滙豐控股 (HSBC) 2005 Q4 法說會逐字稿

Forward-looking statements.

This presentation and the subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations and business of the Group.

These forward-looking statements represent the Group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.

Additional detailed information concerning important factors that could cause actual results to differ materially is available in our annual report.

Good morning ladies and gentlemen and welcome to this briefing on the 2005 results of HSBC Holdings.

I would also like to welcome those investors who are joining us via the internet.

I'm John Bond, the Group Chairman of HSBC.

On the podium is Douglas Flint, our Group Finance Director.

In the front row are Alan Jebson, Group Chief Operating Officer;

Dyfrig John, Chief Executive of HSBC Bank Plc, and of today, congratulations Dyfrig; and a number of my other senior HSBC colleagues.

We're also joined by four non-executive directors;

Sir Brian Moffat, John Coombe, Sharon Hintze and Sir John Kemp-Welch.

Before we start the presentation, I would draw your attention to the cautionary words on looking forward statements showing on the screen.

This is to comply with the regulatory environment.

Could I please ask that you turn off your mobile phones or your BlackBerries during this briefing.

Our 2005 results are the first set of annual results that HSBC has prepared in accordance with the International Financial Reporting Standards, IFRS.

Our 2004 comparative figures are also restated to IFRS, but do not incorporate certain new standards, notably IAS39 on financial instruments, which, under the transition arrangements were not applied until this year for the first time.

Accordingly, the 2004 figures on an individual line basis may not be strictly comparable.

In July last year, we published a document summarizing the principal effects of IFRS on the comparative financial information of 2004, and this document is available on our website, HSBC.com.

Also may I remind you that at HSBC.com, you can find the news release, the slide presentation and our annual report and accounts which includes the information which will be filed on Form 20-F.

Let me run through the headline results.

Net operating income before loan impairment charges was up 12% to $57.6 billion.

Pre-tax profit was up 11% to $21 billion.

Profit attributable to shareholders was up 17% to $15.1 billion.

Earnings per share increased 15% to $1.36.

The Board has declared a fourth interim dividend at $0.31, bringing the total of declared dividend in respect of 2005 to $0.73, an increase of 10.6% against the dividend declared at the same stage last year.

Our capital ratios strengthened with the Tier 1 ratio standing at 9% at the year end, up from 8.9% a year earlier.

Overall, 2005 was a year of sustained progress across the Group's businesses, reflecting our success in growing revenues and improving productivity in line with our managing for growth strategy.

In a year in which we continued to invest in our corporate, investment banking and markets businesses, and in our operations in an emerging market economies, we achieved underlying revenue growth of 12% against cost growth of 9%.

During the course of the year, we attracted new customers, taking our total customer base to over 125 million.

Since 2000, we've more than quadrupled the Group's customer base.

The repositioning of our consumer finance business in the United States to focus increasingly on prime and near-prime customers led to a much better credit experience during the year.

We made strong progress in our businesses in developing markets, particularly in China, India, the Middle East, Mexico, Brazil and Turkey.

The investment phase in the development of our corporate, investment banking and markets business neared completion, and the business is gaining momentum in the areas in which we've invested.

We've also achieved improved results following the restructuring of our private banking, asset management and global equities business.

Whilst our strategy concentrates on organic growth, we have made two significant investments in 2005.

We increased our investments in Bank of Communications and Ping An Insurance to take both stakes to 19.9%, and we acquired Metris in the United States.

We also redeployed some $650 million arising from the sale of non-core businesses.

Our all-round performance has brought impressive returns to our shareholders.

This slide shows dividends per share and total shareholder return over the last 15 years.

We've grown our business while maintaining our capital generation.

Over the last 15 years we've maintained a strong Tier 1 capital ratio.

This slide shows the composition of the Group's earnings by customer groups.

The pattern was similar to 2004, with personal customers accounting for just over half of the Group's pre-tax profits.

Now let me take you briefly through each line of business.

In our personal financial services business, profit before tax increased by 17% to 9.9 billion.

In constant currency terms, and excluding acquisitions, the increase was 15%.

