滙豐控股 (HSBC) 2007 Q3 法說會逐字稿

Welcome to today's conference call.

Let me hand you over to Douglas Flint, HSBC Group Finance Director.

Please go ahead sir.

Thank you very much and welcome to all on the call.

Good morning, good afternoon and good evening depending on where you are.

With me in London are Michael Geoghegan, our Group Chief Executive, and Stuart Gulliver, the Chief Executive of CIBM.

Brendan McDonagh is up very early in Chicago, the Chief Executive of HSBC Finance Corporation and he is also on the call.

Before we start, can I just draw your attention to the traditional forward-looking statement disclaimer and we'll take that as read.

At this stage Mike's going to comment on our headline performance and then Stuart's going to update on CIBM.

Then I'll make a couple of observations on capital.

And then we'll be very pleased to take your questions.

Mike?

Thanks Douglas and welcome to you all, wherever you are, morning, noon or night.

As you know, it's been a pretty quiet time in financial services so I think this will be pretty easy this review of our trading statement and obviously our 10-Q filing and 8-Q.

Let me take you through the main points I would like to make.

The fact that our profit before tax is ahead of the comparable prior year quarter and ahead of the prior year to date, we take great comfort in and it reflects that our strategy of diversification is very much working and is a strength to the HSBC Group.

The emerging market business again is strong across Asia, the Middle East and most of Latin America.

Obviously the U.S.

economy remains strong and however we have our issues in the housing market and no doubt we'll take lots of questions on that, as we go through this presentation today.

The customer groups of commercial banking and private banking are ahead -- ahead -- PFS is ahead in Asia, the Middle East and Europe but obviously is adversely affected in the U.S.

Within the issues in the U.S.

we're taking the actions I said we would take.

I said it would take us two to three years to work through this.

We said we would take whatever steps were necessary and we've been doing that.

We've restricted the product.

We've tightened the underwriting.

We've increased the collections activity.

We've closed D1.

We've closed or announced the closure of certain branches and we're focusing on both the revenue reduction and the cost ramifications.

We've a loan impairment charge of $3.4b.

It speaks for itself.

But remember, this business has an underlying level of loan impairment as part of its business model.

So you need to look at the loan impairment for the quarter which is $1.4b higher than it was extrapolated from the first half trends.

The CIBM strategy is well on track and I know Stuart's with me and he will cover that in detail in a moment.

And Douglas will talk about capitalization.

We're clearly strongly capitalized.

We're liquid and we're diversified.

These are our fundamentals and we won't sway from them.

I think in the past people have talked about have we had too much capital?

I think the market's answered that and we're seeing a wave of funds coming to us because of our strong capital base.

And whilst the markets remain uncertain, our position stays strong.

Clearly we'll have lots of more points to make with your questions but I'd like now to hand you over to Stuart.

Stuart?

Thanks Mike.

Yes, as you said -- Mike said, I think the CIBM strategy actually is proving that it's working well and to just rehearse that again, the emerging market-led and finance focus.

For the third quarter of 2007 we produced a profit before tax broadly in line with the third quarter of 2006.

That's after taking write-downs of $925m as a result of difficult market conditions in credit space which you're all aware of.

And those write-downs were clearly therefore offset by record performances in other parts of CIBM business, particularly foreign exchange payment, cash management, security services, the group investment businesses and in geographical terms we've had very strong performance from the emerging markets generally.

I think it's also true to say that we're comfortable with our exposures in some of the areas that our competitors have flagged problems in since the end of the third quarter.

Now I'll hand you back over to Douglas.

If I can just make three or four small points on the financials.

First, in terms of jaws which I know many focus on, in the third quarter on an underlying basis our revenue growth was a little bit faster than it was in the first half of the year.

Our cost growth was a little bit slower.

You'll note that we make reference to the fact that because of credit spread widening in the third quarter that portion of our own debt that we mark to market as part of the hedging model that we have while the interest rate legs pretty much near (inaudible).

We tend -- we have the impact of our own credit spread going through earnings.

Up until the end of 2006 this credit spread has tightened.

That was a charge to our earnings in the third quarter.

Everybody's credit spread widened and we have the benefit of a bit over a billion dollars of credit to the P&L.

To be clear, that's not allocated to any customer group so that's not in the CIBM numbers.

It will be disclosed in the second half of the year within what is called 'other'.

Again, to be clear, in terms of what's in the results and what's not, we have not recognized any gain yet in the year, in relation to the sale of this building.

And finally in capital, as Mike says we remain strong and indeed our tier one and total capital ratios are essentially in line with those that we disclosed at the end of June.

At this point if I pass back to Mike and we'll be very happy to take your questions.

Thanks Douglas.

Time for the questions.

Can I ask the telephone operator to provide the dialing instructions if you have a question that you would like to ask.

Thank you.

(OPERATOR INSTRUCTIONS).

Okay.

Our first question at this point comes from the line of Alistair Ryan.

Please go ahead sir.

Thanks.

Good morning.

Three questions I guess.

First on the credit card shift in finance, whether that's likely to be an indicator that you might be able to move that business into the bank at some point, whether it's part of the charging structure so it's something that might be fundable within the banking subsidiaries at HSBC?

And then secondly, it's some time since you described Hong Kong as excellent.

Clearly you've benefited very strongly from the IPO stock market frenzy that's been going on.

Whether that's a disproportionate part of the revenue out-performance, you're clearly delivering or whether it's very broadly spread across the business and therefore in a more normal stock market whether we can see the sort of revenue pace we're currently enjoying continuing?

Thanks.

Alistair.

Thanks for your question.

Part of the issues on the cards, clearly we look at what cards we take into the bank.

We generally take what we call our retail cards.

These are our principal cards in the name of some of our clients, and we'll continue to do that.

Clearly we're going to have a mix of business in our U.S.

bank between commercial banking, PFS and CIBM.

But we always look at that and see what we can take.

And hence maximize our funding capability.

Yes.

You're right.

The results in Hong Kong were excellent, are excellent and continue to be going strong.

And across the board they are -- obviously we have benefited from the IPO.

I wouldn't call it a frenzy, but we have benefited from the IPO activity.

But more in line with our strategy it is a wealth management business in PFS that continues to go strongly.

And we're also seeing an improvement in real estate prices etc.

so there is activity there.

But outside of PFS we're also seeing a strong commercial banking business, good FX business, good trading business in CIBM.

So it's a generally very much a booming market at the current time.

Next question please.

The following question comes from the line of Sunil Garg.

Please go ahead.

Hi.

This is Sunil Garg from JP Morgan in Hong Kong.

I have a couple of factual questions, a couple of guidance questions.

Could you confirm that, excluding the $606m fair value gain the revenue performance on a sequential basis would be essentially flat?

And the other factual question is when you talk about doubling of profits from your contribution in the China investments in BoCom and Ping An, does that include the valuation gains that you included in the second quarter?

And just in terms of the U.S.

business itself, we've been hearing for the last nine months that the branch channel is good quality, HSBC U.S.A.

book is good quality.

We've seen a deterioration across the book.

Could you talk a little bit more about how you perceive that book going forward?

Thanks.

Right, I'll ask Douglas to take questions one and two, that's the $660m and the China, and I will take the U.S.

question.

Douglas?

Well let me answer this question slightly differently than you're expecting.

If you take out the fair value gains from revenue you still have underlying revenue growth that is accelerated to the first half of the year.

So that wasn't -- that wasn't the driver of acceleration.

If you take that out underlying revenue growth is still stronger than the first half of the year.

The associates line does not include the dilution gains that we recognized in the first half.

It's purely our share of the earnings reflected in our three associates, Industrial Bank, Bank of Communications and Ping An.

