滙豐控股 (HSBC) 2006 Q4 法說會逐字稿

Well, good morning to all of you here in London and good evening to our colleagues and guests joining us from Hong Kong. I'd like to welcome all of you who are joining via webcast to the conference call.

Let me begin with some introductions. With me in London are Mike Geoghegan, the Group Chief Executive, Douglas Flint, Group Finance Director. And in Hong Kong, the city in which HSBC was founded and to which we owe so much, Vincent Cheng, Chairman of the Hong Kong and Shanghai Banking Corporation, Mike Smith, its Chief Executive, Edgar Ancona, the Chief Financial Officer and Russell Picot, the HSBC Group Chief Accounting Officer.

Before we start the presentation, I'd like to draw your attention to the usual cautionary words on forward-looking statements. And then I'd like to introduce the way we're going to handle today. This is the first time that the new top team at HSBC has presented a full year set of results together. And the structure of today's events reflects our different roles.

We're going to cover three areas. I'm going to take you through the headlines and some of the key themes of the day. Then Douglas is going to fill in with detail on the numbers. Mike is then going to take us through the business performance in '06 and our objectives for '07. And then I'm going to talk a little bit about the Group's strategy going forward.

First then the headlines of our '06 performance. Profit before tax up 5% to just over $22b. Earnings per share up 3% to $1.40 per share. Dividend per share for 2006 up 11% to $0.81. A business performance which represents very strong growth in emerging markets, Asia and Latin America, up over 20%. Strong growth in our Commercial Banking businesses where profit before tax rose by 21% and in Private Banking, profits up 33%. Our CIBM businesses, profit before tax up 36%, if you take out balance sheet management revenues and the loan impairment releases. So a core growth of 36%. And all of this on the back of a robust capital position with Tier I at 9.4%. And of course and we will of course come back to this in detail, mortgage arrears in the U.S. resulting in an increase in loan impairment charges from $448m to $2.17b for the mortgage service business.

Let me now hand over to Douglas to take you through the numbers in more detail. Douglas.

Thank you, Stephen. Let me start by taking you through the Group's income statements. Net operating income before loan impairment charges increased by 13.4%. You are all aware of the issue in our U.S. mortgage services business and that was the main cause of the 35.5% rise in loan impairment charges. And we'll come back to this in more detail later.

Net operating income grew 9.9% to $54.8b. Total operating expenses increased by 13.7%, broadly matching revenue growth. So basically, we had flat [jaws] notwithstanding further investment in the Group's business especially in Asia and Latin America. Profit before tax increased by 5% to $22.1b. The increase in profit attributable to shareholders was also 5%. Earnings per share increased by 3%. Dividend per share with respect to 2006, were increased by 11%. This reflects our consistently progressive dividend policy, our strong capital ratios and our confidence in the future.

The next three slides show our underlying performance over different periods. Consistent with prior times, the underlying basis strips out the effects of currency movements, of acquisitions and disposals. Looking at the underlying growth in 2006 compared to 2005, you can see that we had another year of double digit growth and net operating income before loan impairment charges which at 11% was matched by similar level of growth in total operating expenses. Again, flat jaws on an underlying basis.

If you look at half on half performance, that is firstly the second half against the first half of 2006, underlying performance was dominated by the significant increase in loan impairment charges, which was driven by the U.S. mortgage services business. As we've said in prior periods, there is a seasonal pattern to our results with higher cost growth in the second half versus more modest income growth. This was also the case in 2006. But we were further impacted quite significantly by a weak third quarter in terms of foreign trading activity in corporate investment banking and markets. And on top of this, we started to slow our balance sheet growth.

Looking at the second half of 2006 against the second half of 2005, the picture is better than against the [trailing] half, in this case the negative jaws were largely attributable to lower gains in private equity and the weaker CIBM performance in the third quarter of 2006 that I've referred to.

I'd like to turn to the geographical analysis of the Group's results. What this slide shows is both the balanced diversification of our earnings and the efficiency of our Asian businesses where profitability in less as balance sheet driven. This distribution of assets and earnings places us in a good position to grow our business as the global economy rebalances.

Asia, which covers our operations in Hong Kong, the rest of Asia, and the Middle East produced outstanding results with a the pre-tax contribution of $8.7b, an increase of 23%. We are without doubt the leading international bank in Asia. Stronger deposit margins, higher volumes of retail share trading, record transaction banking revenues on the back of international trade flows, and record custody income on the back of flows into emerging market equities, were key elements of this success. Credit quality was good notwithstanding higher provisioning in Taiwan and Indonesia, which we mentioned in the first half, in relation to the Personal business. Given the strong profitability, we increased our investment in the region.

In Latin America pre-tax growth of 8% understates the underlying performance. 2005 benefited from $211m of profits from the sale of Argentine compensation bonds and the sale of our property and casualty business in Brazil. If we take these out, profit before tax increased by 25%. CIBM delivered a very meaningful pre-tax contribution of $475m, which was 30% higher than in 2005.

Profit before tax in our North American operations was down by 21%. This was of course driven by the substantially higher level of loan impairment charges in the U.S. mortgage services business, a reduction in balance sheet management revenues in CIBM of some $347m and cost growth as we expanded the retail and branch infrastructure. On the other hand, our trading businesses in the U.S. notably in mortgage backed securities and in structured derivatives generated a very strong revenue growth, with trading income more than doubling.

Our European operations delivered a robust 10% growth in pre-tax profits with $7b. Commercial Banking business again stood out with profits up 15% from balance sheet growth. Private Banking had an exceptional year with profits up 49%. And within the CIBM global market revenues were up 36%, but we had lower bad debt recoveries and lower private equity gains. In Personal Financial Services we had very good growth of liabilities and within this the number of fee based accounts in the U.K. more than doubled. Expense growth reflected infrastructure investment in both the U.K. and Turkey where we added 37 new branches during the year.

I would now like to briefly review the performance by customer group. Again you can see the strength we derived from the diversity of our business. And again, you can see how profitable our Personal and Commercial Banking businesses are relative to balance sheet utilization. Of course it's fair to say that CIBM's balance sheet utilization is heavily impacted by the transfer for management of interest rate risks of the commercial surpluses of the Group's Personal and Commercial Banking businesses.

For the reasons already highlighted, problems in the mortgages services business in the U.S. masked the increasing contributions from Asia. I'd also point out that in Latin America, we'd have been ahead by 16%, if we adjusted for the $89m profit on the sale of the casualty and insurance business in Brazil in 2005.

Commercial Banking was again a stand out, with growth across all markets for the Group. CIBM's 12% growth in pre-tax profit was against the headwind of a declining contribution from balance sheet management activities. Operating income in that area fell by $534m to $704m. Elsewhere global markets, transaction banking and investment management all delivered record results.

Our Private Banking business made further considerable progress with an increase in pre-tax profits of 33% in 2006. And this was the third successive year in which profit growth exceeded 20%. Client assets increased by 22% to $333b with net inflows of $34b.

I want to turn to three important things in our 2006 results. First, strong growth in emerging markets. Second, strong performance from CIBM in areas of investment. Third, U.S. mortgage services impairment.

Two things I want to point out in this slide. First, the pre-tax contribution from Asia, Latin America, the Middle East and other emerging markets is approaching 50% of Group profits. Our pure emerging markets businesses are growing well and they're large. You can see from the table that they recorded profit before tax of $4.5b, which is up 19% in 2005. And this is the third year that these businesses delivered strong double digit growth. These businesses today account for 21% of Group profit before tax.

CIBM. These tables illustrate two things. First, that we're delivering strong results across the business. Secondly, that we're achieving good revenue growth in the areas in which we've invested. And by breaking down performance into quarters you can see that the issue in 2006 was a weak third quarter. And the fourth quarter delivered the second best quarterly performance of the year.

Turning now to customer lending and impairment. Customer lending has grown in all major categories. Within mortgages, naturally we slowed growth in the United States mortgage book in the second half of the year. In terms of credit quality, this slide illustrates three things. Firstly, that our credit charge is dominated by Personal business. And then with the European charge as a percentage of lending is stable, and the U.S. charge has increased as a result of the U.S. mortgage services issue. Secondly, the Commercial Banking continues to benefit from modest levels of impairment charge although recoveries are reducing. And thirdly, the CIBM continues to have net recoveries although clearly this cannot continue for much longer.

This slide we hope is helpful to show how the charge, the impairment charges moved year-on-year. Clearly, the very large increase in the charge relates to the U.S. mortgage services business and that stands out. And you can also see how 2005 was impacted by the additional provisions taken in respect of Hurricane Katrina and the change in bankruptcy laws in the United States. 2006 clearly benefited from the absence of Katrina and bankruptcy charges. And outside of the mortgage services business, the major year-on-year differences were in personal lending and credit cards in Taiwan and Indonesia.

If we turn to the North American consumer finance business, this slide illustrates the impact of the business of the change -- the impact on the business of the changed fortunes within mortgage services. Essentially, there's a turnaround of $2b from a profit of $800m in 2005 to a loss of $1.2b in 2006. This overwhelmed the good growth within the core consumer finance business, which grew from $3.1b to $4b.

