滙豐控股 (HSBC) 2004 Q4 法說會逐字稿

I'm John Bond, the Group Chairman of HSBC. Douglas Flint, my colleague, the Group Finance Director, I'm sure needs no introduction. And in the front row are Alan Jebson, our Group Chief Operating Officer; Michael Geoghegan, Chief Executive for HSBC Bank plc, and a number of my other senior HSBC colleagues. And I'm also delighted to welcome 5 non-executive directors - Sir Brian Moffat, Sir John Kemp-Welsh, Sharon Hintze, Sir Brian Williamson and Sir Mark Moody-Stuart, and by James Hughes-Hallett, who is going to join our Board on March 1.

Before we start the presentation, I'd draw your attention to the cautionary words on forward-looking statements on the screen. This is to comply with the regulatory environment. And can I please ask that you turn off your mobile phones or your blackberries during the briefing. And also can I remind you that at hsbc.com you can find the news release, the slide presentation, our Annual Report and Accounts, which includes the information which we filed on form 20-F.

Let me run through the headline figures; as we judge ourselves on cash return on cash invested, we focus internally on profitability excluding goodwill amortization. Operating profit before provisions was up 24% to US$24.7b. Pre-tax profit was up 35% to US$19.4b. Profit attributable to shareholders was up 32% to US$13.7b. Earnings per share increased 26% to US$1.25.

The Board has declared a fourth interim dividend of US$0.27, in line with the program announced with our 2003 results, bringing the total declared dividend to date to US$0.66, an increase of 10% against the dividend declared at the same stage last year. Our capital ratios remain strong, with Tier 1 ratio at 8.9%, unchanged from the end of 2003.

This slide illustrates the movement in pre-tax profit over the year, and it highlights the contribution of underlying growth. Pre-tax profit increased by just over US$5b; of this, US$530m arose from foreign exchange translation. Household's additional first quarter contribution in 2004 added US$1.1b and the Bank of Bermuda and other acquisitions and disposals contributed US$224m. Our existing businesses added US$3.2b, of which US$1.3b arose from lower provision requirements.

Our key achievements in 2004 can be summarized as follows. A solid performance produced record earnings for the Group. Our earnings growth was well diversified across all our main geographical regions and customer groups, all of which achieved record results. A broadly favorable economic environment required a lower level of provisions, and it allowed us to recover certain provisions which we'd made previously.

We completed the integration of a major consumer finance business in the United States, and a large commercial bank in Mexico; 2 of the most important and successful acquisitions in our history. In addition, we've strengthened the foundations for our future development in Mainland China. 2004 was also a year of substantial investment in our established businesses, and recognition of the HSBC brand continued to grow.

This slide shows how the composition of the Group's profits has rebalanced significantly since 2000 towards personal customers, who now contribute 50% of the Group total, up from 35% in the year 2000. In the first year of our Managing for Growth strategy, growth has been generated in all our businesses, as this slide shows.

This slide shows some examples of growth in individual product and service lines over the 4-year period from 2000 to 2004, in which the compound annual growth rate for earnings per share, excluding goodwill amortization, was 12% and for dividends per share 11%.

Most notably our cards in force grew at an annual compound rate of 69%, helped of course by the acquisition of Household, which together with strong growth in Asia has made us a global player in cards. We're now ranked in the top 6 worldwide. We're also ranked in the top 3 in store cards, having been nowhere before.

In our global markets business, foreign exchange dealing profits grew by 17% compound average growth rate. And the Group's insurance business has been a significant contributor to overall profit growth, and has generated a growth in insurance premiums of 24% compound average growth.

In Hong Kong, part of the success in the growth of commission income in personal financial services reflects the strong growth in unit trust sales, which grew by 43% compound average growth over the period. Our custody assets have grown by 16% compound annual growth rate, while assets under administration, transformed by the acquisition of Bank of Bermuda, has grown at over 55% compound average growth rate. Assets under administration now exceed US$600b.

Now let me take you briefly through each customer segment. In personal financial services pre-tax profit, excluding goodwill amortization, increased by 34% to US$5.4b. In constant currency terms and excluding acquisitions, the increase was 27%. In the U.K. our investment in the business in recent years has resulted in growth in market share in the key product areas of mortgages, cards and personal unsecured lending. Our productivity in the U.K. has also improved, with a reduction in the cost income ratio from 64.2% to 58%.

In Hong Kong we grew fee income by 27%, on the back of strong growth across a broad range of products and services. Consistently low Hong Kong dollar interest rates and a flat yield curve contributed to an 8% fall in net interest income, compared with 2003. But improving trends in the second half saw net interest income rise 9%, compared with the first half. Encouragingly, this is the first half-on-half increase since the first half of 2001.

The success in the rest of Asia Pacific continued through into the second half, with profits for the year more than double those of 2003. In Mexico, targeted growth in low-cost deposits and in consumer loans contributed strongly to the growth in net interest income in North America. In consumer finance, pre-tax profit excluding goodwill amortization and with a full year's contribution from Household, was US$3.7b, an increase of 65%. On a constant currency basis and adjusting for the additional quarter from Household, the increase was 13%.

We've now completed the integration of this business. We continue to grow our consumer finance business, with a year-on-year growth in customer loans of 18%, with an increased emphasis on the near prime market. Credit quality indicators improved during the year across all products. The benefit of volume growth was mostly offset by pressure on margins, and we'll come back to this later.

There was also the one-off adjustment to profit caused by different account management practices, as we transferred the private label card portfolio from Household to HSBC Bank in the United States. This resulted in a one-off charge of US$154m, which was in line with our estimate when we announced the acquisition of Household in 2003.