Our consumer finance business in the United States generated strong volume growth and improved its expense management.

Credit experience was good, and notwithstanding the impact of Hurricane Katrina and of higher bankruptcy filings ahead of changes to bankruptcy legislation, impairment charges fell.

The compression of the net interest margin was consistent with the market environment which was affected by rising short-term interest rates.

Underlying risk-adjusted returns stabilized.

In the UK, we improved our productivity.

Our success in growing our customer base, increasing cross sales and controlling costs led to a 23% rise in pre-tax profits on an underlying basis and excluding consumer finance.

Actions taken in response to higher levels of indebtedness in the UK began to have a positive effect during the second part of the year.

In France, we substantially increased the pace of acquisition in our target customer base since the second half of 2005, gaining 1% new customers each month.

In Hong Kong, the strong growth in profits to 27% reflected widening deposit spreads, sales of short-term investment products and controlled cost growth.

In the rest of Asia Pacific, our earlier program of investment in marketing and distribution channels, and in expanding the card base, helped to increase our customer numbers by 22%, generating strong revenue growth.

In Mexico, our liability and asset growth was strong, and credit cards in circulation grew about 80% to over a million.

Our commercial banking business increased pre-tax profits by 22% to $5 billion.

In constant currency terms, and excluding acquisitions, the increase was 19%.

Stronger revenues reflected an expanding customer base which was up by 10% to 2.5 million customers, an increase in customer deposits and lending, and an expansion in the range of products offered to our customers.

These more than offset the lower releases of loan impairment allowances which have benefited our 2004 results.

During the course of the year we segmented our customer base into four; middle market, small and micro businesses to build upon the successful UK and Hong Kong models.

This allowed us to concentrate more sharply on the needs of each specific customer group and help HSBC in the UK attract the highest number of account switchers.

Productivity measures introduced in 2004 benefited our 2005 results in the UK.

Pre-tax profits in commercial banking in the UK rose by 20%.

Investment in small business relationship managers improved small business loan processing and more effective marketing resulted in a significant increase in customer numbers and revenue in Hong Kong, the United States, Brazil and the Middle East.

In North America commercial banking grew strongly, reflecting our expansion out of New York State in the United States, a buoyant economy in Canada, thanks to high natural resource prices, and a strong increase in customer numbers in Mexico as the economy expanded.

Closer regional cooperation in Asia helped us achieve strong growth in the rest of Asia Pacific, on the back of China trade flows and booming markets in the Middle East.

We also recorded a full year contribution from our investments in China, in Bank of Communications, an industrial bank, which are heavily focused on this sector.

In our corporate, investment banking and markets business, pre-tax profits were only marginally lower than in 2004, despite absorbing a $1 million reduction in balance sheet management revenues and $1 billion increase in costs.

We are around halfway through our strategic plan to develop our corporate, investment banking and markets business and I'd like to say a few words about what we've achieved so far.

The investment phase is nearing completion, year on year cost growth has slowed significantly.

The success of our strategy has been evident by the growth in earnings in key products and service areas.

Global markets recorded strong growth in credit and rates revenue, expanded structure derivative activities have achieved higher ranking in foreign exchange options.

Global investment banking increased its market share in debt and equity capital markets.

We were voted the best foreign exchange bank in London.

The advisory business has gained momentum which continued into 2006 with the advisory roles we have secured in landmark deals, namely Mittal and E.on and the [general ALBI] deal which we've announced this morning.

Global transaction banking achieved robust growth with revenues growing in all major product areas including payments and cash management, trade services and security services.

Pre-tax profits in our private banking business increased by 31% on both a reported and underlying basis to $912 million.

This success is built on four key areas of expertise.

First in lending against non-standard collateral, second in alternative investment funds, third in trust and family office structuring and fourthly in liquidity investment.

Client assets increased by 13% to $282 billion.

Client lending grew strongly up 13%.

There was continued development of alternative investment products in hedge funds, funds of hedge funds which reached $29.5 billion.

We increased our operational efficiency by greater use of Group service centers and we improved our cost efficiency ratio by 4 percentage points to 62%.

