Interim Report - 3 of 26

HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$177bn at 30 June 2011.

Through our subsidiaries and associates, we provide a comprehensive range of banking and related financial services. Headquartered in London, we operate through long-established businesses and have an international network of around 7,500 offices in 87 countries and territories in six geographical regions: Europe, Hong Kong, Rest of Asia-Pacific, Middle East and North Africa ('MENA'), North America and Latin America. Within these regions, a comprehensive range of financial services is offered to personal, commercial, corporate, institutional, investment and private banking clients. Services are delivered primarily by domestic banks, typically with large retail deposit bases.

The role of HSBC's values in daily operating practice has taken on increased significance in the context of the global financial crisis, with changes to regulatory policy, investor confidence and society's view of the role of banks. We expect our executives and staff to act with courageous integrity in the execution of their duties.

HSBC's values are being:

·; dependable and doing the right thing;

·; open to different ideas and cultures; and

·; connected with our customers, communities, regulators and each other.

We have strengthened our values-led culture by embedding HSBC's values into our operating standards, training, development and employee induction, and through the personal sponsorship of senior executives. These initiatives will continue in 2011 and beyond.

HSBC's objective is to deliver sustainable long-term value to shareholders through consistent earnings and superior risk‑adjusted returns. We have a clear strategy to become the leading international bank, based on two main elements which are aligned with the key trends shaping the global economy:

·; international connectivity - we are strengthening our presence in those markets and businesses that are most relevant to global trade and capital flows; and

·; economic development and wealth creation - we are investing to capture wealth creation in the selected markets and focusing on retail banking only in those markets where we can achieve profitable scale.

The objectives and incentives of management are aligned to delivering the strategy. Progress is measured through our quarterly financial performance and will be reviewed at the annual Strategy Investor Day.

All of our activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risk or combinations of risks which we assess on a Group-wide basis. We classify certain risks as 'top' or 'emerging'. A 'top risk' is a current, visible risk with the potential to have a material effect on our financial results or our reputation. An 'emerging risk' is one with large unknown components which could have a material impact on our long-term strategy. Top and emerging risks are viewed as falling under the following four broad categories:

·; challenges to our business operations;

·; challenges to our governance and internal control systems;

·; macro-economic and geopolitical risk; and

·; macro-prudential and regulatory risks to our business model.

The top and emerging risks are summarised below:

A detailed account of HSBC's challenges and uncertainties is provided on pages 84 to 88. Further comments on expected risks and uncertainties are made throughout the Interim Management Report, particularly in the section on Risk.

The results of customer groups and global businesses are presented in accordance with the accounting policies used in the preparation of HSBC's consolidated financial statements. Our operations are closely integrated and, accordingly, the presentation of customer group and global business data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and Group Management Office ('GMO') functions, to the extent that these can be meaningfully attributed to operational business lines. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity.

Where relevant, income and expense amounts presented include the results of inter-segment funding as well as inter-company and inter-business line transactions. All such transactions are undertaken on arm's length terms.

Financial summary

In addition to results reported on an IFRSs basis, we measure our performance internally on a like-for-like basis by eliminating the effects of foreign currency translation differences, acquisitions and disposals of subsidiaries and businesses, and fair value movements on own debt attributable to credit spread where the net result of such movements will be zero upon maturity of the debt; all of which distort period-on-period comparisons. We refer to this as our underlying performance.

Reported results include the effects of the above items. They are excluded when monitoring progress against operating plans and past results because management believes that the underlying basis more accurately reflects operating performance.

Underlying performance

The tables below compare our underlying performance for the half-year to 30 June 2011 with the half-years to 30 June 2010 and 31 December 2010. Equivalent tables are provided for each of HSBC's customer groups, global businesses and geographical segments on www.hsbc.com and in the Form 6-K filed with the SEC.

The foreign currency translation differences reflect the relative weakening of the US dollar against most major currencies.

The following acquisitions and disposals were adjusted for in arriving at the underlying comparison:

·; the gain of US$62m on reclassification of Bao Viet Holdings ('Bao Viet') from an available-for-sale asset to an associate in January 2010;

·; the gain of US$66m on sale of our stake in Wells Fargo HSBC Trade Bank in March 2010;

·; the gain of US$107m on disposal of HSBC Insurance Brokers Limited in April 2010;

·; the dilution gains which arose on our holding in Ping An Insurance (Group) Company of China, Limited ('Ping An') following the issue of share capital to third parties in both May 2010 and June 2011 of US$188m and US$181m, respectively;

·; the loss on the sale of our investment in British Arab Commercial Bank plc in 2010;

·; the gain of US$74m on the deconsolidation of private equity funds following the management buy-out of Headland Capital Partners Ltd (formerly known as HSBC Private Equity (Asia) Ltd) in November 2010;

·; the operating results of Eversholt Rail Group for the half year to 30 June 2010 and the gain on the sale of US$255m in December 2010.

Reconciliation of reported and underlying profit before tax

Reconciliation of reported and underlying profit before tax (continued)

For footnotes, see page 81.