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Interim Report - 8 of 21

13th Aug 2010 16:37

RNS Number : 9181Q

HSBC Holdings PLC

13 August 2010

Rest of Asia-Pacific

Profit/(loss) before tax by country within customer groups and global businesses

	Personal Financial Services US$m	Commercial Banking US$m	Global Banking & Markets US$m		Private Banking US$m	Other US$m	Total US$m

Half-year to 30 June 2010
Australia ...................................................	23	42		68	-	3	136
India .........................................................	(50)	39		245	3	103	340
Indonesia ..................................................	(3)	48		60	-	(3)	102
Japan ........................................................	(30)	-		60	-	(2)	28
Mainland China .........................................	364	390		297	(4)	234	1,281
Associates .............................................	415	356		215	-	192	1,178
Other mainland China ...........................	(51)	34		82	(4)	42	103

Malaysia ...................................................	54	45		96	-	6	201
Singapore ..................................................	65	42		111	43	3	264
South Korea ..............................................	8	(4)		180	-	29	213
Taiwan ......................................................	20	32		43	-	(9)	86
Other ........................................................	25	123		146	1	39	334

	476	757		1,306	43	403	2,985

Half-year to 30 June 2009
Australia ...................................................	12	9		60	-	3	84
India .........................................................	(124)	(39)		244	-	120	201
Indonesia ..................................................	(12)	16		77	-	(1)	80
Japan ........................................................	(41)	-		38	(4)	(1)	(8)
Mainland China .........................................	188	292		258	(3)	17	752
Associates .............................................	287	255		143	-	-	685
Other mainland China ...........................	(99)	37		115	(3)	17	67

Malaysia ...................................................	38	27		76	-	(2)	139
Singapore ..................................................	67	43		126	54	(7)	283
South Korea ..............................................	(6)	(6)		186	-	11	185
Taiwan ......................................................	(7)	32		55	-	1	81
Other ........................................................	20	85		119	-	1	225

	135	459		1,239	47	142	2,022

Half-year to 31 December 2009
Australia ...................................................	18	23		80	-	(7)	114
India .........................................................	(95)	(2)		149	1	120	173
Indonesia ..................................................	(12)	44		52	-	(10)	74
Japan ........................................................	(38)	-		27	-	2	(9)
Mainland China .........................................	306	324		221	(4)	33	880
Associates .............................................	391	303		142	-	-	836
Other mainland China ...........................	(85)	21		79	(4)	33	44

Malaysia ...................................................	50	26		64	-	7	147
Singapore ..................................................	62	34		121	44	(2)	259
South Korea ..............................................	3	1		156	-	14	174
Taiwan ......................................................	4	33		41	-	1	79
Other ........................................................	30	122		169	2	(36)	287

	328	605		1,080	43	122	2,178

Loans and advances to customers (net) by country

	At 30 June 2010 US$m	At 30 June 2009 US$m	At 31 December 2009 US$m

Australia .............................................................................................	12,737	10,594	12,112
India ...................................................................................................	5,974	5,236	4,893
Indonesia ............................................................................................	3,200	2,540	2,721
Japan ..................................................................................................	3,325	2,486	2,496
Mainland China ..................................................................................	15,295	10,784	13,294
Malaysia .............................................................................................	10,625	8,873	9,132
Singapore ...........................................................................................	17,616	12,956	14,817
South Korea .......................................................................................	4,911	4,426	4,438
Taiwan ...............................................................................................	5,385	4,123	4,280
Other .................................................................................................	12,604	12,044	11,860

	91,672	74,062	80,043

Customer accounts by country

	At 30 June 2010 US$m	At 30 June 2009 US$m	At 31 December 2009 US$m

Australia .............................................................................................	12,641	9,621	12,093
India ...................................................................................................	11,269	11,719	11,676
Indonesia ............................................................................................	5,599	4,557	5,014
Japan ..................................................................................................	4,432	4,673	4,914
Mainland China ..................................................................................	21,893	19,874	21,867
Malaysia .............................................................................................	13,751	12,080	12,809
Singapore ...........................................................................................	34,696	32,920	33,211
South Korea .......................................................................................	4,258	4,336	4,162
Taiwan ...............................................................................................	10,385	9,819	9,891
Other .................................................................................................	19,395	16,984	18,362

	138,319	126,583	133,999

Economic briefing

GDP growth in mainland China moderated slightly during the first half of 2010 as government measures aimed at cooling the previously rapid rate of expansion encouraged a modest slowdown in economic activity. In the second quarter, the level of GDP rose by 10.3 per cent in year-on-year terms, down from 11.9 per cent during the first quarter of the year, and most indicators suggest some further moderation in activity during the remainder of 2010. Growth in industrial production during the first half of the year, while slowing, proved very strong as output rose by 17.6 per cent on the comparable period in 2009. Consumer spending remained robust, with retail sales rising by 18.3 per cent over the year to June 2010. The annual CPI inflation rate rose to 3.1 per cent in May 2010 before easing slightly to 2.9 per cent in June. The renminbi's de facto peg against the US dollar, which had existed for

23 months, was removed in June 2010 as the Chinese authorities returned to the previous floating system with reference to a basket of currencies.

Economic conditions improved markedly in Japan during the first half of 2010. In the first quarter the level of GDP rose by 1.2 per cent on the previous quarter, due in large part to strong external demand and some improvement in consumer demand. Industrial production rose significantly, albeit remaining well below pre-crisis levels, and labour market conditions proved volatile as unemployment rose to 5.2 per cent at the end of June. Consumer prices fell by 0.7 per cent over the year to June in the deflationary environment. The Bank of Japan kept the target unsecured overnight call rate at 0.1 per cent and introduced a range of initiatives designed to improve the availability and flow of credit across the economy.

