滙豐控股 (HSBC) 2007 Q4 法說會逐字稿

Good morning to all of you here in London and good evening to our guests joining us from Hong Kong. I'd also like to welcome those of you who are joining us via webcast or conference call.

Let me start with some introductions. In Hong Kong, Vincent Cheng, Chairman of the Hong Kong and Shanghai Banking Corporation, Sandy Flockhart, Chief Executive, Edgar Ancona, Chief Financial Officer, and Russell Picot, the HSBC Group Chief Accounting Officer. And may I, whilst we're on introductions in Hong Kong, offer warm congratulations to Vincent, who as everybody knows joined the main Board at the beginning of the year. Sandy - and this is hot off the press - joining the Board with effect from May 1. In addition to a very impressive business performance that we'll be talking about shortly, this of course reflects the importance we attach -- the strategic importance we attach to our businesses in Hong Kong and the rest of Asia.

Many congratulations also to Stuart Gulliver, here with us here in London, as he also joins the Board with effect from May 1. Our global markets chief needs no introduction, I think, leading a very important and strategic and successful business for us.

Alongside me are our other Board directors, Mike Geoghegan, our Group Chief Executive, Douglas Flint, our Group Finance Director.

I start with the usual cautionary words on forward-looking statements, and if I may move straight from that to our reported results. Profit before tax up 10% to $24.2b. Attributable profit up 21% to $19.1b. Earnings per share up 18% to $1.65. Return on shareholders' equity, 15.9%. Dividends per share up 11% to $0.90. And our Tier 1 capital essentially unchanged, 9.3% against 9.4% at the end of last year on the Basel 1 calculation.

Now, the last number of months has produced some extraordinary turmoil in the financial markets and there are some special factors in our results that I want to draw your attention to very briefly. Douglas will talk about these later in more detail. The dilution gains on our Chinese associates, which you're aware of from the first half, $1.1b. Global Banking and Markets write-downs of $2.1b. We've taken a P&L profit of $3.1b from the fair value of our own debt.

I think it's perhaps worth pointing out that the profit on the sale of 8 Canada Square, this building, is not recognized in the '07 accounts. I mention that because I think many were assuming that it would be. And lastly, our effective tax rate is lower than it ordinarily is, because of the profile of our business, at 15%. And as I said, Douglas is going to talk more about some of these special factors shortly.

From my point of view, I want just to review what I think are the performance highlights of '07 and I suppose the summary is that these are record results in what you don't need me to tell you is a challenging environment. The exceptional strength in our fast-growing emerging markets, especially Asia but also Middle East and Latin America. Very weak performance in the U.S., of course, driven by higher loan impairment charges. A strong performance, in fact a record performance, from our Global Banking and Markets business despite those write-downs. And record results from our Commercial Banking and Private Banking businesses.

I think the next point is simply that HSBC's signature strength in capital and balance sheet liquidity continues. As I've already mentioned, our Tier 1 capital ratio is essentially unchanged. And last but not least, we now have a record of over 15 years of double-digit dividend growth.

Progress on strategy. First of all, our emerging markets businesses. We are the world's leading international emerging markets business. And as I've mentioned repeatedly in recent months, we are investing primarily in these markets as we grow our business in the years ahead.

Mainland China, we were the first to incorporate -- amongst the first to incorporate locally. We have built the biggest branch network of any international bank. Taiwan, we've acquired Chailease Credit Services and agreed to acquire The Chinese Bank. Korea, the agreement that you're all familiar with to acquire 51% of KEB and an agreement to acquire just shy of 50% of Hana Life Insurance Company. Vietnam, the investment in strengthening our position in Techcombank and the acquisition of 10% of Bao Viet, the leading insurer in that exciting and fast-growing country. And last, and absolutely not least, India, where the investment in a 26% interest in a new joint venture company which will give us exclusive insurance access to our own client base but also the large client bases of two state banks.

If you look at the profit profile geographically, you can see the shift from '06 to '07. In '07 we're at 64% coming from fast-growing markets. We've talked about a shift in profits to a kind of 60/40 split. We're above that this year. Needless to say, part of the reason why we're above that is not only the barnstorming performance in the emerging markets but the exceptionally weak performance in the U.S. But nonetheless, I think this is evidence of progress in our strategic implementation.

When I look at our developed market businesses, the U.K., France, U.S., Canada. The U.S., Mike is going to talk about this in some detail, the closure and rundown of our mortgage services businesses, the restructuring of HSBC Finance Corporation's branch network. The U.K., disposal of some non-core credit card portfolios, the strategic alliance with Norwich Union on the insurance front. France, we announced on Friday the binding offer from Banc Populaire and an exclusivity agreement that we've signed with them to complete that transaction. And we took full ownership of HSBC Assurances. And lastly Canada, a small item but for completeness I mention it, we've sold our mortgage brokerage business there.

And so we continue with our strategy in both the emerging markets, where we prioritize, and also ensuring that our developed country franchises are evolved in a way that builds on our international connectivity.

Douglas, let me invite you to take us through the detailed numbers. Over to you.

Thank you very much, Stephen. I'd now like to turn to the Group's income statement as it is reported and highlight the key figures behind the performance indicators that Stephen has outlined.

Looking at a summation of the year's result, there was notably strong growth in the top line, with net operating income before loan impairment charges up by 21% to $79b. And this was substantially ahead of the 16% growth in operating expenses. The 63% increase in loan impairment and other charges is a clear reflection of the scale of deterioration in the U.S. consumer finance business and was essentially in line with the period-on-period increase at the half year.

Profit before tax was up by 10% and a lower tax rate helped profit attributable to shareholders increase by 21%. The single most important reason for the reduced tax rate was the shift in geographical profit towards Asia, and in particular to Hong Kong. There were, however, a number of one-off items that took the effective rate to below what should be considered normalized for the Group.

Underlying growth here is shown after adjusting for currency movements, for acquisitions and disposals, small in this year. And it also takes into account the gains arising from the dilution of our interests in our Chinese associates. This shows that top line growth was both strong, with net operating income before loan impairment charges up by 13.5%, and was higher than the growth in operating expenses, which were up by 10.1%. The impact of the higher level of loan impairment charges was to leave the overall profit before tax at a similar level to 2006.

This slide shows the particularly significant financial issues in 2007. We already discussed at the interim stage the dilution gains of $1.1b, which were already present, as I said, when we showed you the interim results. The write-downs in Global Banking and Markets were $2.1b and I'll analyze these in a little bit more detail later.

The $3.1b adjustment, reflecting the change in our credit spread on our own debt, essentially represents the value of having raised debt at spreads not available in today's market. And to some extent the same spread widening caused part of the write-downs in Global Banking and Markets' trading book, but not to the same extent. Over time, of course, these adjustments to the valuation of our own debt will reverse to zero. And for the sake of clarity, this credit spread income after being tax affected is eliminated in our calculation of regulatory capital, so it doesn't affect our capital ratios.

The sale of 8 Canada Square remains unrecognized in the financial statements in 2007, because HSBC has retained a significant interest via a bridging loan provided to part-finance purchase of the building. It is expected that the sale will be recognized when the bridging loan is repaid.

Our effective tax rate of 15.5% was much lower than the normalized expected rate. Against a standard corporate U.K. rate of 30%, the geographic mix reduced this by 6 percentage points. The impact of tax-free gains and prior-year adjustments contributed another 2.5%. The accounting treatment of associates, where we bring in their post-tax earnings at the pre-tax line, reduced the effective tax rate by 2 percentage points. And the recognition of past capital losses contributed another 2 percentage points. And the dilution gains did not attract tax. So a complicated picture. We would expect an effective tax rate to be -- normalized rate to be in a 22% to 25% range.