We were pleased to be named the world's third best private bank in the prestigious Euromoney survey.

This slide shows the unique geographic balance of HSBC's earnings.

The broad balance between Europe, Asia and North America remain and we're encouraged by the growing level of profits being generated in the rest of Asia Pacific.

The reduction in profits in Hong Kong was influenced by some exceptional items, namely the reclassification of preference share dividends from minority interests to interest expenses; the absence of general provision releases which were recorded in 2004 and the decline in balance sheet management revenues as the yield curve flattened.

These items marked the strong growth in our personal financial services and commercial banking businesses whose combined pre-tax profits grew by 21%.

The Group has seen a dramatic change in its geographic composition within the last five years.

The source of profits is much broader and much better balanced.

The contribution of businesses outside our three largest markets today is similar to the profits we made in those three markets alone five years ago.

You can see that we continue to be strongly focused on emerging markets.

The aggregate growth in profits in our largest emerging market operations was strong at 46% adding over $1 billion to our pre-tax profits.

Our cards business is substantial and growing, particularly in emerging markets.

The Group has wide geographic coverage with cards businesses in 39 countries and territories.

Total cards in force passed the 100 million milestone in 2005 to stand at 104 million at the year end, representing growth of 12%.

Turning to our performance in our principal markets, this slide demonstrates the progress made in our personal financial services and commercial banking businesses in the UK, Hong Kong and United States to grow revenues faster than costs.

The revenue growth achieved has been robust.

An important feature in our business today is the way customers are using technology, particularly the internet.

This is have a transforming effect on our relationships with customers and on our cost structure.

Traffic to our websites grew by 48% in 2005 to 1.5 billion visits.

The number of registered internet banking customers increased by 27% last year to 25 million.

Our commercial clients are also breaking the internet; some 950,000, around 40% of our client base, are now registered for internet banking.

The enthusiasm for the internet has also been reflected in growth in worldwide online sales of 66% in 2005.

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

Thank you John.

This slide shows the underlying growth for 2005 adjusting for acquisitions and other investments and restating the prior year figures at constant currency, together with the IFRS adjustments.

The impact of acquisitions has been less important in our 2005 results.

Revenues grew by 11.7% against operating expense growth of 9%.

The next few slides review the key aspects of performance in our corporate investment banking and markets business which is gaining momentum.

This slide illustrates the increasing breadth and balance of our client driven revenues.

You can see that we have achieved significant success in growing revenues in key products areas in which we have invested.

And although the reported revenue growth in structured derivatives is flat the business has grown in volume terms considerably however as you will be aware IFRS accounting requires a significant deferral of day one profits which on new transactions was some $340 million in 2005 and therefore the figures here understate the underlying growth in the business.

The flattening yield curve led to a sharp decline in revenues from balance sheet management which fell by 48% or over $1 billion.

We can demonstrate strong progress in debt capital market underwriting.

The table as you see here is taken straight from Bloomberg , with no adjustments.

I would draw your attention to the results in all international bonds where we have gone from being a second tier player to fifth in the world.

We will continue to show you these league tables at each set of results.

There are two points to note from this slide.

First, revenue growth excluding balance sheet management has been robust in our major markets.

But perhaps more importantly in the emerging markets we have leveraged our global capabilities to generate even stronger revenue growth than that achieved in established markets.

The investment phase in our corporate, investment banking and markets developments neared completion in 2005.

Total cost growth has slowed.

And you can see that those markets that were restructured earliest, in Europe and Asia, have shown the sharpest reduction in cost growth.

And by contrast the Americas, which was restructured later, shows a higher cost growth than in 2004.

The familiar slide of the daily distribution of market risk revenues shows again that revenues remain concentrated in a similar range to previous years.

If we turn now to credit quality.

The personal customer still accounts for over half our total loan and advances to customers at 56%.

Excluding loans to financial institutions, the underlying growth in the Group's customer loans was 12%.

Residential mortgages grew by 9% and other personal lending grew by 17% on an underlying basis.

The growth in the corporate and commercial sector was similar to growth in the total book, at around 12%.