Profit before tax

	Half-year to
Rest of Asia-Pacific	30 June 2010 US$m	30 June 2009 US$m	31 December 2009 US$m

Net interest income ............................................................................	1,822	1,768	1,771

Net fee income ...................................................................................	934	719	838

Net trading income .............................................................................	780	909	697

Changes in fair value of long-term debt issued and related derivatives .	-	(2)	1
Net income/(expense) from other financial instruments designated at fair value ....................................................................................	(2)	31	80

Net income/(expense) from financial instruments designated at fair value .......................................................................................................	(2)	29	81
Gains less losses from financial investments .......................................	39	(21)	2
Dividend income ................................................................................	1	1	1
Net earned insurance premiums ..........................................................	198	152	213
Other operating income .....................................................................	877	608	630

Total operating income ..................................................................	4,649	4,165	4,233

Net insurance claims incurred and movement in liabilities to policyholders .............................................................................	(151)	(156)	(239)

Net operating income before loan impairment charges and other credit risk provisions .................................................................	4,498	4,009	3,994

Loan impairment charges and other credit risk provisions ..................	(147)	(531)	(365)

Net operating income .....................................................................	4,351	3,478	3,629

Operating expenses ............................................................................	(2,417)	(2,151)	(2,299)

Operating profit ..............................................................................	1,934	1,327	1,330

Share of profit in associates and joint ventures ...................................	1,051	695	848

Profit before tax ..............................................................................	2,985	2,022	2,178

	%	%	%

Share of HSBC's profit before tax ......................................................	26.9	40.3	105.7
Cost efficiency ratio ...........................................................................	53.7	53.7	57.6

Period-end staff numbers (full-time equivalent) ..................................	88,605	87,567	87,141

Balance sheet data23
	US$m	US$m	US$m

Loans and advances to customers (net) ...............................................	91,672	74,062	80,043
Loans and advances to banks (net) .....................................................	35,338	34,278	35,648
Trading assets, financial instruments designated at fair value, and financial investments ......................................................................	64,142	55,328	58,941
Total assets ........................................................................................	244,624	217,794	222,139
Deposits by banks ...............................................................................	15,412	12,980	8,075
Customer accounts .............................................................................	138,319	126,583	133,999

For footnote, see page 95.

The commentary on Rest of Asia-Pacific is on an underlying basis unless stated otherwise.

Elsewhere in Asia the recovery continued, with strong rates of growth recorded during the first half of 2010 as the rebound in activity continued from the final months of 2009. In most economies, the level of output exceeded pre-crisis peaks. Singapore, especially, staged a significant recovery, with output growing at double-digit rates, placing the economy amongst the region's best performers during the first half of 2010. Growth also recovered impressively in India, with the level of GDP rising by 8.6 per cent in year-on-year terms during the first three months of 2010, helped by an acceleration of private investment and consumer spending. The pace of recovery encouraged the Reserve Bank of India to tighten monetary conditions modestly from March onwards. In Indonesia, economic recovery continued into 2010 with the year-on-year rate of change in GDP accelerating to 5.7 per cent in the first quarter of the year, while the annual rate of growth in Malaysia rebounded sharply to double-digits in the first quarter, owing in part to an extensive government stimulus programme. Other economies in Southeast Asia also maintained a healthy pace of recovery in the first half of 2010. The Philippines, Thailand, and Vietnam - economies which appeared to lag the regional recovery in 2009 - saw impressive advances in GDP in the first quarter of 2010, with indicative data also suggesting a sustained rate of expansion into the second quarter of the year. Political uncertainties in Thailand appear to have exerted less of a depressive influence on growth than initially feared, while the Philippines and Vietnam also benefited from strong consumer spending and accommodative fiscal policies. Meanwhile, South Korea and Taiwan witnessed impressive gains in industrial output during the first half of 2010, benefiting especially from the improving global trade cycle and rapidly growing demand in mainland China. In both economies, the strength of exports supported labour markets, household income growth and consumer expenditure.

Review of business performance

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2010 ('1H10') compared with half-year to 30 June 2009 ('1H09')
Rest of Asia-Pacific	1H09 as reported US$m	1H09 adjust- ments1 US$m		Currency translation2 US$m	1H09 at 1H10 exchange rates3 US$m	1H10 as reported US$m		1H10 adjust- ments1 US$m	1H10 under- lying US$m	Re- ported change4 %	Under- lying change4 %

Net interest income ..	1,768		-	146	1,914		1,822	(31)	1,791	3	(6)
Net fee income ..	719		-	63	782		934	(3)	931	30	19
Changes in fair value5 ....	(3)		3	-	-		-	-	-
Other income6	1,525		-	137	1,662		1,742	(197)	1,545	14	(7)

Net operating income7 ..............	4,009		3	346	4,358		4,498	(231)	4,267	12	(2)

Loan impairment charges and other credit risk provisions ............	(531)		-	(53)	(584)		(147)	-	(147)	72	75

Net operating income	3,478		3	293	3,774		4,351	(231)	4,120	25	9

Operating expenses	(2,151)		-	(169)	(2,320)		(2,417)	19	(2,398)	(12)	(3)

Operating profit ...	1,327		3	124	1,454		1,934	(212)	1,722	46	18

Income from associates	695		-	-	695		1,051	-	1,051	51	51

Profit before tax ........	2,022		3	124	2,149		2,985	(212)	2,773	48	29

For footnotes, see page 95.