This slide shows the contribution of the mortgage services business to the overall delinquency ration which has increased from 3.78% to 4.43%. The chart also shows that excluding mortgage services, delinquency is more stable with a rise from 4.08% to 4.31% as this portfolio has matured. At the end of 2006, the 2 plus delinquencies within the mortgage services stood at 4.76%.

This I think is an interesting chart. It illustrates three facts. Firstly, the deterioration started in the second quarter of 2006 and accelerated. Secondly, that the second lien portfolio has deteriorated significantly faster. And thirdly that the branch based real estate business, while showing some modest deterioration in the fourth quarter, has been broadly stable over the 18 month period shown here.

This slide looks at the mortgage services portfolio in more detail. The chart analyzes the portfolio by type of lien, by interest rate structure and by the date the mortgage was required. The problems have been most acute in the 2005 and 2006 acquired portfolios. And within these most acute in the second lien and first lien adjustable rate portfolios. Impact has been driven by the impact of slowing or declining house price growth. The absence of equity appreciation has reduced customers' options for refinancing. Reduced refinancing options has highlighted the fact that as adjustable rate mortgage reset over the next few years from their original rates, the impact of higher contractual payment obligations will lead to further delinquency.

We took all of these factors into account in determining the appropriate level of provisions at December 31, 2006 against the mortgages services book. We factored into our provisioning the most recent trends in delinquency and loss severity. And we estimated the impact of the higher payments due on adjustable rate mortgages as they reset. And in particular we estimated the impact where we hold a second lien mortgage, where it ranks behind an adjusting first mortgage.

Clearly going forward the level of future impairment [rises] will be sensitive to the economic conditions and in particular to the state of the housing market, the level of interest rates and the availability of financing options for sub prime borrowers. There's a very much greater detailed analysis of credit statistics in both our own annual report and accounts and HSBC Finance's 10K, both of which were filed today. And of course, with respect to the latter these statistics will be updated quarterly.

And finally, our capital position remains strong and in our view appropriate to the environment in which we're operating. Our debt ratings have also improved through 2006 with a paradoxical impact that our results for 2006 bear a charge of $388m for the improvement in our credit spread on our own debt that's fair valued. Now let me hand you back to Stephen. Stephen.

Douglas, thank you. Now I'm going to invite Mike to take us through our business performance in '06 and our objectives for '07. Mike.

Thank you Stephen. This is the first set of annual results that I'm presenting. And I appreciate many of you don't know me. Hopefully I shall put that to rights in the next 20 minutes as I drill down in more detail as to what's happening. And hopefully, answer some of those questions burning holes in your notepads.

The Group Chairman has previously outlined the new management structure of HSBC. And I believe it's appropriate that I give you more detail of how we run the business. Prior to May 2006, various business heads and country managers reported either to the Group Chairman or to the Group Chief Executive. Now they all report to me in the form of a Group Management Board.

Each Managing Director runs either a large regional business or a global business, in most cases governed by an independent Board of Directors with normal sub committees. The team has worked together for a number of years and knows well the opportunities and the challenges of each of their businesses, whilst also collectively demonstrating the ethos of this Group. This team meets monthly and is empowered by the Board of HSBC Holdings. It's a small, interactive team that has delivered the record results to you this year.

Now let's look at these businesses. Clearly, our Asia the Middle Eastern businesses, regions where I've worked for nearly half my career have again provided a stellar performance with a pre-tax profit of $8.7b and a year-on-year growth of 23%. Naturally, I've listened to the comments about our presence in Asia. And I accept that possibly, we have not been as demonstrative as we could have been in communicating our success there. But I can assure you that Vincent Cheng and the team have been quietly, possibly too quietly, building out the business in that region.

In the last three years as well as the $3.4b invested in associates, we've invested over $2b organically in the region. This has resulted in us building out direct banks in Taiwan and Korea, significantly strengthening our personal financial service capabilities in Malaysia, India and China, where we opened 13 branches in 2006 up to a total of 45. And already in 2007, we've opened six more. Naturally we remain the largest international bank in China with [51] branches.

This patient organic investment, built on the back of critical mass we have in each country, is now really beginning to power us forward in all segments with the rest of Asia adding $1b to the pre-tax profit line. And in fact for the first time, our Commercial Banking outside of Hong Kong exceeded a profit of $1b.

Yet we are prepared to make direct investments where we feel organic growth alone will not keep up with the overall economic growth in the region. One example of this is our recent announcement to take up a 20% stake in Techcom Bank in Vietnam, where we also have branches. But where we believe that we need to move faster than just organic growth allows.

However, the most obvious example of the early investment was in China, where we are really benefiting from investing in Bank of Communications, Ping An Insurance, Industrial Bank and Bank of Shanghai. These investments are long term investments where we are working with our partners in many areas. For example, in Bank of Communications we've sold over 2m cards through our joint business units.

Whilst we do not mark to market our investments in China, because they are long term, if we did there we would need to recognize a further $11.7b in our results today. HSBC wants to participate in Bank of Communications upcoming A share listing. And we are working with them and the regulator to see how this can be achieved, so that our current shareholding of 19.9% is not diluted.

In recent years, we've seen Hong Kong become the gateway to China. And we have positioned ourselves to benefit from this as the service sector has expanded and flows of business and people between Hong Kong and China has accelerated. Despite the very stiff market competition, we grew our overall business in Hong Kong by 14.7% to $5.2b.

From our hub in Hong Kong, we've also been growing out our investment banking business across the region, reflected in a 22% rise in pre-tax profit. Our Private Banking in Hong Kong has been joining up with the rest of Asia, in particular our Commercial Banking customer base. Commercial profit before tax rose 33%.

Asia is also leading the Group in direct Internet sales, up 67% in the year, already a quarter of all PFS sales are done direct. We expect this to increase further in 2007 and beyond.

We continue to dominate in the Middle East where our results for the first time exceed $1b at the pre-tax profit line, a rise of 26%. But Asia and the Middle East are not the only emerging markets we're in.

We've also built an integrated franchise in Latin America, which gave us a pre-tax profit of $1.7b with Mexico providing $1b for the first time. When I first went to the region in 1989, we had two branches in Chile. Then in 1997, we bought Banco Bamerindus in Brazil, a place close to my heart, having spent seven years there. And now a decade later, Sandy Flockheart and his team run a franchise that stretches from Buenos Aires in the south to Monterey in Mexico in the north. With 4,000 offices across Latin America driving the HSBC brand deep into the continent and providing business opportunities across all our business segments in the region and beyond.

In May 2006 when things were not as clear as they are today, we purchased Banco Nazionale del Lavoro in Argentina. We have amalgamating this into our existing Argentine operation and in the process we have doubled the number of branches and increased market share from 3% to 6%. Also in 2006, we opened our first branch in Peru and more will follow. While in the second half of the year, we completed our acquisition of Banistmo for $1.7b, adding their operations in Panama, Colombia, Costa Rica, Nicaragua and El Salvador to that regional network.

We did this because of CAFTA, the Central American equivalent to NAFTA, which allows us to broaden trade between the region and the USA. and Canada. We intend to link Latin America and the Caribbean region with our large Commercial Banking bases in USA and Canada whilst also introducing consumer finance to the region. The consolidation of Banistmo is underway and the early signs are very encouraging.

But we're not just expanding Personal Financial Services but also Corporate Investment Banking where the pre-tax profit rose 37% on the back of cash management and emerging markets finance led opportunities supported out of CIBM in New York.

Now let's turn to North America, where even with our setbacks in our mortgage business, we still have reported a pre-tax profit of $4.7b. Having lived and worked in the USA in the early 90s, I know all too well the challenges one can face in the fast moving market. So working in a really joined up way is absolutely key. Therefore pulling our operations in North America together is fundamental, be that in our investment bank, our financial company or our New York based bank.

We've announced that Brendan McDonagh and Paul Lawrence are becoming respectively CEO of HSBC Finance and HSBC Bank USA. Both Brendon and Paul have U.S. experience. And I'm confident they and their team will be able to refocus and reconfigure our businesses in the USA.

Apart from the businesses we run today, we need to better maximize all of the potential we have in country and across border. For example by effectively linking Latin American and Central American operations with HSBC Finance, we have the ability to provide the millions of Latin American customers with services. Be that remissions out of the U.S. or consumer finance products for the newly arrived Latin American immigrants who already recognize the brand beyond their home country. Anyone can see that there's so much to go for.

But obviously we must also resolve the issues within our mortgage services business. Personally, I want to clarify in the clearest way possible that this is not trailer park lending. The average household income of a typical HSBC Finance customer is $83,000. And the typical profile is a 41 year old with two children and a home worth $190,000. The customer base is in line with demographics of the USA. This is mainstreet America. While trailer park lending makes for good headlines, frankly it's not the customer base of HSBC Finance.

Consumer finance is the fastest growing segment of Personal Financial Services in the USA and has the highest spread. But obviously comes with [volatility of] earnings. And we're going through such a period right now. So what am I doing about the situation? I've indicated the buck stops with me. And whilst you have my full commitment to solve it, I and the U.S. team can't do it overnight. And the work I would say is probably two to three years.