The pattern in credit quality for personal financial services across the regions broadly stable against the prior year, with the exception of the United States and Mexico. And we're particularly pleased that actions that have been taken in the United Kingdom are coming through in lower charges. Mike is going to look at the U.S. in a great deal more detail in a minute.

Credit trends were broadly stable with respect to Commercial Banking and a very modest charge was recorded in Global Banking and Markets for the first time in a number of years, which reflects lower releases and recoveries.

I'd now like to turn to this slide, which gives you a breakdown of the $2.1b write-down incurred in our Global Banking and Markets businesses, roughly two-thirds of which arose in the United States, all of which arose as a result of disruption and deterioration in the credit markets. There are a number of areas to focus on.

First, in respect of sub-prime mortgage-related assets, we've only had a modest involvement in loan securitization and we've taken a write-down of just over $0.5b against the warehouse of whole loans not yet sold, leaving a net exposure of $2b at the year end. In our sub-prime mortgage-backed credit trading businesses, we took write-downs of a little under $0.5b, leaving a net book value of $1.7b at the year end.

Then, as a result of widening credit spreads with respect to non-sub-prime assets in our credit trading portfolio of ABS, MBS and Preferred Securities, we took write-downs of $0.6b. And the net book value of that higher-rated portfolio at the end of the year was $10.3b. In respect of our leveraged loan portfolio, we had write-downs of $0.2b and an $8.9b outstanding at the end of the year, of which $6b is funded exposure and $2.9b is awaiting syndication.

And finally, our principal off-balance sheet risk relates to credit protection bought from monoline insurers as a hedge against securities held within the trading portfolio. The table shows the residual risk after credit risk adjustment, and you can see that we're fully provided against non-investment grade exposure. Net exposure to investment grade monolines amounted to $1.2b at the end of the year. And we have no material exposure to CDOs that are backed by sub-prime or MBS.

Turning to market risk management, you can see that our VAR remained fairly steady throughout 2007. This reflects the combination of taking risk down in a number of markets, offset by the impact of rising volatility. The graph on daily distribution of Global Markets' trading revenues shows more outliers, when both sizeable profits and losses have been incurred as a consequence of both market positioning and volatility. In the lower right-hand box, you will note and hopefully take some comfort from the very small proportion of our trading assets that are valued on a Level 3 basis, i.e. based on modeling with non-observable inputs.

Looking at Tier 1 capital ratios, the Group continues to remain both a strong Tier 1 capital position, with a ratio of 9.3%, and also in terms of the composition of Tier 1 capital, with 90% comprising shareholders' funds after deductions.

Now let me pass you on to Mike, who'll take you through our business achievements for 2007.

Thanks, Douglas. Douglas has given you the numbers and, as always, he tells it as it is, and I believe this year Douglas and the team have given you probably unprecedented access to information. Now, I'd like to take you through the businesses which produce those numbers. As always, I'm going to be completely candid and take you through what's working, what needs fine-tuning and what needs fixing.

Asia, by anybody's measure, had a blockbuster year. Profit before tax is up over 40%, excluding dilution gains. This should not come as any surprise to you, because we have been investing in our businesses there for a long time and the results just show the merits and the value of organic growth. Hong Kong is up 42% and we're winning market share there and across the region. Outside Hong Kong we had strong growth in assets, with 10% increases in mortgages, 19% increases in personal lending and 29% in corporate and commercial. Our Mainland Chinese business passed a milestone in 2007, with us recording a $1b profit before tax for the first time.

The Middle East, again, another record year, another $1b business. Latin America, again, very strong, underlying growth of 14% in Brazil -- underlying growth of 14%. And Brazil had an excellent year, leveraging off the region's most dynamic economy, which now has sovereign reserves of over $180b, a far cry from approximately $9b they had when we bought Banco Bamerindus a decade ago. Mexico's profit before tax was down, but we expected this because having bought Banco Bital we need to balance out the assets and liabilities, and the asset portfolio is now maturing. Latin America now generates $2b profit before tax.

Europe has been good across the businesses. The U.K. was affected by one-offs, mainly in regard to overdraft fees, but overall we believe we're well-positioned for any downturn. Stephen told you about France but that does not mean we are exiting France, quite the reverse. Having executed on the first part of our strategy, we are going to concentrate now on wealth management through our personal financial services, international commercial banking and further growth in Global Banking and Markets, all joined up with the rest of the Group.

North America. Canada and Bermuda are both up with record profits, but the U.S. is well down and more about that in a moment.

Now, turning to the customer groups, first Personal Financial Services. Profits are down because of the U.S. consumer finance. That apart, Financial Services had a record year. Commercial Banking, the jewel in the crown with 2.8m customers, had another great year. Global Banking and Markets had record profits despite the $2.1b write-down. Private Banking also had a record year and was the best-performing customer group. We've quietly built this business into something, I think, rather exceptional on a global basis.

We accomplished all of this while maintaining our financial strength. We are well-capitalized and liquid. And if you look at the 2007 deposit growth, it has been particularly strong, attracting over $230b. This is a real competitive advantage that others can only dream about.

Turning now to our Personal Financial Services, profits were down 38% because of consumer finance. Excluding that, we're actually up 18%. We increased our customer base where we wanted to, in emerging markets, up 8% to 39m customers. We had outstanding results in Hong Kong, particularly in wealth management, and also in Hong Kong we harnessed the Internet. 96% of all Personal Financial Services transactions were conducted outside the branch network in 2007. This is where we are testing out our technology capabilities and achieving high levels of automation. And this allows us to roll out the same across the Group without duplication of effort.

We had a very strong contribution from our Chinese associates and these relationships are working well. We are by far the biggest international bank in China. There is real strength in these franchises. We expanded our global card platform, One HSBC, focusing on emerging markets. They now make up 26% of the 120m cards in force, up by 6 percentage points over 2006.

The U.K. results were affected by expenses from overdraft fees refunds, but the underlying results were good. We called the top of the market in real estate at the end of 2006, and in 2007 we restricted our credit appetite in the case of mortgages. And our book is in good shape. We gave up market share to improve quality.

Now, let me talk about the U.S.A. The deteriorating U.S. housing market and economy and the extremely tight credit market for consumers presents challenges. We expect these conditions to continue or even worsen through 2008. U.S. consumer finance profits declined progressively across all the portfolios in 2007, with rising delinquency rates. Whilst we have a geographically diverse portfolio and no single area is over-represented, all markets experienced some decline in profitability. We highlighted these issues before anybody else and you may recall that I promised to give this my personal attention, and that I have been doing.

I'd like now to take you through each of our major portfolios, first our mortgage businesses. Before I talk about consumer sub-prime exposure, I should say we have minimal exposure to Alt-A mortgages, with balances of less than $300m. Overall, delinquency rates continue to increase, following worsening industry trends and seasoning of portfolios. However, we must remember that as we reduce our outstandings, the proportion of 2+ delinquencies will obviously increase.

In Mortgage Services, where we have approximately 335,000 customers, deterioration delinquency is most severe in first liens, in the states with the greatest decline in home values - California, Florida, Virginia and Washington. The five largest states by customer loans account for 36% of outstandings. And contrary to some alarmist reports, people are paying their mortgages and approximately 82% of our customer accounts in this portfolio remain current. And by current, I mean less than 30 days past due on their mortgages.

