滙豐控股 (HSBC) 2007 Q2 法說會逐字稿

Good morning everyone here in London and good afternoon to everyone who's with us via satellite link in Hong Kong, and welcome also to those joining via webcast or conference call. Let me start with some introductions. First of all here in London to my right, Mike Geoghegan, Group Chief Executive, and to my left Douglas Flint, Group Finance Director. I'm very delighted to report that we have three of our non-executive directors of the main Board sitting right in front of me, Sir Brian Williamson, Sir Brian Moffat, Sir Mark Moody-Stuart, you're all very welcome. And in Hong Kong Vincent Cheng, Chairman of the Hong Kong and Shanghai Banking Corporation. Sandy, the new Chief Executive, a particularly warm welcome to you and in many senses welcome back home to you. Edgar Ancona, the Chief Financial Officer and Russell Picot, HSBC's Group Chief Accounting Officer.

Before we start I would like to put up the usual cautionary statement on forward-looking statements and I'd like to draw your attention to the key performance highlights of our results for the first half of 2007. These are record results. Profit is up 25% at the attributable level to $10.9b. Earnings per share are up 22% to $0.95.

These results do include some one-off exceptional gains that have to do with the dilution of our interest in our China associates and Douglas is going to explain those in more detail shortly. But because of that I'm going to concentrate in what I'm now going to say on the numbers excluding those specific dilution gains.

And there we report really very good business growth. Revenues up 16% to $38.5b. Pre-tax profits up 5% to $14.2b. Loan impairment charges up 63% on the first half of '06 but down 5% on the second half. Continued investment. Cost growing 15% which is lower than revenue growth and yet includes substantial investment -- organic investment in the development of our business.

Turning to our regional performance, we're continuing to make progress with the rebalancing of Group earnings towards developing markets in the way that we said that we would do at the beginning of this year. We are clearly the number one international bank in Asia now. We have very strong profit growth to report across the region. Profit before tax up 55% to $6.7b or 30% excluding those dilution gains that I referred to.

We've been strengthening our regional franchise in Latin America. Profit before tax there hit $1b, up 16%. In the United States we're making good progress in tackling our U.S. Mortgage Services issue and Mike will give you more detail on that later. Despite the challenging environment in Europe, particularly in the U.K., profit before tax is up in Europe 13% to $4.1b.

When I look at the highlights by customer group, we see that in Personal Financial Services yes we've seen some challenges, the U.S. Mortgage Services issue that we talked about. And in the U.K. Personal Financial Services has faced some challenges, again Mike and Douglas will talk about those. And so profit is down 20% to $4.7b. But on the other hand our Commercial Banking business continues to perform extremely strongly, profit before tax of $3.4b, up 20%. Record results in CIBM show that our strategy and new focus is working profit before tax of $4.2b, up 32%, and positive jaws of over 6%. And the leveraging of our Group connections for the benefit of our Private Banking client base has shown great results with profit before tax up $0.8b or up 30% year on year.

Now I'm going to hand over to Douglas to take us through the number in more detail.

Thank you Stephen. I'd like to turn first to the Group's income statement as it's reported. Net operating income before loan impairment charges increased by 19.6%.

The 63.1% rise in loan impairment charges clearly stands out. This is predominantly arising in the United States. The first thing to note however is that the comparable period in 2006 was significantly advantaged because of the pull-forward of impairment losses into the final quarter of 2005 consequent upon the change in bankruptcy law in that quarter. The other major impact of course is the higher delinquency and charge-offs in our U.S. correspondent mortgage business and I'll return to this later.

Net operating income increased by 13.6% to $52b.

Total operating expenses increased by 15.3%. And this primarily reflected business expansion, particularly in Asia, as well as higher performance-related expenses and higher volumes in the transactional banking businesses in CIBM.

Profit before tax increased by 13.1% and profit attributable to shareholders increased by 24.8% as a result of a lower than normal tax charge which I'll discuss later.

Earnings per share increased by 21.8% to $0.95. Dividends per share in respect of the first half of 2007, $0.34, were as set out in the schedule contained in our 2006 accounts.

I'd like to highlight certain items contained in these financial results. First, the gains from the dilution of our interest in our Chinese associates amounting to $1.1b. These arose from the secondary share offerings of our associates in Shanghai which we could not participate in. However, our share of the proceeds of issue exceeded the book cost of our dilution and therefore we recognized a gain.

Secondly, the decline in the tax rate to 18.7% was driven principally by geographic mix, together with some tax-free gains and prior year tax settlement.

And you'll also recall that we sold 8 Canada Square in May of this year and for technical reasons the gain on the sale which will be about $1.3b is expected to be recognized in the second half of this year.

Turning to the next slide we present the results adjusted for the dilution gains. You can see that net operating income before loan impairment charges increased by 16.3% which is 1% higher than the increase in operating expenses at 15.3%. The increase in profit before tax is 4.5% and the growth in earnings per share is 10.3%.

And finally, this slide highlights the underlying performance against the two previous half-years adjusting for both the dilution gains and stripping out the effect of currency movement and acquisitions and disposals. In terms of underlying performance for the first half of 2007 against the first half of 2006 there was a continuation of double digit growth in net operating income before loan impairment charges. This was 11.3% which is 1.6 percentage points higher than the growth in operating expenses of 9.7%.

The modest growth in profit before tax reflects the 57.4% growth in loan impairment charges. And against the second half of 2006 there was a strong recovery in profit before tax in the first half of 2007, up 33.4%. This of course reflected significant improvement in our U.S. businesses and strong growth in Corporate Investment Banking in Markets and all across Asia.

Analyzing results by geography, let's start with Asia. And whenever we discuss financial performance in Asia we're excluding the dilution gain. Asia continues to produce excellent results with profit before tax up by 30%. With a profit before tax contribution of $5.6b Asia accounted for 43% of Group profit. This strong growth was broadly based across all customer groups with Personal Financial Services and CIBM outstanding. Within Asia the Middle East contributed $600m to Group profits, a growth of 8%. And the apparently disappointed PFS results are entirely attributable to Saudi Arabia as a result of lower stock market activity following significant market correction in the latter half of 2006. Elsewhere in the Middle East PFS was 29% ahead of the prior year period.

We delivered balanced growth in Latin America with profit before tax up 16%. Commercial banking produced the strongest performance with profit before tax up 49%. In PFS Brazil delivered good growth which was partially offset by higher loan impairment charges in Mexico. The decline in profit before tax for CIBM was largely due to lower balance sheet management income in Mexico.

The 35% decline in profit before tax from North America was in line with expectations. This performance was primarily driven by higher loan impairment charges in respect of the U.S. Mortgage Services business and normalization of credit charges in other consumer finance businesses. Against the second half of last year profits were markedly up. The modest growth in Commercial Banking reflected continuing expenditure to support expansion of operations.