We have put in new management, we have curtailed production of correspondent mortgage loans and eliminated certain classes of mortgages. We are aligning our broker channel to our investment bank requiring it only to source products for sale. We are packaging mixing and matching various portfolios for disposal in the market through our investment bank. We are increasing our collections activity and we're beginning to run off the book.

On the question of whether we are seeing a deterioration in credit quality in other portfolios of consumer lending, auto finance and cards, currently those portfolios are performing within industry trends. And although there's been a kick up from the very low delinquencies of early 2006, because remember 2006 was impacted by the changes in the U.S. bankruptcy laws in the end of 2005, but it's still within our projections. But obviously we are watching things closely.

On the question of what would be the impact of revenues for HSBC Finance, we believe the run off of these income streams will be gradual as they were relatively finely priced mortgages. And it could be managed by a partial run down of the supporting cost base as well as more proactively joining up the bank and the finance company. It's also likely that even when we sell down the portfolio risk we will keep the [seed] generating side of the business in the area of servicing of those mortgages.

To the question, have we got enough provision? Firstly, I want to say 90% of our mortgage service customers are not delinquent. Secondly, we have taken provisions for those that are delinquent. Thirdly, we have taken provisions for those that are not delinquent but we believe their loans are impaired. What we can't take into provision now are those loans that are not delinquent and show no current evidence of impairment.

However, the reality is that the market is not stable. And were house prices or unemployment to deteriorate further and or interest rates were to rise and people were unable to refinance then further provisions will be required. There will be in any event further provisions as the portfolio matures. The size and timing of those provisions will be dependent on the economic circumstances at the time and be governed by the general accounting requirements.

I hope you will appreciate from the candor of this briefing the team and I are fully focused on this matter. But equally, you would expect me to remain focused on our overall business. And in this regard, I now want to turn to Europe.

In Europe, where I worked initially soon after the Midland acquisition and latterly from 2004 to 2006 as Head of the U.K. Bank, we have grown pre-tax profits by 10% to $7b. In the PFS world, we have segmented our customer base and recognized well before many, that a move to value based services propositions is key both for shareholders and customers alike. We believe in the years to come, our customers in Personal Financial Service and small business will want far more direct service and sales approach, offered 24/7, with branches being only one of the forms of distribution. But the most important contact point in regard to offering the face to face quality advice.

Because of this we are continuing to invest in our branches. And more than 10% of our U.K. network has either been relocated, refurbished or opened anew in the last two years. This is also happening in France and Turkey and will continue into 2007, along with better qualified and more staff being available to our customers in branches during longer opening hours. We do believe customers appreciate good service. As we see with the First Direct, which leads the entire industry, customers are prepared to buy more products from companies, which offer such quality of service and are prepared to pay.

We await with interest with regards to the OFT's findings on overdraft fees but continue to believe that free banking will remain available in the U.K. We continue to build out our Commercial and Private Banking capabilities in Europe in 2006, which led to a growth in pre-tax profits of 15% and 49% respectively. This comes from a growth in fee income and a focused approach to cross selling of products. And the overall return on risk weighted assets has risen. Although there's been a slight pick up in U.K. personal credit losses in 2006, it does appear to be slowing in recent months and corporate losses remained benign.

Now let's turn to our customer groups. I've already told you the strong emerging market story but we have opportunities in all our markets. We now have a 120m personal customers worldwide. And our intention is to really broaden our relationship with them either in country or across border. Our Premier proposition is currently offered in 36 countries, 18 of which offer enhanced international services. These international services will be rolled out to 39 markets by the end of 2007.

Premier International provides service such as cross border account opening, best in class credit cards, the ability to be approved in your home country for a purchase of property overseas, emergency assistance for all Premier customers from every HSBC outlet, and the ability to have a single view through the Internet of all your accounts held with HSBC globally.

An extensive program of retail development is underway to provide a network of 300 international flagship centers in all the major cities where HSBC operates. Infrastructure and technology development are also underway to systematically connect each of these centers and provide global recognition, welcome, priority service and local support to customers wherever they travel, wherever they're from. We're also going to use technology to deepen our relationships, which I will talk about in a moment.

But before that I want to talk about Commercial Banking. Commercial Banking with its 2.6m customers has been the unsung hero of this Group. This liabilities led business has been the cornerstone of funding the growth of the Group's assets, whilst we have also assisted customers in a meaningful way across borders. However, I believe there is a lot more that we can do. Because of our global footprint, we believe we have the potential to link up our customers across the world.

For this reason, we have introduced our global link service, across border referral system involving 50 sites and 4,000 relationship managers. In 2006 alone, 1,200 successful referrals were made with total facilities granted in excess of $3b. We're only just starting. This year, electronic smart across border account opening is planned for implementation. Together with global links, this will provide a greatly enhanced across border account opening service to our CIBM international customer base.

Now let's turn to our global businesses. Douglas has taken you through the numbers for CIBM. And whilst they're impressive, I believe there's more that needs to be said. We are building an emerging markets led finance focused business with London, New York, Hong Kong and Paris being the hubs. We are not trying to be a bulge bracket bank, but rather using these hubs to work with our regional based relationship managers to build out those customer relationships, by financing their aspirations using debt, equity and derivatives. Thereby providing an overall financial package with an attractive relationship return which is above and beyond what we could currently earn in country from such clients.

Already half of the pre-tax profit comes from Asia, the Middle East and Latin America. Although [Stuart Govern] here in the front has made great progress in 2006, markets permitting, the best is yet to come in 2007. We are really going to be joining up the country management CIBM hubs and really leveraging the potential of our second to none client base. I believe the quality of earnings now being generated by CIBM is significantly better than many of our competitors. And the scope of our business allows us to avoid the need for the higher risk products and the niche businesses such as tax structuring, commodities trading and energy futures, which we believe have a long -- low long term revenue value to investors.

Private Banking. Private Banking is a business, which in a decade, we have taken from nowhere to being another billion dollar business. In fact it grew pre-tax profit by 33% to $1.2b. We have clearly demonstrated that by acquisition and organic growth one can build a world class business. Our Private Banking business is now ranked third globally by Euromoney.

There's been much comment that our managing for growth strategy is not working. But we think that with half a dozen different units that have either reached a pre-tax profit of some $1b for the first time or have increased profits by extra $1b in 2006, our strategy is certainly working. However, I believe I can refine it and take it to a further level. I've talked a little about joining up the company. But for those of you, who haven't heard me before, let me explain what that means.

On the day of the AGM last year, my first day on the job, the Group Management Board and the Chairman went off site to discuss how to take the Company forward in the coming years. We quickly focused on our global distribution and our technology capabilities as being our most compelling advantages. And we also recognized that we were not using them to the fullest, be it in country, in region or globally. Joining up the Company was launched that day. It's about taking this fantastic distribution network and really making it work for our customers in a joined up way via technology.

So what are we doing about it? A lot is the answer. I mentioned our Premier plans some months ago. We have also improved our direct proposition as the power of the internet and the desire of our customers to be served 24/7 has led us to build distribution via technology. I have challenged our team that automation should be to a level such that growth in staff costs in the area of Personal Financial Services and small business should slow to single staff figures as sales of automated products reach 50% of total sales of Personal Financial Services and small business.

We are focusing on six products, two assets two liabilities and two insurance, with the intention of delivering these over the next three years. I don't just mean online. I mean end to end straight through processing for a better customer experience. Single signature. Also we will build on the success of our direct savings proposition which has done us so well in the U.S.A. and which we are now building out in Taiwan and Korea. Initially we are growing liabilities but we will look to expand the product range for our asset and insurance products, much as we did with First Direct. In a very real sense we intend to build a global direct bank with branches with only one form of distribution.

To achieve all of this, we need to go even further in putting our technology at the forefront of all that we do. We are already one of the most efficient users of technology. But we believe we can do much more by making more of our systems common across the world. We also want to improve our insurance business where we currently have a penetration rate of only 9% of our customer base, a lot to go for. We have the ability to do much better. And Clive Bannister who built the Private Banking business so successfully has been charged with doubling the contribution from insurance. Focusing on life and pensions investments or the interconnectivity between the Internet and advice at the branch level is absolutely key.

The success of all the above is being driven off the success of our global brand, which is a very powerful tool in growing all of our businesses. However, we now believe the time has come to create that unique customer experience on a global basis so that wherever the customer touches HSBC, he or she will experience the common service quality. This is not going to be easy. But we are confident it can be done. And we will have more to say about that in the months ahead.

So what will joining up the Company look like in financial terms in 2007 for you? I believe automation, Internet sales, focused customer offerings built around segments and interlinking our various segments in country and globally will over time lead to a slowing of cost growth and increase in revenues. In other words, positive jaws. But we'll still be able to invest organically and by acquisition.

So, as to -- let's look at 2007 in terms of economic outlook. We see a benign credit position in Asia and, to a lesser extent, in Latin America. While concerns over the U.K. consumers' indebtedness remain, the overall environment appears to have stabilized. Looking at the U.S. consumer, it's really hard to give a view so early on in the cycle with regard to house prices but we're encouraged by the high level of employment and the likelihood of stable and falling interest rates.

