $ 5,839 3.6% 6.5% $ 36 $ 380 Commercial paper............. 6,357 6,830 1.6 1.9 103 130 Bank and other borrowings.... 1,187 1,473 3.9 3.4 46 51 Due to affiliates............ 3,014 - 2.4 - 73 - Long term debt (with original maturities over one year)...................... 73,383 69,406 3.6 4.8 2,670 3,310 -------- ------- ---- ---- ------- -------Total debt..................... $ 84,933 $83,548 3.4% 4.6% $ 2,928 $ 3,871Other liabilities.............. 9,836 3,251 -------- -------Total liabilities.............. 94,769 86,799Preferred securities........... 1,119 865Common shareholder's(s') equity....................... 14,209 8,640 -------- -------TOTAL LIABILITIES AND SHAREHOLDER'S(S') EQUITY..... $110,097 $96,304 ======== =======NET INTEREST MARGIN - OWNED BASIS(3)(5).................. 7.8% 7.6% $ 7,314 $ 6,654 ==== ==== ======= =======INTEREST SPREAD - OWNED BASIS(4)..................... 7.5% 7.4% ==== ==== INCREASE/ (DECREASE) DUE TO: ------------------------------------ VOLUME RATE VARIANCE VARIANCE(2) VARIANCE(2)------------------------------- ------------------------------------ (DOLLARS ARE IN MILLIONS)Receivables: Real estate secured.......... $ (199) $ 268 $ (467) Auto finance................. 5 54 (49) MasterCard/Visa.............. 287 288 (1) Private label................ 65 137 (72) Personal non-credit card..... (212) 7 (219) Commercial and other......... - (1) 1 Purchase accounting adjustments................ (200) (200) - ------- ----- -------Total receivables.............. (254) 781 (1,035)Noninsurance investments....... (29) (1) (28) ------- ----- -------Total interest-earning assets (excluding insurance investments)................. $ (283) $ 735 $(1,018)Insurance investments..........Other assets...................TOTAL ASSETS...................Debt: Deposits..................... $ (344) $(224) $ (120) Commercial paper............. (27) (9) (18) Bank and other borrowings.... (5) (11) 6 Due to affiliates............ 73 73 - Long term debt (with original maturities over one year)...................... (640) 181 (821) ------- ----- -------Total debt..................... $ (943) $ 63 $(1,006)Other liabilities..............Total liabilities..............Preferred securities...........Common shareholder's(s') equity.......................TOTAL LIABILITIES AND SHAREHOLDER'S(S') EQUITY.....NET INTEREST MARGIN - OWNED BASIS(3)(5).................. $ 660 $ 672 $ (12) ======= ===== =======INTEREST SPREAD - OWNED BASIS(4)..................... --------------- (1) Nonaccrual loans are included in average outstanding balances. (2) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components (3) Represents net interest income as a percent of average interest-earning assets (4) Represents the difference between the yield earned on interest-earning assets and the cost of the debt used to fund the assets (5) The net interest income analysis includes the following for foreign businesses: 2003 2002-----------------------------------------------------------------------------Average interest-earning assets............................. $8,779 $6,616Average interest-bearing liabilities........................ 7,957 6,076Net interest income......................................... 660 483Net interest margin......................................... 7.5% 7.3% (6) Average rate does not recompute from dollar figures presented due to rounding. 88 HSBC FINANCE CORPORATION AND SUBSIDIARIES NET INTEREST MARGIN - 2004 COMPARED TO 2003 AND 2002 (MANAGED BASIS) NET INTEREST MARGIN ON A MANAGED BASIS As receivables are securitized ratherthan held in our portfolio, net interest margin is reclassified tosecuritization revenue. We retain a substantial portion of the profit inherentin the receivables while increasing liquidity. The comparability of net interestmargin between periods may be impacted by the level and type of receivablessecuritized. Net interest margin on a managed basis includes finance incomeearned on our owned receivables as well on our securitized receivables. Thisfinance income is offset by interest expense on the debt recorded on our balancesheet as well as the contractual rate of return on the instruments issued toinvestors when the receivables were securitized. FINANCE AND INTEREST AVERAGE OUTSTANDING(1) AVERAGE RATE INCOME/INTEREST EXPENSE -------------------------------- -------------------------- -------------------- 2004 2003 2002 2004 2003 2002 2004 2003 2002------------------------------------------------------------------------------------------------------------------------ (RESTATED) (RESTATED) (RESTATED) (DOLLARS ARE IN MILLIONS)Receivables: Real estate secured.............. $ 56,462 $ 50,124 $ 47,830 8.8% 9.7% 10.7% $ 4,984 $ 4,874 $ 5,114 Auto finance..................... 