滙豐控股 (HSBC) 2003 Q4 法說會逐字稿

Good morning. Next to me is Douglas Flint, our Group Finance Director. In the front row are Alan Jebson, our Group Chief Operating Officer and Michael Geoghegan, our newly appointed Executive Director and Chief Executive of HSBC Bank plc who follows a number of our other Senior HSBC colleagues. I am delighted to say that five of our non-Executive Directors are also able to join us this morning - Sir John Kemp Welsh, Brian Moffat, Mark Moody-Stuart, Dr Helmut Sohmen and Sir Brian Williamson. We also welcome Robin Munro Davies, our newest Director of HSBC Bank plc[inaudible].

Before we start the presentation, I would draw your attention to the cautionary words on forward-looking statements, which is to comply with our regulatory environment. Can I remind you at that hsbc.com, you can find the news release, slide presentation and our Annual Report, which includes the information to be filed on Form 20F and we have given you copies in the pack. Could I also please ask that you turn off your mobile phones during the briefing? We have found that they can interfere with the electronic equipment we use to make the presentation.

Let me run you through the headline figures. As we judge ourselves on cash return on cash invested, we focused internally on profitability excluding goodwill amortization. Contributable profits were up 26% to $10.4b and EPS were up 30%. The Group increased operating profits before provisions by 72% to almost $20b. We have increased the total dividend for the year by 13% to $0.60. On Friday's closing price, HSBC yields around 3.6% and this dividend marks a compound annual growth rate in dividends of 18% over the last 10 years [indiscernible] in Sterling terms.

Our tier 1 ratio at 8.9% maintains our traditional strong capital position. This chart shows the movements in the component parts of our pre-tax profit performance. Pre-tax profits increased by 37% or $3.9b to $14.4b. Of that, Household added $2.2b and HSBC Mexico, formerly GFBital $501m. Underlying growth excluding these acquisitions was $740m with currency translation movements accounting for $439m [indiscernible] profits [indiscernible].

The key achievements for the year can be summarized as follows. Strong financial performance, these record results a testament to HSBC's ability to grow our business organically, required growth and favorable opportunities arise against a backdrop of improvement in most of the world's major economies.

Strong contributions from our recent acquisitions, Household and HSBC Mexico, both of which performed ahead of expectations and integration is nearing completion. We extended the reach of our Group, improving the balance of our operations both by geography and by customer group and this gives us the unique platform for growth. We continue to invest in our operating infrastructure.

The HSBC brand continues to go from strength to strength. GFBital was re-branded HSBC Mexico in January this year. We also re-launched our Private Banking operations at the beginning of this year as HSBC Private Bank. This year, we will also re-brand Household's prime credit card business, retail services business and its auto-finance business.

Looking at the results by line of business, you can see progress across the board. The acquisition of Household has further diversified our earnings stream by adding a new business in the finance. In Personal Financial Services, pre-tax profit excluding goodwill amortization increased by 18% to $4b. On a constant currency basis and excluding Household and HSBC Mexico, growth was 6%. We saw strong demand for mortgages, other lending products in many of our most important markets.

Overall, mortgages grew by 15% on a constant currency basis with particularly good growth in the UK, US, Canada, Korea, Singapore, Malaysia, Australia, India through the result of an acquisition [indiscernible]. Excluding Household, credit cards in issue grew by 20% to 16m, including 15% organic growth in Asia. Customers remain cautious in preferred liquidity and security and we attracted record savings levels, deposits growing 7% in constant currency terms to $291b.

Further growth in income was constrained by increased margin pressure in Hong Kong and the write-down of mortgage servicing rights in our US Mortgage business. Structurally we are seeing the growing importance of e-channels, both for the delivery of products and as a means for improving service for our customers.

Including Household, our e-banking customer base more than trebled in 2003. Registered users of Internet banking increased by 200% to 13.5m, 60% of them are regular users. We sold 2.3m products and conducted 87m transactions over the Internet last year. We now have over 2m visits to HSBC websites every day and we are challenging ourselves to turn these into sales opportunities. Our credit quality experience is stable.

In Consumer Finance which represents 9-month's contribution from Household, we built progressively stronger organic loan growth post-acquisition and supplemented this with portfolio acquisitions. The strongest growth was in the Real Estate secured portfolio, particularly in the near prime segment, where the better funding now available broadened Household's reach and improved its competitiveness. In the branch-based consumer lending business, Household rebuilt its sales strength post-acquisition and began to add new net growth in lending by the end of the year.

Household's credit card business had a record performance, growing both fees and net interest income strongly. New partners in the retail service and store card business including Suzuki, Saks, Gottshalks in the United States and the John Lewis Partnership in the United Kingdom. This should enable us to do more business with these companies.

Credit quality indicators improved in the second-half of the year, specifically delinquency and charge-off rates. Early stage delinquency rates and collections experience improved in Q4, as a result of the recovery in the US economy and tighter underwriting in some products. These trends are continuing into 2004.

In Commercial Banking, pre-tax profit excluding goodwill amortization improved 5% to $3.2b. On a constant currency basis and excluding acquisitions, pre-tax profits were down by 4%. Results were adversely affected by the impact of the Competition Commission in the UK and restructuring costs, principally in the UK. However, we improved our position in the UK business start-up market, with a 21% market share, helping over 100,000 businesses start-up during the year.