So, in summary, 2006 was a record year. There's a lot to go for in 2007 in all our markets as we continue to join up the Company, for our customers and for our shareholders, using the strength of our technology and the size of our capability of our global network. Thank you for giving me this opportunity to speak to you and I'm now going to hand back to Stephen with no further ado. Stephen.

Mike, thank you for that. I want to spend the final few minutes talking about Group strategy going forward. The way we intend to take the Company over the next five and more years.

And I'd like to begin with a chart that shows where we've come from over the last decade-and-a-half, since 1991. This is interesting because it shows two things. You've got the red bars there show earnings per share and the gray bars show dividends per share. To take the second first, the dividend share -- per share, show the delivery on the specific commitment of aggressive dividend policy and interrupted growth there up to $0.81 in 2006. And that, by the way, represents a 58% payout. The earnings per share shows an overall compound annual growth of around 17% too. And it is interesting to note that if you look in the -- a couple of periods in 1998 at the time of the Asian crisis, and in 2001 at the time of the Argentine crisis, we actually saw a decline in earnings per share. I make that point really by contrast with the experience this year where, despite the obvious issue in mortgage services in the U.S., we have actually produced a record profit and an earnings per share growth. Overall, though, I think you'll agree that's a pretty remarkable track record and it's one that I think that we can build on.

I want, really, to focus on three major trends in the world that are conditioning the way we think about Group strategy and the first is this. We all know it in principle, but the numbers are striking, emerging markets growing faster than mature economies. Ten years' ago, the emerging markets represented about 35% with world GMP. Today, they're just over 40%. On the current trends, which we believe will continue, they'll be 50% or more within ten years. This has obvious implications for the way we develop our franchise.

The second trend is not unrelated to the first one, of course, is that as globalization continues its momentum so you see not only reasonable levels of world economic growth but that world trade grows faster, and systematically faster, than world economic growth. And so for a bank with a strong position in Commercial Banking, that's a powerful context for evolving Group strategy.

And then the third point, again, it's discussed extensively these days, but the extent of it I'm not sure is always appreciated it, longevity increasing virtually everywhere. We all recognize this is true of the more developed economies and, in particular, of Europe. And the bars there show -- the red bar is the world in total, percentage of people aged over 60, the gray bar is the maturer economies, and the buff bar, if that's the right color at the end, is Europe in particular. The black bar is interesting because that's the less developed or emerging markets. And even in those countries, the percentage of people over the age of 60 is increasing and expected to continue to do so over the next generation.

So those three main trends in the world at large set the context for the way I'm determined that we take the Group forward over the next few years. In particular, going forward, we will focus more on the emerging markets business, building on the huge strengths of the HSBC franchise that Douglas and Mike have just been talking about. Asia, Middle East, Latin America and other emerging markets are now just shy of half the Group total. We expect them to be over half of Group profit and to trend upwards over the next five years or so.

Specifically in the context of Asia, we see Hong Kong and Mainland China being -- becoming dovetailed more and more economically. As Mike put it, more and more people and businesses flowing in both directions. We will increasingly manage those as a seamless business.

And thirdly, it follows from the above that we see incremental investment being weighted, not exclusively but largely weighted towards the emerging markets. And, indeed, if you look at what we've been doing in recent months, you can see the clear evidence of this. Mike has referred to the investments in Banistmo. Towards the end of last year and to the increased stake in Vietnam's Tech Com Bank. Just this morning, we announced in India a new memorandum of understanding signed with Canara Bank and the Oriental Bank of Commerce, they're are both State banks, for an exclusive arrangement whereby we provide insurance products to their customer base, that's 40 million people, including the HSBC customer base, in India. A very exciting new initiative as part of what we talk about with our new thrust in insurance.

So far as the maturer markets are concerned, we're going to focus particularly on Diaspora, especially those within emerging markets, connectivity. And here I'm thinking of Hispanics in America. We've talked about that before. But not just that constituency. There is the Chinese and the India Diaspora that have stood HSBC in such good stead over the decades. There are groups like the Polish community in this country, for which the passport product that we launched last year has been such an astonishing success. I'm thinking too, for examples, Indians in Silicon Valley. A very wealthy constituency that our Private Bank is beginning to tap into.

Customers in general, with international connectivity. When I think of our 2.6 million commercial banking customers around the world, at least 40% of those, and that percentage is trending upwards, have international connectivity in one way or another. They're either involved in exporting or importing, they're looking at outsourcing, they have joint ventures. One way or another we, with our calling card in 82 different countries, have an obvious opportunity to do more and more business with them.

Tight cost control based on technology. Mike has talked through the detail of that and then our commitment to make sure that we re-engineer and/or when, in the limit, dispose of businesses which are not core to strategy or earning the freight in terms of capital allocation.

We will remain a broad-based universal bank. That is our proposition. I don't see that fundamentally changing. I see no need for it to change at all. We have four strategic businesses. All of them have obvious opportunities for us to develop our franchise with them.

In Personal Financial Services, which is a significant part of the Group with 40% plus, consumer finance will remain a core competence within that line of business. I cannot conceive that you can develop a personal financial services business around the world without having consumer finance as a core part of the business offering in that area. And so the products and services that we acquired through HSBC Finance are critical to our strategy. And one of our key opportunities is to take the credit card capabilities, the direct lending capabilities, around the world in the years to come. We've been working on this, Mike I know would agree, there's much more to go in this area.

Commercial Banking. Those 2.6 million customers are a unique -- unique's an over-used word but, in this case, it's justifiable -- a unique franchise for us.

CIBM. Mike has spoken about the way in which we're going to refashion and make sure, led by Stuart, that we have a business which is emerging markets-led. Already, roughly 50% of its business is emerging markets related. Financing focused in a way which meets the needs our client base around the world.

And then lastly, Private Banking, with its powerful international network and strong connectivity with the rest of the Group's business.

And then across all of those businesses, if you look over to the right hand side of the slide, the opportunity with all those customer types to grow our business in protection, investment and insurance because so many of our customers, of all kinds, have need for that business -- for those services.

When I look at capital strategy, we will maintain a strong capital position. A Tier 1 ratio of 9.4%. We believe that it is appropriate to maintain a robust capital position as we develop our business. We will maintain our scrip dividend scheme, which is so popular with our retail investment base in Hong Kong and elsewhere in Asia.

We will maintain a strong return on capital and focus on economic profit so that we are making sure that we are using capital effectively for our shareholders. If we found that that was diluting then, clearly, we would look at the ways in which we should consider returning capital to shareholders but, as of right now, our commitment is to continue to maintain that strong capital position. And we believe that we have the opportunities to make good use, for our shareholders, of that capital. But we review this regularly and our commitment to our shareholders is to make sure that we hold that amount of capital and not more than and not less than we need for a sustainable business returning very good returns for you.

Finally, I'd just to leave you with a slide that summarizes the strengths and the results in 2006 despite the obvious issues surrounding U.S. mortgage services. Revenue, up 13% to $65b. That revenue growth is double-digit, and has been for the last three years. We have a number of businesses that join what we like to call the billion-dollar club. Mike has referred to them. Mexico, the Middle East, Private Banking, Commercial Banking in Asia outside of Hong Kong. Our profits before tax, $22.1b. Our cost efficiency ratio, essentially flat despite significant investment in a number of businesses. An extra $1b from Commercial -- an extra $1b from Commercial Banking globally. The strong capital ratio, I've already referred to. Earnings per share of $1.40. And dividends increased by 11% to $0.81.

So thank you for bearing with us in what is, obviously, a longer presentation than we've done on previous occasions. I think it's appropriate, or I hope you would agree that it was appropriate, to take you through in more than usual detail, not only our performance, but our objectives for this year and our strategy going forward. We'd be very happy now to take questions.

If may just, a word or two on the kind of traffic control arrangements with Hong Kong and London. If you'd like to raise a question, please raise your hand and wait for a microphone to come to you. In Hong Kong, Vincent will invite the next question and I'll do the same here. And Vincent and I will make sure that the traffic works well. Vincent, I wonder if we could start at your end.

Well, [Amos].

Yes. If I may about household [return], speak to the comments that you made. The first question is you gave four factors in terms of sensitivity the future provisioning needs for the household mortgage book. Assuming those four factors are relatively stable going forward, are you willing or prepared to say that provisioning from here is going to be at the more normalized level or, as you said previously, that it's still early days so you -- that's a hard statement to make.

The second question I had, again also on household, is to challenge a bit your comment about revenues. We've had enough boom bust -- consumer boom bust episodes here in Asia to know that it's usually accompanied by two, three, five years of revenue contraction. My follow-up question is why do you think that's not going to be the case here? Or, to put it another way, what -- why are we not going to be surprised again on a negative side in terms of the revenue contraction issue going forward with household? Thank you.

Right, thank you very much. What I'd like to do is suggest that Douglas takes the first question about provisioning and Mike the second one on business growth and revenue implications.

Hi. You're trying to tempt us into giving a forecast for next year on the provisioning charge. I think Mike said that very clearly the factors that will impact and I think it would be foolish to try and project what our understanding of those factors are and then for you to try and assess whether your interpretation of our view of the underlying economic circumstances is the same as your own. I think all we can do is point to the drivers. There's a lot within our control in terms of corrections and so on but there's a great deal outside of our control in relation to the economy. So we can only really point you to the factors.