9,432 7,918 6,942 13.3 14.9 16.7 1,250 1,180 1,156 MasterCard/Visa.................. 20,674 19,272 17,246 12.7 12.9 13.4 2,627 2,484 2,304 Private label.................... 17,579 16,016 13,615 10.8 11.5 12.2 1,895 1,843 1,663 Personal non-credit card......... 18,986 19,041 18,837 17.2 17.8 18.6 3,260 3,388 3,505 Commercial and other............. 354 430 483 2.5 2.2(5) 2.1 9 10 10 Purchase accounting adjustment... 319 397 - - - - (201) (200) - -------- -------- -------- ----- ----- ----- ------- ------- -------Total receivables................. 123,806 113,198 104,953 11.2 12.0 13.1 13,824 13,579 13,752Noninsurance investments.......... 4,853 5,280 5,302 2.1 2.0 2.5 104 103 131 -------- -------- -------- ----- ----- ----- ------- ------- -------Total interest-earning assets (excluding insurance investments)..................... $128,659 $118,478 $110,255 10.8% 11.5% 12.6% $13,928 $13,682 $13,883 -------- -------- -------- ----- ---- ----- ------- ------- -------Total debt........................ $122,362 $109,064 $105,919 3.0% 3.2% 4.3% $ 3,671 $ 3,494 $ 4,546 -------- -------- -------- ----- ---- ----- ------- ------- -------NET INTEREST MARGIN - MANAGED BASIS(3)......................... 8.0% 8.6% 8.5% $10,257 $10,188 $ 9,337 ===== ===== ===== ======= ======= =======INTEREST SPREAD - MANAGED BASIS(4)......................... 7.8% 8.3% 8.3% ===== ===== ===== INCREASE/(DECREASE) DUE TO: --------------------------------------------------------------------------- 2004 COMPARED TO 2003 2003 COMPARED TO 2002 ------------------------------------ ------------------------------------ VOLUME RATE VOLUME RATE VARIANCE VARIANCE(2) VARIANCE(2) VARIANCE VARIANCE(2) VARIANCE(2)---------------------------------- --------------------------------------------------------------------------- (DOLLARS ARE IN MILLIONS)Receivables: Real estate secured.............. $ 110 $ 583 $(473) $ (240) $ 238 $ (478) Auto finance..................... 70 210 (140) 24 153 (129) MasterCard/Visa.................. 143 179 (36) 180 263 (83) Private label.................... 52 173 (121) 180 281 (101) Personal non-credit card......... (128) (10) (118) (117) 38 (155) Commercial and other............. (1) (2) 1 - - - Purchase accounting adjustment... (1) (1) - (170) (170) - ----- ------ ----- ------- ------ -------Total receivables................. 245 1,253 (1,008) (143) 1,036 (1,179)Noninsurance investments.......... 1 (6) 7 (58) (1) (57) ----- ------ ----- ------- ------ -------Total interest-earning assets (excluding insurance investments)..................... $ 246 $1,133 $(887) $ (201) $1,025 $(1,226) ----- ------ ----- ------- ------ -------Total debt........................ $ 177 $ 408 $(231) $(1,052) $ 133 $(1,185) ----- ------ ----- ------- ------ -------NET INTEREST MARGIN - MANAGED BASIS(3)......................... $ 69 $ 725 $(656) $ 851 $ 892 $ (41) ===== ====== ===== ======= ====== =======INTEREST SPREAD - MANAGED BASIS(4)......................... --------------- (1) Nonaccrual loans are included in average outstanding balances.(2) Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total interest variance. For total receivables, total interest-earning assets and total debt, the rate and volume variances are calculated based on the relative weighting of the individual components comprising these totals. These totals do not represent an arithmetic sum of the individual components(3) Represents net interest income as a percent of average interest-earning assets(4) Represents the difference between the yield earned on interest-earning assets and cost of the debt used to fund the assets.(5) Average rate does not recompute from dollar figures presented due to rounding. 