In the branch lending business, where we have approximately 550,000 customers, though credit quality performance was relatively stable in the first half, there has been deterioration in the second half. However, the delinquency ratios remain well below those of Mortgage Services. But once again, the delinquency is most severe in the states with the greatest decline in home values. Approximately 91% of our customers continue to remain current on their mortgages and the total portfolio growth has leveled off in the last six months.

So, how are we managing all of this? As I said we would, with some tough decisions. We have reduced the Mortgage Services portfolio from around $50b at the beginning of 2007 to about $36b by the end, a reduction of around $14b in 12 months. We have closed the Mortgage Services correspondent channel, the wholesale business of Decision One, our mortgage-backed securities trading operations and approximately 400 branches, with a total loss of about 6,000 jobs. We have tightened our credit underwriting standards and slimmed down our product offerings.

The situation has been very difficult. It's extremely hard for our customers and frankly we don't like it either, especially when we see our colleagues losing their jobs. We're working hard to get our customers through this, including modifying 8,500 loans worth about $1.4b.

Whilst it's still early days, there are signs that they are benefiting from this restructuring. I took the U.S. Board to visit Brandon in Florida recently, where we have over 3,000 people working with overdue customers to find solutions. And we listen to what our customers are saying about their finances. It's clear a significant number of people are experiencing hard times, but I can tell you the whole Company is working hard to assist them, whilst obviously protecting our shareholders. Our people really care about our customers because, after all, it is their homes we're talking about and we will endeavor to ensure we keep as many of them in them as possible.

We've continued to build our reserves aggressively against mortgage portfolio loans. Loan impairment charge against secured real estate assets totaled approximately $4.7b in 2007.

Now, turning to cards, throughout 2007 we took steps to protect profitability in card services. We slowed receivable and account growth, decreased credit lines, modified our finance charge and fee billing practices and reduced our marketing spend. We have integrated our retail and credit card service businesses to provide a single credit card and private label solution. Consequently, with all these measures taken, approximately 91% to 97% of our credit card and private customers -- label customers, respectively, remain current.

In unsecured personal credit, we have tightened underwriting criteria for all products and eliminated direct mail loans to new customers.

And in vehicle finance, to protect profitability we have reduced new loan originations in the dealer channel and in the direct channel we have placed emphasis on higher credit quality, moving up market to the near-prime space. And again, 89% of our customers are current.

I've just outlined for you the current position for our consumer finance customers. Clearly, you can see that the vast majority of our customers continue to meet their debt obligations on time, and therefore there appears to be a market difference in pricing of securities and the actual performance.

Moving now to Commercial Banking, over half our profits now come from Asia Pacific, the Middle East and Latin America. We are the world's leading international business bank. And our global network is key to generating good results. Our Global Links referral system more than doubled the level of referrals, with an aggregate transaction value of over $6b. We also had growth in Payments and Cash Management and in Trade and Supply Chain businesses, with income up 18%. And in our receivables financing, we increased our coverage from 12 countries to 19. Overall, we saw very strong growth in loans and deposits, up 27% and 25%, respectively. Again, another example of our advantage over others.

Now, let's turn to Global Banking and Markets. Pre-tax profits for Global Banking and Markets rose 5% to a record $6.1b, despite the $2.1b in write-downs. These results are proof of concept. Our strategy is working, with corporate banking now truly aligned around our customers, wherever they are in the world and wherever they want to transact, a truly joined-up business. The performance was driven by record revenues in equities, foreign exchange, securities services, payments and cash management and asset management. Strong growth from Asia Pacific, the Middle East and Latin America means that they now deliver nearly three-quarters of Global Banking and Markets' pre-tax profits.

Douglas has already discussed our exposure and write-downs in respect of illiquidity in financial markets. I would like to emphasize the importance of the strength of the Group's balance sheet in riding through these difficult market conditions with our reputation intact. A good example of this was our capability to take over $40b of exposure to SIVs onto our balance sheet with ease.

As you know, there continues to be high volatility in the market, which gives the business opportunities as well as challenges. However, I do not rule out further asset value reductions, because pricing is dictated by market values and, as you know, there are forced sellers out there. Whilst we do not need to sell and will in many cases keep our assets to maturity, we do expect further market volatility.

Now, turning to Private Banking. Private Banking, our fastest-growing business, built on its consistent success and producing a 24% growth in profit before tax. We saw exceptionally strong performance from our teams in Asia and in Switzerland. Building on the joining-up concept, cross-referrals from other customer groups provided over $6b of new client assets in the last 12 months. And we grew overall client assets by 26% to $421b. We expect this growth to continue as the flight to quality continues. And whilst we are proud to be ranked the number three by Euromoney, we intend to close the gap in the coming years.

Next we turn to Insurance. Across our customer groups, this business generated profit before tax of $3.1b, 13% of the total Group profits before tax, up from 11% at the half year. And we're well on the way to our ambition of insurance contributing 20% of the Group's profits over time. And we're only starting to get into our stride. We've done a great job of creating linkages across the organization and promoting our products. We've strengthened links with Personal Financial Services, making insurance a part of the new HSBC Premier proposition. And our sterling reserve bond in the U.K. has been very successful. We've also announced five transactions in 2007, including purchasing the remaining 50% share of Erisa in France. And we have launched our new HSBC insurance brand, which we will use to increase customer awareness.

In presenting our results today, we slice and dice HSBC every which way, by customer group, by geography. But now I come to the heart of the proposition, joining up the Company. Joining up the Company is about connecting the whole business, to extract value that this global network brings for our customers and for our shareholders.

Premier is a global product, but it's focused on our international personal customer base. This is a great product that we re-launched in 35 countries last year. It gives our customers worldwide recognition, a single emergency help line, a unified view of all accounts and a single worldwide brand. We added 340,000 net new customers and more than half of them were new to bank. This gave us a year end total of some 2.1m customers, each generating average revenues of more than $2,000 per year. We've made a good start but we want 6m customers, effectively building the world's largest international mass affluent bank. We believe nobody has the ability to offer what we can and do. We said this is our product and we intend to win, and we're winning.

HSBC Direct, our online proposition, is a global product in a different way. We built it once. Now we're deploying it in different markets. This goes to the very heart of personal -- of the future of personal banking, and is driven off our belief that our personal customers want access to their money 24 by 7, be that on the net, in the call center or in the branch. And we intend to deliver this through one HSBC global system. By the end of 2007, HSBC Direct reached over 620,000 customers with $11.5b in deposits in the U.S.A., up 80% and 60%, respectively. In Asia, in Taiwan and in South Korea, we had over 240,000 customers who deposited $1.2b. And we launched in Canada in June and attracted 45,000 customers and $800m by year end.

In Commercial Banking, we rolled out the infrastructure to support Global Links worldwide. 99% of our commercial relationship managers have access to the system that gives them real time information on all our commercial customers across the world. Again, very hard for anybody to duplicate. We had $6b of referrals in 2007 from this system, double 2006, and I would expect the growth rate will continue as we broaden out the service.

Today, we published the KPIs in the annual report, which we will use to measure the business. One of the key metrics is customer recommendation. We now track performance against our core competitors in the top 12 retail banking markets around the world. We have achieved a top three ranking in eight of those markets. Whilst this is a good performance, we have set targets to improve and we're adding new markets to our survey during 2008. In Commercial Banking, we benchmark ourselves against the competitors in eight markets. We are first in three and top three in six. And we will track 12 markets this year.