On the revenue and the trends, certainly, you've seen already a number of people leaving the market. And what you're going to see is those who stay will be more robust, they'll have pricing power, and that is already beginning to come. So I think, yes, there will be a decline in revenues but, as I've said also, it won't be a total decline because I imagine we'll keep the servicing rights of this. And, clearly, we need to work through this and this is a downturn and people will still be buying houses, they'll still be financing the houses they've got, so there will be customers to speak to. So we're going through a downturn. No different than you've seen downturns, as you say yourself, in Asia. It comes back robustly. No different to the downturn in consumer lending here in the U.K. and it will be the same in the U.S. They'll be a dip and a comeback.

A question from here. Yes. Please.

Morning. Thank you. Ian Smillie from ABN Amro. Two more questions on HSBC Finance, please. The first one. Could you quantify for us how much, if any, direct lending exposure you've got to the competition in that market? And, secondly, could you -- could I encourage you to talk a little bit about the outlet for volume growth on the unsecured loan book? I guess, on the one hand, the two-month cost delinquencies there unambiguously rising, but you tell us that's within your level of expectations. So does that give you the confidence to continue to lend on the unsecured book or will you be slowing that as well? Thank you.

Douglas.

To my mind it's a -- to competitors within the HSBC Finance business negligible. Clearly, we have within our CIBM platform in New York, which does mortgage-backed securities, we have some exposure and we've looked at that but that's not a significant factor at all. In relation to volume growth, I think it's better that Mike deals with that because.

Mike.

Well, firstly, on the consumer lending side, we do the bulk of this, if we exclude mortgage, we do the bulk of this face-to-face in our 1,400 outlets across the U.S. And that's the right place to do it because you have a much better response, a much better credit quality in that environment. And I'm not seeing any need to pull away from that.

On the cards side, we -- frankly, you can see the prices on the portfolio of cards that are being acquired. They're being acquired at a premium so it is not coming into the card business and we're not seeing any major trends there at the current time.

Also, finance, again, there's been an adjustment there. The auto-finance work -- manufacturers themselves are in the market, cars are being sold again. So we see a bit of pricing power there, but I'm not going to say there isn't going to be a delinquency level in regard to these consumer products because we've also analyzed how many of our customers have -- are likely to have an under -- an adjustable rate mortgage in their collection of liabilities. So we -- there must be some sort of feed-off from a reduction in disposal income but nothing of an impact that we've seen at the present time.

Thank you.

Vincent, a question from Hong Kong.

Thank you, Stephen. Gentlemen.

Hi. This is Kevin Chan from Nomura Securities. I have two questions. Back to the Argentina problems you had a few years ago. You made a special general provision of $1b. Have you considered doing that again for the U.S. mortgage business, in particular the [second lien] business?

Secondly, in your mature market strategy you talk about re-engineering or disposal of businesses which are non-core to the strategy. Could you give us some guidance as in what are the non-core business in the mature market? Thank you.

Kevin, thank you. On Argentina, it wasn't actually a special general provision but, Douglas, do you want to comment on the detail?

I think you're referring to.

The last time that I'm aware of we did a special general provision was in Asia for the current -- for the crisis in 1998.

That's right. That's exactly right. And the world has moved on in terms of what's permissible under accounting. There's no possibility today of taking a catch all general provision and, therefore, we have not. But what we have done is look very, very carefully and critically at all elements of impairment. And, as I said, specifically, and importantly looking at the impact of non -- our non-delinquent mortgages or payments stressed that will come from adjustable rate research, non-core businesses.

Mike. On engineering in non-core business.

Okay. We look at this all the time. And I believe that you've got to have market share, particularly in PFS, and I'd put a guide between 5 and 7%. It's what we looked for. In some markets, it's just not possible to do it and then we take decisions to sell down. Normally in these things, it's where we haven't got control of the situation. We sold down in Cyprus last year. We've got other things that we do as they come forward. There's nothing that we have of a major business that is not meeting the critical [holes] that we want but, I think, the message we're giving to you is that if they don't meet the critical [holes], we'll take action.

Please.

Morning. It's Simon Samuels from Citigroup. I've actually a couple of questions on household, surprisingly, as well but, before I get on to that, I just wanted a point of clarification. At the very end of Mike's presentation he sort of said, I'm paraphrasing here from my notes but along the lines of so what are you -- kind of what should you expect for '07 in your numbers, and you went on to say a slower rate of cost growth, an increase in revenues, i.e. positive jaws. I just wanted to confirm, did you mean for '07 specifically, positive operating jaws?

What I actually said was actually talking about automation. I said what will that lead to over time. And I said was that as you automate these products, you'd largely expect us to be controlling our staff costs line so we will grow the revenue, because that's what our customers want to interact with us, and we should be able to control the cost. And that element of the business should see positive jaws over time.

Okay. Thank you.

I know that's not a forecast.

The -- right, so the household stuff. First of all, I just wanted to -- if I look on slide 30, which shows the two month past delinquencies by mortgage channel and if I convert the mortgage service percentages into dollar millions, just, obviously, using the period end balances, it basically looks like you've got about $2.3b at the end of December, $2.3b of two month plus delinquent loans in the first and second lien in mortgage service business. So $2.3b was the end of December '06 position. That was $1.3b at the end of '05 so it's gone up about $1b. What I -- the first question I've got is, just very simply, what is your provision charge against that? I know you've got that earlier slide that shows the increase in the Group provision and $2.3b of the increase was in mortgage services, but what is the actual P&L charge against the mortgage service channel for '06, please?

Well, both numbers are about $1b. It's about $2b -- sorry, $2b. It's about $2b charge and the stock of provisions in mortgage services at the end of the year is about $2.1b.

Okay. Thank you. And then, I'm interested, again, using, I think it's slide -- yes, looking at slide 31, the, obviously, the detailed breakdown between first and second charge by product. You say in the statement that, as you kind of, basically, hunted through the customer base, you found that a significant number of your fixed rate products, second Lien Fixed products, are actually standing behind a first charge ARM and my question is what -- how much of that $7b is standing behind a first charge ARM? So you've got, on slide 31, $7.1b of second charge fixed rate mortgages and you say in the statement that a significant number of those sit behind a first charge ARM. So my question is how much of that £7.1b sits behind a first charge ARM?

I don't have that number off the top of my head, Simon. We'll have a look at it. But what we did was we went to the references of the credit agencies, and, indeed, some other services, to look at the -- and we extrapolated a sample so I think it would be foolish to try and extrapolate that from the point of view of that portfolio. That wasn't the way that we did it. But because the estimated loss on those second ARMs with first mortgages behind them or ahead of them was more significant, we increased across the whole book. I haven't got a split in the way that you've got it in these columns.

Okay. Thank you. And just one -- sorry, just while I've got the mike, just one for you Stephen, I think, is you've conditioned us not to take any signaling value from your declaration of quarterly dividends. I do know this year's declaration is a 13% increase on the three quarters of '06 and the prior year is a 7% so should -- is that still -- does that still hold true? There's no signaling value in that?

You should not take any signaling value for the full year dividend. We wanted to send a signal that we care about the reward to our shareholders so we did move it up from $0.01 -- previously, it's been a $0.01 increase but I wouldn't want you to translate that into a percentage assumption about the full year. That's not a commitment we're prepared to make. Could I take a question from Hong Kong? Vincent.

Thank you, Stephen.

Yes. Hi. It's John Wadle from UBS. Just a follow-up, again, on HSBC Finance. I'd appreciate any color you could give us on the sort of transmission mechanism for these mortgages that you talk about that you've taken provisions for, i.e. do you anticipate them actually going into delinquency within a relatively short period of time, the next six months or so? Do you anticipate that there would be foreclosures that you'll have to do, actual bankruptcy filings from these customers? How does it work itself through your outlook for these customers?

Mike.

Well, firstly, we contact our customers and work through what they're saying to us in regard to their disposable income. Clearly, as the portfolio matures, just like it does in a credit card portfolio, we give basic terms, often people taken out a new credit card, they keep up with the first two or three payments and then fall behind. The same type of approach with a mortgage portfolio and that will mature over time and then will be called [seasons through].

We're not always taking -- repossessing properties. It's the last thing we'd want to do. We're working with our customers. We're looking at the interest rate. We're seeing what they can pay. In some cases they'll say to us here, we'll give you back the keys. You take them and we walk away. That's a small amount. And this is a responsible business we're in. We're trying to work through these issues with our customers and taking back a home is our last resort. And, as we develop this out -- I think it's worth pointing out, we're probably the second business in this business, the collection business, of managing this type of thing. So we've got a very skilled base at work here. And we've managed expertise. And we're able to bring people across from our credit card division, our auto finance division, to assist us in understanding how's the best way to manage this. So we expand out the loan repayment schedules, we look at the interest rate, and the very last thing we'd do, we'd take a property back.

Mike, thanks for that. Questions from the back over there.

Yes. Good morning. It's James Eden from Dresdner. You have a very fat Tier 1 ratio, especially when you take into account how little hybrid leverage you have within it. We estimate you've got about $20b of surplus capital. Aren't you doing shareholders a disservice by hanging on to this war chest?