Turning to the U.S.

mortgage books, both in the branch network and the correspondent channel, the branch network credit continues to be better than the correspondent channel and that's what you'd expect as we underwrite each person individually.

But the reality is that the real estate values in the U.S.

continue to fall, particularly in California, in Florida, some of the rough belt states and in Boston.

And what is happening is people are making a choice of whether they want to continue owning their own home or moving into a rental environment.

And it's hard to tell how that actually works out.

It virtually goes street by street.

And until the confidence comes back in real estate in the U.S.

you can expect that to continue and that choice between owning and renting.

But it's not as severe in the retail channel as it is in the correspondent channel.

But it is a fact that is beginning to show up.

Next question please?

The following question comes from the line of Tom Rayner.

Please go ahead.

Yes.

Good morning.

It's Tom Rayner from Citigroup here.

Just a couple of questions please.

The first one just again on the trends you're seeing in the branch channel.

And quite a big step up in delinquencies Q3 on Q2.

My question really is given that you were quite early to recognize the problems coming through in the mortgage services portfolio, why do you think -- you've grown balances I think on a year on year basis by about 18% in the branch channel.

Why were you not maybe quicker to realize that you were going to see a similar deterioration coming through, although not as severe across your branch channel?

And I suppose the same question can be made for the non-mortgage exposures as well because they've all grown, although albeit at a slower pace.

That's my first question.

I have a second question on mortgage services.

Thanks.

Well let me just take the first question.

The reality is that there is some movement between the correspondent channel and the branch channel.

So some time what we do is we re-underwrite people in the correspondent channel if they fit into the branch channel profile.

There is no question, in the second half of the year we have seen a deterioration.

But we have also cut back a large amount of our products.

We've reduced our LTVs in a number of areas.

And that's one of the reasons why we're closing some of the branches.

So I have to say that it is a business.

You don't turn off entirely because if you did you would just kill it off altogether.

We do -- we have seen some deterioration but we don't see it as severe as the correspondent side.

But I'll ask Brendan.

Brendan, would you like to add anything from Chicago?

Yes, only that I think we've put in a lot of the changes even into the consumer lending network probably in the second quarter and the third quarter.

In the 10-Q we mention the fact that we've already closed approximately about 100 branches.

And that branch optimization is actually going on for the last four to five months.

So I take the point the analyst has mentioned.

There is a jump in the delinquency.

But compared to the level of delinquencies we're seeing in the correspondent channel it's still relatively low.

But you are going to see some impact across the network as you get the general decline of the American housing market.

But at the risk of repeating myself, a lot of the increased risk (inaudible) we started to put in in the second and the third quarter and the branch reductions.

Thanks Brendan.

Tom, your second question?

Yes, thanks.

Just maybe a very quick follow-up on that.

Would we expect the expected loss rates in the branch channels?

I looked at the delinquencies that are similar to what you're seeing in the correspondent channel first lien and second lien?

Or would the fact that lower delinquencies also be reflected in lower expected loss against those exposures?

We're not expecting the branch channels to have the same delinquency level as the correspondent channel and we are seeing the branch channel keeping in line with the industry.

But clearly the big issue here is --

Sorry Mike, I mean the actual loss on default, not the delinquency trend itself but for a given delinquent loan, would you expect the loss on default to be higher or similar or lower in the branch channel versus the correspondent channel?

It varies frankly from state to state.

It depends on what the LTV -- what the deterioration in real estate prices are.

Okay.

Really it's very broad across the whole area.

If you look at California dropping 20% or more.

Other areas haven't dropped as much.

So if you do have a default then the loss is going to be less depending on what the LTVs are.

Okay.

Thanks.

Sorry, my second question -- I know I obviously had a second already, was just on the fact that you're not running off mortgage services as quickly now in the third quarter as you have been.

And I guess that reflects the fact it's not -- it's more difficult to sell some of these exposures down.

And I just wondered if that might affect your overall view of total losses from that portfolio if it now takes longer or is more difficult to sell down and has to be worked through?

Or not?

Well clearly if you can't sell it down or people can't refinance, you've got a higher risk in the tail of the business.

We're living through difficult times, at the present time and the valuations you see in the market are not really reflective of what we want to sell at.

And whether that will come back overall.

I think there's been an overreaction to the sub-prime market in regard to what are the actual number of customers that are defaults.

But we have said in our trading statement that we do expect higher losses through the lives of this portfolio.

But we'll make our best effort to sell part of it, to work out other parts of it.

But we'll do it at a sensible time.

I don't think you'd want us to do anything like a fire sale on this.

We don't need to.

We've got the capital.

We've got the expertise to work it through.

But we'll take our opportunities as they arise.

Thanks very much for that.

The following question comes from the line of Ian Smillie.

Please go ahead.

Morning gents.

Three questions please.

Firstly, could you give a sense of what the change in the available for sale reserve is through the quarter?

Secondly, and related to that, could you give us some extra color on the $31b of asset-backed securities that you are carrying in that portfolio at the half year and perhaps in terms of what collateral they are invested in?

And thirdly, particularly for Stuart, looking back at the quarterly profit contributions last year, Q3 was the weakest by some distance and then accelerated sharply in Q4.

Would you encourage us to think about the same sort of recovery this year relative to last year?

All right Ian.

I'll get Douglas to take point one and two and Stuart will take three.

Douglas?

Gosh that's the first time I've been asked what the change in the available for sale reserve is.

It's not that different.

So about the same.

The $31b that you've seen in the note, I think the important part to note is the sub-prime element is a very, very small piece of that $31b.

The rest of it is -- it's a whole mixture of things but it's not sub-prime residential mortgages in the United States.

So we shouldn't expect any sort of material negative to come through on that piece Douglas?

That is -- that is our expectation and I hope it will be yours as well.

Thank you.

Ian, in terms of the fourth quarter I think that goes dangerously close to profit forecasts.

But I think the reality of the marketplace is the same for us as any other institution.

And what I would say by that is that actually -- I don't think you could reasonably expect as strong a recovery in the fourth quarter of this year as we had in the fourth quarter of last year.

But actually trading conditions in October and November so far have been better than they were during the third quarter.

Thanks Stuart.

Next question please.

The following questions come from the line of Nick Lord.

Please go ahead.

Hi.

Yes.

Three questions again, continuing the trend.

First of all just a question on what you said in the trading statement about the U.S.

business going forward.

You talk about changing the loan book that would reduce consumer lending of loan originations by about 5% or equivalent to 5% of gross revenue.

You talk about a fee reduction in there for 2008 in Q4 -- 2007.

And obviously you're talking about reducing the branch network further.

I'm trying to work out what impact that would have on if you like the underlying revenues coming from that household business.

Are these three incremental things?

Would each reduce that?

Or is the 5% reduction in gross revenue from consumer lending including the adjustment to fees and including the branch reduction?

So I'm trying to get some indication as to what you're signaling there.

Secondly, just on Hong Kong, just to ask whether the unusual level of HIBOR had a particularly beneficial effect for you in Q3?

And finally, just to refer you to slide 11 on the HSBC Finance Corporation presentation pack.

And it's the chart that shows charge-offs and loan impairment charges on the U.S.

retail bank real estate secured.

You clearly make an impairment charge of 659 in Q3 on that.

You've got a charge-off that's still running at around about 140.

Should we read that you've made a large pre-emptive charge on that real estate secured book?

Well I'll ask Brendan to take the first one on business outlook in the U.S.

and I will take the next two.

All right?

Brendan?

Yes.

Hi.

Good morning.

It's pretty hard to estimate overall what would be the impact because while there is some gross -- in gross terms revenue reductions by the fact that we'll have lower originations in the branch network and we've also given up a certain amount of fee income in the credit card business.