We strengthened our distribution network in the UK with the addition of 22 specialist corporate banking centers, and in the United States we doubled the number of relationship managers.

During the year we launched business Internet banking in 13 more countries, bringing the total to 20. The number of business Internet customers doubled to over 0.5m. Overall credit quality remained stable with continuing good recoveries in Asia.

In Corporate Investment Banking and Markets, pre-tax profit excluding goodwill amortization improved 14% to $4.4b. On a constant currency basis, excluding acquisitions, the increase was 9% and although we made significant investments in the business, our cost income ratio improved.

Our Global Markets business excelled. Investments in corporate relationship manager improved our market share and bond issuance. HSBC now has a top eight position in the international debt issuance league compared to 18th in 1999.

Currency and interest rate volatility contributed to record demand for risk management and structured products. Concerns about market concentration risks, reputational damage from corporate scandals enabled HSBC to extend profitable relationships within an enlarged customer group.

We restructured our Markets business in the United States, where profitability improved partly as a result of the non-recurrence of bond losses suffered in 2002. We gained market share in foreign exchange, particularly in New York and built up our currency options business, which is managed from London, and our credit derivatives business, which is managed from New York.

Our payments and cash management business also improved its position, now ranking second globally, first in Asia and in the Middle East, third in Europe and fourth in North America. We restructured our Investment Banking operations and focused the business more sharply along industry-group lines. We were entrusted with a number of landmark deals during the year in areas related to capital structuring, corporate reorganization and broad strategic advice. These deals spanned our global client footprint and served to re-enforce our commitment to build resource to serve the industry segment where HSBC has competitive strength through existing relationships.

We have been re-organizing our Equities business into a new business model. Our concentration in areas where we have a competitive advantage helps us to return to a modest profit in Q4.

In Private Banking we delivered a strong performance with pre-tax profits, excluding goodwill amortization, up 36% to $563m. HSBC Private Bank is now ranked third best global private bank by Euromoney. Client activity increased across a wide range of products and funds under management in Private Banking increased by 18% to $169b. The increase in discretionary mandate and strong demand for client tailored structured products contributed to increased fee revenues and dealing income.

This slide shows the continuing evolution of the shape of HSBC. We believe that we are unique among major international banks in the spread of our business. You can see very clearly the increase in North America's contribution post-Household.

Let me now hand you over to Douglas, who will take you through some of the details.

Thank you John. [indiscernible], the Annual Report this year was 380 pages, but the last three are perhaps the most important in some ways [in index?]. Let me take you through the underlying growth. If we take out Household and HSBC Mexico and re-state our 2002 results on a constant currency basis, pre-tax profit increased by 7%. Operating profit before provisions increased by 4% with increment costs showing similar rates of growth of around 5%. Charge for bad and doubtful debt remained little changed.

Turning to operating margin on a risk-adjusted basis, the Group's profitability improved from 2.51% for 2002 to 2.55% for 2003. The impact of Household can be seen in the increase of our margin at the level of operating profit before provisions and this funded the rise in the bad debt margin.

This slide shows the change in the loan mix from the effect of the acquisition of Household in the Group. Total personal lending is now 56.2% of customer loans against 42.3% in 2002 and residential mortgage loans now account for almost a third of the book. During the year at constant exchange rates and excluding loans to the financial sector, over 90% of the growth on lending was in personal lending. Less than 2% of the growth arose in the corporate sector, which reflected the muted demand for credit and a restricted appetite. Household grew its loan book at 16% on an annualized basis post-acquisition.

Saving profits continued to account for a reasonable proportion of our total income, just over 5%. Foreign Exchange profits continue to account for over half of our dealing profits. Moving on to this familiar slide, you can see that daily distribution of market risk revenues remained essentially concentrated in the similar range to previous years, albeit with very, very careful eyesight you can see a couple of outliers. These arose principally from volatility in the Hong Kong/US dollar exchange rate in the second-half of the year.

Turning to credit quality, you can see that the acquisition of Household clearly changed the shape of the bad debt charge of the Group. We are very comfortable with the level of bad debt in Household, given that it arises as a highly predictable part of their business model.

Elsewhere we experienced some recoveries in an improving domestic economy in Argentina and from a general reduction in the uncertainty, as historical troubled industries were re-financed and restructured, the benefits of which flow through to general reserve requirements.

Looking at the bad debt charge by line of business, you can see that stability was maintained across our existing lines of business. If we look in particular focus at the UK personal market, where there is concern in some quarters over the level of indebtedness against the prospect of rising interest rates, we believe that the Group is prudently positioned. 71% of HSBC Banks personal lending is in residential mortgages. Our pattern for residential mortgage arrears has been consistently well below the industry average. The average loan to value ratio on new lending has been at conservative levels and our level of repossessions has been consistently low.

In the HSBC credit card business in the UK, there is a credit risk history significantly better than the industry as a whole.

Household's key indicators showed improvement in credit quality during the second-half of 2003 with improved risk adjusted revenues, a stable delinquency rate at 5.26% in Q4 and reducing charge-off at 4.39% in Q4 against 4.68% in Q3.

Let me take you through our progress with Household in a bit more detail. We are realizing the funding benefits that we anticipated. We continue to see annualized funding synergies in excess of $1b. We continue to integrate technology and are benefiting from operating synergies. We are consolidating data centers and converting HSBC credit card portfolios onto Household systems.