Leveraging the consumer finance expertise in the Group has enabled us to use the scale of the global cards technology platform to accelerate growth in emerging markets. Also to acquire Marks & Spencer's financial services business in the United Kingdom, and to grow our consumer finance business in Mexico and Brazil.

Turning to commercial banking, pre-tax profit excluding goodwill amortization was US$4.2b, an increase of 32%. In constant currency terms and excluding acquisitions, the increase was 24%. The results benefited from good revenue growth underpinned by a strong increase of 26% in customer lending, a 24% increase in customer deposits, together with improved productivity and lower credit costs.

During the year, we launched our global relationship management proposition, catering for clients with international operations within the commercial customer base. Revenue growth was generated by improved segmentation of the customer base, the launch of new packaged products, and the refocusing and expansion of commercial centers.

The Group's new e-banking platform for middle market and corporate clients, HSBCnet, has been rolled out to customers in 30 countries. The strength of our Internet banking proposition was reflected in the 43% increase in customers using the service. The bad debt charge was lower than in 2003, with net releases in bad debt provisions in Hong Kong and a lower charge in North America, due to the favorable economic environment.

Our pre-tax profit, excluding goodwill amortization, for our corporate, investment banking and markets business was US$5.2b, an increase of 17%. On a constant currency basis and excluding acquisitions, the increase was 11%. In 2004, substantial progress was made in realigning the CIBM business and establishing multi-disciplinary global client service teams. The planned investment program is on track. We have recruited nearly 2,000 people and 1,455 people have left the organization.

Against the backdrop of difficult market conditions, global markets maintained strong business momentum. Global transaction banking had a strong year, aided by the launch of our proprietary Internet banking service, HSBCnet, by the introduction of our integrated payables and receivables service in Asia, and by strong earnings from our securities services business.

The restructuring of global investment banking has resulted in significant advisory and financing roles with global clients, such as the US$17b reverse acquisition of LNM Holdings by Ispat International, to form Mittal Steel. The improved economic environment and the increased corporate restructuring activity resulted in a net release of provisions.

Pre-tax profit for private banking, excluding goodwill amortization, grew to US$693m, an increase of 23%. On a constant currency basis, excluding acquisitions and business transfers, the increase was 21%. Income grew 3 times as fast as costs. The lending book grew strongly as clients sought to leverage their investments in low interest environments.

The integration of the Bank of Bermuda's private banking operation is largely complete, and has strengthened the private trust capabilities of the Group. We expanded our onshore private banking operations and we completed the integration of 4 French private banks. Since the Republic acquisition in 1999, the business has developed substantially and is now the fourth ranked private bank globally.

The unique balance of HSBC's profits by geographic region is shown here. In 2004 Europe, Asia and North America all made similar contributions. The Group has changed its geographic profile in the last 4 years. In 2000, the Group's profits were dominated by Asia and Europe. All regions grew profits in 2004. This slide shows the broad range of countries from which the Group's pre-tax profits derive. Over the last 6 years, this range has been increased with the significant additions of Mexico, France, Malta, Turkey and Bermuda.

Let me now hand you over to Douglas, who'll take you through some of the detail.

Thank you John. This slide shows the underlying growth for the Group. Reading from the left, we've adjusted for the impact of the additional quarter for Household, by taking out the first quarter figures for 2004, and then adjusted for the impact of other acquisitions, principally Bank of Bermuda and Losango in Brazil. After restating last year to a constant currency basis, you can see that underlying operating profit growth is 6.5%. This reflects the benefits of our investments in fee and commission income-generating businesses.

We have also continued to invest in our established businesses, reflected in cost growth of 8.5%. Historically, as we're all aware now, HSBC's results have shown a degree of seasonality, typically characterized by a slightly stronger first half than second half. These 2 graphs show this, at both the pre-provision level and at the attributable level, and expressed on a per share basis. This chart also shows that year-on-year trends for each half are generally stronger. I'd now like to turn to the rates of growth in income and costs for our PFS businesses.

In Europe, we grew revenues by 13.7% and held cost growth to 3.7%. Income continued to grow at a faster rate than costs, when looking at the second half compared to the first.

For Hong Kong, the outcome for the year, where income growth was marginally lower than cost growth, was a marked improvement on the position at the half-year, when cost growth was significantly higher than income growth. This change reflected the improved position in net interest income, as the pressure on margins began to ease. And the recent rise in Hong Kong dollar interest rates and in loan demand are encouraging signs for 2005. However, the market will continue to be affected by macroeconomic issues, including the strength of the U.S. economy and the success of the Chinese authorities in engineering a cooling of the investment boom in Mainland China.

In the rest of Asia Pacific, income grew by 23.4% against cost growth of 15.1%. We increased marketing activity and we added sales staff to deliver strong growth in mortgage and credit card balances, and in investment products. In North America, income growth was 13.7% against cost growth of 11.7%. And in particular, Mexico delivered strong growth in consumer lending, in customer deposits, in pension fund business, with commensurate cost growth to support the business activity.

Turning to commercial banking - income growth was ahead of cost growth in all regions. In Europe, there was strong growth in both lending and deposit gathering in the United Kingdom, and credit card fee income also recorded strong growth. Cost growth, at 2%, was substantially lower than the income growth at 10%, and was helped by lower staff costs in the U.K.

In Hong Kong, revenue growth of 14% was nearly double that of cost growth of 7%. Income growth benefited from the investment in relationship managers and business banking centers, and from a significant rise in trade finance activity, and from demand for our broader range of commercial wealth management products. In the rest of Asia Pacific, the higher levels of income were driven by growth in international trade.

In North America, increased lending balances and commercial deposits generated revenue growth, and a substantial fall in costs reflected to the disposal of businesses in 2003.