In Europe we have three positive stories and one that's disappointing. First, CIBM was up by 39% spread across our major platforms in London, Paris and Dusseldorf. Second, CMB continued to grow steadily. Third, Private Banking was strongly ahead. These successes however were partially offset by the effects of a difficult operating environment in the U.K. retail banking, the major item being the impact of unauthorized overdraft charge refund claims which impacted operating expenses by $236m. Absent these charges the U.K. bank held costs flat and achieved a 4% revenue growth in PFS.

Switching now to a review of performance by customer group, we'll start with PFS. Asia had an excellent half-year, 38% up on history, driven by strong growth in fee products, wealth management, insurance and higher deposit spreads. But aggregate profit before tax from PFS declined by 20% as credit charges in the U.S. and the difficult operating environment we've referred to in the U.K. offset that strong growth in Asia.

Commercial Banking continued its success story with the growth in profit before tax of 20%. There was very good growth in the major markets of Asia and Europe.

And within the record profits from CIBM, an increase of 32% to $4.2b, there are three points to note. First, these profits were equally balanced between Asia and Latin America on one hand versus Europe and North America on the other. Second, revenue generation was well spread across products and third, balance sheet management revenues began to recover.

Private banking again delivered very strong growth in profit before tax, up 30% to $780m.

Looking at the detail of loan impairment charges, I'd make the following point. First, there's been a decline in the loan impairment charges for North America against the second half of 2006. In Mortgage Services we had net charge-offs of $680m in loans and we raised provisions of $760m. This indicates that the six months forward we detected no material change needed in the basis of provisioning. At June 30 we hold $2.1b of provision, the same as we had at December 31 2006. And that's against a mortgage portfolio which at $41.4b is down some $8.1b from the end of last year. Mike will discuss in much more detail the actions we've taken and how we've managed down this portfolio.

Secondly, although European PFS loan impairment charges have risen as we've dealt with some legacy issues, new credit taken on in the last 18 months is tracking much better.

Third, commercial credit quality remains well inside historical trends and the environment remains benign for large corporates.

Finally let me comment on two specific areas. Firstly, on U.S. prime mortgages we have seen no material deterioration. Secondly, in the area of leveraged acquisition finance we have a very successful but a relatively small business. And in respect of the pipeline of incomplete deals, if the market was close to sell-down we could accommodate the funding easily in the normal course of events if required. And we would be very happy with the credit risk.

Turning to capital adequacy, this slide shows that our tier one ratio has remained strong, both in its level at 9.3% and also in its composition with the bulk of capital coming from tangible shareholders' funds. We believe that maintaining financial strength is compatible with the profitable deployment of these funds. In the first half the return on invested capital was 18.4% or 16.8% if we exclude the dilution gains. Now let me hand you over to Mike who will run you through business performance. Mike.

Thank you Douglas. Six months ago Stephen outlined the split of management responsibilities between us, with Stephen focusing on the strategy and me with the Group managing Board on its implementation. Let me update you now on our progress to date.

We seek to balance the contribution from our businesses. We've already broadly achieved the balance of earnings mix we want with half from Asia, the Middle East and Latin America and half from Europe and North America. But that doesn't mean the job is done. The challenge is to improve the contribution mix from both parts. We will continue to go for sustainable growth and we will execute much more efficiently in developed markets. Meanwhile, we will continue to invest organically and by acquisition in developing markets in the pursuit of strong consistent growth.

It's worth recalling that our historic roots lie deep in emerging markets. Our recent history features a blend with developed economies. It's that balance that sets us apart and constitutes a major opportunity. Our future lies in building the link between the two. As the number one international bank in Asia and the number one in Hong Kong we have distinct advantages and opportunities. We're making the most of them, with profit before tax from Asia up strongly by 30% in the first half to $5.6b excluding the net dilution gain.

We're increasingly managing our Hong Kong and mainland China business as a whole as economic integration in China continues. We were among the first banks to incorporate locally and intend to remain the number one international bank in China. We are targeting international corporate and commercial clients and on the personal side attracting more global premier customers. Our China business is well on the way to being a billion dollar business with pre-tax profits up 69% to $473m, and that doesn't include the contributions from dilution gain.

While HSBC has focused on the international side of China, adding over 30 branches by the end of 2007, our domestic associates are building out nationally at a very impressive rate and that is reflected in their own results. I also believe we are getting it right in Hong Kong by upgrading our PFS product range and automating wherever possible to provide a better customer experience. 83% of all customer stock trading activity is now online, up 133% in a year with volumes of more than 4m trades in the period. And 59% of all customer bill payments in Hong Kong are now made online, that's 0.5m a month.

Our Wealth Management and Private Banking businesses are now joined up to CIBM like never before. Last month for instance we launched the first multi-manager Chinese equity fund in Hong Kong raising over $1b from our retail and private banking customers across the region. That's something no other institution has the ability to do.

Joining up isn't only about personal banking. It's also about Commercial Banking, CIBM and Insurance. We are actively managing the linkages between our businesses to unlock value. This is happening across Asia and the Middle East.

We've delivered significant growth, pretty much across the board. In fact we achieved double digit growth in profit before tax in 26 out of our 33 markets in Asia and the Middle East, ranging from 115% in our relatively small Indonesian business to 39% in the major markets of India. On this considerable return on investment you can see we continue to invest heavily in organic growth in Asia. We have rigorous cost efficiency standards at HSBC, improving at the Group level to 48.3%. But because we see Asia as such a great opportunity we are willing to spend to grow there.

And although organic growth is cheaper, we will not shy away from investment opportunities in the region, as we recently showed in Vietnam. You should be under no illusion that we intend to boost our number one position in Asia and the Middle East.

We're also growing our business in emerging Europe. In Turkey we increased profits by 34% to $161m and are on track to add 400,000 customers this year as we invest in our branch network. In Russia we have obtained a license to begin retail business and aim to open more than 35 branches in the next three years. And only this morning we got the go-ahead to begin general banking in Georgia.

Now, turning to Latin America. We have built a highly successful regional business through acquisitions. We now have 4,000 offices across the region against a handful a decade ago. In the first half of the year we achieved a $1b profit before tax for the first time for an acquisition spend of just over $5b in the past decade. So on recent industry multiples that now appears to have been a very shrewd investment.

We will continue to invest organically and where possible through acquisitions in this region. I would also say that while we can expect some period to period variation in growth in these markets there are fundamental drivers behind the economic expansion in Latin America. An emerging middle class which plays well to our regional strengths in global premier and packaged personal banking propositions. And growing populations that are new to banking who we can service through our consumer finance operation.

However, I think the most pleasing aspect of our results in Latin America has been our real success in joining up the region to CIBM and Private Banking businesses in the U.S. A hub and spoke approach is working well. The next challenge is to build our common IT platform that will allow further automation and reduce costs.

The overall PFS strategy for developed markets is to hold cost growth to single figures while developing up-market propositions. We see opportunities to build on our direct channels, grow revenue line and improve cost efficiency through technology.