We are exploiting Household's consumer credit business models wherever we see the opportunity, most immediately in Brazil and Mexico. Here practices include credit risk management, card management, collections, retail services and customer-focused technology.

We are seeing expanded business opportunities, for example Household has quickly developed prime and near-prime products to expand customer reach. We are also seeing opportunities in cross-border payments lining up Household with HSBC counterparts, particularly HSBC Mexico. We have a number of initiatives here, a web-based option for use with a store value card and remittance services available from HSBC branches and kiosks in Mexico. HSBC Mexico has already seen a significant increase in its market share of money remittances from the United States since we acquired it.

We believe that there are opportunities in global resourcing for Household's back office operations. Processing costs have already been reduced in Household consumer lending and office finance business by using HSBC's processing centers in India.

This slide updates the improvement in Household's spread post-acquisition. It shows they have been maintained and indeed improved relate to other US corporates. This slide we show how spreads have moved since the date of acquisition and that fair values were established. Taking the five-year and the three-year maturities on a like-for-like basis, spreads have narrowed significantly and this slide illustrates in relation to the current issues, two particular issues which have been re-financed recently. So these are actual figures.

We have also made good progress with HSBC Mexico. We exceeded our financial objectives for 2003, achieving 18% in deposits and over 20% growth in consumer lending. Non-performing loans declined by 52% as we cleared out the loan book. We achieved a cash-on-cash return on cash invested of 20% in our first year.

We have established customer segmentation. We have implemented, or begun to implement, good control and compliance standards. We took full control of our insurance joint venture, HSBC Seguros, and we have bought a pension company to compliment it, AFORE Allianz Dresdner. Last month, we re-banded Bital as HSBC Mexico which has been very well received.

Turning to Hong Kong, we see a much-improved economic environment in 2004. Our business is well positioned to grow with the economy having achieved remarkably consistent results over the last four years, during a period of deflation for Hong Kong's economy. By this, we have grown our business over that period, a credit to our management team and our colleagues there.

Over that period, there was only modest growth in customer lending and there was a significant reduction in net interest margins. Now with employment figures improving, bankruptcy petitions have shown a 32% reduction in the second-half on second-half and the proportion of mortgage loans with negative equity has reduced significantly with 31% at the peak, 20% by the end of the year. Volume growth has begun to pick up in Commercial Banking with outstandings recording growth of 18% during the year. Our business in Hong Kong is one we continue to invest in.

Let me turn to Corporate Investment Banking and Markets. This slide illustrates the shape of our CIBM business today. Over 60% of profits are generated in our Markets business, which manages our own liquidity and is a leading player globally in foreign exchange, interest rate and derivative markets. There within Corporate and Investment Banking the lion share of profit arises in financing and credit for corporate and institutional clients and in transactional banking. Advisory revenues are growing and we are investing further in that business.

Our opportunity is to use the profitability of these businesses as the foundation to develop deeper and broader business streams which harness the strength of the customer relationships in these businesses.

We have a track record of success in doing this. Over the recent years we have built the Markets business progressively, funding growth from profitability. Profitability has grown faster than the rate in which we have invested in the business, improving our returns. Over the last four years we have grown pre-tax profits by over 100%, which is more than the risk-weighted asset growth of over 60%. The team that built that Markets business and that performance is the team that leads us today. On top of that we now have leadership in Investment Banking with a similar track record of success. We have already significantly reshaped the scale and the skills of our human resources across the businesses in line with our plans, and we are also greatly encouraged by the number of senior experienced bankers who want to join us.

We fully recognize our success will be measured not by what we tell you we plan to do, but what our customers tell you we are doing and we believe we are off to a good start.

Let me now hand you back to John.

Thank you Douglas. In November 2003 we launched our new five-year strategic plan. Using the delivery platform, which HSBC has constructed around the world, harnessing all of our strengths, we aim to target the economies and within these economies the businesses within which give us the best opportunities for growth.

At the same time, however, we shall not compromise our traditionally conservative risk profile, which has served us well. Our plan recognizes the rapidly changing pattern of our clients' interaction with us, reflecting the transforming effect of telecommunications and new technologies, including the Internet and imaging technology. Consequently, the extent to which our customers can now choose how to conduct their business with us is through a strategic review of our resources.

Our plan also reflects the need to free up resources by reducing or eliminating our involvement in businesses limited in scope or potential in order to allocate additional resources to areas which demonstrate strong growth prospects. You have already seen examples of this in 2003, such as the sale of our factoring business in the United States.

In addition our strategies always allow us to respond to opportunities to expand our geographical reach and [gap in audio] our acquisition of the Bank of Bermuda. In addition to providing HSBC with a strong position in the local banking market in Bermuda where there is potential for further expansion, the acquisition adds significant scale and geographical spread to our existing international fund administration, private banking, trustee and payments and cash management businesses. We are now hard at work on the integration.

Turning to 2004, we have already seen growth in consumer spending and borrowing, in increased merger and acquisition activity and a resumption of growth and demand for equity investment products. We see improving prospects for economic growth and private sector employment, particularly in the United States and Hong Kong. In emerging markets, such as Brazil, Mexico and the ASEAN countries, relatively stable currencies and historically low interest rates are promoting consumer activity, fuelling domestic growth and reducing export dependence.