James, thank you. First of all, we don't see it as a war chest, meaning we're about to do something dramatic with it, and nor do we see it as excess capital. What we do commit to you is that if we couldn't find ways of using our capital in a way that earns a good return to the shareholder, we will find ways of addressing that issue. We think it is appropriate to have a strong capital position. We do think it's important to maintain the scrip dividend scheme. We know that that's very valued by our retail Asian shareholder base. But we're committed to maintaining a strong return on capital and a focus on economic profit. And the working out of that would be that whilst we can find ways of investing the capital in a way that achieves a strong return on capital, you want to be happy with that, and if we can't, we'll be the first to tell you. And we have the mechanisms to deal with it, as I think you are aware. Douglas.

I think the other thing I'd say, and lots of people have an estimate as to what they regard as excess capital, but we have very many businesses in Asia, in Latin America, particularly Mexico, in Private Banking, where the conventional Tier 1 ratio is well above the most leverage ratio you might see in some European banks. And therefore it would be impossible to, in fact, infer that you could run the entire Group on the sort of capital ratios that some domestic banks run in individual countries across Europe. So that would just be a false calculation.

Questions. Yes, please.

Yes. Good morning. It's John-Paul Crutchley from Merrill Lynch. Two questions, if I can. One on the investment bank and one on the strategy, principally, in the U.S. What you seem to be saying today is almost a thinly veiled repudiation of almost the [books] we've been doing for the last seven years which has been, very much, almost like becoming more OECD, more developed market, and, clearly, you're signaling a reversal of that trend in term of incremental investment. I'd just like to invite you to maybe just talk a little bit about the U.S. business, in particular, which, clearly, as a business is very top-heavy in consumer finance, has limited CIBM but is very light in terms of deposits. And do you feel that that business, in term of its current shape, is where you really want it to be long-term or is it very much still an evolving business? And then I've got a second question on CIBM.

Let me take that one and Mike may well want to chip in as well. First of all, I wouldn't use the word thinly veiled repudiation. I don't think that's true. I think we are evolving it. We are saying that whereas we have previously talked about a tripartite view of the world, Asia, Europe, Americas, now we do see our focus being more heavily on emerging markets. This is not to the exclusion of our important mature markets businesses, obviously. We have good businesses in this country, in France, in Canada.

And in the U.S. I think you've drawn attention to some issues that we will be working on. It is the case that our businesses use the phrase top-heavy. What is certainly true is consumer finance bulks much larger in our business in the U.S. than the typical bank profile in the US. I think there are issues about how we -- not issues. There are challenges that we have to address as we take it forward. We need, I believe, to get a closer integration between the consumer finance and the Bank. I think the direct banking initiative that we launched at the end of '05 actually did very well through '06, has generated very significant deposit growth. That's, I think, an extremely result. It's actually, to be honest, much better than we initially thought. It's done extremely well.

And then, as we look forward at how we evolve the customer base in the U.S., we do see opportunities. Really majoring on, not exclusively, but nonetheless heavily emphasizing diaspora business. I think the Hispanic component of the client base of household HSBC Finance as we know it, is an important one to us because the connectivity with our Mexican business is an obvious one. But these are the kinds of things that we will be working on over the next few years.

I don't want, and neither would Mike, to leave you with the impression that six months and the waive of a magic wand, will get us from A to B. But we've got very good building blocks. I am confident that our, and I said it before, that our consumer finance competence, that resides primarily in household, is something which is significant for the Group and which we value and where part of our management challenge for the next few years is to take that around the world. We've been working on it but I know Mike would share the view that there's a lot more we can do.

I don't think I can say much more after all that. I think what we could add is, clearly, what we looked at and what went wrong was in a place where we actually weren't talking to the customers direct. And if we get over that and get that more aligned to an investment banking model, and you've seen all of our competitors buying brokerage businesses across the U.S. because there's value there, and getting that aligned and that channel going straight into the investment bank. And then building out with our consumer clients across America -- let's say first, there are 60 million customers of ours there. As I've said before, people would die to get that type of customer base. We've just got to work it better, get more of the sort of HSBC classic approach to that, and use this brand of HFC and beneficial, it's the feeder-brand for HSBC in the U.S.

And there's a lot of work to be done there. I was over there the other week, as many of you know, and there's a management team in place to do that and we're going to build it out, and they all know what they've got to do. They know their colleagues from Canada down to Buenos Aires. They will get this done. It will take a little bit of time but I think it's very exciting what we can do with this business.

I'd like to take a question from Hong Kong and then I know we've got one on the web. So, Hong Kong. Vincent.

Thank you, Stephen. Gentlemen.

Thanks. This is [Senio Gogue] from JP Morgan. I have a question related to strategy and just following on from the previous one. Didn't you say that should the Group see an opportunity in the U.S. with, I guess, a greater emerging market focus now, you would bypass opportunities to acquire in the U.S.?

And I have another question related to that which is would you look to reset the balance in emerging markets through organic growth or are you significantly acquisition focused? Thanks.

Senio, thank you. Firstly, we don't set out with a strategy that has acquisition at its core anyway. So whether it's the U.S. or anywhere else, we don't start saying the only way to make progress is by making an acquisition. And we remain very focused on value in acquisitions. As far as the U.S. is concerned, I think it does follow from what we're saying that you shouldn't expect us -- to see us doing a big bank acquisition of general banking in the U.S. market. It wouldn't be consistent with what I'm saying. I think even at the smaller ticket level, whilst I don't want to rule anything out, I think that's inappropriate to do, you should expect us to be focused on reasonable value. And you're probably aware, as I would certainly be aware of some acquisitions in the U.S. context that have a diaspora focus to them or a connectivity that still look extremely highly priced to me anyway.

More generally, if I look at the emerging market, same comment really. I don't start by saying you have to acquire to build our business. We've invested, as Mike said, $2b in our -- through the P&L, in our Asian business in the last year or two. We will continue to do that. We see very significant opportunities to grow our business organically but, again, I think it's wrong to say you don't acquire and, indeed, our record, Banistmo, in particular, in the latter part of last year, shows that we're prepared to do this when we think it's right for shareholders, strategically and financially.

Can I take the question from the web now, please? Danielle.

We have a question from [Jodie Simmons] at [Bramavera Capital Partners]. I have a two-part question regarding geographic exposure within the U.S. mortgages business. One, in which state does the Bank have most exposure to sub-prime loans? And two, in which states are you seeing the highest rates of delinquency?

Douglas.

Page 174 of the filing that the Finance company made sets out a very detailed analysis of their states exposure, which is broadly across the demographics of the U.S. They would typically be lighter in states with high concentrations of wealth so, California and New York, in terms of penetration. And, I think, it is industry knowledge that it is California where the house prices were most buoyant that has seen a higher degree of delinquency, and then some of the rust belt sates driven by unemployment. But the statistics, they're all set out in page 174, but it's broadly right across the U.S., in line with demographics.

Questions. Yes, please.

Yes. Thank you very much. It's Tom Rayner from Citigroup. A couple of questions on strategy, please. The first one on the U.S. consumer finance business because I hear what you're saying about exporting the skills of the U.S. consumer finance business across the Group. It sounds very similar to what was said very soon after the acquisition of household and, I guess, it's fair to say it hasn't really happened. And I just wonder if there's an element of there not actually being enough available data in most countries outside of the U.S. where you have a huge depth of credit bureau data which makes that exporting of that type of model really very difficult to actually achieve. And I have a second question on the insurance side, if that's okay.

Tom, thank you. Let's just take that one. First, a general comment from me. We are at work on this and have been at work for a number of years but, at I said, I think there's a great deal more we can do. Mike.

The first thing, you're absolutely right. There's positive data and negative data and the U.S. works on positive data, the emerging markets work on negative data. We're covered in both instances because, you will recall, we thought [Lasangro] in Brazil, which is the Lloyds franchise. We are now the biggest in consumer finance in Brazil. And they work on the negative data side and we're exporting that to the markets that need negative data. Other markets, Australia, for example, needs positive data. We move that model from our household across.

To your question, we heard this after the acquisition, I think that's a fair comment. I don't think we really pushed this together. What we did after the acquisition was we focused on the U.S. and then, secondary, assisted other parts around the world. We need to crank that forward and we need, internally in the U.S., to make it far more using the demographics the Group has worldwide, so the immigrants coming from a different markets and positioning the brand in the places where those immigrants are landing and living when they come into the U.S. So there's a lot of work to be done, I think a lot of positive work and advance should be gained.

Vincent or Mike in Hong Kong, I wonder if you want to make any comments about the way we've been investing in and developing consumer finance business throughout your region.

I may ask Mike to do it.

Thank you, Stephen. Yes. We have started a consumer finance business in Australia which -- where we have been able to use the household model quite effectively. And we have also started the business in India and Indonesia, which is a slightly different model and, as Mike Geoghegan was saying, this is using negative data or the negative aspect. And, again, that is -- both those businesses are actually growing very strongly. We do see that there is capacity in other markets in which we operate and we are looking at the opportunities at the moment.

Your question on insurance.