The Group's loan impairment charge, measured as a percentage of average advances, was 116 basis points, up from 99 basis points.

The key points to note are firstly that the level of new provisions taken in 2005 of 150 basis points is broadly similar to 2004.

Secondly, the level of recoveries and releases of general provisions in 2005 was lower than the unusually high levels recorded in 2004, when we benefited from a one-off release of general provisions.

This slide illustrates the loan impairment charge by customer group.

The increase in the charge in commercial banking principally reflected the swing from net recoveries in 2004 to a charge in 2005 in Hong Kong.

And at 40 basis points, the charge more closely approximates a more normal level in the current conditions.

If you look at the regional breakdown of the personal financial services and commercial banking loan impairment charge, there are two points to note.

Firstly on the personal financial services charge there was a weakness in the UK reflecting a change in loan mix and some adverse experience.

But this was outweighed by improvements in North America where the loan impairment charge fell notwithstanding the impact of Hurricane Katrina and changes in bankruptcy legislation.

Let me now hand you back to John.

Thanks Douglas.

HSBC aspires to be the world's leading financial services company.

We consider that the development of our brand plays a fundamental part in helping us achieve that goal.

In an internet enabled world, brands have acquired enormous significance and the development of the HSBC brand is one of the most exciting developments in recent years.

In a comparatively short space of time recognition of our brand has grown strongly.

We are now ranked the 29th most valuable brand in the world which is four places higher than we were in 2004.

In 2005 we sought to leverage this brand for business growth.

HSBC used the power of its brand to launch a US-wide savings product, Online Savings, through HSBC Direct USA which has been extremely successful.

During the year, the majority of our French operations adopted the HSBC name and the hexagon symbol.

We were pleased to received a number of awards during 2005 that recognized our standing, including being named Global Bank of the Year by The Banker magazine for an unprecedented fourth year in a row.

I'd now like to say a few words about the outlook for HSBC.

We believe that HSBC's unique international footprint gives us competitive advantage.

Together with the scale and the breadth of the Group's operations, this will enable us to continue to deliver profitable growth.

We see strong opportunities for further organic growth in all our emerging markets businesses, particularly in Asia, Turkey, Mexico, Brazil and the Middle East.

We also see opportunities to strengthen our established franchises in the UK, Hong Kong, the USA and France.

We believe that there's growing momentum from the development of our new business streams within corporate, investment banking and markets businesses.

In summary, HSBC is well positioned for further growth.

Let me leave you with our core messages which are those on the screen now.

And now we'll will be very happy to answer any questions.

Can I ask that you wait till the roving microphone reaches you so that we can hear your questions and it would be helpful if you could identify yourself.

Thanks.

Yes Simon?

Yes thanks good morning, it's Simon Samuels from Citigroup.

Three questions if I could actually.

Two on the investment bank, or CIBM division, and one on US credit quality.

Just the easy one actually, just on US credit quality.

Just looking at the numbers you've just released in the PFS division in the US, I think your impairment costs in the first half of the year are around $2 billion and the second half of the year around 3 billion.

Now obviously at the time of the Q3 US update I think you indicated Katrina and US bankruptcy would cost you about $300 million pre-tax.

And I just wanted to confirm whether that was in the end the outturn or whether that was in the second half more badly impacted by those dynamics.

I thin it was around about that number.

And kind of linked to that then, I was wondering if you could just talk about US consumer credit quality going forward, whether we should be thinking about that second half '05 number ex the bankruptcy and Katrina dynamics as being a good base to grow from as it were.

Well as we said in the presentation, the actual run rate of provisioning has actually improved in North America and therefore the charge as a percentage of loans average advances in the US business is less this year.

As we go into 2006 the delinquencies are lower as a percentage of -- than they were in 2004 and delinquency is usually a guide to future charge offs and charge offs is a guide to historic delinquencies.

So we enter 2006 with delinquency lower than it was at the beginning of the year and the charge off rate and the provisioning charge in 2005 a lower run rate than it was in 2004.

So I would use those figures.