HSBC's operations in the Rest of Asia-Pacific regionreported pre-tax profits of US$3.0 billion compared with US$2.0 billion in the first half of 2009, an increase of 48 per cent. Within reported profits was an accounting gain of US$188 million arising from the dilution of HSBC's shareholding in Ping An Insurance following its issue of share capital to a third party in the first half of 2010. On an underlying basis, which excludes this dilution gain, pre-tax profit rose by 29 per cent as a result of increased economic activity, expanding trade flows and improved credit conditions.

HSBC's focus on the key regional markets of mainland China, India, Indonesia, Singapore, Malaysia and Australia, where the greatest opportunities have been identified to support customers' growing local and international needs, resulted in expansion of the business in these countries, including the opening of new branches. In addition, HSBC increased its shareholding in Bao Viet. The new mainland China head office building was opened in Shanghai in June which, along with the 100th HSBC branded outlet, reaffirmed HSBC's position as the leading foreign bank in the country. Two Hang Seng Bank branded outlets and one rural bank outlet were also opened in the first half of 2010. During the period, HSBC increased its investment in the Bank of Communications by agreeing to subscribe for its full entitlement of H‑Shares in the Bank of Communications rights issue for a consideration of approximately US$921 million. The Group also subscribed for its entitlement in Industrial Bank's rights issue through its holding in Hang Seng Bank. In July 2010, HSBC agreed to acquire a substantial part of Royal Bank of Scotland Group plc's commercial and retail business in India with assets of US$1.8 billion as at 31 March 2010 and approximately 1.1 million customers.

Advance was successfully launched in six countries and territories. The acquisition of Premier customers continued apace, with numbers growing by 15 per cent in the 15 countries and territories within Rest of Asia-Pacific where the proposition is offered. Commercial Banking further enhanced its international connectivity, with inward referrals from other regions and outward referrals increasing by 62 per cent and 75 per cent, respectively, providing evidence of its progress with implementing HSBC's strategic objective to be the leading international business bank.

Net interest income decreased by 6 per cent, mainly in Balance Sheet Management, driven by the maturing of higher yielding positions and the flattening of yield curves.

Lending increased as a result of business growth in Commercial Banking and Global Banking, primarily in mainland China but also in Singapore and Japan, in part reflecting the recovery in trade volumes in the region. Lending balances in Personal Financial Services also grew, particularly in the residential mortgage books in Malaysia, Australia, mainland China and Singapore. The risk profile of lending improved as the planned reduction in non-relationship managed cards and personal loans continued, particularly in India.

Asset spreads narrowed due to intensified market competition, primarily in residential mortgages in Personal Financial Services, and a change in the mix of assets towards more secured lending.

Customer deposits grew by 6 per cent from 30 June 2009, with continued growth in mainland China, Australia, Singapore and Malaysia. Premier customer balances in the region increased as demand for the proposition continued to expand.

Liability spreads remained constrained, reflecting low interest rates in many countries across the region. However, improvement was seen in Australia and mainland China, where overall spreads gradually widened in the first half of 2010.

Balance Sheet Management income declined from the exceptional results of the first half of 2009 as higher yielding trades matured, interest rates remained low and yield curves flattened, primarily in Japan, Singapore and Australia.

Net fee income was 19 per cent higher, driven by a rise in fees from funds under management, securities services and sales of investment products, all of which benefited from an improvement in equity markets and investor sentiment compared with the first half of 2009. Marketing activities were increased to support revenue growth opportunities arising from these developments. Increased levels of regional trade generated higher fee income from greater volumes of remittances and credit facilities. Re-pricing initiatives taken in 2009 were also a contributing factor.

Net trading income declined by 22 per cent, as lower market volatility resulted in fewer trading opportunities in Credit, Rates and foreign exchange compared with the first half of 2009. Similarly, the non-recurrence of significant gains from credit trading in India and the one-off gains recognised on certain transactions in South Korea, further affected revenues. This was partly offset by higher interest income on trading products, notably in India, reflecting growth in the size of the trading portfolio.

Increased economic activity, expanding trade flows and improved credit conditions drove a 29 per cent increase in pre-tax profit in Rest of Asia-Pacific.

A net expense of US$2 million on financial instruments designated at fair value was recorded, compared with income of US$34 million in the first half of 2009. The movement was primarily driven by lower revaluation gains on assets linked to the insurance business. To the extent that the current period gains were attributed to policyholders, there was a corresponding change in net insurance claims incurred and movement in liabilities to policyholders.

Gains less losses from financial investments rose by US$52 million as a result of gains on sales of available-for-sale investments and the non-recurrence of impairments reported in the same period in 2009.

Net earned insurance premiums increased by 22 per cent to US$198 million, largely due to higher sales in Taiwan primarily from unit-linked products, and successful product launches and marketing campaigns in Malaysia. Growth in the insurance business resulted in an increase in net insurance claims incurred and movement in liabilities to policyholders.

Loan impairment charges decreased by 75 per cent to US$147 million. In Personal Financial Services, the decrease was driven by the planned reduction in cards and other unsecured lending balances in India, and the general improvement in economic conditions in the region. The economic environment also contributed to fewer individual loan impairment charges in Commercial Banking.