For our people, 2007 was the year we asked them what they thought about working for HSBC, and 290,000 of them or 90% told us. We will use the feedback we have got to plan how to create the best possible experience for our people because, after all, they are our future. And you know and I know that companies with highly engaged staff generally have 15% higher stock prices. As ever, I want to thank all our staff for their feedback and hard work. I'm enormously proud of everything they've achieved in 2007.

At the Group Management Board level, we've set targets for improvement in both customer recommendation and staff engagement, and we're linking this directly into executive remuneration, for me, for the senior management team and many others across the world, all of which goes to building the brand. HSBC is rated the number one banking brand in the world by the Banker magazine. And Interbrand rates HSBC the 23rd most valuable of all brands in the world. Not bad for a brand that's less than a decade old.

Let me finish with our priorities for management this year. U.S.A., as I said, it will probably get worse before it gets better. We will sell portfolios if we can, but only at sensible prices. We'll also protect the overall franchise, because when the dust settles there are going to be fewer competitors and the strong, once more, will be able to deliver growth. We're one of the strongest.

In the U.K., I said we'd called the top of the market at the end of 2006. We feel relatively comfortable going into the slowdown in the U.K., but one must expect corporate credit to deteriorate over time. In the event both the U.K. and the U.S. continue to slow, we have no doubt that commercial property values will fall and corporate and real estate lending will come under pressure. We have been of this view for some time, and therefore believe our lending in this area is appropriately positioned.

In Asia, Hong Kong, where I'm going later today, may see some slowing of growth but we believe it will remain strong overall. Hong Kong is the gateway to China, which still has exceptionally high growth prospects for 2008. We will endeavor to keep taking market share in Greater China. Across Asia Pacific generally, there may be slowing of growth, although probably not until 2009. But there will also be a flight to quality and we will benefit, as we normally do. The economies are strong with high reserves, which leaves governments free to stimulate internal growth. We will continue to build out our businesses there and seize acquisition opportunities as they appear.

In the Middle East, where I took the Group Management Board in January, clearly the surplus liquidity will allow these countries to invest in different industries and in different countries outside of their region. We know all these clients at home and we can help them away as well because, be that in Asia, Latin America, Europe or the U.S.A., Global Banking Markets have proved they can do it in 2007 and we will build on that success in 2008.

I've just come back from visiting our businesses in Latin America and they're still benefiting from high commodity prices. These countries have diversified away from the U.S.A. and are now well-positioned in Asia, the Middle East and Europe. Even if commodity prices slow, there are significant opportunities for internal wealth generation. The exception to this may be Mexico, which inevitably will be impacted by the U.S.A.

So, in summary, 2007 was both interesting and rewarding, and I'm confident the connectivity in the business for joining up the Company will continue to gain strength in 2008. The team is well-positioned, whatever opportunities and challenges arise.

Now let me hand you back to Stephen. Stephen.

Mike, thank you. What I just want to do very briefly in summary is to talk a little bit about the financial metrics that we're going to be using to measure our success in the public domain in the years to come, and secondly about our view of the world outlook.

Firstly, the financial measures. We are looking particularly at return on total shareholders' equity as having a target range through the investment cycle of 15% to 19%. And to remind you, this 2007 result came in at 15.9%, so just within that range.

Cost efficiency ratio of 48% to 52%. That range is important, because it's intended to be a balance between, on the one hand, clearly running the business as efficiently as we possibly can, and I'm sure Mike would join me in saying that's work in progress but that that's our objective, with on the other hand making sure that we continue to invest through the P&L organically in the development of our exciting businesses, particularly in the emerging markets.

So far as capital is concerned, a range on the Basel 2 basis of 7.5% to 9%. And on that basis, to remind you, we came in, in '07, at the top end of that range at 9%.

And lastly, total shareholder return above the peer group average. And again, in the case of '07 we came in above the peer group average.

Looking at our view of the world, it's in an interesting state. Of course, you don't need me to tell you that. But we do believe that emerging markets are going to continue to be the strong performers on the world stage, that they will become increasingly strong as long-term drivers of global economic growth. And we believe that HSBC's whole strategy is focused on investment in those markets and gives us a position that's remarkably strong. And I think, compared with many of our competitors, this is a franchise that we will continue to invest in and build.

When I look at the U.S. economy, Mike's already implied it, we think it's likely to get worse before it gets better. Mike has described to you how we're underway in reconfiguring our U.S. businesses to dovetail fully with our Group strategy. That's not a magic wand. It will take us a period of time, both in terms of workout of some of the credit issues and in terms of restructuring the business in the way that we talked about, actually, in our November strategy meeting.

When I look at the financial markets, the deleveraging of the financial system which is underway points to the continued importance of something that we're wedded to, and have been over many decades, the conservative balance sheet and the strong capital base. The liquidity of the financial services markets points to, again, the traditional HSBC strength of a strong asset-liability position, conservative advance-deposit ratio. Those we are committed to and will continue and we believe they stand us in immensely good stead.

And lastly, world economic growth and continued trends in globalization and trade flows. We believe, actually, that this year's world economic growth will be reasonable. Not as good as last year's, but nonetheless reasonable in the probably in the top part of the range between 3% and 4%. And that points -- and I think that will continue. And that points to the importance of the leadership that we can exercise, given our footprint and our franchise and our international business banking businesses, of servicing trade based on that unique international connectivity.

So there we are. That's the performance of '07. I'm delighted now to invite your questions, both here in London and in Hong Kong. Just if I can, a moment or two on how we're going to handle this. If you'd like to ask a question, could you put your hand up at either end and we'll get a microphone to you. In Hong Kong, Vincent will invite the next question and I'll do the same in London. We'd be grateful if you could tell us your name and the organization you represent before you ask the question. And if I could ask you, please try to ask one question per turn.

Vincent, let me start at the Hong Kong end.

Thank you, Stephen. Any questions? That gentleman.

This is Sunil Garg from JP Morgan. There's one quick factual question and one other question. Could you give us an indication of what kind of gains you would record on the sale of the French businesses?

And the other question relates to M&A opportunities. You've continued to highlight since summer that you're going to redeploy capital into emerging markets, but does the Group not see unprecedented M&A opportunities in the developed world to make acquisitions? Are you making a call that the U.S. business is not where you want to be? Thanks.

Thank you for the question. Could I -- maybe, Douglas, you could tackle the first one on the French gain.

Yes. I think the best indication you can get is from the fact that we said that it was a multiple of between 3.5 and 4 times book. So I guess by the time you take that, that gives you an indication of the gain, we're selling for just over EUR2b. So at 3, 3.5, 4 times book, that gives you the indication of sort of the raw gain. There'll be some adjustment for tax. There may be some adjustment for goodwill. But that would give you the benchmark, I think.

And if I may, on the second question on M&A, we're committed strategically and we're not going to depart from this, to investing as a priority in those markets that we have said are important to us, namely the fast-growing markets, largely emerging markets. I do not think we should be buying things simply because they're cheap, if I could put it that way. We should buy businesses where they fit with our strategy, where they complement, where they strengthen it. Sometimes that will be in developed markets, where that has an obvious emerging markets or international connectivity, but our priority focus, as we've said a number of times in recent months, is on emerging markets.

And I think the other point to mention is that you shouldn't think of -- you shouldn't think of investment only in, or even primarily, necessarily, in terms of M&A. I think there's a whole lot we can and should and are doing in terms of organic investment through our P&L, and hence my comment a couple of moments ago on the cost/income ratio. The easiest thing in the world would be to drive our cost/income ratio down by not investing, as we have been doing significantly and will continue to do so in, for example, our fast-growing rest of Asia businesses.