Some of the current issues facing banks in the U.K. are obviously overdraft charges, IVAs and mortgage quality. Take overdrafts first, which have generated a considerable amount of public interest and we have experienced a significant number of claims. The level of refunds we have confirmed today more than demonstrates our commitment to treat our customers in a fair and transparent manner. We very much welcome the agreement with the OFT to take the case to court to achieve legal clarity and a resolution for our customers and our business. And I'm bound to say that we have a very fair overdraft proposition in the U.K. and we're only -- we are the only bank with a comprehensive formal waival policy that has saved our customers GBP37m in the last six months.

On the FSA announcement, let me say that we are not one of the two banks referred to enforcement. As part of the Treating Customers Fairly review the FSA did review our handling of complaints and did not voice any concerns to us. However to place the matter in the context, in Group terms U.K. PFS strictly represents less than 10% of our worldwide profit.

Moving on to IVAs. After a disturbing slide, normal levels of activity have returned. IVAs are now being used by customers for whom they were originally designed, those with the greatest need. And after five successive interest rate rises we're carefully monitoring our mortgage book but remain confident that mortgage quality remains strong. We have been similarly conservative with our product offerings. We do not offer buy-to-let mortgages as a core product. Nor do we have teaser interest rate products. What we are doing is improving our customer proposition. For example, as part of our branch improvement program, we opened the U.K.'s biggest branch last week. The Queen Victoria Street branch in the heart of the City has sections dedicated to the specific needs of premier, corporate, commercial and retail customers. For those of you who work in the City, it's well worth a visit.

Looking beyond PFS, our U.K. Commercial, Private Banking and CIM business did exceptionally well, up 18%, 87% and 36% respectively. Elsewhere in Europe there was good growth in France and Germany. And there's more about CIBM in a moment.

But now I wish to turn to North America where our general banking businesses in the U.S.A. and Canada performed to our expectations with Canada achieving a record first half. Our direct proposition in the U.S.A. is going from strength to strength. Online saving balances for HSBC Direct have now reached $12b, up almost $5b in half a year. They've also added more than 225,000 customers this year. We are watching the U.S. economy carefully and while there may be short term turbulence from a weakening U.S. dollar, there will be long term benefits for us, thanks to our Commercial Banking network, as the U.S. becomes a competitive exporter again. And our award-winning cash management capabilities will also continue to attract commercial customers.

Now let's turn to sub prime mortgages. We were the first to highlight the issues in the sub prime mortgages industry last year. We believe we were right to do so. And this management team will continue to call things as we see them. I promised you earlier this year that I would give this issue my personal attention. I'm pleased to report that we are ahead of our own expectations at this stage. The provisions we took in the last financial year are sufficient for the foreseeable future. Credit impairment provisions in mortgage services in the half year were $760m and we charged off $680m against provisions already raised. As a result our impairment reserve remained at $2.1b.

You will recall that we had $49.5b in correspondent mortgages at the end of last year. The team led by Brendan McDonagh who's with us today has now cut that to $41.4b in the first half. That $8.1b reduction includes the sale of $2.7b worth of loans. Markets permitting, we hope to reduce the portfolio significantly again by the end of the year. In the process of reducing outstanding we cut ARM balances by 30% to $19b, the second liens by 18% to $8.2b, and the stated income by 20% to $9.4b.

We can also measure our progress in improving the quality of the mortgage services portfolio in the terms of reductions of ARMS expected to re-set in the second half of 2007. At the start of the year we made an estimate of $7b. At June 30 we have managed that down to $5.3b. I should also say at this stage that our exposure to CDOs linked to sub prime mortgages traded through CIBM is minimal.

The non-correspondent businesses, cards, auto finance and consumer lending conducted through our branch networks are performing better than anticipated.

Despite the good progress, we continue to monitor the market very carefully and I will not hesitate to take whatever further action is necessary. All information on our consumer finance business in HSBC's finances [10Q and 8K] both of which we are filing today.

Now turning to CIBM. We've previously stated our intention to build out our capabilities. Stuart Gulliver and his team have now fine-tuned the business to be emerging markets-led and financing-focused. That was a logical refinement and Stuart, along with the 83 country managers, are executing that strategy with great success, as our results demonstrate.

Let me offer two examples, one large, one small, of recent transactions that demonstrate how HSBC is joined up. First, Saudi Basic Industries' $11.6b acquisition of GE Plastics. Here CIBM, harnessing our industry expertise and our geographical coverage to create a unique value-added proposition for the strategic buyer from the Middle East. Second is Singapore Communications' purchase of a $758m stake in Warid Telecoms of Pakistan. In this case we were the sole advisor to SingTel where the collaboration between HSBC Asia and HSBC Middle East was critical to the deal and clearly demonstrates our strengths in emerging markets.

Joining up is the model that works for us and it's what our clients want, especially those from developing countries. No presentation on CIBM is complete without a few award tombstones. Here are just a few that HSBC has won. Of course the awards are not a proof of concept but I would highlight the most significant for me, Best Risk Management House. I'm sure you will appreciate the importance of that award at this time. In summary CIBM has a lot going for it without taking high level risk for short term gain.

Now turning to Private Banking and Insurance. I mention them together because I see an HSBC parallel. Insurance today is where HSBC banking was a decade ago. Private Banking was a disjointed subscale business back then. Today it's a billion dollar business and rated the world's third-largest private bank by Euromoney. Clive Bannister, who's in front of me today who drove this growth, has now switched his energies to Insurance. But Private Banking continues to prosper under Chris Mears with pre-tax profits up 30% in the half to $780m. In the U.K. alone intra-Group referrals have multiplied fivefold over the past three years. Between Chris, Mark McCombe who heads our $343b fund management business and Stuart Gulliver in CIBM we are really beginning to join up private banking, fund management and investment product origination, especially industry-leading emerging markets products.

Now turning to Insurance, less than 15% of our 125m customers take an insurance product from us. We are adding insurance to the vocabulary of every single HSBC business in every country. And we have the ambition to add HSBC insurance to the shopping list of every customer. Our strategy is to use our distribution capabilities to the full, manufacturing products where we have scale or buying products where we don't. We have announced three deals in three months. We acquired the remaining stake in Erisa in France to increase our life business. We are partnering with Aviva in the U.K. for general insurance. And we plan to create a joint venture in India to distribute our products to Canara Bank and OBC's 40m customers.

Today we are announcing Insurance pre-tax profits of $1.6b, or 11% on the Group's results. We are only at the foothills with this business. We aim to increase this to a fifth of our profit, to around $4-5b in today's terms.

I'd like now to talk about joining up the Company and what it will mean for the bottom line of this business. Put simply, we couldn't have produced these results today if we had not started joining up. In my 34 years in the Group I've never seen an initiative that has captured the imagination as much as this one. The enthusiasm is genuine because everybody knows that is what the customer wants. We want to create a seamless customer experience globally, one which reflects the value of our customers and what they bring to the company. We are unlocking more value for our 125m customers around the world than ever before.