89 HSBC FINANCE CORPORATION AND SUBSIDIARIES RECONCILIATIONS TO GAAP FINANCIAL MEASURES Our consolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States ("GAAP"). In addition to theGAAP financial results reported in our consolidated financial statements, MD&Aincludes reference to the following information which is presented on a non-GAAPbasis: OPERATING RESULTS, PERCENTAGES AND RATIOS Certain percentages and ratios havebeen presented on an operating basis and have been calculated using "operatingnet income", a non-GAAP financial measure. "Operating net income" is net incomeexcluding certain nonrecurring items. These nonrecurring items are also excludedin calculating our operating basis efficiency ratios. We believe that excludingthese items helps readers of our financial statements to understand better theresults and trends of our underlying business. MANAGED BASIS REPORTING We monitor our operations and evaluate trends on amanaged basis (a non-GAAP financial measure), which assumes that securitizedreceivables have not been sold and are still on our balance sheet. We manage andevaluate our operations on a managed basis because the receivables that wesecuritize are subjected to underwriting standards comparable to our ownedportfolio, are serviced by operating personnel without regard to ownership andresult in a similar credit loss exposure for us. In addition, we fund ouroperations, review our operating results, and make decisions about allocatingresources such as employees and capital on a managed basis. When reporting on a managed basis, net interest margin, provision for creditlosses and fee income related to receivables securitized are reclassified fromsecuritization revenue in our owned statements of income into the appropriatecaption. Additionally, charge-off and delinquency associated with thesereceivables are included in our managed basis credit quality statistics. Debt analysts, rating agencies and others also evaluate our operations on amanaged basis for the reasons discussed above and have historically requestedmanaged basis information from us. We believe that managed basis informationenables investors and other interested parties to better understand theperformance and quality of our entire managed loan portfolio and is important tounderstanding the quality of originations and the related credit risk inherentin our owned portfolio. EQUITY RATIOS Tangible shareholder's(s') equity to tangible managed assets("TETMA"), tangible shareholder's(s') equity plus owned loss reserves totangible managed assets ("TETMA + Owned Reserves") and tangible common equity totangible managed assets are non-GAAP financial measures that are used by HSBCFinance Corporation management or certain rating agencies to evaluate capitaladequacy. These ratios may differ from similarly named measures presented byother companies. The most directly comparable GAAP financial measure is commonand preferred equity to owned assets. We and certain rating agencies also monitor our equity ratios excluding theimpact of purchase accounting adjustments. We do so because we believe that thepurchase accounting adjustments represent non-cash transactions which do notaffect our business operations, cash flows or ability to meet our debtobligations. Preferred securities issued by certain non-consolidated trusts are consideredequity in the TETMA and TETMA + Owned Reserves calculations because of theirlong-term subordinated nature and the ability to defer dividends. Our AdjustableConversion-Rate Equity Security Units, which exclude purchase accountingadjustments, are also considered equity in these calculations because theyinclude investor obligations to purchase HSBC ordinary shares in 2006. QUANTITATIVE RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIALMEASURES For a reconciliation of managed basis net interest income, fee incomeand provision for credit losses to the comparable owned basis amounts, see Note23, "Business Segments," to the accompanying consolidated financial statements.For a reconciliation of our owned loan portfolio by product to our managed loanportfolio, see Note 7, "Receivables," to the accompanying consolidated financialstatements. Reconciliations of our owned basis and managed basis credit quality,loss reserves, net interest income, selected financial ratios, includingRelated Shares:
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