Turning to our corporate investment banking and markets businesses, which we have been restructuring and expanding, this slide shows the change in income and costs. The growth in income was constrained by the impact of lower interest rates affecting yields on the investment of the Group's liquidity, and this contributed to the $318m decline in net interest income.

This was, however, more than compensated by growth in other operating income of $583m, which represented 11% growth over 2003, adjusted for constant currency and for acquisition. On costs, with the underlying increase of $744m, slightly under half was directed towards the planned expansion of our capabilities in corporate advisory services, sector relationship management, equity sales and trading in asset-backed securities, and in research.

And the remaining increase in costs related to the continuing build-up of our derivatives capabilities, the improvement of our operating infrastructure, and higher related staff costs related to business growth and profitability.

You can see from this slide that the investment in people has been broadly based across the different products and service areas within CIBM, together with strengthening support platforms. This investment has also covered our many geographies within the global markets area, and we have also restructured the global equities business to implement a more focused and cost-effective operating model. The investment in key senior management is now largely complete. In 2005 we will see the consequential build up of support and technology cost.

This slide shows the profit contributions from each product and service line. Our business is broadly based. This reflects the range of financial services that our corporate and institutional customer base requires, and generates a comparatively low level of volatility in customer-driven earnings. And the familiar slide of the daily distribution of market risk revenues shows that revenues remain concentrated in a similar range to previous years.

Dealing profits continued to account for what we regard as an acceptable proportion of total income, amounting to just over 5%. Foreign exchange profits, which were near an all-time high, accounted for 70% of all dealing profits. I'd now like to look at credit quality.

HSBC's risk profile has changed significantly over the last 4 years, with lending to the personal customer base now standing at 56.8% of advances, compared to 39% in 2000. Growth in lending in 2004 was 18% on a constant currency basis, excluding acquisitions and lending to financial institutions. Residential mortgage lending increased by 30%, and there was good growth in other personal lending of 13%. There was a notable pick up in corporate and commercial lending, particularly the commercial sector, which was 14%.

The Group's charge for bad and doubtful debts was 104 basis points, down from 125 basis points. Household bad debt charge fell by 96 basis points to 425 basis points, reflecting the strength of the U.S. economic recovery, increasing employment, and a more conservative positioning of the loan portfolio. Excluding the impact of Household, the charge was only 19 basis points, which clearly continues to be low in historical terms and reflects the improved economic climate.

Excluding Household, the rate of new provisioning improved over 2003. Corporate credit quality remains highly favorable compared with historic trends. Improved sentiment resulted in corporate restructuring and refinancing, and this allowed us to recover provisions made previously. Related specific and general provisions were US$1.7b, which is US$540m higher than in 2003, and recoveries were US$435m, $132m higher.

This helped reduce the net charge by US$680m. The improved economic climate also had favorable impact in credit quality trends, which was reflected in lower delinquency and loss statistics, particularly in the United States and in Hong Kong. If we look at a longer historical perspective, and again excluding Household, there has been a steadily improving trend in credit quality, as shown by the declining level of new specific provisioning as a percentage of average advances.

If we turn to credit quality in Household, both the charge-off rate and the delinquency rate show improving trends. The decline in the risk-adjusted revenue margin reflects a combination of the lagged impact of charge offs, relating to business written some time ago, and pressure on net interest margins, particularly as a result of a move to more secured lending.

We have completed the integration of Household with HSBC. 2004 was a record year, with pre-tax profits of US$3.7b, and this represented a return on investment at an attributable level of 18%. We generated strong momentum in volume growth of 18% in 2004, and we expect this momentum to continue. Several factors have contributed to a contraction of net interest margin.

There has been market pricing pressure, which has been the most important factor, particularly in the real estate secure portfolio. There has also been pressure experienced in personal unsecured lending, and also loan portfolios. And it's worth noting that personal unsecured lending, although static in dollar terms, is a lower proportion of the portfolio and therefore there is a mix effect. Funding costs increased with rising interest rates, and the change in the loan mix again accounted for a modest element in the decline.

The risk-adjusted return is stabilizing, and an improving U.S. economy should improve it -- should provide opportunities to rebalance the loan mix. The transfer of Household's consumer finance skills to other parts of HSBC is continuing to prove very valuable.

Looking at operating margin for the Group on a risk-adjusted basis, the Group's profitability improved from 2.55% in 2003 to 2.75% in 2004, reflecting a full year's contribution from Household and an improved credit environment. Let me now hand you back to John.

Thanks Douglas. I'd like to update you on our progress during 2004, in building further our platform for growth in China - one of the world's fastest growing economies, and where we've had a continuous presence since we were founded in 1865. In 2004 we invested US$1.7b to acquire a 19.9% stake in Bank of Communications, China's fifth largest bank with 2,700 branches.

We invested a further US$168m to maintain our 9.99% stake in Ping An Insurance, and Hang Seng Bank invested US$208m to acquire a 15.98% stake in Industrial Bank. Combined with our 8% stake in Bank of Shanghai and the steady expansion of our own proprietary branch network in Mainland China, these investments are laying the foundations for our future in a country that may be within a few decades the largest economy in the world.

We continue to invest in the HSBC brand. During 2004 Household International became HSBC Finance Corporation, and in France CCF will adopt the HSBC name for much of its operations later this year. Recognition for our brand continues to grow. According to Interbrand, the HSBC brand is the 33rd most valuable in the world and the first among British based-companies. We were delighted to receive a number of awards last year, including being named Global Bank of the Year for the third year running by the Banker magazine.