Question from here. Yes.

It's Simon Samuels from Citigroup, beating Tom Rayner. The question I had, actually, is -- I'm just grabbing the big announcement today. I'm looking on page 218.

That sounds like a question for Douglas.

I know. Well, actually, I think it's not specifically. It's as far as I got on the release. But what -- here's the question. If I look at the disclosure on page 218, you've got about $11b of mortgages in negative equity and another $42b, I guess between 90% to 100% LTV. And you do say in the notes, actually, that this is based on their at-origination LTV, so presumably the proportion that's actually in excess of 100% is well in excess of that now. So the question I had is, first of all, can you comment about what you think the proportion of your book that's north of 100% LTV is?

But actually, linked to that, if you look historically at credit cycles, collateral-based ones anyway, they tend to have a loss severity deterioration and then what happens -- sorry, a probability of default deteriorates and then the loss severity gets worse as collateral values decline. And so really my question is what sort of scope for further top-up provisioning would you expect in your secured mortgage portfolio, really, going into '08, '09? Maybe you could answer by giving us some comments about what assumptions you've made for house price deflation in the U.S. as well. So it's all linked to that issue of additional provisioning on collateral-based provisioning.

Well, Simon, at the risk of stating the obvious, we won't make an impairment forecast for those businesses in either '08 or '09. But Douglas, do you want to elaborate?

Clearly, the percentage above 90%, the percentage in negative equity will have risen. Interestingly, our analysis of the causation of the fault is less to do with being in negative equity than in a lifestyle event that effectively takes someone to the point that they can't make payments anymore, or indeed they are in an area where there is a preponderance of homes that are for sale and therefore the area has lost the value that they thought it was. It's less to do with the value in the home than just other factors. So there isn't a direct correlation between negative equity and default.

I think one of the other -- I can't remember which page it's in but I'll find it, Simon. We've also given some indications that we are continuing to see a relatively steady turnover of homes that are repossessed. We're selling in just over six months and that's been fairly steady throughout 2007. And although there is a deterioration, particularly in the states that saw the most rapid price appreciation, we can -- we've had a reasonably good, in fact we've had a very good, recovery rate in relation to the value of homes that we have sold. So the loss severities have been rising, but gently rising, throughout 2007.

Could it get worse? Of course it could. And I think the concentration of focus is predominantly on those four or five markets that Mike indicated are seeing the most significant strain now on the economy, because the economies of the states where the house prices rose fastest are now declining because the employment that was related to construction and home building and fit-out and real estate activities are -- those jobs have been lost. Mike?

Yes. The only thing I'd add to that is that we're a reflection of the underlying economy. So frankly, the employment goes, then obviously houses go as well. But what we're seeing at the moment is not so much employment numbers dropping, but what we're seeing is people who used to have two jobs have now got one. That type of thing has an impact. But again, you're looking at various states, as Douglas has said, and they are the vast majority of this. But overall, the numbers speak for themselves, who are actually paying. And I think negative equity on its own isn't a reflection of what's going to happen in the future. You look at Hong Kong back a few years ago.

Yes, yes.

A question from Hong Kong. Vincent?

Thank you, Stephen.

No questions from Hong Kong?

Apparently, Stephen, we don't yet have a question here, so can I --

In that case, there are a number of hands up. Please, but towards the back over that side.

Thanks. It's Alistair Ryan from UBS. It's actually a question on Hong Kong. Always an entertaining one, to work out the dynamics, a very strong deposit growth, HIBORs now at a level back to early '05 levels, and then fantastic fee growth. And just how much of that is related to the IPO boom we had in China? It looks largely to be over. So just the dynamics of that business and the sustainability, very strong in 2007, but the mixes, deposits would be good for you, the margin on deposits would be bad. The yield curve is steepening and you had a spectacular fee performance. How much of that is something that may not recur? So I'm not looking for specific -- well, I am looking for specific forecasts. I know you don't give them. But just generally, how should we read the strength of the performance in '07 as an underlying picture on how much of that is things which were -- which are done, or which are going to be a struggle more this year?

Alistair, thank you. You've actually neatly summarized the profile of that business. There was a particularly strong performance in fees. What we tend to find in Hong Kong is that in any given year it's one thing rather than another. There was a time when it was the profit on liabilities. There was a time when it was investment management products. This time it's been the fees on securities trading. But -- and we're not going to make a profit forecast and I know you wouldn't expect that. But Sandy in Hong Kong, would you like to comment on business prospects?

Well, I think the forecast GDP growth is 4% to 5% GDP. 2007 was a remarkable year. And I think probably, if we look at market activity, we'd probably see market activity being less, but it's an early part of the year yet, so let's see what actually happens. We haven't yet reached the compression point yet. If the U.S. continues to cut aggressively, we will hit a compression point. But we have the ability then to, with widening margins, to compensate for some of that and increase on commissions as well. So it's going to be a mixture of things that will compensate for some downturns in the stock market, but we'll just have to wait and see.

If I could add one other point about Hong Kong, this is not so much on specific performance one year to the next, but there is a gradual trend for Hong Kong to become more and more dovetailed with the Mainland. We find an increasing part of our Commercial Banking business in Hong Kong has to do with what is, in effect, Mainland business being run by Hong Kong companies. And so the growth of the Mainland is pretty important to prospects in Hong Kong.

Any other questions? Yes, please.

Good morning. Thank you. It's Ian Smillie from ABN. The question's on the new financial targets which you've set yourself. The one that certainly stands out, to my eyes, is the capital ratio target. By our forecasts, certainly, your Tier 1 ratio won't be coming down organically over the next couple of years. So the question is how proactively will you look to manage that ratio if sufficient M&A doesn't come along to drive it down from an M&A perspective?

Well, thanks for that. We do each year review our capital position and each year we do a capital plan. We like to keep a strong capital ratio. Obviously, theoretically, there is a point at which you would conclude you've got too much capital, if you were generating capital and not investing it, and we would have to draw the conclusions from that. I have to say that's not where we feel we are. And that range that we put out of 7.5% to 9% is a comfort zone, but I wouldn't want to be too rigid on either end of it, but clearly it starts to -- if we moved outside that range we'd have to start drawing the conclusions. We're at the top of that range at the moment. We've been at the top of that range on the Basel 1 perspective for some years.

Douglas, do you want to add anything?

Just add one technical point. We always end up -- under now IFRS accounting, we always end up with our technically strongest ratio at the end of the year, because the final dividend isn't deducted. So -- and then, as you get into the year, you can't count your interim profits until you get to the half year. So you're always kind of at a high point at the end of the year. But we see good opportunities to deploy in many of the markets that we're growing in and we've thought carefully about that ratio.

Vincent, are there any Hong Kong questions or shall I take another one from London?

Thank you, Stephen. This gentleman in the middle?

Thank you. It's John Wadle from UBS. On page 46 of your presentation you have some bullet points on HSBC Finance. And you mentioned that you've just injected $1.6b into the business in the first quarter of '08 and you also mentioned that you've written off $5.9b of goodwill, but at the Group level there is no write-down of that goodwill. Could you explain to me what's driving the recap decision and the amount? And why wouldn't you also be taking a write-down of the goodwill at the Group level? Thank you.

Douglas?

The driver of the recapitalization is very simple. The capital of the finance company is substantially dictated by the arrangement that is agreed with the rating agencies in terms of keeping a tangible equity ratio as a proportion of tangible managed assets. And the $1.6b was effectively to repair that ratio after the results of 2007, which is what we agreed we would do. So, as the results made a loss, the ratio fell and the $1.6b is effectively to re-establish the ratios for the capital framework that the finance company in the U.S. maintains.