However, we remain very conscious of the changing nature of the global economy and the speed of change. China plays an increasingly important role, not only through its export growth, but also as the fastest growing market for commodity producing countries and for those developed countries which are supplying the technology, equipment and services to support its economic expansion. Nor do we underestimate the impact on sentiment and consumer spending of globally strong property prices, which continue to rise faster than underlying wage growth in many developed markets. While such rises are understandable in the context of low interest rates and limited appetite for alternative investment opportunities, in the long-run property prices have to be linked to income growth.

The picture therefore is one of improving sentiment and stronger growth prospects in the near term, but with the potential risk that structural imbalances might lead to economic weakness or dislocation. Against this backdrop, we are concentrating on building our businesses steadily. We expect to see lending to consumers around the world rise as a proportion of our total lending, with the emphasis on real estate secured lending. We also expect to see business in the United States grow in importance to HSBC as we fulfill the potential of the Household acquisition and as the US economy shows its flexibility and responds to the lower value of its currency.

We look forward to the future with confidence. We are second to none in terms of geographic and product diversification. We believe that China, India, Brazil and Mexico will become increasingly important to the global economy. We also believe many of the world's largest companies see the same opportunities as we do, and therefore we will use HSBC's position as 'the world's local bank' to serve their needs. We have built a capital strength that allows us to develop our businesses wherever we see opportunities. Alternatively, such strength gives us resilience if economic conditions deteriorate.

We have an excellent customer base with opportunities across the board: In Personal Financial Services, in Commercial Banking where we have the largest international middle market franchise, and in Corporate Investment Banking and Markets and in Private Banking. We have a talented team, we have a commitment to do business only when it's in the interests of our customers and in line with our wider responsibilities to the communities we serve.

In so doing we protect and strengthen the value of our brand and this lies at the heart of our ability to create value for our shareholders who have entrusted to us, directly or indirectly, an important element of their long-term savings and pensions provisions.

Now we would be happy to take your questions.

I wonder if I could turn to Household and focusing on the slide that you showed that the fund in corporate Household improved since the acquisition. The run rate of net interest income appears to be lower in the second half and the provisioning run rate seems to have increased in the second half as well. I wonder if you could comment a little bit more on the mix effects of assets? Certainly looking at the volume development, it's up something like 11% since the end of June and also on provisions, delinquency rates are stable. What is happening on coverage levels and the [indiscernible] and the FFIEP positioning of $200m, which you flagged earlier on, well last year I guess?

Which of your seven questions do I do first? There are some important points to make in relation to mix in the point you make. One of the features of the improved funding costs that we have in Household is that has enabled Household to originate assets closer to prime and near prime and indeed in prime itself. Therefore, higher quality assets as a proportion of the lending group are growing and indeed the piece of the business that is weaker, partly because of origination difficulties is because that particular pool of individuals in the United States is weaker relatively [indiscernible] branch based business, means that the mix of business is getting stronger in terms of quality. That means lower yield. There is something which they colloquially call 'pig in the pipe', there is an element of the margin, as the mix changes towards lower margin, lower risked business there is still the lagging charge-off of the business that was written one and two years ago which is on higher margin but higher credit risk business and that comes through the system as [indiscernible] margin a little bit in the near-term. So that's the element.

It also actually comes through partially in the fair value exercise in the sense that it is an interesting observation to make. On the liability side of the balance sheet, the easy thing to do is fair value the cash payments, because the cash payments are certain because we are paying them. On the asset side of the balance sheet, where you would also have a fair value impact, the impact is slightly less because the discounting is on the expected cash flows and the expected cash flows take into account expected delinquency. If delinquency was expected to be rising because of the weak US economy, you have something of a lower yielding rate on your assets compensated by a higher credit charge, which is why Household risk adjusted revenue through all this period and all the fair values have remained fairly constant.

The coverage ratios of credit have remained fairly steady, in fact, modestly better. On the last day of the year I think, or the second last day, we transferred $2.8b of higher quality mortgages from Household to HSBC Bank US, which is the first asset transfer we've made. There are plans to do [$5b] or so of credit cards and store cards during this year which is likely to be more likely towards the second-half than the first-half. As part of that, you point to the impact of FFIEC in terms of the way we manage the Group, increasingly as Household originates closer to prime, the account management processes are similar to FFIEC. They will formally go on to that to the extent that they come into the bank environment. It's difficult to tell what the impact will be and therefore we haven't updated what we said at the time we filed the F4, on the basis that it will depend on the mix of the book at that time and it will also depend on economic circumstances. Clearly as we do it, we will tell you what it is.

I think we've moved something like $14b of deposits from HSBC into Household, have we not Douglas?

In terms of the impact that HSBC and HSBC customers have made on the funding of Household, it's been around $14b yes, which has been a significant impact on the improvement on the spread as it is a significantly less active user of the market, [although it is still very much a frequent issuer].

Just while we're on the Household credit quality subject, can I just ask you on slide 21, the trend in charge-offs Q3 versus Q4, is that a reasonably good guide to what we might be seeing on a P&L basis under UK GAAP?

Also on the risk adjusted revenue, I know you've answered a lot of parts in the last question, but do you believe that risk adjusted revenue metric can actually go up from here once the full-year benefit of the funding synergies have worked through the numbers?