Let me just explain a couple of initiatives. We have improved our Premier -- global Premier proposition which is an integrated, international banking service, the world's local bank account if you like. It's also a globally portable credit facility and a pre-approved international mortgage facility. The proposition is being tested in 35 countries and we will promote it around the world in the fourth quarter with a global advertising campaign.

From September this premium service will be boosted by state of the art technology so that Premier customers can have a single screen view of their accounts around the world. And soon after that we will upgrade the service again allowing customers to transfer money across borders at the click of a mouse.

Since its test launch in May we've attracted over 100,000 new customers to date and that's without advertising. We are conducting the first ever worldwide mystery shopping program to ensure consistent, high quality customer service. This is a dynamic and fast-growing market. We believe that we can get to 6m customers over time and while the value of these accounts will vary from country to country it is reasonable to expect a significant number will create revenue in excess of $1,000 a year per account.

What is certain is that a proposition like this plays to our global strengths, capitalizing on our distribution and technology in a way competitors will be hard-pressed to match. If you're interested in finding out more there's a Premier display outside the brief room here in London which gives a taste of what we can offer customers in our Premier branches and online.

My other example of joining up is from Commercial Banking. We are now concentrating our international distribution and generating cross-border revenues at record levels. In the first half we opened seven more international banking centers adding to a network that now spans 23 countries. And our cross-border referral system Global links, generated over 3,000 referrals in the first half, up 37% or a total transaction value of $3.2b. We know that there is more to do, that we can do for our 2.7m customers and we intend to do it.

Finally, joining up the Company is about world technology platforms that deliver a seamless experience wherever a customer wants to deal with us, online, by the phone or at a branch. So for example we've upgraded our business Internet banking platform to deliver better prices and simpler products. We've added over 150,000 business accounts in the last year, meaning we now have an active online customer base of 760,000 customers.

In Asia HSBC Direct has attracted more than 120,000 personal banking customers with total savings balances now exceeding $1b. And through Whirl, our credit card platform, which serves 75% of our 115m customers in 16 countries, we have cut our IT costs per account by 16%. By the end of the year we'll have converted two more of HSBC's countries to Whirl and entered seven new credit card markets. We are welcoming 40,000 customers a day with a card from HSBC.

In the first five months of this year we made Internet sales worth $795m, up 68% period on period. And that's only the start. We will build common platforms for cards, mortgages, loans and other major product lines, generating revenue and significantly lowering operating costs each time.

The results we have presented today are clear evidence of our determination to unlock the value that we see in HSBC. Joining up the Company isn't easy but we all know it can be done. It was a brave decision a decade ago to sacrifice long-established brand names around the world in the pursuit of a single brand. That brand is now the 23rd most valuable brand in the world, up five places in last week's Interbrand survey. HSBC is the fastest-growing financial services brand in the world.

In the same way, I'm sure that within a decade joining up the company will be seen as the industry-leading approach to global banking, followed by many but created by HSBC.

Let me leave you with the following. In the U.S. we have managed down the mortgage services portfolio as I committed to you. In Asia and the Middle East we have leveraged our distribution platforms and brands to deliver strong, diversified revenue growth. This, together with excellent results in CIBM where we are implementing our emerging markets-led and finance-focusing strategy, is more than covering the higher impairment charges in the U.S.

In summary, we're doing what we said we were going to do. Thank you. Stephen.

Mike, thank you very much. And I'd like just to spend a minute or two on our view of the macroeconomic outlook which as you will appreciate is a particularly interesting one at the moment. And indeed it's in many senses a tale of two halves. On the one hand when you look at real economic growth we see a pretty robust level of growth continuing this year and through into next, a tad lower than last year perhaps, but only a tad. The U.S. economy still expected to grow, clearly more slowly than last year, but nevertheless still expected to grow despite the weak housing market. And a gradual disentangling of the importance of the U.S. consumer for world economic growth, with greater momentum coming from the domestic markets in Europe, Japan and in emerging markets, such that overall we're pretty confident about the overall level of global growth. And emerging markets in particular we expect to continue to power ahead.

On the other hand, we're seeing all of us in the markets, some turbulent conditions reflecting a pervasive feeling that asset prices are now very stretched in several markets and clearly risk premiums are rising. There is a concern in a number of markets about inflation and we think interest rates in the major markets are frankly unlikely to fall. And there is a clear risk of asset price dislocation where credit structures are being particularly stretched.

In this context, the Group we believe is well-positioned to continue to invest for sustainable growth on a diversified basis. We will continue to maintain strong capital ratios and we will continue our prudent stance on risks.

Let me now leave you with the highlights as we're very happy to take questions both here and in Hong Kong. Please -- as we come to the questions if you could raise your hand and wait for the microphone to get to you and Vincent in Hong Kong, if I could perhaps invite you to invite somebody to place the first question. Vincent.

Thank you Stephen. Any questions from the floor? We don't seem to have any questions.

Okay. Well then in London. Yes, Alistair?

(Technical difficulties) would that also be booked as a tax-free gain in the second half.

The other question relates to U.S. non-mortgage delinquency trends, if you could give some color on that?

And lastly, you talk about building up Insurance, is that largely an organic strategy or would the Group be contemplating acquisitions? Thanks.

Thank you. Thank you for the question sir, we actually missed the first half of your first question here in London. I'll get Vincent to repeat it if I may. Vincent?

The first question is on the booking of the Canada Square [property], is that right?

Vincent, thank you. If I may I'll get Douglas to talk to the first one and Mike to the second one on the non-mortgage delinquencies in the U.S. and I'll cover our Insurance strategy. Douglas?

The gain we expect to be taking in the second half of the year, the gain will be taxable, but we have some capital losses within the Group, so I think the effective tax rate will be lower, significantly lower, than the standard rate.

Yes, on the mortgages side, the non sub-prime mortgages, our consumer finance business, that's the business driven through our branches, is performing well. Our credit card business did well. Pricing power is coming back in a number of product lines.

On the prime mortgages, we don't see any deterioration. Now, that -- those mortgages are going through our branch network, which is specifically or mainly in the state of New York, and we all know prices of real estate in the city of New York have held up very well. And we don't have Alt A mortgages. We don't have option ARMs which affect California.

So overall, we are comfortable with our book and we're managing the mortgages services element. That's what we're focusing on.

Thank you, Mike. And as far as Insurance is concerned, you asked about our strategy and whether it's organic or by acquisition. The answer is essentially organic and it's very focused on distribution. What we have is the power of distribution. We have 125m customers. Something like 15% of those take Insurance products from us, whereas, as you will be well aware, of course, the vast majority of them take insurance from somebody. So that's a tremendous distribution opportunity and that's what we're focusing on.

There is, to some extent, an opportunity to grow our customer base, like, as mentioned, the memorandum of understanding that we've signed in the case of India with two of the state banks to give exclusive access to their client bases. And that's 40m people for insurance services provided through a joint venture that we will establish. So that's the kind of thing that we'll be doing, very much distribution-led and very much, I think, in our power to pull off, to bring about, to realize, because of the extraordinary franchise that we've got. But thank you for the question.