In relation to goodwill, in HSBC Finance's own books they were required to look at the carrying value of goodwill which had been allocated down to lines of business, mortgage services, consumer finance, auto, cards and so on. And the only part of that that when you looked at the cash flows, and also when you took into account that the accounting standard requires you to discount the cash flows at the rate at which the market today would pay for those cash flows, which in relation to sub-prime lending is quite a high discount rate, there was impairment of everything apart from the credit card goodwill, and therefore it was written off.

When we get to the Group level, we have the same rules but the level to which we have to go down is one level below our primary segments. And therefore we look at North American PFS as a whole, not down into individual businesses, and therefore the goodwill in the cards businesses, the goodwill in Canada, the goodwill in the U.S. bank personal business and the goodwill in Bermuda effectively more than compensate for the deterioration in the finance company's sub-businesses. And we don't have an impairment in aggregate because of offsets in North American PFS and therefore we don't have an impairment at Group level.

Douglas, thank you. We'll take a question from London. Yes, please.

Good morning. It's John-Paul Crutchley from Merrill Lynch. Maybe a question for Stephen and one for Michael too, if I can. The one for Stephen maybe is just on the targets. Ian asked about the Tier 1 target. I'm wondering if I can just broaden that slightly. '07 has obviously been a fairly challenging year and you're comfortably inside that target range. So how would you respond to criticism that those targets are actually fairly light in that a Group like yourselves should be setting something more challenging in terms of where you aspire to?

The second question, maybe for Michael, was you made an interesting comment, I think, in your speech, pointing out the dichotomy between where the financial markets have valued some of the sub-prime assets against what you were seeing, actually, in terms of the actual customer flows and deterioration. And I guess in some ways you're looking at both sides of -- or rather, you need to be looking at both sides of a coin. I guess, from that perspective, who do you think is looking at it most correctly? Do you think the financial markets have overreacted to a degree, or are they discounting the losses which will come through in your business in '08 and '09 and beyond?

Yes. John-Paul, thank you. Well, let me take the first one. I think the relevant one you're really driving at is the ROE target. We've set out a range of 15% to 19% through the cycle. And when you say comfortably in the target, actually we were just into that range this year, so I wouldn't agree that that's an unstretching objective. And if over the cycle we deliver in that range, I think that's a pretty reasonable result for our shareholders, and certainly it doesn't feel like it's easy to do, I can tell you. We would certainly regard that as a stretching objective. Like I say, I think it's a reasonably good result this year and we're just into that range.

The cost/income ratio I've already commented on. And I think we've set that after careful thought in that range, because we don't want to be seen as a bank that is delivering on short-term P&L simply by not investing. I just think that's not what shareholders are really interested in. And then the Tier 1, well, we -- you know our story on Tier 1. It's not changed over the years and won't.

Mike?

I think the second bit, John-Paul, is if you look at the securities pricing, it's driven by people who have to sell and accounting requirements, and I think some others have done calculations. If you look from the security side, virtually -- that's 60% of houses in the United States you'd have to default on. Some of the prices you're getting. Because if you take prime, Alt-A and everything else. And frankly, I don't see that happening. There'd be much more serious problems in the United States if that was to happen.

So the numbers we gave you today, although it's still rising, it doesn't appear to us that it's the same level of rise that we're seeing in the securities pricing. So I'm hoping that we are right and the prices will adjust elsewhere. I think -- maybe Stuart wants to comment, but the pricing we're seeing is such a low base. And even when we do get those prices, people won't transact them. But Stuart, you might want to add something on that.

All right.

Well, moving right along. Yes, please.

Yes, thank you very much. It's Tom Rayner from Citigroup.

Tom, I wouldn't want to deny you the opportunity.

No, probably you'll whip it out of my hands in a second. No, just following on from Mike's comments at the end there, I'm trying to get to a sense of how bearish you guys really are about the U.S. outlook, because I hear the headline comments and I think nobody wants to hear you saying, yes, it's all fine, we're no longer concerned. But when I look at the breakdown in the Finance Corporation, outside of Mortgage Services, you still seem to be growing the loan book in pretty much every asset class, and that seems to be quarter by quarter, which doesn't seem consistent with me with a view that the whole economy's coming down and you're really battening down the hatches. So I just wonder if you could square that circle for me and maybe secretly you guys are thinking second half '08, we might be through the worst, or not?

Well, if I may, Tom, I'm going to let Mike comment on what we've done with the loan book, and I think some important things to clarify on that. But just on what do we think about the U.S. economy, we've said it. I do think it may well get worse before it gets better. I wouldn't want to call the time when the bottom comes and it feels like spring has arrived. Having said that, I don't think it's going to be before the second half. You're as aware as I am of the various forecasts around. The truth is, nobody really knows and we'll find out. But it will come. House prices don't go to zero. Mike just said it. At some point, this will bottom out. Transactions will start getting done in the secondary market and things will begin to turn. And the secondary market may turn either, I think, possibly ahead of and more likely slightly ahead of than behind the underlying market, but we'll see. The point is I don't think we are there yet. Mike?

I think if you look at our provisioning line, it's going to be very interesting as we go through the half years and things, is this something that you're going to see the swing factor in our results. There is certainly an issue here in confidence, and I think the confidence is driving through all markets, as you see in the stocks this morning and you see out of Asia earlier on. When that confidence settles, I think people are going to start looking at the fundamentals of this. Where is unemployment? Which states is it in? And where are house prices in that? And I go back to the original question. It's the unemployment level which will dictate how many houses get repossessed and how many -- how severe this downturn is going to be.

It is not flattening out yet. There is still growth in delinquencies in the portfolios, but clearly you've seen us operating in this. We've taken from $50b to $36b out of this portfolio in 12 months. We will continue to do those sorts of things. We're seeing some interesting pricing differentials in the market. We're looking at portfolios to sell, etc. And some of those prices are far better than you'd think they were, when you actually look at the indexes we're seeing out of the exchanges. So it's a work in progress.

How about growth in the loan book?

Well, growth in the loan books, clearly across -- outside of the United States, I'm not seeing any real impact whatsoever at the current time. As I said, I've just come back from Latin America. I've been in the Middle East. Asia, the numbers speak for themselves. In all those markets, the growth is there.

I think Tom's question is specifically about U.S. loan growth in the Finance Corporation.

Outside of -- sorry, within the Finance Corporation outside of Mortgage Services, which obviously [you didn't] run off --

Well --

It was still showing growth in most of the other -- in credit cards, motor finance, branch-based real estate.

It's credit cards mainly. We've got a big -- 50/50 book there, which is prime and sub-prime. Clearly, the revenue income comes from the sub-prime more than the prime, but we're clearly -- our brand is at work there. We're taking business there. Auto finance, we're not intentionally trying to grow it, but we are improving the quality. We're going up to the near-prime market there, particularly on the direct channel. That's been extremely successful for us. But in all areas, we are improving quality. We've got pricing power. All those things are working to our strength. As I said in the commentary, there's going to be winners in this at the end. There's a large number of people who have left the stage and those who are there will be able to have that pricing power. And sub-prime will not go away altogether.

No. And actually, consumer lending growth through the branch network has in fact stopped in the fourth quarter.

Okay. Am I allowed a second quick one?

(Multiple speakers) second quick one, and then we must go to Hong Kong.