The reason we've put that table in the US GAAP is to give the history because obviously we've only got [indiscernible] quarters. The dynamics that are driving credit quality improvement are to do with a lower percentage of accounts falling into delinquency at early stage debtor collection, late stage, fewer bankruptcies in the United States and better employment trends. So it doesn't matter what accounting GAAP you are working on, all of those circumstances which flowed through Q3 to Q4 and then to 2004 are beneficial.

The next question is a good one. I think as we get a broader product range, I would hope that yes we can improve the risk adjusted revenues of the business. You are right to point out that at the moment the funding synergies are substantially being used or partially being used in terms of taking the business into a different product mix, which we can now do with the same margin but with less risk.

A question on the same kind of topic. The return on equity of the sub-prime business in the US versus return on equity of the near-prime business that you are orientating Household to, could you say what the difference is, because Household International used to be a 25% return on equity or thought to have a 25% return on equity and well above its peers because it was so thick in the sub-prime business. Does that mean you are moving the business to a lower return on equity or in line with its peer level?

I think that it's going to be mixed. The Consumer Finance is not going to shrink in Household, but the other businesses will grow faster and I think it's actually going to be quite difficult, not because we are trying to be lacking in transparency in looking in three years time as to what Household is because a lot of that business, all the store cards, all the credit cards and a large part of the mortgage business is going to be in the banks, so you are going to be looking at a North American Personal Financial Services business in aggregate and therefore there will be the synergies of putting the two businesses together particularly in originating at near-prime.

That mix, yes would have a modestly lower return, but also a lower risk profile that goes with it. I think on a risk adjusted basis, we would believe that it would be better for us to be there, than to have a higher notionally [indiscernible] investments and then the higher volatility that goes with credit costs in weak times. [indiscernible] return.

One macro question and then a couple of micro. By some measure China now has a higher loans per GDP ratio than any Asian country ahead of the crisis. It has a faster growth of loans per GDP and its investment has been growing about four times GDP. Was this one particular area where you were talking about potential structural problems going forward?

I have to confess we were looking much more at the trade deficit in America and fiscal deficits in the Western world, if you want an honest answer to the question.

Just reverting to Household, I'm afraid a couple of very nitty gritty deals. Could you give the actual cash as opposed to the accounting synergies realized to date? I particularly noticed on page 53 of your full documentation that the tax charge obviously includes an adjustment for that. Secondly on a philosophical point of view, given that you haven't changed the Household risk matrices and you haven't changed the management of Household particularly, why is it actually a synergy of doing this deal if you use HSBC deposits, if you could have bought Household bonds yourself and then had the earnings enhancement?

That's how the conversations all began about buying their bonds, but anyway we'll let Douglas answer that.

There's a number in Household's filing which will be on the web, at New York Open Today which points to cash synergy on the funding of $124m and that is the actual cash benefit realized on re-financings that had taken place during 2003. So I think that's the first part of your question.

The second part of your question, the difference between buying their bonds and owning the business is that you control a quality of the origination and you can develop the synergies between the two businesses, which you can't do by being a passive investor in the bonds and we would never do that.

On the growth rate of unsecured personal lending within the Group as a whole on page 104[indiscernible] weighty tome. Could you just give us a little more color on the drivers of the high rates of growth pretty much across Europe, Asia Pacific and Hong Kong on unsecured personal lending? Is that gains in market share, is that new products or is it just doing what you did before rather better?

I think it's all of that actually. I think in the UK we used to challenge ourselves that we had one of the best opportunities to grow our credit card business because were losing like 1% charge-offs in the credit card business, which is unusual. Over the last year we have significantly targeted for the switch credit cards, we have had zero percent transfers, programs which have been very successful. We have managed credit lines more accurately for people who have shown the ability to use credit and use credit responsibly. The same would be true in Asia. The card base has grown by 20% in Asia and we have been very successful particularly in Hong Kong again in working on programs with the merchants to encourage people to use our card for their transacting rather than other people's cards.

So I think it is all of the things that you say, but I think one of the most positive impacts has been to encourage our customers in the UK, not only to give us more of their mortgage business or to bring their mortgage into the Group because of the price promise that we have, but also to use our card when they are transacting on credit cards. Again we have moved ourselves to be more competitive and we have been rewarded by growth in balances.

Two questions on cost if I may? Firstly, I guess back at the Strategic Strategy Day in November, you talked more about the strategic management of costs. If you exclude the acquisitions you are talking about underlying income up 5% and costs up 5%, cost income ratio of 57%. I was just wondering if you are satisfied with that or you think you can do better than that looking forward?

Secondly, by reference to the UK business, a number of your peers have been talking about moving cost income ratios down to below 40% and I look at your PFS business in the UK or in Europe, it seems virtually stuck near the 70% level in terms of cost income ratio. I am trying to understand why that should be the case given the scale of the Group and whether it's this more of an income or a cost issue that should be addressed, could you comment please?