If I take the latter first, what we haven't factored in at this stage is a lot of the changes are impacting the interests of the customer.

And there's a good chance that will extend customer loyalty and the average period of time cards are with us.

So there could be a counterbalancing revenue increase by longer life -- average life of the card customer.

With the consumer lending branch network again, the reduction in terms of the amount of the amount of volumes will have a revenue impact.

But we're also taking out costs and we'll have a better idea next year of how much those costs will be.

And in addition, you will see over time a better loan performance in terms of delinquencies in charge-offs because we're originating against a much tighter set of criteria.

So when you put those together against the more blunt gross figures we've quoted on the revenues, the situation won't be as it seems.

But it's very hard at this stage to explain what will actually be the impact in '08 and '09.

Thanks Brendan.

Nick, on HIBOR, no there's no real effect at all in the results.

In regard to the provisioning on the real estate, we've taken everything we can see on the horizon at the current time and providing accordingly.

As you now we're limited to how much we can provide under accounting rules but we've taken the max we can on the trends we've seen.

So you're pretty happy with the level of provisioning on that real estate secured --?

I'm never happy with the level of provisioning but the fact of the matter is that we've -- we are where we are, we take what we can see.

And I feel comfortable in the provision we've taken at the present time.

Thanks very much.

All right.

Next question please.

The following questions come from the line of John Crutchley.

Please go ahead.

Yes.

Good morning all.

JP here from Merrill Lynch.

Two questions if I can, one on -- sorry HSBC international and one on the U.S.

business outside of HI.

The question actually was just about funding of the business.

I noticed that you've actually made a cap injection to the business.

Obviously you're not growing the book but one assumes you are getting maturities of debt rolling through as well.

As you look to refinance the liabilities side of the book can you just make some comments about what you're seeing on the funding cost side of the equation?

And the second question was just on the PFS business in HSBC -- in HUSA if you like, HSBC U.S.A.

The business there is essentially flat revenues if I look at it on a quarter to quarter basis or on a year to date basis with obviously penetrating up, no surprise there and costs are up too.

And I'm just wondering about the shape of that business and whether that's where you want it to be or whether there's need for some restructuring work there as well?

JP, first I'll ask Douglas to take you on the funding side of the consumer finance business.

HSBC Finance's funding costs over the last couple of years have pretty much been in line with bank subordinated paper and continues to be so through the last three months when there has been turmoil in some of the markets.

The finance company has funded perfectly normally and in line with comparable spreads.

Its spreads haven't run out against those that it now peers -- would see in a peer group.

And it has had no difficulty in rolling over funding.

We don't expect that to change.

The ratings -- at least one of the rating agencies has already announced this morning on the basis of seeing the results confirmed rating.

So we're -- we see no difficulty on the funding side, or the cost of that funding.

And Douglas, the cap injection was what -- was just to stabilize for the losses to date?

The capital position of the finance company is really geared to rating agency requirements for tangible equity as a proportion of tangible managed assets.

The $750m that we put in was effectively to put that into the middle, upper-middle part of that range, which is where we keep it.

And so basically, yes, that's exactly what it was doing.

JP, on the rest of the PFS business in the U.S., clearly -- let me get the cost side first.

As we expand out our branch network outside of New York City and already (inaudible) a Mars 1 and a Mars 2 project.

Clearly we're investing in the businesses.

We're also investing in our direct business that is going extraordinarily well.

On the revenues side, I think that we're not going actively out for real estate lending etc.

etc.

So there is going to be a slowness or revenue.

But you shouldn't really read anything into that.

It's not material.

And we continue to review our business in the U.S., where we should be and the locations etc.

and you should expect more on that.

Thank you.

Thanks.

Next question please.

The following questions come from the line of Simon Willis.

Please go ahead.

Yes.

Good morning.

Simon Willis here from NCB.

I have two questions if I could.

The first one relates to PFS.

The statement comments that Europe was strongly ahead and also makes reference to improved impairment situation.

I wondered if you could comment on what else was driving that or whether it was very largely an improved impairment experience?

And secondly regarding the gain on the sale of the head office.

You say that the gain is not in these figures.

Is it likely that that will be taken in Q4 and can you explain what's happened there?

Well let me just take the PFS first.

The -- you're correct.

We looked at the market about October last year and maybe we were wrong but we called the top of the market and we pulled back from both personal lending, unsecured loans and mortgage lending.

Both of those have -- we've dropped our market share but equally we've dropped our impairment charges and they're looking much healthier now.

And that's the position that we continue to take.

We do believe that there is some risk in the U.K.

market in particular.

But overall we're rightly positioned at the present time.

Now in regard to the head office deal, yes we do hope to have that completed this quarter but I'm not giving you any assurance.

But it's on our things to do for the end -- before the end of the year and we'll be indicating that in the normal process.

Thank you.

Next question please.

The following questions come from the line of Michael Helsby.

Please go ahead.

Yes.

Morning everyone.

I've got a couple of questions just on the U.S.

and one on CIBM if I can.

You kindly give us the vintage data on the mortgage service book.

I know the branch-based lending in the -- from the real estate is obviously different but I was wondering if you could give us a feel for the -- how the vintages stack up in the $50b book as we look at it today?

And also just in the branch real estate, you reference how at the moment you've been reducing LTVs to tighten your underwriting.

Can you give us a feel for what the average LTV is on the branch real estate book?

And then just in CIBM, I noticed in the U.S.

on Friday you announced that you'd closed down your asset-backed desk.

I was wondering if you could give us some form of outlook in terms of volumes -- well just in terms of the business for the U.S.

and the European business?

Clearly there's a lot going on there in terms of ForEx rates.

But also in credit private equity.

So if you could just give us some broad comments on the U.S.

and Europe please?

Thanks Michael.

I'll ask Brendan to take questions one and two.

Brendan?

Yes, hi.

I wasn't quite sure about the question on the vintages.

The vintages in consumer lending network are generally evenly spread.

Though obviously there was a certain amount of build-up in originations in the '05 and '06 but nowhere near the rate of build-up for the mortgage service vintages.

And in the sub-prime market generally you have quite a high repayment rate.

So that your portfolio strengths or shall we say replaces itself quite quickly.

So you don't have a lot of older mortgages going out beyond three and four years.

Except, having said that, within consumer lending, a point I perhaps should have made in one of the earlier questions, when we're distinguishing regarding performance.

The consumer lending network compared to mortgage services, we've got over 90% of them are actually fixed rate.

Regarding the second question with loan to values.

What we've done recently is we have restricted the LTVs down to 90% as a general rule but in certain geographies we've gone as far as restricting it to 80%.

Thanks Brendan.

Stuart?

Yes.

Let me give a bit of precision to what we actually did in New York.

We closed the sub-prime MBS trading sales operation.

We did not exit ABS, which obviously is a much broader category of securitized asset which would have underneath it corporate receivables or trade receivables or auto loans or whatever.

It's actually the sub-prime MBS piece.

And the logical reason why we closed this, having closed Decision One we closed the originator of sub-prime mortgages therefore it made complete sense to close the trading and sales aspect.

So it's a very, very precise piece of the MBS trading business.

And therefore there isn't a logical read across to Europe from that because there wasn't substantial sub-prime MBS business in Europe.

But in terms of the question in terms of general volume, October and November have been better trading months than the third quarter was.

There does appear to be reasonable volumes of leverage loans, reasonable volumes of bond and derivative transactions going through.

But clearly one of the things that we will need to get comfortable with for 2008 is whether those volumes will hold up.

And most of you have got estimates for CIBM businesses generally, not specifically HSBC's, showing really marked volume drops into 2008.