Just on the size of the gains on your own debt, it seemed quite large relative to the size of the debt that's been revalued. Is there anything there in particular, no?

The canny Scotsman who raised the debt.

No, it's pure credit spread. The two big contributors are the U.S., the finance company clearly, and then the holding company and the U.K. bank here for that portion of our debt that is marked. And it's purely the credit spread since those loans were taken on.

Thank you.

A question from Hong Kong. Vincent?

Thank you, Stephen. That gentleman in front?

Thank you. Alistair Scarff from Merrill Lynch. Just if I can have a follow-up question on your debt securities, on your [own issue] debt. The $3.1b, you made a comment earlier about that will be reversed over time. I just wondered if you could give some color on that, as to how that will be reflected in your P&L. Will that be just an eventual ebbing back, or dependent on interest rates?

I think by both is the answer, Alistair, but Douglas.

Yes. The way that works is that through the line items measured at fair value, the credit spread element is adjusted through that line. So the interest accrues in the normal way in the loan and the credit spread movement goes through fair value, so it could be lumpy. It clearly comes back over time, because at the end of the day we borrow a thousand, we pay back a thousand, so everything comes back to par.

A question from London. Yes, please.

Thank you. It's Michael Helsby from Morgan Stanley. Mike referred to the reduction of the correspondent book of $50b down to $36b. I was wondering if you would give us a bit more detail in terms of what's actually driving that, i.e. how much of it is just because you've written a lot of it off, how much of it is because you've -- I think you sold a little bit in the first half, and I think you've also been transferring some into the branch channel, and how much is just people have repaid?

Well, it's not the very last point you mentioned, but Mike, do you want to talk about this?

Yes. See if I've got the figures with me. Douglas, help me here. There's -- I know $2.7m (sic) was sold, the --

Sold in the first half.

Yes. The charge-offs in the branch channel were about $1.5b last year. Get the right number. Yes, $1.5b. We sold a bit over -- about $2.5b. The biggest driver was repayment. The biggest driver was repayment.

Yes, which does lead on to a general comment. Mike mentioned it in a number of points in his presentation. Actually, the vast majority of our customers are repaying their debts. Sometimes one gets the impression nobody's repaying. This is a million miles from the truth. We've got significant issues, of course. But even in that Mortgage Services portfolio, well over 80% of customers are current.

Thank you. Just you seem to be lumping the U.K. into the same basket as the U.S., in terms of outlook. I was just wondering if you could enhance or give us a little bit more flavor. You've specifically referred to commercial real estate lending. You're saying you've called the top on the residential market. Just to give us a bit more of a flavor.

I'd like Mike to comment, but I don't think we are lumping the U.K. and the U.S. I think the U.K. has got significant economic issues looking forwards, but they're not the same [magnitude] as the U.S. The housing market is not as over-stretched here and the mode of financing the housing market has not been the same here. So whilst I think there are certainly issues in the U.K., they're different. And the second is that we're differently positioned, for reasons you'll understand. Mike?

I think one of the things we all have to reflect on is that the balance sheets of banks in 2008 won't be as expansionary as they were in 2007. They simply haven't got the capital, they haven't got the funding. HSBC has got both. And what we said in 2006, and I remember speaking at a conference and before me were two very bullish U.K. banks, and I was somewhat spoiling the party by saying 2000 -- end of 2006 we thought this was near the top. The reality is that those products that were fueling the market, 100% finance or more, those are not in the market any more. So I think there has to be some slowdown. But again, as Stephen says, we're not linking that into the United States, but we are linking it into a general excess of prices in the 2006, 2005/6/7, so you have to give some of it back.

Thanks.

A question -- Vincent, a question from Hong Kong?

Thank you, Stephen.

Hi. This is Kevin Chan from Nomura Securities. I have two questions. The first, relating to page 28 of your Group press release, is about loan impairment charge. I noticed that in the second half of '07 you have a big jump in new allowance for collective assessment. Can I confirm that A, that's relating to the U.S. situation, and B, given the backward-looking nature under IFRS, should we continue to see an increase in the collective assessment ratio?

The second question is, following the disposal of the regional French operations, would you consider selling other non-core banking assets within HSBC Group? If yes, could you give us more color? Thank you very much.

Kevin, thank you. On the first point, the short answer is yes. It is the U.S. Consumer Finance business that's generating that collective assessment number. And no, we don't make forecasts of how that will play out. Mike's talked about this before. So much depends in the U.S. on the state of the economy that I think it would frankly be unwise for us to put any kind of a forecast on that.

On the French businesses, we've sold the -- well, we have received a binding cash offer from Banques Populaires and entered into exclusive discussions with them with a view to the sale of those subsidiary banks of HSBC France. And as Mike said, this does absolutely not mean that we're poised to sell the rest of France. On the contrary, we think that what we have left in France after that transaction goes through fits very well with the Group strategy that we've articulated.

On other things, we have nothing to talk about at the moment beyond -- in terms of acquisitions or disposals. Just the general comment I would make is that we're committed to reviewing where we deploy our capital. And where there are businesses where the return on capital is not sufficient and there's no obvious Group connectivity and we can think of no way of restructuring this, such that it does become appropriately dovetailed with Group strategy, we're committed to freeing up the capital and using it where it can be used profitably and strategically. But we've nothing specific to talk about today, beyond the French transaction.

Yes, please.

Thank you. It's Tim Sykes from Execution. First of all, congratulations on a very good set of results. Two questions, if I can, firstly on HFC. The first is what proportion of the fourth quarter charge was judgmental? Can you tell us that?

Douglas?

Gosh, not off the top of my head. I think we've got to be careful. I think we've got to be careful between what we mean by judgmental, because it's not the good old-fashioned general provision that we all remember from a decade ago. What it means is that the roll-rate methodology is based on a set of inputs that cover a particular period. And then there's an assessment to see whether in fact that period and those inputs are appropriate, because more recent factors in the last two or three weeks of the year, whatever, would indicate that that roll rate may give a false result.

So the judgmental piece is effectively bringing a roll-rate methodology up to date, rather than saying let's have a bit more on top. So I regard it as all part of the same thing and I don't think it's appropriate to look at a distinction between a statistical rate and a judgmental thing. Both are coming to the same answer, which is what element of impairment has been incurred at the end of December. If it hasn't been captured in the statistical rate, how do you support it on a judgmental basis? It comes to the right answer, that we're [in], and I think the distinction between the two is frankly irrelevant.

Tim, thanks for the question.

Can I have a follow-up?

Please do.

Without getting into Markoff Chains and any other consumer analytics, just about capital deployment, you've mentioned that you would review where capital is being deployed, but actually what we've seen, somewhat disappointingly, is more capital going into HFC in this period. What options do you think you have with regard to capital deployment in HFC to restructure along the lines of the new targets for the Group?

Well, I think we have to be realistic. HFC Finance, what we're talking about, has got significant business issues. We've talked about them in a great detail. We've got to see those through. We're going to see those through. And as we do so, as Douglas explained, we will make sure that it's capitalized in accordance with the ratings objectives. The U.S. is going to perform normally in the future. This will come back. And we need to take our capital decisions, frankly, on a medium-term basis. We need to be -- you don't wave magic wands in this. There's some realities that -- we all know that. But what we've said, repeatedly and publicly, is that as we go forward our priority for investment, both in terms of M&A and organic, is going to be the emerging markets and the emerging markets related businesses, and that's what we're committed to.

Thank you.

A question from Hong Kong?

Thank you, Stephen. There's one there. Yes, thank you.