I was just focusing on the deterioration in the second half of the year.

I think -- I certainly wouldn’t take 3 billion over 2 billion and try and extrapolate that, I'd look at the year as a whole.

The second question is just on the -- a lot of us in this room are trying to get a sense of the damage or the [inaudible] inverted yield curves around the world.

The useful caption that you give as the money market and balance sheet revenue stream was about 800 million in the first half of the year and 450 of revenues in the second.

So can you give us a sense of how -- given the yield curves just basically stay where they are, how much damage is [played] out?

Is it all taken now or is there more damage [inaudible] on this dynamic?

It's impossible to say Simon, I mean it depends what happens to the shape of the yield curve and that depends on what actions we're able to take within the treasury business to mitigate that.

So I think if we end up going forward with an absolutely flat yield curve then the revenues could be weaker.

If we end up perspectively with a steepening yield curve, again there will be more opportunities for treasury to position.

But I think it's a very difficult thing to call because it depends both on the shape of the yield curve actual and perspective and indeed the actions that we take.

Thank you.

Just a last one, it's just on cost growth in CIBM going forward.

You obviously put up a slide showing the half on half growth, the 12%, the sequential half year growth [inaudible].

I was just wondering if you could give us a sense of what you think we should be looking at as an ongoing cost growth number for that division?

I guess two points.

There's always going to be cost growth because it's a business that's leveraging intellectual capital so it's always investing in people and technology and product design to support customer business.

There's an element as we get to the run rate of infrastructure costs it's going to be dependant on revenues and I hope the costs are rising because the revenues are rising faster.

So there will always be a single digit growth in infrastructure and then the rest will reflect performance and it will be what it will be.

I think the efficiency ratio is going to be more important in [inaudible] than the cost per se.

Good morning it's Ian Smillie from ABN Amro, two questions please.

The first one on capital.

If we look at the rate of earnings growth and dividend growth from the first half to the full year, earnings have gone from 8 to 15, dividend's from 8 to 11.

And the Tier 1 ratio has gone up slightly and is substantially higher than your own target Tier 1 ratio.

I'm just wondering what are you signaling to us where the [inaudible] dividend growth lower than earnings and [by around] the capital ratio continues to rise above your own target.

And at what level would you think about giving us a higher rate of dividend growth?

Well the Board is committed first and foremost to a progressive dividend policy and that's what we've delivered this year.

We are still seeing a wide range of investment opportunities for retained earnings, mainly at the moment in our own businesses as you've seen in the presentation.

And I think that we felt that an 11% increase struck a balance between a progressive dividend policy and the range of opportunities that we see available to HSBC for further investment in its own business.

Thank you.

And the second question, Douglas at the half year you explained to us not to over-focus on any one line item on the revenue net interest income -- the net financial instrument shift.

Is that true for the full year because if you look at the second half versus the first half it looks like net interest income suffered a bit, but the net financial gains benefited a bit.

Do we look through that and aggregate them together or is there anything that you should point to us what's going on there?

No you should aggregate them.

I think 2005 versus 4 is going to be a very complicated analysis because of the change in GAAP.

And indeed there were some changes between the first and the second half as [participants] looked at some of the anomalies in our IFRS presentational aspects and we managed to get clarification from the accounting firms how to present them.

So there's a bit of noise between the [halves] and there's certainly noise between '05 and '04.

I would look at '05 as a whole rather than try and look at the halves on an individual line basis.

I think going forward there is going to be a lot of noise from individual lines, the way IFRS explores economics across individual lines on a technical basis and I think we're going to have to look at subtotals more and more.

So can we take from that that there's no particular one-offs that you want us to rip out or add back into the revenue base?

No.

Thank you.

John-Paul Crutchley from Merrill Lynch.

Two questions, the first actually back on CIBM, looking at the European contribution and net interest income line which appears to be much stronger second half than the first half.

I just wondered if you can comment whether there's any underlying trend in there we should be aware of, or is that the second half in sustainable [inaudible] going forward?

The second question was just on the recoveries at the Group level which again, it appears to be quite resilient.