Let me answer the second one. I have no idea what comparison you are making, but there are those who put insurance premium in revenues and insurance claims in bad and doubtful debt, which has quite a beneficial effect on your cost income ratio. There are those that don't. We're one of the ones that don't. You will find the claims are in the expenses side and I think that has quite a significant effect on when you are comparing cost income ratios, so you need to check the underlying accountancy. The answer to can we do better on managing our costs? The answer is unequivocally yes. You will see some one-offs going through in 2003, one-offs in pensions, one-offs in restructuring charges, one-offs on valuations in the Canary Wharf and properties for disposal. So there are quite a few one-offs going through in 2003. However it doesn't alter the underlying thing, yes, you own the business and you pay us to become more productive and we will be very hard at work on it.

I think one of the things that we see which we [indiscernible] shadow in our statement is the changing pattern of customer usage of our facilities. At First Direct, telephone calls are dropping at a dramatic speed, 65% of all interaction is now over the Internet. We have to reconfigure these businesses to reflect the changing pattern of consumer behavior. Similar patterns inside the UK bank where clearly telephone calls are leveling off, they are not growing nearly as fast as they have done in past years. Douglas is the Scotsman in charge of the checkbooks, I'll ask him to answer.

The Personal Finances Services business, no one of course looks at Hang Seng which we would call up as having the most efficient cost income ratio and I don't think any of the UK banks are quite going to challenge that one yet.

Actually it flips because their return on capital is now lower than their cost income ratio by two points.

We'll get there. In fact the European Personal Financial Services business had the lowest cost income ratio in the second-half of 2003 for six halves. There is still a huge amount to do and I think one of the things that has constrained PFS cost income ratio is on the revenue side in terms of our lower value of deposits as we raise deposits in a low interest rate environment and maintain the liquidity that we have and the high quality of the assets that we put our liquid assets in. There is a strain on the margin which we have made up, well substantially by mix particularly getting into personnel lending. There's a lot we can do and I think you will continue to see us to do that.

The other thing if you look across the Group as a whole, that a lot of the PFS costs in the second-half of the year was in South America and Mexico. Mexico because of growth and South America because we had some, I hope they are one-offs, but some pension and labor claim and adjustments which are not huge in absolute terms, but in terms of looking at half-one half comparison impact of the comparison, the European and North American [indiscernible].

Could I ask for Sterling investors, when the foreign exchange rate will be set for the dividend payment? Will it be on the ex-date or the payment date or some other date?

April 26 is my recollection. We'll double check that for you and if you want to know, we think it remains positive in Sterling terms for our UK investors up to 194 on cable. That's the other part of your question. We will just check, my recollection is April 26 [indiscernible] exchange rate [indiscernible].

I can't find the page in the accounts, which shows just what benefit the index is, but there is a page -

It will be converted on April 26, page 17 of this [indiscernible].

SG. First, could you just make a few more comments about the outlook for corporate loan growth going forward? And secondly on Household it seemed quite strong, loan growth, since you acquired it. To what extent is that a catch-up from perhaps weak performance before you bought it, or is it actually sustainable over the medium-term?

Clearly the answer to the first question will depend on business investment. At the moment, I think companies are funding themselves from the markets, most of the larger companies. I think we see relatively subdued demand from the corporate sector funds, but a lot will hinge on whether corporate investment picks up. At the moment, I think it's better than it was this time last year, but it's certainly not climbing in an appreciable way.

The Household sales force, they went through a very difficult period because of funding difficulties they needed to restrain their sales force and what we have now put in place is the ability for them to look outwards again, but there is a lagging effect. I think we anticipate it picking up. The first quarter is typically in the consumer finance area, the area where they get a lot of pay down from people post-Christmas. I think we are anticipating it picking up steadily.

The platform was cut back in Q4 of 2002 and into Q1 of 2003 because effectively they were at the market because of the uncertainty over their ownership and because they did not want to raise net new funds at rates that were not attractive at that time. It took a quarter to put the sales force back in place again. That also coincided with significant re-flow activity in the mortgage market in the States and as house prices rose people found they had equity that enabled them to migrate into the traditional bank channels on the basis of having equity that enabled them to re-finance. There is an incredible turnover in the absolute amounts of credit within the [indiscernible].

As we turn from 2003 into 2004, the sales force are back in shape. The credit cards are growing, the store card relationships are expanding and the product range is widening because of the ability to price near-prime and even prime through the branch channels and indeed to originate higher quality [indiscernible]. I think the opportunity for 2004 is just growth that we want to achieve. All the drivers are in place.

Lehmans. I have two questions if I may? Firstly on the US operations and secondly on CIBM. On the US operations, I was really looking at their performance in the second-half ex-Household. It looks to have declined. Could you give us some reasons for that and could you comment or update us on the pretty ambitious targets for that area that were outlined at the Investor Day?

Secondly on CIBM, your famous bell-curve on slide 17 has obviously moved significantly to the right in 2003 compared with 2002 with what looks like about $650m. I wondered if you could comment on why that is and whether we might expect it to be sustained.

I think we mentioned mortgage servicing rights as having been a challenge for us in the United States in the second-half of last year and that's part of the explanation.

The principle part of the explanation is that they had a very bad Q3 in both writing down mortgage servicing rights and the hedges that had been put in place were ineffective. The basis correlation did not work as it should have done and management of the hedges was not as good as it could have been. That has been changed, people changed all that kind of stuff, but there was an impact on Q3 which significantly impacted the rate of growth first-half, second-half in the personal businesses in the United States.

And the outlook for 2004 first of all on the US business?