Yes. This is Sunil Garg from JP Morgan again. Just on your comments, Mr. Green, on the HFC business. Since it doesn't appear to have much connectivity with the Group, are you saying once you see it through it's ready for divestment? Thanks.

No, and thank you for that question, because no, I'm certainly not saying that. Let me just give you the most obvious example. I think that a bank that has a strategy for personal financial services around the world, focused as a priority on emerging markets, nonetheless, we're a big bank in personal financial services, you can't have a credible personal financial services business without having a leading edge credit card capability. Household brought us that leading edge credit card capability. We are the sixth biggest credit card issuer. We have a leading edge platform for that. It's the sort of business you have to do in industrial strength, because of the nature of the product, and I'm absolutely saying that's a key strategic part of the Group.

Robert.

(Inaudible - microphone inaccessible) on the Household HSBC finance business, please. You've commented you think the U.S. may get worse before it gets better. Can I ask you what kind of assumptions you've made behind the reserving you've made? And in your reserving you've included significant reserve build. What does it take for you to stop building reserves in the U.S.? And I've got a supplementary.

Well, Robert, let's deal with the first one first, and Douglas?

We've assumed that -- clearly, the actual metrics seen in the fourth quarter and towards the end of the fourth quarter were the weakest of 2007. We assumed that those metrics continued and indeed deteriorated. We assumed that loss severities weakened. We continued to believe that the securitization markets were not going to give an easy way out in terms of recovery of the ability, those markets weren't going to come back very quickly, giving liquidity to the marketplace. So we basically assumed that what we were seeing at the end of the year would continue and weaken. And that's how we did it.

And the supplementary?

Well, just before I get onto that, what does it take to stop building reserves?

I think the combination of two. Clearly, the reserves build is a reflection of the outlook at the end of the year. And I guess it would take the outlook to suggest that there was -- the two things that I think are most important is the deterioration in house prices begins to bottom off, if not come back. And that most importantly, probably more importantly, that there is a liquid market again for securitized mortgages, because I think without that liquidity in the marketplace it's going to be difficult to see house prices come back. The other factor, clearly, is going to be the run-off of the portfolio. As the portfolio runs off, certainly in Mortgage Services, then one would expect the reserve build just from the fact that the pool of mortgages is getting smaller, would significantly decline. And we've been building reserves now for every quarter, essentially for two years.

And the supplementary?

Well, the supplementary was you mentioned about this does stop and you come out the other side. Can you give us some indication as to what you think the credit cost of new business you're putting on is now, so we can make some kind of assessment on what Household might make when you come out the other side?

Everyone's looking at me.

I think that's -- I think it's a very -- clearly, we're looking at the 2007 vintage to see how that matures and that will be the real test for us. But it's too early to tell yet. Another half, we'll be able to show you a better framework for that. That's going to be key.

Any from Hong Kong? If not, yes, please.

Thank you. It's Simon Willis from NCB Stockbrokers. Two questions, again on HSBC Finance. Firstly, on the deterioration in delinquencies in Q3 and Q4, particularly on credit cards and other personal, you've got a $50b credit card book and $38b in other personal, and those two in aggregate are the same size as the mortgage book. The deterioration in delinquencies in Q3 and Q4 was as big or bigger in those two areas. And arguably, well, the Mortgage Services we can argue is a one-off because of structural issues in the market. But with the U.S. economy slowing in the way it is, past experience would suggest it's fair to expect quite a -- well, expect the loss severity to follow the impairment trends quite swiftly and to a similar extent. Is there any reason why that train of thought is materially wrong on a six to 12-month view from here?

We can't tell you what will happen, other than to say that if the economy weakens and unemployment rises, that's a key driver for these things. And we're absolutely not in a position to say there wouldn't be further deterioration in those books. What we can say is that this is an industry-wide phenomenon, but we're a sizeable credit card operator in the U.S. and as -- if and as the U.S. economy deteriorates, it will impact that book.

Stephen, can I just add, on those assets you've said, for cards, for example, it's about 50/50 between prime and sub-prime, so you shouldn't all assume it's all sub-prime. So obviously it's going to behave in a different way. There is an up-tick, which you would expect. And we also said it's particularly an up-tick in the states that have the highest -- high real estate -- or the falls in real estate value. So there is some linkage there. You shouldn't assume it across the whole country.

And if I could just add one other point, I think on the credit -- the storecard businesses is well-diversified. On the credit card business, if you go outside of the prime cards, it's very correlated to unemployment. The sub-prime card business is essentially a $400, $350, $400 balance card business, so it's really linked to unemployment. It's not -- people do not use that card to borrow large amounts of money. And in the near-prime, above the sub-prime business in the card business, the sweet spot for the finance company, including Mattress, is in the $1,500 to $3,000 range. These are relatively small amounts of money, balances on cards spread over a very large number of customers. And so what you're really talking about is correlated exactly to unemployment.

And just a quick second one, if I could, related to revenue in North America. With the third quarter disclosures, you gave some indications as to the downsizing -- plans for downsizing of the branch network. And also you gave some steer on the extent to which revenues might be lower in 2008 than in 2007 as a consequence of that and one or two other things. Could you perhaps give us an update on that? And in particular, I'm wondering whether you feel now that the trends in the last couple of months in the States are sufficiently worse, that the fall in revenue in '08 against '07 would be materially larger than you were flagging in November.

Certainly, conditions have deteriorated in the last two or three months. And it is likely that revenue will be subdued in '08 compared with '07 and obviously '06. We've battened down the hatches in so many ways. We have restructured the network. We've changed the way -- the loan to value ratios and the nature of the lending propositions. So we've done a number of things that have to do with battening down the hatches. I think the key question really is not about trying to forecast this year's number, actually. It's about making sure that we've got a business that is still capable of generating reasonable returns when more normal and settled times resume.

Mike, do you want to --?

No, I would say that's fine. The only thing I would say is you do have pricing power. It's pricing power and you also -- you've got ability to select the quality that you want. With so many people out of business there, we have the opportunity. The other thing, you shouldn't assume that there should be more to come down on the branch network. That branch network is the size we'd want to keep.

There's probably time for one last question. Can I just check whether there's anybody from Hong Kong who would like a question? If not, yes, please.

We don't appear to have any questions here, Stephen. Back to you.

Okay. Well, please.

I realize we're getting over time, so I'll keep it short. Sandy Chen from Panmure Gordon. I just had a point of detail question on page 258, believe it or not, with --

That sounds like a Douglas one.

Yes. And thanks for the disclosure -- additional disclosure on the Alt-A mortgages. But there was 48b in MBS and CDO non sub-prime exposure. Could you give a bit more color on that? Especially given that there was only GBP1b of fair value movements recorded against that, given the accelerating trend in U.S. delinquencies, etc., do you -- would you expect further charges on that?

Well, the biggest elements of the -- this was a table that was setting out mortgage-related assets. On the mortgage-related assets, non-sub-prime include all our liquidity holdings, the Fannie and Freddie paper, and the largest portion of that is that. So we wouldn't expect massive write-downs of Fannie Mae and Freddie Mac papers, so that's the -- these are predominantly liquidity assets.

Thanks.

Thanks. Look, I think, ladies and gentlemen, both here in London and in Hong Kong, thank you for joining us this morning in the case of London, this evening in the case of Hong Kong. I hope you've found that interesting. We've covered a wide range of questions and thank you for those. Mike, you're on a plane shortly to Hong Kong and I know you'll be certainly meeting with somebody there tomorrow. Thank you very much, everybody.

Thank you.

Thank you. This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.