Managing for Growth, 1 year on, is on track. I'd like to say a few words about the outlook for 2005. The continuing growth in the United States' economy is encouraging, given the scale of our consumer-facing businesses in U.S.A. As world trade continues to grow and the world seeks higher investment returns, we expect emerging markets to be increasingly important to HSBC in generating profitable growth in the future, and we're positioning our business accordingly.

We continue to position HSBC to withstand any sudden economic volatility, as well as to respond to opportunities for profitable growth. In 2005, our prime areas of focus will be to leverage the Group's considerable expertise in cards, consumer finance, and funds administration internationally. We will also concentrate on building our investments in businesses in the emerging markets of China, India, Brazil and Mexico, which all have good growth prospects for the future.

We'll complete the restructuring of our corporate investment banking and markets business, and we'll also focus on achieving further revenue growth and improvements in productivity. Finally, we plan to pursue organic growth opportunities in Korea - a country which has strong growth potential for financial services. We believe that direct investment in Korea offers greater potential returns than those that are available by acquisition at today's prices.

Now we'd be very happy to answer any questions. Could I ask you to wait until the roving microphone reaches you, so that we can hear your questions, and it would be helpful if you could identify yourself. And if time permits, we will also take some questions by email. Usual format - difficult ones for Douglas, easy ones for me, please.

Any questions?

Yes. It's Nick Lord from Deutsche Bank. A couple of questions actually related probably more to the interest rate environment that we saw in 2004. First of all, could you maybe talk about what your thoughts are for the environment in Hong Kong, especially in 2005? And whether you think you can see margins recover for HSBC in Hong Kong in'05?

And secondly, if you could maybe talk about how much of the very strong dealing profits you saw in 2004, were dependent upon low interest rates, and how sustainable those are going forward?

Why don't I take the first part and pass the second to Douglas? There's been quite a strong rise in inter-bank rates in Hong Kong over the first early part of this year. There was a period towards the end of last year, when there was a massive inflow of liquidity, which we think was probably related to the Renminbi and other issues outside Hong Kong's control.

I think logically you'd expect, with the linked currency regime, the interest rates in Hong Kong to follow very closely those in U.S.A. And the signs are that that is in the process of happening in Hong Kong, and all of that is positive for our margins.

In terms of the dealing profit, the interest from the bond element was modest. Indeed it was $50m -- $49m profit on desk securities trading, and what drove dealing profits was foreign exchange and derivatives. Those 2 areas that we have been investing fairly consistently over the last couple of years, and extending the reach that we have geographically to customers and in the products that we have, and both of them had record years.

So I think that that shows 2 things. 1, the ability to turn investment into profitability, and the fact that it's not positioned on interest rates on the bond portfolios. It's a very broadly based, customer business that's a very broadly risk-taking business, and it's spread across derivatives, foreign exchange, and bonds. But the most important are derivatives and foreign exchange, with foreign exchange by far the most important.

Thank you very much.

Thanks. It's Alistair Ryan at UBS. Just a question on the dividend. 10% growth on the back of 30% growth in earnings per share seems quite modest, given the Group's capital strength. Are you telling us in particular about your concerns on the world outlook, or opportunities on your own growth outlook?

I don't think you should read any of those messages into it. I think HSBC is committed to a progressive dividend policy. We aim to increase it each year. We've always said 60% is the payout ratio around which we're comfortable, sometimes it will be slightly over that, sometimes it'll be slightly under. This year it's slightly under.

I think the 1 thing I would say in relation to the numbers, Alistair, is that clearly the bad debt charge this year had an element of reversal. The general provision had an element of recovery, particularly in the corporate bank, net -- large net recoveries which are unsustainable in terms of a benchmark basis. So that high headline growth in earnings has an element of windfall from the credit environment, which one certainly wouldn't want to reflect in the base.

I think the other thing that is also true is that we are seeing probably more opportunity to invest capital organically, than we've seen for some time, and that's in our mind when we think of a level of sustainable dividend, or a plan for sustainable dividend.

Good morning. It's Simon Samuels of Citigroup Smith Barney. Got 3 questions actually. The first is a bit of a spreadsheet thing, completion exercise which I guess, therefore, is probably for Douglas. I'm looking at page 30 of the earnings release, within the very detailed breakdown of fees and commissions, receivable and payable.

The glamorously titled 'Other' line at the very bottom - $1.5b of revenues in the full year - was running about half, well, $500m at the half year stage, $1b in the second half. I just wanted to know if there's anything unusual that basically saw that line double from $500m to $1b from the first and second half of the year? And there's 2 separate questions as well.

We keep trying -- In fact, you will notice that we keep in fact breaking down this further and further and further, and we end up with an ultimately large 'Other' even after we do that. It tends to be a ragbag of bits and pieces, and some of the insurance streams and so on. I don't think there's anything to note except that, yes, there are elements of one-off - type of fees and commissions - but there always there in different guises. So I don't think there's anything special to note, no.

Thank you, and --

Except ragbag.

Ragbag is very [inaudible - over speaking] profit.

Right. The second question is, just maybe you can just flesh out a little bit the comments on the corporate banking division, in terms of what's left to go on the cost side? This time 6 months ago, at the half-year stage, you spoke about 90% of the senior hires being largely complete. I think in the commentary today you're talking about the senior managers being largely complete again.

But there's a comment that was volunteered about the back-office and the IT side for '05. So what I'm really trying to get a sense is what cost growth for the corporate banking division we should be expecting for '05?

Douglas is in charge of cost. Actually I'm responsible for them.

I think you continue -- I think that the -- a large element of the investment has been made, but there will be a continuing significant but lesser in proportion terms growth. And it will depend on how well the business is doing. The plans for this year envisage, in fact, require us to put in place the technology platforms an the back-office support, to control the revenue generation that we've recruited to deliver and there's no cutting back on that.