And it may well be the case that that actually does take place.

But that will be a generic market feature rather than idiosyncratic to HSBC.

Thanks Stuart.

Next question please.

The following questions come from the line of Simon Samuels.

Please go ahead.

Yes, good morning.

Simon Samuels here at Citi.

I wanted to ask two slightly more general questions.

One is specifically on the household or the HSBC Finance business, on the unsecured portfolio, whether you can just give some sense of whether the old relationships that I know in the past you used to advertise about the credit quality in things like cards and consumer loans and also finance.

A lot of those areas credit quality was really linked to both unemployment trends and also average weekly pay trends as well.

Whether those trends -- whether those linkages rather still are true today?

Or whether you think that's somehow been broken?

What I'm trying to get to is get a sense of whether you could have a -- it's actually without even a proper recession in the U.S.

whether you could see charge-offs in those unsecured products go to previous peaks?

So that's the first question and there's another question afterwards.

Right Simon.

Firstly I think we're all working through a strong economy in the U.S.

as reported in the figures, both in regard to growth and employment trends.

And then you're seeing this anomaly in housing.

So I think the first thing we'll have to look at is, clearly the housing aspect of it is being driven by people who now think of their home as an investment rather than a home.

And then now they see there's no equity in it decide that they might all go and rent.

So there's going to be no equity back.

In regard to the consumer lending unsecured, we've got no evidence to say that it's not still directly linked to employment.

We are seeing some pick-up in that but we're mainly seeing it picked up in areas that are suffering from unemployment.

The rough belts etc.

So it is a -- we'd still stand by the saying if unemployment was to deteriorate this is when this portfolio would be impacted.

But it's not being impacted by unemployment to any great extent at the current time.

And just to rearrange the final points of that.

So, okay it would deteriorate if unemployment deteriorates but is the opposite true?

That we shouldn't be expecting a meaningful deterioration in unsecured portfolios on the assumption that unemployment and average wages stay reasonably firm?

Actually it is the same effect on as we have.

But clearly there is unemployment in certain parts of the States.

Sure.

Okay.

Thank you.

The second question is, in some ways you're the best people to answer this and in some ways the worst, which is to do with your overall sense, both as experienced bankers and also sitting on top of an organization that straddles the world.

Can you give some sense of first of all the extent to which you think we are through the credit and liquidity corrections that we saw from August onwards?

So your own assessment of how far through the shake-up process you think we are?

And then secondly your comments on the leveraging and in this sense of course you're badly positioned because I guess most people would see you as already quite heavily deleveraged.

Is your sense that the industry generally is going to deleverage more to HSBC style capital structures?

Would that be broadly your expectation over the next year or 18 months or so?

Well, Simon, firstly I think we're not through the credit crunch at the current time.

I think you've just got to look at the pricing in the market for debt will give you a fair indication that there's a long way to go.

I think the fact that we aren't through this credit crunch is going to impact the economy.

It's already set at the second emotion as far as I'm concerned.

I think it was set between August, September time.

And the reality is that people are looking at balance sheets.

They've got to put assets back onto those balance sheets.

That doesn't allow them to lend to new customers.

I also believe it's not just going to be in the developing markets.

I think this must feed into changes in the developed market.

You must feed into the developing markets as well.

Because banks against cross border lines etc.

are going to review those.

So I think that yes, this has got some way to go.

I think probably at some stage we're going to look back and say this growth strategy that the world has followed it's been -- was it good growth or poor growth.

Because what we're seeing in real estate in the United States is a revaluation of asset classes.

And that I imagine will continue.

I think you'll see it in commercial real estate.

You'll see it in other assets classes as well.

It's a natural progression.

If there isn't money to lend to it then asset classes have to adjust.

And that's what we're seeing in the U.S.

Thank you.

And then specifically on the mechanics by which the system deleverages, because as you say at the moment it's going the other way, assets are coming onto balance sheets and write-offs are reducing capital.

So at the moment the pressure is re-leveraging slightly ironically.

But what do you -- how do you think -- what's your view of the mechanism for the industry to deleverage?

Oh sorry, to deleverage this balance sheet again.

Frankly I've been focusing on it re-leveraging itself in the short term.

Yes.

But deleveraging has got to be done by confidence.

But again a need -- certainly probably regulation.

Maybe Basel II will help in some areas.

But it will require equity I think, to be honest.

Thank you.

Thanks a lot.

Next question please.

The following question comes from the line of Russell Jones.

Please go ahead.

Yes, hi.

Just a couple of questions.

Can you provide some FICA score analysis please for your mortgage balances outstanding?

Secondly, can you just talk a little bit more about your renegotiated loan portfolio.

How long for example have they been delinquent before they have been renegotiated?

Can you renegotiate the same loan twice or even more?

And secondly, your delinquency rates are actually pretty decent compared to the rest of the market.

I just wondered if you had a higher level reason as to why that was?

Thank you.

Well frankly on the FICA scores, we don't at the quarter give out information on them and publish them at this stage.

On the loan restructuring, clearly we're always very cautious on the weakness of a loan being restructured and the likelihood of it going delinquent again.

And there isn't a rationale so we would do it a second time.

Frankly I think we're too tuned into the cycle to see the need for that.

And our accounting for it is very conservative in regard to revenue taken for restructured loans.

So again it's not that material in the overall sum of the parts of the business.

Okay.

And just in terms of how long the delinquent loans -- the renegotiated loans have been delinquent prior to being renegotiated?

Do you have some data there?

No.

In fact we do two things.

And Douglas is going to say something in a second.

But the first thing is we don't necessarily wait until they become delinquent.

We actually go and look at the trend and the likelihood of people who may get themselves into difficulties.

And we've mentioned that before.

Our adjustable rate mortgage for example we read in prior to it.

And we actually lead the market in this.

We prior approve people and write to them and say we approved you to an adjustment to your mortgage.

Because there was a resistance at one stage of taking any phone calls from banks basically talking about your mortgage.

But if you identify up front what you're going to be offering them there's a more positive response from them.

But Douglas you might want to add color.

I think one of the things that we should draw attention to is the majority of the modifications that we're doing at the moment to help people cope with the rate shock or just lower rate mortgages are to customers that are not delinquent i.e.

we're getting to them ahead of them getting into delinquency, discussing the payment shock that is forthcoming when they reset and modifying the loan while they are still current.

So they are not delinquent.

And I think it's that ability to get to people before delinquency because we own the mortgages is giving us the best handle on dealing with payment shock and foreclosure avoidance than perhaps some others who have to wait until a payment has been missed.

We're doing it ahead of --

And to add to Douglas's point, we now have 3,000 people in Brandon, Florida doing this round-the-clock, talking to our customers.

And that actually is almost a comparison against where you see people holding securities on the street where they're dealing with a trustee and where the trustee actually is unable to do anything until I think about two payment delinquents.

And often that is basically too late.

So that is the big difference, we've always emphasized.

Owning the customer base is far more beneficial than owning securities.

That's really useful.

Thanks.

And can I just go back to the first question.

Do you intend to provide the FICA scores at year end or in your 10-K?

No we don't provide FICA scores.

Okay.

Next question please.

The following question comes from the line of Tim Sykes.

Please go ahead.

Tim?

He doesn't seem to be there operator.

Do we have another call.

Can you hear me now?

Yes.

Sorry about that.

That's a new phone.

Good morning gentlemen and good morning everyone.

Firstly a question on Mexico.

Your cautious comments there in your response to Simon, Michael, about emerging markets and asset pricing eventually spreading to them, you do mention that you're seeing some existing bad debts in Mexico.

But you point out that's to do with the maturity of the book which is obviously great.