Well we certainly encouraged them not to make the same mistake again. I hope that's been fixed, but perhaps [indiscernible]. I think that has been fixed and I think you could take that out and model off that I hope. Indeed they are also finding benefits from Household. Household are referring the turn, the people who turned down Household because they have the ability to get better rates than Household will fund them at into the Bank and also they are proactively referring people whose behavior patterns suggest that they are about to re-finance in the bank channel because they are eligible and therefore we are getting a flow of hot leads.

On the bell-curve, it is not that much different. Apart from the two outliers, which are the abnormalities in the Hong Kong dollar in Q4, it is a bigger business and therefore slightly to the right in terms of [indiscernible]. It is very well concentrated and I do not see any reason to think that that is not a base that we would hopefully be able to build from.

As a supplementary to that if I may, the investment portfolio in that area, I think, has been maturing and has seen some downward pressure on revenues from that area. Has that now stopped or where does that go?

The gains on investment securities, which are pretty modest, were fractionally, only fractionally down and indeed the inherent gain still within the portfolio is still well over $1b. I mean we have not been robbing the investment book to make gains. As the portfolios have sort of adjusted there are odd sales and half over gains. There is still virtually, in fact I think it is slightly larger than it was at the beginning of the year, so there is still well over $1b in unrecognized gain in the investments which will flow through hopefully in net interest income over the residual duration of that book. So I do not think there is an issue there.

WestLB. I also have a couple of questions relating to imbalances in the global economy. I believe the IMF [indiscernible] is that in order for fiscal balance to be restored in the US a permanent 60% increase in federal taxation would be required. Do you believe there will be a significant increase in taxation post the election in the US and if so, what impact will it have on the US and global economy?

Secondly, can you comment on how quickly you believe the border between Hong Kong and China will become porous? What I am looking at here is the imbalances in things like the relationship between property prices and the border of China and Hong Kong and wages? Would it be fair long-term to look at the ratios between Manhattan and New Jersey as comparable?

I think all we are trying to signal in our statement is this, that there is a fairly sizeable trade deficit in America; there is a fairly sizeable fiscal deficit. There is probably a strong probability that these will unwind gradually rather than at a very rapid pace, in which case I am quite certain the world's financial markets would absorb them. How they unwind is a matter fiscally for the electorate and the government in America. We will live with the consequences, but we will not be part of the decision.

I think all we are signaling is that if there was a rapid unwinding, that could lead to a little bit of choppiness in [indiscernible], we are not necessarily anticipating that, but I think we have a duty, you ask us in an outlook statement to point out the pluses and the potential minuses and that is all we have tried to do.

The border between Hong Kong, SAR and mainland China, traffic increases every day across the border, people movement increases every day, money both ways, very powerful tourist revenue coming in from China, staying longer than the Japenese who used to historically be the most affluent tourists visiting Hong Kong, staying longer and spending more than Japanese tourists is having a powerful effect in Hong Kong. I think you should expect to see this happen. It is not property prices, it depends what you mean. At the luxury end of the market in Hong Kong there is a fine number of properties and probably an increasing level of demand for them. In the middle income housing, the prices are still fairly competitive. Prices in Southern China have risen very fast. They have risen fast in Shanghai. You should not regard it as completely porous in terms of property investment. There are still [indiscernible] trend is upwards clearly in most of the China areas near the border. [indiscernible].

ABN Amro. On page 48 of the big book, relating to operating expenses, there is a lot of references to restructuring provisions and costs under long-term restructuring programs to redundancy costs through moevements in pension costs. I was just wondering if you could give us sort of an aggregate cash dollar number for restructuring, redundancy and pensions movements and some indication of the extent to which they will be recurring?

In Europe the restructuring costs were around $100m covering business restructuring, cost of the initiatives that were announced in the second-half of the year to move a number of activities offshore and then the cost also in the UK of reorganizing the UK equities business. Are they recurring? Those ones will not be, but other ones will be. I think it is very difficult to say that restructuring costs do not recur because they do, because you are constantly, and that is why we do not take them out. I think that they were of a different magnitude to the year before and they were predominately in the second-half of the year, so they need to be understood. I would not want to say that once you have restructured it in 2003 you would never do it again, because I think that is a ridiculous statement to make. The impact on the UK pension scheme was about £80m on amortizing the deficit.

As the pace of change outside HSBC in the marketplace accelerates, I think you can expect to see these charges more regularly than perhaps we did historically. I think this is one of the periods where the speed of change is more rapid than anything I have experienced in the recent stages of my career.

CSFB. I have got two questions, one really about your acquisition ideas, especially for the US. I see you have been quoted in certain Newswires as suggesting that there may well be opportunities for acquisitions in the US and I sort of recall the debate last time round about the definition of infill, which I think for HSBC probably came in at somewhere below $5b or $6b.

The second question relates to Household. I am trying to get my mind around what exactly you are saying. Clearly it seems to me that the benefits of being redeployed as you say in writing a higher quality business, does that mean that we will still see those benefits except on different lines of the P&L account, or does it mean that those that have gone away and taken Household as was and bolted on the benefit and said that is Household mark II and may be disappointed in that?