Operating expenses increased marginally by 3 per cent to US$2.4 billion. Higher staff costs in mainland China, Singapore and Taiwan to support business expansion were partly offset by reduced costs due to lower headcount in most other countries in the region, as high utilisation of direct channels continued, reflecting the progressive benefits of cost efficiency programmes and technology enhancement.

Share of profit from associates and joint ventures in the region increased by 51 per cent, with a higher contribution from Ping An Insurance, which achieved very strong sales growth as the company capitalised on improved economic conditions. An increase in net interest income and net fee income in Bank of Communications and lower loan impairment charges in Industrial Bank also resulted in higher profits as both banks benefited from buoyant economic growth and a higher lending base in mainland China following the stimulus packages implemented in 2009.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2010 ('1H10') compared with half-year to 31 December 2009 ('2H09')
Rest of Asia-Pacific	2H09 as reported US$m	2H09 adjust- ments1 US$m		Currency translation2 US$m	2H09 at 1H10 exchange rates8 US$m	1H10 as reported US$m		1H10 adjust- ments1 US$m	1H10 under- lying US$m	Re- ported change4 %	Under- lying change4 %

Net interest income .....	1,771		-	47	1,818		1,822	-	1,822	3	-
Net fee income .....	838		-	19	857		934	-	934	11	9
Other income6 ..................	1,385		-	40	1,425		1,742	(188)	1,554	26	9

Net operating income7 ....	3,994		-	106	4,100		4,498	(188)	4,310	13	5

Loan impairment charges and other credit risk provisions .	(365)		-	(14)	(379)		(147)	-	(147)	60	61

Net operating income .....	3,629		-	92	3,721		4,351	(188)	4,163	20	12

Operating expenses ...	(2,299)		-	(56)	(2,355)		(2,417)	-	(2,417)	(5)	(3)

Operating profit ........	1,330		-	36	1,366		1,934	(188)	1,746	45	28

Income from associates	848		-	1	849		1,051	-	1,051	24	24

Profit before tax ............	2,178		-	37	2,215		2,985	(188)	2,797	37	26

For footnotes, see page 95.

Analysis by customer group and global business

Profit before tax

	Half-year to 30 June 2010
Rest of Asia-Pacific	Personal Financial Services US$m	Commercial Banking US$m	Global Banking & Markets US$m		Private Banking US$m	Other US$m	Inter- segment elimination35 US$m	Total US$m

Net interest income ............	754	431		662	40	30	(95)	1,822

Net fee income/(expense) ...	320	204		385	30	(5)	-	934

Trading income/(expense) excluding net interest income ............................	36	61		462	35	(8)	-	586
Net interest income on trading activities ..............	-	-		98	-	1	95	194

Net trading income/ (expense)25 ......................	36	61		560	35	(7)	95	780
Net income/(expense) from financial instruments designated at fair value ....	2	1		-	-	(5)	-	(2)
Gains less losses from financial investments ......	1	3		30	2	3	-	39
Dividend income .................	-	-		1	-	-	-	1
Net earned insurance premiums ........................	172	26		-	-	-	-	198
Other operating income ......	52	53		20	-	826	(74)	877

Total operating income ...	1,337	779		1,658	107	842	(74)	4,649

Net insurance claims26 .........	(133)	(18)		-	-	-	-	(151)

Net operating income7.....	1,204	761		1,658	107	842	(74)	4,498

Loan impairment (charges)/ recoveries and other credit risk provisions .................	(175)	18		10	-	-	-	(147)

Net operating income ......	1,029	779		1,668	107	842	(74)	4,351

Operating expenses .............	(997)	(376)		(564)	(64)	(490)	74	(2,417)

Operating profit ...............	32	403		1,104	43	352	-	1,934

Share of profit in associates and joint ventures ............	444	354		202	-	51	-	1,051

Profit before tax ...............	476	757		1,306	43	403	-	2,985

	%	%		%	%	%		%
Share of HSBC's profit before tax ........................	4.3	6.8		11.8	0.4	3.6		26.9
Cost efficiency ratio ...........	82.8	49.4		34.0	59.8	58.2		53.7

Balance sheet data23
	US$m	US$m		US$m	US$m	US$m		US$m
Loans and advances to customers (net) ...............	31,317	26,284		30,718	3,181	172		91,672
Total assets .........................	42,096	34,810		153,877	12,013	10,393	(8,565)	244,624
Customer accounts ..............	48,890	31,046		46,089	12,262	32		138,319

Profit before tax (continued)

	Half-year to 30 June 2009
Rest of Asia-Pacific	Personal Financial Services US$m	Commercial Banking US$m	Global Banking & Markets US$m		Private Banking US$m	Other US$m	Inter- segment elimination35 US$m	Total US$m

Net interest income ..............	730	380		626	55	63	(86)	1,768

Net fee income/(expense) .....	254	154		294	25	(8)	-	719

Trading income/(expense) excluding net interest income ..............................	40	71		609	35	(15)	-	740
Net interest income/(expense) on trading activities ..........	(1)	-		82	-	2	86	169

Net trading income/ (expense)25 ........................	39	71		691	35	(13)	86	909
Net income/(expense) from financial instruments designated at fair value ......	34	-		(3)	-	(2)	-	29
Gains less losses from financial investments ........	5	3		(10)	-	(19)	-	(21)
Dividend income ...................	-	-		1	-	-	-	1
Net earned insurance premiums ..........................	136	16		-	-	-	-	152
Other operating income ........	36	28		17	-	590	(63)	608