But should we be concerned that this is a darkness at the edge of town in Mexico?

Darkness at the edge of town.

Clearly Mexico business, I'm talking about the banking industry overall, has grown very rapidly in recent years.

And on top of that there's been a number of new entrants into the market.

What we have said is that we don't need growth for -- just for the sake of having growth.

And we've asked our teams in Mexico to slow that growth.

Clearly as you slow the growth you're going to have that wave of impairment that will come up and we're dealing with those impairments at the current time.

I would -- one thing is we're taking breath in Mexico is the best way.

Obviously the U.S.

has a slowing of the economy will have an impact on Mexico and we're watching it carefully.

Okay.

That's helpful.

Thank you.

Three very quick questions for Douglas if I may.

The first one on the tax charge.

Obviously if Hong Kong is materially more significant in the results it would be beneficial for the Group tax charge.

Is there any more color we can have on that rather than the statement in the update?

There are one or two -- there are always one or two adjustments in terms of prior year settlements or adjustments to restructurings and so on that come through.

There are some beneficial ones in Q3 and that augments.

But the biggest element is the fact that Hong Kong profits were very strong and the U.S.

was very, very weak.

So the mix effect is quite significant.

Okay.

Brilliant.

Thank you Douglas.

Two very last questions.

One on Basel II.

Is there any change from the impact that you've seen in CIBM and also the impact on your U.S.

business to -- and I suppose thirdly the growth in emerging markets within the mix.

Is there any impact to your assessment of the impact that Basel II will have relative to what you talked about in (inaudible)?

No I don't think particularly.

I think the element that people are reflecting more on about Basel II currently is, because it's ratings-driven at the standardized approach and because its probability default was driven at the advanced approach.

Given the volatility that's been seen in credit markets over the last quarter and liquidity events, the volatility potentially in capital requirement must be higher than people would have been modeling up until the third quarter of this year.

And therefore I think one of the things we'll all be reflecting on is what's the appropriate cushion of capital.

Now we are strongly capitalized and we remain so but what's the appropriate cushion of capital that financial institutions will need to keep because of that volatility?

And I think that goes back to the question Simon was raising as to whether in fact one of the consequences of this deleveraging will be it will become about because of a requirement for higher capital.

I think there is an element of both that being demanded by the markets and regulators and indeed always looking at the potential volatility of capital requirements.

And saying that we need to have a better cushion.

Yes, okay.

And lastly -- thanks Douglas that's helpful.

And lastly I suppose a question which you might not choose to answer.

But if we were to exclude the gain on your debt which was about a billion I think you said, would the statement still hold that the nine months year to date are ahead of the nine-month of last year?

And also the Q3-over-Q3, would that still be the case if we were to exclude that billion on your debt?

I think, gosh -- I think it's getting awfully close to numbers.

I think what I did say, which I think is important, is that if you took the billion out of 3Q revenues we'd still be underlying stronger in revenue growth third quarter against third quarter than we were in the first half of the year.

I think it's quite difficult to say if you pull out all the good things or some of the good things what does it do.

So given that we don't do numbers I think I'd rather not answer that question.

It's also, to some extent, given that it's occasioned by spread widening, it has an offset in economic through some of the impairment, some of the write-downs that Stuart was taking in CIBM which were occasioned by spread widening, so it would be wrong to look at one side of the equation.

Fair enough.

Douglas, thank you very much.

Michael, thank you.

Thank you, Tim.

Next question, please.

The next question comes from the line of Bill Stacey.

Please go ahead.

Yes.

My question initially is about Hong Kong and CIBM.

To what extent was balance sheet management an important contributor to the strength in CIBM within the third quarter, and has anything that's happened in interest rate markets in the last month or so changed the circumstances that were quite favorable for balance sheet management within the third quarter within Hong Kong?

Stuart.

Yes, Bill.

Balance sheet management was a contributor to CIBM of the asset management in Hong Kong because, obviously, we had, and this applies over the whole of 2007 not just in the third quarter, because we've had a normalization of positive yield curves.

The recent changes and Hong Kong rates and HIBOR going close to zero when the TT hit 775 had not had a material adverse impact on our balance sheet management today.

Thanks very much for that.

And I was wondering if also on the CIBM side you could give us some more color about your structured investment vehicles that you have at the moment?

What the underlying business purpose of those is for the investors, and what likely impacts there are going to be from any restructuring that happens with those structured investment vehicles, and whether or not from the possible restructuring options there will be any incremental capital requirements in terms of higher risk weighting?

Sure.

Let me just talk broadly on the SIVs.

As you're aware, the SIVs are quite different from the Conduits.

In essence, the SIVs are businesses in which HSBC provided asset management and custodial services to SIV, namely Cullinan and Asscher, and their combined assets are the moment are about $47b.

Actually, when you take which they're holding out, the combined assets are actually under $40b.

But we're managers of those SIVs, and they are bankruptcy remote, and they are not consolidated at the moment from either an accounting or regulatory capital point of view because, actually, it's the mezzanine note and income note investors that bear the majority of economic risk.

It's not us.

And, therefore, we have not, at this moment in time, got the same exposure to them as we have the Conduits, which we provide 100% liquidity backing to.

However, since we are an asset manager to them, we clearly have an obligation and duty as a manager to work proactively with the income note holders and with the senior note holders to both fund these vehicles and, in due course, to look at whether these vehicles may need to be restructured if asset prices continue to fall.

Because equally, as you're aware, these have net asset value triggers within them, actually within the income note tranche, and for the SIVs overall.

Now, there are variation or there are a number of options that can be considered, one of which of course is what this super SIV in the U.S.

is looking to address, and we have had informal discussions, and examine that to some extent, but that is just one of the things that we'll be looking at.

At this moment in time, it would be fair to say that whatever restructuring does take place, we would expect the income note holders to take a share of any financial loss that was to occur because, actually, they do hold the capital structure of these vehicles.

And they've enjoyed a very high return over the past two or three years from enjoying holding those income notes.

But, at this moment in time, we have not made a decision as to what we will actually do with these structured investment vehicles but I think the important point is that both continue to fund satisfactorily in the market.

And the risk to them, Bill, is clearly the asset prices dropping to a point that may trigger some of the NAB triggers that sit within the structures.

But, as I say, as Managers, we are proactively and have met actually all of the income note holders, and indeed are discussing with the various senior note holders what our options are on them.

Just as a sideline, this is not saying that we necessary would do this but just to give you some relative context, if we took $40b and add it to our balance sheet footings, our balance sheet footings are about $2.2 trillion, so it would be under 2% of additional balance sheet footings, were we to actually make that decision which, as I say, it's fair at this moment in time we have not, because we are simply a manager, an asset manager of these funds.

And if, touching on your original question of why did anyone do these in the first place?

Yhey were a very popular investment for institutional investors such as banks insurance companies.

We've got strong asset management capabilities.

We earn very good management fees in other ancillary custodian incomes from managing these funds.

Thanks, Stuart.

Thanks very much.

And if I could perhaps just add on the Conduits, what is the risk weighting on the balance sheet conduit assets?

They're consolidated from accounting point of view but not from a rate cap point of view.

And if they were they would depend on the individual assets.

It's a wide, wide variety of assets in the Conduit.

And are there any changes that would require a capital be put aside for them based on changes within, again, the structure of the covenants?

Not currently.

No.

The covenants don't have any triggers in them and they have 100% liquidity backing from HSBC.

So, actually, therefore, they are funding very strongly.

Okay.

Thanks very much.

No problem.

Next question, please.

The following question comes from the line of [Sakesh Kuhli].

Please go ahead.

Hi.

This is an overall question, sort of beyond the specific bank.