The answer to your first question is unfortunately itis quite hard - well I have to stand by that remark. I was asked did I think there would be acquisition opportunities in America, to which the answer is yes. It does not follow on that HSBC will be taking advantage of them. I personally think that this is a period when the American financial services is going through a period of consolidation. It has a unique financial system, a highly fragmented one, still 9,000 over banks there. I think that consolidation process will continue in just the same way as new banks are formed every year in America and some banks depart the scene. We are hard at work on Household. I cannot say here that we will do nothing in America, but I can say we have nothing to comment on specifically. It was a very general question that was handed to me by the media, to which I made a very general response. It's been edited quite [indiscernible].

If you did not understand my response, I did not understand your question. It is complicated and I think [indiscernible] on the benchmark. Clearly where we will be in about three years time is everything will sort of substantially amortize away and we will be with a business that will have a funding structure, a funding basis which will be equivalent to Citi or Wells or the major competitors in that marketplace. We will have at least as integrated a distribution channel as our major competitors and therefore the shape of our business will give us the ability to compete in equal terms, both in product design and our ability to fund them profitably with that marketplace. That was the position that they were not in as the market moved away from consumer finance companies.

How we used that opportunity, either to point ourselves at higher margin, higher risk paper, because we believe we have ways of managing it more profitably than everybody else is one possibility, albeit we will look like the others and compete on attracting a larger share of that marketplace in volume terms. I think the way to look at it is in three or four years time we will have as good a funding base as anyone else in America, pointing at that base and we have got the technology particularly in the marketing technology to originate customers in segments which are difficult to access through traditional bank channels where [indiscernible] in that way. That is the way to look at Household.

One addendum that we will have surplus liquidity from other parts of the Group in Household that may not necessarily be true of the other names that Douglas mentions and the propensity to grow that is still there. We are at $14b but we believe we can grow that, but I should not leave you with the impression that all of the funding will come, it will not. It would be reasonable to expect up to 25% of their funding to be coming over a period of time from surplus liquidity elsewhere in HSBC.

Could I come back to Mexico and I have a question of detail I am afraid. In the first-half of this year the cash [PBT] from Mexico was $273m, which rose to $532m for the full-year. Looking at, which was projected to a similar run rate in the second-half versus the first-half, looking at the Mexican GAAP which we have done in the past, there is a large difference between the GAAP figures that you report and the Mexican GAAP figures and a large area of the difference comes from the provision line. I wonder if you could help us by briefly explaining this large difference [indiscernible] contributors to the growth of [PBT]?

It is pretty straightforward. In Mexico, many of the banks provide on the basis of the regulatory minimum. As the banking system has recovered or is recovering from the [indiscernible] crisis and so on, you did not have the capital, you do not provide more than you need to because you do not. Clearly when we bought or the capital injection that we made into the bank was to enable it to bring its provisioning up to the way we would look at it which is to write-off anything that is impaired rather than amortized.

Therefore, you have still got amortization of delinquent credits coming through local GAAP numbers in line with the rest of the industry apart from the other foreign banks. Although if you look at all the foreign banks, their Mexican GAAP statements are similar [indiscernible] very different. So the amortization in Mexican GAAP of historic problems which we have dealt with as part of taking on the bank and injecting capital into it and putting it on to an international basis. That is the difference.

Morgan Stanley. In the trading statement in December you talked about the Group enjoying levels of commercial bad debt, which were historically very low, and I wondered if you could give us an update on what you feel the risk tendency for the Group might now be?

I think we would certainly continue to say that the commercial sector has been particularly good in 2003. We still benefit from quite good recoveries, particularly in the rest of the Asia Pacific which will be coming to an end on the basis that fill, if you like the collection of accounts that went wrong in 1998, 1999 on the back of the Asian crisis which have been in restructuring. We have restructured and we have got some money back and that benefits the net charge.

You ultimately end up having emptied that box because you move on. I think that all businesses have done remarkably well through this period, better management and better financial organization and I do not think we would pretend that we can continue at this level. I find it very difficult to give out what the tendency is because we have actually had three or four years of really very good performance. It is very similar now to personal lending and it is really a reflection of unemployment. Small businesses are really just personal lending in a different guise. As long as unemployment stays low and interest rates stay low, I think we will maybe have a better performance that we might have expected a few years ago. I do not think we can stay as low and we do not expect to stay as low as we've been in the last couple of years.

We are moving towards credit scoring in this area progressively across the Group, which should improve the performance.

Your comment in your outlook about property prices to rise only in line with income. I guess you are referring to the UK over the last few years in that comment? Are you modifying or changing your behavior in the UK in the mortgage banking area because you are concerned about a bubble in the UK house prices?

That was not quite what we were saying. We are saying over the long haul there has to be some strong correlation between incomes and property prices. I think what we told you here is that we are probably more conservative than the industry average. 80% of our mortgage books is with clients who are already clients of HSBC Bank plc and our loan to value rates are still ranging in the 64%, 65% area.

I think that is right. We are relatively light as a proportion of our business in first-time mortgages which I think there could be strain in. We do not do any significant amount of buy-to-let. We do not originate through other people. It is very much bringing in-house into the relationship that we have with people with their current and savings accounts the mortgage that they have elsewhere because our price is better. We have been increasingly successful in doing that and we would expect to be able to build on that business.

And we re-price the back book, which is not a universal practice. Any other questions? If not, could I thank you all very much indeed for your interest in HSBC. Very nice to have you with us. Thank you.