Total operating income ........	1,234	652		1,616	115	611	(63)	4,165

Net insurance claims26 ...........	(145)	(11)		-	-	-	-	(156)

Net operating income7...........	1,089	641		1,616	115	611	(63)	4,009

Loan impairment charges and other credit risk provisions	(375)	(151)		(5)	-	-	-	(531)

Net operating income ...........	714	490		1,611	115	611	(63)	3,478

Operating expenses ...............	(870)	(291)		(517)	(68)	(468)	63	(2,151)

Operating profit/(loss) .........	(156)	199		1,094	47	143	-	1,327

Share of profit/(loss) in associates and joint ventures ............................	291	260		145	-	(1)	-	695

Profit before tax ...................	135	459		1,239	47	142	-	2,022

	%	%		%	%	%		%
Share of HSBC's profit before tax .........................	2.7	9.1		24.7	0.9	2.9		40.3
Cost efficiency ratio .............	79.9	45.4		32.0	59.1	76.6		53.7

Balance sheet data23
	US$m	US$m		US$m	US$m	US$m		US$m
Loans and advances to customers (net) .................	27,780	21,693		21,682	2,739	168		74,062
Total assets ..........................	36,761	29,760		138,266	13,068	5,958	(6,019)	217,794
Customer accounts ................	45,179	26,031		42,712	12,624	37		126,583

	Half-year to 31 December 2009
Rest of Asia-Pacific	Personal Financial Services US$m	Commercial Banking US$m	Global Banking & Markets US$m	Private Banking US$m	Other US$m	Inter- segment elimination35 US$m	Total US$m

Net interest income ..............	763	427	548	60	28	(55)	1,771

Net fee income/(expense) .....	300	177	342	30	(11)	-	838

Trading income/(expense) excluding net interest income ..............................	40	63	404	20	(3)	-	524
Net interest income/(expense) on trading activities ..........	-	-	120	-	(2)	55	173

Net trading income/(expense)25 ...........	40	63	524	20	(5)	55	697
Net income from financial instruments designated at fair value ...........................	76	1	1	-	3	-	81
Gains less losses on financial investments ......................	-	(1)	3	-	-	-	2
Dividend income ...................	-	-	-	-	1	-	1
Net earned insurance premiums ..........................	201	12	-	-	-	-	213
Other operating income/ (expense)...........................	31	38	24	(2)	610	(71)	630

Total operating income ........	1,411	717	1,442	108	626	(71)	4,233

Net insurance claims26 ..........	(235)	(4)	-	-	-	-	(239)

Net operating income7 ..........	1,176	713	1,442	108	626	(71)	3,994

Loan impairment charges and other credit risk provisions	(274)	(70)	(18)	(2)	(1)	-	(365)

Net operating income ...........	902	643	1,424	106	625	(71)	3,629

Operating expenses ...............	(969)	(345)	(489)	(63)	(504)	71	(2,299)

Operating profit/(loss) ..........	(67)	298	935	43	121	-	1,330

Share of profit in associates and joint ventures .............	395	307	145	-	1	-	848

Profit before tax ...................	328	605	1,080	43	122	-	2,178

	%	%	%	%	%		%
Share of HSBC's profit before tax .........................	15.9	29.4	52.4	2.1	5.9		105.7
Cost efficiency ratio .............	82.4	48.4	33.9	58.3	80.5		57.6

Balance sheet data23
	US$m	US$m	US$m	US$m	US$m		US$m
Loans and advances to customers (net) .................	30,433	22,595	23,989	2,834	192		80,043
Total assets ...........................	40,266	31,221	138,884	11,928	7,160	(7,320)	222,139
Customer accounts ................	47,573	30,196	43,698	12,496	36		133,999

For footnotes, see page 95.

Middle East

Profit/(loss) before tax by country within customer groups and global businesses

	Personal Financial Services US$m	Commercial Banking US$m	Global Banking & Markets US$m		Private Banking US$m	Other US$m	Total US$m

Half-year to 30 June 2010
Egypt .........................................................	18	41		19	-	-	78
Qatar .........................................................	10	28		33	-	-	71
United Arab Emirates .................................	7	98		24	(2)	(1)	126
Other .........................................................	14	15		(64)	(1)	-	(36)

Middle East (excluding Saudi Arabia) ..........	49	182		12	(3)	(1)	239
Saudi Arabia ...............................................	9	76		37	(20)	5	107

	58	258		49	(23)	4	346

Half-year to 30 June 2009
Egypt .........................................................	10	27		49	-	34	120
Qatar .........................................................	10	29		35	-	-	74
United Arab Emirates .................................	(14)	141		182	(1)	3	311
Other .........................................................	9	6		(15)	-	(4)	(4)

Middle East (excluding Saudi Arabia) ..........	15	203		251	(1)	33	501
Saudi Arabia ...............................................	20	49		53	6	14	142

	35	252		304	5	47	643

Half-year to 31 December 2009
Egypt .........................................................	8	24		48	-	24	104
Qatar .........................................................	-	31		31	-	-	62
United Arab Emirates .................................	(163)	(277)		125	(1)	2	(314)
Other .........................................................	(6)	(21)		(65)	-	1	(91)

Middle East (excluding Saudi Arabia) ..........	(161)	(243)		139	(1)	27	(239)
Saudi Arabia ...............................................	-	12		24	2	13	51

	(161)	(231)		163	1	40	(188)