What do you see is the prospect for large scale government, U.S.

Government, intervention in the mortgage market to help sort out some of the problems that are increasingly -- that look like increasing quarter-to-quarter?

Thank you.

Brendan, you can take that one.

You are nearest to the center of power.

Yes.

I think at the moment there's very little likelihood of any, as you have put it, large scale intervention.

There is some signs that the Government sponsored entities are pretty math to math will go a little bit deeper into the marketplace, they're going to increase some of the cap, and Congress is debating at the moment.

There's some disagreement between the Democrats and Republicans on that.

There is also some legislation out there which is not really about intervention, it's about changing the rules going forward in terms of regulating the industry, but, in simple terms, the Government has made it very clear they'll be no bail out.

Thanks, Brendan.

Next question, please.

The following question comes from the line of Sandi Chen.

Please go ahead.

Hi.

It's Sandi Chen from Panmure Gordon.

I wanted to follow up on that earlier question on SIVs as well, and thanks very much for the additional disclosure on it.

The -- given the parts of Cullinan and Asscher have, I think, been earmarked for or are on watch downgrade or watch negative, would that potentially be another trigger for unwind on those SIVs?

And I have a related question as well.

Stuart.

Actually, the income notes are on negative outlook as are, I think, every income note in every SIV in the industry.

Actually, the trigger would be -- the net asset value of the income notes falling below 50 would trigger the first stage, which is restricted investment, which would simply mean that the fund couldn't invest in any fresh assets.

That would, in turn, though have an impact on the senior notes which may take the senior notes sort of below AAA.

But actually, the downgrade itself would not, and Cullinan is actually funded into 2008 so, indeed, even if it was downgraded, provided that the NAB trigger wasn't at 50, or actually even if the NAB trigger was going through 50, Cullinan is actually funded.

Understood.

And just related to the underlying assets, are those exposed to the ongoing round of downgrades on either RMBS, ABS, or CDOs then?

I would image they would but if you could give us more flavor.

They are absolutely exposed to ongoing downgrades as a market.

However, they are not holding material amounts of CDOs, but they are exposed to ABS.

About 80% of the holdings are ABS, about 20% are bank capital.

And actually, so far, none of the assets have been downgraded except for two.

And two issuers were downgraded after the end of the third quarter and actually, ironically, the two are two financial institutions, Merrill Lynch and Citibank.

Okay.

And just to -- thank you very much for that.

And then just a related question, I think.

There was on page 20 of the HSBC USA disclosure just disclosure on the variable interest entities and could you explain the nature of the maximum exposure to loss that's on that page?

I think it's gone up from $8.8b to $10.2b.

We're just getting that page.

Just one moment.

It was in unconsolidated variable interest entities, note 13.

Clearly, this is a 'no' both in the U.S.

filing and in the Group filing.

It's getting ones that more interest.

On the other hand, it's an incredibly technical note, and the maximum exposure doesn't really say anything other than on our technical basis what's the size of the asset that could ultimately, on any kind of scenario, come back?

It doesn't express any risk to that loss so I'm not sure that the number in and of itself is not particularly meaningful.

It tends to be in relation to some of the securitization vehicles and credit repackaging vehicles that we've got, but I don't think the actual number itself, or indeed the movement, has any particular relevance.

If there was risk to that number we'd be drawing attention to it in this quarter.

And if there was a sort of a contingent risk that we felt was material we'd be telling you that there is.

I don't believe there is and, therefore, there's nothing to say.

It's just a technical number in a very technical note.

Okay.

Thanks very much.

Thanks very much.

Next question, please.

The next question comes from the line of [John Whatley].

Please go ahead.

Yes.

Hi.

It's John Whatley from Hong Kong.

A couple of questions.

One is at the interim results you mentioned that there was an objective to try to sell down assets or I assume that because you were trying to reduce exposures you may have also thought about putting on some credit hedges or anything, so were you indeed ever able to sell any assets or put on any credit hedges for your sub-prime books in the U.S.?

That's the first question.

The second would be you currently have about $3.4b of reserves for the total mortgage book of $93b, which is about 3.7% of existing reserves.

You mentioned earlier that given accounting rules that you put aside as much as you can.

How do you determine that reserve of $3.4b, of 3.7%, as being in compliance with accounting or, I guess, maybe some view on the kind of expected loss of that portfolio?

I know it's a tough question but I just wanted to understand how you think about that $3.4b of reserves.

The final question is the -- of the incremental provisions for the mortgage book of about $0.7b, how much of that was for, if you can, the second lien parts of the portfolio or the first lien, and whether the severity of losses on the first lien are getting much higher than you had previously assumed?

Well, I'll take the first two questions and probably Brendan will take the third, if not Douglas will take it.

Yes.

At the interims we said if we could sell down the portfolio in regard this is the correspondent mortgage portfolio, we would as well as running it off.

Now, we told the market first that there was issue an in sub-prime, and between what we told you in January of this year until June we sold down and got repaid something like -- we went down from $49b to $40b, around those ballpark figures.

Clearly, July and August a lot of (inaudible) no ability to sell at reasonable prices this portfolio.

And in our trading statement today we said that if the opportunities arise we will sell down the portfolio as and when those opportunities come but it will create losses.

The Management has to decide if it's better to work through some of these transactions or take the losses, and we will look at that on a case-by-case basis.

As regards credit hedges, candidly, I'm not too sure if there's too many out there that actually can support the risk that they claim to support, or I think you've seen some of the issues in regard to people who have written these hedges and the ability to collect under them.

So the answer to your question, no, we have not put credit hedges in place.

On the $3.4b, is it sufficient?

Well, you're in a city that a few years ago virtually every home was below a Dell TV, and I'm talking about Hong Kong.

And the reality is we run a business that is we look at people's lives.

We look at their employment capability, and make a decision on the cash flow that they have to repay their mortgages.

In reality, it's about 5% of our customers at the current time, a little bit more than 5% of our customers are having a difficulty paying their mortgages, that's on a two plus basis.

So the vast majority of people continue to pay for their mortgage and I think the vast majority of people will continue to pay.

It's not appropriate for us to take provisions for something that hasn't happened and we wouldn't be allowed to anyway.

So I'm a believer, as long as unemployment doesn't come up to any significant level, the vast majority of our people will continue to pay us.

And as we've said earlier, we will work with them to ensure that they can pay us, and that's what we're doing.

But, on the last question, of the $0.7b, Douglas, are you going to take this?

Yes.

We don't split between first and second.

In terms of our loss severity we assume there's no way we assume essentially on secondly 100% or virtually 100% loss severity.

And, in fact, the loss severity of, firstly, we haven't seen dramatic deterioration over the course of this year but we have been continuously testing that, validating it, and updating it to most recent experience on the housing market by housing market state is.

As Mike says, what we do is take into account the most recent evidence that we have right up to the date against which we draw the balance sheet up of impairment and we recognize that fully based on our loss severity calculations and on the roll rates of delinquency.

What we don't do is project future delinquency because we have future margin coming in from a portfolio that addresses that to some extent.

And also, you're not allowed to, and nor should you be allowed to, take future losses which have not yet been evidenced.

So when you say that it hasn't changed on the first lien what would a typical loss rate be then on a delinquency of a first lien?

I think we said when we announced the -- the thing we said that we were building our provisioning models, we were assuming on a first lien we would lose something like 40%.

Between 30% and 40%.

On a first lien?

Yes.

Okay.

Thank you very much.

Thanks, John.

Next question, please.

The following question comes from the line of Robert Law.

Please go ahead.

Good morning everybody.

Actually, I was going to ask questions very similar to the last ones.

I wondered if you could expand on the kind of assumptions you've made in the U.S.

on the reserving assumptions?