Yes. Thank you. Just [inaudible], just on the insurance. Again, listening again to what Mike was saying about joining up the Group. And looking at your strategy across the entire Group now it does seem to be that in some regions manufacturing and distribution is the model and in others it's distribution only. I'm just trying to get a sense that when you join up the whole Group is there likely to be a very clear view about whether it's distribution that creates the value in this business or whether manufacturing is a crucial part as well?

Tom, it is primarily distribution but we have a number of manufacturing businesses and we will -- it's work in progress and we will see how we build that going forward. Mike, do you want to --

The only thing is we do manufacturing in certain countries because we -- basically we have to make a return on it. Others, who are the big distribution capabilities, we use distribution but it's a bit of both.

Questions from Hong Kong.

Thank you Stephen. Gentleman in front.

Thank you. It's Alistair Scarff from Merrill Lynch. Just a quick question if I may in relation to comment on your slowing of balance sheet growth. Just looking at your loan growth numbers across the regions, I was wondering if you could drill down into where you think there'll be arguably a slower expansion of your balance sheet than you've seen in the past 12 months or so?

Clearly in the U.S. we will be reducing our exposure to the broker channel so that itself had a large expansion in the balance sheet. It's fair to say we're using more use of securitization than we have in the past so that itself will impact the balance sheet. But we're in a fortunate position, we have the capital to expand the balance sheet if we want, we'll take the assets that have the yield for us that we want and the others we'll securitize or not do those businesses.

Thanks.

Good morning this is Antony Broadbent from Sanford Bernstein. I've got two questions if I may. The first one is on U.S. unsecured credit losses where in light of falling house prices, falling levels of employment, a rising debt servicing burden and the general slowing economy, many commentators are expecting significant increases in the levels of unsecured loss rates, some are saying 25 to 30% during in 2007. Now if you don't want to share us the forecast for 2007 for yourselves, can you at least share with us what your industry expectations are and perhaps give us some idea of where the latest delinquency trends are pointing?

We would certainly share the industry trend view that unsecured lending is going to show higher delinquency, higher costs, next year, largely -- this year in 2007 largely as Mike said because 2006 was abnormally good, coupled with the fact because of the bankruptcy effect in 2005 coupled with the fact that the economy is slower in 2007 than it was in 2006. We share all of that and I think one of the points we keep coming back to is that as long as we can foresee the trends in the economy and price that into the product, the actual level of delinquency and the cost of it is not that relevant. It's a question of whether we've built it into the margin and what we're seeing at the moment is broadly in line with the trends that we expect. And therefore that's not as damaging a situation clearly as one where we've got an unexpected turn of events.

Can I have one more question? On -- just on corporate credit, just going back to a comment that you made in the Q3 trading update where you said that your appetite for corporate credit was selective in the light of historically low risk pricing. And I'm interested in whether that still holds true today and whether you've got any guidance for us in terms of what you expect your corporate loan appetite to be for 2007?

Well what we were referring to there, I have to say for all the years I've been in this business the deterioration in covenants or the lack of covenants in general banking at the moment is probably at the weakest it's been for a long time. And my concern was that we would not wish to be involved in those types of credit that didn't meet the normal credit standards that HSBC expects to be run to. It doesn't necessarily mean that we're not going to do transactions but it does mean that we'll be selective and knowing our customers better in regard to that customer base that we have. [Although] we're continuing to finance the major projects and you see us in the markets all the time so there isn't a reluctance to lend but there is a focus on quality.

[Inaudible] from ING. My questions are on the PSF. Given that PSF represents 43% of Group profits and putting aside the impairment issues in both the U.S. and the U.K., if we look at performance on a regional basis, forward momentum only seems to be coming from a few key locations because profits have actually fallen back in Brazil, Argentina, Canada, Turkey, Thailand, Taiwan, South Korea, Indonesia, France and Italy. So when can we expect to see PSF performing on more cylinders?

I think, let me make a general comment and Mike you [inaudible]. I think and we mentioned this earlier, quite a lot of those businesses that you've just mentioned, we've been investing significantly. And Turkey's a good example, 37 new branches of 150, that's a substantial expansion of the network. There are one or two businesses where there were provision issues, I think they're well known in the industry, in Taiwan and Indonesia, for different reasons. And there were some other one-offs, Brazil's another one. So when you list that number of countries, in a number of those are specific one-offs. If you look the underlying performance I think it's very satisfactory. The PFS business has historically been higher than 42%. It's down this year because of the U.S. issue but overall I would expect it to be nearer half. Mike do you want to add --

I think I would just add obviously in the rest of Asia and in Hong Kong itself we're focusing very much on the customer proposition and to do that you've got to spend money, particularly on the direct channels. And that's what we're going to do and continue to do. Obviously taking in Banistmo is another one that puts the expenses up for the first time and obviously the revenues as well, there's a lot to do there. I used to run the Personal Financial Services business until I took up this position. I don't see anything in the trends today that is giving me a concern. I think there's a great opportunity to grow and I reiterate the insurance side of it, there's a lot to go for. And I wouldn't be surprised that a flight to quality will come along on this thing and we will benefit from that as well.

Vincent or Mike in Hong Kong, I wonder whether you want to add some comments on the direct banking initiatives that are being launched this year in Korea and in Taiwan.

Well hopefully it's very successful, they're quite well received by customers there and I think the record matches that of our experience in the United States. But Mike, do you have anything to add?

Yes. The first direct business that we launched was in Taiwan and it's interesting to note that in the first five weeks of operation there we managed to obtain as many customers as we had done in five years for a branch. The growth in Korea which has been open for about a month now is also equally positive. So we're very optimistic. Going back to the question on the issues with PSFs in the countries like Taiwan and Indonesia, they as you aware, have been affected by systemic problems in the credit card regulation. Thailand is just sub-scale and it's something we need to build and of course the regulation there restricts us to one branch. And in Korea the cost of the direct banking was the main cause of that performance blip. But the rest of the business in Asia Pacific in PFS is going very well.

Mike, thank you. A question -- one more from here and then one more from Hong Kong.

Robert Law of Lehman, can I have a few questions please. It's taking a while for the mike to arrive but anyway. So if I start with HSBC Finance, in an answer to an earlier question given the net impairment charge we can work out therefore that the mortgage services division I think may take $100m provision. Can you give us some figure as to how much of that you think may be sustainable? In particular you mentioned a fee business you're going to continue to retain. That's the first question.

Mike?

Well certainly the fee business that we've got in the mortgage services we will certainly retain. To the numbers, I don't break it out to those numbers but I think general business going forward is robust. As we've said before, there's going to be ups and downs in this, we're going through a down period. And I think there'll be a market consolidation and we'll benefit from that. So I don't think there's an issue in the long term business or a major turndown that there will be if the economy slows and people readjust their spending habits. And I think it's more likely to come in the other revenue lines than in the mortgage side itself. Because as people adjust they will hold -- they will put their money towards their homes.

So you think that $800m is broadly sustainable?

That's your number.

I think the other way of looking at it Robert is that in the mortgage services business we had actually had a lower return on assets than we had in the rest of the consumer finance business. We were making about 1.5, 1.6% on assets and that's lower than we make in the other businesses. So I think that it gives us an opportunity to redeploy. That business will shrink and I think it gives us a chance to redeploy into areas that we'd prefer to be in and where we may -- which would give us higher growth. Clearly we can't replace the size of the portfolio, that would be foolish. But I think we can get higher margin products if we stick with the consumer branch based business and the credit card business. And it will be a redeployment of capital so I'm not bothered if that business shrinks, we'll redeploy the capital elsewhere.

[Inaudible] actually the classic thing with consumer finance is you're always trying to extend the longevity of your loan. Well, the reality is we won't need to go out to get so many more new customers. The customers we have will be more likely to stay with us so the loan will actually stay for a longer period of time.

That brings me to the second point which was can you give us some idea of the growth you're expecting in the HSBC Finance business outside the mortgage services division? For example, what's new business origination running at, at the moment outside that division?

Well I don't give out those figures per se. All I'm saying is that they're in keeping with our projections and our operating plans. We don't see any downturn in those businesses. They're driven very much by the underlying economy as well.

May I have one final --

One more.

You've increased the dividend significantly despite the fact that [you haven't] grow much and you've now got the payout ratio up to 58%. Could you comment on what you view as an appropriate level of payout?

I think the only commitment I'd make or reaffirm which is the one we always have made is that of a progressive dividend policy. We don't commit to a specific payout ratio, and there's a general commitment to make sure that we use capital in areas where we think it earns a good return for the shareholder and to return it to the shareholder if we can't. But the specific commitment on dividends is to a progressive dividend policy.

Can I take a question from Hong Kong?

Thank you Stephen.

I'm [Inaudible] from Morgan Stanley. I was hoping to better understand the $2b provision you've taken on the mortgage service business. How much of that actually does relate broadly to the first lien portfolio and how much relates to the second lien portfolio? And what kind of severity rates are you seeing in both businesses given delinquencies?

And maybe one step further, how much of these provisions relate to existing delinquencies and how much relate to impairments which are not existing delinquencies?

Okay. The majority of the provision relates to the second lien book which I think is what you'd expect because the severity is a great deal higher. We are expecting severity to be upwards of 90% of second lien's default because essentially if they do default, the first lien is already burnt and there's likely to be very little left and certainly that's our assumption.