Again should we take that as an ongoing trend or would you expect recoveries [inaudible] against 2006?

I'll take the second one of those.

No we can't comment on the future recoveries but I think what you will have gained is a pattern over the years from HSBC is that recoveries are a permanent feature of the landscape because we're pretty conservative about new positioning.

Yes on the half, CIBM in Europe had a much better second half.

I wouldn't look at the individual lines because again I think there is noise between the positioning between trading and net interest income the way IFRS explodes it, it doesn't have anything to do with economics.

So look at the aggregate.

Yes it's Mark Thomas of KBW.

Two unrelated questions.

You just mentioned some modest deterioration in UK SME credits in the fourth quarter.

Is that just a limited number of instances or do you think it's the start of a trend?

Secondly if we aggregate the other incomes between pages 32 and 36 excluding [inaudible] we end up at about 4.4 billion instead of 3.2 for last year, including various property revaluations and obviously all sorts of odds and sods [inaudible] description.

Do you think that 4.4 is a more normal aggregate run rate for the other income or is the 3.2?

Having a run rate for other other I think is pretty spectacular.

There's a lot of things in there.

I don't think you can have a run rate on other income.

One thing goes away and another thing comes in so you have to make your own judgment on that.

[But we're paid to do better].

Absolutely.

So next year there'll be other other items.

I can confidently tell you that.

And some of this year's other will be [inaudible].

The -- what can you say, I think we've sensed in the fourth quarter, you can see it as well as we can the decline in the retail sector in the UK.

We had one or two individual items.

But there was a sense that things were a little bit weaker and we said so.

But nothing dramatic, just a sense that the book is not as confident perhaps if you like as it was 12 months' ago.

It's to do with the economy.

Robert Law of Lehmans.

Could I have a go at a run rate as well please?

I'm looking at CIBM and the real feature of these numbers I think is the CIBM revenue in the second half.

Particularly if you back out the balance sheet money market contribution that you split out, I think it's up by about $1 billion in the second half compared with the first.

Can you comment on those two run rates?

And what might have been the factors behind the improvement in the second half?

Is there anything [large] you want to highlight there or could you comment on the fact that we've got some idea of how we might [inaudible] that going forward?

No, the trading performance was better in the second half than it was in the first half.

We had -- and indeed we've split it out in the [inaudible] that there were a number of venture capital disposals and therefore you can determine to what extent you put those into the run rate.

But that was a significant element of looking at the change in revenues one year over the other.

But I think underlying it all the areas of investment credit in [related] structure derivatives, foreign exchange options in equity all began to play off a much larger platform in the second half than they did in the first half and showed revenue gain.

So I don't know how to take a run rate from that Robert because you know that there's an element of volatility.

Quarter on quarter and half on half the platform that we have is significantly larger and the operation of that platform was more successful in the second half of the year so we're encouraged.

Simon Willis from NCB Stockbrokers.

Douglas you touched on venture capital gains there and the private equity realization of $400 million or so higher in the full year than the previous year.

Looking forward would you be prepared to say that [inaudible] sufficient in the bag for that to be a broadly sustainable kind of [inaudible]?

One or two of your peers have been drawn on that.

[Inaudible] we're unlikely to be.

Are we still in the business, yes, so it would be foolish to speculate on a run rate.

It depends on the state of the market really.

It's Alistair Ryan at UBS.

Two questions if I may.

Firstly on UK PFS.

A very strong revenue in cost performance somewhat masked by what looks like the continuing losses on the old household and [inaudible].

If I've read correctly, in fact [inaudible] italics on the bottom of page 56 about the profit or otherwise of the old household UK entity, it looks like in the second half the losses were a lot lower than they were in the first half.

So the question is really on that sort of $1 billion book are you more or less over the problems that you created for yourselves or were otherwise imposed on you?

And there's a second unrelated question.

You're right.

The charges in the second half are lower and all other things being equal, changes in the shape of the book in actions and collections should mean that yes we're over the [ramp] subject to all the caveats about the economy.

And we transferred the credit card business within what was household [inaudible] into the UK bank at the end of the year [inaudible]?