Loans and advances to customers (net) by country

	At 30 June 2010 US$m	At 30 June 2009 US$m	At 31 December 2009 US$m

Egypt ....................................................................................................	2,689	2,503	2,553
Qatar ....................................................................................................	1,743	1,802	1,811
United Arab Emirates ............................................................................	14,350	15,906	13,883
Other ....................................................................................................	4,612	4,886	4,597

	23,394	25,097	22,844

Customer accounts by country

	At 30 June 2010 US$m	At 30 June 2009 US$m	At 31 December 2009 US$m

Egypt ....................................................................................................	6,666	5,642	5,743
Qatar ....................................................................................................	3,192	2,742	2,698
United Arab Emirates ............................................................................	16,136	19,284	17,498
Other ....................................................................................................	6,983	6,613	6,590

	32,977	34,281	32,529

Profit/(loss) before tax

	Half-year to
Middle East	30 June 2010 US$m	30 June 2009 US$m	31 December 2009 US$m

Net interest income ..............................................................................	667	763	722

Net fee income .....................................................................................	356	308	317

Net trading income ...............................................................................	194	220	174

Gains less losses from financial investments ..........................................	(1)	13	3
Dividend income ...................................................................................	5	2	1
Other operating income/(expense) ........................................................	(33)	63	8

Total operating income .....................................................................	1,188	1,369	1,225

Net insurance claims incurred and movement in liabilities to policyholders ................................................................................	-	-	-

Net operating income before loan impairment charges and other credit risk provisions ....................................................................	1,188	1,369	1,225

Loan impairment charges and other credit risk provisions .....................	(438)	(391)	(943)

Net operating income ........................................................................	750	978	282

Operating expenses ...............................................................................	(519)	(482)	(519)

Operating profit/(loss) ......................................................................	231	496	(237)

Share of profit in associates and joint ventures ......................................	115	147	49

Profit/(loss) before tax ......................................................................	346	643	(188)

	%	%	%

Share of HSBC's profit before tax .........................................................	3.1	12.8	(9.1)
Cost efficiency ratio .............................................................................	43.7	35.2	42.4

Period-end staff numbers (full-time equivalent) .....................................	8,264	8,819	8,281

Balance sheet data23
	US$m	US$m	US$m

Loans and advances to customers (net) .................................................	23,394	25,097	22,844
Loans and advances to banks (net) ........................................................	8,627	6,556	8,420
Trading assets, financial instruments designated at fair value, and financial investments ........................................................................	10,944	10,064	10,230
Total assets ...........................................................................................	49,637	48,601	48,107
Deposits by banks .................................................................................	1,938	991	1,491
Customer accounts ................................................................................	32,977	34,281	32,529

For footnote, see page 95.

The commentary on Middle East is on an underlying basis unless stated otherwise.

Economic briefing

Most of the economies of the Middle East stabilised during the first half of 2010, but continued to show growth rates far short of pre-crisis levels. Resilient oil prices offered some support, particularly in the Gulf, with the US$77 per barrel average price of the first six months of 2010 sufficient to leave all the region's major oil producers with budget surpluses, supporting growth in public spending and a further reduction of public debt. However, while growth in public spending provided some impetus to regional economies, domestic demand struggled to build

momentum. Most immediately, consumption and investment spending were held back by a limited access to credit, with lending growth remaining weak over the first few months of 2010. More difficult access to international debt and equity funding also weighed on the performance of the economy, particularly in the UAE. Egypt, meanwhile, took more convincing steps towards recovery, with the level of GDP in the first quarter rising by more than 5.5 per cent in year-on-year terms.

Review of business performance

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2010 ('1H10') compared with half-year to 30 June 2009 ('1H09')
Middle East	1H09 as reported US$m	1H09 adjust- ments1 US$m		Currency translation2 US$m	1H09 at 1H10 exchange rates3 US$m	1H10 as reported US$m		1H10 adjust- ments1 US$m	1H10 under- lying US$m	Re- ported change4 %	Under- lying change4 %

Net interest income ..	763		-	-	763		667	-	667	(13)	(13)
Net fee income ..	308		-	-	308		356	-	356	16	16
Other income6	298		-	-	298		165	47	212	(45)	(29)

Net operating income7 ..............	1,369		-	-	1,369		1,188	47	1,235	(13)	(10)

Loan impairment charges and other credit risk provisions ............	(391)		-	-	(391)		(438)	-	(438)	(12)	(12)

Net operating income	978		-	-	978		750	47	797	(23)	(19)

Operating expenses	(482)		-	-	(482)		(519)	-	(519)	(8)	(8)

Operating profit ...	496		-	-	496		231	47	278	(53)	(44)

Income from associates	147		-	-	147		115	-	115	(22)	(22)

Profit before tax ........	643		-	-	643		346	47	393	(46)	(39)

For footnotes, see page 95.

HSBC's operations in the Middle East reported profit before tax of US$346 million, a decline of 46 per cent compared with US$643 million in the first half of 2009 but a significant improvement on the second half of 2009.

In June 2010, HSBC agreed to sell its shareholding in British Arab Commercial Bank plc, pending regulatory and other approvals. Reflecting the terms of the sale, an impairment of US$47 million was recognised following the reclassification of the asset as available for sale. On an underlying basis, and excluding this impairment, pre-tax profit declined by 39 per cent, largely due to the run-off of higher yielding loans and weaker economic conditions, which were reflected in a rise in loan impairment charges and other credit risk provisions and reduced revenues compared with the first half of 2009.

In light of the weaker economic backdrop, HSBC augmented its support for local internationally-focused businesses through the launch of a US$100 million fund targeted at SMEs in the UAE engaged in cross-border business. Over 75 per cent of these facilities were allocated at 30 June 2010.