And, in particular, this is the first quarter where we see significant evidence of reset and I wonder if you could update us on your thoughts about the effect of those compared with the reserving assumption that you've made in the past, particularly, the assumptions you made when you did your charge in Q4 last year?

That's the first question.

The second one, if I may, is what kind of revenue impact do you think the restructuring of the branch network in the U.S.

would have?

Brendan, if you could take those two questions, please.

Yes.

Regarding the provisioning, I think it's fair to say that on the arm resets, when we back six or eight months ago, it certainly was out there as a major issue for us coming up at this time of the year.

In the 80k you will be able to see that, in fact, the amounts that are resetting as we get through the year are smaller because, certainly in the earlier part of the year, a number of the customers have obtained refinancing or it just wasn't an issue for them.

You then add that to the fact that we have contacted so many customers in this, as Mike described it earlier on, our pro-active calling program, we've contacted 31,000 customers and we've actually modified 1.2b of the arms.

So it is still an issue but it is not as critical as we perhaps thought six months earlier, in terms of the impact on delinquencies and charge-offs.

Robert, could you repeat your second question for me, please?

Well, the second one was what kind of impact on revenue do you expect the restructuring of the branch network, and lower volumes from that, to have?

Yes.

I think there's an estimate in the 10Q of somewhere between about $450m to $700m in revenues but this is gross figures and, as I mentioned earlier on, you have to look at the whole range of factors both in terms of cost reductions.

And when you're closing branches, are those branches -- should we think about those as being proportionately in proportion to the cost base of the business?

Pardon?

So will the cost situation with the branches you are co-locating or closing, are those proportionate with the whole size of the business?

Yes.

It's pretty -- it's reasonably sort of scientific in a sense of when we look at the current volumes and the projected volumes after the various credit cuts that we've made, we then obviously look at the size of the network.

And, as I mentioned earlier on, we've actually be shrinking the network progressively throughout the year.

So 100 branches approximately have already been done and we intend to do another 260.

In some cases, we actually consolidate where we have several branches within a certain urban area.

We've just decided that it's better to merge three down into two as distinct from getting out of the market in its entirety, which is happening in certain places.

Okay.

Thank you.

Thanks, Robert.

Next question, please.

The following question comes from the line of [Sarah Rennee].

Please go ahead.

Yes.

Hi.

I have just one question.

It's about the dividend policy.

May we have more details on the dividend policy of the Group, and especially the dividend growth outlook for fiscal year '07 in light of the [rubbish] capital position of the Group?

Thank you.

Douglas?

The policy has not changed.

Our stated policy is to seek to maintain a progressive growing dividend.

Long-term that dividend flow has to be related to underlying operating results.

You have seen that the Q3 is ahead of Q3 last year and is ahead of last year.

We don't make dividend projections but our policy is to retain sufficient capital to support our business and to progressively grow the dividend, and that's our ambition.

That's not a forecast, it's an ambition, and I don't think that's changed.

Thank you.

Next question, please.

The next question comes from the line of Antony Broadbent.

Please go ahead.

Morning.

Yes.

A couple of areas I'd like to probe if I may.

Firstly, on consumer impairment losses, the $1.4b worsening that you indicated.

You said half of that was coming from unsecured so I guess my question's whether unsecured is still performing in line with pricing expectations as you said it was previously?

And also, how you expect the balance of secured versus unsecured impairments going forward given the different drivers of those two loss categories?

Thanks, Antony.

Brendan, your reply, please.

Regarding the unsecured, I think we put in that it was around about $400m of the $1.4b.

We've -- in that whole area we've made some quite significant costs in terms of risk appetite and, in fact, we don't see, going forward, originating a huge amount of unsecured.

So that amount of balances will level off and as attrition works into it I expect the balances will come down over time because that's one of the areas which we picked up quite early that we would start to see some deterioration in unsecured loans.

Because, effectively, they're very similar in behavior to second liens that we're seeing in the marketplace.

And I'm afraid I'm sorry, I missed that second question again.

It was really how you see the balance of secured versus unsecured impairments going forward given the different drivers of those two loan categories?

The balances of the impairments?

The mix of them, yes.

Well, I think it really depends on the attrition rates of how the customers been paying off.

As you can see, that's started to slowdown because of the lack of refinancing opportunities.

So they're all going to, I suppose, reduce at different rates and it's a little hard, at this moment in time, to forecast that other than that there is a general slowing down of repayment rates.

Okay.

Thank you.

I have a second area as well that I have a question on which is on the write down of the not yet securitized wholesale sub-prime mortgages.

There was 750m of write-down and, if I'm reading these figures correctly, $2b of remaining unsecuritized loans there.

I guess the question's what's likely to happen to that?

And then also, on the leveraged loan commitment where you've given us $175m of write-down, how much leveraged loan commitment that you've still got on the balance sheet do you still have, and I guess looking for some idea of how we might forecast future write downs there?

If you look at the leveraged loans, at the end of September we had about $11b of commitments to leveraged loans both funded and unfounded where we believed it would difficult to securitize.

There has been one large transaction that actually is funded and on balance sheet to the tune of about $5b to $6b.

So there's probably $5b more of it.

And the mark that you're looking at there is the mark net of fees of the one significant transaction that was funded in September, which I think is a matter of public record as to what that transaction is.

So the answer is about $5b.

And there's -- of transactions which we still have to fund and don't have necessarily clear lines in sight to entirely sell down, but it's not larger than that.

Well, if I could just add to that, when we look at leveraged assets by business, which we're not big players in but there are important relationships that we have.

We look at each one individual and the credit team decide whether this is the type of asset that we would be happy to have on our balance sheet.

And for the ones that we have, and as you say we haven't got many, we are more than happy to have those assets on our balance sheet.

But it's not a case we originated this with the priority to sell it, that's not the case.

So it's a small business, important business, and happy on our balance sheet.

Yes.

All these credits have been done on the basis that if we have to take and hold them we have both the funding, the capital to take the write downs, and are quite happy to hold them, and certainly is the case and the number's very manageable.

And on the not yet securitized wholesale sub-prime mortgages, you've written down about 30%, if I'm reading this right, from about $2.75b, is -- what happens to the remaining $2b I guess is the other question?

To clarify, the $750m write down on the non-leveraged finance portfolio encompass the whole bunch of stuff.

It's not all against the wholesale loan portfolio, or not securitized.

That's only -- it's only a piece of it.

It's actually against the whole loan, the ABS, the post known residuals, flow NBS, flow credit.

It's ventured against a range of different activities but totals up to the $750m.

And the $2.2b of whole loans, the best way to think of it is those are positions we have in the market.

So the extent to which the market continues to deteriorate, we will continue to take marks against those.

We believe we're conservatively marked at this point in time and, clearly, those marks have been agreed by KPMG.

Okay.

Thank you.

Thanks.

Next question, please.

The following question is coming from the line of [Angus McAllister].

Please go ahead.

Hi.

Given the relatively limited underlying disclosure on the underlying mortgage portfolio, if bond holders in HSBC Finance have really taken the pain over the last week, I can't really get comfortable with what's in the underlying portfolio and what you might say in Q4 or going forward, as with certain other U.S.

mortgage lenders.

I'm afraid I've got to ask the big question for finance bond holders is what is your current level of commitment to those bond holders and for creditors of HSBC Finance?

Should we be confident that you will support HSBC Finance going forward if the situation gets worse?

I'm looking at CDS spreads in HSBC Finance which are twice those of HSBC Group.

Perhaps you could just answer that question?

Douglas, you take it.

Well, Standard & Poor's have already come out with their assessment of that this morning, and you can see that because they published it.