Thanks.

And then, more broadly on Hong Kong, I know there are other [moving parts] but your cost in dollars, millions rose as quickly as your revenues in 2005 which is a relatively uncharacteristic performance.

Could you comment on whether that's from the yield curve gains in PFS in commercial banking [wash out] one way and yield curve losses [inaudible] the other way?

Is that something broadly that you're comfortable with given the circumstances in the year and pretty moderate volume growth?

I think we would always try and -- when you say Hong Kong, Hong Kong -- the build up -- PFS and CMB both had reduced costs.

It was in CIBM where there was a significant growth in costs during the year as we added relationship managers and infrastructures to support an expanded business.

I think that's part of the investment phase that we showed in the CIBM slide; it peaked and then it has come off.

So PFS and CMB had terrific [cost] performances and CIBM was the year of investment.

So that's what's impacted Hong Kong.

Good morning it's [James Chessell] at Goldman Sachs.

I just wanted to touch on the US PFS business if I may.

Half on half trend, even if you strip out the impact of Katrina and the bankruptcy [legislation] it looks at though [PBT] is down about 35% half on half.

Could you just explain the trend underlying that and what we should look at going forward in terms of an underlying run rate?

There's always a seasonable impact just because of the growth in credit card lending, there's a seasonal effect which has been [inaudible] 2004 as well.

I think the other thing we pointed out in the first half was there was some derivative noise which was for the benefit of the first half which wasn't there because it is noise and effort, it wound up.

I think the story on the North American business if you take the business as a whole for the year and expressed it as a percentage of last year and it's up maybe 9, 10%.

And that's the story of that business last year and as I said it entered this year with a lower rate of delinquency than it did at this time last year.

Hello it's David Williams from Morgan Stanley.

Given all the comments you made on CIBM and working off a bigger platform, could I just ask you to comment on slide 22 in your presentation pack which you didn't talk about in the main bulk.

It was very kind of you to put it in, but it does seem that you are actually having fewer days where you are earning bigger profits in CIBM.

Given everything you've said about the trading revenue, is this just a [set] of the yield curve or is there another explanation here?

I think the yield curve has some impact because that includes those revenues.

But our CIBM positioning is not to be [naked] position takers, so we would be as nervous as if we had a big loss day as if we had an unexpected big credit day.

So I would expect that perhaps with better balance sheet management environment we might see this shift slightly to the right.

But I think the shape we would hope would be relatively similar to it.

We wouldn't want to have lots of crazy days either profits or losses because it would suggest that we were exposed to price movements more than our risk limits.

If you look at our VAR, the VAR has gone up, but not dramatically.

So we do position market-making customer businesses as opposed to [naked] positions on movements in underlying rates.

Our analysis shows that compared with our competitors, using the amount of VAR that we have, that we're probably one of the highest performing dealing rooms anywhere, based on the risk take.

Thank you.

It's Tom Rayner at Citigroup.

Could I just go back to the underlying revenue question from earlier because I hear what you're saying about the distortions and the in between at the half-year.

Just so I'm clear, when you show us 11.7% underlying revenue, you've adjusted that position, you've also adjusted the IFRS on a sort of pro forma for 2004, but how about the volatile items?

Because if I'm just looking half on half it does seem there's been quite big swings between some of the fair value adjustments [inaudible] IFRS volatility.

If you were able to give us the 11.7 fully adjusted for volatility between the years, are you saying that is the clean clean number or that volatility has actually made a difference either way?

Not materially.

The only IFRS adjustment we've made is the geography where preference dividends go above the line, that's all we've adjusted, so it's a purely clean number.

Take out acquisitions, constant currency, [inaudible] preference dividend, up to interest expense it's on a like for like basis.

I don't think IFRS noise is material in relation to the revenues [for cost].

Because I was just looking at the income from financial instruments at fair value [inaudible] minus 354 to plus 1 billion at the full year, plus 1.3 second half.

Is that just a revenue item which should get netted out as you go down all these related items?

The biggest element of items at fair value are [matching] insurance contracts that pass the benefit.