But other aspects of growth will depend on how well the business is doing. So, I think you can continue to see costs grow, probably a little bit ahead of revenues this year. Hopefully we'll be -- do better than that but it will be commensurate with the scale of our business.

Okay. And then the last question which is -- and your license to [indiscernible] bond. Just on the Group cost income ratio growth for '05, in your outlook statement you talk about improving productivity for '05. Do you expect that to translate into a lower Group cost income ratio for '05?

Well, we work continuously, year-on-year, on our productivity but there are some years where we have investment costs that go through the cost line. We've been investing in the Asia-Pacific region outside Hong Kong. We've been investing, as you know, in our CIBM business. But I think the overall mission statement for HSBC is to improve its productivity, but we won't shy away from any internal investment opportunities that we see which would go through the cost line.

And I think you're beginning to see some of the benefit of initiatives and investments, that were made through the cost line in prior years, in improving the efficiency within the PFS and the commercial banking businesses. There have been questions in this room historically, as to what we could do to bring those down. And I think in 2004 you've seen some very strong evidence that historic steps, restructuring to refocusing on the business, have proved in 2004 to be very successful and powerfully so.

Good morning, John-Paul Crutchley from Merrill Lynch. 2 questions, please. The first 1 relates to slide 17, where you talk about the underlying growth, whatever is lined out there, the various aspects of that. The first question really is, if you ignore clearly the windfall element which came from the bad debt line, the operating profit growth was about 6.5%. I really just wanted to ask you a question on that number, in the context of your Managing for Growth Strategy.

Is that a number with which you're comfortable, or do you aspire for that to be better long-term? And just give us a feel of how you feel the business can achieve more or less than that?

The word windfall's emotive.

That's obviously a blend, and we put up the slide that showed the PFS business and the commercial banking business were doing significantly better than that. And think that those are at the core of the generation of profitability, that's allowing us to afford the investment in building out our wholesale, or elements of our wholesale business.

So I think you've got to look at it on a customer sector by customer sector. Within that 6.5% figure are significantly higher figures than in the other customer groups, and we're taking the opportunity to use that profit generation to invest in CIBM, and in 2 years time will reflect where that's got us to. But I think you've got to look at it customer group by customer group.

But if you remember when we sat here last year, we were focused on that 4% revenue and costs, so the half year we were 8%, we're now 7.5%, 8% for the whole year. That's close to double the generation of revenue that we were a year ago, and I think that is a reflection of success in the Managing for Growth strategy.

The second question was actually about CIBM. I just really wanted to get a gauge of where you feel you are, in terms of the overall rollout of that business. Because, if you're being somewhat cynical, you say at this stage of the game you've managed to up the cost income ratio and bring the operating profit down, virtually to where you were last year.

And I was just intrigued as to how you perceive that, and whether you are -- where you anticipate to be at this stage.

I think we are where we expect to be. If you're saying we're at the stage where we've made the investment and we've yet to see the return, of course, we are. That's where we would expect to be, and I think we point to the fact that, certainly in the markets business where we have got a longer track record, we have consistently invested in people. We've invested in product. We've invested in geographic expansion, and that investment has been funded by the business, and then grow profits in the future.

We intend to do the same again. We are in an investment phase; this is the stage we're in. Where broadly where we expect to be, and we'll keep tracking progress and keep having this discussion.

Robert Law of Lehman. Can I explore 2 areas, please? Firstly Hong Kong and also then North America. On Hong Kong, can I ask what it would take to get net interest income to start to move forwards? Is an improvement in short rates sufficient? Can you quantify the sensitivity to short-term interest rates, and I'm looking at the table you give on page 171, which suggests that 100 basis points only improves net interest income by about $74m?

And secondly, in terms of North America, that was quite disappointing, certainly by my numbers. Can you comment on what the reason for the cost growth in the second half of the year was? And do the management changes imply any change of strategy for North America?

I think the interest rates sensitivity - there's 2 things that matter. Clearly the level of interest rates in the short-term is part of it, because if -- because we have a lot of liquidity in Hong Kong. And at the moment, in anticipation of rising rates, we are relatively short on the duration of our liquidity.

We need a -- We benefit from a positive yield curve, and if the Hong Kong dollar rates were to come back to close to, or even reach U.S. rates, it would be positive to the value of our deposit base in Hong Kong. As we've said historically, we've had 2 impacts on the value of those deposits. 1, as rates have come down, they've been worth less and as we've effectively not wanted to walk in at those rates, and have gone shorter there's been a second impact as well.

I think the table on page 171 - congratulations for getting that far - only another 100 or something, 200 to go.

I did skip a bit.

It's broadly indicative, right? We always put the caveat in there that this assumes we don't do anything and manage it, and clearly we do. But a Hong Kong dollar yield curve, if you looked at the U.S. yield curve, would be very positive and that's why we drew attention to the fact that the fittest half was the first half. 1 swallow does not a summer make but it was the first half we'd seen net interest income growth in Hong Kong. The second part of the question I've forgotten now because I --

North America.

Yes. Part of this is the margin equation, in the sense that cost as a proportion of the size of the book haven't moved that much but the book -- So the costs are going up with volume but the yields are coming down on much of the production that we're doing, because it's been in real estate secured.

There's also been some mix in the contractual arrangements we have in some of the affiliate cards, where we are picking up a higher proportion of the costs, in return for -- There's a switch between margin and cost, in terms of the way that the spoils get split between Household and some of the affiliate cards that they do. So it's geography in the P&L.

I think all of these elements are part of a general comment that over the last 2 years, particularly in real estate secured, there has been great pressure in yields, because it's been the 1 asset in the United States that has had growth opportunities. And there have been more people in that marketplace and pricing has come down. It's really a reflection of that single thing, and the question is whether that continues in the future.