The emphasis on attracting high quality Personal Financial Services customers continued with further roll out of Premier and the introduction of the Advance proposition in the region. The number of Premier customers grew by 21 per cent

in the first half of 2010 and the number of Advance customers reached 63,000 as at June 2010.

A rise in loan impairment charges and lower revenues reduced underlying pre-tax profit by 39 per cent in the Middle East.

Net interest income decreased by 13 per cent as average lending balances fell in both Personal Financial Services and Commercial Banking.

In Personal Financial Services, HSBC continued to manage down unsecured lending balances at greatest risk in the weaker economic conditions, and this more than offset new lending primarily targeted at more creditworthy Premier and Advance customers. The move from riskier unsecured lending to a higher quality portfolio resulted in a narrowing of spreads.

Average Commercial Banking lending fell compared with the first half of 2009, reflecting the decline in economic activity, particularly in construction. However, trade-related balances recovered from the low levels of the second half of 2009.

Average customer accounts declined as corporate customers reduced their funding requirements in response to lower activity levels and tighter liquidity in the local markets. This was partly offset by an increase in personal customer deposits as a result of successful marketing campaigns.

Deposit spreads improved as fixed-term deposits raised at higher rates towards the end of 2008 matured in the second half of 2009.

Net fee income grew by 16 per cent, with increased volumes in credit facilities, primarily related to trade and guarantees, and remittances in Commercial Banking. Global Banking and Markets generated higher fee income from export and project finance and an increase in the institutional equities business.

Net trading income declined by 12 per cent to US$194 million. In Credit, lower revenues were due to the non-recurrence of gains which had resulted from the tightening of credit spreads on trading positions in the first half of 2009, coupled with lower liquidity levels in the regional markets. The decrease in foreign exchange income was driven by lower market volatility as speculation regarding the unpegging of Gulf currencies from the US dollar receded.

Other operating income declined by 78 per cent. The first half of 2009 benefited from the gains arising from the one-off buy-back and extinguishment of own debt.

Loan impairment charges and other credit risk provisions rose by 12 per cent compared with the first half of 2009 to US$438 million, although this reflected a significant decline on the second half of the year. The increase on the comparable period was driven by the economic downturn which occurred in the latter part of 2009 and continued to affect activity in the first half of 2010. This, combined with further restructuring activity, led to additional loan impairment charges in Global Banking and Markets related to the UAE.

Loan impairment charges fell by 43 per cent in Commercial Banking compared with the first half of 2009 and by 90 per cent from their peak in the second half of 2009 as incremental new impairment allowances were required on only a small number of customer accounts. In Personal Financial Services, loan impairment charges were lower than in both halves of 2009 as measures taken to improve loan quality, primarily from repositioning the loan book to more creditworthy customers, strengthening origination criteria and collections processes and running off certain mass market portfolios, resulted in lower delinquency rates.

Operating expenses increased by 8 per cent. Staff costs were unchanged and other costs increased, reflecting higher premises costs, property write-downs in the UAE and higher litigation provisions.

Profit from associates and joint ventures declined by 22 per cent, principally driven by a fall in contribution from The Saudi British Bank as loan impairment charges rose and revenue declined in the challenging operating conditions as lending contracted.

Reconciliation of reported and underlying profit before tax

	Half-year to 30 June 2010 ('1H10') compared with half-year to 31 December 2009 ('2H09')
Middle East	2H09 as reported US$m	2H09 adjust- ments1 US$m		Currency translation2 US$m	2H09 at 1H10 exchange rates8 US$m	1H10 as reported US$m		1H10 adjust- ments1 US$m	1H10 under- lying US$m	Re- ported change4 %	Under- lying change4 %

Net interest income ......	722		-	(1)	721		667	-	667	(8)	(7)
Net fee income ......	317		-	-	317		356	-	356	12	12
Other income6 ..................	186		-	(1)	185		165	47	212	(11)	15

Net operating income7 ....	1,225		-	(2)	1,223		1,188	47	1,235	(3)	1

Loan impairment charges and other credit risk provisions .	(943)		-	-	(943)		(438)	-	(438)	54	54

Net operating income ......	282		-	(2)	280		750	47	797	166	185

Operating expenses ...	(519)		-	1	(518)		(519)	-	(519)	-	-

Operating profit/(loss) ..................	(237)		-	(1)	(238)		231	47	278	197	217

Income from associates	49		-	-	49		115	-	115	135	135

Profit/(loss) before tax .	(188)		-	(1)	(189)		346	47	393	284	308

For footnotes, see page 95.

Analysis by customer group and global business

Profit/(loss) before tax

	Half-year to 30 June 2010
Middle East	Personal Financial Services US$m	Commercial Banking US$m	Global Banking & Markets US$m		Private Banking US$m	Other US$m	Inter- segment elimination35 US$m	Total US$m

Net interest income .............	287	214		163	1	5	(3)	667

Net fee income ....................	103	134		113	6	-	-	356

Trading income/(expense) excluding net interest income ............................	30	44		113	-	(3)	-	184
Net interest income on trading activities ..............	1	3		5	-	(2)	3	10

Net trading income/ (expense)25 ......................	31	47		118	-	(5)	3	194

Gains less losses from financial investments .......	1	-		(1)	-	(1)	-	(1)
Dividend income .................	2	1		2	-	-	-	5
Other operating income/ (expense) .........................	11	(20)		(11)	-	16	(29)	(33)