Let me now, if I may, turn to Alastair here in London.

Thank you. Alastair Ryan at UBS. Two questions, if I may. First, the process of forbearance and loan rearrangement in mortgage services business, to a degree, that's bringing forward potential future bad debts to actual charges in the current period, if I understand the math of that process correctly. Can you give us a sense of how much of the charge in the first half was really actions that you took that brought forward charges you would have incurred in the future? Not that there won't be more of that again in the second half for things that will happen in 2008, but just a sense of how much is that.

And then, secondly, for Stuart really, how should we think about the major drivers of revenue for your business now? If it's not the CDOs and it's only to a very limited degree term leveraged loan [limits], which obviously we welcome, is it as simple as emerging market growth, or is it much broader than that? I know, obviously, that balance sheet management has stayed (inaudible) after three difficult years.

Alastair, thank you. If I may, on the first question, let me get Douglas to talk to the specifics of the numbers and Mike, if you want to add anything on the business actions. Douglas.

Okay. What we're doing is a whole variety of things. During the first half of the year, we contacted something like 19,000 customers and discussed the impact on their personal financial position of ARM resets. We then, as a consequence of that, modified about 5,000.

Now, those modifications have a variety of actions, extending from formal rewriting of the loan, which I think is what you're describing, where in fact you actually rewrite the loan to different terms and take the discounted cash flows, the new cash flows, bring them back to a present value and take an adjustment. That's probably not the majority. The majority is, in fact, extending the low-payment period for a period of time, effectively just letting people take a little bit longer to see how they can accommodate.

Now, the good news is that those loans that we've modified are tracking better than we expected. They're showing that the benefits of modification are working for our customers and for our own. But in volume terms, it's relatively modest. We've modified about $700m worth of loans in the first half of this year. We expect to do more in the second half of the year. So in relation to bringing forward, I don't think that's a particularly large element of the charge.

And the modification's only for 12 months.

Typically, yes.

And on the second question, Stuart. Can you just wait for a mike, I think, Stuart?

Thank you. We feel pretty good about these results, because we've focused our strategy into a series of niches within the capital markets, where HSBC either has or, we believe, can get a competitive edge. And I think you can see that this set of numbers tends to prove that that's working.

This is a very broad platform by product. Although you can see substantial improvement in balance sheet management and private equity, if you take those out, the PBT was still up 18%. Global markets was up 26%, global banking up 11%, the balance sheet, as I say, was up 46%, the overall thing up 32%. And there's tremendous diversity by product in credit and rates, where we've invested tremendously in our derivative platform. You've got substantial increases half on half for both (inaudible) and in structured derivatives numbers, directly because we invested in those areas.

So the honest answer is it's a broadly diversified platform, it's across a number of geographies. The emerging markets, in particular, as Mike was saying, Latin America and Asia 49%, but actually Europe and Asia account for 83% of the total number. And it's a credit and rates, derivatives, emerging market, with a modest leverage acquisition finance business, which is a growing business but it's a modest one at this moment in time, but that we feel is actually a platform that's got tremendous legs to it still and it is now one that fits HSBC. And I think that's the most pleasing aspect, is we've now actually had three quarters of this working rather well.

Stuart, thank you. Vincent, a question from Hong Kong?

Thank you, Stephen.

Any questions? If not, Vincent, then --

There appears to be none at the moment (inaudible).

In that case, Vincent, let me take a -- there are a number here from London. Sir, towards the back.

Thank you. It's Ian Smillie from ABN. I have a question for CBIM, please. Stuart, the division delivery there over the last two or three years has been quite volatile. Are you encouraging us to come to the end of thinking about the volatility within the division's earnings would be the first question?

And the second question is, if that is true, could you give us some sense of the sort of growth rates that you should be encouraging us to think about? Because clearly, there is quite a lot that we could start to pencil in now that the engines look like they are coming through.

Ian, thank you. Mike.

I don't think I can do the second, which is by way of a profit forecast. I guess what I would say is that the -- how can I choose my words carefully? The volatility that we may have created ourselves is behind us, in the sense that we have a mapped out business model that we will stick to. The volatility that occurs to all of our businesses because of the market I can't comment on. I think that would be a fair way of dealing with the question.

Okay. Back -- just briefly back to Hong Kong, any questions now? No? Okay. The gentleman in the front. Okay.

Firstly, thank you for the additional disclosure on the Asia divisional operations. And picking up on those, I wonder if you can comment, given that the consumer business in India is not currently contributing a profit, on the size of your investment plans within that business and what sort of your timeframe your investment in India is pitched over. Thank you.

Yes, thank you. And if I may just make a general comment then I'll pass the question to Mike on some of the business specifics. But generally, we see India as one of the three or four markets that offer most significant strategic opportunity over the medium term, for all the obvious reasons, the law of large numbers, this is a banking market which is quite strong, it's got a tremendous economic growth in it. And I believe that's largely sustainable now and therefore you will see us investing in India in ways that seem good and opportune.

You're probably aware that, as of now, foreign banks have pretty tight restrictions on what they can do by way of inorganic investment in India. And of course we will develop our business within those -- within that context and that framework. As and when that framework were to evolve, we will clearly be looking at the opportunities that that presents for us. But in the meantime, we will grow organically through our existing businesses, our existing network. And we are investing substantially in our consumer business in India. And that's part of the reason, but I'll -- let me let Mike amplify on why the current P&L is so low, because we're putting a lot of investment into it.

[I don't know why], you've answered it already for me. We are growing in the card business, but the infrastructure going in, the outside sales forces, all those types of things put a fair bit of cost up front. And also, on the insurance side, we get the distribution with Canara Bank and getting that through with 40m customers. There are lots of things to go there and I think that will play out to other products as well.

So there's a number of things going on. I'm not concerned at the short period of time that the revenue line hasn't grown substantially and as fast as the cost line. And that's what you'd want me to do, you'd want me to invest at this place in time and then we'll acquire when we can with WTO.

Question from London, Robert.

Robert Law of Lehman. Could I ask you to comment about the revenue growth in Hong Kong, please? It was certainly particularly strong for us in the first half. Could you comment on what the key driver of that was so we can make some conclusion about how sustainable it might be?

Robert, thank you, and can I turn the question to Vincent? Vincent and Sandy, revenue growth in Hong Kong, sources of.

Thank you, Stephen. I think revenue growth in Hong Kong has been driven by all the lines of business, PFS, CMB, CIBM, Private Banking, Insurance. Basically, we are doing extremely well in all areas of businesses. Partly, of course, it's because of the market, which has been buoyant, but also because of the joining up which we have made, which makes our CMB business strategy much more attractive to our customers. And of course, the China dimension has also played a major role in that one. So it's a good performance across all lines of businesses, really.