I think the positives for this year are that housing markets are not as buoyant as they were, and therefore refinancing is considerably lower, certainly as rates are rising. A growing U.S. economy and improving employment is good for the model that Household, but it's very early days in 2005.

As to the final part of your question, Bill Angelis(ph) leaves on the back of a record year for Household. Its record year prior to that was 2001 when I think it made about $1.9b, it made $12.7b. He leaves having completed the integration in 2 years, when we sat down and reflected on it we thought it would take 3. So, as you can imagine, he goes with our good wishes.

Thank you. Simon Maughan at Dresdner. On page 36, you have the disclosure on specific provisions, and here the gross new provision has risen, I think, just over 15% and obviously customer loans and advances have risen much faster than that. There is, however, a pick up in the half-on-half gross new provision, and my question is a general one. Do you think now we've seen the best of the credit quality in your businesses globally, and we should perhaps expect gross new specific provisioning to be in line with asset growth going forward?

Part of the change in provisions is having Household in for a full 4 quarters as opposed to 3, which is effecting 1 of the numbers. You look at the graph of where new provisions have gone in those nice little red barrels there, it can only go so much further down. I think you'd have to say that 2004 was a very favorable credit environment, otherwise clearly we wouldn't have been releasing general provisions. This is an organization that doesn't like doing that very much. Douglas?

Certainly in the corporate world, it's difficult to imagine that we can continue to have, a, as favorable conditions and as much benefit from recoveries and releases. For no other reason than we've not been adding as much into the pot in the last couple of years, because the environment has been relatively favorable. I think that putting Household to one side, we've also done a focused and targeted growth in personal lending around the world.

Doing much more credit cards in Asia, doing more personal lending in this country, more credit cards in this country, and there is an element of mix that's moving new provisioning requirements in the personal sector up. And I think it's also fair to say, that there is evidence in the U.K. of a deterioration in bankruptcy and delinquency statistics. Manageable within the margin but there's no question that there is -- it's not as good as it was 18 months ago to a year ago.

So I think - long answer to your question - I think that we will begin to see new provisioning requirements rise.

We have done, as we tried to show you, made a strategic move towards more personal lending. If you look at it, it's much more noticeable over the 4-year period which we showed for you, and that's for a number of reasons. The private consumption expenditure is two-thirds of most major Western economies. So sitting astride that part of the economy makes sense.

It's a business where you have scored lending. Historically most of the surprises on our credit portfolio have come from major corporates, and this is a more predictable but higher level of charge-offs. So part of it has been the strategic repositioning of the loan portfolio, which we've done deliberately over the past 4 years.

Good morning. It's Ian Smillie from ABN Amro. It looks like that business on the finance business in North America went down 28%, in the second half over the first half. Could you give us a guide as to how much that might be seasonal, and how much it's rebasing to a lower level? And just on that second point, could you give us an update on how into Q4 looks actually with Q3, please?

I think you'll find that what we've been doing is transferring businesses, between Household and HSBC Bank U.S.A. We've moved the store card business in from Household into HSBC Bank U.S.A., for funding reasons and a number of other reasons. And I think if you look back, our desktop analysis over the past 10 years will show you historically consumer finance has probably grown faster than commercial banking, the normal banking system, in U.S.A.

That's looking at the broad sweep of the past 10 years but Douglas do you want to?

I think that, first of all, Q1 and Q2 had exceptional credit experience in the sense that, because the forward indicators of loss were reflecting significantly less expectation of loss, there was provision recovery in the first 2 quarters. That did not repeat, and indeed then the general provision began to build up again, as this began to grow.

So you get this phenomenon at the turning points, where you've been growing provisions ahead of your charge-offs because of bad times. Bad times disappear, and you begin to drop back then to charge-offs pretty much equaling the provisioning charge. We had the benefit of the draw down of general provision in Q1 and Q1, which did not repeat. And in Q3 and Q4, as the bit got larger, you had just the scored provisioning coming through of a larger portfolio.

I think the other thing that's -- or it's an important made before, that there has been continuing margin pressure particularly on yield, which is partly mix as we've moved more -- the production has been predominantly in real estate secured, as opposed to unsecured consumer lending. So there's been a mix effect, and indeed within the product there has been lower yield, partly to competition and partly because moving the portfolio more to near prime.

The other thing is the cost of funds have been up. Now, there's 3 reasons for that - rising interest rates are too simplistic. In anticipation of moving the store card business to the bank, the portfolio was essentially funded short, longer than it would have been otherwise, because it would have been more behavioralized.

It was funded short, and of course the benefit of that probably came through in second quarter, and then as it -- as interest rates rose, it was more expensive to fund that. And then it transferred at the end of the year. There's an element to the Group that it was funded short-term anyway, so that got hit with higher interest rates.

And there's this one-time impact that will roll through in the space of a couple of years. In the sense that, when Household was acquired and then it was fair valued, and we all understand that. But 1 of the impacts of that is, not only did we benefit from credit spreads, we benefited from the yield curve. In the sense that if you had -- say you had a 5-year or a 4-year obligation with 18 months to run. You fair valued the residual payments off the 18-month point in the yield curve.

So you've got the benefit of the credit spread reduction, and you've got the benefit of coming down in the yield curve, as you replace what was the figure full year credit or funding. With 3 or 4-year credit you've actually got better at credit spending you had then, but you are actually moving back up the yield curve in terms of funding costs. So that's beginning to roll off, so it all goes together.

But to add that up, it's mostly a rebasing rather than seasonality?