I think our commitment to the Finance company is best illustrated by the fact we've put $750m capital in last week.

So you can read what the rating agencies are saying.

I don't whether the other three have come out since S&P but we discussed very openly with them, but the evidence is there.

We put $750m into the Finance company last week.

I don't actually accept your point that bond holders in the Finance company have taken any strain so.

Could you clarify what strain you've taken?

We've seen around 40 basis points of widening in the HSBC Finance ten-year bond over the last three to four days, and on the back of results this morning, bond holders are not getting any better, equity is up, and HSBC Bank bonds have gone slightly better.

So it really is HSBC Finance bond holders who have taken the pain over the last few days, and that's not been relieved this morning.

And I think the question I'm being asked here is will HSBC Finance be allowed to fall further or will there be increased commitment?

That's really the big question for an HBCS Finance bond holder, and I think that commitment that you just commented on, and the S&P report, which I can't actually see in front of me at the moment, should go someway to answering that.

Well, I think $750m capital injection is a heck of a commitment.

Okay.

Great.

Thank you very much for that.

Next question, please.

The following question comes from the line of Michael Helsby.

Please go ahead.

Yes.

Thank you very much.

It's Michael Helsby from Morgan Stanley.

I'd just like to follow up on the question I asked earlier.

I think Brendan, in answering the question on LTV, he said that you'd actually restricted LTVs to 90%.

I was just asking what's the average LTV on the book, and what have you actually moved the LTV from?

It's origination to the 90%.

And also, just a broader question, and I'm just very interested in the comments that Mike made about just a broader credit crunch, how that is likely to spread from the developed to the developing world.

I was just wondering whether this is actually changing your -- the way you're going to run your business in the emerging markets and reduce your appetite for risk in, particularly in Asia, obviously, and South America.

Well look, on the LTV issue we clearly -- the LTV is there literally from state to state and city by city.

So what we've said is we've taken the LTVs down for new business at 90%.

In some places it's down to 85%.

We don't give out the average LTV on the whole book.

Although, I said, it may be a misleading figure in that we give -- we have different LTVs for different areas of the country which I'm sure you'd expect us to do.

But all I would say is that we believe that real estate price has got further to fall so, hence, we're taking that precautionary position overall.

To the second point of your question, what we have said is because of our strong capital base we are seeing a very significant amount of deposits coming to us.

So from a funding perspective we're well able to fund anything that we want to do in emerging markets or elsewhere.

What I did say, and I still believe will happen, is that certain banks that were focusing on international finance may well have to pull back, and that isn't HSBC.

I'm talking about others who may well have funded cross-border but now will need those funds to support assets coming back onto their balance sheets in their home bases.

Those are the people that will contract the market and I think there has been some comment already in certain markets are having more difficulty than they had in funding themselves through cross-border loans.

But that's a natural adjustment when there's a credit squeeze going on.

From an economic perspective, I think there's still a lot of firepower in Asia.

There is firepower in Latin America, but if the U.S.

does contract we're all going to feel it.

There's no alternative.

Fair enough.

Thank you very much.

Thanks a lot.

Next question, please.

The following question comes from the line of [Catherine O'Donovan].

Please go ahead.

Hello.

Good morning.

I wondered if you could talk a bit through your undrawn commitments.

On your balance sheet at the half year you had, I think, $763b of commitments on a balance sheet of 2150, and I just wondered if you could us through, there's obviously a very large slug of some one year and under $620b and [$130] of one year and over.

If you could talk a bit, I know you mentioned it in leveraged finance, but if you could talk generally about whether we're seeing some of this being drawn down and exactly what it is.

Douglas.

Stuart.

I'll take it.

I'll take this initially.

No.

There isn't any sign of anything being drawn down.

The thing that's functioned throughout the whole summer period has been the corporate CP market, which has continued to fund extremely well.

It's been the asset backed CP market that got into difficulty and where the total amount of outstanding, as reported by the phone on a frequent basis, has dropped off considerably.

So there's been absolutely no drawing of committed facilities to corporates, which is what that would represent, at all during this period.

If anything, this is a financial institution issue this credit crunch, not a corporate issue.

And the other thing that's in that number, of course, is undrawn commitments on the personal side.

As people talk about credit card lines, it's all that normal stuff that's part of being in the banking business.

Thanks, Catherine.

Can we have the last question now?

The last question comes from the line of Jason Napier.

Please go ahead.

Jason?

Good morning everyone.

Can you hear me now?

Yes.

Thank you.

I have three relatively simple and quick questions, if I may.

The first one to you Mike, the outlook comments that you made in the Cantos interview this morning, I guess you could interpret those as being relatively cautious in terms of the outlook for corporate credit and a reduction in the availability of credit for corporates and commercial.

Can I just ask you to clarify whether that outlook for higher bad debts in that segment is based on things you are seeing now or just on a macro economic statement of there being less credit around and that costing more?

Right.

Second question?

For Douglas, I just wanted to check, in the first half balance sheet provisions in North America to risk element actually fell as a proportion relative to the end of last year.

And I just wondered, given the size of the provisions we can see in household relative to charge-offs, whether you think that may rise or whether it did rise in the third quarter.

And then lastly, a question for Stuart, principal investment strength was one of the features of the first half and I just wondered whether that's continued into the third quarter within CIBM?

All right.

I'll take the first question and then Douglas and Stuart will follow.

The reality is if the 90 days LIBOR is now at between 45 and 60 basis points and that the liquidity of the same isn't that great.

It tells you there are a number of people do their calculations when they were doing such finance impact by such lines that they're not going to make as much and the next time they roll they're going to have to pay more.

That, in itself, is going to drive a credit cost.

It's going to slow down values, and I think that's inevitable, and we're seeing it, frankly, from the number of transactions that you see going through the markets.

Capital markets are down about 40% since August.

So, yes, I think if there's not liquidity, there isn't going to be growth.

Are you seeing it in your arrears numbers just yet?

No.

We, as I said, certainly for the U.K.

we've cornered top of the market in October last year and so we're not surprised and we've adjusted for that and that's one of our major markets for credit.

And for the rest, we're just being cautiously -- Asia continues to fire along but we are aware there will be a -- if there's a slowdown in the U.S.

it will follow into the other markets so we're just being careful that's all.

Not overly cautious but, then again, I'm always cautious.

Right.

I think in relation to the question on risk, I think page 65 of the -- it's an unfair question to give me.

It really is.

Page 65 of HSBC Finance Corporate 10-Q shows the reserves as a percentage of net charge, also reserves as a percentage of non-performing loans.

As stated, were pretty constant with the position generally with 124% of net charge-offs and 117% of non-performing loans, which is exactly in line with where we were at the half year.

So we think the coverage ratios that we've got are both appropriate and consistent.

Great.

Stuart.

Principal investments, gains were lower in the third quarter than the run rate achieved in the first half.

Okay.

Thanks very much.

Well, I think I'll just wrap up.

Presumably, with these results that really reflect one thing and it reflects that diversification pays off.

And you've got your shareholders in a very good diversified company.

You've seen the strengths coming out of certain parts of the Group, supporting the weaknesses in other parts of the Group and that's been reflected by the strength of the share price overall and compared to the market.

We reckon there's been good progress made in restructuring the Group towards a 50% developing develop.

We are ahead of our prior quarter in year to date.

We think that's a strong performance in the markets that we are experiencing.

We will remain strongly capitalized.

We are liquid, and we will continue to be diverse and to deliver the type of results that you expect from us.

So thank you very much for attending today and we look forward to seeing you at our end of year presentation.

Thank you, ladies and gentlemen.

That concludes the HSBC Holding plc pre-close trading update.

Thank you for participating.