I think that focus on wealth management that you've seen in Hong Kong has really paid off dividends. Obviously, markets have helped, but in fact the growing wealth and affluence in all of our customer base and the products that we're selling them has given that profitability.

I'd also just like to say a few comments about that Indian business. Our Indian business is very profitable, made profit before tax of $299m. And I think you've got to see us invest in some of our businesses. And we only started that business in October '06, so I think two or three years of investment is probably what you've got to look at before you start seeing any returns coming back.

Sandy, Vincent, thank you.

Thank you very much. Good morning. It's Tom Rayner from Citigroup here. Could I have a couple of questions, please? The first one, going back to the delinquency trends in the U.S. non-Mortgage Services, I note in some of the text inside the big release you do talk about seasoning still on the consumer lending balances. And when I look at the second quarter, there's quite a big jump, for instance, in personal non-credit card and it's been a trend that's been deteriorating for some time.

So I just wondered if I could tighten you up on the comments regarding the U.S., because clearly you're happy with the reserving against Mortgage Services. The divisions were very much in line with your expectations. Is the same true in all of these other non-Mortgage Service areas in the U.S. or might there be some additional reserving required, do you think?

Tom, thank you. Douglas, are you prepared to be tightened up?

Boy. I think a number of factors to note. The end of '05, we bought Metris, which brought in a large lower than prime credit card business, and that's expanded. We grew in the unsecured area and in credit cards quite noticeably in the second half of '06. And that seasoning in part is driving the impairment charges and the delinquency, which is a mix impact into '07.

And then you've had just -- if you look at the branch-based business, the cards business and the unsecured business, these have grown, while Mortgage Services have declined. And as they have seasoned we've seen normalized levels of delinquency come through. I think the important thing is those delinquency levels are in line with the pricing parameters when we took the business on. So they are in line with our expectations.

The word, the contagion word, is I guess the one we're trying to avoid here.

We've avoided it.

Obviously, we continue to look for it. It's not showing up at the present time and we will look and continue to look.

Okay, thanks very much. My second question, just on the refunds on the current account fees in the U.K., clearly a less important issue for you than some other U.K. banks, maybe. $236m, can I just ask you a little bit more about that? Do you think that's the extent of the issue for you guys? And if it is, I think you have a 16% market share, roughly, does that imply $1.5b is the scale of the industry problem? Are you significantly better, do you think, than the industry on this one?

Well, the OFT case I think is a wise way to go to find out what is -- what should be done in this complex situation. Everybody's got different documentation and we've got different pricing over different periods. I don't think you can just multiply it by that. You're going to see some people not going to bother, other people are. They're looking at it in different ways. And I think we've got to work and wait and see the outcome is, because that might be a solution that not necessarily just multiplying will give you.

What is the case, you alluded to it, is it's a relatively smaller issue for us than for many of the obvious comparator banks in the U.K. For us, PFS in the U.K. is just 7% of our total Group business. We're the fifth largest bank in the U.K. market. And for us actually Commercial Banking is much more important than our PFS business, so our profile is different from some of our obvious competitors.

But I think, like everybody, I strongly believe that this case that's now been brought by the OFT was necessary and is the right way to go. We need, both we and the customers and the regulators all need legal clarity on this issue. It's just nonsense that a core banking product should be in such uncertain legal territory as it turns out that it is.

A question from Hong Kong, perhaps?

Thank you, Stephen. We don't seem to have any at the moment --

Okay, well, then let's -- let me.

One question.

Tracy Yu from Citigroup. I have a question on Hong Kong and the rest of Asia. Despite the relatively high increase in cost of around 11% for Hong Kong and almost 30% for Asia, you still have improvement in cost to income ratio, especially for Hong Kong it is around 32%, one of the lowest in the history. Can you comment on how sustainable this relatively low cost to income ratio in an inflationary environment, especially our labor market is actually quite tight? Thank you.

Vincent, can I just first ask Mike to say a few words? And then clearly you and Sandy may well want to elaborate. Mike?

It is exactly for this reason, where you see the pressures on labor markets, that we go for automation. Outlining what we've done so far is only just a beginning. We believe our automation capabilities across the globe, by leveraging what we've got in one market and taking it to another market, is a major advantage, which we intend to take forward to keep our cost base low. But clearly, Sandy and Vincent may want to add to that, so I'll hand it over to them. Vincent?

Thank you, Mike. You are right to point out that we are under cost pressure, but we just hope that automation, (inaudible) automation, straight-through processing, could help us to keep unit costs down.

But on the other hand, on the revenue side we believe that Asia Pacific, Hong Kong, China will continue to grow and we therefore would expect revenue to go up. I don't want to forecast where the cost income ratio should be, but of course we would hope that it would continue in a favorable trend. Sandy?

(Technical difficulty) invest in our businesses appropriately. And to that extent, I think as you look at it across the region there may be places where we have to put money up front before we get the revenue back. So I can see situations where we could possibly have the costs going up in the short time, but equally as well that we have good revenue growth. And the key, obviously, is to make sure it's good revenue growth.

Sandy, thank you --

Thank you. Stephen, back to you.

Good morning. It's John-Paul Crutchley from Merrill Lynch. Strong revenue growth obviously in the Asian franchise and I really just wanted to ask a question about the capital intensity of that growth. There seems to be a very large increase in the risk-weighted assets in the Hongkong and Shanghai Banking Corporation, about %70b or so since the year end. And I can't quite reconcile that back against how the loan balances have moved over the same period. So I guess a lot of that is presumably coming through in the capital markets side of the business. I just wonder if you can elucidate a bit more on where that growth has come from, whether we should think about that as a stable rate of growth of risk assets in that business or whether there's some lumpy issues over the balance sheet end which have contributed to that.

John-Paul, thank you. Douglas?

Well, I think it's as you described it. There's good loan growth across the region. The capital markets business has been a user of capital, but it's -- the loan growth is there. The asset growth is as you see it. Nothing particular to draw attention to.

I'd also say the deposit growth is there as well.

The point was, I guess, is that the risk asset growth is [high at times] relative to the loan growth, so it looks as if it's much more coming from the capital markets side of the business. And should we therefore extrapolate that level of risk asset growth going forward or was there a specific issue in that over the half year?

I certainly wouldn't extrapolate that rate of growth, no.

I think, overall, as you've recognized, John-Paul, this is a very high return on capital business and one with strong growth. It is one where we think we should be investing Group capital and will continue to do so. Simon.

Yes, thanks. Good morning. It's Simon Samuels from Citigroup. Couple of questions, actually. One is just back to the U.S. and the Mortgage Service business. I think, Mike, you said about a third of the first half shrinkage was to do with sell-downs, which I was a bit surprised to see, only because I think your -- certainly you claim your collections policies are better than the industry and obviously you've got the balance sheet that you can carry on keeping the assets on your balance sheet for as long as you want, really. So can you just talk about the interaction of sell-down going forward and particularly whether that's going to be a big feature of the shrinkage of the Mortgage Service portfolio?