Yes. It's more of a rebasing than seasonality but I wouldn't -- yes, it's more a rebasing than seasonality, but I'd be very nervous about taking any individual quarter, a good one or a bad one, then extrapolating 1 quarter through.

Thank you. It's Tom Rayner at Citigroup Smith Barney. Could I just ask you when, as we move on to IFRS this year, we will see a full restatement of 2004 on the new standards for loan impairment? And the reason I'm asking is, I'm trying to get a sense to whether, I think it's 38 basis points of general provisions we're now at.

Whether this is a level which, moving on to IFRS, will be consistent with the portfolio provisioning number. Or whether implicit in the move, there might be a further net release of these provisions on the balance sheet?

I don't think there'll be much change. I think that there would be virtually no change from where we are today, moving on to IFRS for that particular aspect. We will publish in the second quarter of this year, 2004, numbers rebased or restated to IFRS, with all the intermediate columns so that you can see what's the geography and what's just the different measurement base. But I don't think you'll see a change in the bad debt line.

Thank you.

Mark Thomas of Keefe Bruyette. 2 completely non-related questions. First of all, is there any impact on the risk-adjusted revenue for Household for these transfers? And could you just give an indication of scale just between the inter-Group items.

And secondly, back to corporate and investment banking. Even if we exclude all of the acquisitions, you still have negative draws in an excellent year for dealing revenue. I just wondering if you could actually comment on what you're actually feeling about, even excluding all investment costs having negative jaws?

There's no impact on -- The consumer finances we present in the U.K. accounts reflects the consumer finance business, on the basis of a constant perimeter. So it puts into those results assets that were, on the last day of the year, transferred to the margins in there. The difference on Household [so far] is the way presented is to make a consistent perimeter.

The fact that we had negative draws, reflects the fact that this business so successful. There's an element of close below the line of credit recovery, and people get rewarded as much for that as other things. But also we've been investing in our business. I don't think we're embarrassed or apologetic about the business, excluding the investment spend, having negative draws on the basis that we continue to invest.

And I think, coming back to the record results in foreign exchange and in derivatives, these are directly attributable to investments that perhaps we're not as much focused on, in the 2 years preceding, have generated those results. And we continue to build out in what have been successful areas for us. So it is the fact, yes.

It's Sheila Garrett of Mann Securities. I know you've drawn our attention to seasonality in some of the businesses, but is that the only reason for the nearly $300m drop between H2 and H1 in seasoned commissions in the North American operation?

Yes. 1 of the biggest elements of that is tax refund business in Household, which is entirely a first half business and a very successful and quite a large one. In efforts, it's a H1 business, in fact, it's a Q1 business, and it doesn't repeat in the second half because effectively it's getting tax refunds for people who do their tax prep. So that is the biggest element of that seasonal variant, yes.

The other thing I should of said about the cost income ratio, and forgot, is that there is an element of impact on what is a growing business for us, which is fund administration. Where we're doing an increasing number of lift-outs of the back-offices of fund managers, to do all the administration. And that is a high cost income ratio business, by definition it is effectively doing somebody's back off and getting a margin on costs for dong that for them.

And we've had some very great successes in that business area in 2004, particularly after the integration with Bank of Bermuda.

Peter Toeman from Morgan Stanley. Douglas, you gave us a comment about stabilization in risk-adjusted returns at Household. But I think from a year ago, when HSBC gave a presentation on U.S. prime and sub-prime lenders, the risk -- highest risk adjusted returns are found in sub-prime lenders. And I wondered if this transition continues from sub-prime to prime, in fact we will see more erosion of risk-adjusted returns? Simply because on the basis of the difference in industry profitability between sub-prime and prime?

I think that has to be a true statement. I think of the part comment -- what I've been saying also today is that, we believe that the opportunities to grow the sub-prime part of the book in Household, will be stronger in '05 than they were in '04. Now whether we can capture those opportunities and whether they continue to be as profitable, time will tell. But we think the opportunity to capture sub-prime business will be higher in 2005, because there will be less equity release refinancing alternatives.

I think it's fair to say that Household adjusted their score cards less than they believe others did, in terms of continuing to originate higher yield in paper in '04 and '03. Now the question as to whether that was an opportunity cost because it was still good value stuff, or whether in fact other people went in for than they may feel comfortable with, only time will tell. And I don't know.

But certainly there was a conscious decision not to chase the yield on the sub-prime site. So into areas that Household has historically not felt comfortable with. They believe that the origination opportunities will be broader in '05, and there will be more opportunity to get a higher proportion of sub-prime in the next production for this year. We'll have to wait and see.

There was a question from the Internet which I will --

Neil Davis at Panmure Gordon.

Can we comment on the big increase in dividend income in CIBM? In particular, the profit and loss account lines impact, and whether it will continue to grow? I think basically 1 of the aspects, which I think will be quite pleasing when we move to international accounting standards, is that the CIBM business will be able to present itself pretty much along the lines that it manages itself.

Which is anything within the trading arena will go into trading income, as opposed to being split between technical profit and loss accounts, including dividend income. And what you have in dividend income is arbitrage trading which, in some cases comes as -- you have a funding cost and dividend income, or you have dividend income and a dealing loss, depending on the instruments you're dealing with.

So the geography of the profit and loss account is really split between equity trading dividend, income and net interest income, and you've really got to put them all together to a get meaningful analysis of how the business is doing. When we're not forced to go on to particular P&L lines, then we'll be able to present the business more sensibly. So that number is a not a particularly meaningful number. It's really part of a business that's spread over 3 P&L lines.

It's Simon Samuels, Citigroup. I can't really have a meeting without asking a question of Households.

No. We'd be disappointed.

Work for the outfit that has the biggest business in this area. It's not(ph) surprising.

Not as profitable.