We used to show that as effectively a net number of commissions, but now in the brave new world we show a huge amount of instruments [marked at] fair value and then the corresponding [payable rates] for policyholders on investment contracts elsewhere.

So yes [inaudible].

But you can't really look at the individual [inaudible] unfortunately.

Robert Law of Lehman.

Thanks.

Could I just follow that last question again please, particularly with reference to net interest income because obviously that fell sharply in the second half of the year and we've seen a big fall in the margin [inaudible] half on half.

Again can I try your patience by asking whether we look at that on a single line basis or whether we just compare that with other lines in the P&L?

The truth Robert is I think you have to start looking at aggregate revenues, because now that we've split out the trading income and included within that line external interest, so interest earned on trading assets plus dividend earned on trading assets less external interest expense, funding trading assets you get a net number.

If you switch the funding from external to internal you end up with the internal interest above the line and all the income below the line, so you get a noise between trading income and net interest income.

I think you're going to have to look -- I think the margin information is going to be incredibly volatile because of the way IFRS presents internal and external interest.

And I think that [inaudible] trading are going to have a big impact on that [inaudible].

It's not going to be an equal number and indeed I think some of the other UK banks have stopped showing margin information because it is full of noise.

We have to do it for SEC otherwise I think we would probably go the same way.

Yes please?

It's [inaudible] from [inaudible].

Looking at the risk weighted asset growth it seems that there was a significant acceleration in the second half with about $50 billion in assets [inaudible] versus 17 billion added in the first half of '05.

And looking in the back of the [inaudible], it seems like a lot of that was risk [inaudible] rest of Asia Pac and South America in particular.

Now is this a seasonal effect or is it more structurally sustainable growth driven in particular by this region?

It's certainly not seasonal.

I'm going to have to struggle to find the figures because in fact the risk weighted assets in December '04 was 759 then they went to 794 then they went to 827.

So the second half was slower growth than the first half and indeed [inaudible] what would happen [inaudible] in the second half as well as in the first half.

We put on a lot of assets in the first half and we put on less assets on a constant currency basis in the second half.

But in terms of year-on-year acceleration it seems that the rest of Asia Pac and South America in particular were actually quite high growth.

Yes they were.

We had huge growth in the Middle East and in South America on a percentage basis, yes.

Thanks very much it's Simon Samuels again from Citigroup.

I think it would be churlish not to -- particularly as it's John's last results meeting, to comment very positively on the underlying JAWS, revenue growth and excessive cost growth which as you know we've been writing a lot about over the last few years.

I was wondering if you could just give us a sense, when you bring everything together, we can all see that the [weekly] gains have been strong, that you've had a big yield effect damage, the cost [inaudible] CIBM because [inaudible].

But 12% revenue, 9% cost growth, is that what you think we should be looking at as the shape of this Group going forward?

And the reason I ask that is because [certainly] in the years which we estimate at nine but I guess you calculate it differently, but we think it's been nine years since we've had meaningful [inaudible] JAWS at Group level.

Throughout most of that period you've told us that JAWS management is not something you particularly focus on.

So I was wondering whether you could comment whether that will change now, or whether we should now expect cost growth and revenue growth to be with this kind of [inaudible].

Well Simon, first of all thank you for the opening remarks and [inaudible].

My take, if I were sitting where you sit, is that we're capable of investing in this business, and the investments will work and they will feed through.

But we will continue to invest in the business, and it's really a question of whether you get a series of lumpy investments, i.e., more cash out waiting for cash in, which has happened, it's happened during the growth of Group service centers, it's happened as we've invested in CIBM, it's happened.

Some of the things that you can't see, funds administration businesses we've invested in, huge investment in systems for new businesses like Amanah Finance.

So I think -- the important thing to me personally is do we still have a good expense discipline in HSBC?

I believe that we do.

Will we continue to look for opportunities to grow this business internally in every way we can?

We will, even if we get messages from you that we don't know how to control our costs.

Right, are we nearing the end?

How are we doing?

Any other questions?

If not, thank you very much indeed for attending today and for your interest in HSBC.

Thank you.