Well, clearly we are working to a strategy of getting out of correspondent bank mortgages, and that means we will work them out with our customers, or if we can sell down the risk, we will. And as we said in the second half, it depends how the market behaves and we will -- it's a mixture of a number of different things. And frankly, a lot of customers, believe it or not, do actually refinance themselves and go to another borrower, so it's not all doom and gloom. And so that's generally spun off about $2.5b every year for people who refinance. And we're bringing it down as fast as we can and if the pricing is right we will unload more.

And I think you said it in your comment -- I think you said it in print, but not in your verbal commentary, but am I right in saying that that first half pace of decline is what you're expecting for the second half?

No. I think what we said market dependence. We will continue to work it down. I'm giving no projections what we'll get it down to and we'll have to come back to this room to see what it is at the end of the year.

Okay. The second unrelated question was to do with the strategy in the CIBM division. You've got a business now that's about $17b annualized run rate of revenues. So it's pretty substantial, but at the same time it's very low level of exposure towards equities in investment bank. They're running about 15% contribution. And if I take you back to the Managing for Growth day, three, three and a half years ago, I think the aspiration there was to get reasonably high up in various league tables, particularly M&A league tables, in each geography around the world. And I don't think you're there in any of them yet.

And my question, really, is you've -- it sounds a bit weird, but you've stumbled into a [debt weighted investment] bank in a way that BarCap, for example, didn't. You had aspirations, I think, to be a much bigger investment bank in equities. Have those aspirations gone away forever, or would you see a change in the shape of the CIBM division going forward?

Simon, if I may, I'd like to respond in part to that, but then I want to hand the mike to Stuart to elaborate. We have refined the strategy. I think it probably is true to say that, if one looks back a couple of years or so, there were expressed aspirations to be bigger in M&A per se. But to be clear, we've refined this not merely in order to, as it were, back fill some events in the way that you're implying, but because actually we think it's the right thing to do.

We announced this earlier this year, that we were focusing this Group more strongly back on to emerging markets. And that involves, amongst many other things, the fine-tuning of our CIBM strategy, because that's where we have clear competitive strength. We don't think that it's sensible to go toe to toe with a number of other great houses represented in this room in the domestic U.S. market, for instance. We think the right thing to do is to focus on our obvious strengths.

But to be clear, this is not a BarCap strategy either. This is still saying -- and both Mike and Stuart have quoted the kinds of transactions that we've been doing clearly in M&A that focus on emerging markets. Does that mean that we care about being in the big ticket league tables in M&A? No it doesn't because that's not what we're about. We're about doing a business that's tailored to our competitive strengths.

Stuart, would you like to elaborate further? Again, have you got a mike?

Yes, I now have a mike. Okay. Look, it's undoubtedly the case that the position that was set out in 2003 has been modified. There was a sense that was picked up by the marketplace that we were trying to be a global bulge bracket firm, which, as a universal bank, we're not able to compete with. So therefore we have modified and precisely focused this into being emerging market led and finance focused. And therefore there is a change. And that therefore means that we are more focused on credit and rates, derivatives, financing and less on M&A and equities.

But I say less, because the BarCap comparison isn't right either. The problem with HSBC is we've designed a CIBM business that suits our clients and our marketplace, and that doesn't actually match to anyone else's. So if you want a synthesis of what this is, it's kind of Citi, JP Morgan, BarCap, RBS and Standard Chartered, so that you can pick up the equity part, the emerging markets part, the derivatives and the fixed income part.

So it isn't easy to fit this into a nice little sound bite. So it ain't BarCap, but it absolutely isn't Goldman Sachs either. And I think what you can see is what we have got now works for HSBC, because it works for our customers.

Stuart, thank you. You described that as a problem for HSBC. I think that's precisely our advantage. This is (inaudible) generally. I wonder if we could take a question from Hong Kong.

Thank you, Stephen. Question from front.

Yes, good morning. It's Nick Lord from Macquarie. Two questions, really, on detail. Just going back to your CIBM results and the gains you made in the private equity book, could you maybe comment just on the relative size of your private equity book now versus the beginning of the year, i.e. are we still seeing that book grow and that's still an ongoing growth business?

And secondly, just on Mexico, I noticed that profit in the Personal Financial Services is actually down half on half. It seems to be driven by an increase in the bad debt charge. I just wonder if you could give us some indication of the seasoning that you're saying you're seeing in that book. Is that in line with expectations, or is there something happened there that has caused the bad debt charge to move up faster than you were anticipating?

Nick, thank you. On the first question on private equity in CIBM, Douglas, in terms of --

We still have a fairly sizeable portfolio and we still have an encouraging book of investments that we think look -- give prospects for the future. It's not something that we've grown dramatically over the last couple of years. It's something that we are beginning to put a little bit more into now and will build up a bit from where we are. But it's still -- it's probably round about the same size as it was, but it's certainly not -- it's not finished.

I think the other thing that I would add on our private equity investments is that they're very important to our client base in our Private Banking line of business. And you will understand many of our ultra high net worth Private Banking clients want access to good private equity investment opportunities. And again, it goes back to a theme that we've just touched on. Our distinctive calling card is clearly the emerging markets. We ought to be able to do private equity in places like China, India and elsewhere better than anybody and that will be the focus of our efforts. On Mexico, Mike --

Just to add to what you just said, it's being focused round our customers as well. When we structure a transaction, we like to get a layer of private equity in and our customers like to see us in it as well. So that's part of it.

On Mexico, it is basically seasoning, particularly in the cards business. Mexico is growing at a rapid rate and there is stiff competition in market. There's always credit quality issues in fast-growing markets and we're taking that as seasoning. I don't see anything [untoward] at the present time. We watch all these markets very carefully and that's why we get the returns on those markets.

Fine, thank you. Questions from --

Thank you. Simon Willis from NCB. I've got three questions, if I could. The first one is on the U.S. sub-prime mortgage book. On the ARM resets, you've indicated that H2 you now see the size of the business to reset down to $5.4b. Could you give an indication for '08 or as far out as you can now see?

Secondly, on the tax rate, I wonder whether you could perhaps give a slightly clearer steer for the full year tax rate. In the -- I hear what Douglas said on the outlook for Canada Square and offsetting losses, but I think in the context of the scale of the earnings growth, an idea of where the tax rate might end up as actually quite important.

And thirdly, on the outlook for the U.S. business, the question relates to credit appetite. Growth in the first half has come in double digits in cards. The prime mortgage growth has slowed. And the question is really what lines do you think could we see the growth coming in the States over the next 1 to 2 years? Is the growth really in cards which I guess might be more vulnerable to a rising impairment charge if the U.S. economy slows materially from here? Or should we be thinking about a broader spread all the books including a return to higher growth in prime mortgage area?

Simon, thank you. If I can make a general comment, but I'd like Douglas to comment on the tax issue and perhaps Mike to comment on the business outlook for the U.S. market.