In terms of the -- one of the big elements in setting the provision was as we've said, ARM resets. And I think it's in that area where we are taking into account the impairment that we estimate is already in place but where the customer at this stage may not in fact be behind with his payments but we estimate that the ratio that is built in either to his own payment obligation or has opened his payments obligation to another lender is such that that loan is impaired and we've reflected that. And that is a big element of the provision that we have against the second lien loans.

I don't think we're going to split the actual numbers out because it's a level of detail we haven't disclosed. But the majority of the provision at the end of the year is for the seconds and the majority of that provision is already a very large proportion of that provision is in relation to second liens that have resets or have got resetting firsts ahead of them.

Morning, thanks, it's Mike Trippitt of Oriel Securities. The question follows on from that last one. You've given in the release the maturity of the resetting of the mortgage services, 9.9b I think -- $9.9b meeting a first reset in '07 and then a 3.8b facing first reset in '08, page 891 of the report and accounts. Can you give a split of that between first and second lien and can you give a sort of risk assessment of how much you've provided against those resets already?

Douglas?

As I said, we're not going to split the provision down against what it was against each element because I think that that's a level of detail we haven't disclosed. We have as you said split out the adjustable rate mortgages that reset in 2007 and you can see that it's as you've described it, and there's a lesser number coming through in 2008. Those resets are what drove the element of the provision which was a very significant portion of that provision that was raised for second lien ARMs is driven by those resets. So that's all we can say.

Vincent, from Hong Kong?

Thank you Stephen.

Bill Stacey from Credit Suisse and my question follows up similarly. Just overall with regard to the consumer finance business compared to a number of the originators that are currently under a lot of pressure and portfolios that are currently priced in the market, your outcomes although weak nonetheless seem on the whole even in the weaker parts to be somewhat better than the market. Can you give us some indication of your average [Flycro] scores within mortgage services compared to your home equity portfolios or branch-based portfolios or other evidence that might support the earlier suggestion that your branch-based business is substantially better in underlying quality than the originated business?

I don't think we're getting into [Flycro] scores and I think one of the lessons for us in this is that Flycro scores in any event are only one element of the credit evaluation. The reason the branch-based business is different from the mortgage services business in terms of impairment today is really twofold or threefold. One the branch-based business is substantially fixed rate. Secondly it's predominantly consolidation lending, i.e. it's not house purchase, so we're consolidating unsecured debt into a real estate secured loan and therefore people get a benefit in their monthly payments. And thirdly we have a face-to-face contact with the customer, which we don't do where we have a loan that we acquire from a correspondent banker broker. And those are the three elements that I think make the difference, a different shape altogether.

I think the other thing is we're going to have no drop in the consumer lending.

It's Alistair Ryan from UBS. Two questions, one on emerging markets, one on Hong Kong. On the emerging markets businesses should we infer that you're likely to be indulgent of hockey stick profit forecasts from those asking for investment, or has the $2b that you mentioned, is that enough to stop the revenue momentum that you were alluding to going already?

And certainly in Hong Kong, a marked step-up in revenue growth despite the apparent unwillingness of anybody to borrow any money over there. Is the strength of the underlying economy and the pace of integration with China, is that enough to drive decent revenue growth on good margins in Hong Kong despite that aversion to borrowing?

Alistair thank you. I don't think any of us would want to say we're indulgent of hockey stick approaches but there will be some where it makes sense to treat it that way. But Mike?

Well clearly we've got the organic growth going and to find acquisitions that add value is not easy but clearly we have them on our radar as we always have had them on our radar. Price is everything in all of this.

As regard to the lending in Hong Kong, what has really come through there and this really goes to the whole core of what we're trying to do on a global basis, is that we're really looking after that customer who's got investments, who's all got those fee income products that they want their lifestyle to be in a certain way. And that's where the success has been. We haven't made on the assets side per se at the PFS levels, clearly we have on the Commercial Banking side.

Vincent, Mike in Hong Kong, do you want to comment on the Hong Kong economy and prospects for business growth in a place where as Alistair put it, nobody ever wants to borrow anything?

Thank you Stephen. Just on the business prospects, we are forecasting Hong Kong economy to grow by 5.3% and the Chinese economy is still growing very strong, despite the cooling policies that the government has been trying to implement. Mike, do you have anything to add to that?

Yes, just going back to the point of where we're trying to increase the income base in Hong Kong, it's absolutely correct that this is a very, very competitive banking market. However, as Stephen has already mentioned, it is the access to China and that access is now going to be even more important particularly as the trade cycles become more together or they come together. I would also say that the banking model that we have in Hong Kong is actually very sophisticated. In terms of our transaction volumes nearly 95% of total transaction volume is now completely automated. So we are also looking at driving down the cost whilst maintaining the incomes there.

Mark Thomas, [inaudible], two very quick questions. Would it be correct to assume the HSBC Finance revenue will slow down more in 2008 than in 2007?

And secondly, this is about the fifth go to try and get to this, but what is the implied deterioration in delinquency in the charge that you've taken this year?

It certainly must be the case that revenue will slow because we are going to slow the book. Now the question whether we can replace that is a challenge that we have. But yes, if we take the steps we've taken to slow origination acquisition in the mortgage services area that is quite a headwind for the other businesses which do continue to grow to make up. Clearly as you've said the fact that we have taken into an impairment provision mortgages that have not yet missed payments and therefore been delinquent means that that delinquency will flow through in future periods and therefore that will cause the delinquency rate to rise. And indeed as the denominator of the calculation shrinks because the book runs off then the percentage rate will rise without there being any necessarily any deterioration, just simply a sticky delinquent portfolio and a declining book will make the numbers go up.

So I think that's as much as I'm going to say. No I'm not going to give you it.

One more question from Hong Kong.

Thank you Stephen. The gentleman right.

Yes good evening, it's Nick Moore from Macquarie. It's a question really at the Group level on the relationship between costs and income going forward. Clearly you've identified lots of investment areas around the Groups, lots of investment opportunities. And you've identified a number of areas where you'll see revenue headwinds, especially in the U.S. So I'm just interested in what your attitude is towards pacing investment to keep cost growth at least in line with revenue growth, or below revenue growth.

Well Nick apart from anything else we will pace investment at the rate that we can handle it managerially for one thing. We -- there is no point in coming out with lavish plans to roll out direct banking in six different countries at once, increase bricks and mortar network in half a dozen other places at once. Clearly you have to sequence this just in terms of how you can manage it. And on top of that clearly we have to bear in mind that you can't simply say that jam is tomorrow, you need to have a clear sense of what is manageable in the context of our growth expectations year by year.

That's stopping short of a concrete forecast which clearly you wouldn't expect me to give for revenue growth this coming year or cost growth this coming year. Just to say that we're very conscious of the need to balance the two and to make sure that we don't invest at a rate we can't cope with managerially, nor invest at a rate that we can't cope within with reasonable revenue expectations.

I think we've essentially got time for one more question. Since the last one was from Hong Kong let me take it from here.

Thank you. It's Simon Willis from NCB. Two questions if I could. First on dividend policy and the second on the insurance side. On dividend policy you've acknowledged quite straightforwardly the issues over the outlook for further provisioning in the States and also acknowledged the likelihood of a slowdown in revenue growth there. In that context could I just go back to Robert Law's question but ask more specifically if the Board has in mind a ceiling on the payout ratio?

The answer is we don't set ceilings on payout ratios. We -- our public commitment and our real managerial commitment is to a progressive growth in the dividend. Beyond that we take a decision year by year on what makes sense given the prospects for our shareholders.

Thank you. And on the insurance side, in the context of the ambition to double the contribution to Group profits from the insurance businesses over what seems a fairly short timescale if it's all going to come organically, could you just perhaps refer to two things. One is geographically where you see a lot of that growth coming and secondly whether or whether not that might require significant investment?

Well on the insurance side, clearly there are some places more advanced than others. Asia, Hong Hong in particular is well ahead of the rest of the Group in regard to customer penetration for insurance. All I'm putting down as a marker is 120m out there, only 9% of them have insurance. We need to do something about it. You're absolutely right, we won't do it all by organic growth. I'm not going to tell you there's going to be an acquisition tomorrow. We will look at market per market and see A, do we want to go a distribution way, do we want to go at manufacturing, do we want to have a mix of the two, do we want to do it on the net, do we want to do it on outside sales forces? This is quite a detailed approach we're taking to it and we will look at those strengths to weaknesses and fill the weaknesses with how we think is right.

Ladies and gentlemen I think the time has got to the point where we need to draw this to a close. I'd like to thank our guests both in London and in Hong Kong for joining us. Vincent, your colleagues remain at the disposal of our guests in Hong Kong to continue asking questions, to continue answering questions I should say. Here I'm afraid we have to adjourn because we have a press conference starting in five or 10 minutes. But thank you for being with us. I hope you will indulge us with the slightly longer presentations that we've given today. I hope you all appreciate that we wanted to be fuller in our description of the performance in '06, our business objectives in '07 and our strategy as we take the Company forward over the next few years.

Thank you very much for being with us. Thank you.