Total operating income ...	435	376		384	7	15	(29)	1,188

Net insurance claims26 .........	-	-		-	-	-	-	-

Net operating income7......	435	376		384	7	15	(29)	1,188

Loan impairment charges and other credit risk provisions	(141)	(47)		(250)	-	-	-	(438)

Net operating income ......	294	329		134	7	15	(29)	750

Operating expenses .............	(245)	(150)		(127)	(10)	(16)	29	(519)

Operating profit/(loss) ....	49	179		7	(3)	(1)	-	231

Share of profit/(loss) in associates and joint ventures ...........................	9	79		42	(20)	5	-	115

Profit/(loss) before tax .....	58	258		49	(23)	4	-	346

	%	%		%	%	%		%
Share of HSBC's profit before tax ........................	0.5	2.3		0.4	(0.2)	0.1		3.1
Cost efficiency ratio ............	56.3	39.9		33.1	142.9	106.7		43.7

Balance sheet data23
	US$m	US$m		US$m	US$m	US$m		US$m
Loans and advances to customers (net) ................	5,443	11,541		6,389	18	3		23,394
Total assets .........................	6,238	13,892		29,106	(267)	4,247	(3,579)	49,637
Customer accounts ..............	16,449	10,482		5,359	641	46		32,977

	Half-year to 30 June 2009
Middle East	Personal Financial Services US$m	Commercial Banking US$m	Global Banking & Markets US$m		Private Banking US$m	Other US$m	Inter- segment elimination35 US$m	Total US$m

Net interest income .............	343	243		149	1	27	-	763

Net fee income ....................	99	109		98	1	1	-	308

Trading income excluding net interest income ..........	26	37		146	-	1	-	210
Net interest income on trading activities ..............	-	-		10	-	-	-	10

Net trading income25 ...........	26	37		156	-	1	-	220

Gains less losses from financial investments .......	11	(2)		(1)	-	5	-	13
Dividend income .................	-	-		2	-	-	-	2
Other operating income ......	24	33		25	2	19	(40)	63

Total operating income .......	503	420		429	4	53	(40)	1,369

Net insurance claims26 .........	-	-		-	-	-	-	-

Net operating income7.........	503	420		429	4	53	(40)	1,369

Loan impairment charges and other credit risk provisions	(244)	(83)		(64)	-	-	-	(391)

Net operating income ..........	259	337		365	4	53	(40)	978

Operating expenses .............	(245)	(135)		(117)	(5)	(20)	40	(482)

Operating profit/(loss) .........	14	202		248	(1)	33	-	496

Share of profit in associates and joint ventures ............	21	50		56	6	14	-	147

Profit before tax .................	35	252		304	5	47	-	643

	%	%		%	%	%		%
Share of HSBC's profit before tax ........................	0.7	5.0		6.1	0.1	0.9		12.8
Cost efficiency ratio ............	48.7	32.1		27.3	125.0	37.7		35.2

Balance sheet data23
	US$m	US$m		US$m	US$m	US$m		US$m
Loans and advances to customers (net) ................	6,645	11,567		6,799	31	55		25,097
Total assets .........................	7,578	13,040		27,423	95	5,285	(4,820)	48,601
Customer accounts ..............	14,967	9,844		7,312	1,645	513		34,281

Profit/(loss) before tax (continued)

	Half-year to 31 December 2009
Middle East	Personal Financial Services US$m	Commercial Banking US$m	Global Banking & Markets US$m	Private Banking US$m	Other US$m	Inter- segment elimination35 US$m	Total US$m

Net interest income .............	301	221	181	-	19	-	722

Net fee income ....................	104	110	100	2	1	-	317

Trading income excluding net interest income ..........	29	38	89	1	2	-	159
Net interest income on trading activities ..............	-	-	10	-	5	-	15

Net trading income25 ...........	29	38	99	1	7	-	174

Gains less losses from financial investments .......	1	-	2	-	-	-	3
Dividend income .................	-	-	1	-	-	-	1
Other operating income/ (expense) .........................	11	6	10	(3)	20	(36)	8

Total operating income .......	446	375	393	-	47	(36)	1,225

Net insurance claims26 .........	-	-	-	-	-	-	-

Net operating income7 ........	446	375	393	-	47	(36)	1,225

Loan impairment charges and other credit risk provisions	(344)	(490)	(109)	-	-	-	(943)

Net operating income/ (expense) .........................	102	(115)	284	-	47	(36)	(282)

Operating expenses .............	(263)	(134)	(138)	(1)	(19)	36	(519)

Operating profit/(loss) .........	(161)	(249)	146	(1)	28	-	(237)

Share of profit in associates and joint ventures ............	-	18	17	2	12	-	49

Profit/(loss) before tax ........	(161)	(231)	163	1	40	-	(188)

	%	%	%	%	%		%
Share of HSBC's profit before tax ........................	(7.8)	(11.1)	7.9	-	1.9		(9.1)
Cost efficiency ratio ............	59.0	35.7	35.1	-	40.4		42.4

Balance sheet data23
	US$m	US$m	US$m	US$m	US$m		US$m
Loans and advances to customers (net) ................	5,979	10,281	6,554	28	2		22,844
Total assets .........................	6,810	11,861	28,189	96	4,952	(3,801)	48,107
Customer accounts ..............	15,074	10,122	5,752	1,172	409		32,529

For footnotes, see page 95.

This information is provided by RNS

The company news service from the London Stock Exchange

END

IR UAAURRNAWAAR

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