The general comment is the obvious one, you've heard it from us before and I know you'll appreciate it, we avoid giving forecasts. And that goes for, I'm afraid, tax rates because they have indications for business and we avoid giving forecasts.

And with that caveat, we've made some comments on the macroeconomic framework in the U.S., which, by the way, I do think is looking better now than it did nine months ago. I think the issue is of course the prospect of a U.S. recession, I don't know whether it was ever very high, has probably receded. We're looking at growth at about 2% and employment remaining pretty robust. That colors one's expectations. But Douglas, do you want to say something on tax rate.

I'm certainly not going to indicate what I think the tax is going to be for this year, because it would I guess get into an indication of the mix in the second half. I think it's probably fair to say we would say that our normalized tax rate would be 24%, round about that. So clearly we're running considerably lower than that.

That's not the same as a forecast.

No, no, no, that is normalized and the second half of this year won't be normalized. But a normalized rate would be round about that.

On the ARMs reset, for next year it's about $4b of which $3b is about is in the Mortgage Services element, so that's that.

I don't see the prime mortgage business growing. That will only be run through branch network and we won't be buying mortgages in the area. And that, we've been running down the prime mortgage book for some time now.

So -- and for the other businesses, yes, credit cards will be a major force, player, but we don't see the charge-offs of those getting out of hand at the present time, they're staying inside our models. First mortgages in the sub-prime market, our fixed rate mortgages will continue. And various other products around that, wrapping insurance around those products etc., will be there. And generally a consolidation of loan facilities or loan requirements against the mortgage will be there.

But it's -- what I see coming is a re-pricing because there are a number of people out of the market now, and I can see an opportunity to get pricing back into this while we're not being distracted by other products. So I think all to go there.

As I said it's $3b in the Mortgage Services for ARMs reset for next year, and that's what they're focusing on, get that sorted out.

Fine, thank you.

We've probably got time for a couple more questions. I think there's one on the web at the back. I wonder if we could take that.

We have a question from [Philippe Bordereau] at [Kemco]. We've seen dramatic re-pricing of credit cards in the last two to three weeks. This means higher funding costs for you too. Do you expect a substantial impact?

With market appetite for credit risk in freefall do you see the risks associated with committed bridge loans?

Do you anticipate issues with regards to undrawn credit lines?

Thank you Philippe. We commented on this in both Douglas' part of the presentation. Our own leverage buy-out business is -- has been growing but is still relatively small. And as Douglas commented the one or two positions that we've got at the moment, if they were to end up on our balance sheet because we couldn't distribute, we would be comfortable with the -- we could easily absorb them on the balance sheet under normal conditions and be very comfortable with the credit.

In terms of pricing, Douglas.

In terms of pricing I don't think we -- I mean clearly as credit spreads widening there's both an opportunity for prospective business and some adjustment for business that's already written. But I wouldn't say that we have a particular sensitivity to that issue, no.

We've probably got time for a couple more questions, maybe one from here and one from Hong Kong.

It's Derek Chambers from Standard & Poors Equity Research. Can I ask two questions? One is, the slide on page 29 on the breakdown of U.S. Mortgage Services portfolio, you've got an item of stated income which I think it overlaps with some of the other categories. I'm not sure if you will discuss where you see impairments or delinquencies going in that area. You did at one stage say that you had no (inaudible) exposure and I would've thought that fixed income might be regarded as similar to that. So could you just comment on the trends in that segment?

And I wondered if you could just comment separately on Basal II. In the statement you say there's still some lack of clarity about the U.S. But is there anything you can say now about how you think it's going to affect you?

If I may just quickly on Basal II first. The answer is I think not a lot to be honest. We are clearly dependent on what happens in the U.S. and how that works out. Until the final rules are issued for the advanced approach the impact on us is uncertain. I don't actually think it's going to be terribly material at Group level, but the honest answer is we can't give you much more precision than that at this stage. We are on track to implement Basel II from January 1 next year, subject to the relevant regulatory approvals.

On the delinquency trends on stated income products --

We've got Brendan. Would you like to add here on that?

Yes, we've got Brendan McDonagh who runs the business in America for us. Brendan. You work with Mike. Do you want to make any comments.

Yes, good afternoon and good morning. We're not seeing any increased delinquency in that area. In other words, whether it's the second lien ARMs, i.e. in the stated income loans, the levels of delinquency which we forecast are keeping basically within expectations. And you can see the decreases are largely in line in terms of second lien [come down] 18%, stated come down 20%, about the same as we bring the portfolios down across the whole spectrum of the loan time.

There was also an earlier comment about the sales vis-a-vie our collection practices. And a large proportion of the sale is actually performing loans. So we still are sticking to our strategy that in most cases we will track better because of our experience in that business. Where we can track better we will not sell those loans.

Brendan, thank you. Time for one final question from Hong Kong, Vincent.

Thank you Stephen, Roy Ramos.

Roy Ramos with Goldman -- Roy Ramos with Goldman Sachs. There are two follow-on questions [for] some additional color. First, you've actually continued to grow your branch based mortgage loans at HSBC Finance U.S.A. including on a half on half basis. Am I right that these are sub-prime loans and what is motivating this continued increase? Is it -- are the delinquencies fairly stable etc., etc?

And then I guess another follow-on question I had was, your balance sheet management revenues which have also improved on a half on half basis, could you give us a bit more color as to what is driving this? You mentioned it's mostly about Asia. Is this mostly about the HIBOR situation here in Hong Kong, or is it the start of broad based recovery in the balance sheet management revenues for the Group as a whole?

Roy, thank you for those two questions. On branch based mortgage business in the U.S., Mike, let me turn to you.

Firstly, yes it is. It's in our sub-prime business in the United States. It would be wrong to assume that everybody doesn't need a mortgage to live their lives. We underwrite those mortgages on an individual basis through our branch network. The majority are first lien mortgages and we're continuing to write that business except we're writing it with a better spread now than we had before. We take the same sort of guidance and looking at it as we do and we're comfortable that we're writing good business.

And on balance sheet revenues, Stuart?

Thanks Roy. It's actually Hong Kong dollars. So basically the curve in Hong Kong has now got some positive curvature to it. So there's revenue opportunities in Hong Kong and the Hong Kong dollar curve, and also the negative positions we've had have matured and run off. So therefore what you conclude is that the [CSM] number should not continue to go down, but what you cannot extrapolate is that it will continue -- it will go up a lot from where it is now because sterling, euros and U.S. dollar curves remain challenging. So it's specifically the run off of bad positions in Asia and opportunities to actually make money out of the [Hong P] curve.

Stuart, thank you. And I'm afraid at that point we must draw this session to a close. Ladies and gentlemen in Hong Kong thank you for joining us this afternoon. I'm about to get onto a plane so I will be with you and meeting a lot of you over the next 48 hours, Tuesday, Wednesday. Ladies and gentlemen here in London, thank you for being with us. Looking forward to seeing you again at the full year. Thank you.