The -- What I'm trying to do actually, before I can even ask the question, is understand whether I've got the analysis right. Which is, if I look at your analysis on your results today on page 44, which is just your analysis by business unit, you've obviously got the consumer finance division reporting a profit of $367m. Now is it reasonable -- At the time of the Household's Q3 results, you very kindly produced a U.K. GAAP numbers for Household for both the first, second and third quarter of '04.

So obviously, assuming that the analysis is valid, can I compare the just reported numbers with that 9-month performance in U.K. GAAP, and therefore derive the fourth quarter number?

Yes.

Okay. The second part of the question though is, that division that you have on page 44, is that the cost line include some of the $154m additional cost of the credit card transfer? Was it seen as you suggested, I think to Ian Smillie?

No. It's clean in the sense that the results of that business are in there, and therefore not in HBOS, but the costs of the adjustment of moving are in there. So the $154m is spread over a number of lines but it's in that number.

Okay. Well, in which case then my question is valid. Because what I've done in my question basically is to derive Q4 from previous filings in the statement here, but also adjust for the $154m that you suggested is right. What it shows basically is, in the fourth quarter of '05 --'04 Household net earnings are down 16%, sequential of course they're down 12% against the fourth quarter of '03. Which is probably the better comparison because of the seasonality of the business.

So I'm just trying to get a sense really of the '05 outlook for a business like Household, in terms of revenue growth, cost growth, credit quality. Because it does feel as though we're now at a new level of base for Household, and I guess that's probably what your answer to Ian's question was. So I just wondered if you could just go into a little bit further, in terms of thinking about the business growth for Household, the cost growth and the credit quality for '05?

Without going to jail. I think -- first again -- As I say again, I wouldn't extrapolate 1 quarter, even a good 1 or a bad 1. I think the trend you noted in the fact was it down on the preceding quarter and the comparable quarter. The answer would be yes.

I think the biggest impacts have been yield in its broadest sense, and part of that has been mix. And I think the answer to your question then is, the extent to which the U.S. economy affords more opportunity to originate more sub-prime paper, than we have been comfortable doing in the last 2 years.

That will have an impact on the yield and on the profitability. To the extent that we can't originate in the space that we feel comfortable with the credit, then we'll be happy with the lower risk adjusted returns, but the more stable returns. I think that some of the funding adjustments that I also referred to in an earlier question, are beginning to wind through.

But the big issue is yield, and I think that you will have noted in many of the U.S. banks announcements that they continue to not yield pressure, particularly in personal lending, particularly in mortgages. And I don't think we can be immune from that.

It's Richard Staite from Soc Gen. You had a very strong loan growth last year - 30% in mortgages, 13% in other personal, 14% in commercial I think. You talked about slowing consumer borrowing, perhaps in a number of countries, going into this year but that obviously doesn't stop you from taking market share. Do you think you can see such strong rate of loan growth over the next year?

Yes, I think there are a number of economies where we can continue to see good growth in lending. We certainly see continuation in the U.S. I think the U.K. plan is based upon continuing, strong origination of personal lending, and that's because we're coming off a low -- lower than, what might be regarded as a natural market share, if that's got anything to do with the size of our current account base.

I think we also -- we differentiate ourselves from many others, in the sense that we're seeing very strong consumer credit and personal credit opportunities in Brazil, in Mexico, in parts of Asia. We're seeing very strong commercial lending opportunities in the Middle East, off the back of the oil revenues that are there. So I think that there are significant opportunities to continue to grow lending profitably, even from where we are today.

I think 1 of the debates we'll have is, to what extent we want to focus that on mortgages, because that is becoming an increasingly expensive space unless we can generate the peripheral income, which we have been successful in doing. But it is becoming ever more competitive. But, yes, I think we can continue to see good asset growth.

Thanks.

It's James Hamilton from WestLB. My question is also on growth. If 2005 is a less buoyant year for global residential property prices, how do you see the prospect of Household actually saving money, particularly in the U.S. by putting cash aside, to generate increase in Household? Rather than just watch the value of their property increase?

And if they do go down this route of saving much more, what is the analysis of the property market? What are the implications for your mortgage business and your consumer credit business?

I think 1 of the factors we noted in the conclusion of the earlier statement, was at -- if at some point the world starts to save more, because it begins to concern itself more with the -- with the possibility for pensions, that clearly will have an impact on GDP growth. We continue to believe that the biggest, and indeed, by far the most important risk to our mortgage business is unemployment rather than interest rates.

So I think that, even if house prices stop rising or even if they fall, even interest rates move even to the range of what the analysts expectations are. I think the impact will be relatively muted, as opposed to what would happen if we saw significant changes in employment. Our mortgage business is entirely geared to employment trends, and I think that will continue to be the most important factor.

You don't think there's a -- I'm less concerned about the credit quantity issue. I appreciate obviously if your customers lose their jobs there, that credit quantity can be impacted on mortgages. Trying -- their willingness to take on additional debt and if they're actually saving money, they're probably not taking on additional loans.

I think we expect there to be a slowdown in the rate of growth of consumer credit, but I think that we're coming off in many markets of such a -- Well, talking on this -- on the Western markets, we're coming off a small market share in U.K. and we think we can do better. But as I said earlier, there are pockets in the world - Mexico, Brazil, Middle East, parts of the Asian(ph) regions - where credit penetration is still very, very, low and the economies, the domestic economies are growing very strongly.

And we think credit demand from an emerging and a very strongly emerging middle class is going to be very, very powerful in those parts of the world.

Okay. Well, time's come for us to draw it to a close. Be happy to entertain questions after the meeting, if anybody has anything left answered. But thank you all very much indeed for your interest in HSBC, and for joining us to day.